CRED TRANS Digest Pool | Atty.

Sarona SY 2015-2016 1

PART I: CONCEPT OF CREDIT the agreement is not for a price certain.

TRANSACTIONS
ISSUE: Whether or not the contractual
PART II: LOAN (Articles 1933 – 1961) relationship between Pajuyo and Guevarra
was that of a commodatum.
I. Concept
II. Commodatum HELD: No. In a contract of commodatum, one
of the parties delivers to another something not
PAJUYO VS. CA consumable so that the latter may use the
same for a certain time and return it.
FACTS: In June 1979, petitioner Pajuyo paid
P400 to a certain Perez for the rights over a Essential features of commodatum:
250-square meter lot in Quezon City. Pajuyo  it is gratuitous.
then constructed a house on the lot and he and  the use of the thing belonging to
his family lived in the house from 1979 to 1985. another is for a certain period

On 8 December 1985, Pajuyo and private Thus, the bailor cannot demand the return of
respondent Guevarra executed a Kasunduan the thing loaned until after expiration of the
or agreement. Pajuyo, as owner of the house, period stipulated, or after accomplishment of
allowed Guevarra to live in the house for free the use for which the commodatum is
provided Guevarra would maintain the constituted.
cleanliness and orderliness of the house.
Guevarra promised that he would voluntarily If the bailor should have urgent need of the
vacate the premises on Pajuyos demand. thing, he may demand its return for temporary
use. If the use of the thing is merely tolerated
In September 1994, Pajuyo informed Guevarra by the bailor, he can demand the return of the
of his need of the house and demanded that thing at will, in which case the contractual
Guevarra vacate the house. Guevarra refused. relation is called a precarium, which is a kind of
Pajuyo filed an ejectment case against commodatum.
Guevarra with the MTC.
The Kasunduan reveals that the
Guevarra claimed that Pajuyo had no valid title accommodation accorded by Pajuyo to
or right of possession over the lot because the Guevarra was not essentially gratuitous.
lot is within the 150 hectares set aside by While the Kasunduan did not require Guevarra
Proclamation No. 137 for socialized housing. to pay rent, it obligated him to maintain the
Guevarra pointed out that from December property in good condition. The imposition of
1985 to September 1994, Pajuyo did not show this obligation makes the Kasunduan a
up or communicate with him. Guevarra insisted contract different from a commodatum.
that neither he nor Pajuyo has valid title to the
lot (both were squatters). The effects of the Kasunduan are also different
from that of a commodatum. Case law on
MTC rendered its decision in favor of Pajuyo. ejectment has treated relationship based on
Pajuyo allowed Guevarra to use the house tolerance as one that is akin to a landlord-
only by tolerance. Thus, Guevarras refusal to tenant relationship where the withdrawal of
vacate the house on Pajuyos demand made permission would result in the termination of
Guevarras continued possession of the house the lease. The tenants withholding of the
illegal. RTC affirmed the MTC decision in toto. property would then be unlawful.

CA reversed the MTC and RTC rulings and Even assuming that the relationship
declared that Pajuyo and Guevarra illegally between Pajuyo and Guevarra is one of
occupied the contested lot which the commodatum, Guevarra as bailee would
government owned. CA also declared that still have the duty to turn over possession
Pajuyo and Guevarra are in pari delicto or in of the property to Pajuyo, the bailor. The
equal fault. Moreover, the Kasunduan is not a obligation to deliver or to return the thing
lease contract but a commodatum because received attaches to contracts for safekeeping,
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 2

or contracts of commission, administration and Doronilla issued 3 postdated checks, all of

commodatum. which were dishonored.

Guevarra freely entered into the Vives received a letter from Doronilla assuring
Kasunduan. Guevarra cannot now impugn him that his money was intact and would be
the Kasunduan after he had benefited from returned to him. Doronilla issued a postdated
it. The Kasunduan binds Guevarra. check for P212k in favor of Vives. However,
upon presentment to the drawee bank, the
The Kasunduan is not void for purposes of check was dishonored. Doronilla requested
determining who between Pajuyo and Vives to present the same check on a later
Guevarra has a right to physical date but it was again dishonored.
possession of the contested property. The
Kasunduan is the undeniable evidence of Vives referred the matter to a lawyer, who
Guevarras recognition of Pajuyos better right made a written demand upon Doronilla for the
of physical possession. Guevarra is clearly a return of his clients money. Doronilla issued
possessor in bad faith. The absence of a another check but was again dishonored for
contract would not yield a different result, as insufficiency of funds.
there would still be an implied promise to
vacate. Vives instituted an action for recovery of sum
of money in the RTC against Doronilla,
PRODUCERS BANK VS. CA Sanchez, Dumagpi and Producers Bank. He
also filed criminal actions against Doronilla,
FACTS: Sometime in 1979, private respondent Sanchez and Dumagpi in the RTC.
Vives was asked by his neighbor and friend
Sanchez to help her friend, Col. Doronilla, in RTC rendered a decision in favor of Vives. CA
incorporating his business (Sterela). Sanchez affirmed the decision of the RTC in Toto.
asked Vives to deposit in a bank a certain
amount of money in the bank account of Petitioner contends that the transaction
Sterela for purposes of its incorporation. She between private respondent and Doronilla is a
assured Vives that he could withdraw his simple loan (mutuum) since all the elements of
money from said account within a months time. a mutuum are present: first, what was
delivered by private respondent to Doronilla
Vives, Sanchez, Doronilla and a certain was money, a consumable thing; and second,
Dumagpi, Doronillas private secretary, met and the transaction was onerous as Doronilla was
discussed the matter. Relying on the obliged to pay interest, as evidenced by the
assurances and representations of Sanchez check issued by Doronilla in the amount of
and Doronilla, Vives issued a check in the P212k, or P12k more than what Vives
amount of P200k in favor of Sterela which was deposited in Sterelas bank account.
subsequently deposited under Sterela's
account. ISSUE: Whether or not the transaction
between Doronilla and Vives was one of
Subsequently, Vives learned that Sterela was simple loan or mutuum.
no longer holding office in the address
previously given to him. He went to the Bank to HELD: No, it was a commodatum.
verify if their money was still intact. Atienza, Article 1933 of the Civil Code distinguishes
the assistant manager, informed them that part between the two kinds of loans in this wise:
of the money had been withdrawn by Doronilla,
and that only P90k remained therein. He By the contract of loan, one of the parties
likewise told them that they could not withdraw delivers to another, either something not
the remaining amount because it had to consumable so that the latter may use the
answer for some postdated checks issued by same for a certain time and return it, in which
Doronilla. case the contract is called a commodatum; or
money or other consumable thing, upon the
Sterela, through Doronilla, obtained a loan of condition that the same amount of the same
P175k from the Bank. To cover payment, kind and quality shall be paid, in which case
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 3

the contract is simply called a loan or mutuum. that the bailee in commodatum acquires the
use of the thing loaned but not its fruits. Hence,
Commodatum is essentially gratuitous. Simple it was only proper for Doronilla to remit the
loan may be gratuitous or with a stipulation to interest.
pay interest. In commodatum, the bailor retains
the ownership of the thing loaned, while in Neither does the Court agree with petitioners
simple loan, ownership passes to the borrower. contention that it is not solidarily liable for the
return of private respondents money because it
The foregoing provision seems to imply that if was not privy to the transaction between
the subject of the contract is a consumable Doronilla and Vives.
thing, such as money, the contract would be a
mutuum. However, there are some instances Under Article 2180 of the Civil Code,
where a commodatum may have for its employers shall be held primarily and solidarily
object a consumable thing. liable for damages caused by their employees
acting within the scope of their assigned tasks.
Article 1936 of the Civil Code provides:
Atienzas acts of helping Doronilla, a customer
Consumable goods may be the subject of of the petitioner, were obviously done in
commodatum if the purpose of the contract is furtherance of petitioners interests. It was
not the consumption of the object, as when it is established that the transfer of funds from
merely for exhibition. Sterelas savings account to its current account
could not have been accomplished by
Thus, if consumable goods are loaned only for Doronilla without the invaluable assistance of
purposes of exhibition, or when the intention of Atienza, and that it was their connivance which
the parties is to lend consumable goods and was the cause of private respondents loss.
to have the very same goods returned at
the end of the period agreed upon, the loan Under Article 2180 of the Civil Code, petitioner
is a commodatum and not a mutuum. is liable for private respondents loss and is
solidarily liable with Doronilla and Dumagpi for
The rule is that the intention of the parties the return of the P200k since it is clear that
thereto shall be accorded primordial petitioner failed to prove that it exercised due
consideration in determining the actual diligence to prevent the unauthorized
character of a contract. The evidence shows withdrawals from Sterela's savings account.
that Vives agreed to deposit his money in the
savings account of Sterela for the purpose of
making it appear that said firm had sufficient MINA VS. PASCUAL
capitalization for incorporation, with the
promise that the amount shall be returned FACTS: Francisco Fontanilla and Andres
within 30 days. Fontanilla were brothers. Francisco acquired a
lot in Laoag, the property having been awarded
Vives merely accommodated Doronilla by to him through its purchase at a public auction.
lending his money without consideration, as a Andres, with the consent of his brother
favor to Sanchez. It was however clear to the Francisco, erected a warehouse on a part of
parties to the transaction that the money would the said lot.
not be removed from Sterelas savings account
and would be returned to Vives after 30 days. Francisco, the former owner of the lot, being
dead, the plaintiffs, Alejandro Mina, et al., were
Doronillas attempts to return the amount recognized as his heirs. Andres, the former
did not convert the transaction from a owner of the warehouse, also having died, the
commodatum into a mutuum because such children of Ruperta Pascual were recognized
was not the intent of the parties and (though it is not said how) and consequently
because the additional P12k corresponds are entitled to the said building.
to the fruits of the lending of the P200k.
The plaintiffs and the defendants are the
Article 1935 of the Civil Code expressly states owners of the warehouse, while the plaintiffs
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 4

are undoubtedly, the owners of the part of the Supreme Court which found for them by
lot occupied by that building, as well as of the holding that they are the owners of the lot in
remainder thereof. question, although there existed and still exists
a commodatum by virtue of which the
This was the state of affairs when on May 6, guardianship (meaning the defendants) had
1909, Ruperta Pascual, as the guardian of her and has the use, and the plaintiffs the
minor children (defendants), petitioned the CFI ownership, of the property, with no finding
for authorization to sell "the 6/7 of the one-half concerning the decree of the lower court that
of the warehouse, of 14 by 11 meters, together ordered the sale.
with its lot."
ISSUE: Whether or not there is a contract of
The plaintiffs opposed the petition of Ruperta commodatum.
Pascual for the reason that the latter had
included the lot occupied by the warehouse, HELD: No. Although both litigating parties
which they claimed was their exclusive may have agreed in their idea of the
property. commodatum, it is not, a question of fact
but of law. The denomination given by them to
The plaintiffs requested the court to decide the the use of the lot granted by Francisco
question of the ownership of the lot before it Fontanilla to his brother, Andres Fontanilla, is
pass upon the petition for the sale of the not acceptable.
warehouse. But the court before determining
the matter of the ownership of the lot occupied Contracts are not to be interpreted in
by the warehouse, ordered the sale of the conformity with the name that the parties
building. thereto agree to give them, but must be
construed, duly considering their constitutive
The warehouse, together with the lot, was sold elements, as they are defined and
to Cu Joco (P2890) at a public auction. denominated by law.

The plaintiffs insisted upon a decision of the By the contract of loan, one of the parties
question of the ownership of the lot, and the delivers to the other, either anything not
court decided it by holding that the land perishable, in order that the latter may use
belonged to the owner of the warehouse which it during the certain period and return it to
had been built thereon thirty years before. the former, in which case it is called
commodatum . . . (art. 1740, Civil Code).
The plaintiffs appealed and this court reversed
the judgment of the lower court and held that It is, therefore, an essential feature of the
the appellants were the owners of the lot in commodatum that the use of the thing
question. When the judgment became final belonging to another shall for a certain
and executory, a writ of execution was issued period.
and the plaintiffs were given possession of the
lot; but soon thereafter the trial court annulled Francisco Fontanilla did not fix any definite
this possession for the reason that it affected period or time during which Andres Fontanilla
Cu Joco, who had not been a party to the suit could have the use of the lot whereon the latter
in which that writ was served. was to erect a stone warehouse of
considerable value, and so it is that for the past
It was then that the plaintiffs commenced the 30 years of the lot has been used by both
present action for the purpose of having the Andres and his successors in interest.
sale of the said lot declared null and void and
of no force and effect. The present contention of the plaintiffs that Cu
Joco, now in possession of the lot, should pay
An agreement was had add to the facts, the rent for it at the rate of P5 a month, would
ninth paragraph of which is as follows: destroy the theory of the commodatum
sustained by them, since, according to the
9. That the herein plaintiffs excepted to the second paragraph of the aforecited article
judgment and appealed therefrom to the 1740, "commodatum is essentially
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 5

gratuitous," of witnesses that Santos, sent in charge of

various persons, the 10 carabaos requested by
With that expectation in view, it appears more Jimenea (it was revealed that Jimenea is the
likely that Francisco intended to allow his father in law of de los Santos). Also, de los
brother Andres a surface right; but this right Santos produced 2 letters proving that
supposes the payment of an annual rent, and Jimenea received them in the presence of said
Andres had the gratuitous use of the lot. persons (brother of Jimenea) who saw the
animals arrive at the hacienda. FOUR of the
carabaos died of rinderpest and thus the
FELIX DE LOS SANTOS VS AGUSTINA judgment appealed from only deals with 6
JARRA (1910 CASE) carabaos.

FACTS: Felix de los Santos brought suit THE ALLEGED PURCHASE of 3 carabaos by
against Agusitina Jarra (the administratrix of Jimenea from his son-in-law Santos is not
the estate of Magdaleno Jimenea, he alleges evidenced by any trustworthy evidence.
that Jimenea borrowed and obtained from the Therefore, it is not true.
plaintiff 10 first class carabos, to be used at the
animal power mill of Jimenea’s hacienda, From the foregoing, it may be logically inferred
without recompense or remuneration for the that the carabaos loaned or given on
use of it and under the sole condition that they commodatum to the deceased Jimenea were
should be returned to the owner as soon as the ten in number, that 6 survived and that these
work at the mill was terminated. Jimenea carabaos have not been returned to the owner
however, did not return the carabaos even delos Santos, and lastly, that the 6 carabaos
though de los Santos claimed their return after were not the property of the deceased nor any
the work at the mill was finished. of his descendants, it is the duty of the
Jimenea died in 1904 (before the suit) and administratrix to return them or indemnify the
Jarra was appointed by the CFI as owner for the value.
administratrix of his estate.
ISSUE: W/N the contracts is one of a
De los Santos presented his claim to the commodatum.
commissioners of the estate of Jimenea for
return of the carabaos. (for the carabaos to be HELD: YES. The carabaos were given on
exluded from the estate of Jimenea). The commodatum as these were delivered to be
commissioners rejected his claim, and thus a used by defendant. Upon failure of defendant
lawsuit ensued. to return the cattle upon demand, he is under
the obligation to indemnify the plaintiff by
Jarra answered and said that it was true that paying him their value. Since the 6 carabaos
the late Jimenea asked the plaintiff to loan him were not the property of the deceased or of
ten carabaos, but that he only obtained any of his descendants, it is the duty of the
THREE (3) second-class carabaos, which administratrix of the estate to either return
were afterwards sold by the Delos Santos to them or indemnify the owner thereof of their
Jimenea. (Basically Jarra denied all the value.
allegations in the complaint)
It was not part of Jimenea’s estate. Therefore
The case came up for trial and the court Agustina Jarra should exclude it or indemnify
rendered judgment against Jarra and ordering De los Santos… “for the reasons above set
her to return to de los Santos 6 second-class forth, by which the errors assigned to the
and third class carabaos. The value of which judgment appealed from have been refuted,
was 120 each so 720 pesos. Jarra moved for a and considering that the same is in accordance
new trial on the ground that the findings of fact with the law and the merits of the case, it is our
were openly and manifestly contrary to the opinion that it should be affirmed and we do
weight of the evidence. hereby affirm it with the costs against
appellant.
The record however, discloses that it has been
fully proven from the testimonies of a number RATIO: The ratio differentiates a loan from a
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 6

commodatum. Art 1740. (Old civil code) By the the thing should have been lost or injured…
contract of loan, one of the parties delivers
to the other, either anything not perishable
(in the new civil code it’s consumable), in REPUBLIC OF THE PHILIPPINES VS. JOSE
order that the latter may use it during a BAGTAS, FELICIDAD BAGTAS,
certain period and return it to the former, in ADMINISTRATRIX OF THE INTESTATE
which case it is called commodatum, or ESTATE LEFT BY JOSE BAGTAS
money or any other perishable thing, under the
condition to return an equal amount of the FACTS: On May 8, 1948, Jose Bagtas
same kind and quality, in which case it is borrowed from the Bureau of Animal Industry 3
merely called a loan. bulls for 1 year for breeding purposes, subject
to breeding fee for 10% of the book value of
Commodatum is essentially gratuitous. the bulls. Upon the expiration of the contract,
Bagtas asked for a renewal for another year.
A simple loan may be gratuitous, or made The renewal granted was only for 1 bull.
under a stipulation to pay interest. Bagtas offered to buy the bulls at book value
less depreciation, but the Bureau told him that
Art 1741. The bailor retains ownership of the he should either return the bulls or pay for their
thing loaned the bailee acquires the use book value. Bagtas failed to pay the book
thereof, but not its fruits; if any compensation value, and so the Republic commenced an
is involved, to be paid by the person requiring action with the CFI Manila to order the return of
the use, the agreement ceases to be a the bulls of the payment of book value.
commodatum. Felicidad Bagtas, the surviving spouse and
administratrix of the decedent’s estate, stated
Art 1742. The obligations and rights which that the 2 bulls have already been returned in
arise from the commodatum pass to the heirs 1952, and that the remaining one died of
of both contracting parties, unless the loan has gunshot during a Huk raid. As regards the two
been made in consideration for the person of bulls, is was proven that they were returned
the bailee, in which case his heirs shall not and thus, there is no more obligation on the
have the right to continue using the thing part of the appellant. As to the bull not
loaned. returned, Felicidad contends that the obligation
is extinguished since the contract is that of a
The carabaos delivered to be used were not commodatum and that the loss through
returned by Jiminea upon demand. There is no fortuitous event should be borne by the owner.
doubt that Jarra is under the obligation to
indemnify delos Santos. ISSUE: Whether, depending on the nature of
the contract, the respondent is liable for the
Article 101. Those who in fulfilling their death of the bull
obligations are guilty of fraud, negligence or
delay…. HELD: A contract of commodatum is
essentially gratuitous. If the breeding fee be
The obligation of the bailee or of his considered a compensation, then the contract
successors to return either the thing loaned or would be a lease of the bull. Under article 1671
its value is sustained by the tribunal of Spain, of the Civil Code the lessee would be subject
which said in its decision - (Mentioned to the responsibilities of a possessor in bad
jurisprudence): legal doctrine touching faith, because she had continued possession
commodatum as follows: of the bull after the expiry of the contract. And
Although it is true that in a contract of even if the contract be commodatum, still the
commodatum the bailor retains the appellant is liable, because article 1942 of the
ownership of thing loaned at the expiration Civil Code provides that a bailee in a contract
of the period, or after the use for which it of commodatum -
was loaned has been accomplished, it is . . . is liable for loss of the things, even if it
the imperative duty of the bailee to return should be through a fortuitous event:
the thing itself to its owner, or to pay him (2) If he keeps it longer than the period
damages if through the fault of the bailee stipulated . . .
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 7

(3) If the thing loaned has been delivered with registration of Lots 2 and 3.
appraisal of its value, unless there is
a stipulation exempting the bailee During trial, the Heirs of Octaviano presented
from responsibility in case of a one (1) witness, who testified on the alleged
fortuitous event. ownership of the land in question (Lot 3) by
their predecessor-in-interest, Egmidio
The loan of one bull was renewed for another Octaviano; his written demand to Vicar for the
period of one year to end on 8 May 1950. But return of the land to them; and the reasonable
the appellant kept and used the bull until rentals for the use of the land at P10,000 per
November 1953 when during a Huk raid it was month.
killed by stray bullets. Furthermore, when lent
and delivered to the deceased husband of the On the other hand, Vicar presented the
appellant the bulls had each an appraised Register of Deeds for the Province of Benguet,
book value. It was not stipulated that in case of Atty. Sison, who testified that the land in
loss of the bull due to fortuitous event the late question is not covered by any title in the name
husband of the appellant would be exempt of Egmidio Octaviano or any of the heirs. Vicar
from liability. dispensed with the testimony of Mons.
Brasseur when the heirs admitted that the
Special proceedings for the administration and witness if called to the witness stand, would
settlement of the estate of the deceased Jose testify that Vicar has been in possession of Lot
V. Bagtas having been instituted in the Court of 3, for 75 years continuously and peacefully and
First Instance of Rizal (Q-200), the money has constructed permanent structures thereon.
judgment rendered in favor of the appellee
cannot be enforced by means of a writ of ISSUE: WON Vicar had been in possession of
execution but must be presented to the lots 2 and 3 merely as bailee borrower in
probate court for payment by the appellant, the commodatum, a gratuitous loan for use.
administratrix appointed by the court.
HELD: YES. Private respondents were able to
prove that their predecessors' house was
CATHOLIC VICAR VS. CA borrowed by petitioner Vicar after the church
and the convent were destroyed. They never
FACTS: 1962: Catholic Vicar Apostolic of the asked for the return of the house, but when
Mountain Province (Vicar), petitioner, filed with they allowed its free use, they became bailors
the court an application for the registration of in commodatum and the petitioner the bailee.
title over lots 1, 2, 3 and 4 situated in
Poblacion Central, Benguet, said lots being The bailees' failure to return the subject matter
used as sites of the Catholic Church, building, of commodatum to the bailor did not mean
convents, high school building, school adverse possession on the part of the
gymnasium, dormitories, social hall and borrower. The bailee held in trust the property
stonewalls. subject matter of commodatum. The adverse
claim of petitioner came only in 1951 when it
1963: Heirs of Juan Valdez and Heirs of declared the lots for taxation purposes. The
Egmidio Octaviano claimed that they have action of petitioner Vicar by such adverse claim
ownership over lots 1, 2 and 3. (2 separate civil could not ripen into title by way of ordinary
cases) acquisitive prescription because of the
absence of just title.
1965: The land registration court confirmed the
registrable title of Vicar to lots 1, 2, 3 and 4. The Court of Appeals found that petitioner
Upon appeal by the private respondents Vicar did not meet the requirement of 30 years
(heirs), the decision of the lower court was possession for acquisitive prescription over
reversed. Title for lots 2 and 3 were cancelled. Lots 2 and 3. Neither did it satisfy the
requirement of 10 years possession for
VICAR filed with the Supreme Court a petition ordinary acquisitive prescription because of the
for review on certiorari of the decision of the absence of just title. The appellate court did
Court of Appeals dismissing his application for not believe the findings of the trial court that
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 8

Lot 2 was acquired from Juan Valdez by under it Quintos gratuitously granted the use of
purchase and Lot 3 was acquired also by the furniture to BECK, reserving for herself the
purchase from Egmidio Octaviano by petitioner ownership thereof; by this contract he bound
Vicar because there was absolutely no himself to return the furniture to Quintos, upon
documentary evidence to support the same the latter’s demand (clause 7 of the contract,
and the alleged purchases were never Exhibit A; articles 1740, paragraph 1, and 1741
mentioned in the application for registration. of the Civil Code). The obligation voluntarily
assumed by BECK to return the furniture upon
demand, means that he should return all of
MARGARITA QUINTOS and ANGEL A. them to Quintos at the latter's residence or
ANSALDO vs. BECK house. BECK did not comply with this
obligation when he merely placed them at the
FACTS: BECK was a tenant of the Quintos disposal of the Quintos, retaining for his benefit
and as such occupied the latter's house on M. the three gas heaters and the four eletric
H. del Pilar street, No. 1175. On January 14, lamps. The provisions of article 1169 of the
Civil Code cited by counsel for the parties are
1936, upon the novation of the contract of not squarely applicable. The trial court,
lease between them, the former gratuitously therefore, erred when it came to the legal
granted to the latter the use of the furniture conclusion that the Quintos failed to comply
subject to the condition that the BECK would with her obligation to get the furniture when
return them to the Quintos upon the latter's they were offered to her.
demand. Quintos sold the property to Maria
Lopez and Rosario Lopez and on September ISSUE 2: WON Quintos is bound to bear the
14, 1936, these three notified BECK of the deposit fees. NO.
conveyance, giving him sixty days to vacate
the premises under one of the clauses of the HELD 2: As BECK had voluntarily undertaken
contract of lease. There after Quintos required to return all the furniture to the Quintos, upon
BECK to return all the furniture transferred to the latter's demand, the Court could not legally
him for them in the house where they were compel her to bear the expenses occasioned
found. by the deposit of the furniture at the BECK's
behest. The latter, as bailee, was not entitled
On November 5, 1936, BECK, through another to place the furniture on deposit; nor was
person, wrote to Quintos reiterating that she Quintos under a duty to accept the offer to
may call for the furniture in the ground floor of return the furniture, because he wanted to
the house. On the 7th of the same month, he retain the three gas heaters and the four
wrote another letter to Quintos informing her electric lamps.
that he could not give up the three gas heaters
and the four electric lamps because he would As to the value of the furniture, we do not
use them until the 15th of the same month believe that Quintos is entitled to the payment
when the lease in due to expire. Quintos thereof by BECK in case of his inability to
refused to get the furniture in view of the fact return some of the furniture because under
that BECK had declined to make delivery of all paragraph 6 of the stipulation of facts, BECK
of them. On November 15th, before vacating has neither agreed to nor admitted the
the house, the BECK deposited with the Sheriff correctness of the said value. Should he fail to
all the furniture belonging to Quintos and they deliver some of the furniture, the value thereof
are now on deposit in the warehouse situated should be later determined by the trial Court
at No. 1521, Rizal Avenue, in the custody of through evidence which the parties may desire
the said sheriff. to present.

ISSUE 1: WON BECK complied with his ISSUE 3: WON Quintos is entitled to the costs
obligation to return the furniture upon the of litigation. YES.
Quintos’ demand. NO.
HELD 3: The costs in both instances should be
HELD 1: The contract entered into between borne by BECK because the plaintiff is the
the parties is one of commadatum, because prevailing party (section 487 of the Code of
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 9

Civil Procedure). He was the one who proceeds of ALS’s loan of P500,000. 

breached the contract of commodatum, and
without any reason he refused to return and On September 13, 1982, BPIIC released to
deliver all the furniture upon demand. In these ALS P7,146.87, purporting to be what was left
circumstances, it is just and equitable that he of their loan after full payment of Roa’s loan. 

pay the legal expenses and other judicial costs
which the plaintiff would not have otherwise In June 1984, BPIIC instituted foreclosure
defrayed. proceedings against ALS on the ground that
they failed to pay the mortgage indebtedness
POLICY: Commodatum is a contract where which from May 1, 1981 to June 30, 1984,
the bailor delivers to the bailee a non- amounted to P475,585.31. 

consumable thing so that the latter may use it
for a certain time and return the identical thing. ALS and Litonjua filed a civil case against
BPIIC. They alleged, among others, that they
were not in arrears in their payment, but in fact
III. Mutuum made an overpayment as of June 30, 1984.
They maintained that they should not be made
BPI INVESTMENT CORPORATION vs. HON. to pay amortization before the actual release of
COURT OF APPEALS and ALS the P500,000 loan in August and September
MANAGEMENT & DEVELOPMENT 1982. Further, out of the P500,000 loan, only
CORPORATION the total amount of P464,351.77 was released
to ALS. 

FACTS: Frank Roa obtained a loan at an
interest rate of 16.25% per annum from Ayala RTC favored ALS and Litonjua. CA affirmed in
Investment and Development Corporation toto. 

(AIDC), 
 the predecessor of petitioner BPIIC,
for the construction of a house on his lot in CA reasoned that a simple loan is perfected
New Alabang Village, Muntinlupa. Said house only upon the delivery of the object of the
and lot were mortgaged to AIDC to secure the contract. The contract of loan between BPIIC
loan. Sometime in 1980, Roa sold the house and ALS & Litonjua was perfected only on
and lot to private respondents ALS and September 13, 1982, the date when BPIIC
Antonio Litonjua for P850,000. They paid released the purported balance of the
P350,000 in cash and assumed the P500,000 P500,000 loan after deducting therefrom the
balance of Roa’s indebtedness with AIDC. 
 value of Roa’s indebtedness. Thus, payment of
the monthly amortization should commence
AIDC, however, was not willing to extend the only a month after the said date, as can be
old interest rate to ALS and proposed to grant inferred from the stipulations in the contract.
them a new loan of P500,000 to be applied to This, despite the express agreement of the
Roa’s debt and secured by the same property, parties that payment shall commence on May
at an interest rate of 20% per annum and 1, 1981. From October 1982 to June 1984, the
service fee of 1% per annum on the total amortization due was only P194,960.43.
outstanding principal balance payable within Evidence showed that ALS had an
ten years in equal monthly amortization. 
 overpayment. Therefore, there was no basis
for BPIIC to extrajudicially foreclose the
Consequently, on March 1981, ALS executed mortgage.
a mortgage deed containing the above
stipulations with the provision that payment of BPIIC contends among others that CA erred in
the monthly amortization shall commence on ruling that because a simple loan is perfected
May 1, 1981. 
 upon the delivery of the object of the contract,
the loan contract in this case was perfected
On August 1982, ALS and Litonjua updated only on September 13, 1982. BPIIC claims that
Roa’s arrearages by paying BPIIC the sum of a contract of loan is a consensual contract, and
P190,601.35. This reduced Roa’s principal a loan contract is perfected at the time the
balance to P457,204.90 which, in turn, was contract of mortgage is executed conformably
liquidated when BPIIC applied thereto the with SC’s ruling in Bonnevie v. CA, 125 SCRA
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 10

122. due as of the date when BPIIC extrajudicially

caused the foreclosure of the mortgage, the
ISSUE: WON a contract of loan is a starting date is October 13, 1982 and not May
consensual contract. NO, A CONTRACT OF 1, 1981.
LOAN IS A REAL CONTRACT.
Other points raised by BPIIC in connection with
HELD: 
 A loan contract is not a consensual this issue, such as the date of actual release of
contract but a real contract. It is perfected only the loan and whether ALS were the cause of
upon the DELIVERY of the object of the the delay in the release of the loan, are factual.
contract. BPIIC misapplied Bonnevie. The
contract in Bonnevie declared by this Court as CA decision was affirmed but with modification
a perfected consensual contract falls under the as to the award of damages.
first clause of Article 1934, CC. It is an
accepted promise to deliver something by way
of simple loan. 
 A perfected consensual YONG CHAN KIM vs. PEOPLE OF THE
contract, as shown above, can give rise to an PHILIPPINES, HON. EDGAR D. GUSTILO
action for damages. However, said contract Presiding Judge, RTC, 6th Judicial Region,
does not constitute the real contract of loan Branch 28 Iloilo City and COURT OF
which requires the delivery of the object of the APPEALS (13th Division), SOUTHEAST
contract for its perfection and which gives rise ASIAN FISHERIES DEVELOPMENT
to obligations only on the part of the borrower. CENTER AQUACULTURE DEPARTMENT
(SEAFDEC)
In the present case, the loan contract between
BPI, on the one hand, and ALS and Litonjua, FACTS: Petitioner Yong Chan Kim was
on the other, was perfected only on September employed as a Researcher at the Aquaculture
13, 1982, the date of the second release of the Department of the Southeast Asian Fisheries
loan. Following the intentions of the parties on Development Center (SEAFDEC) with head
the commencement of the monthly station at Tigbauan, Province of Iloilo. As Head
amortization, as found by the CA, ALS’s of the Economics Unit of the Research
obligation to pay commenced only on October Division, he conducted prawn surveys which
13, 1982, a month after the perfection of the required him to travel to various selected
contract. 
 A contract of loan involves a provinces in the country where there are
reciprocal obligation, wherein the obligation or potentials for prawn culture.
promise of each party is the consideration for
that of the other. On 15 June 1982, petitioner was issued Travel
Order No. 2222 which covered his travels to
As averred by ALS, the promise of BPIIC to different places in Luzon from 16 June to 21
extend and deliver the loan is upon the July 1982, a period of thirty five (35) days.
consideration that ALS and Litonjua shall pay Under this travel order, he received P6,438.00
the monthly amortization commencing on May as cash advance to defray his travel expenses.
1, 1981, one month after the supposed release
of the loan. It is a basic principle in reciprocal Within the same period, petitioner was issued
obligations that neither party incurs in delay, if another travel order, T.O. 2268, requiring him
the other does not comply or is not ready to to travel from the Head Station at Tigbauan,
comply in a proper manner with what is Iloilo to Roxas City from 30 June to 4 July
incumbent upon him. Only when a party has 1982, a period of five (5) days. For this travel
performed his part of the contract can he order, petitioner received a cash advance of
demand that the other party also fulfills his own P495.00.
obligation and if the latter fails, default sets in.
On 14 January 1983, petitioner presented both
Consequently, petitioner could only demand for travel orders for liquidation, submitting Travel
the payment of the monthly amortization after Expense Reports to the Accounting Section.
September 13, 1982 for it was only then when When the Travel Expense Reports were
it complied with its obligation under the loan audited, it was discovered that there was an
contract. Therefore, in computing the amount overlap of four (4) days (30 June to 3 July
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 11

1982) in the two (2) travel orders for which of money advanced to him by his employer, as
petitioner collected per diems twice. In sum, per diems and allowances.
the total amount in the form of per diems and
allowances charged and collected by petitioner Similarly, as stated in the assailed decision of
under Travel Order No. 2222, when he did not the lower court, "if the amount of the cash
actually and physically travel as represented advance he received is less than the amount
by his liquidation papers, was P1,230.00. he spent for actual travel . . . he has the right to
demand reimbursement from his employer the
Petitioner was required to comment on the amount he spent coming from his personal
internal auditor's report regarding the alleged funds.
anomalous claim for per diems. In his reply,
petitioner denied the alleged anomaly, claiming In other words, the money advanced by either
that he made make-up trips to compensate for party is actually a loan to the other. Hence,
the trips he failed to undertake under T.O. petitioner was under no legal obligation to
2222 because he was recalled to the head return the same cash or money, i.e., the bills or
office and given another assignment. coins, which he received from the private
respondent.
In September 1983, two (2) complaints for
Estafa were filed against the petitioner before Article 1933 and Article 1953 of the Civil
the Municipal Circuit Trial Court at Guimbal, Code define the nature of a simple loan.
Iloilo. Art. 1933. By the contract of loan, one
of the parties delivers to another, either
ISSUE: Whether or not petitioner can be held something not consumable so that the
criminally liable on the ground of failure to latter may use the same for a certain
liquidate her traveling expenses. NO. time and return it, in which case the
contract is called a commodatum; or
RULING: It is undisputed that petitioner money or other consumable thing, upon
received a cash advance from private the condition that the same amount of
respondent SEAFDEC to defray his travel the same kind and quality shall be paid,
expenses under T.O. 2222. It is likewise in which case the contract is simply
admitted that within the period covered by T.O. called a loan or mutuum.
2222, petitioner was recalled to the head
station in Iloilo and given another assignment Commodatum is essentially gratuitous.
which was covered by T.O. 2268. The dispute
arose when petitioner allegedly failed to return Simple loan may be gratuitous or with a
P1,230.00 out of the cash advance which he stipulation to pay interest.
received under T.O. 2222. For the alleged
failure of petitioner to return the amount of In commodatum the bailor retains the
P1,230.00, he was charged with the crime of ownership of the thing loaned, while in
Estafa under Article 315, par. 1(b) of the simple loan, ownership passes to the
Revised Penal Code. borrower.

In order that a person can be convicted under Art. 1953.— A person who receives a
the above-quoted provision, it must be proven loan of money or any other fungible
that he had the obligation to deliver or return thing acquires the ownership thereof,
the same money, good or personal property and is bound to pay to the creditor an
that he had received. Was petitioner under equal amount of the same kind and
obligation to return the same money (cash quality.
advance) which he had received? We believe
not. The ruling of the trial judge that ownership of
the cash advanced to the petitioner by private
Liquidation simply means the settling of respondent was not transferred to the latter is
indebtedness. An employee, such as herein erroneous. Ownership of the money was
petitioner, who liquidates a cash advance is in transferred to the petitioner.
fact paying back his debt in the form of a loan
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 12

Since ownership of the money (cash advance) and having obtained a loan from respondent,
was transferred to petitioner, no fiduciary alleging that the check was issued by
relationship was created. Absent this fiduciary respondent in Davao City on February 6, 1992
relationship between petitioner and private "in exchange for equivalent cash"; they never
respondent, which is an essential element of received from respondent any demand for
the crime of estafa by misappropriation or payment, be it verbal or written, respecting the
conversion, petitioner could not have alleged loan; since the alleged loan was one
committed estafa. with a period payable in six months, it should
have been expressly stipulated upon in writing
Additionally, it has been the policy of private by the parties but it was not, hence, the
respondent that all cash advances not essential requisite for the validity and
liquidated are to be deducted correspondingly enforceability of a loan is wanting; and the
from the salary of the employee concerned. check is inadmissible to prove the existence of
The evidence shows that the corresponding a loan for P250,000.00.
salary deduction was made in the case of
petitioner vis-a-vis the cash advance in 
 Petitioners maintain that they did not secure
question. a loan from respondent, insisting that they
encashed in Davao City respondent's February
(Failure of bank to return the amount 6, 1992 crossed check; in the ordinary course
deposited, not a case of estafa) of business, prudence dictates that a contract
of loan must be in writing as in fact the New
Civil Code provides that to be enforceable
SPOUSES ANTONIO and LOLITA TAN vs. "contracts where the amount involved
CARMELITO VILLAPAZ
 exceed[s] P500.00 must appear in writing even
a private one," hence, respondent's "self-
FACTS: On February 6, 1992, respondent serving" claim does not suffice to prove the
Villapaz issued a Philippine Bank of existence of a loan; respondent's allegation
Communications (PBCom) crossed check in that no memorandum in writing of the
the amount of P250,000.00, payable to the transaction was executed because he and they
order of petitioner Tony Tan. On that date, the are "kumpadres" does not inspire belief for
check was deposited at the drawee bank, respondent, being a businessman himself, was
PBCom Davao City branch at Monteverde with more reason expected to be more
Avenue, to the account of petitioner Antonio prudent; and the mere encashment of the
Tan also at said bank. check is not a contractual transaction such as
a sale or a loan which ordinarily requires a

 On November 7, 1994 respondent filed a receipt and that explains why they did not
Complaint for sum of money against the issue a receipt when they encashed the check
spouses, alleging that on February 6, 1992, the of respondent.
spouses went to his place of business at
Malita, Davao and obtained a loan of Petitioners furthermore maintain that they were
P250,000.00, hence, his issuance of the financially stable on February 6, 1992 as
February 6, 1992 PBCom crossed check which shown by the entries of their bank passbook
loan was to be settled interest-free in six (6) hence, there was no reason for them to go to a
months. distant place like Malita to borrow money.

On the maturity date of the loan or on August 
 The lower Court gave four reasons for ruling
6, 1992, petitioner Antonio Tan failed to settle out a loan:
the same, and despite repeated demands, (a) the defense of spouses Tan that they did
petitioners never did, drawing Villapaz to file not go to Villapaz's place on February 6, 1992,
the complaint; and on account of the willful date the check was given to them;
refusal of petitioners to honor their obligation, (b) Spouses Tan could not have borrowed
he suffered moral damages in the amount of money on that date because from January to
P50,000.00, among other things. March, 1992, they had an average daily
deposit of P700,000 and on February 6, 1992,

 The spouses denied having gone to Malita they had P1,211,400.64 in the bank, hence,
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 13

they had "surely no reason nor logic" to borrow

money from Villapaz; 
 That apart from the check, no written proof of
(c) the alleged loan was not reduced in writing the grant of the loan was executed was
and the check could not be a competent credibly explained by respondent when he
evidence of loan. declared that petitioners' son being his godson,
he, out of trust and respect, believed that the
ISSUE: Whether or not the transaction in crossed check sufficed to prove their
dispute was a contract of loan and not a mere transaction.
matter of check encashment as found by the
trial court. YES. 
 As for petitioners' reliance on Art. 1358[22] of
the Civil Code, the same is misplaced for the
HELD: The four-fold reasoning cannot be requirement that contracts where the amount
sustained. They are faulty and do not accord involved exceeds P500.00 must appear in
either with law or ordinary conduct of men. For writing is only for convenience.
one thing, the first two given reasons partake
more of alibi and speculation, hence, deserve 
 At all events, a check, the entries of which
scant consideration. For another, the last two are no doubt in writing, could prove a loan
miss the applicable provisions of law. transaction.



 The existence of a contract of loan cannot be
denied merely because it is not reduced in PNB VS. CA AND IBARROLA
writing. Surely, there can be a verbal loan.
Contracts are binding between the parties, FACTS: Province of Isabela issued several
whether oral or written. The law is explicit that checks drawn against its account with PNB (P)
contracts shall be obligatory in whatever form in favor of Lyndon Pharmaceuticals
they may have been entered into, provided all Laboratories, a business operated by Ibarrola
the essential requisites for their validity are (R), as payments for the purchase of
present. A loan (simple loan or mutuum) exists medicines.
when a person receives a loan of money or
any other fungible thing and acquires the The checks were delivered to R’s agents who
ownership thereof. He is bound to pay to the turned them over to R, except 23 checks
creditor the equal amount of the same kind and amounting to P98k. Due to failure to receive
quality. full amount, R filed case against P.


 Contracts are perfected by mere consent, Trial Court, CA and SC ordered PNB to pay;
and from that moment the parties are bound however, all 3 courts failed to specify the legal
not only to the fulfillment of what has been rate of interest – 6% or 12%.
expressly stipulated but also to all the
consequences which, according to their nature, ISSUE: WoN the rate to be used is 6%.
maybe in keeping with good faith, usage and
law. HELD: YES. This case does not involve a loan,
forbearance of money or judgment involving a

 The lower Court misplaced its reliance on loan or forbearance of money as it arose from
Article 1358 of the Civil Code providing that to a contract of sale whereby R did not receive
be enforceable, contracts where the amount full payment for her merchandise.
involved exceed five hundred pesos, must
appear in writing. Such requirement, it has When an obligation arises “from a contract of
been held, is only for convenience, not for purchase and sale and not from a contract of
validity. It bears emphasis that at the time loan or mutuum,” the applicable rate is 6% per
Villapaz delivered the crossed-check to the annum as provided in Art. 2209 of the NCC
petitioner spouses, Villapaz had no account and not the rate of 12% per annum as provided
whatsoever with them. Spouses' contention in (CB) Cir. No. 416.
that they did not obtain any loan but merely
exchanged the latter's check for cash is not The rate of 12% interest referred to in Cir. 416
borne by any evidence. applies only to: Loan or forbearance of money,
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 14

or to cases where money is transferred from provisions in the contract.

one person to another and the obligation to
return the same or a portion thereof is In a letter in 2000, Spouses demanded the
adjudged. return of the amount within 15 days from
receipt. In reply, Estores promised to return the
Any other monetary judgment which does not same within 120 days. Spouses agreed but
involve or which has nothing to do with loans imposed an interest of 12% annually. Estores
or forbearance of any money, goods or credit still failed despite demands.
does not fall within its coverage for such
imposition is not within the ambit of the Spouses filed a complaint with the RTC against
authority granted to the Central Bank. Estores and Roberto Arias (allegedly acted as
Estores’ agent).
When an obligation not constituting a loan or
forbearance of money is breached then an In Answer, Estores said they were willing to
interest on the amount of damages awarded pay the principal amount but without the
may be imposed at the discretion of the court interest as it was not agreed upon. That since
at the rate of 6% per annum in accordance the Conditional Deed of Sale provided only for
with Art. 2209 of the Civil Code. Indeed, the the return of the downpayment in case of
monetary judgment in favor of private breach, they cant be liable for legal interest as
respondent does not involve a loan or well.
forbearance of money, hence the proper
imposable rate of interest is six (6%) per cent. RTC ruled saying that the Spouses are entitled
to the interest but only at 6% per annum and
Therefore, the proper rate of interest referred also entitled to atty’s fees. On appeal, CA said
to in the judgment under execution is only 6%. that the issue to resolve is whether it is proper
This interest shall be computed from the time to impose interest for an obligation that does
of the filing of the complaint considering that not involve a loan or forbearance of money in
the amount adjudged (P98,691.90) can be the absence of stipulation of the parties. CA
established with reasonable certainty. Said affirmed RTC.
amount being merely the uncollected balance
of the purchase price covered by the 23 That interest should start on date of formal
checks encashed and appropriated by demand by Spouses to return the money not
Ibarrola's agents. However, once the judgment when contract was executed as stated by the
becomes final and executory, the "interim RTC; That Arias not be solidarily liable as he
period from the finality of judgment awarding a acted as agent only and did not expressly bind
monetary claim and until payment thereof, is himself or exceeded his authority.
deemed to be equivalent to a forbearance of
credit." Estores contends: Not bound to pay interest
because the deed only provided for the return
*6% from filing of complaint until full payment of the downpayment in case of failure to
before finality of judgment. comply with her obligations; That atty fees not
*12% from finality of judgment. proper because both RTC and CA sustained
HERMOJINA ESTORES VS. SPOUSES her contention that 12% interest was uncalled
ARTURO AND LAURA SUPANGAN for so it showed that Spouses did not win.

FACTS: In Oct. 1993, Hermojina Estores and Spouses contend: It is only fair that interest be
Spouses Supangan entered into a Conditional imposed because Estores failed to return the
Deed of Sale where Estores offered to sell, and amount upon demand and used the money for
Spouses offered to buy a parcel of land in her benefit.
Cavite for P4.7M.
Estores failed to relocate the house outside the
After almost 7 years and despite the payment perimeter of the subject lot and complete the
of P3.5M by the Spouses, Estores still failed to necessary documents.
comply with her obligation to handle the
peaceful transfer of ownership as stated in 5 As to the fees, they claim that they were forced
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 15

to litigate when Estores unjustly held the goods or credits” is meant to have a separate
amount. meaning from a loan, otherwise there would have
been no need to add that phrase as a loan is
ISSUES: Is the imposition of interest and already sufficiently defined in the Civil Code
attorney’s fees is proper? YES
Interest based on Art 2209 of CC (6%) or under Forbearance of money, goods or credits should
Central Bank Circular 416 (12%)? 12% therefore refer to arrangements other than loan
agreements, where a person acquiesces to the
HELD: Interest may be imposed even in the temporary use of his money, goods or credits
absence of stipulation in the contract. pending happening of certain events or fulfillment
Article 2210 of the Civil Code expressly provides of certain conditions.
that “interest may, in the discretion of the court, be
allowed upon damages awarded for breach of Estores’ unwarranted withholding of the money
contract.” amounts to forbearance of money which can be
considered as an involuntary loan so rate is 12%
Estores failed on her obligations despite demand. starting in Sept. 2000
She admitted that the conditions were not The award of attorney’s fees is warranted.
fulfilled and was willing to return the full No doubt that the Spouses were forced to litigate to
amount of P3.5M but hasn’t done so she is protect their interest, i.e., to recover their
now in default. money. The amount of P50,000.00 is more
appropriate.
The interest at the rate of 12% is applicable
in the instant case.
Gen Rule: the applicable interest rate shall be PAN PACIFIC vs EQUITABLE PCI BANK
computed in accordance with the stipulation of
the parties FACTS: Pan Pacific is engaged in contracting
mechanical works on airconditioning system.
Exc: if no stipulation, applicable rate of interest They entered into a contract of mechanical
shall be 12% per annum when obligation works with respondent for the total
arises out of a loan or forbearance of money, consideration for the whole project
goods or credits. In other cases, it shall be 6% was P23,311,410.30. The Contract stipulated
that Pan Pacific shall be entitled to a price
In this case, no stipulation was made. adjustment in case of increase in labor costs
and prices of materials under paragraphs 70.1
Contract involved in this case is not a loan and 70.2 of the General Conditions for the
but a Conditional Deed of Sale. Construction of PCIB Tower II Extension.

No question that the obligations were not Pan Pacific commenced the mechanical works
met and the return of money not made in the project site. In 1990, labor costs and
prices of materials escalated. On 5 April 1991,
Even if transaction was a Conditional Deed in accordance with the escalation clause, Pan
of Sale, the stipulation governing the return Pacific claimed a price adjustment
of the money can be considered as a of P5,165,945.52. Respondents asked for a
forbearance of money which requires 12% reduction in the price adjustment. To show
interest goodwill, Pan Pacific reduced the price
adjustment toP4,858,548.67.
In Crismina Garments, Inc. v. Court of Appeals,
Forbearance-- “contractual obligation of lender or On 28 April 1992, respondent asked that the
creditor to refrain during a given period of time, price adjustment should be pegged
from requiring the borrower or debtor to repay at P3,730,957.07, based on the DOLE Labor
a loan or debt then due and payable.” Indices and the General Conditions of their
contract.
In such case, “forbearance of money, goods or
credits” will have no distinct definition from a Due to the extraordinary increases in the costs
loan. However, the phrase “forbearance of money, of labor and materials, Pan Pacific’s
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 16

operational capital was becoming inadequate PRICE, AND INTEREST AT THE LEGAL
for the project. However, respondent withheld RATE OF TWELVE (12%) PERCENT PER
the payment of the price adjustment under the ANNUM
escalation clause despite Pan Pacifics
repeated demands. The CA removed the deduction
ofP126,903.97 because it represented the final
Instead, respondent offered Pan Pacific a loan payment on the basic contract price. Hence,
of P1.8 million. Pan Pacific was constrained to the CA ordered respondent to
execute a promissory note in the amount pay P1,516,015.07 to petitioners, with interest
of P1.8 million as a requirement for the loan. at the legal rate of 12% per annum starting 6
Pan Pacific also posted a surety bond. May 1994.
The P1.8 million was released directly to
laborers and suppliers and not a single On MR he CA increased the loan rate to 18%,
centavo was given to Pan Pacific. rate of equitable PCI.

Pan Pacific made several demands for ISSUE: Whether the CA, in awarding the
payment on the price adjustment but unpaid balance of the price adjustment, erred
respondent merely kept on promising to in fixing the interest rate at 12% instead of the
release the same. Meanwhile, the P1.8 18% bank lending rate. YES
million loan matured and respondent
demanded payment plus interest and penalty. HELD: The CA went beyond the intent of the
Pan Pacific refused to pay the loan. Pan parties by requiring respondent to give its
Pacific insisted that it would not have incurred consent to the imposition of interest before
the loan if respondent released the price petitioners can hold respondent liable for
adjustment on time. Pan Pacific alleged that interest at the current bank lending rate. This is
the promissory note did not express the true erroneous. A review of Section 2.6 of the
agreement of the parties. Pan Pacific Agreement and Section 60.10 of the General
maintained that the P1.8 million was to be Conditions shows that the consent of the
considered as an advance payment on the respondent is not needed for the imposition of
price adjustment. Therefore, there was really interest at the current bank lending rate, which
no consideration for the promissory note; occurs upon any delay in payment.
hence, it is null and void from the beginning.
Article 1956 of the Civil Code, which refers to
Respondent stood firm that it would not release monetary interest, specifically mandates that
any amount of the price adjustment to Pan no interest shall be due unless it has been
Pacific but it would offset the price adjustment expressly stipulated in writing. Therefore,
with Pan Pacifics outstanding balance payment of monetary interest is allowed only if:
of P3,226,186.01, representing the loan, (1) there was an express stipulation for the
interests, penalties and collection charges. payment of interest; and
(2) the agreement for the payment of interest
Pan Pacific refused the offsetting but agreed to was reduced in writing. The concurrence of the
receive the reduced amount two conditions is required for the payment of
of P3,730,957.07 as recommended by the monetary interest.
TCGI Engineers for the purpose of extrajudicial
settlement, less P1.8 million and P414,942 as The consent of the respondent is not needed in
advance payments. order to impose interest at the current bank
lending rate.
On 6 May 1994, petitioners filed a complaint
for declaration of nullity/annulment of the Under Article 2209 of the Civil Code, the
promissory note, sum of money, and damages appropriate measure for damages in case of
against the respondent with the RTC. On 12 delay in discharging an obligation consisting of
April 1999, the RTC declared the promissory the payment of a sum of money is the payment
note as null and void and ordered Pan Pacific of penalty interest at the rate agreed upon in
to pay P1,389,111.10 REPRESENTING the contract of the parties. In the absence of a
UNPAID BALANCE OF THE ADJUSTMENT stipulation of a particular rate of penalty
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 17

interest, payment of additional interest at a rate As of January 4, 1997, respondent found that
equal to the regular monetary interest the petitioners still had an outstanding balance
becomes due and payable. Finally, if no of P1,364,151.00, to which respondent applied
regular interest had been agreed upon by the a 4% monthly interest.
contracting parties, then the damages payable
will consist of payment of legal interest which is On August 28, 1997, respondent filed a
6%, or in the case of loans or forbearances of complaint for sum of money to enforce the
money, 12% per annum. It is only when the unpaid balance, plus 4% monthly interest. The
parties to a contract have failed to fix the rate petitioners admitted the loan of P1,240,000.00,
of interest or when such amount is but denied the stipulation on the 4% monthly
unwarranted that the Court will apply the 12% interest, arguing that the interest was not
interest per annum on a loan or forbearance of provided in the promissory note. Pantaleon
money. also denied that he made himself personally
liable and that he made representations that
The written agreement entered into between the loan would be repaid within six (6) months.
petitioners and respondent provides for an
interest at the current bank lending rate in case RTC found that the respondent issued a check
of delay in payment and the promissory note for P1M in favor of the petitioners for a loan
charged an interest of 18%. that would earn an interest of 4% or
P40,000.00 per month, or a total of
To prove petitioners entitlement to the 18% P240,000.00 for a 6-month period. RTC
bank lending rate of interest, petitioners ordered the petitioners to jointly and severally
presented the promissory note prepared by pay the respondent the amount of
respondent bank itself. This promissory note, P3,526,117.00 plus 4% per month interest
although declared void by the lower courts from February 11, 1999 until fully paid.
because it did not express the real intention of
the parties, is substantial proof that the bank Petitioners appealed to CA insisting that there
lending rate at the time of default was 18% per was no express stipulation on the 4% monthly
annum. Absent any evidence of fraud, undue interest. CA favored respondent but noted that
influence or any vice of consent exercised by the interest of 4% per month, or 48% per
petitioners against the respondent, the interest annum, was unreasonable and should be
rate agreed upon is binding on them. reduced to 12% per annum. MR denied hence
this petition.

PRISMA CONSTRUCTION & ISSUE: Whether the parties agreed to the 4%

DEVELOPMENT CORPORATION and monthly interest on the loan. If so, does the
ROGELIO S. PANTALEON vs ARTHUR F. rate of interest apply to the 6-month payment
MENCHAVEZ period only or until full payment of the loan?

FACTS: December 8, 1993, Pantaleon, RULING: Interest due should be stipulated in

President and Chairman of the Board of writing; otherwise, 12% per annum APPLIES.
PRISMA, obtained a P1M loan from the
respondent, with monthly interest of Obligations arising from contracts have the
P40,000.00 payable for 6 months, or a total force of law between the contracting parties
obligation of P1,240,000.00 payable within 6 and should be complied with in good faith.
months. When the terms of a contract are clear and
leave no doubt as to the intention of the
To secure the payment of the loan, Pantaleon contracting parties, the literal meaning of its
issued a promissory. Pantaleon signed the stipulations governs. Courts have no authority
promissory note in his personal capacity and to alter the contract by construction or to make
as duly authorized by the Board of Directors of a new contract for the parties; a court’s duty is
PRISMA. The petitioners failed to completely confined to the interpretation of the contract
pay the loan within the 6-month period. the parties made for themselves without regard
to its wisdom or folly, as the court cannot
supply material stipulations or read into the
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 18

contract words the contract does not contain. It The facts show that the parties agreed to the
is only when the contract is vague and payment of a specific sum of money of
ambiguous that courts are permitted to resort P40,000.00 per month for six months, not to a
to the interpretation of its terms to determine 4% rate of interest payable within a 6-month
the parties’ intent. period.

In the present case, the respondent issued a No issue on the excessiveness of the
check for P1M. In turn, Pantaleon, in his stipulated amount of P40,000.00 per month
personal capacity and as authorized by the was ever put in issue by the petitioners; they
Board, executed the promissory note. Thus, only assailed the application of a 4% interest
the P1M loan shall be payable within 6 months. rate, since it was not agreed upon.
The loan shall earn an interest of P40,000.00
per month, for a total obligation of It is a familiar doctrine in obligations and
P1,240,000.00 for the six-month period. We contracts that the parties are bound by the
note that this agreed sum can be computed at stipulations, clauses, terms and conditions they
4% interest per month, but no such rate of have agreed to, which is the law between
interest was stipulated in the promissory note; them, the only limitation being that these
rather a fixed sum equivalent to this rate was stipulations, clauses, terms and conditions are
agreed upon. not contrary to law, morals, public order or
public policy. The payment of the specific sum
Article 1956 of the Civil Code specifically of money of P40,000.00 per month was
mandates that “no interest shall be due unless voluntarily agreed upon by the petitioners and
it has been expressly stipulated in writing.” The the respondent. There is nothing from the
payment of interest in loans or forbearance of records and, in fact, there is no allegation
money is allowed only if: (1) there was an showing that petitioners were victims of fraud
express stipulation for the payment of interest; when they entered into the agreement with the
and (2) the agreement for the payment of respondent.
interest was reduced in writing. The
concurrence of the two conditions is required Therefore, as agreed by the parties, the loan of
for the payment of interest at a stipulated rate. P1M shall earn P40,000.00 per month for a
The collection of interest without any period of 6 months, for a total principal and
stipulation in writing is prohibited by law. interest amount of P1,240,000.00. Thereafter,
interest at the rate of 12% per annum shall
The interest of P40,000.00 per month apply. The amounts already paid by the
corresponds only to the six-month period of the petitioners during the pendency of the suit,
loan, or from January 8, 1994 to June 8, 1994, amounting toP1,228,772.00 as of February 12,
as agreed upon by the parties in the 1999, should be deducted from the total
promissory note. Thereafter, the interest on the amount due, computed as indicated above. We
loan should be at the legal interest rate of 12% remand the case to the trial court for the actual
per annum. computation of the total amount due.

When the obligation is breached, and it

consists in the payment of a sum of money,
i.e., a loan or forbearance of money, the EASTERN SHIPPING LINES, INC. vs. HON.
interest due should be that which may have COURT OF APPEALS AND MERCANTILE
been stipulated in writing. Furthermore, the INSURANCE COMPANY, INC
interest due shall itself earn legal interest from
the time it is judicially demanded. In the FACTS: This is an action against defendants
absence of stipulation, the rate of interest shall shipping company, arrastre operator and
be 12% per annum to be computed from broker-forwarder for damages sustained by a
default, i.e., from judicial or extrajudicial shipment while in defendants' custody, filed by
demand under and subject to the provisions of the insurer-subrogee who paid the consignee
Article 1169 of the Civil Code. the value of such losses/damages.
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 19

On December 4, 1981, two fiber drums of

riboflavin were shipped from Yokohama, Japan ISSUE:
for delivery vessel "SS EASTERN COMET" 1. Whether or not a claim for damage
owned by defendant Eastern Shipping Lines. sustained on a shipment of goods can be a
The shipment was insured under plaintiff's solidary, or joint and several, liability of the
Marine Insurance Policy No. 81/01177 for common carrier, the arrastre operator and the
P36,382,466.38. customs broker. YES
2. Whether the payment of legal interest on an
Upon arrival of the shipment in Manila on award for loss or damage is to be computed
December 12, 1981, it was discharged unto from the time the complaint is filed or from the
the custody of defendant Metro Port Service, date the decision appealed from is rendered.
Inc. The latter excepted to one drum, said to 3. Whether the applicable rate of interest,
be in bad order, which damage was unknown referred to above, is twelve percent (12%) or
to plaintiff. six percent (6%). 6%

On January 7, 1982 defendant Allied HELD:

Brokerage Corporation received the shipment 1. Solidary. Since it is the duty of the
from defendant Metro Port Service, Inc., one ARRASTRE to take good care of the goods
drum opened and without seal. that are in its custody and to deliver them in
good condition to the consignee, such
On January 8 and 14, 1982, defendant Allied responsibility also devolves upon the
Brokerage Corporation made deliveries of the CARRIER. Both the ARRASTRE and the
shipment to the consignee's warehouse. The CARRIER are therefore charged with the
latter excepted to one drum which contained obligation to deliver the goods in good
spillages, while the rest of the contents was condition to the consignee.
adulterated/fake.
The common carrier's duty to observe the
Plaintiff contended that due to the requisite diligence in the shipment of goods
losses/damage sustained by said drum, the lasts from the time the articles are surrendered
consignee suffered losses totaling P19,032.95, to or unconditionally placed in the possession
due to the fault and negligence of defendants. of, and received by, the carrier for
Claims were presented against defendants transportation until delivered to, or until the
who failed and refused to pay the same. lapse of a reasonable time for their acceptance
by, the person entitled to receive them (Arts.
As a consequence of the losses sustained, 1736-1738, Civil Code; Ganzon vs. Court of
plaintiff was compelled to pay the consignee Appeals, 161 SCRA 646; Kui Bai vs. Dollar
P19,032.95 under the aforestated marine Steamship Lines, 52 Phil. 863). When the
insurance policy, so that it became subrogated goods shipped either are lost or arrive in
to all the rights of action of said consignee damaged condition, a presumption arises
against defendants against the carrier of its failure to observe that
diligence, and there need not be an express
The Court, among others, ordered defendants finding of negligence to hold it liable.
to pay plaintiff, jointly and severally The
amount of P19,032.95, with the present legal 2. It may not be unwise, by way of clarification
interest of 12% per annum from October 1, and reconciliation, to suggest the following
1982, the date of filing of this complaints, until rules of thumb for future guidance.
fully paid (the liability of defendant Eastern
Shipping, Inc. shall not exceed US$500 per I. When an obligation, regardless of its
case or the CIF value of the loss, whichever is source, i.e., law, contracts, quasi-contracts,
lesser, while the liability of defendant Metro delicts or quasi-delicts is breached, the
Port Service, Inc. shall be to the extent of the contravenor can be held liable for
actual invoice value of each package, crate damages. The provisions under Title XVIII on
box or container in no case to exceed "Damages" of the Civil Code govern in
P5,000.00 each, pursuant to Section 6.01 of determining the measure of recoverable
the Management Contract) damages.
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 20

II. With regard particularly to an award of NOTE: The Central Bank Circular imposing the
interest in the concept of actual and 12% interest per annum applies only to loans
compensatory damages, the rate of interest, as or forbearance of money, goods or credits, as
well as the accrual thereof, is imposed, as well as to judgments involving such loan or
follows: forbearance of money, goods or credits, and
1. When the obligation is breached, and it that the 6% interest under the Civil Code
consists in the payment of a sum of governs when the transaction involves the
money, i.e., a loan or forbearance of money, payment of indemnities in the concept of
the interest due should be that which may have damage arising from the breach or a delay in
been stipulated in writing. Furthermore, the the performance of obligations in general.
interest due shall itself earn legal interest from Observe, too, that in these cases, a common
the time it is judicially demanded. In the time frame in the computation of the 6%
absence of stipulation, the rate of interest shall interest per annum has been applied, i.e., from
be 12% per annum to be computed from the time the complaint is filed until the
default, i.e., from judicial or extrajudicial adjudged amount is fully paid.
demand under and subject to the provisions of
Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan PILIPINAS BANK vs. COURT OF APPEALS
or forbearance of money, is breached, an
interest on the amount of damages awarded FACTS: Private respondent Lilia Echaus filed
may be imposed at the discretion of the a complaint against petitioner and its president,
court at the rate of 6% per annum. No interest, Constantino Bautista, for collection of a sum of
however, shall be adjudged on unliquidated money. The complaint alleged: (1) that
claims or damages except when or until the petitioner and Greatland Realty Corporation
demand can be established with reasonable executed a "Dacion en Pago," wherein
certainty. Accordingly, where the demand is Greatland conveyed to petitioner several
established with reasonable certainty, the parcels of land in consideration of the sum of
interest shall begin to run from the time the P7,776,335.69; (2) that Greatland assigned
claim is made judicially or extrajudicially (Art. P2,300,000.00 out of the total consideration of
1169, Civil Code) but when such certainty the Dacion en Pago, in favor of private
cannot be so reasonably established at the respondent; and (3) that notwithstanding her
time the demand is made, the interest shall demand for payment, petitioner in bad faith,
begin to run only from the date the judgment of refused and failed to pay the said amount
the court is made (at which time the assigned to her.
quantification of damages may be deemed to
have been reasonably ascertained). The actual The trial court ordered petitioner and its co-
base for the computation of legal interest shall, defendant, jointly and severally, to pay private
in any case, be on the amount finally adjudged. respondent P2,300,000.00 the total amount
3. When the judgment of the court awarding a assigned by Greatland in her favor out of the
sum of money becomes final and executory, P2,300,000.00 liability of defendant Pilipinas to
the rate of legal interest, whether the case falls Greatland plus legal interest from the dates of
under paragraph 1 or paragraph 2, above, assignments until fully paid.
shall be 12% per annum from such finality until
its satisfaction, this interim period being On March 22, 1985, petitioner appealed the
deemed to be by then an equivalent to a decision of the trial court to the Court of
forbearance of credit. Appeals. On the same day, private respondent
filed a motion for Immediate Execution
3. The legal interest to be paid is SIX Pending Appeal which the trial court granted.
PERCENT (6%) on the amount due computed
from the decision, dated 03 February 1988, of Petitioner complied with the writ of execution
the court a quo. A TWELVE PERCENT (12%) pending appeal by issuing two manager's
interest, in lieu of SIX PERCENT (6%), shall be checks in the total amount of P5,517,707.00
imposed on such amount upon finality of this and which was encashed by the private
decision until the payment thereof. respondent.
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 21

there being no stipulation to the contrary,

On June 28, 1990, the Court of Appeals shall be the payment of the interest agreed
rendered a decision in CA-G.R. No. CV-06017, upon, and in the absence of stipulation, the
which modified the judgment and ordered legal interest, which is six per cent per
Pilipinas Bank to pay 2,300,000,00 Pesos, annum.
representing the total amount assigned by
Greatland to her, with interest at the legal rate ISSUE: Whether or not the legal rate of
starting July 24, 1981, date when demand was interest on the amount of P2,300,000.00
first made. adjudged to be paid by petitioner to private
respondent is 12% per annum.
On September 4, 1990, petitioner filed a
motion in the trial court praying that private RULING: Presidential Decree No. 116
respondent to refund to her the excess authorized the Monetary Board to prescribe the
payment of P1,898,623.67 with interests at maximum rate or rates of interest for the loan
6%. or renewal thereof or the forbearance of any
money, goods or credits and amended the
Private respondent opposed the motion of Usury Law (Act No. 2655) for that purpose.
petitioner with respect to the rate of interest to
be charged on the amount of P2,300,000.00. As amended, the Usury Law now provides:
According to private respondent, the legal Sec. The rate of interest for the loan or
interest on the principal amount of forbearance of any money, goods, or
P2,300,000.00 due her should be 12% per credits and the rate allowed in judgments,
annum pursuant to CB Circular No. 416 and in the absence of express contract as to
not 6% per annum as computed by petitioner. such rate of interest, shall be six per
centum per annum or such rate as may be
On October 12, 1990, the trial court, while prescribed by the Monetary Board of the
ordering the refund to petitioner of the excess Central Bank of the Philippines for that
payment, fixed the interest rate due on the purpose in accordance with the authority
amount of P2,300.000.00 at 12% per hereby granted.
annum as proposed by private respondent,
instead of 6% per annum as proposed by Sec. 1-a. The Monetary Board is hereby
petitioner. authorized to prescribe the maximum rate
or rates of interest for the loan or renewal
The Court of Appeals was of the theory that thereof or the forbearance of any money,
the action in Civil Case No. 239-A filed by goods or credits, and to charge such rate
private respondent against petitioner "involves or rates whenever warranted by prevailing
forbearance of money, as the principal award economic and social conditions:Provided,
to plaintiff-appellee (private respondent) in the That such changes shall not be made
amount of P2,300.000.00 was the overdue oftener that once every twelve months.
debt of defendant-appellant to her since July
1981. The case is, in effect, a simple collection In the exercise of the authority herein
of the money due to plaintiff-appellee, as the granted, the Monetary Board may
unpaid creditor from the defendant bank, the prescribe higher maximum rates for
debtor" (Resolution, p.3; Rollo, p. 33). Applying consumer loans or renewals thereof as
Central Bank Circular No. 416, the Court of well as such loans made by pawnshops,
Appeals held that the applicable rate of interest finance companies and other similar credit
is 12% per annum. institutions although the rates prescribed
for these institutions need not necessarily
Petitioner argues that the applicable law is be uniform.
Article 2209 of the Civil Code, not the Central
Bank Circular No. 416. Said Article 2209 Acting on the authority vested on it by the
provides: Usury Law, as amended by P.D. No. 116, the
Art. 2209. If the obligation consists in the Monetary Board of Central Bank issued
payment of a sum of money, and the debtor Central Bank Circular No. 416, which provides:
incurs in delay, the indemnity for damages,
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 22

By virtue of the authority granted to it pending appeal, funds are advanced by the
under Section 1 of Act 2655, as amended, losing party to the prevailing party with the
otherwise known as the "Usury Law" the implied obligation of the latter to repay former,
Monetary Board in its Resolution No. 1622 in case the appellate court cancels or reduces
dated July 29, 1974, has prescribed that the monetary award.
the rate of interest for the loan, or
forbearance of any money, goods, or In the case before us, the excess amount
credits and the rate allowed in judgments, ordered to refunded by private respondent falls
in the absence of express contract as to within the ruling in Viloria and Buiser that
such rate of interest, shall be twelve (12%) Circular No. 416 applies to cases where
per cent per annum. This Circular shall money is transferred from one person to
take effect immediately. another and the obligation to return the same
or a portion thereof is subsequently adjudged.
Note that Circular No. 416, fixing the rate of
interest at 12% per annum, deals with (1)
loans; (2) forbearance of any money, goods or CHUA vs. TIMAN
credit; and (3) judgments.
FACTS: In February and March 1999,
What then is the nature of the judgment petitioners Salvador and Violeta Chua granted
ordering petitioner to pay private respondent respondents Rodrigo, Ma. Lynn and Lydia
the amount of P2,300,000.00? Timan the following loans: a) P100,000;
b) P200,000; c) P150,000; d) P107,000;
The said amount was a portion of the e) P200,000; and f) P107,000. These loans
P7,776,335.69 which petitioner was obligated were evidenced by promissory notes with
to pay Greatland as consideration for the sale interest of 7% per month, which was later
of several parcels of land by Greatland to reduced to 5% per month.
petitioner. The amount of P2,300,000.00 was
assigned by Greatland in favor of private Respondents paid the loans initially at 7%
respondent. The said obligation therefore interest rate per month until September 1999
arose from a contract of purchase and sale and then at 5% interest rate per month from
and not from a contract of loan or mutuum. October to December 1999. Sometime in
Hence, what is applicable is the rate of 6% per March 2000, respondents offered to pay the
annum as provided in Article 2209 of the Civil principal amount of the loans through a
Code of the Philippines and not the rate of Philippine National Bank manager’s check
12% per annum as provided in Circular No. worth P764,000, but petitioners refused to
416. accept the same insisting that the principal
amount of the loans totalled P864,000.
Petitioner next contends that, consistent with
its thesis that Circular No. 416 applies only to On May 3, 2000, respondents
judgments involving the payment of loans or deposited P864,000 with the Clerk of Court of
forbearance of money, goods and credit, the the RTC of Quezon City. Later, they filed a
Court of Appeals should have ordered private case for consignation and damages which was
respondent to pay interest at the rate of 12% released to the petitioners.
on the overpayment collected by her pursuant
to the advance execution of the judgment. The RTC rendered a decision in favor of
respondents which was affirmed by the CA. It
We sustain petitioner's contention as correct. ruled that the original stipulated interest rates
Private respondent was paid in advance the of 7% and 5% per month were excessive. It
amount of P5,517,707.00 by petitioner to the further ordered petitioners to refund to
order for the execution pending appeal of the respondents all interest payments in excess of
judgment of the trial court. On appeal, the the legal rate of 1% per month or 12% per
Court of Appeals reduced the total damages to annum.
P3,619,083.33, leaving a balance of
P1,898,623.67 to be refunded by private The Court of Appeals declared illegal the
respondent to petitioner. In an execution stipulated interest rates of 7% and 5% per
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 23

month for being excessive, iniquitous, petition for review under Rule 45 of the Rules
unconscionable and exorbitant. Accordingly, of Civil Procedure which allows only questions
the Court of Appeals reduced the stipulated of law.
interest rates of 7% and 5% per month
(equivalent to 84% and 60% per annum, As well set forth in Medel:
respectively) to a fair and reasonable rate of We agree … that the stipulated rate of
1% per month or 12% per annum. The Court of interest at 5.5% per month on
Appeals also ordered petitioners to refund to the P500,000.00 loan is excessive,
respondents all interest payments in excess of iniquitous, unconscionable and exorbitant.
12% per annum. However, we can not consider the rate
"usurious" because this Court has
Petitioners aver that the stipulated interest of consistently held that Circular No. 905 of
5% monthly and higher cannot be considered the Central Bank, adopted on December
unconscionable because these rates are not 22, 1982, has expressly removed the
usurious by virtue of Central Bank (C.B.) interest ceilings prescribed by the Usury
Circular No. 905-82 which had expressly Law and that the Usury Law is now "legally
removed the interest ceilings prescribed by the inexistent."
Usury Law. Petitioners add that respondents
were in pari delicto since they agreed on the In Security Bank and Trust Company vs.
stipulated interest rates of 7% and 5% per Regional Trial Court of Makati, it was held that
month. They further aver they honestly CB Circular No. 905 "did not repeal nor in any
believed that the interest rates they imposed way amend the Usury Law but simply
on respondents’ loans were not usurious. suspended the latter’s effectivity." "Usury has
been legally non-existent in our jurisdiction.
ISSUE: Whether or not the original stipulated Interest can now be charged as lender and
interest rates of 7% and 5%, equivalent to 84% borrower may agree upon."
and 60% per annum, are unconscionable
Nevertheless, we find the interest at 5.5% per
RULING: Yes. The stipulated interest rates of month, or 66% per annum, stipulated upon by
7% and 5% per month imposed on the parties in the promissory note iniquitous or
respondents’ loans must be equitably reduced unconscionable, and, hence, contrary to
to 1% per month or 12% per annum. We need morals ("contra bonos mores"), if not against
not unsettle the principle we had affirmed in a the law. The stipulation is void.
plethora of cases that stipulated interest rates
of 3% per month and higher are excessive,
iniquitous, unconscionable and exorbitant. DIO vs. SPOUSES JAPOR
Such stipulations are void for being contrary to
morals, if not against the law. While C.B. FACTS: Herein respondents Spouses Virgilio
Circular No. 905-82, which took effect on Japor and Luz Roces Japor were the owners
January 1, 1983, effectively removed the of an 845.5 square-meter residential lot
ceiling on interest rates for both secured and including its improvements. Adjacent to the
unsecured loans, regardless of maturity, Japor’s lot is another lot owned by respondent
nothing in the said circular could possibly be Marta Japor.
read as granting carte blanche authority to
lenders to raise interest rates to levels which On August 23, 1982, the respondents obtained
would either enslave their borrowers or lead to a loan of P90,000 from the Quezon
a hemorrhaging of their assets. Development Bank (QDB), and as security
therefor, they mortgaged the two lots as
Petitioners cannot also raise the defenses of in evidenced by a Deed of Real Estate Mortgage
pari delicto and good faith. The defense of in duly executed by and between the
pari delicto was not raised in the RTC, hence, respondents and QDB.
such an issue cannot be raised for the first
time on appeal. The defense of good faith must On December 6, 1983, respondents and QDB
also fail because such an issue is a question of amended the Deed of Real Estate Mortgage
fact which may not be properly raised in a increasing respondents’ loan to P128,000.
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 24

ISSUE: Whether or not the stipulations on

The respondents failed to pay their aforesaid interest and penalty in the Deed of Real Estate
loans. However, before the bank could Mortgage is contrary to morals, if not illegal
foreclose on the mortgage, respondents, thru and were respondents entitled to any "surplus"
their broker, one Lucia G. Orian, offered to on the auction sale price
mortgage their properties to petitioner Teresita
Dio. Petitioner prepared a Deed of Real Estate RULING: On the main issue, petitioner
Mortgage, whereby respondents mortgaged contends that The Usury Law1 has been
anew the two properties already mortgaged rendered ineffective by Central Bank Circular
with QDB to secure the timely payment of No. 905, series of 1982 and accordingly, usury
a P350,000 loan that respondents had from has become legally non-existent in this
petitioner Dio. jurisdiction, thus, interest rates may
accordingly be pegged at such levels or rates
Under the terms of the deed, respondents as the lender and the borrower may agree
agreed to pay the petitioner interest at the rate upon.
of five percent (5%) a month, within a period of
two months or until April 14, 1989. In the event Respondents admit they owe
of default, an additional interest equivalent to petitioner P350,000 and do not question any
five percent (5%) of the amount then due, for lawful interest on their loan but they maintain
every month of delay, would be charged on that the Deed of Real Estate Mortgage is null
them. and void since it did not state the true intent of
the parties, which limited the 5% interest rate
The respondents failed to settle their obligation to only two (2) months from the date of the
to petitioner on April 14, 1989, the agreed loan and which did not provide for penalties
deadline for settlement. and other charges in the event of default or
delay. Respondents vehemently contend that
On August 27, 1991, petitioner made written they never consented to the said stipulations
demands upon the respondents to pay their and hence, should not be bound by them.
debt.
On the first issue, we are constrained to
Despite repeated demands, respondents did rule against the petitioner’s contentions.
not pay, hence petitioner applied for
extrajudicial foreclosure of the mortgage. Central Bank Circular No. 905, which took
effect on January 1, 1983, effectively removed
Meanwhile, on February 24, 1992, the ceiling on interest rates for both secured
respondents filed an action for Fixing of and unsecured loans, regardless of maturity.
Contractual Obligation with Prayer for However, nothing in said Circular grants
Preliminary Mandatory Injunction/ lenders carte blanche authority to impose
Restraining Order, praying that the Deed of interest rates, which would result in the
Real Estate Mortgage dated February 13, 1989 enslavement of their borrowers or to the
be declared null and void, and the plea that the hemorrhaging of their assets. While a
trial court fix the contractual obligations of the stipulated rate of interest may not technically
Japors with Dio. and necessarily be usurious under Circular No.
905, usury now being legally non-existent in
On May 8, 1996, the bidding invoving the our jurisdiction, nonetheless, said rate may be
properties was conducted, with petitioner Dio equitably reduced should the same be found to
as the sole bidder, purchased the properties be iniquitous, unconscionable, and exorbitant,
for P3,500,000. and hence, contrary to morals (contra
bonos mores), if not against the law. What is
The appellate court affirmed the decision of the iniquitous, unconscionable, and exorbitant
trial court with respect to the validity of the shall depend upon the factual circumstances of
Deed of Real Estate Mortgage, but modified each case.
the interest and penalty rates for being
unconscionable and exorbitant. In the instant case, the Court of Appeals found
that the 5% interest rate per month and 5%
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 25

penalty rate per month for every month of

default or delay is in reality interest rate at ** The interest rate for the subject loan owing
120% per annum. This Court has held that a to QDB is hereby fixed at five percent (5%) for
stipulated interest rate of 5.5% per month or the first two (2) months following the date of
66% per annum is void for being iniquitous or execution of the Deed of Real Estate
unconscionable. We have likewise ruled that Mortgage, and twelve percent (12%) for the
an interest rate of 6% per month or 72% per succeeding period. The penalty rate thereafter
annum is outrageous and inordinate. shall be fixed at one percent (1%) per month.
Conformably to these precedent cases, a Petitioner Teresita Dio is declared free of any
combined interest and penalty rate at 10% per obligation to return to the respondents, the
month or 120% per annum, should be deemed Spouses Virgilio Japor and Luz Roces Japor
iniquitous, unconscionable, and inordinate. and Marta Japor, any surplus in the foreclosure
Hence, we sustain the appellate court when it sale price. There being no surplus, after the
found the interest and penalty rates in the court below had applied our ruling
Deed of Real Estate Mortgage in the present in Sulit, respondents could not legally claim
case excessive, hence legally impermissible. any overprice from the petitioner, much less
Reduction is legally called for now in rates of the amount of P2,247,326.00.
interest and penalty stated in the mortgage
contract.
DARIO NACAR vs GALLERY FRAMES
What then should the interest and penalty AND/OR FELIPE BORDEY, JR.
rates be?
FACTS: Petitioner Dario Nacar filed a
The evidence shows that it was indeed the complaint for constructive dismissal before the
respondents who proposed the 5% interest National Labor Relations Commission (NLRC)
rate per month for two (2) months. Having against Gallery Frames (GF) and/or Felipe
agreed to said rate, the parties are now Bordey, Jr.
estopped from claiming otherwise. For the
succeeding period after the two months, On October 15, 1998, the Labor Arbiter
however, the Court of Appeals correctly rendered a Decision in favor of petitioner and
reduced the interest rate to 12% per found that he was dismissed from employment
annumand the penalty rate to 1% per month, in without a valid or just cause and was never
accordance with Article 2227 of the Civil Code. afforded due process. Thus, petitioner was
awarded backwages and separation pay in lieu
But were respondents entitled to the "surplus" of reinstatement, in the amount of
of P2,247,326 as a result of the "overpricing" P158,919.92, computed only up to
in the auction? promulgation of this decision. Length of service
was 8 yrs and 1 day.
We note that the "surplus" was the result of the
computation by the Court of Appeals of On November 5, 2002, petitioner filed a Motion
respondents’ outstanding liability based on a for Correct Computation, praying that his
reduced interest rate of 12% per annum and backwages be computed from the date of his
the reduced penalty rate of 1% per month. dismissal on January 24, 1997 up to the finality
of the Resolution of the Supreme Court on May
In the instant case, however, there is no 27, 2002. Upon recomputation, NLRC arrived
"surplus" to speak of. In adjusting the interest at an updated amount in the sum of
and penalty rates to equitable and P471,320.31.
 w
conscionable levels, what the Court did was
merely to reflect the true price of the land in the Respondents filed a Motion to Quash Writ of
foreclosure sale. The amount of the petitioner’s Execution, arguing that no more recomputation
bid merely represented the true amount of the is required after the decision becomes final
mortgage debt. No surplus in the purchase and executory, the same cannot be altered or
price was thus created to which the amended anymore. Denied. Reappealed and a
respondents as the mortgagors have a vested recomputation was granted but only in the
right. amount of P147,560.19.
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 26

Nacar then filed a Motion praying for the re- Code govern in determining the measure of
computation of the monetary award to include recoverable damages. II. With regard
the appropriate interests. particularly to an award of interest in the
concept of actual and compensatory damages,
The Labor Arbiter granted the motion, but the rate of interest, as well as the accrual
reasoned that it is the October 15, 1998 thereof, is imposed, as follows:
Decision that should be enforced considering
that it was the one that became final and 1. When the obligation is breached, and it
executory. However, the Labor Arbiter consists in the payment of a sum of money,
reasoned that since the decision states that the i.e., a loan or forbearance of money, the
separation pay and backwages are computed interest due should be that which may have
only up to the promulgation of the said been stipulated in writing. Furthermore, the
decision, it is the amount of P158,919.92 that interest due shall itself earn legal interest
should be executed. Thus, since petitioner from the time it is judicially demanded. In
already received P147,560.19, he is only the absence of stipulation, the rate of
entitled to the balance of P11,459.73. interest shall be 6% per annum to be
computed from default, i.e., from judicial or
Nacar appealed to the CA. Denied. It opined extrajudicial demand under and subject to
that since petitioner no longer appealed the the provisions of Article 1169 of the Civil
October 15, 1998 Decision of the Labor Code.
Arbiter, which already became final and
executory, a belated correction thereof is no 2. When an obligation, not constituting a loan
longer allowed. The CA stated that there is or forbearance of money, is breached, an
nothing left to be done except to enforce the interest on the amount of damages
said judgment. awarded may be imposed at the discretion
of the court at the rate of 6% per annum.
ISSUE: WON a re-computation in the course No interest, however, shall be adjudged on
of execution of the labor arbiter's original unliquidated claims or damages, except
computation of the awards made is legally when or until the demand can be
proper. YES established with reasonable certainty.
Accordingly, where the demand is
HELD: Computation should start from the time established with reasonable certainty, the
Nacar was illegally dismissed until judgment interest shall begin to run from the time the
has become final and executory on May 27, claim is made judicially or extrajudicially
2013. Moreover, a recomputation is necessary (Art. 1169, Civil Code), but when such
and is not a violation of the principle of certainty cannot be so reasonably
immutability of final judgments. The established at the time the demand is
recomputation of the consequences of illegal made, the interest shall begin to run only
dismissal upon execution of the decision does from the date the judgment of the court is
not constitute an alteration or amendment of made (at which time the quantification of
the final decision being implemented. The damages may be deemed to have been
illegal dismissal ruling stands; only the reasonably ascertained). The actual base
computation of monetary consequences of the for the computation of legal interest shall, in
dismissal is affected. any case, be on the amount finally
adjudged.
As to the payment of legal interest, the
guidelines laid down in the case of Eastern 3. When the judgment of the court awarding a
Shipping Lines are accordingly modified to sum of money becomes final and
embody BSP-MB Circular No. 799, as follows: executory, the rate of legal interest,
whether the case falls under paragraph 1
I. When an obligation, regardless of its source, or paragraph 2, above, shall be 6% per
i.e., law, contracts, quasi-contracts, delicts or annum from such finality until its
quasi-delicts is breached, the contravenor can satisfaction, this interim period being
be held liable for damages. The provisions deemed to be by then an equivalent to a
under Title XVIII on “Damages” of the Civil forbearance of credit.
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 27

The Decision of the CA is reversed and set RULING: YES. The Supreme Court affirmed
aside. The case is remanded back to the LA the ruling of the lower four and tribunals, with a
for the proper recomputation. slight modification of the legal interest
imposable:
* The rate of interest starting July 1, 2013 is
6% per annum (since the original case was “Article 2209 of the New Civil Code provides
decided in 2002, 12% int was still applied) and that “If the obligation consists in the payment of
applies prospectively. Computation of a sum of money, and the debtor incurs in
backwages and separation pay should start delay, the indemnity for damages, there being
from the time an employee is illegally no stipulation to the contrary, shall be the
dismissed to the time judgment has become payment of the interest agreed upon, and in
final and executory. Interest of such amount the absence of stipulation, the legal interest,
acrrues until full payment is made. which is six per cent per annum.” There is no
doubt that ECE incurred in delay in delivering
the subject condominium unit, for which reason
ECE REALTY AND DEVELOPMENT, INC., the trial court was justified in awarding interest
VS. HAYDYN HERNANDEZ to the respondent from the filing of his
complaint. There being no stipulation as to
FACTS: Haydn filed a complaint for specific interest, under Article 2209 the imposable rate
performance with damages against EMIR and is six percent (6%) by way of damages,
ECE Realty due to the failure of the following the guidelines laid down in the
respondents to deliver a condominium unit landmark case of Eastern Shipping Lines v.
which he purchased from them. The Court of Appeals:
respondents allegedly promised to turn over to
him the unit by December 31, 1999, but failed II. With regard particularly to an award of
to do so. Worse, he learned that the actual interest in the concept of actual and
area was only 26 square meters, not 30 square compensatory damages, the rate of interest, as
meters as indicated in their contract to sell, and well as the accrual thereof, is imposed, as
the company refused to grant his follows:
corresponding reduction in the purchase price;
instead the companies told him to settle his 1. When the obligation is breached, and it
arrears in amortizations. He learned later that consists in the payment of a sum of money,
that company sold Unit 808 to a third party. i.e., a loan or forbearance of money, the
interest due should be that which may have
In their defense, the respondent faulted been stipulated in writing. Furthermore, the
complainant for unjustifiably refusing to accept interest due shall itself earn legal interest
delivery of the condominium unit; that they from the time it is judicially demanded. In
were forced to cancel the contract to sell the absence of stipulation, the rate of
because of the refusal of the complainant to interest shall be 12% per annum to be
settle his past arrears. computed from default, i.e., from judicial or
extrajudicial demand under and subject to
The HLURB ruled in favor of the complainant the provisions of Article 1169 of the Civil
and ordered the company to reimburse the Code.
respondent the amount of P452,551.65, plus 2. When an obligation, not constituting a loan
legal interest, from the filing of the complaint, or forbearance of money, is breached, an
and to pay the respondent P50,000.00 as interest on the amount of damages
moral damages, P50,000.00 as attorney’s awarded may be imposed at the discretion
fees, and P50,000.00 as exemplary of the court at the rate of 6% per annum.
damages.[11] No interest, however, shall be adjudged on
unliquidated claims or damages except
The company appealed the case all the way to when or until the demand can be
the CA and eventually to the Supreme Court. established with reasonable certainty.
Accordingly, where the demand is
ISSUE: W/N ECE should be liable to established with reasonable certainty, the
reimburse Hernandez interest shall begin to run from the time the
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 28

claim is made judicially or extrajudicially credit, regardless of whether the award in fact
(Art. 1169, Civil Code) but when such pertained to one. Pursuant to Central Bank
certainty cannot be so reasonably Circular No. 416 issued on July 29, 1974, in
established at the time the demand is the absence of written stipulation the interest
made, the interest shall begin to run only rate to be imposed in judgments involving a
from the date the judgment of the court is forbearance of credit was twelve percent (12%)
made (at which time the quantification of per annum, up from six percent (6%) under
damages may be deemed to have been Article 2209 of the Civil Code. This was
reasonably ascertained). The actual base reiterated in Central Bank Circular No. 905,
for the computation of legal interest shall, in which suspended the effectivity of the Usury
any case, be on the amount finally Law beginning on January 1, 1983.
adjudged.
3. When the judgment of the court awarding a But since July 1, 2013, the rate of twelve
sum of money becomes final and percent (12%) per annum from finality of the
executory, the rate of legal interest, judgment until satisfaction has been brought
whether the case falls under paragraph 1 back to six percent (6%). Section 1 of
or paragraph 2, above, shall be 12% per Resolution No. 796 of the Monetary Board of
annum from such finality until its the Bangko Sentral ng Pilipinas dated May 16,
satisfaction, this interim period being 2013 provides: “The rate of interest for the loan
deemed to be by then an equivalent to a or forbearance of any money, goods or credits
forbearance of credit.” and the rate allowed in judgments, in the
absence of an express contract as to such rate
“The term “forbearance,” within the context of of interest, shall be six percent (6%) per
usury law, has been described as a contractual annum.” Thus, the rate of interest to be
obligation of a lender or creditor to refrain, imposed from finality of judgments is now back
during a given period of time, from requiring at six percent (6%), the rate provided in Article
the borrower or debtor to repay the loan or 2209 of the Civil Code.”
debt then due and payable.

Eastern Shipping Lines, Inc. synthesized the ANTONIO TAN v. COURT OF APPEALS and
rules on the imposition of interest, if proper, the CULTURAL CENTER OF THE
and the applicable rate, as follows: The 12% PHILIPPINES
per annum rate under CB Circular No. 416
shall apply only to loans or forbearance of FACTS: On May 14, 1978 and July 6, 1978,
money, goods, or credits, as well as to petitioner Antonio Tan obtained two (2) loans
judgments involving such loan or forbearance each in the principal amount of
of money, goods, or credit, while the 6% per (P2,000,000.00), or in the total principal
annum under Art. 2209 of the Civil Code amount of Four Million Pesos (P4,000,000.00)
applies “when the transaction involves the from respondent Cultural Center of the
payment of indemnities in the concept of Philippines (CCP) evidenced by two (2)
damage arising from the breach or a delay in promissory notes with maturity dates on May
the performance of obligations in general,” with 14, 1979 and July 6, 1979, respectively.
the application of both rates reckoned “from Petitioner defaulted but after a few partial
the time the complaint was filed until the payments he had the loans restructured by
[adjudged] amount is fully paid.” In either respondent CCP, and petitioner accordingly
instance, the reckoning period for the executed a promissory note on August 31,
commencement of the running of the legal 1979 in the amount of (P3,411,421.32) payable
interest shall be subject to the condition “that in five (5) installments. Petitioner Tan failed to
the courts are vested with discretion, pay any installment on the said restructured
depending on the equities of each case, on the loan of (P3,411,421.32), the last installment
award of interest.” (Emphasis ours) falling due on December 31, 1980.

Thus, from the finality of the judgment In a letter dated January 26, 1982, petitioner
awarding a sum of money until it is satisfied, requested and proposed to respondent CCP a
the award shall be considered a forbearance of mode of paying the restructured loan, i.e., (a)
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 29

twenty percent (20%) of the principal amount findings, has allegedly made partial payments
of the loan upon the respondent giving its on the loan. And if penalty is to be awarded,
conformity to his proposal; and (b) the balance the petitioner is asking for the non- imposition
on the principal obligation payable in thirty-six of interest on the surcharges inasmuch as the
(36) equal monthly installments until fully paid. compounding of interest on surcharges is not
provided in the promissory note marked Exhibit
On October 20, 1983, petitioner again sent a “A”. The petitioner takes exception to the
letter to respondent CCP requesting for a computation of the private respondent whereby
moratorium on his loan obligation until the the interest, surcharge and the principal were
following year allegedly due to a substantial added together and that on the total sum
deduction in the volume of his business and on interest was imposed. Petitioner also claims
account of the peso devaluation. No favorable that there is no basis in law for the charging of
response was made to said letters. Instead, interest on the surcharges for the reason that
respondent CCP, through counsel, wrote a the New Civil Code is devoid of any provision
letter dated May 30, 1984 to the petitioner allowing the imposition of interest on
demanding full payment, within ten (10) days surcharges.
from receipt of said letter, of the petitioner’s
restructured loan which as of April 30, 1984 We find no merit in the petitioner’s contention.
amounted to (P6,088,735.03). Article 1226 of the New Civil Code provides
On August 29, 1984, respondent CCP filed in that:
the RTC of Manila a complaint for collection of
a sum of money against the petitioner after the In obligations with a penal clause, the penalty
latter failed to settle his said restructured loan shall substitute the indemnity for damages and
obligation. The petitioner interposed the the payment of interests in case of non-
defense that he merely accommodated a compliance, if there is no stipulation to the
friend, Wilson Lucmen, who allegedly asked for contrary. Nevertheless, damages shall be paid
his help to obtain a loan from respondent CCP. if the obligor refuses to pay the penalty or is
Petitioner claimed that he has not been able to guilty of fraud in the fulfillment of the obligation.
locate Wilson Lucmen.
The penalty may be enforced only when it is
While the case was pending in the trial court, demandable in accordance with the provisions
the petitioner filed a Manifestation wherein he of this Code.
proposed to settle his indebtedness to
respondent CCP by proposing to make a down In the case at bar, the promissory note (Exhibit
payment of (P140,000.00) and to issue twelve “A”) expressly provides for the imposition of
(12) checks every beginning of the year to both interest and penalties in case of default
cover installment payments for one year, and on the part of the petitioner in the payment of
every year thereafter until the balance is fully the subject restructured loan. The pertinent
paid. However, respondent CCP did not agree portion of the promissory note (Exhibit “A”)
to the petitioner’s proposals and so the trial of imposing interest and penalties provides that:
the case ensued.
xxx xxx xxx
TC: Ruled in favor of CCP. CA: Affirmed trial
court’s decision. With interest at the rate of FOURTEEN per
cent (14%) per annum from the date hereof
ISSUE (1): Whether there are contractual and until paid. PLUS THREE PERCENT (3%)
legal bases for the imposition of the penalty, SERVICE CHARGE.
interest on the penalty and attorney’s fees.
YES In case of non-payment of this note at
maturity/on demand or upon default of
HELD 1: The petitioner imputes error on the payment of any portion of it when due, I/We
part of the appellate court in not totally jointly and severally agree to pay additional
eliminating the award of attorney’s fees and in penalty charges at the rate of TWO per cent
not reducing the penalties considering that the (2%) per month on the total amount due until
petitioner, contrary to the appellate court’s paid, payable and computed monthly. Default
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 30

of payment of this note or any portion thereof penalty. He claims that since there is no law
when due shall render all other installments that allows imposition of interest on penalties,
and all existing promissory notes made by us the penalties should notearn interest. But as
in favor of the CULTURAL CENTER OF THE we have already explained, penalty clauses
PHILIPPINES immediately due and can be in the form of penalty or compensatory
demandable. interest. Thus, the compounding of the penalty
or compensatory interest is sanctioned by and
xxx xxx xxx allowed pursuant to the above-quoted
provision of Article 1959 of the New Civil Code
The stipulated fourteen percent (14%) per considering that:
annum interest charge until full payment of the
loan constitutes the monetary interest on the First, there is an express stipulation in the
note and is allowed under Article 1956 of the promissory note (Exhibit “A”) permitting the
New Civil Code. On the other hand, the compounding of interest. The fifth paragraph of
stipulated two percent (2%) per month penalty the said promissory note provides that: “Any
is in the form of penalty charge which is interest which may be due if not paid shall be
separate and distinct from the monetary added to the total amount when due and shall
interest on the principal of the loan. become part thereof, the whole amount to bear
interest at the maximum rate allowed by law.”
Penalty on delinquent loans may take different Therefore, any penalty interest not paid, when
forms. In Government Service Insurance due, shall earn the legal interest of twelve
System v. Court of Appeals, this Court has percent (12%) per annum, in the absence of
ruled that the New Civil Code permits an express stipulation on the specific rate of
agreement upon a penalty apart from the interest, as in the case at bar.
monetary interest. If the parties stipulate this
kind of agreement, the penalty does not Second, Article 2212 of the New Civil Code
include the monetary interest, and as such the provides that “Interest due shall earn legal
two are different and distinct from each other interest from the time it is judicially demanded,
and may be demanded separately. although the obligation may be silent upon this
point.” In the instant case, interest likewise
The penalty charge of two percent (2%) per began to run on the penalty interest upon the
month in the case at bar began to accrue from filing of the complaint in court by respondent
the time of default by the petitioner. There is no CCP on August 29, 1984. Hence, the courts a
doubt that the petitioner is liable for both the quo did not err in ruling that the petitioner is
stipulated monetary interest and the stipulated bound to pay the interest on the total amount
penalty charge. The penalty charge is also of the principal, the monetary interest and the
called penalty or compensatory interest. penalty interest.

ISSUE (2): whether interest may accrue on the In the case at bar, however, equity cannot be
penalty or compensatory interest without considered inasmuch as there is a contractual
violating the provisions of Article 1959 of the stipulation in the promissory note whereby the
New Civil Code. YES petitioner expressly agreed to the
compounding of interest in case of failure on
HELD 2: Art. 1959. Without prejudice to the his part to pay the loan at maturity. Inasmuch
provisions of Article 2212, interest due and as the said stipulation on the compounding of
unpaid shall not earn interest. However, the interest has the force of law between the
contracting parties may by stipulation capitalize parties and does not appear to be inequitable
the interest due and unpaid, which as added or unjust, the said written stipulation should be
principal, shall earn new interest. respected.

According to the petitioner, there is no legal The said statement of account also shows that
basis for the imposition of interest on the the amounts stated therein are net of the
penalty charge for the reason that the law only partial payments amounting to a total of
allows imposition of interest on monetary (P452,561.43) which were made during the
interest but not the charging of interest on period from May 13, 1983 to September 30,
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 31

1983. The petitioner now seeks the reduction complaint for sum of money against petitioner
of the penalty due to the said partial payments. Sebastian Siga-an alleging that she was a
The principal amount of the promissory note businesswoman engaged in supplying office
(Exhibit “A”) was (P3,411,421.32) when the materials and equipment to the Philippine Navy
loan was restructured on August 31, 1979. As Office (PNO) while petitioner was a military
of August 28, 1986, the principal amount of the officer and comptroller of the PNO.
said restructured loan has been reduced to Respondent claimed that petitioner
(P2,838,454.68). Thus, petitioner contends that approached her inside the PNO and offered to
reduction of the penalty is justifiable pursuant loan her the amount of P540,000.00. Since she
to Article 1229 of the New Civil Code which needed capital for her business transactions
provides that: “The judge shall equitably with the PNO, she accepted petitioner’s
reduce the penalty when the principal proposal. The loan agreement was not
obligation has been partly or irregularly reduced in writing. Also, there was no
complied with by the debtor. Even if there has stipulation as to the payment of interest for the
been no performance, the penalty may also be loan.
reduced by the courts if it is iniquitous or
unconscionable.” Petitioner insists that the Respondent issued a check worth
penalty should be reduced to ten percent P500,000.00 as partial payment of the loan,
(10%) of the unpaid debt in accordance with another check of P200,000.00 as payment of
Bachrach Motor Company v. Espiritu. the remaining balance of the loan. Petitioner
told her that since she paid a total amount of
There appears to be a justification for a P700,000.00 for theP540,000.00 worth of loan,
reduction of the penalty charge but not the excess amount of P160,000.00 would be
necessarily to ten percent (10%) of the unpaid applied as interest for the loan. Not satisfied
balance of the loan as suggested by petitioner. with the amount applied as interest, petitioner
Inasmuch as petitioner has made partial pestered her to pay additional interest and
payments which showed his good faith, a threatened to block or disapprove her
reduction of the penalty charge from two transactions with the PNO if she would not
percent (2%) per month on the total amount comply. Thus she paid additional amounts for
due, compounded monthly, until paid can the loan. The total amount paid to petitioner for
indeed be justified under the said provision of the loan and interest accumulated
Article 1229 of the New Civil Code. toP1,200,000.00.

In other words, we find the continued monthly Respondent consulted a lawyer and her lawyer
accrual of the two percent (2%) penalty charge told her that petitioner could not validly collect
on the total amount due to be unconscionable interest because there was no agreement
inasmuch as the same appeared to have been between her and petitioner regarding payment
compounded monthly. of interest thus she made overpayment to
petitioner so she sent a demand letter to
Considering petitioner’s several partial petitioner asking for the return of the excess
payments and the fact he is liable under the amount of P660,000.00. But petitioner ignored
note for the two percent (2%) penalty charge her claim for reimbursement.
per month on the total amount due,
compounded monthly, for twenty-one (21) ISSUE: WON respondent is entitled to
years since his default in 1980, we find it fair reimbursement? YES
and equitable to reduce the penalty charge to a
straight twelve percent (12%) per annum on HELD: Interest is a compensation fixed by the
the total amount due starting August 28, 1986, parties for the use or forbearance of money.
the date of the last Statement of Account. This is referred to as monetary interest.
Interest may also be imposed by law or by
courts as penalty or indemnity for damages.
SEBASTIAN SIGA-AN vs ALICIA This is called compensatory interest. The right
VILLANUEVA to interest arises only by virtue of a contract or
by virtue of damages for delay or failure to pay
FACTS: Respondent Alicia Villanueva filed a the principal loan on which interest is
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 32

demanded. The principle of solutio indebiti applies where

(1) a payment is made when there exists no
Article 1956 of the Civil Code, which refers to binding relation between the payor, who has
monetary interest, specifically mandates that no duty to pay, and the person who received
no interest shall be due unless it has been the payment; and (2) the payment is made
expressly stipulated in writing. Payment of through mistake, and not through liberality or
monetary interest is allowed only if: some other cause. Respondent was under no
(1) there was an express stipulation for the duty to make such payment because there was
payment of interest; and no express stipulation in writing to that effect.
(2) the agreement for the payment of interest There was no binding relation between
was reduced in writing. petitioner and respondent as regards the
payment of interest. The payment was clearly
The concurrence of the two conditions is a mistake. Since petitioner received something
required. Thus, we have held that collection of when there was no right to demand it, he has
interest without any stipulation therefor in an obligation to return it.
writing is prohibited by law.
POLICY: No interest shall be due unless it
Petitioner and respondent did not agree on the has been expressly stipulated in writing.
payment of interest for the loan. Neither was
there convincing proof of written agreement
between the two regarding the payment of PART III: USURY LAW
interest.
SOLIDBANK vs PERMANENT HOMES
As to the contention of petitioner that
respondent executed a promissory note: the FACTS: PERMANENT HOMES is a real
presented promissory note was in her estate development company, and to finance
handwriting because Siga-an told her to copy it its housing project known as the “Buena Vida
and she did because she feared the threats of Townhomes” located within Merville
Sigaan to block her deals with the PhilNavy. Subdivision, Parañaque City, it applied and
And as to the alleged admission in the BP 22 was subsequently granted by SOLIDBANK
cases that they had agreed on the payment of with an “Omnibus Line” credit facility in the
interest at the rate of 7%, respondent merely total amount of SIXTY MILLION PESOS. Of
testified that after paying the total amount of the entire loan, FIFTY NINE MILLION as time
loan, petitioner ordered her to pay interest. loan for a term of up to three hundred sixty
Respondent did not categorically declare in the (360) days, with interest thereon at prevailing
same case that she and respondent made an market rates, and subject to monthly
express stipulation in writing as regards repricing. The remaining ONE MILLION was
payment of interest at the rate of 7%. available for domestic bills purchase.

An interest may be imposed even in the To secure the aforesaid loan, PERMANENT
absence of express stipulation, verbal or HOMES initially mortgaged three (3)
written, regarding payment of interest under Art townhouse units within the Buena Vida project
2209 of CC that if the obligation consists in the in Parañaque. At the time, however, the instant
payment of a sum of money, and the debtor complaint was filed against SOLIDBANK, a
incurs delay, a legal interest of 12% per annum total of 36 townhouse units were mortgaged
may be imposed as indemnity for damages if with said bank.
no stipulation on the payment of interest was
agreed upon. It only applies to compensatory Of the 60 million available to PERMANENT
interest and not to monetary interest. The case HOMES, it availed of a total of 41.5 million
at bar involves petitioner’s claim for monetary pesos, covered by three (3) promissory notes,
interest. Further, said compensatory interest is which contain the following provisions, thus:
not chargeable in the instant case because it
was not duly proven that respondent defaulted “xxx 5. We/I irrevocably authorize
in paying the loan. Solidbank to increase or decrease at any
time the interest rate agreed in this Note or
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 33

Loan on the basis of, among others, prevailing

rates in the local or international capital Permanent filed a case before the trial court
markets. For this purpose, We/I authorize seeking the following: (1) the annulment of the
Solidbank to debit any deposit or placement increases in interest rates on the loans it
account with Solidbank belonging to any one of obtained from SOLIDBANK, on the ground that
us. The adjustment of the interest rate shall be it was violative of the principle of mutuality of
effective from the date indicated in the written agreement of the parties, as enunciated in
notice sent to us by the bank, or if no date is Article 1409 of the New Civil Code, (2) the
indicated, from the time the notice was sent. fixing of the interest rates at the applicable
interest rate, and (3) for the trial court to order
6. Should We/I disagree to the interest rate SOLIDBANK to make an accounting of the
adjustment, We/I shall prepay all amounts due payments it made, so as to determine the
under this Note or Loan within thirty (30) days amount of refund PERMANENT is entitled to,
from the receipt by anyone of us of the written as well as to order SOLIDBANK to release the
notice. Otherwise, We/I shall be deemed to remaining available balance of the loan it
have given our consent to the interest rate extended to PERMANENT. In addition,
adjustment.” Permanent prays for the payment of
compensatory, moral and exemplary damages.
Contrary, however, to the specific provisions SOLIDBANK, on the other hand, avers that
as afore- quoted, there was a standing PERMANENT HOMES has no cause of action
agreement by the parties that any increase against it, in view of the pertinent provisions of
or decrease in interest rates shall be the Omnibus Credit Line and the promissory
subject to the mutual agreement of the notes agreed to and signed by PERMANENT
parties. HOMES.

For the first loan availment of PERMANENT Thus, in accordance with said provisions,
HOMES on March 20, 1997, in the amount of SOLIDBANK was authorized to, upon due
19.6 MILLION, from the initial interest rate notice, periodically adjust the interest rates on
of14.25% per annum (p.a.), the rate was PERMANENT HOMES’ loan availments during
increased to 30% p.a. on January 16, 1998. the monthly interest repricing dates, depending
For the second loan availment in the amount of on the changes in prevailing interest rates in
18 million, the rate was initially pegged at the local and international capital markets.
15.75% p.a. on June 24, 1997 increased 30%
p.a.from January 22, 1998 to February 20, SOLIDBANK, to establish its defense,
1998. presented its lone witness, Mr. Cesar Lugtu,
who testified to the effect that, contrary to
For the third loan availment on July 15, 1997, PERMANENT HOMES’ assertions that it was
in the amount of 3.9 million, the interest rate not promptly informed of the repriced interest
was initially pegged at 35% p.a., decreased at rates, SOLIDBANK’s officers verbally advised
29% p.a. for the month of February. PERMANENT HOMES of the repriced rates at
the start of the period, and even added that
It is Permanent’s stand that SOLIDBANK their transaction[s] were based on trust. Aside
unilaterally and arbitrarily accelerated the from these allegations, however, no written
interest rates without any declared basis of memorandum or note was presented by
such increases, of which PERMANENT SOLIDBANK to support their assertion that
HOMES had not agreed to, or at the very least, PERMANENT HOMES was timely advised of
been informed of. This is contrary to their the repriced interests.
earlier agreement that any interest rate
changes will be subject to mutual agreement of The trial court promulgated its Decision in favor
the parties. PERMANENT HOMES further of Solidbank. Permanent filed an appeal before
admits that it was not able to protest such the appellate court. The appellate court
arbitrary increases at the time they were granted the appeal, and set aside the trial
imposed by SOLIDBANK, for fear that court’s ruling. The appellate court not only
SOLIDBANK might cut off the credit facility it recognized the validity of escalation clauses,
extended to PERMANENT HOMES. but also underscored the necessity of a basis
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 34

for the increase in interest rates and of the admitted that it did not promptly send
principle of mutuality of contracts. Permanent written repriced rates, but rather
verbally advised Permanent’s officers over
ISSUE: WON the increases in the interest the phone at the start of the period.
rates on Permanent’s loans are void for having
been unilaterally imposed without basis. YES. Solidbank did not present any written
memorandum to support its allegation that it
HELD: The Usury Law had been rendered promptly advised Permanent of the change in
legally ineffective by Resolution No. 224 dated interest rates. Solidbank advised Permanent
3 December 1982 of the Monetary Board of the on the repriced interest rate applicable for the
Central Bank, and later by Central Bank 30-day interest period only after the period had
Circular No. 905 which took effect on 1 begun. Permanent presented a tabulation
January 1983. These circulars removed the which showed that Solidbank either did not
ceiling on interest rates for secured and send a billing statement, or sent a billing
unsecured loans regardless of maturity. The statement 6 to 33 days late. Solidbank’s
effect of these circulars is to allow the parties computation of the interest due from
to agree on any interest that may be charged Permanent should be adjusted to take effect
on a loan. The virtual repeal of the Usury Law only upon Permanent’s receipt of the
is within the range of judicial notice which written notice from Solidbank.
courts are bound to take into account.
Although interest rates are no longer subject to
a ceiling, the lender still does not have an PART IV: DEPOSIT (Articles 1962 – 2009)
unbridled license to impose increased
interest rates. The lender and the borrower
should agree on the imposed rate, and such I. Deposit in General and its Different
imposed rate should be in writing. Kinds

The stipulations, contained in the 3 promissory BPI vs IAC

notes on interest rate repricing are valid
because (1) the parties mutually agreed on FACTS: The original parties to the case were
said stipulations; (2) repricing takes effect only Zshornack and Commercial Bank and Trust
upon Solidbank’s written notice to Permanent Company of the Phils (Comtrust). In 1980, BPI
of the new interest rate; and (3) Permanent absorbed Comtrust through a merger and was
has the option to prepay its loan if Permanent substituted as party to the case.
and Solidbank do not agree on the new
interest rate. The phrases “irrevocably Zshornack and his wife maintained in Comtrust
authorize,” “at any time” and “adjustment of the a dollar savings account and a peso current
interest rate shall be effective from the date account. On Dec 8, 1975, Zshornack delivered
indicated in the written notice sent to us by the to the bank $3000 for safekeeping. When he
bank, or if no date is indicated, from the time requested the return of the money, Comtrust
the notice was sent,” emphasize that explained that the sum was disposed of in this
Permanent should receive a written notice manner: US$2,000.00 was sold on December
from Solidbank as a condition for the 29, 1975 and the peso proceeds amounting to
adjustment of the interest rates. P14,920.00 were deposited to Zshornack's
current account per deposit slip accomplished
Solidbank’s range of lending rates were by Garcia; the remaining US$1,000.00 was
consistent with “prevailing rates in the local or sold on February 3, 1976 and the peso
international capital markets.” The interest rate proceeds amounting to P8,350.00 were
repricing happened at the height of the Asian deposited to his current account per deposit
financial crises in late 1997, when banks slip also accomplished by Garcia.
clamped down on lendings because of higher
credit risks across industries, particularly the Aside from asserting that the US$3,000.00 was
real estate industry. properly credited to Zshornack's current
account at prevailing conversion rates, BPI
The SC also recognize that Solidbank now posits another ground to defeat private
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 35

respondent's claim. It now argues that the business day from receipt. Otherwise, the
contract embodied in the document is the contract of depositum would never have been
contract of depositum (as defined in Article entered into at all.
1962, New Civil Code), which banks do not
enter into. The bank alleges that Garcia Since the mere safekeeping of the greenbacks,
exceeded his powers when he entered into the without selling them to the Central Bank within
transaction. Hence, it is claimed, the bank one business day from receipt, is a transaction
cannot be liable under the contract, and the which is not authorized by CB Circular No. 20,
obligation is purely personal to Garcia. it must be considered as one which falls under
the general class of prohibited transactions.
ISSUE: WON the contract between petitioner Hence, pursuant to Article 5 of the Civil Code,
and respondent bank is a deposit. YES. it is void, having been executed against the
provisions of a mandatory/prohibitory law.
HELD: The document which embodies the More importantly, it affords neither of the
contract states that the US$3,000.00 was parties a cause of action against the other.
received by the bank for safekeeping. The "When the nullity proceeds from the illegality of
subsequent acts of the parties also show that the cause or object of the contract, and the act
the intent of the parties was really for the bank constitutes a criminal offense, both parties
to safely keep the dollars and to return it to being in pari delicto, they shall have no cause
Zshornack at a later time, Thus, Zshornack of action against each other. . ." [Art. 1411,
demanded the return of the money on May 10, New Civil Code.] The only remedy is one on
1976, or over five months later. behalf of the State to prosecute the parties for
violating the law.
The above arrangement is that contract
defined under Article 1962, New Civil Code, Therefore, Zshornack cannot recover under
which reads: this cause of action.

Art. 1962. A deposit is constituted from the

moment a person receives a thing belonging to II. Voluntary Deposit
another, with the obligation of safely keeping it
and of returning the same. If the safekeeping CALIBO, JR. VS COURT OF APPEALS
of the thing delivered is not the principal
purpose of the contract, there is no deposit but FACTS: In 1985, Mike Abella rented a house
some other contract. owned by Atty. Dionisio Calibo, Jr. Meanwhile,
Dr. Pablo Abella, Mike’s father, entrusted to
Note that the object of the contract between Mike a tractor. Pablo delivered the tractor to
Zshornack and COMTRUST was foreign Mike in order for the latter to safe-keep the
exchange. Hence, the transaction was covered same.
by Central Bank Circular No. 20, Restrictions
on Gold and Foreign Exchange Transactions, In November 1986, Mike defaulted in his rental
promulgated on December 9, 1949, which was payments to Calibo. Calibo repeatedly
in force at the time the parties entered into the demanded payments but Mike failed to pay.
transaction involved in this case. Under the However, Mike assured Calibo that he will
said circular, safekeeping of the greenbacks soon pay and Mike used his father’s tractor as
without selling them to Central Bank within 1 a security. Hence, Calibo took possession of
business day from receipt, is a transaction the tractor. Later, Mike advised Calibo that he
which is not authorized. can sell the tractor as payment for his debts.

As earlier stated, the document and the Pablo learned of the foregoing and so he
subsequent acts of the parties show that they contacted Calibo. He offered to pay a portion
intended the bank to safekeep the foreign of Mike’s debt and in return Calibo must return
exchange, and return it later to Zshornack, who the tractor. Calibo refused and he wanted
alleged in his complaint that he is a Philippine Pablo to guarantee all of Mike’s debt which
resident. The parties did not intended to sell Pablo does not want. Eventually, to redeem his
the US dollars to the Central Bank within one tractor, Pablo filed a replevin suit against
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 36

Calibo, which Pablo won. CHAN VS. MACEDA, JR.

On appeal, Calibo invoked that the replevin FACTS: On July 28, 1976, Bonifacio S.
should not have been granted as there was a Maceda, Jr., herein respondent, obtained a
valid contract of pledge between him and Mike; P7.3 million loan from the Development Bank
and that Mike was Pablo’s agent because of the Philippines for the construction of his
Pablo was aware of the fact that Mike pledged New Gran Hotel Project in Tacloban City.
the tractor to him. In the alternative, Calibo Thereafter, on September 29, 1976,
invoked that if there’s no contract of pledge, respondent entered into a building construction
there is at least a contract of deposit since contract with Moreman Builders Co., Inc.,
Mike himself left the tractor with him in the (Moreman). They agreed that the construction
concept of an innkeeper. would be finished not later than December 22,
1977.
ISSUE: Whether or not the arguments of
Calibo are valid. Respondent purchased various construction
materials and equipment in Manila. Moreman,
HELD: No. There is no contract of pledge. in turn, deposited them in the warehouse of
Wilson and Lily Chan, herein petitioners. The
The elements of a contract of pledge are as deposit was free of charge. Unfortunately,
follows: Moreman failed to finish the construction of the
1. the pledge is constituted to secure the hotel at the stipulated time. Hence, on
fulfillment of a principal obligation; February 1, 1978, respondent filed with the
2. the pledgor be the absolute owner of the then Court of First Instance (CFI, now Regional
thing pledged; and Trial Court), Branch 39, Manila, an action for
3. the person constituting the pledge has the rescission and damages against Moreman,
free disposal of his property, and in the docketed as Civil Case No. 113498.
absence thereof, that he be legally authorized
for the purpose. Meanwhile, during the pendency of the case,
respondent ordered petitioners to return to him
In this case, element number 2 is missing. the construction materials and equipment
Mike is not the absolute owner of the tractor. which Moreman deposited in their warehouse.
Petitioners, however, told them that Moreman
There is no contract of agency between Pablo withdrew those construction materials in 1977.
and Mike.
Hence, on December 11, 1985, respondent
It was proven in court that Pablo only left the filed with the Regional Trial Court, Branch 160,
tractor in his son’s possession only for the Pasig City, an action for damages with an
purpose of safekeeping. Pablo was not aware application for a writ of preliminary attachment
that his son pledged it to Calibo and he never against petitioners,7 docketed as Civil Case
authorized his son to do so. No. 53044.

There is no contract of deposit between Mike ISSUES:

and Calibo. 1. Has respondent presented proof that the
construction materials and equipment were
There is no deposit where the principal actually in petitioners' warehouse when he
purpose for receiving the object is not asked that the same be turned over to him?
safekeeping. In this case, Calibo himself NO
admitted in court that Mike delivered the tractor 2. If so, does respondent have the right to
to him as security for Mike’s debts. demand the release of the said materials and
equipment or claim for damages? NO
The judgment ordering Calibo to return the
tractor to Pablo was affirmed by the Supreme HELD: Under Article 1311 of the Civil Code,
Court. contracts are binding upon the parties (and
their assigns and heirs) who execute them.
When there is no privity of contract, there is
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 37

likewise no obligation or liability to speak about compensatory damages cannot be presumed,

and thus no cause of action arises. but must be proved with reasonable degree of
Specifically, in an action against the certainty. A court cannot rely on speculations,
depositary, the burden is on the plaintiff to conjectures, or guesswork as to the fact and
prove the bailment or deposit and the amount of damages, but must depend upon
performance of conditions precedent to the competent proof that they have been suffered
right of action. A depositary is obliged to return by the injured party and on the best obtainable
the thing to the depositor, or to his heirs or evidence of the actual amount thereof. It must
successors, or to the person who may have point out specific facts which could afford a
been designated in the contract. basis for measuring whatever compensatory or
actual damages are borne.
In the present case, the record is bereft of any
contract of deposit, oral or written, between Considering our findings that there was no
petitioners and respondent. If at all, it was only contract of deposit between petitioners and
between petitioners and Moreman. And respondent or Moreman and that actually there
granting arguendo that there was indeed a were no more construction materials or
contract of deposit between petitioners and equipment in petitioners' warehouse when
Moreman, it is still incumbent upon respondent respondent made a demand for their return, we
to prove its existence and that it was executed hold that he has no right whatsoever to claim
in his favor. However, respondent miserably for damages.
failed to do so. The only pieces of evidence
respondent presented to prove the contract of
deposit were the delivery receipts. SIA v. CA
Significantly, they are unsigned and not duly
received or authenticated by either Moreman, FACTS: Herein petitioner and respondent
petitioners or respondent or any of their entered into a contract denominated as a
authorized representatives. Hence, those Lease Agreement whereby the former rented a
delivery receipts have no probative value at all. safety deposit box owned by the latter .
While our laws grant a person the remedial Petitioner placed in the deposit box her stamp
right to prosecute or institute a civil action collection which was subsequently lost and
against another for the enforcement or damaged due to a flood that took place in 1985
protection of a right, or the prevention or and 1986. The defendant bank rejected the
redress of a wrong, every cause of action ex- petitioner’ s claim for compensation for his
contractu must be founded upon a contract, damaged stamps collection, so, the plaintiff
oral or written, express or implied. instituted an action for damages against the
defendant bank.
Moreover, respondent also failed to prove that
there were construction materials and The bank alleged that the contract was that of
equipment in petitioners' warehouse at the time lease and its liability was limited to the exercise
he made a demand for their return. of the diligence to prevent the opening of the
safe by any person other than the Renter, his
Considering that respondent failed to prove (1) authorized agent or legal representative; The
the existence of any contract of deposit Bank is not a depository of the contents of the
between him and petitioners, nor between the safe and it has neither the possession nor the
latter and Moreman in his favor, and (2) that control of the same. The Bank has no interest
there were construction materials in petitioners' whatsoever in said contents, except as herein
warehouse at the time of respondent's demand provided, and it assumes absolutely no liability
to return the same, we hold that petitioners in connection therewith.
have no corresponding obligation or liability to
respondent with respect to those construction RTC ruled in favor of petitioner. CA reversed
materials. the decision.

Anent the issue of damages, petitioners are ISSUE: Is SBTC liable for damages and loss?
still not liable because, as expressly provided YES
for in Article 2199 of the Civil Code, actual or
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 38

HELD: SBTC is a Depository Notwithstanding the depositary would be liable if, in performing
the Contract of Lease. its obligation, it is found guilty of fraud,
In the recent case CA Agro-Industrial negligence, delay or contravention of the tenor
Development Corp. vs. Court of Appeals, the of the agreement [Art. 1170, id.]. In the
Court held that the use of a safety deposit box absence of any stipulation prescribing the
is not a contract of lease and that it is actually degree of diligence required, that of a good
a special kind of deposit. father of a family is to be observed [Art. 1173,
id.]. Hence, any stipulation exempting the
The prevailing rule in American jurisprudence depositary from any liability arising from the
— that the relation between a bank renting out loss of the thing deposited on account of fraud,
safe deposit boxes and its customer with negligence or delay would be void for being
respect to the contents of the box is that of a contrary to law and public policy.
bailor and bailee, the bailment for hire and
mutual benefit — has been adopted in this Condition 13 and 14 of the Contract of Lease
jurisdiction, thus: are Void.
In the context of our laws which authorize Conditions 13 and l4 of the questioned contract
banking institutions to rent out safety deposit of lease of the safety deposit box, which read:
boxes, it is clear that in this jurisdiction, the "13. The bank is a depositary of the contents of
prevailing rule in the United States has been the safe and it has neither the possession nor
adopted. Section 72 of the General Banking control of the same.
Act [R.A. 337, as amended] pertinently "14. The bank has no interest whatsoever in
provides: said contents, except as herein expressly
"Sec. 72. In addition to the operations provided, and it assumes absolutely no liability
specifically authorized elsewhere in this Act, in connection therewith."
banking institutions other than building and are void as they are contrary to law and public
loan associations may perform the following policy. Said provisions are inconsistent with the
services: respondent Bank's responsibility as a
depositary under Section 72 (a) of the General
(a) Receive in custody funds, documents, and Banking Act.
valuable objects, and rent safety deposit boxes
for the safequarding of such effects. Furthermore, condition 13 stands on a wrong
xxx xxx xxx premise and is contrary to the actual practice
The banks shall perform the services permitted of the Bank. It is not correct to assert that the
under subsections (a), (b) and (c) of this Bank has neither the possession nor control of
section asdepositories or as agents. . . the contents of the box since in fact, the safety
."(emphasis supplied) deposit box itself is located in its premises and
is under its absolute control; moreover, the
Note that the primary function is still found respondent Bank keeps the guard key to the
within the parameters of a contract of deposit, said box.
i.e., the receiving in custody of funds,
documents and other valuable objects for As stated earlier, renters cannot open their
safekeeping. The renting out of the safety respective boxes unless the Bank cooperates
deposit boxes is not independent from, but by presenting and using this guard key. Clearly
related to or in conjunction with, this principal then, to the extent above stated, the foregoing
function. A contract of deposit may be entered conditions in the contract in question are void
into orally or in writing (Art. 1969, Civil Code] and ineffective. It has been said:
and, pursuant to Article 1306 of the Civil Code, "With respect to property deposited in a safe-
the parties thereto may establish such deposit box by a customer of a safe-deposit
stipulations, clauses, terms and conditions as company, the parties, since the relation is a
they may deem convenient, provided they are contractual one, may by special contract define
not contrary to law, morals, good customs, their respective duties or provide for increasing
public order or public policy. The depositary's or limiting the liability of the deposit company,
responsibility for the safekeeping of the objects provided such contract is not in violation of law
deposited in the case at bar is governed by or public policy. It must clearly appear that
Title I, Book IV of the Civil Code. Accordingly, there actually was such a special contract,
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 39

however, in order to vary the ordinary and Paula Pugao entered into an agreement
obligations implied by law from the relationship where the former purchased from the latter two
of the parties; liability of the deposit company parcels of land for P350,625. P75,725 was
will not be enlarged or restricted by words of paid as downpayment while the balance was
doubtful meaning. The company, in renting covered by three postdated checks. Among the
safe-deposit boxes, cannot exempt itself from terms and conditions of said agreement were
liability for loss of the contents by its own fraud that the titles to the lots shall be transferred to
or negligence or that, of its agents or servants, the petitioner upon full payment of the
and if a provision of the contract may be purchase price and that the owner's copies of
construed as an attempt to do so, it will be held the certificates of title shall be deposited in a
ineffective for the purpose. Although it has safety deposit box. The same could be
been held that the lessor of a safe-deposit box withdrawn only upon the joint signatures of
cannot limit its liability for loss of the contents petitioner and spouses Pugaos upon full
thereof through its own negligence, the view payment of the purchase price.
has been taken that such a lessor may limit its
liability to some extent by agreement or Petitioner and spouses Pugaos then rented
stipulation. safety deposit box no. 1448 of respondent
Security Bank and Trust Company and for this
SBTC is Negligent. purpose both signed a contract of lease which
Respondent cannot invoke fortuitous event contained the following conditions:
under Article 1174by reason of its negligence .
SBTC's negligence aggravated the injury or 13. The bank is not a depositary of the
damage to the stamp collection. SBTC was contents of the safe and it has neither the
aware of the floods of 1985 and 1986; it also possession nor control of the same.
knew that the floodwaters inundated the room
where Safe Deposit Box No. 54 was located. In 14. The bank has no interest
view thereof, it should have lost no time in whatsoever in said contents, except herein
notifying the petitioner in order that the box expressly provided, and it assumes absolutely
could have been opened to retrieve the no liability in connection therewith.
stamps, thus saving the same from further
deterioration and loss. In this respect, it failed Thereafter, a certain Mrs. Margarita Ramos
to exercise the reasonable care and prudence offered to buy from the petitioner the two lots
expected of a good father of a family, thereby and demanded the execution the deed of sale
becoming a party to the aggravation of the which necessarily entailed the production of
injury or loss. the certificates of title. However, when the
safety deposit box was open, the box yielded
Accordingly, the aforementioned fourth no such certificates. The delay in the
characteristic of a fortuitous event is absent reconstitution of the title compelled Mrs.
Article 1170 of the Civil Code is therefore Ramos to withdraw her offer and as a
applicable ; consequence, petitioner allegedly suffered a
loss which forced the latter to file a complaint
Those who in the performance of their for damages against Security Bank and Trust
obligation are guilty of fraud, negligence, or Company.
delay, and those who in any manner
contravene the tenor thereof, are liable for The Court of First Instance (Regional Trial
damages. Court) decided in favor of respondent bank
citing paragraph 13 and 14 of the contract of
lease which exonerates the bank from any
liability. The Court of Appeals in turn affirmed
CA AGRO-INDUSTRIAL DEVELOPMENT the decision of the trial court on the theory that
CORP. vs CA and SECURITY BANK AND the contract executed between petitioner and
TRUST COMPANY respondent bank is a contract of lease (Article
1643) by virtue of which respondent bank was
FACTS: On July 3, 1979, petitioner through its divested of any possession nor control over the
president Sergio Aguirre, and spouses Ramon safety deposit box.
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 40

authorize banking institutions to rent out safety

ISSUE: Is the contractual relation between deposit boxes, it is clear that in this jurisdiction,
petitioner and respondent bank one of bailor the prevailing rules in the United States has
and bailee or one of lessor and lessee? bailor been adopted. Section 72 of the General
and bailee Banking Act provides:

HELD: The contract in the case at bar is a Sec. 72. In addition to the operations
special kind of deposit. specifically authorized elsewhere in this Act,
banking institutions other than building and
The Court agrees with the petitioner that the loan associations may perform the following
contract for the rent of the safety deposit box is services:
not an ordinary contract of lease. However, the
Court cannot fully subscribe to the view that (a) Receive in custody funds,
the same contract is to be strictly governed by documents, and valuable objects, and rent
the provisions of the Civil Code on deposit. It safety deposit boxes for the safeguarding of
cannot be characterized as a contract of lease such effects.
because the full and absolute possession and xxx xxx xxx
control of the safety deposit box was not given The banks shall perform the services
to the joint renters. The guard key remained permitted under subsections (a), (b) and (c) of
with the bank and without this, the renters this section as depositories or as agents. . .
cannot open the safety deposit box. On the .(emphasis supplied)
other hand, the respondent bank could not
likewise open the box without the renter's key. It is to be noted that the primary function is still
Thus, Article 1643 and Article 1975 which was found within the parameters of a contract of
invoked by the Court of Appeals does not deposit, i.e., the receiving in custody of funds,
apply in the present case. documents and other valuable objects for
safekeeping. The renting out of the safety
We observe, however, that the deposit theory deposit boxes is not independent from, but
itself does not altogether find unanimous related to or in conjunction with, this principal
support even in American jurisprudence. We function. . A contract of deposit may be
agree with the petitioner that under the latter, entered into orally or in writing and, pursuant to
the prevailing rule is that the relation between Article 1306 of the Civil Code, the parties
a bank renting out safe-deposit boxes and its thereto may establish such stipulations,
customer with respect to the contents of the clauses, terms and conditions as they may
box is that of a bail or and bailee, the bailment deem convenient, provided they are not
being for hire and mutual benefit. This is just contrary to law, morals, good customs, public
the prevailing view because: order or public policy. Accordingly, the
depositary would be liable if, in performing its
There is, however, some support for the view obligation, it is found guilty of fraud,
that the relationship in question might be more negligence, delay or contravention of the tenor
properly characterized as that of landlord and of the agreement.
tenant, or lessor and lessee. It has also been
suggested that it should be characterized as N.B.
that of licensor and licensee. The relation
between a bank, safe-deposit company, or 1. In the absence of any stipulation
storage company, and the renter of a safe- prescribing the degree of diligence required,
deposit box therein, is often described as that of a good father of a family is to be
contractual, express or implied, oral or written, observed. Hence, any stipulation exempting
in whole or in part. But there is apparently no the depositary from any liability arising from the
jurisdiction in which any rule other than that loss of the thing deposited on account of fraud,
applicable to bailments governs questions of negligence or delay would be void for being
the liability and rights of the parties in respect contrary to law and public policy. Thus,
of loss of the contents of safe-deposit boxes. conditions 13 and 14 of the questioned
contract of lease of the safety deposit box are
In the context of Philippine laws which void as they are contrary to law and public
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 41

policy. contract of commodatum.

Under Article 1768 of the Civil Code, when the
2. Although the contract between depository has the permission to make use of
petitioner and respondent bank was the thing deposited, the contract loses the
considered as a contract of deposit, the Court character of mere deposit and becomes a loan
still affirmed the CA's decision to dismiss the or a commodatum; and of course by
case because no competent proof was appropriating the thing, the bailee becomes
presented to show that respondent bank was responsible for its value. In the present case,
aware of the agreement between the petitioner the parties agreed that Pablo was at liberty to
and spouses Pugaos to the effect that the convert it into rice and dispose of it at his
certificates of title were withdrawable from the pleasure. It was insignificant whether the
safety deposit box only upon both parties' joint contract between the parties is that of a sale
signatures. Also, no evidence was submitted to or a deposit for even supposing that the palay
reveal that the loss of the certificates of title may have been delivered in the character of
was due to fraud or negligence of the deposit subject to future sale or withdrawal at
respondent bank. plaintiff's election because it was understood
that Pablo might mill the palay and he has in
fact appropriated it to his own use, therefore he
SILVESTRA BARON vs PABLO DAVID is bound to account for its value.
G.R. Nos. L-26948 and L-26949 (October 8,
1927) 2) Pablo David is liable for the value of the
palay.
FACTS: Silvestra Baron and Guillermo Baron, It should be stated that the palay in question
plaintiffs in the present case are the aunt and was place by the plaintiffs in the defendant's
uncle respectively of Pablo David, the mill with the understanding that the defendant
defendant, who is engaged in running a rice was at liberty to convert it into rice and dispose
mill in the municipality of Magalang, in the of it at his pleasure. The mill was actively
Province of Pampanga. running during the entire season, and as palay
was daily coming in from many customers and
In the months of March, April and May 1920, as rice was being constantly shipped by the
Silvestra placed a quantity of palay in Pablo's defendant to Manila, or other rice markets, it
mill which amounted to 1,012 cavans and 24 was impossible to keep the plaintiffs' palay
kilos. During the same period, Guillermo segregated. In fact the defendant admits that
placed 1,865 cavans and 43 kilos of palay in the plaintiffs' palay was mixed with that of
the same milll. On January 17, 1921, a fire others. In view of the nature of the defendant's
occurred that destroyed the rice mill and its activities and the way in which the palay was
contents owned and in the possession of Pablo handled in the defendant's mill, it is quite
David. Silvestra and Guillermo now seek to certain that all of the plaintiffs' palay, which
recover the value of such palays as they both was put in before June 1, 1920, been milled
claim that the palay they delivered was sold to and disposed of long prior to the fire of January
Pablo. Pablo, on the other hand, claims that 17, 1921.
the palay was deposited subject to future
withdrawal by the depositors or subject to Considering the fact that the defendant had
some future sale which was never effected. thus milled and doubtless sold the plaintiffs'
Pablo therefore seeks to relieved himself from palay prior to the date of the fire, it result that
all responsibility by virtue of the fire. he is bound to account for its value, and his
liability was not extinguished by the occurrence
ISSUES: of the fire.
1) What is the nature of the contract between
the parties?
2)Whether or not Pablo David is liable for the ANGEL JAVELLANA vs JOSE LIM, ET AL.,
value of the palays G.R. No. 4015 (August 24, 1908)

HELD: FACTS: On October 30, 1906, Angel Javellana

1) The contract between the parties is a filed a complaint with the Court of First
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 42

Instance against Jose Lim and Ceferino 1,000 pesos paid to the plaintiff on the 15th of
Domingo Lim and be sentenced jointly and May, 1900, according to the receipt issued by
severally to pay the sum of P2.686.58 with him to the defendants, would be included, and
interest at the rate of 15 per cent per annum. that the said rate of interest would obtain until
It was alleged that on May 26, 1897, the the defendants on the 20th of May, 1897, it is
defendants executed and subscribed a called a deposit consisted, and they could
document in favor of the plaintiff reading as have accomplished the return agreed upon by
follows: the delivery of a sum equal to the one received
by them.
We have received from Angel Javellana, as a
deposit without interest, the sum of two For this reason, it is understood that the
thousand six hundred and eighty-six cents of defendants were lawfully authorized to make
pesos fuertes, which we will return to the said use of the amount deposited, which they have
gentleman, jointly and severally, on the 20th of done, as shown when they asked for an
January, 1898. — Jaro, 26th of May, 1897. — extension of the time to return the amount,
Signed Jose Lim. — Signed: Ceferino inasmuch as they have subjected the plaintiff
Domingo Lim. to losses and damages for not complying with
what was stipulated and being aware that they
When the obligation became due, the had used the money that they received
defendants begged the plaintiff for an apparently as a deposit, they promised to pay
extension of time for the payment thereof, the interest from the date named until the time
agreeing to pay interest at the rate of 15 per when the refund should be made. Such
cent, to which the latter accepted. On May 15, conduct on the part of the defendants is
1902, the defendants paid on account of unquestionable evidence that the transaction
interest due the sum of P1,000, with the was not a deposit, but a real contract of loan.
exception of either capital or interest, had Article 1767 of the Civil Code provides that
thereby been subjected to loss and damages. —
The defendants admitted the statements of the
plaintiff relative to the payment of P1,102.16 The depository cannot make use of the thing
made on November 15, 1902, not as payment deposited without the express permission of
of interest but on account of the principal, and the depositor.
denied that there had been any agreement as
to the extension of the time of payment and the Otherwise he shall be liable for losses and
payment of interest at the rate of 15 per cent damages.
per annum. Article 1768 also provides that —

ISSUE: Whether or not the contract between When the depository has permission to make
the parties is a contract of deposit use of the thing deposited, the contract loses
the character of a deposit and becomes a loan
HELD: The contract between the parties is a or bailment.
contract of loan. The document of
indebtedness inserted in the complaint stated The permission shall not be presumed, and its
that the plaintiff left on deposit with the existence must be proven.
defendants a given sum of money which they
were jointly and severally obliged to return on a When on one of the latter days of January,
certain date fixed in the document; but 1898, Jose Lim went to the office of the plaintiff
nevertheless it was acknowledged at the date asking for an extension of one year, and
thereof, November 15, 1902, the amount agreed to pay interest at the rate of 15 per cent
deposited had not yet been returned to the per annum, it was because, as a matter of fact,
plaintiff, whereby he was subject to losses and he did not have in his possession the amount
damages. When the return was again deposited, he having made use of the same in
stipulated with the further agreement that the his business and for his own profit; and the
amount deposited should bear interest at the plaintiff, by granting them the extension,
rate of 15 per cent per annum, from the evidently confirmed the express permission
aforesaid date of January 20, and that the previously given to use and dispose of the
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 43

amount deposited, which, in accordance with and asked the court to declare it a preferred
the loan, to all intents and purposes claim.
gratuitously, until the 20th of January, 1898,
and from that dated with interest at 15 per cent The assignee of the insolvency answered the
per annum until its full payment, deducting claim by interposing a general denial.
from the total amount of interest the sum of
1,000 pesos, in accordance with the provisions On September 23, 1929, the court rendered a
of article 1173 of the Civil Code. decision declaring that the alleged deposit was
a preferred claim for the sum mentioned, with
Notwithstanding that it does not appear that interest at 6 per cent per annum from April 5,
Jose Lim signed the document executed in the 1918, until paid. From this decision the
presence of three witnesses on the 15th of assignee appealed.
November, 1902, by Ceferino Domingo Lim on
behalf of himself and the former, nevertheless, The evidence presented by the claimant
the said document has not been contested as Compania Agricola de Ultramar consisted of a
false, either by a criminal or by a civil receipt in writing, and the testimony of Jose
proceeding, nor has any doubt been cast upon Velasco who was manager of Mariano Velasco
the authenticity of the signatures of the & Co. at the time the note was executed. The
witnesses who attested the execution of the receipt reads as follows:
same; and from the evidence in the case one
is sufficiently convinced that the said Jose Lim MANILA, P. I., April 5, 1918.
was perfectly aware of and authorized his joint Received from the "Compania Agricola de
co-debtor to liquidate the interest, to pay the Ultramar" the sum of ten thousand Philippine
sum of 1,000 pesos, on account thereof, and to pesos as a deposit at the interest of six per
execute the aforesaid document No. 2. A true cent annually, for the term of three months
ratification of the original document of deposit from date.
was thus made, and not the least proof is
shown in the record that Jose Lim had ever In witness thereof, I sign the present.
paid the whole or any part of the capital stated MARIANO VELASCO & CO.
in the original document. By (Sgd.) JOSE VELASCO
Manager.
There was no renewal of the contract P10,000.00.
deposited converted into a loan, because, as
has already been stated, the defendants In his testimony, Jose Velasco stated that his
received said amount by virtue of real loan signature on the receipt was authentic and that
contract under the name of a deposit, since the he received the said sum of P10,000 from the
so-called bailees were forthwith authorized to appellee and deposited it with the bank in the
dispose of the amount deposited. This they current account of Mariano Velasco & Co.
have done, as has been clearly shown.
ISSUE: WON the claim filed is that of a deposit
COMPAÑIA AGRICOLA VS. NEPOMUCENO or a loan? LOAN

FACTS: On March 17, 1927, the registered HELD: The Supreme Court reiterated the
partnerships, Mariano Velasco & Co., Mariano ruling in the case of Gavieres vs. De Tavera (1
Velasco, Sons, & Co., and Mariano Velasco & Phil., 17) which had a very similar facts to the
Co., Inc., were declared insolvent by the Court present case. The court held that the
of First Instance of Manila. transaction therein involved was a loan and not
a deposit. The court said:
On the 16th day of April, 1927, the Compania
Agricola de Ultramar filed a claim against one Although in the document in question a
of the insolvents Mariano Velasco & Co., deposit is spoken of, nevertheless from an
claiming the sum of P10,000, with the agreed examination of the entire document it
interest thereon at the rate of 6 per cent per clearly appears that the contract was a loan
annum from April 5, 1918, until its full payment and that such was the intention of the
was a deposit with said Mariano Velasco & Co. parties. It is unnecessary to recur to the
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 44

cannons of interpretation to arrive at this necessity of the borrower.

conclusion. The obligation of the
depository to pay interest at the rate of 6 Nor does the contract in question fulfill the
per cent to the depositor suffices to cause third requisite indicated by Manresa, which is,
the obligation to be considered as a loan that in an irregular deposit, the depositor can
and makes it likewise evident that it was the demand the return of the article at any time,
intention of the parties that the depository while a lender is bound by the provisions of the
should have the right to make use of the contract and cannot seek restitution until the
amount deposited, since it was stipulated time for payment, as provided in the contract,
that the amount could be collected after has arisen. It is apparent from the terms of this
notice of two months in advance. Such documents that the plaintiff could not demand
being the case, the contract lost the his money at any time. He was bound to give
character of a deposit and acquired that of notice of his desire for its return and then to
a loan. (Art.1768, Civil Code.) wait for six months before he could insist upon
payment.
Article 1767 of the Civil Code provides that —
"The depository cannot make use of the thing In the present case the transaction in
deposited without the express permission of question was clearly not for the sole benefit
the depositor." "Otherwise he shall be liable for of the Compania Agricola de Ultramar; it
losses and damages." was evidently for the benefit of both
parties. Neither could the alleged depositor
Article 1768 also provides that — "When the demand payment until the expiration of the
depository has permission to make use of the term of three months.
thing deposited, the contract loses the
character of a deposit and becomes a loan or For the reasons stated, the appealed judgment
bailment." "The permission not be presumed, is reversed, and we hold that the transaction in
and its existence must be proven." question must be regarded as a loan, without
preference.
Moreover it may be inferred that there was no
renewal of the contract of deposit converted
into a loan, because, as has already been ROGERS VS. SMITH
stated, the defendants received said amount
by virtue of a real loan contract under the FACTS: Plaintiff Jose Rogers (Rogers)
name of a deposit, since the so-called brought this action in the CFI city of Manila
bailees were forthwith authorized to upon the following document:(the subject
dispose of the amount deposited. This they document of the case) No. 1418. $12,000.
have done, as has been clearly shown.
The sum of pesos twelve thousand has been
The ten thousand pesos delivered by the deposited with us, received from Jose Rogers,
appellee to Mariano Velasco & Co. cannot be which sum we will pay on the last day of the six
regarded as a technical deposit. But the months after the presentation of this document,
appellee argues that it is at least an "irregular to the order of Mr. Jose Rogers. Manila,
deposit." This argument is, we think, February 17, 1876. SMITH, BELL & CO.
sufficiently answered in the case of Rogers vs.
Smith, Bell & Co. (10 Phil., 319). There this The said sum of twelve thousand pesos shall
court said: bear interest at the rate of eight per centum
(8%) per annum from this date, February 17,
…Manresa, in his Commentaries on the Civil 1876.
Code (vol. 11, p. 664), states that there are
three points of difference between a loan and SMITH, BELL & CO.
an irregular deposit. The first difference which
he points out consists in the fact that in an When this document was delivered by the
irregular deposit the only benefit is that which defendants Smith, Bell & CO. (Smith) to
accrues to the depositor, while in a loan the Rogers, 12,000 pesos in silver were worth
essential cause for the transaction is the more than 12,000 pesos in gold.
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 45

HELD: The document is an evidence of

The only question in the case is, whether upon ordinary loan.
these documents Rogers is entitled to recover
12,000 pesos or 24,000 pesos. CFI held that Rogers repeatedly calls it a deposit, that is,
he was entitled to recover only 12,000 pesos. that the ownership of the particular coin which
Rogers has appealed. Rogers delivered to was delivered by him to Smith did not pass to
Smith, in consideration of the execution of the Smith but remained in him and that Smith was
document, 12,000 in gold. bound to return to him the identical coin which
they had received. It is apparent that no such
Soon thereafter Rogers moved to Barcelona claim could be maintained in view of that part
and has since resided there. Smith remitted of the instrument which provides for the
the interest to him every three months at the payment of interest. But while not a deposit in
rate of 8 per cent per annum until the 30th day the strict sense of the word, the document
of January, 1888, when they notified him that evidences what is known as an "irregular
thereafter the interest would be 6 per cent. deposit."
Rogers accepted this reduction and interest
and that rate was remitted to him by Smith until The Supreme Court cited Manresa's
the 10th of February, 1904. This interest was discussion on the differences of a loan and an
remitted in silver; that is to say, every three irregular deposit namely:
months the Smith took 180 pesos in silver and
with it bought exchange on Barcelona or other 1. in irregular deposit the benefit accrues
European point converted into pesetas. Rogers to the depositor alone whereas in loan
received these payments in silver without any the benefit is for both parties, the
protest whatever until the 10th day of essential cause is the necessity of the
February, 1904. borrower;

In his letter of that date, he called the attention 2. in irregular deposit the depositor has a
of the Smith to the fact that by the new preference over other creditors
American law in force in the Philippines the whereas in loan there is no such
gold standard had been introduced and that by preference;
reason thereof he was entitled to receive his
interest in gold, in view of the fact that when he 3. in irregular deposit the depositor can
delivered the money to the Smith in 1876 he demand the return of the article at any
delivered it in gold coin. time whereas in loan the parties are
bound by the contract.
In another letter of the 15th of December,
1904, he expressly refers to the act of In the first difference, the contract in question
Congress of March 2, 1903, and to the does not fulfill this requirement of an irregular
subsequent proclamations of the Governor- deposit. It is very apparent that is was not for
General relating to coinage. the sole benefit of Rogers. It like any other loan
of money was for the benefit of both parties.
Rogers claims that, having paid to Smith The benefit which Smith, Bell & Co. received
12,000 pesos in gold coin, he is now entitled to was the use of the money; the benefit which
receive from them the value of 12,000 pesos in Rogers received was the interest of his money.
gold coin; that is to say, 24,000 pesos in silver. In the letter which Smith, Bell & Co. on the
It is necessary to determine in the first place 30th of June, 1888, notified the plaintiff of the
the nature of the contract evidenced by the reduction of the interest, they said: "We call
document of the 17th of February, 1876. your attention to this matter in order that you
may if you think best employ your money in
some other place."
ISSUE: WON the document is an evidence of
an ordinary loan which created between the The second difference which exists, according
Rogers and the Smith the simple relation of to Manresa, between an irregular deposit and
debtor and creditor. YES a loan lies in the fact that in an irregular
deposit the depositor has a preference over
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 46

other creditors in the distribution of the debtor's obtained a loan of P73,000.00 from CBTC as
property. It is apparent, therefore, that this "Additional Working Capital,". Eastern issued a
document does not state those requisites negotiable promissory note for P73,000.00
which are essential to an irregular deposit. payable on demand to the order of CBTC with
interest at 14% per annum. The note was
Nor does the contract in question fulfill the third signed by Lim. The loan is wholly/partly
requisite, which is, in an irregular deposit, the secured by the Hold-Out on a 1:1 on C/A No.
depositor can demand the return of the article 2310-001-42, which refers to the joint account
at any time, while a lender is bound by the of Velasco and Lim with a balance of
provisions of the contract and cannot seek P331,261.44. In addition, Eastern and Lim, and
restitution until the time for payment, as CBTC signed another document entitled
provided in the contract, has arisen. It is "Holdout Agreement,"
apparent from the terms of this document that
the plaintiff could not demand his money at any On the other hand, a case for the settlement of
time. He was bound to give notice of his desire Velasco's estate was filed. In the said case, the
for its return and then to wait for six months whole balance of P331,261.44 in the aforesaid
before he could insist upon payment. joint account of Velasco and Lim was being
claimed as part of Velasco's estate. The
From the above discussions, it is very apparent intestate court granted motion of the heirs of
that is was not for the sole benefit of Rogers. Velasco to withdraw the balance and
Like any other loan it was for the benefit of authorized the heirs to divide among
both parties. The benefit of Smith Bell themselves the amount withdrawn.
Company was the use of the money while Jose
Rogers' benefit was the interest on his money. CBTC was merged with BPI. BPI filed a
Also, he was not able to demand for the money complaint against Lim and Eastern demanding
at any time for he is supposed to give notice payment of the promissory note for
and wait for six months first before payment. P73,000.00. Defendants Lim and Eastern, in
Thus, the transaction is that of an ordinary loan turn, filed a counterclaim against BPI for the
and not an irregular deposit. return of the balance in the disputed account
subject of the Holdout Agreement and the
interests thereon after deducting the amount
BPI v. CA due on the promissory note.

FACTS: Private respondents Eastern Plywood RTC dismissed the complaint and CA affirmed
Corporation (Eastern) and Benigno D. Lim the decision.
(Lim), held one joint bank account with the
Commercial Bank and Trust Co. (CBTC), the BPI’s CONTENTION: BPI alleged that the
predecessor-in-interest of petitioner Bank of Holdout Agreement in question was subject to
the Philippine Islands (BPI). a suspensive condition stated therein, viz., that
the "P331,261.44 shall become a security for
Sometime in March 1975, a joint checking respondent Lim's promissory note only if
account with Lim in the amount of P120,000.00 respondents' Lim and Eastern Plywood
was opened by Mariano Velasco with funds Corporation's interests to that amount are
withdrawn from the account of Eastern and/or established as a result of a final and definitive
Lim. judicial action or a settlement between and
among the contesting parties thereto." Hence,
Velasco died. At the time of his death, the BPI asserts, the Court of Appeals erred in
outstanding balance of the account stood at affirming the trial court's decision dismissing
P662,522.87. the complaint on the ground that it was the
duty of CBTC to debit the account of the
On 5 May 1977, by virtue of an Indemnity defendants to set off the amount of P73,000.00
Undertaking executed by Lim one-half of this covered by the promissory note.
amounts was provisionally released and
transferred to one of the bank accounts of EASTERN and LIM’s CONTENTION: Eastern
Eastern with CBTC. Thereafter, Eastern and Lim dispute the "suspensive condition"
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 47

argument of the petitioner that they are rightful concerning simple loan."
owners of the money in question, the
suspensive condition does not find any In Serrano vs. Central Bank of the
application in this case and the bank had the Philippines, we held that bank deposits are
duty to set off this deposit with the loan. in the nature of irregular deposits; they are
really loans because they earn interest. The
ISSUES: relationship then between a depositor and a
1. WON BPI can demand payment of the loan bank is one of creditor and debtor. The
of P73,000.00 despite the existence of the deposit under the questioned account was
Holdout Agreement? YES an ordinary bank deposit; hence, it was
2. WON BPI is still liable to the private payable on demand of the depositor.
respondents on the account subject of the
Holdout Agreement after its withdrawal by the The account was proved and established to
heirs of Velasco? YES belong to Eastern even if it was deposited in
the names of Lim and Velasco. As the real
HELD: creditor of the bank, Eastern has the right to
ISSUE 1: It is clear in paragraph 02 of the withdraw it or to demand payment thereof. BPI
“Holdout Agreement” that CBTC, or BPI as its cannot be relieved of its duty to pay Eastern
successor-in-interest, had every right to simply because it already allowed the heirs of
demand that Eastern and Lim settle their Velasco to withdraw the whole balance of the
liability under the promissory note. It cannot be account. The petitioner should not have
compelled to retain and apply the deposit in allowed such withdrawal because it had
Lim and Velasco's joint account to the payment admitted in the Holdout Agreement the
of the note. What the agreement conferred on questioned ownership of the money deposited
CBTC was a power, not a duty. Generally, a in the account.
bank is under no duty or obligation to make the
application. To apply the deposit to the Moreover, the order of the court merely
payment of a loan is a privilege, a right of set- authorized the heirs of Velasco to withdraw the
off which the bank has the option to exercise. account. BPI was not specifically ordered to
release the account to the said heirs; hence, it
Also, paragraph 05 of the Holdout Agreement was under no judicial compulsion to do so.
itself states that notwithstanding the Because the ownership of the deposit
agreement, CBTC was not in any way remained undetermined, BPI, as the debtor,
precluded from demanding payment from had no right to pay to persons other than those
Eastern and from instituting an action to in whose favor the obligation was constituted
recover payment of the loan. What it provides or whose right or authority to receive payment
is an alternative, not an exclusive, method of is indisputable. Payment made by the debtor to
enforcing its claim on the note. Its suit for the the wrong party does not extinguish the
enforcement of the note was then in order and obligation as to the creditor who is without fault
it was error for the trial court to dismiss it on or negligence, even if the debtor acted in
the theory that it was set off by an equivalent utmost good faith and by mistake as to the
portion in C/A No. 2310-001-42 which BPI person of the creditor, or through error induced
should have debited. The "suspensive by fraud of a third person. The payment then
condition" theory of the petitioner is, therefore, by BPI to the heirs of Velasco, even if done in
untenable. good faith, did not extinguish its obligation to
the true depositor, Eastern.
ISSUE 2: The Court of Appeals correctly
decided on the counterclaim. The counterclaim
of Eastern and Lim for the return of the METROBANK VS BA FINANCE
P331,261.44 was equivalent to a demand that
they be allowed to withdraw their deposit with FACTS: Lamberto Bitanga obtained from
the bank. Article 1980 of the Civil Code respondent BA Finance a loan, to secure
expressly provides that "[f]ixed, savings, and which, he mortgaged his car to respondent BA
current deposits of money in banks and similar Finance. Bitanga had the mortgaged car
institutions shall be governed by the provisions insured by respondent Malayan Insurance.
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 48

behalf. The payment of an instrument over a

The car was stolen. On Bitanga's claim, missing indorsement is the equivalent of
Malayan Insurance issued a check payable to payment on a forged indorsement or an
the order of "BA Finance Corporation and unauthorized indorsement in itself in the case
Lamberto Bitanga", drawn against China Bank. of joint payees. Clearly, petitioner, through its
The check was crossed with the notation "For employee, was negligent when it allowed the
Deposit Payees' Account Only." Without the deposit of the crossed check, despite the lone
indorsement or authority of his co-payee BA endorsement of Bitanga, ostensibly ignoring
Finance, Bitanga deposited the check to his the fact that the check did not, it bears
account with the Asian Bank, now merged with repeating, carry the indorsement of BA
herein petitioner Metrobank. Bitanga Finance.
subsequently withdrew the entire proceeds of
the check. In the meantime, Bitanga's loan
became past due, but despite demands, he REYES vs CA
failed to settle it.
FACTS: In view of the 20th Asian Racing
BA Finance eventually learned of the loss of Conference to be held in Sydney, Australia, the
the car and of Malayan Insurance's issuance of Philippine Racing Club, Inc. (PRCI) sent 4
a crossed check payable to it and Bitanga, and delegates to the said conference. Petitioner
of Bitanga's depositing it in his account at Gregorio Reyes, as VP for finance racing
Asian Bank and withdrawing the entire manager, treasurer, and directory of PRCI,
proceeds thereof. BA Finance thereupon sent Godofredo Reyes, the club's chief cashier,
demanded the payment of the value of the to Far East Bank and Trust Company
check from Asian Bank but to no avail, (respondent) to apply for a foreign exchange
prompting it to file a complaint before the RTC demand draft in Australian dollars (AU$
for sum of money and damages against Asian 1,610.00).
Bank and Bitanga, alleging that, inter alia, it is
entitled to the entire proceeds of the check. Mr. Yasis, bank's assistant cashier, first denied
The RTC, holding that Asian Bank was the application for the reason that respondent
negligent in allowing Bitanga to deposit the bank did not have an Australian dollar account
check to his account and to withdraw the in any bank in Sydney. Since Godofredo asked
proceeds thereof, without his co-payee BA if there could be a way for respondent bank to
Finance having indorsed it or authorized him to accommodate PRCI's urgent need to remit
indorse it in its behalf, found Asian Bank and AUS$ to SYdney, Yasis informed him of
Bitanga jointly and severally liable to BA another way of effecting the requested
Finance following Section 41 of the NIL. The remittance.
appellate court affirmed the RTC's decision
and held that BA Finance has a cause of The respondent bank would draw a demand
action against it even if the subject check had draft against Westpac-Sydney and have the
not been delivered to BA Finance by the issuer latter reimburse itself from the US$ account of
itself. Hence, this petition. the respondent in Westpac-New York. This
arrangement has been customarily resorted to
ISSUE: WON the petitioner is liable for the full since the 1960s and the procedure has proven
value of the check. YES to be problem-free.

HELD: The SC held that Sec 41 of the NIL July 28, 1988, the respondent bank approved
provides: "Where an instrument is payable to the said application of PRCI and issued
the order of two or more payees or indorsees Foreign Exchange Demand Draft(FXDD) No.
who are not partners, all must indorse unless 209968 in the sum applied for payable to the
the one indorsing it has no authority to indorse order of the 20th Asian Racing Conference
for the others. Bitanga alone endorsed the Secretariat of Sydney, Australia, and
crossed check, and the petitioner allowed the addressed to Westpac-Sydney as the drawee
deposit and release of the proceeds thereof, bank.
despite the absence of authority of Bitanga's
co-payee BA Finance to endorse it on its August 10, 1988, upon due presentment of the
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 49

FXDD the same was dishonored, with the

notice of dishonor stating; "xxx No account The degree of diligence required of banks, is
held with Westpac." Meanwhile, on August 16, more than that of a good father of a family
1988, Wespac-New York sent a cable to where the fiduciary nature of their relationship
respondent bank informing the latter that its with their depositors is concerned. In other
dollar account in the sum of AU$ 1,610.00 was words, banks are duty bound to treat the
debited. The respondent bank informed deposit accounts of their depositors with the
Wespac-New York requesting the latter to highest degree of care. But the said ruling
honor the reimbursement claim of Westpac- applies only to cases where bank act under
Sydney. Upon its second presentment for their fiduciary capacity, that is, as depositary of
payment, FXDD No. 209968 was again the deposits of their depositors. But the same
dishonored by Westpac-Sydney for the same higher degree of diligence is not expected to
reason. be exerted by banks in commercial
transactions that do not involve their fiduciary
When the petitioner Gregorio Reyes arrived in relationship with their depositors.
Sydney in the morning of September 18, 1988,
he went directly to the lobby of Hotel Regent Respondent bank was not required to exert
Sydney to register as a conference delegate. more than the diligence of a good father of a
At the registration desk, the conference family in regard to the sale and issuance of the
secretariat said that he could not register subject FXDD. The case at bar does not
because the FXDD for his registration fee had involve the handling of the petitioner's deposit.
been dishonored for the second time. The Instead, the relationship involved was that of a
same situation was experienced by his wife buyer and seller, that is, between the
Consuelo who is a member of the House of respondent bank as the seller of the subject
Rep representing the District of Makati, Metro foreign exchange demand draft, and PRCI as
Manila. the buyer of the same, with the 20th Asian
Racing conference Secretariat in Sydney,
The petitioners filed a complaint for damages Australia as the payee thereof. The FXDD was
against FEBTC. Claiming that as a result of the intended for the payment of the registration
dishonor of the said demand draft, they were fees of the petitioners as delegates of the
exposed to unnecessary shock, social PRCI.
humiliation, and deep mental anguish in a
foreign country, and in the presence of an The evidence shows that the respondent bank
international audience. RTC and CA ruled in did everything within its power to prevent the
favor of the respondent. dishonor of the subject FXDD. The erroneous
reading of its cable message to Westpac-
ISSUE: WON the respondent bank was Sydney by an employee of the latter could not
negligent. NO have been foreseen by the respondent bank.
Being unaware that its employee erroneously
HELD: The facts as found by the courts a quo read the said cable message, Westpac-Sydney
show that respondent bank did not cause an merely stated that the respondent bank has no
erroneous transmittal of its SWIFT cable deposit account with it to cover for the amount
message to Westpac-Sydney. It was the AU$ 1,610.00 indicated in the FXDD. Thus, the
erroneous decoding of the cable message on respondent bank had the impression that
the part of Westpac-Sydney mistakenly read Westpac-New York had not yet made available
the printed figures in the SWIFT cable the amount for reimbursement to Westpac-
message of respondent bank as "MT799" Sydney despite the fact that respondent bank
instead of as "MT199". As a result, Westpac- has a sufficient deposit dollar acct with
Sydney construed the said cable message as Westpac-New York. That was the reason why
a format for letter of credit, and not for a the respondent bank had to re-confirm and
demand draft. The figure before '99' can still be repeatedly notify Westpac-New York to debit
distinctly seen as number '1' and not number its (respondent bank's) deposit dollar with it
'7' is in a slanting position while the line of a '1' and to transfer or credit the corresponding
id in a 1 horizontal position. Thus, the number amount to Westpac-Sydney to cover the
'1' in 'MT199' cannot be construed as '7'. amount of the said demand draft.
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 50

the Office of the City Fiscal. David charged

NOTE: The degree of diligence required of petitioners with estafa and violation of Central
banks, is more than that of a good father of a Bank Circular No. 364 and related regulations
family where the fiduciary nature of their on foreign exchange transactions.
relationship with their depositors is concerned.
Petitioners moved to dismiss the charges
against them for lack of jurisdiction because
GUINGONA VS CITY FISCAL David's claims allegedly comprised a purely
civil obligation, but the motion was denied.
FACTS: From March 20, 1979 to March 1981, After the presentation of David's principal
David invested with the Nation Savings and witness, petitioners filed this petition for
Loan Association (NSLA) the sum of P prohibition and injunction because:
1,145,546.20 on nine deposits, P 13,531.94 on a. The production of various documents
savings account deposits (jointly with his sister, showed that the transactions between David
Denise Kuhne), US$10,000 on time deposit, and NSLA were simple loans i.e., civil
US$15,000 under a receipt and guarantee of obligation which were novated when Guingona
payment and US$50,000 under a receipt dated and Martin assumed them
June 8, 1980 (jointly with Denise Kuhne), that
David was induced into making the aforestated ISSUE: WON the contracted perfected was a
investments by Robert Marshal an Australian contract of simple loan. YES
national who was allegedly a close associate
of petitioner Guingona Jr., then NSLA HELD: It must be pointed out that when private
President. respondent David invested his money on nine.
and savings deposits with the aforesaid bank,
NSLA was placed under receivership by the the contract that was perfected was a contract
Central Bank, so that David filed claims of simple loan or mutuum and not a contract of
therewith for his investments and those of his deposit. Thus, Article 1980 of the New Civil
sister; On June 1981, Guingona and Martin, Code provides that:
upon David's request, assumed the bank's Article 1980. Fixed, savings, and
obligation to David by executing a joint current deposits of-money in banks and
promissory note in favor of private respondent similar institutions shall be governed by
acknowledging an indebtedness of the provisions concerning simple loan.
P1,336,614.02 and US$75,000. This
promissory note was based on the statement In the case of Central Bank of the Philippines
of account as of June 30, 1981 prepared by vs. Morfe, the SC said:
the private respondent. The amount of It should be noted that fixed, savings,
indebtedness assumed appears to be bigger and current deposits of money in banks
than the original claim because of the added and similar institutions are hat true
interest and the inclusion of other deposits of deposits. are considered simple loans
private respondent's sister in the amount of and, as such, are not preferred credits.
P116,613.20.
This Court also declared in the recent case
On July 17, 1981, petitioners Guingona and of Serrano vs. Central Bank of the
Martin agreed to divide the said indebtedness, Philippines (96 SCRA 102 [1980]) that:
and the petitioner Guingona executed another Bank deposits are in the nature of
promissory note antedated to June 17, 1981 irregular deposits. They are really
whereby he personally acknowledged an 'loans because they earn interest. All
indebtedness of P668,307.01 and US$37,500 kinds of bank deposits, whether fixed,
in favor of private respondent. On July 22, savings, or current are to be treated as
1981, David received a report from the Central loans and are to be covered by the law
Bank that only P305,821.92 of those on loans. Current and saving deposits,
investments were entered in the records of are loans to a bank because it can use
NSLA. the same.

On Dec 1981, David filed I.S. No. 81-31938 in Hence, the relationship between the private
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 51

respondent and the Nation Savings and Loan But even granting that the failure of the bank to
Association is that of creditor and debtor; pay the time and savings deposits of private
consequently, the ownership of the amount respondent David would constitute a violation
deposited was transmitted to the Bank upon of paragraph 1(b) of Article 315 of the Revised
the perfection of the contract and it can make Penal Code, nevertheless any incipient
use of the amount deposited for its banking criminal liability was deemed avoided, because
operations, such as to pay interests on when the aforesaid bank was placed under
deposits and to pay withdrawals. While the receivership by the Central Bank, petitioners
Bank has the obligation to return the amount Guingona and Martin assumed the obligation
deposited, it has, however, no obligation to of the bank to private respondent David,
return or deliver the same money that was thereby resulting in the novation of the original
deposited. And, the failure of the Bank to contractual obligation arising from deposit into
return the amount deposited will not constitute a contract of loan and converting the original
estafa through misappropriation punishable trust relation between the bank and private
under Article 315, par. l(b) of the Revised respondent David into an ordinary debtor-
Penal Code, but it will only give rise to civil creditor relation between the petitioners and
liability. private respondent. Consequently, the failure
of the bank or petitioners Guingona and Martin
The nature of simple loan is defined in Articles to pay the deposits of private respondent
1933 and 1953 of the Civil Code. would not constitute a breach of trust but would
"Art. 1933. — By the contract of loan, merely be a failure to pay the obligation as a
one of the parties delivers to another, debtor.
either something not consumable so
that the latter may use the same for a NOTE: While the bank has the obligation to
certain time- and return it, in which case return the amount deposited, it has, however,
the contract is called a commodatum; no obligation to return or deliver the same
or money or other consumable thing, money that was deposited.
upon the condition that the same
amount of the same kind and quality
shall he paid in which case the contract PROVINCE OF BATAAN VS. VILLAFUERTE
is simply called a loan or mutuum. (G.R. No. 129995, October 19, 2001)
"Commodatum is essentially gratuitous.
"Simple loan may be gratuitous or with FACTS: In its order, the lower court directed
a stipulation to pay interest. that petitioner Province of Bataan to remit to
"In commodatum the bailor retains the said court whatever lease rentals petitioner
ownership of the thing loaned while in may receive from lessees 7-R Port and Marina
simple loan, ownership passes to the Port Services, and that such lease rentals be
borrower. placed under a special time deposit with the
"Art. 1953. — A person who receives a Land Bank for the account of the RTC-Balanga
loan of money or any other fungible Branch 4, in escrow, for the person or persons,
thing acquires the ownership thereof, natural or juridical, who may be adjudged
and is bound to pay to the creditor an lawfully entitled thereto. The order denied
equal amount of the same kind and herein petitioner’s motion for reconsideration of
quality." the 28 July, 1993 order.

It can be readily noted from the above-quoted Pursuant to Presidential Decree No. 464,
provisions that in simple loan (mutuum), as otherwise known as the Real Property Tax
contrasted to commodatum the borrower Code of 1974, the Provincial Treasurer of
acquires ownership of the money, goods or Bataan advertised for auction sale the
personal property borrowed Being the owner, BASECO property due to real estate tax
the borrower can dispose of the thing borrowed delinquency amounting to P7,914,281.72,
(Article 248, Civil Code) and his act will not be inclusive of penalties. At the auction sale, no
considered misappropriation thereof' (Yam vs. bidder vied for said property as a result of
Malik). which, the Provincial Treasurer of Bataan
adjudged the property to, and acquired the
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 52

same for, and in the name of herein petitioner special time deposit with the Land Bank in the
Province of Bataan. Upon the expiration of the name or account of the Court to be held in trust
one-year redemption period, and without the for the person, natural or juridical, who may
owner exercising its right to redeem the subject lawfully be entitled thereto.
property, the Provincial Government of Bataan
consolidated its title thereon; the ISSUE: Whether or not the deposit of rentals in
corresponding certificates of title were then escrow was proper. YES
issued in the name of herein petitioner
Province of Bataan. HELD: In the main, petitioner insists that the
issuance of the escrow order by the trial court
Eventually, petitioner, thru then Provincial “was patently irregular, if not downright
Governor Enrique T. Garcia, entered into a anomalous”, reasoning that “nowhere in the
ten-year contract of lease with 7-R Port Revised Rules of Court is the trial court, or any
Services, Inc., whereby portions of the court for that matter, authorized to issue such
BASECO property including facilities and escrow order, whether as a provisional or
improvements thereon, were leased to the permanent remedy.” According to petitioner,
latter for a minimum escalating annual rental of “the escrow orders in question are null and
P18 million. Petitioner forged another contract void ab initio for having been issued absent
of lease with Marina Port Services, over a ten- any legal basis” and are “merely calculated to
hectare portion of the BASECO property. prejudice the petitioner province without any
Private respondent filed for annulment of sale, practical or worthwhile, much less legal
principally assailing the validity of the tax objective.”
delinquency sale of the BASECO property in
favor of petitioner Province of Bataan. PCGG The court does not agree. An escrow fills a
filed for writ of preliminary injunction to enjoin definite niche in the body of the law; it has a
herein petitioner “from entering into a lease distinct legal character. The usual definition is
contract with Marina Port Services, Inc. that an escrow is a written instrument which by
(Marina), or any other entity, and/or from its terms imports a legal obligation and which is
implementing/enforcing such lease contract, if deposited by the grantor, promisor, or obligor,
one has already been executed, and to or his agent with a stranger or third party, to be
maintain the status quo until further orders kept by the depositary until the performance of
from the Court.” a condition or the happening of a certain event,
and then to be delivered over to the grantee,
The lower court denied the motion ratiocinating promisee, or obligee.
that the lease contract with Marina was already
a fait accompli when the motion was filed, and While originally, the doctrine of escrow applied
that Marina was not a party to the suit for not only to deeds by way of grant, or as otherwise
having been impleaded as party-defendant. stated, instruments for the conveyance of land,
under modern theories of law, the term escrow
The PCGG filed with the lower court an is not limited in its application to deeds, but is
“Urgent Motion to Deposit Lease Rentals,” applied to the deposit of any written instrument
alleging inter alia that the rentals amounting to with a third person. Particular instruments
“Hundreds of Millions of Pesos” are “in danger which have been held to be the subject of an
of being unlawfully spent, squandered and escrow include bonds or covenants, deeds,
dissipated to the great and irreparable damage mortgages, oil and gas leases, contracts for
of plaintiffs who are the rightful owners of the the sale of land or for the purchase of personal
property leased.” property, corporate stocks and stock
subscriptions, promissory notes or other
The lower court granted the PCGG’s urgent commercial paper, insurance applications and
motion and ordered the defendant Province of policies, contracts for the settlement of will-
Bataan to remit to the court the lease rentals it contest cases, indentures of apprenticeship,
may receive from the defendant 7-R Port receipts assigning concessions and
Services and the Marina Port Services from discontinuances and releases of causes of
the receipt of this order. It also ordered the action. Moreover, it is no longer open to
clerk of court to deposit the amount under question that money may be delivered in
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 53

escrow. trips to Philippines. McLoughlin became friends

with Tan, who convinced the former to transfer
“ X X X the impugned orders appear to us as a from Sheraton Hotel to Tropicana Hotel were
fair response to the exigencies and equities of (petitioners) Lainez, Payam and Lopez. Lopez
the situation. served as manager while Lainez and Payam
had custody of the keys for the safety deposit
Parenthetically, it is not disputed that even boxes of Tropicana Hotel.
before the institution of the case, the Province
of Bataan has been utilizing the rental The procedure for the safety deposit box at
payments on the Baseco Property to meet its Tropicana Hotel was that it can be opened by 2
financial requirements. To us, this keys only. 1 key is given to the registered hotel
circumstance adds a more compelling guest while the other key is held by the hotel
dimension for the issuance of the assailed management.
orders. X X X”
McLoughlin deposited $15,000 (US) and
Applying the foregoing principles and $10,000 (AUS) as well as letters, bankbooks,
considering the peculiarities of the instant credit cards and a checkbook in the safety
case, the lower court, in the course of deposit box during his stay at Tropicana Hotel.
adjudicating and resolving the issues
presented in the main suit, is clearly After his trips abroad, McLoughlin discovered
empowered to control the proceedings therein that some cash and valuables he deposited in
through the adoption, formulation and issuance the safety deposit box were missing.
of orders and other ancillary writs, including the McLoughlin immediately confronted Lainez and
authority to place the properties in custodia Payam. Both admitted that Tan opened the
legis, for the purpose of effectuating its safety deposit box with the key assigned to
judgment or decree and protecting further the him.
interests of the rightful claimants of the subject
property. When McLoughlin confronted Tan, she
admitted to have stolen the key with the
To trace its source, the court’s authority assistance of Lopez, Payam and
proceeds from its jurisdiction and power to Lainez. A promissory note was written by
decide, adjudicate and resolve the issues Lopez, promising to pay the amount of $4,000
raised in the principal suit. Stated differently, (AUS) and $2,000 (US).
the deposit of the rentals in escrow with the
bank, in the name of the lower court, “is only McLoughlin insisted that Tropicana Hotel be
an incident in the main proceeding.” To be responsible for the loss. However, Lopez
sure, placing property in litigation under judicial refused and relied on the conditions for renting
possession, whether in the hands of a receiver, the safety deposit box which provides that the
and administrator, or as in this case, in a hotel is free from any liability arising from loss
government bank is an ancient and accepted should the key be lost and to return the key
procedure. Consequently, we find no cogency and execute the release in favor of the hotel
to disturb the questioned orders of the lower upon giving up the use of the box.
court and in effect uphold the propriety of the
subject escrow orders. McLoughlin filed a case against petitioners.
RTC ruled in favor of McLoughlin, making
petitioners jointly and severally liable for the
III. Necessary Deposit losses plus damages. The hotel conditions
were ruled not valid for being contrary to Art
YHT REALTY VS. CA 2003 of the NCC and public policy. The CA
(451 SCRA 638, G.R. No. 126780, February also ruled in favor of McLoughlin.
17, 2005)
ISSUE: Whether or not YHT Corporation is
FACTS: McLoughlin (private respondent), an jointly and severally liable for the losses
Australian businessman, regularly stayed at suffered by McLoughlin? – YES.
Sheraton Hotel during
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 54

HELD: SC appreciated the facts found and supervising him for it is hard for the victim to
proven by the lower court that McLoughlin prove the negligence of such employer.
indeed deposited such cash and valuables as
he claimed. Thus, given the fact that the loss of
McLoughlin’s money was consummated
The evidence also revealed that the hotel through the negligence of Tropicana’s
guest alone cannot open the safety deposit employees in allowing Tan to open the safety
box without the assistance of the hotel deposit box without the guest’s consent, both
management or its employees. In case of loss the assisting employees and YHT Realty
of any item deposited, it is inevitable to Corporation itself, as owner and operator of
conclude that the management had at least a Tropicana, should be held solidarily liable
hand in the consummation of the taking, unless pursuant to Article 2193.
the reason for the loss is force majeure.
Also, Art 2003 is controlling which provides
Noteworthy is the fact that Payam and Lainez, that the hotel-keeper cannot free himself from
who were employees of Tropicana, had responsibility by posting notices to the effect
custody of the master key of the management that he is not liable for the articles brought by
when the loss took place. They even admitted the guest. Any stipulation between the hotel-
that they assisted Tan on 3 separate occasions keeper and the guest whereby the
in opening McLoughlin’s safety deposit box. responsibility of the former as set forth in
Articles 1998 to 2001 is suppressed or
It is proved that Tropicana had prior knowledge diminished shall be void.
that a person aside from the registered guest
had access to the safety deposit box. Yet the Petitioners contend that McLoughlin’s case
management failed to notify McLoughlin of the was mounted on the theory of contract, but the
incident and waited for him to discover the trial court and the appellate court upheld the
taking before it disclosed the matter to him. grant of the claims of the latter on the basis of
Therefore, Tropicana should be held tort. There is nothing anomalous in how the
responsible for the damage suffered by lower courts decided the controversy for this
McLoughlin by reason of the negligence of its Court has pronounced a jurisprudential rule
employees. that tort liability can exist even if there are
already contractual relations. The act that
Tan’s acts should have prompted the breaks the contract may also be tort.
management to investigate her relationship
with McLoughlin. Then, petitioners would have
exercised due diligence required of them. DURBAN APARTMENTS VS. PIONEER
Failure to do so warrants the conclusion that (639 SCRA 441, G.R. No. 179419, January
the management had been remiss in 12, 2011)
complying with the obligations imposed upon
hotel-keepers under the law. FACTS: On July 22, 2003, Pioneer Insurance
and Surety Corporation, by right of
Under Art 1170 of NCC, those who, in the subrogation, filed [with the RTC of Makati City]
performance of their obligations, are guilty of a Complaint for Recovery of Damages against
negligence, are liable for damages. As to who Durban Apartments Corporation, doing
shall bear the burden of paying damages, Art business under the name and style of City
2180 Par (4) of NCC provides that the owners Garden Hotel, and [defendant before the RTC]
and managers of an establishment are likewise Vicente Justimbaste.
responsible for damages caused by their
employees in the service of the branches in Respondent’s contention:
which the latter are employed or on the Respondent averred that it is the insurer for
occasion of their functions. loss and damage of Jeffrey See’s Suzuki
Grand Vitara in the amount of P1,175,000.
Also, this Court has ruled that if an employee is
found negligent, it is presumed that the On April 30, 2002, See arrived and checked in
employer was negligent in selecting and/or at the City Garden Hotel in Makati corner
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 55

Kalayaan Avenues, Makati City before was See himself who parked his Vitara within
midnight, and its parking attendant, defendant the premises of the hotel as evidenced by the
Justimbaste got the key to said Vitara from valet parking customer’s claim stub issued to
See to park it. him.

On May 1, 2002 (1am) – the Hotel Chief Defendant Justimbaste saw the Vitara
Security Officer informed him that his car was speeding away from the place where it was
carnapped while it was parked unattended at parked; he tried to run after it, and blocked its
the parking area of Equitable PCI Bank along possible path but to no avail.
Makati Ave.
RTC ruled in favor of respondent and ordered
See then reported the incident to the Durban Apartment to pay respondent the sum
Operations Division of Makati City Police Anti- of P1, 163, 250.00. CA affirmed the decision of
Carnapping unit and then conducted RTC. Hence, present petition.
investigation. The car has not yet been ISSUE: Whether or not petitioner is liable to
recovered since July 23, 2002. respondent for the loss of See’s vehicle.YES.

Respondent paid P1,163,250 money claim of HELD: In this case, respondent substantiated
See and mortagee ABN AMRO Savings Bank the allegations in its complaint, i.e., a contract
as indemnity for the loss of the car. The car of necessary deposit existed between the
was lost due to the negligence of Durban insured See and petitioner.
Apartments and Justimbaste because it was
discovered that this was the second time that a On this score, we find no error in the following
similar incident of carnapping happened in the disquisition of the appellate court. The records
valet parking service of Durban Apartments also reveal that upon arrival at the City Garden
and no necessary precautions were taken to Hotel, See gave notice to the doorman and
prevent its repetition. parking attendant of the said hotel, x x x
Justimbaste, about his Vitara when he
Defendant Justimbaste and Durban entrusted its ignition key to the latter. x x x
Apartments failed and refused to pay Pioneer’s Justimbaste issued a valet parking customer
valid, just, and lawful claim despite written claim stub to See, parked the Vitara at the
demands. Equitable PCI Bank parking area, and placed
the ignition key inside a safety key box while
Petitioner’s contention: See proceeded to the hotel lobby to check in.
See did not check in at its hotel, on the The Equitable PCI Bank parking area became
contrary, he was a guest of a certain Ching an annex of City Garden Hotel when the
Montero x x x; defendant x x x Justimbaste did management of the said bank allowed the
not get the ignition key of See’s Vitara, on the parking of the vehicles of hotel guests thereat
contrary, it was See who requested a parking in the evening after banking hours.
attendant to park the Vitara at any available
parking space, and it was parked at the Article 1962, in relation to Article 1998, of the
Equitable Bank parking area, which was within Civil Code defines a contract of deposit and a
See’s view, while he and Montero were waiting necessary deposit made by persons in hotels
in front of the hotel. or inns:

They made a written denial of the demand of Art. 1962. A deposit is constituted from the
[respondent] Pioneer Insurance for want of moment a person receives a thing belonging to
legal basis; valet parking services are provided another, with the obligation of safely keeping it
by the hotel for the convenience of its and returning the same. If the safekeeping of
customers looking for a parking space near the the thing delivered is not the principal purpose
hotel premises; it is a special privilege that it of the contract, there is no deposit but some
gave to Montero and See; it does not include other contract.
responsibility for any losses or damages to
motor vehicles and its accessories in the Art. 1998. The deposit of effects made by
parking area; and the same holds true even if it travelers in hotels or inns shall also be
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 56

regarded as necessary. The keepers of hotels ownership of the subject property to Macy. On
or inns shall be responsible for them as the strength of the forged Deed of Absolute
depositaries, provided that notice was given to Sale, Macy was able to cause the issuance of
them, or to their employees, of the effects a TCT in her name, without the knowledge of
brought by the guests and that, on the part of any of herein petitioners.
the latter, they take the precautions which said
hotel-keepers or their substitutes advised In March 1994, petitioners discovered that the
relative to the care and vigilance of their subject property was mortgaged by Macy to
effects. the respondent bank. To protect their interests
over the subject property, petitioners lodged an
Plainly, from the facts found by the lower action in court against Macy and the
courts, the insured See deposited his respondent bank for Annulment of Title, Deed
vehicle for safekeeping with petitioner, of Absolute Sale and Deed of Mortgage.
through the latter’s employee, Justimbaste.
In turn, Justimbaste issued a claim stub to The respondent bank in utter bad faith,
See. Thus, the contract of deposit was foreclosed the subject property on June 11,
perfected from See’s delivery, when he 1996 without due notice to the petitioners,
handed over to Justimbaste the keys to his prompting the petitioners to amend [their]
vehicle, which Justimbaste received with complaint, this time incorporating therein a
the obligation of safely keeping and prayer for the issuance of a temporary
returning it. Ultimately, petitioner is liable restraining order and/or writ of preliminary
for the loss of See’s vehicle. injunction, to stop the respondent bank from,
among others, consolidating title to the subject
POLICY: A deposit is constituted from the property.
moment a person receives a thing belonging to
another, with the obligation of safely keeping it Petitioner argues that respondents do not have
and returning the same. a right to the relief demanded, because they
merely have possession of the property, as the
legal title is in the name of Macy Africa.9
Furthermore, it claims that the consolidation of
title in its name does not constitute an
IV. Sequestration or Judicial Deposit "invasion of a right that is material and
substantial.
LOS BAÑOS RURAL BANK VS AFRICA
On the other hand, respondents maintain that
FACTS: Pacita Africa is the widow of Alberto they would suffer great irreparable damage if
Africa and the rest of her co-petitioners are the writ of preliminary injunction is not
their children. granted.11 They likewise contend that if
petitioner is allowed to consolidate its title to
In June 1989, the Register of Deeds was razed the subject property, they would lose their
by fire, destroying some of its ancestral home, a loss that would result in
records/documents among which was the unnecessary and protracted proceedings
original TCT covering a parcel of land involving third parties.
registered in the name of petitioner Pacita. The
aforesaid property was part of the conjugal ISSUE: Whether the appellate court erred in
property of petitioner Pacita and her late issuing a writ of preliminary injunction to stop
husband Alberto Africa. petitioner’s consolidation of its title to the
subject property.
On request of Pacita, private respondent Macy
Africa, the common-law wife of petitioner
Antonio Africa, worked for the reconstitution of HELD:
the TCT. While the reconstituted title was in Main Issue:
her possession, Macy allegedly forged, or Propriety of Preliminary Injunction
caused the forgery of, Pacita’s signature on a We agree with respondents.
Deed of Absolute Sale purporting to transfer The grounds for the issuance of a writ of
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 57

preliminary injunction are enumerated in Rule necessary, its existence need not be
58, Section 3 of the Revised Rules of Court, conclusively established.22 In fact, the evidence
which reads as follows: required to justify the issuance of a writ of
"Sec. 3. Grounds for issuance of preliminary preliminary injunction in the hearing thereon
injunction. – A preliminary injunction may be need not be conclusive or complete. The
granted when it is established; evidence need only be a "sampling" intended
(a)That the applicant is entitled to the relief merely to give the court an idea of the
demanded, and the whole or part of such relief justification for the preliminary injunction,
consists in restraining the commission or pending the decision of the case on the
continuance of the act or acts complained of, merits.23 Thus, to be entitled to the writ,
or in requiring the performance of an act or respondents are only required to show that
acts, either for a limited period or perpetually; they have the ostensible right to the final relief
(b)That the commission, continuance or non- prayed for in their Complaint.
performance of the act or acts complained of
during the litigation would probably work First Requisite:
 Existence of the Right
injustice to the applicant; or In the case at bar, we find ample justification
(c)That a party, court, agency or a person is for the issuance of a writ of preliminary
doing, threatening, or is attempting to do, or is injunction.25 Evidently, the question on whether
procuring or suffering to be done, some act or or not respondents possess the requisite right
acts probably in violation of the rights of the hinges on the prima facie existence of their
applicant respecting the subject of the action or legal title to the subject property.26 They have
proceeding, and tending to render the shown that they have that right, and that it is
judgment ineffectual." directly threatened by the act sought to be
enjoined.
Injunction is a preservative remedy aimed at
no other purpose than to protect the First, Respondent Pacita Africa is the
complainant’s substantive rights and interests 13 registered owner of the subject property. Her
during the pendency of the principal action.14 A ownership is evidenced by the reconstituted
preliminary injunction, as the term itself Transfer Certificate of Title.
suggests, is merely temporary.15 It is to be
resorted to only when there is a pressing Second, the validity of the Deed of Sale30
necessity to avoid injurious consequences that dated December 29, 1992, is still in dispute
cannot be remedied under any standard of because Respondent Pacita Africa claims that
compensation. her signature was forged by the vendee, Macy
Africa.3
Moreover, injunction, like other equitable
remedies, should be issued only at the Third, there is doubt as to the validity of the
instance of a suitor who has sufficient interest mortgage in favor of petitioner, because there
in or title to the right or the property sought to exists on record two TCTs covering the
be protected.17 It is proper only when the mortgaged property: (1) TCT No. 81519 32
plaintiff appears to be entitled to the relief registered in the name of Pacita Africa and (2)
demanded in the complaint.18 In particular, the TCT No. 8151933 registered in the name of
existence of the right and the violation thereof Macy Africa.
must appear in the allegations of the
complaint19 and must constitute at least a If indeed the Deed of Sale is a forgery, no
prima facie showing of a right to the final parcel of land was ever transferred to the
relief.20 Thus, there are two requisite conditions purported buyer34 who, not being the owner,
for the issuance of a preliminary injunction, could not have validly mortgaged the
namely, (1) the right to be protected exists property.35 Consequently, neither has petitioner
prima facie, and (2) the acts sought to be -- the buyer and mortgagee of the same lot --
enjoined are violative of that right.21 It must be ever acquired any title thereto.36 Significantly,
proven that the violation sought to be no evidence was presented by petitioner to
prevented would cause an irreparable injustice. controvert these allegations put forward by
respondents. Clearly then, on the basis of the
Further, while a clear showing of the right is evidence presented, respondents possess the
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 58

right to prevent petitioner from consolidating We are not persuaded. A notice of lis pendens
the title in its name. The first requisite -- the serves as an announcement to the whole world
existence of a right to be protected -- is thus that a particular real property is in litigation and
present.37 as a warning that those who acquire an
interest in the property do so at their own risk --
Second Requisite:
 Violation of Applicant’s they gamble on the result of the litigation over
Right it.49
As to the second requisite, what is sought to
be enjoined by respondents is the However, the cancellation of such notice may
consolidation of the title to the subject property be ordered by the court that has jurisdiction
in petitioner’s name. After having discovered over it at any given time.50 Its continuance or
that the property had been mortgaged to removal -- like the continuance or the removal
petitioner, respondents filed on June 12, 1994 of a preliminary attachment or injunction -- is
an action for Annulment of Title, Deed of Sale, not contingent on the existence of a final
and Mortgage to protect their rights over the judgment on the action and ordinarily has no
property.38 This notwithstanding, petitioner effect on the merits thereof.51 Thus, the notice
foreclosed it on June 11, 1996.39 To enjoin of lis pendens does not suffice to protect
petitioner from consolidating the title in its herein respondents’ rights over the property.52
name, respondents then filed an Amended It does not provide complete and ample
Complaint,40 praying for a writ of preliminary protection.
injunction.
Status Quo Ante
Unless legally stopped, petitioner may Petitioner further claims that the RTC erred in
consolidate title to the property in its name and enjoining the foreclosure sale of the subject
enjoy the unbridled freedom to dispose of it to property.53 It argues that the foreclosure may
third persons, to the damage and prejudice of no longer be enjoined, because it has long
respondents.41 What respondents stand to lose been effected since 1996.54 We agree with
is material and substantial.42 They would lose petitioner.
their ancestral home even without the benefit
of a trial.43 Clearly, the act sought to be It is a well-entrenched rule that consummated
enjoined is violative of their proprietary right acts can no longer be restrained by injunction 55
over the property.44 whose sole objective is to preserve the status
quo until the merits of the case are fully
A writ of preliminary injunction is issued heard.56 Status quo is defined as the last actual
precisely to preserve threatened or continuous peaceful uncontested situation that precedes a
irremediable injury to some of the parties controversy, and its preservation is the office of
before their claims can be thoroughly studied an injunctive writ.57
and adjudicated.45 Denial of the application for
the writ may make the Complaint of In the instant case, the status quo was the
respondents moot and academic. Furthermore, situation of the parties at the time of the filing
it would render ineffectual a final judgment in of the Amended Complaint58 with a prayer for a
their favor or, at the very least, compel them to writ of preliminary injunction. It was that point
litigate needlessly with third persons who may at which petitioner had already foreclosed the
have acquired an interest in the property.46 subject property and, hence, could no longer
Such a situation cannot be countenanced.47 be enjoined from going on with the foreclosure.
However, the last actual uncontested status
Lis Pendens that preceded the controversy was when the
Petitioner further contends that respondents property in dispute was still registered in the
are not entitled to the relief prayed for, name of Macy Africa, petitioner not having
because they caused a notice of lis pendens to consolidated in its name the title thereto.59
be annotated at the back of TCT No. 81519, Thus, the issuance of the writ would no doubt
registered in the name of Macy P. Africa; thus, preserve the status quo.60
that notice provided ample protection of their
rights and interests.48 We cannot rule on the allegation of petitioner
that this case is a "scam perpetrated by private
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 59

respondents" to defraud it.61 The truth or the secure the loan. However, Falcon
falsity of that assertion cannot be ascertained subsequently defaulted in its payments. After
by this Court at this time. Verily, we refrain PDCP foreclosed on the chattel mortgage,
from expressing any opinion on the merits of there remained a subsisting deficiency of Php
the case, pending a full consideration of the 5,031,004.07 which falcon did not satisfy
evidence that would be presented by the despite demands.
parties.
ISSUE: Whether the obligation to repay is
solidary, as contended by respondent and the
PART V: WAREHOUSE RECEIPTS LAW lower courts, or merely joint as argued by
PART VI: TRUST RECEIPTS LAW petitioners.

PART VII: GUARANTY & SURETYSHIP HELD: The obligation to repay is only jointly as
(Articles 2047-2084) declared by the Court. In case there is a
concurrence of two or more creditors or of two
I. Nature and Extent or more debtors in one and the same
obligation, Article 1207 of the Civil Code states
ESCAÑO & SILOS V. ORTIGAS, JR. that among them, “there is a solidary liability
only when the obligation expressly so states,
FACTS: On April 28, 1980, Private or when the law or the nature of the obligation
Development Corporation of the Philippines requires solidarity.” Article 1210 supplies
(PDCP) entered into a loan agreement with further caution against the broad interpretation
Falcon Minerals, Inc. (Falcon) amounting to of solidarity by providing: “The indivisibility of
$320,000.00 subject to terms and conditions. an obligation does not necessarily give rise to
solidarity. Nor does solidarity of itself imply
On the same day, three (3) stockholder-officers indivisibility.” These Civil Code provisions
of Falcon: Ortigas Jr., George A. Scholey, and establish that in case of concurrence of two or
George T. Scholey executed an Assumption of more creditors or of two or more debtors in one
Solidary Liability “to assume in their individual and the same obligation, and in the absence of
capacity, solidary liability with Falcon for due express and indubitable terms characterizing
and punctual payment” of the loan contracted the obligation as solidary, the presumption is
by Falcon with PDCP. Two (2) separate that the obligation is only joint. It thus becomes
guaranties were executed to guarantee incumbent upon the party alleging that the
payment of the same loan by other obligation is indeed solidary in character to
stockholders and officers of Falcon, acting in prove such fact with a preponderance of
their personal and individual capacities. evidence. Note that Article 2047 itself
specifically calls for the application of the
One guaranty was executed by Escaño, Silos, provisions on joint and solidary obligations to
Silverio, Inductivo and Rodriguez. Two years surety ship contracts. Article 1217 of the Civil
later, an agreement was developed to cede Code thus comes into play, recognizing the
control of Falcon to Escaño, Silos and Matti. right of reimbursement from a co-debtor (the
Contracts were executed whereby Ortigas, principal debtor, in case of suretyship) in favor
George A. Scholey, Inductivo and the heirs of of the one who paid (i.e. the surety).
then already deceased George T. Scholey
assigned their shares of stock in Falcon to However, a significant distinction still lies
Escaño, Silos and Matti. between a joint and several debtor, on one
hand, and a surety on the other. Solidarity
An Undertaking dated June 11, 1982 was signifies that the creditor can compel any one
executed by the concerned parties, namely: of the joint and several debtors or the surety
with Escaño, Silos and Matti as “sureties” and alone to answer for the entirety of the principal
Ortigas, Inductivo and Scholeys as “obligors”. debt. The difference lies in the respective
Falcon eventually availed of the sum of faculties of the joint and several debtor and the
$178,655.59 from the credit line extended by surety to seek reimbursement for the sums
PDCP. It would also execute a Deed of Chattel they paid out to the creditor. In the case of joint
Mortgage over its personal properties to further and several debtors, Article1217 makes plain
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 60

that the solidary debtor who effected the Lucky Star Drilling & Construction Corporation
payment to the creditor “may claim from his co- (Lucky Star) - obligor
debtors only the share which corresponds to Stronghold Insurance Company (Stronghold) –
each, with the interest for the payment already surety, respondent
made.” Such solidary debtor will not be able to
recover from the co-debtors the full amount FACTS: ABC entered into an agreement with
already paid to the creditor, because the right Lucky Star as part of the completion of its
to recovery extends only to the proportional project to construct the ACG Commercial
share of the other co-debtors, and not as to the Complex. Lucky Star was to supply labor,
particular proportional share of the solidary materials, tools, and equipment including
debtor who already paid. In contrast, even as technical supervision to drill one (1) exploratory
the surety is solidarily bound with the principal production well on the project site.
debtor to the creditor, the surety who does pay
the creditor has the right to recover the full To guarantee faithful compliance with their
amount paid, and not just any proportional agreement, Lucky Star engaged respondent
share, from the principal debtor or debtors. Stronghold which issued two (2) bonds in favor
Such right to full reimbursement falls within the of petitioner ABC.
other rights, actions and benefits which pertain
to the surety by reason of the subsidiary ABC paid Lucky Star P575,000.00 as advance
obligation assumed by the surety. payment, representing 50% of the contract
price. Lucky Star, thereafter, commenced the
Decision: Petitioners and Matti are jointly drilling work.
liable to Ortigas, Jr. in the amount of P1.3M;
Legal interest of 12% per annum on P 1.3M On agreed completion date, Lucky Star
computed from March 14, 1994. Assailed managed to accomplish only 10% of the drilling
rulings are affirmed. Costs against petitioners. work. ABC sent a demand letter to Lucky Star
for the immediate completion of the drilling
Note: A guarantor who binds himself in work. However, Lucky Star failed to fulfill its
solidum with the principal debtor under the obligation.
provisions of the second paragraph does not
become a solidary co-debtor to all intents and ABC sent Notice of Rescission of Contract with
purposes. Demand for Damages to Lucky Star and a
Notice of Claim for payment to Stronghold to
SURETY SOLIDARY CO- make good its obligation under its bonds.
DEBTOR Despite notice, ABC did not receive any reply
Outside of the liability he Solidarity signifies that either from Lucky Star or Stronghold,
assumes to pay the debt the creditor can compel prompting it to file its Complaint for Rescission
before the property of any one of the joint and with Damages against both before the RTC.
the principal debtor has several debtors or the
been exhausted surety alone to answer RTC rendered the assailed decision ordering
for the entirety of the Lucky Star to pay ABC but absolving
principal debt. Stronghold from liability. Relevant parts of the
Has the right to recover “May claim from his co- decision reads: “The surety bond and
the full amount paid, and debtors only the share performance bond executed by defendants
not just any proportional which corresponds to Lucky Star and Stronghold Insurance are in the
share, from the principal each, with the interest nature of accessory contracts which depend
debtor or debtors. for the payment already for its existence upon another contract. Thus,
made.” when the agreement between the plaintiff
Subsidiary Solidary Asset Builders and defendant Lucky Star was
rescinded, the surety and performance bond
were automatically cancelled.”
ASSET BUILDERS VS STRONGHOLD
Thus, Asset Builders filed this present petition
for review on certiorari assailing decision of
Asset Builders Corp (ABC) – obligee, petitioner
RTC which orders defendant Lucky Star to pay
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 61

petitioner Asset Builders the sum of Undeniably, when Lucky Star reneged on its
P575,000.00 with damages, but absolving undertaking with the petitioner and further
respondent Stronghold Insurance of any failed to return the P575,000.00 downpayment
liability on its Surety Bond and Performance that was already advanced to it, respondent,
Bond. as surety, became solidarily bound with Lucky
Star for the repayment of the said amount to
ISSUE: Whether or not respondent insurance petitioner.
company, as surety, can be held liable under
its bonds. Contrary to the trial court’s ruling, respondent
insurance company was not automatically
HELD: Yes. As provided in Article 2047, the released from any liability when petitioner
surety undertakes to be bound solidarily with resorted to the rescission of the principal
the principal obligor. That undertaking makes contract for failure of the other party to perform
a surety agreement an ancillary contract as it its undertaking. Precisely, the liability of the
presupposes the existence of a principal surety arising from the surety contracts comes
contract. Although the contract of a surety is in to life upon the solidary obligor’s default. It
essence secondary only to a valid principal should be emphasized that petitioner had to
obligation, the surety becomes liable for the choose rescission in order to prevent further
debt or duty of another although it possesses loss that may arise from the delay of the
no direct or personal interest over the progress of the project. Without a doubt,
obligations nor does it receive any benefit Lucky Star’s unsatisfactory progress in the
therefrom. Let it be stressed that drilling work and its failure to complete it in due
notwithstanding the fact that the surety time amount to non-performance of its
contract is secondary to the principal obligation.
obligation, the surety assumes liability as a
regular party to the undertaking. In fine, respondent should be answerable to
petitioner on account of Lucky Star’s non-
Suretyship, in essence, contains two types of performance of its obligation as guaranteed by
relationship – the principal relationship the performance bond.
between the obligee (petitioner) and the obligor
(Lucky Star), and the accessory surety Finally, Article 1217 of the New Civil Code
relationship between the principal (Lucky Star) acknowledges the right of reimbursement from
and the surety (respondent). In this a co-debtor (the principal co-debtor, in case of
arrangement, the obligee accepts the surety’s suretyship) in favor of the one who paid (the
solidary undertaking to pay if the obligor does surety). Thus, respondent is entitled to
not pay. Such acceptance, however, does not reimbursement from Lucky Star for the amount
change in any material way the obligee’s it may be required to pay petitioner arising from
relationship with the principal obligor. Neither its bonds.
does it make the surety an active party to the
principal obligee-obligor relationship. Thus,
the acceptance does not give the surety the CASTELLVI DE HIGGINS VS SELLNER
right to intervene in the principal contract. The (L-158025, November 5, 1920)
surety’s role arises only upon the obligor’s
default, at which time, it can be directly held FACTS: Higgins filed an action to recover
liable by the obligee for payment as a solidary against Sellner the sum of P10,000. The basis
obligor. of the action is a letter written by defendant
George C. Sellner to John T. Macleod, agent
In the case at bench, when Lucky Star failed to for Mrs. Horace L. Higgins, on May 31, 1915,
finish the drilling work within the agreed time of the following tenor:
frame despite petitioner’s demand for
completion, it was already in delay. Due to this DEAR SIR: I hereby obligate and bind
default, Lucky Star’s liability attached and, as a myself, my heirs, successors and
necessary consequence, respondent’s liability assigns that if the promissory note
under the surety agreement arose. executed the 29th day of May, 1915 by
the Keystone Mining Co., W.H. Clarke,
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 62

and John Maye, jointly and severally, in case the latter should fail to do so." But "If the
your favor and due six months after surety binds himself in solidum with the
date for Pesos 10,000 is not fully paid principal debtor, the provisions of Section
at maturity with interest, I will, within fourth, Chapter third, Title first, shall be
fifteen days after notice of such default, applicable." What the first portion of the cited
pay you in cash the sum of P10,000 article provides is, consequently, seen to be
and interest upon your surrendering to somewhat akin to the contract of guaranty,
me the three thousand shares of stock while what is last provided is practically
of the Keystone Mining Co. held by you equivalent to the contract of suretyship. When
as security for the payment of said in subsequent articles found in section 1 of
note. Chapter II of the title concerning fianza, the
Code speaks of the effects of suretyship
Respectfully, between surety and creditor, it has, in
(Sgd.) GEO. C. SELLNER. comparison with the common law, the effect of
guaranty between guarantor and creditor. The
Higgins contends that he is a surety while civil law suretyship is, accordingly, nearly
Sellner contends that he is a guarantor. synonymous with the common law guaranty;
and the civil law relationship existing between
ISSUE: What is the status of the transaction? codebtors liable in solidum is similar to the
GUARANTY. common law suretyship.

HELD: In the original Spanish of the Civil Code It is perfectly clear that the obligation
now in force in the Philippine Islands, Title XIV assumed by SELLNER was simply that of a
of Book IV is entitled "De la Fianza." The guarantor, or, to be more precise, of the fiador
Spanish word "fianza" is translated in the whose responsibility is fixed in the Civil Code.
Washington and Walton editions of the Civil The letter of Mr. Sellner recites that if the
Code as "security." "Fianza" appears in the promissory note is not paid at maturity, then,
Fisher translation as"suretyship." The Spanish within fifteen days after notice of such default
word "fiador" is found in all of the English and upon surrender to him of the three
translations of the Civil Code as "surety." The thousand shares of Keystone Mining Company
law of guaranty is not related of by that name stock, he will assume responsibility. Sellner is
in the Civil Code, although indirect reference to not bound with the principals by the same
the same is made in the Code of Commerce. instrument executed at the same time and on
In terminology at least, no distinction is made the same consideration, but his responsibility is
in the Civil Code between the obligation of a a secondary one found in an independent
surety and that of a guarantor. collateral agreement. Neither is Sellner jointly
and severally liable with the principal debtors.
A surety and a guarantor are alike in that
each promises to answer for the debt or With particular reference, therefore, to
default of another. A surety and a guarantor assignments of error, Sellner is a guarantor
are unlike in that the surety assumes liability within the meaning of the provisions of the Civil
as a regular party to the undertaking, while Code.
the liability as a regular party to upon an
independent agreement to pay the There is also an equitable aspect to the case
obligation if the primary pay or fails to do which reenforces this conclusion. The note
so. A surety is charged as an original executed by the Keystone Mining Company
promissory; the engagement of the matured on November 29, 1915. Interest on
guarantor is a collateral undertaking. The the note was not accepted by the makers until
obligation of the surety is primary; the September 30, 1916. When the note became
obligation of the guarantor is secondary. due, it is admitted that the shares of stock used
as collateral security were selling at par; that
Turning back again to our Civil Code, we first is, they were worth pesos 30,000. Notice that
note that according to article 1822 "By fianza the note had not been paid was not given to
(security or suretyship) one person binds and when the Keystone Mining Company stock
himself to pay or perform for a third person in was worthless. Sellner, consequently, through
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 63

the laches of plaintiff, has lost possible chance faith in suing her alone without including the
to recoup, through the sale of the stock, any Azarragas when they were the only ones who
amount which he might be compelled to pay as benefited from the proceeds of the loan.
a surety or guarantor. The "indulgence," as this
word is used in the law of guaranty, of the ISSUE: Where a party signs a promissory note
creditors of the principal, as evidenced by the as a co-maker and binds herself to be jointly
acceptance of interest, and by failure promptly and severally liable with the principal debtor in
to notify the guarantor, may thus have served case the latter defaults in the payment of the
to discharge the guarantor. loan, is such undertaking of the former deemed
to be that of a surety as an insurer of the debt,
or of a guarantor who warrants the solvency of
PALMARES VS CA the debtor? SURETY
(288 SCRA, 422, G.R. No. 126490, March 31,
1998) HELD: The Civil Code pertinently provides:
Art. 2047. By guaranty, a person called the
FACTS: Pursuant to a promissory note dated guarantor binds himself to the creditor to fulfill
March 13, 1990, private respondent M.B. the obligation of the principal debtor in case
Lending Corporation extended a loan to the the latter should fail to do so.
spouses Osmeña and Merlyn Azarraga,
together with petitioner Estrella Palmares, in If a person binds himself solidarily with the
the amount of P30,000.00 payable on or principal debtor, the provisions of Section 4,
before May 12, 1990, with compounded Chapter 3, Title I of this Book shall be
interest at the rate of 6% per annum to be observed. In such case the contract is called a
computed every 30 days from the date thereof. suretyship.
On four occasions after the execution of the
promissory note and even after the loan It is a cardinal rule in the interpretation of
matured, petitioner and the Azarraga spouses contracts that if the terms of a contract are
were able to pay a total of P16,300.00, thereby clear and leave no doubt upon the intention of
leaving a balance of P13,700.00. No payments the contracting parties, the literal meaning of
were made after the last payment on its stipulation shall control. In the case at bar,
September 26, 1991. petitioner expressly bound herself to be
jointly and severally or solidarily liable with
Consequently, on the basis of petitioner's the principal maker of the note. The terms
solidary liability under the promissory note, of the contract are clear, explicit and
Respondent Corporation filed a complaint unequivocal that petitioner's liability is that
against petitioner Palmares as the lone party of a surety.
defendant, to the exclusion of the principal
debtors, allegedly by reason of the insolvency A surety is an insurer of the debt, whereas a
of the latter. guarantor is an insurer of the solvency of the
debtor. A suretyship is an undertaking that the
In her Amended Answer with Counterclaim, debt shall be paid; a guaranty, an undertaking
petitioner alleged that sometime in August that the debtor shall pay. Stated differently, a
1990, immediately after the loan matured, she surety promises to pay the principal's debt if
offered to settle the obligation with respondent the principal will not pay, while a guarantor
corporation but the latter informed her that they agrees that the creditor, after proceeding
would try to collect from the spouses Azarraga against the principal, may proceed against the
and that she need not worry about it; that there guarantor if the principal is unable to pay. A
has already been a partial payment in the surety binds himself to perform if the principal
amount of P17,010.00; that the interest of 6% does not, without regard to his ability to do so.
per month compounded at the same rate per A guarantor, on the other hand, does not
month, as well as the penalty charges of 3% contract that the principal will pay, but simply
per month, are usurious and unconscionable; that he is able to do so. In other words, a
and that while she agrees to be liable on the surety undertakes directly for the payment and
note but only upon default of the principal is so responsible at once if the principal debtor
debtor, respondent corporation acted in bad makes default, while a guarantor contracts to
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 64

pay if, by the use of due diligence, the debt the principal debtors cannot as yet be
cannot be made out of the principal debtor. considered in default, there having been no
judicial or extrajudicial demand made by
In a desperate effort to exonerate herself from respondent corporation. Significantly,
liability, petitioner erroneously invokes the rule paragraph (G) of the note states that "should I
on strictissimi juris, which holds that when the fail to pay in accordance with the above
meaning of a contract of indemnity or guaranty schedule of payment, I hereby waive my right
has once been judicially determined under the to notice and demand." Hence, demand by the
rule of reasonable construction applicable to all creditor is no longer necessary in order that
written contracts, then the liability of the surety, delay may exist since the contract itself already
under his contract, as thus interpreted and expressly so declares. As a surety, petitioner is
construed, is not to be extended beyond its equally bound by such waiver.
strict meaning. The rule, however, will apply
only after it has been definitely ascertained that Even if it were otherwise, demand on the
the contract is one of suretyship and not a sureties is not necessary before bringing suit
contract of guaranty. It cannot be used as an against them, since the commencement of the
aid in determining whether a party's suit is a sufficient demand. On this point, it may
undertaking is that of a surety or a guarantor. be worth mentioning that a surety is not even
entitled, as a matter of right, to be given notice
Prescinding from these jurisprudential of the principal's default. Inasmuch as the
authorities, there can be no doubt that the creditor owes no duty of active diligence to
stipulation contained in the third paragraph of take care of the interest of the surety, his mere
the controverted suretyship contract merely failure to voluntarily give information to the
elucidated on and made more specific the surety of the default of the principal cannot
obligation of petitioner as generally defined in have the effect of discharging the surety. The
the second paragraph thereof. Resultantly, the surety is bound to take notice of the principal's
theory advanced by petitioner, that she is default and to perform the obligation. He
merely a guarantor because her liability cannot complain that the creditor has not
attaches only upon default of the principal notified him in the absence of a special
debtor, must necessarily fail for being agreement to that effect in the contract of
incongruent with the judicial pronouncements suretyship.
adverted to above.
A creditor's right to proceed against the surety
In this regard, we need only to reiterate the exists independently of his right to proceed
rule that a surety is bound equally and against the principal.
absolutely with the principal, and as such is
deemed an original promisor and debtor from Under Article 1216 of the Civil Code, the
the beginning. It will further be observed that creditor may proceed against any one of the
petitioner's undertaking as co-maker solidary debtors or some or all of them
immediately follows the terms and conditions simultaneously. The rule, therefore, is that if
stipulated between respondent corporation, as the obligation is joint and several, the creditor
creditor, and the principal obligors. A surety is has the right to proceed even against the
usually bound with his principal by the same surety alone. Since, generally, it is not
instrument, executed at the same time and necessary for the creditor to proceed against a
upon the same consideration; he is an original principal in order to hold the surety liable,
debtor, and his liability is immediate and direct. where, by the terms of the contract, the
A surety usually enters into the same obligation of the surety is the same that of the
obligation as that of his principal, and the principal, then soon as the principal is in
signatures of both usually appear upon the default, the surety is likewise in default, and
same instrument, and the same consideration may be sued immediately and before any
usually supports the obligation for both the proceedings are had against the principal.
principal and the surety. Perforce, in accordance with the rule that, in
the absence of statute or agreement otherwise,
There is no merit in petitioner's contention that a surety is primarily liable, and with the rule
the complaint was prematurely filed because that his proper remedy is to pay the debt and
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 65

pursue the principal for reimbursement, the appear that the extension was for a definite
surety cannot at law, unless permitted by period, pursuant to an enforceable agreement
statute and in the absence of any agreement between the principal and the creditor, and that
limiting the application of the security, require it was made without the consent of the surety
the creditor or obligee, before proceeding or with a reservation of rights with respect to
against the surety, to resort to and exhaust his him. The contract must be one which
remedies against the principal, particularly precludes the creditor from, or at least hinders
where both principal and surety are equally him in, enforcing the principal contract within
bound. the period during which he could otherwise
have enforced it, and which precludes the
We agree with respondent corporation that its surety from paying the debt.
mere failure to immediately sue petitioner on
her obligation does not release her from None of these elements are present in the
liability. Where a creditor refrains from instant case. Verily, the mere fact that
proceeding against the principal, the surety is respondent corporation gave the principal
not exonerated. In other words, mere want of debtors an extended period of time within
diligence or forbearance does not affect the which to comply with their obligation did not
creditor's rights vis-a-vis the surety, unless the effectively absolve here in petitioner from the
surety requires him by appropriate notice to consequences of her undertaking. Besides, the
sue on the obligation. Such gratuitous burden is on the surety, herein petitioner, to
indulgence of the principal does not discharge show that she has been discharged by some
the surety whether given at the principal's act of the creditor, herein respondent
request or without it, and whether it is yielded corporation, failing in which we cannot grant
by the creditor through sympathy or from an the relief prayed for.
inclination to favor the principal, or is only the
result of passiveness. The neglect of the As a final issue, petitioner claims that
creditor to sue the principal at the time the debt assuming that her liability is solidary, the
falls due does not discharge the surety, even if interests and penalty charges on the
such delay continues until the principal outstanding balance of the loan cannot be
becomes insolvent. And, in the absence of imposed for being illegal and unconscionable.
proof of resultant injury, a surety is not Petitioner additionally theorizes that
discharged by the creditor's mere statement respondent corporation intentionally delayed
that the creditor will not look to the surety, or the collection of the loan in order that the
that he need not trouble himself. The interests and penalty charges would
consequences of the delay, such as the accumulate. The statement, likewise traversed
subsequent insolvency of the principal, or the by said respondent, is misleading.
fact that the remedies against the principal
may be lost by lapse of time, are immaterial.
MACHETTI VS HOSPICIO DE SAN JOSE
The raison d'être for the rule is that there is (G.R. No. L-16666, April 10, 1922)
nothing to prevent the creditor from proceeding
against the principal at any time. At any rate, if FACTS: Machetti undertook to construct a
the surety is dissatisfied with the degree of building for Hospicio de San Jose. In such
activity displayed by the creditor in the pursuit written agreement, Macheti obtained the
of his principal, he may pay the debt himself ‘guarantee’ of Fidelity and Surety Company of
and become subrogated to all the rights and the Philippine Islands.
remedies of the creditor.
Machetti undertook the construction with the
It may not be amiss to add that leniency shown supervision of the Hospicio architect. Machetti
to a debtor in default, by delay permitted by the was paid for the work with the exception of P4,
creditor without change in the time when the 978 to which the former filed a complaint. A
debt might be demanded, does not constitute counterclaim with damages was field by
an extension of the time of payment, which Hospicio alleging that the work has not been
would release the surety. In order to constitute carried out in accordance with the
an extension discharging the surety, it should specifications provided in the agreement.
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 66

remedy against Machetti.

Machetti was thereafter declared as insolvent
and the proceeding was suspended.
GILAT SATELLITE NETWORKS LTD. v.
Hospicio filed a motion asking that Fidelity be UNITED COCONUT PLANTERS BANK
made a cross defendant and that the GENERAL INSURANCE CO., INC.
proceeding continue as against such company.
The Court granted the motion and Hospicio FACTS: On September 15, 1999, One Virtual
sought to recover from Fidelity the amount of placed with GILAT a purchase order for
P12, 800 as guaranty. The Court ruled in favor various telecommunications equipment,
of Hospicio hence this present appeal. accessories, spares, services and software, at
a total purchase price of US$ 2,128,250.00. Of
ISSUE: WON recourse can be had against the said purchase price for the goods
Fidelity as guaranty? NO (not yet) delivered, One Virtual promised to pay a
portion thereof totalling US$1.2 Million in
HELD: (Discussion centered on the difference accordance with the payment schedule dated
of surety and guaranty) 22 November 1999. To ensure the prompt
payment of this amount, it obtained defendant
It appear that the contract is the guarantor's UCPB’s surety bond dated 3 December 1999,
separate undertaking in which the principal in favor of GILAT.
does not join, that its rests on a separate
consideration moving from the principal and During the period between September 1999
that although it is written in continuation of the and June 2000, GILAT shipped and delivered
contract for the construction of the building, it is to One Virtual the purchased products and
a collateral undertaking separate and distinct equipment, as evidenced by airway bills/Bill of
from the latter. All of these circumstances are Lading. All of the equipment, including the
distinguishing features of contracts of software components for which payment was
guaranty. secured by the surety bond, was shipped by
GILAT and duly received by One Virtual. Under
Now, while a surety undertakes to pay if the an endorsement dated December 23, 1999,
principal does not pay, the guarantor only the surety issued, with One Virtuals conformity,
binds himself to pay if the principal cannot pay. an amendment to the surety bond, Annex A
The one is the insurer of the debt, the other an thereof, correcting its expiry date from May 30,
insurer of the solvency of the debtor. This 2001 to July 30, 2001.
latter liability is what the Fidelity and Surety
Company assumed in the present case. The One Virtual failed to pay GILAT the amount of
undertaking is perhaps not exactly that of a US$ 400,000.00 on the due date of May 30,
fianza under the Civil Code, but is a perfectly 2000 in accordance with the payment schedule
valid contract and must be given the legal to the surety bond, prompting GILAT to write
effect if ordinarily carries. The Fidelity and the surety defendant UCPB on June 5, 2000, a
Surety Company having bound itself to pay demand letter for payment of the said amount
only the event its principal, Machetti, of US$400,000.00. No part of the amount set
cannot pay it follows that it cannot be forth in this demand has been paid to date by
compelled to pay until it is shown that either One Virtual or defendant UCPB. One
Machetti is unable to pay. Such ability may Virtual likewise failed to pay on the succeeding
be proven by the return of a writ of execution payment installment date of 30 November
unsatisfied or by other means, but is not 2000 of the surety bond, prompting GILAT to
sufficiently established by the mere fact that he send a second demand letter dated January
has been declared insolvent in insolvency 24, 2001, for the payment of the full amount of
proceedings under our statutes, in which the US$1,200,000.00 guaranteed under the surety
extent of the insolvent's inability to pay is not bond, plus interests and expenses and which
determined until the final liquidation of his letter was received by the defendant surety on
estate. January 25, 2001. However, defendant UCPB
failed to settle the amount of US$1,200,000.00
Therefore, Hospicio much first exhaust all its or a part thereof, hence, the instant complaint.
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 67

In suretyship, the oft-repeated rule is that a

Gilat filed a Complaint against respondent surety’s liability is joint and solidary with that of
UCPB to recover the amounts supposedly the principal debtor. This undertaking makes a
covered by the surety bond, plus interests and surety agreement an ancillary contract, as it
expenses. presupposes the existence of a principal
contract. Nevertheless, although the contract
ISSUES: of a surety is in essence secondary only to a
1. WON the CA erred in dismissing the case valid principal obligation, its liability to the
and ordering petitioner and One Virtual to creditor or promise of the principal is said to be
arbitrate. direct, primary and absolute; in other words, a
2. WON petitioner is entitled to legal interest surety is directly and equally bound with the
due to the delay in the fulfillment by principal. He becomes liable for the debt and
respondent of its obligation under the duty of the principal obligor, even without
Suretyship Agreement. possessing a direct or personal interest in the
obligations constituted by the latter. Thus, a
HELD: surety is not entitled to a separate notice of
Suretyship Agreement default or to the benefit of excussion. It may in
The existence of a suretyship agreement does fact be sued separately or together with the
not give the surety the right to intervene in the principal debtor.
principal contract, nor can an arbitration clause
between the buyer and the seller be invoked After a thorough examination of the pieces of
by a non-party such as the surety. evidence presented by both parties, the RTC
found that petitioner had delivered all the
Petitioner alleges that arbitration laws mandate goods to One Virtual and installed them.
that no court can compel arbitration, unless a Despite these compliances, One Virtual still
party entitled to it applies for this relief. This failed to pay its obligation, triggering
referral, however, can only be demanded by respondent’s liability to petitioner as the
one who is a party to the arbitration formers surety. In other words, the failure of
agreement. Considering that neither petitioner One Virtual, as the principal debtor, to fulfill its
nor One Virtual has asked for a referral, there monetary obligation to petitioner gave the latter
is no basis for the CAs order to arbitrate. an immediate right to pursue respondent as
the surety.
Moreover, Articles 1216 and 2047 of the Civil
Code clearly provide that the creditor may Consequently, we cannot sustain respondents
proceed against the surety without having first claim that the Purchase Agreement, being the
sued the principal debtor. Even the Surety principal contract to which the Suretyship
Agreement itself states that respondent Agreement is accessory, must take
becomes liable upon mere failure of the precedence over arbitration as the preferred
Principal to make such prompt payment. Thus, mode of settling disputes.
petitioner should not be ordered to make a
separate claim against One Virtual (via First, the acceptance of a surety agreement
arbitration) before proceeding against does not change in any material way the
respondent. creditor’s relationship with the principal debtor
nor does it make the surety an active party to
On the other hand, respondent maintains that the principal creditor-debtor relationship. In
a surety contract is merely an accessory other words, the acceptance does not give the
contract, which cannot exist without a valid surety the right to intervene in the principal
obligation. Thus, the surety may avail itself of contract. The surety’s role arises only upon the
all the defenses available to the principal debtors default, at which time, it can be directly
debtor and inherent in the debt that is, the right held liable by the creditor for payment as a
to invoke the arbitration clause in the Purchase solidary obligor. Hence, the surety remains a
Agreement. stranger to the Purchase Agreement. We
agree with petitioner that respondent cannot
We agree with petitioner. invoke in its favor the arbitration clause in the
Purchase Agreement, because it is not a party
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 68

to that contract. An arbitration agreement being demand on 24 January 2001.

contractual in nature, it is binding only on the
parties thereto, as well as their assigns and We sustain petitioner. Article 2209 of the Civil
heirs. Code is clear: if an obligation consists in the
payment of a sum of money, and the debtor
Second, Section 24 of Republic Act No. incurs a delay, the indemnity for damages,
928542 is clear in stating that a referral to there being no stipulation to the contrary, shall
arbitration may only take place if at least one be the payment of the interest agreed upon,
party so requests not later than the pre-trial and in the absence of stipulation, the legal
conference, or upon the request of both parties interest.
thereafter. Respondent has not presented Delay arises from the time the obligee judicially
even an iota of evidence to show that either or extrajudicially demands from the obligor the
petitioner or One Virtual submitted its performance of the obligation, and the latter
contesting claim for arbitration. fails to comply. Delay, as used in Article 1169,
is synonymous with default or mora, which
Third, sureties do not insure the solvency of means delay in the fulfilment of obligations. It
the debtor, but rather the debt itself. They are is the nonfulfillment of an obligation with
contracted precisely to mitigate risks of respect to time.52 In order for the debtor (in
nonperformance on the part of the obligor. This this case, the surety) to be in default, it is
responsibility necessarily places a surety on necessary that the following requisites be
the same level as that of the principal debtor. present: (1) that the obligation be demandable
The effect is that the creditor is given the right and already liquidated; (2) that the debtor
to directly proceed against either principal delays performance; and (3) that the creditor
debtor or surety. This is the reason why requires the performance judicially or
excussion cannot be invoked. To require the extrajudicially.
creditor to proceed to arbitration would render
the very essence of suretyship nugatory and Having held that a surety upon demand fails to
diminish its value in commerce. If the surety is pay, it can be held liable for interest, even if in
dissatisfied with the degree of activity thus paying, its liability becomes more than the
displayed by the creditor in the pursuit of his principal obligation. The increased liability is
principal, he may pay the debt himself and not because of the contract, but because of the
become subrogated to all the rights and default and the necessity of judicial collection.
remedies of the creditor.
However, for delay to merit interest, it must
Interest; Delay be inexcusable in nature.
Interest, as a form of indemnity, may be As to the issue of when interest must accrue,
awarded to a creditor for the delay incurred by our Civil Code is explicit in stating that it
a debtor in the payment of the latter’s accrues from the time judicial or extrajudicial
obligation, provided that the delay is demand is made on the surety. This ruling is in
inexcusable. accordance with the provisions of Article 1169
of the Civil Code and of the settled rule that
Anent the issue of interests, petitioner alleges where there has been an extra-judicial demand
that it deserves to be paid legal interest of 12% before an action for performance was filed,
per annum from the time of its first demand on interest on the amount due begins to run, not
respondent on 5 June 2000 or at most, from from the date of the filing of the complaint, but
the second demand on 24 January 2001 from the date of that extra-judicial demand.
because of the latter’s delay in discharging its Considering that respondent failed to pay its
monetary obligation. Citing Article 1169 of the obligation on 30 May 2000 in accordance with
Civil Code, petitioner insists that the delay the Purchase Agreement, and that the
started to run from the time it demanded the extrajudicial demand of petitioner was sent on
fulfilment of respondent’s obligation under the 5 June 2000, we agree with the latter that
suretyship contract. Significantly, respondent interest must start to run from the time
does not contest this point, but instead argues petitioner sent its first demand letter (5 June
that it is only liable for legal interest of 6% per 2000), because the obligation was already due
annum from the date of petitioner’s last and demandable at that time.
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 69

HELD: Intent is controlling: clear from the

evidence that the Continuing Guarantee
WILLEX PLASTIC, INC. V. CA, executed by Willex with Inter-Resin would
INTERNATIONAL CORPORATE BANK cover sums obtained (in the past– retroactive)
(1996) and/or to be obtained by Inter-Resin Industrial
from Interbank.
Doctrine: It is never necessary that a guarantor
or surety should receive any part or benefit, if Although a contract of suretyship is ordinarily
such there be, accruing to his principal not to be construed as retrospective, in the end
the intention of the parties as revealed by the
FACTS: 1978: Inter-Resin took out a loan evidence is controlling– apply it to the 1978
from Manila Bank. As additional security, Inter- loan.
Resin and Investment Underwriting
(IUCP) executed a Continuing Surety Guarantor or surety is bound by the
Agreement stating that they are liable to Manila same consideration that makes the contract
Bank solidarily for the loan taken out by Inter- effective between the principal parties thereto.
Resin. . . . It is never necessary that a guarantor or
surety should receive any part or benefit, if
1979: Inter-Resin and Willex Plastic executed such there be, accruing to his principal.
a Continuing Guarantee for the loan which
Inter-Resin obtained from Investment
Underwriting to the extent of P5M. RCBC VS. HON. JOSE P. ARRO
31 July 1982
1981: Investment Underwriting (IUCP) paid
Manila Bank P4M to satisfy Inter-Resin’s 1978 FACTS: Private respondent Residoro Chua,
Obligation. with Enrique Go, Sr., executed a
comprehensive surety agreement to guaranty,
Investment Underwriting (IUCP) then above all, any existing or future indebtedness
demanded payment of the P4M from both of Davao Agricultural Industries Corporation
Inter-Resin and Willex. (Daicor), and/or induce the bank at anytime or
from time to time to make loans or advances or
Inter-Resin paid IUCP P600K from to extend credit to said Daicor, provided that
the proceeds of its fire insurance the liability shall not exceed at any time
Php100,000.00.
Willex denied obligation, it alleged that it is
only a guarantor of the principal, hence its A promissory note for Php100,000.00 (for
liability was only secondary to the principal additional capital to the charcoal buy and sell
and that it did not receive consideration nor and the activated carbon importation business)
benefit from the contract between the bank and was issued in favor of petitioner RCBC payable
Inter-Resin. a month after execution. This was signed by
Go in his personal capacity and in behalf of
Willex insisted that IUCP should pursue Inter- Daicor. Respondent Chua did not sign in said
Resin and apply to the loan the assets of the promissory note. As the note was not paid
latter first before going after it. despite demands, RCBC filed a complaint for a
sum of money against Daicor, Go and Chua.
Willex further alleged that it is guarantor of a
loan to Manila Bank and not to Interbank, The complaint against Chua was dismissed
hence the Continuing Guaranty cannot be upon his motion, alleging that the complaint
retroactive applied as contracts of suretyship states no cause of action against him as he
contemplates future dealing. was not a signatory to the note and hence he
cannot be held liable. This was so despite
ISSUE: WON Willex is liable as guarantor for RCBC’s opposition, invoking the
the loans obtained by Inter-Resin to IUCP? – comprehensive surety agreement which it
Yes holds to cover not just the note in question but
also every other indebtedness that Daicor may
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 70

incur from petitioner bank. RCBC moved for

reconsideration of the dismissal but to no avail.
ATOK CORPORATION vs. COURT OF
ISSUE: WON respondent Chua may be held APPEALS, SANYU CORPORATION,
liable with Go and Daicor under the promissory DANILO E. ARRIETA, NENITA B. ARRIETA,
note, even if he was not a signatory to it, in PABLITO BERMUNDO and LEOPOLDO
light of the provisions of the comprehensive HALILI
surety agreement wherein he bound himself
with Go and Daicor, as solidary debtors, to pay FACTS: SANYU as principal and Sanyu
existing and future debts of said corporation. Trading along with individual private
stockholders of SC(Halili and Bermundo) as
HELD: Yes, he may be held liable. The sureties, executed in the continuing
comprehensive surety agreement executed by Suretyship Agreement in favor of ATOK as
Chua and Go, as president and general creditor. Under this Agreement, Sanyu Trading
manager, respectively, of Daicor, was to cover and Halili and Bermudo jointly and severally
existing as well as future obligations which unconditionally guarantee to ATOK
Daicor may incur with RCBC. This was only CORPORATION the full, faithful and prompt
subject to the proviso that their liability shall not payment and discharge of any and all
exceed at any one time the aggregate principal indebtedness of SANYU.
amount of Php100,000.00. (Par.1 of said
agreement). The word "indebtedness" is used herein in its
most comprehensive sense and includes any
The agreement was executed to induce and all advances, debts, obligations and
petitioner Bank to grant any application for a liabilities of Principal or any one or more of
loan Daicor would request for. According to them,here[to]fore, now or hereafter made,
said agreement, the guaranty is continuing and incurred or created, whether voluntary or
shall remain in full force or effect until the bank involuntary and however arising, whether direct
is notified of its termination. or acquired by the Creditor by assignment or
succession, whether due or not due, absolute
During the time the loan under the promissory or contingent, liquidated or unliquidated,
note was incurred, the agreement was still in determined or undetermined and whether the
full force and effect and is thus covered by the Principal may be may be liable individually of
latter agreement. Thus, even if Chua did not jointly with others, or whether recovery upon
sign the promissory note, he is still liable by such indebtedness may be or hereafter
virtue of the surety agreement. The only become barred by any statute of limitations, or
condition necessary for him to be liable under whether such indebtedness may be or
the agreement was that Daicor “is or may otherwise become unenforceable.
become liable as maker, endorser, accept or or
otherwise.” SANYU assigned its trade receivables (P125K)
in consideration of receipt from ATOK of the
The comprehensive surety agreement signed amount of P105,000.00.
by Go and Chua was as an accessory
obligation dependent upon the principal Later, additional trade receivables were
obligation, i.e., the loan obtained by Daicor as assigned by SANYU to ATOK with a total face
evidenced by the promissory note. The surety value of P100,378.45.
agreement unequivocally shows that it was
executed to guarantee future debts that may Subsequently Atok commenced action against
be incurred by Daicor with petitioner, as SANYU, the Arrieta spouses, Pablito
allowed under NCC Art.2053. Bermundo and Leopoldo Halili to collect the
sum of P120,240.00 plus penalty charges
“A guaranty may also be given as security for amounting to P0.03 for every peso due and
future debts, the amount of which is not yet payable for each month starting from 1
known; there can be no claim against the September 1983.
guarantor until the debt is liquidated. A
conditional obligation may also be secured.”
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 71

ATOK alleged that SANYU had failed to collect they were executed, the principal obligation
and remit the amount due under the trade referred to in said bonds had not yet been
receivables. entered into, as no copy thereof was attached
to the deeds of suretyship. This defense is
SANYU et al sought dismissal of Atok's claim untenable, because in its complaint the NARIC
upon the ground that such claim had averred, and the appellant did not deny that
prescribed under Article 1629 of the Civil Code these bonds were posted to secure the
and for lack of cause of action. The private additional credit that Fojas has applied for, and
respondents contended that the Continuing the credit increase over his original contract
Suretyship Agreement, being an accessory was sufficient consideration for the bonds. That
contract, was null and void since, at the time of the latter were signed and filed before the
its execution, SANYU had no pre-existing additional credit was extended by the NARIC is
obligation due to ATOK. no ground for complaint. Article 1825 of the
Civil Code of 1889, in force in 1948, expressly
ISSUE: Whether the individual private recognized that "a guaranty may also be given
respondents may be held solidarily liable with as security for future debts the amount of
SANYU under the provisions of the Continuing which is not yet known."
Suretyship Agreement. YES
In Rizal Commercial Banking Corporation
OR Whether that Agreement must be held null v. Arro, the Court was confronted again with
and void as having been executed without the same issue, that is, whether private
consideration and without a pre-existing respondent was liable to pay a promissory note
principal obligation to sustain it. NO dated 29 April 1977 executed by the principal
debtor in the light of the provisions of a
HELD: It is true that a serious guaranty or a comprehensive surety agreement which
suretyship agreement is an accessory contract petitioner bank and the private respondent had
in the sense that it is entered into for the earlier entered into on 19 October 1976. Under
purpose of securing the performance of the comprehensive surety agreement, the
another obligation which is denominated as the private respondents had bound themselves as
principal obligation. It is also true that Article solidary debtors of the Diacor Corporation not
2052 of the Civil Code states that "a guarantee only in respect of existing obligations but also
cannot exist without a valid obligation." This in respect of future ones. In holding private
legal proposition is not, however, like most respondent surety (Residoro Chua) liable
legal principles, to be read in an absolute and under the comprehensive surety agreement,
literal manner and carried to the limit of its the Court said that the surety agreement which
logic. was earlier signed by Enrique Go, Sr. and
private respondent, is an accessory obligation,
Art. 2052. A guaranty cannot exist without a it being dependent upon a principal one, which,
valid obligation. in this case is the loan obtained by Daicor as
Nevertheless, a guaranty may be evidenced by a promissory note. What
constituted to guarantee the performance obviously induced petitioner bank to grant the
of a voidable or an unenforceable contract. loan was the surety agreement whereby Go
It may also guaranty a natural obligation." and Chua bound themselves solidarily to
guaranty the punctual payment of the loan at
Art. 2053. A guaranty may also be given as maturity. By terms that are unequivocal, it can
security for future debts, the amount of be clearly seen that the surety agreement was
which is not yet known; there can be no executed to guarantee future debts which
claim against the guarantor until the debt is Daicor may incur with petitioner, as is legally
liquidated. A conditional obligation may allowable under the Civil Code.
also be secured.
In both Case Laws, the Court rejected the
In National Rice and Corn Corporation v. Jose distinction which the Court of Appeals in the
A. Fojas and Alto Surety Co., case at bar sought to make with respect to
Inc., appellant Fojas questions the validity of Article 2053, that is, that the "future debts"
the additional bonds on the theory that when referred to in that Article relate to "debts
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 72

already existing at the time of the constitution

of the agreement but the amount of which is Again in 1979, UTEFS secured another credit
unknown," and not to debts not yet incurred accommodation which was fully settled. They
and existing at that time. Of course, a surety is then applied and obtained an irrevocable letter
not bound under any particular principal of credit in the sum of P815, 600.00, covered
obligation until that principal obligation is born. UTEFS' purchase of "8,000 Bags Planters
But there is no theoretical or doctrinal difficulty Urea and 4,000 Bags Planters 21-0-0." It was
inherent in saying that the suretyship applied for and obtain by UTEFS without
agreement itself is valid and binding even the participation of Norberto Uy and Jacinto
before the principal obligation intended to be Uy Diño as they did not sign the document
secured thereby is born, any more that there denominated as "Commercial Letter of
would be in saying that obligations which are Credit and Application." Also, they were not
subject to a condition precedent are valid and asked to execute any suretyship to
binding before the occurrence of the condition guarantee its payment. Neither did
precedent. METROBANK nor UTEFS inform them that
the 1979 Letter of Credit has been opened
Comprehensive or continuing surety and the Continuing Suretyships separately
agreements are in fact quite common place in executed in February, 1977 shall guarantee
present day financial and commercial practice. its payment.
A bank or a financing company which
anticipates entering into a series of credit UTEFS executed and delivered to
transactions with a particular company, METROBANK the Trust Receipt whereby the
commonly requires the projected principal former acknowledged receipt in trust from the
debtor to execute a continuing surety latter of the aforementioned goods from
agreement along with its sureties. By executing Planters Products which amounted to P815,
such an agreement, the principal places itself 600.00. Being the entrusted, the former agreed
in a position to enter into the projected series to deliver to METROBANK the entrusted goods
of transactions with its creditor; with such in the event of non-sale or, if sold, the
surety agreement, there would be no need to proceeds of the sale thereof, on or before
execute a separate surety contract or bond for September 2, 1979.
each financing or credit accommodation
extended to the principal debtor. As we However, UTEFS did not acquiesce to the
understand it, this is precisely what happened obligatory stipulations in the trust receipt.
in the case at bar.
METROBANK sent letters to the said principal
obligor and its sureties, Uy and Uy Diño,
JACINTO UY DIÑO and NORBERTO UY vs. demanding payment of the amount due.
HON. COURT OF APPEALS and
METROPOLITAN BANK AND TRUST Diño denied his liability saying that he cannot
COMPANY be held liable for the 1979 credit
accommodation because it is a new obligation
FACTS: In 1977, Uy Tiam Enterprises and contracted without his participation. Besides,
Freight Services, thru its representative Uy the 1977 credit accommodation which he
Tiam, applied for and obtained credit guaranteed has been fully paid. Accordingly,
accommodations (LOC and TRA) the Continuing Suretyships executed in 1977
METROBANK in the sum of P700,000.00. To cannot be availed of to secure Uy Tiam's Letter
secure the aforementioned credit of Credit obtained in 1979 because a guaranty
accommodations Uy and Diño executed cannot exist without a valid obligation. It was
separate Continuing Suretyships, where further argued that they cannot be held liable
Norberto UY agreed to pay METROBANK any for the obligation contracted in 1979 because
indebtedness of UTEFS up to the aggregate they are not privies thereto as it was
sum of P300,000.00 while Jacinto Uy Diño contracted without their participation.
agreed to be bound up to the aggregate sum of
P800,000.00. This obligation was settled and METROBANK contends that the terms and
paid by UTEFS. conditions embodied in the comprehensive
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 73

suretyships separately executed by sureties- which shall remain in full force and effect until
defendants, the bank argued that sureties- the bank is notified of its revocation.
movants bound themselves as solidary
obligors of defendant Uy Tiam to both existing The Continuing Suretyship Agreements CAN
obligations and future ones based on Article be made applicable to the 1979 obligation
2053 even if the latter was not yet in existence when
the agreements were executed in 1977, as
ISSUE: Whether petitioners are liable as stated in Art 2053 par 2.
sureties for the 1979 obligations of Uy Tiam to
METROBANK by virtue of the Continuing The limit of the petitioners respective liabilities
Suretyship Agreements they separately signed must be determined from the suretyship
in 1977. YES but only for the amount or limit agreement each had signed. The Continuing
stated in the surety contract Suretyship Agreements signed by petitioner
Diño and petitioner Uy fix the aggregate
HELD: A continuing guaranty is one which amount of their liability, at any given time, at
covers all transactions, including those arising P800,000.00 and P300,000.00, respectively. It
in the future, which are within the description or is also stated in the contract that they are
contemplation of the contract, of guaranty, until bound to pay for the interest and for a
the expiration or termination thereof. A reasonable amount of cost of suit in case of
guaranty shall be construed as continuing judicial proceedings. The law is clear that a
when by the terms thereof it is evident that the guarantor may bond himself for less, but not
object is to give a standing credit to the for more than the principal debtor, both as
principal debtor to be used from time to time regards the amount and the onerous nature of
either indefinitely or until a certain period, the conditions.
especially if the right to recall the guaranty is
expressly reserved. Hence, where the contract Thus, by express mandate of the Continuing
of guaranty states that the same is to secure Suretyship Agreements which they had signed,
advances to be made "from time to time" the petitioners separately bound themselves to pay
guaranty will be construed to be a continuing interest, expenses, attorney's fees and costs.
one.
Even without such stipulations, the petitioners
The use of particular words and expressions would, nevertheless, be liable for the interest
such as payment of "any debt," "any and judicial costs.
indebtedness," "any deficiency," or "any sum,"
or the guaranty of "any transaction" or money Article 2055 of the Civil Code provides that …
to be furnished the principal debtor "at any A guaranty is not presumed; it must be express
time," or "on such time" that the principal and cannot extend to more than what is
debtor may require, have been construed to stipulated therein. If it be simple or indefinite, it
indicate a continuing guaranty. shall comprise not only the principal obligation,
but also all its accessories, including the
The Court looked into the provisions of the judicial costs, provided with respect to the
Surety entered by Diño. latter, that the guarantor shall only be liable for
those costs incurred after he has been
It shows that the suretyship agreement are judicially required to pay. Interest and
continuing in nature. Petitioners do not deny damages are included in the term accessories.
this; in fact, they candidly admitted it. Neither However, such interest should run only from
have they denied the fact that they had not the date when the complaint was filed in court.
revoked the suretyship agreements. The Even attorney's fees may be imposed
purpose of the execution of the Continuing whenever appropriate, pursuant to Article 2208
Suretyships was to induce appellant to grant of the Civil Code.
any application for credit accommodation
(letter of credit/trust receipt) UTEFS may
desire to obtain from appellant bank. By its FORTUNE MOTORS (PHILS.)
terms, each suretyship is a continuing one CORPORATION and EDGAR L.
RODRIGUEZA vs. THE HONORABLE
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 74

COURT OF APPEALS and FILINVEST

CREDIT CORPORATION SOUTH CITY HOMES vs. BA

FACTS: In 1981, Joseph Chua and Edgar FACTS: Fortune Motors Corporation (Phils.)
Rodrigueza executed separate surety has been availing of the credit facilities of
agreements in favor of Fortune Motors (Phils.) plaintiff-appellant BA Finance Corporation. On
Corporation to cover obligations incurred by January 17, 1983, Joseph L. G. Chua,
Fortune Motors whether they be enforced or President of Fortune Motors Corporation,
thereafter made (from the time of said surety executed in favor of plaintiff-appellant a
contracts). Continuing Suretyship Agreement, in which he
"jointly and severally unconditionally"
In 1982, Fortune Motors secured cars from guaranteed the "full, faithful and prompt
Canlubang Automotive Resources Corporation payment and discharge of any and all
(CARCO) via trust receipts and drafts made by indebtedness" of Fortune Motors Corporation
CARCO. These were assigned to Filinvest to BA Finance Corporation.
Credit Corporation. Later Filinvest, when the
obligation matured, demanded payment from On February 3, 1983, Palawan Lumber
Fortune Motor as well as from Chua and Manufacturing Corporation plaintiff-appellant a
Rodrigueza. No payment was made. A case Continuing Suretyship Agreement in which,
was filed. Rodrigueza averred that the surety said corporation "jointly and severally
agreement was void because when it was unconditionally" guaranteed the "full, faithful
signed in 1981, the principal obligation (1982) and prompt payment and discharge of any and
did not yet exist. all indebtedness of Fortune Motors Corporation
to BA Finance Corporation. On the same date,
ISSUE: Whether surety can exist even if there South City Homes, Inc. represented by Edgar
was no existing indebtedness at the time of its C. Rodrigueza and Aurelio F. Tablante,
execution. YES likewise executed a Continuing Suretyship
Agreement in which said corporation "jointly
HELD: Surety May Secure Future and severally unconditionally" guaranteed the
Obligations "full, faithful and prompt payment and
The case at bench falls on all fours with Atok discharge of any and all indebtedness" of
Finance Corporation vs. Court of Appeals Fortune Motors Corporation to BA Finance
which reiterated our rulings in National Rice Corporation.
and Corn Corporation (NARIC) vs. Court of
Appeals and Rizal Commercial Banking Upon failure of the defendant-appellant
Corporation vs. Arro. Fortune Motors Corporation to pay the
amounts due under the drafts and to remit the
Future obligations can be covered by a surety. proceeds of motor vehicles sold or to return
Comprehensive or continuing surety those remaining unsold in accordance with the
agreements are in fact quite commonplace in terms of the trust receipt agreements, BA
present day financial and commercial practice. Finance Corporation sent demand letter to
A bank or financing company which anticipates Edgar C. Rodrigueza, South City Homes, Inc.,
entering into a series of credit transactions with Aurelio Tablante, Palawan Lumber
a particular company, commonly requires the Manufacturing Corporation, Joseph L. G.
projected principal debtor to execute a Chua, George D. Tan and Joselito C. Baltazar.
continuing surety agreement along with its Since the defendants-appellants failed to settle
sureties. By executing such an agreement, the their outstanding account with plaintiff-
principal places itself in a position to enter into appellant, the latter filed on December 22,
the projected series of transactions with its 1983 a complaint for a sum of money with
creditor; with such suretyship agreement, there prayer for preliminary attachment.
would be no need to execute a separate surety
contract or bond for each financing or credit On January 19, 1984, the defendants filed a
accommodation extended to the principal Motion to Dismiss. Therein, they alleged that
debtor. conventional subrogation effected a novation
without the consent of the debtor (Fortune
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 75

Motors Corporation) and thereby extinguished dealer defaults in paying the financing
the latter's liability; that pursuant to the trust company, may the surety escape liability on
receipt transaction, it was premature under P. the legal ground that the obligations were
D. No. 115 to immediately file a complaint for a incurred subsequent to the execution of the
sum of money as the remedy of the entruster is surety contract?
an action for specific performance; that the
suretyship agreements are null and void for "x x x Of course, a surety is not bound under
having been entered into without an existing any particular principal obligation until that
principal obligation; and that being such principal obligation is born. But there is no
sureties does not make them solidary debtors. theoretical or doctrinal difficulty inherent in
saying that the suretyship agreement itself is
ISSUE: Whether the suretyship agreement is valid and binding even before the principal
valid obligation intended to be secured thereby is
born, any more than there would be in saying
HELD: On the first issue, petitioners assert that obligations which are subject to a
that the suretyship agreement they signed is condition precedent are valid and binding
void because there was no principal obligation before the occurrence of the condition
at the time of signing as the principal obligation precedent.
was signed six (6) months later. The Civil
Code, however, allows a suretyship agreement "Comprehensive or continuing surety
to secure future loans even if the amount is not agreements are in fact quite commonplace in
yet known. present day financial and commercial practice.
A bank or financing company which anticipates
Article 2053 of the Civil Code provides that: entering into a series of credit transactions with
"Art. 2053. A guaranty may also be given as a particular company, commonly requires the
security for future debts, the amount of which projected principal debtor to execute a
is not yet known. x x x" continuing surety agreement along with its
sureties. By executing such an agreement, the
In Fortune Motors (Phils.) Corporation v. Court principal places itself in a position to enter into
of Appeals we held: the projected series of transactions with its
"To fund their acquisition of new vehicles creditor; with such suretyship agreement, there
(which are later retailed or resold to the would be no need to execute a separate surety
general public), car dealers normally enter into contract or bond for each financing or credit
wholesale automotive financing schemes accommodation extended to the principal
whereby vehicles are delivered by the debtor."
manufacturer or assembler on the strength of
trust receipts or drafts executed by the car
dealers, which are backed up by sureties. PACIFIC BANKING CORPORATION vs. IAC
These trust receipts or drafts are then
assigned and/or discounted by the FACTS: On October 24, 1975, Celia Syjuco
manufacturer to/with financing companies, Regala, applied for and obtained from the
which assume payment of the vehicles but with plaintiff the issuance and use of Pacificard
the corresponding right to collect such credit card, under the Terms and Conditions
payment from the car dealers and/or the Governing the Issuance and Use of Pacificard.
sureties. In this manner, car dealers are able to On the same date, the defendant-appelant
secure delivery of their stock-in-trade without Robert Regala, Jr., spouse of defendant Celia
having to pay cash therefor; manufacturers get Regala, executed a "Guarantor's Undertaking
paid without any receivables/ collection in favor of the appellee Bank, whereby the
problems; and financing companies earn their latter agreed "jointly and severally of Celia
margins with the assurance of payment not Aurora Syjuco Regala, to pay the Pacific
only from the dealers but also from the Banking Corporation upon demand, any and all
sureties. When the vehicles are eventually indebtedness, obligations, charges or liabilities
resold, the car dealers are supposed to pay the due and incurred by said Celia Aurora Syjuco
financing companies — and the business goes Regala with the use of the Pacificard, or
merrily on. However, in the event the car renewals thereof, issued in her favor by the
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 76

Pacific Banking Corporation". It was also any change or novation of the terms and
agreed that "any changes of or novation in the conditions in connection with the issuance of
terms and conditions in connection with the the Pacificard credit card." Roberto, in fact,
issuance or use of the Pacificard, or any made his commitment as a surety a continuing
extension of time to pay such obligations, one, binding upon himself until all the liabilities
charges or liabilities shall not in any manner of Celia Regala have been fully paid. All these
release me/us from responsibility hereunder, it were clear under the "Guarantor's
being understood that I fully agree to such Undertaking" Roberto signed, thus:
charges, novation or extension, and that this
understanding is a continuing one and shall . . . Any changes of or novation in the terms
subsist and bind me until the liabilities of the and conditions in connection with the issuance
said Celia Syjuco Regala have been fully or use of said Pacificard, or any extension of
satisfied or paid. time to pay such obligations, charges or
liabilities shall not in any manner release
The defendant Celia Regala, as such me/us from the responsibility hereunder, it
Pacificard holder, had purchased goods and/or being understood that the undertaking is a
services on credit under her Pacificard, for continuing one and shall subsist and bind
which the plaintiff advanced the cost me/us until all the liabilities of the said Celia
amounting to P92,803.98 at the time of the Syjuco Regala have been fully satisfied or
filing of the complaint. paid. (p. 12, supra; emphasis supplied)

In view of defendant Celia Regala's failure to Private respondent Roberto Regala, Jr. had
settle her account for the purchases made thru been made aware by the terms of the
the use of the Pacificard, a written demand undertaking of future changes in the terms and
was sent to the latter and also to the defendant conditions governing the issuance of the credit
Roberto Regala, Jr. under his "Guarantor's card to his wife and that, notwithstanding, he
Undertaking." voluntarily agreed to be bound as a surety. As
in guaranty, a surety may secure additional
Private respondent Roberto Regala, Jr. was and future debts of the principal debtor the
made liable only to the extent of the monthly amount of which is not yet known.
credit limit granted to Celia Regala, i.e., at
P2,000.00 a month and only for the advances The application by respondent court of the
made during the one year period of the card's ruling in Government v. Tizon, supra is
effectivity counted from October 29, 1975 up to misplaced. It was held in that case that:
October 29, 1976
. . . although the defendants bound themselves
ISSUE: What is the extent of Roberto’s in solidum, the liability of the Surety under its
liability? bond would arise only if its co-defendants, the
principal obligor, should fail to comply with the
HELD: It is true that under Article 2054 of the contract. To paraphrase the ruling in the case
Civil Code, "(A) guarantor may bind himself for of Municipality of Orion vs. Concha, the liability
less, but not for more than the principal debtor, of the Surety is "consequent upon the liability"
both as regards the amount and the onerous of Tizon, or "so dependent on that of the
nature of the conditions. 2 It is likewise not principal debtor" that the Surety "is considered
disputed by the parties that the credit limit in law as being the same party as the debtor in
granted to Celia Regala was P2,000.00 per relation to whatever is adjudged, touching the
month and that Celia Regala succeeded in obligation of the latter"; or the liabilities of the
using the card beyond the original period of its two defendants herein "are so interwoven and
effectivity, October 29, 1979. We do not agree dependent as to be inseparable." Changing the
however, that Roberto Jr.'s liability should be expression, if the defendants are held liable,
limited to that extent. Private respondent their liability to pay the plaintiff would be
Roberto Regala, Jr., as surety of his wife, solidary, but the nature of the Surety's
expressly bound himself up to the extent of the undertaking is such that it does not incur
debtor's (Celia) indebtedness likewise liability unless and until the principal debtor is
expressly waiving any "discharge in case of held liable.
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 77

"This certifies that I, Jeanette D. Molino,

A guarantor or surety does not incur liability approve of the request of Danilo and
unless the principal debtor is held liable. It is in Gloria Alto with Card No. 3651-203216
this sense that a surety, although solidarily 0006 and 3651-203412-5007 to upgrade
liable with the principal debtor, is different from their card from regular to diamond
the debtor. It does not mean, however, that the edition."
surety cannot be held liable to the same extent
as the principal debtor. The nature and extent Danilo's request was granted and he was
of the liabilities of a guarantor or a surety is issued a Diamond (Edition) Diners Club Card.
determined by the clauses in the contract of He used this card and made purchases from
suretyship. member establishments. On October 1, 1988
Danilo had incurred credit charged plus
appropriate interest and service charges in the
MOLINO vs. SECURITY DINERS aggregate amount of P166,408.31. He
defaulted in the payment of this obligation.
FACTS: The Security Diners International
Corporation ("SDIC') operates a credit card SDIC demanded of Danilo and Jeanette to pay
system under the name of Diners Club through said obligation but they did not pay. So, on
which it extends credit accommodation to its November 9, 1988, SDIC filed an action to
cardholders for the purchase of goods and collect said indebtedness against Danilo and
payment of services from its member Jeanette.
establishments to be reimbursed later on by
the cardholder upon proper billing. There are Defendant Danilo Alto failed to file an Answer.
two types of credit cards issued: one, the Petitioner was left as the lone defendant, sued
Regular (Local) Card which entitles the in her capacity as surety of Danilo.
cardholder to purchase goods and pay
services from member establishments in an In the Answer petitioner claimed that her
amount not exceeding P10,000.00; and two, liability under the Surety Undertaking was
the Diamond (Edition) Card which entitles the limited to P10,000.00 and that she did not
cardholder to purchase goods and pay expressly and categorically agree to act as
services from member establishments in surety for Danilo in an amount higher than
unlimited amounts. One of the requirements for P10,000.00.
the issuance of either of these cards is that an
applicant should have a surety. Petitioner posits that she did not expressly give
her consent to be bound as surety under the
On July 24, 1987, Danilo A. Alto applied for a upgraded card. She points out that the note
Regular (Local) Card with SDIC. He got as his she signed, marked as Exhibit "C", registering
surety his own sister-in-law Jeanette Molino her approval of the request of Danilo Alto to
Alto. Thus, Danilo signed the printed upgrade his card, renders the Surety
application form and Jeanette signed the Undertaking she signed under the terms of the
Surety Undertaking. previous card "without probative value,
immaterial and irrelevant as it covers only the
On the basis of the completed and signed liability of the surety in the use of the regular
Application Form and Surety Undertaking, the credit card by the principal debtor x x x. " She
SDIC issued to Danilo Diners Card No. argues further that because the principal
36510293216-0006. The latter used this card debtor, Danilo Alto, was not held liable, having
and initially paid his obligations to SDIC. On been dropped as a defendant, she could not
February 8, 1988, Danilo wrote SDIC a letter be said to have incurred liability as surety.
requesting it to upgrade his Regular (Local)
Diners Club Card to a Diamond (Edition) one. ISSUE: Whether petitioner is liable as surety
As a requirement of SDIC, Danilo secured from under the Diamond card revolves around the
Jeanette her approval. The latter obliged and effect of the upgrading by Danilo Alto of his
so on March 2, 1988, she signed a Note which card.
states:
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 78

HELD: There is no doubt that the upgrading It is likewise not disputed by the parties that
was a novation of the original agreement the credit limit granted to Celia Regala was
covering the first credit card issued to Danilo P2,000.00 per month and that Celia Regala
Alto, basically since it was committed with the succeeded in using the card beyond the
intent of canceling and replacing the said card. original period of its effectivity, October 29,
However, the novation did not serve to release 1979. We do not agree, however, that
petitioner from her surety obligations because Roberto Jr.'s liability should be limited to
in the Surety Undertaking she expressly that extent. Private respondent Roberto
waived discharge in case of change or Regala, Jr., as surety of his wife, expressly
novation in the agreement governing the use of bound himself up to the extent of the
the first credit card. debtor's (Celia's) indebtedness likewise
expressly waiving any "discharge in case of
The nature and extent of petitioner's any change or novation of the terms and
obligations are set out in clear and conditions in connection with the issuance
unmistakable terms in the Surety Undertaking. of the Pacificard credit card." Roberto, in
Thus: fact, made his commitment as a surety a
continuing one, binding upon himself until all
2. She declared that "any change or novation the liabilities of Celia Regala have been fully
in the Agreement or any extension of time paid. All these were clear under the
granted by SECURITY DINERS to pay such "Guarantor's Undertaking" Roberto signed,
obligation, charges, and fees, shall not release thus:
(her) from this Surety Undertaking";
"x x x Any changes of or novation in the
We cannot give any additional meaning to the terms and conditions in connection with
plain language of the subject undertaking. The the issuance or use of said Pacificard,
extent of a surety's liability is determined by the or any extension of time to pay such
language of the suretyship contract or bond obligations, charges or liabilities shall
itself. not in any manner release me/us from
the responsibility hereunder, it being
This case is no different from Pacific Banking understood that the undertaking is a
Corporation vs. IAC, supra, correctly applied continuing one and shall subsist and
by the Court of Appeals, which involved a bind me/us until all the liabilities of the
Guarantor's Undertaking (although thus said Celia Syjuco Regala have been
denominated, it was in substance a contract of fully satisfied or paid."
surety signed by the husband for the credit
card application of his wife. Like herein As a last-ditch measure, petitioner asseverates
petitioner, the husband also argued that his that, being merely a surety, a pronouncement
liability should be limited to the credit limit should first be made declaring the principal
allowed under his wife's card but the Court debtor liable before she herself can be
declared him liable to the full extent of his proceeded against. The argument, which is
wife's indebtedness. Thus: hinged upon the dropping of Danilo as
defendant in the complaint, is bereft of merit.
We need not look elsewhere to determine
the nature and extent of private respondent The Surety Undertaking expressly provides
Roberto Regala, Jr.'s undertaking. As a that petitioner's liability is solidary. A surety is
surety he bound himself jointly and severally considered in law as being the same party as
with the debtor Celia Regala "to pay the the debtor in relation to whatever is adjudged
Pacific Banking Corporation upon demand, touching the obligation of the latter, and their
any and all indebtedness, obligations, liabilities are interwoven as to be inseparable.
charges or liabilities due and incurred by Although the contract of a surety is in essence
said Celia Syjuco Regala with the use of secondary only to a valid principal obligation,
Pacificard or renewals thereof issued in his liability to the creditor is direct, primary and
(her) favor by Pacific Banking Corporation. x absolute; he becomes liable for the debt and
x x. duty of another although he possesses no
xxx xxx xxx direct or personal interest over the obligations
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 79

nor does he receive any benefit therefrom. (PN) for the amount of USD ~1.7Million (same
There being no question that Danilo Alto amount as above) and secured by a chattel
incurred debts of P166,408.31 in credit card mortgage over Gateway’s equipment for USD
advances, an obligation shared solidarily by 2 million.
petitioner, respondent was certainly within its
rights to proceed singly against petitioner, as Gateway initially made payments on its loan
surety and solidary debtor, without prejudice to obligations, but eventually defaulted. Upon
any action it may later file against Danilo Alto, Gateway’s request, Asianbank extended the
until the obligation is fully satisfied. This is so maturity dates of the loan several times. On
provided under Article 1216 of the Civil Code: July 15 and 30, 1999, Gateway issued two
checks as payment for its arrearages and
The creditor may proceed against any one interests for the periods June 30 and July 30,
of the solidary debtors or some or all of 1999; However, both checks were dishonored
them simultaneously. The demand made for insufficiency of funds. Asianbank’s
against one of them shall not be an obstacle demands for payment made upon Gateway
to those which may be subsequently and its sureties went unheeded such that as of
directed against the others, so long as the November 23, 1999, Gateway’s obligation to
debt has not been fully collected. Asianbank, inclusive of principal, interest, and
penalties, totaled USD ~2.2Million.
Petitioner is a graduate of business
administration, and possesses considerable Thus, Asianbank later filed with the RTC
work experience in several banks. She knew Makati a complaint for a sum of money against
the full import and consequence of the Surety Gateway, Geronimo, and Andrew.
Undertaking that she executed. She had the
option to withdraw her suretyship when Danilo RTC held Gateway, Geronimo and Andrew
upgraded his card to one that permitted jointly and severally liable to pay Asianbank.
unlimited purchases, but instead she approved Gateway, Geronimo and Andrew appealed to
the upgrading. While we commiserate in the the CA.
financial predicament she now faces, it is also
evident that the liability she incurred is only the During the appeal, Gateway filed a petition for
legitimate consequence of an undertaking that voluntary insolvency with the RTC Cavite in
she freely and intelligently obliged to. which Asianbank was listed as one of the
creditors.

GATEWAY ELECTRONICS CORPORATION CA affirmed the decision of the RTC Makati.

and GERONIMO B. DELOS REYES, JR., VS. Gateway, Geronimo and Andrew filed MR
ASIANBANK CORPORATION stating that RTC Cavite had issued an Order
(574 SCRA 698, G.R. No. 172041, December declaring Gateway insolvent.
18, 2008)
ISSUES:
FACTS: Petitioner Gateway Electronics 1. WON Geronimo is liable as surety to pay
Corporation (Gateway) is a domestic Asianbank – YES
corporation that used to be engaged in the 2. WON Geronimo should be liable to pay
semi-conductor business. During the period notwithstanding
material, petitioner Geronimo delos Reyes, Jr. the order of insolvency of the SEC – YES
was its president and one Andrew delos Reyes
its executive vice-president. In July 1996, HELD:
Geronimo and Andrew executed separate but 1. Gateway may be discharged from
almost identical deeds of suretyship for Liability but not Geronimo
Gateway in favor of respondent Asianbank Under this issue, SC discussed the effect of
Corporation (Asianbank). Asianbank later the issuance of an order declaring Gateway
extended to Gateway several export packing insolvent under the Insolvency Law. Here, SC
loans in the total aggregate amount of USD ~ ruled that in accordance with said law, the
1.7Million. This loan package was later issuance of the insolvency order had the effect
consolidated with a Dollar Promissory Note of automatically staying the civil action for a
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 80

sum of money filed by Asianbank against debt covered by the deed on suretyship,
Gateway. In net effect, the proceedings before subject to the rule prohibiting double
the CA, but only insofar as the claim against recovery from the same cause. This legal
Gateway was concerned, was, or ought to postulate becomes all the more logical in
have been, suspended after the date of the case of an insolvency situation where, as
order. But according to SC, Geronimo’s liability here, the insolvency court is bereft of
is a different story. Suretyship is covered by jurisdiction over the sureties of the
Article 2047 of the CC, which states: principal debtor.

By guaranty a person, called the guarantor, As Asianbank aptly points out, A SUIT
binds himself to the creditor to fulfill the AGAINST THE SURETY, INSOFAR AS THE
obligation of the principal debtor in case the SURETY’S SOLIDARY LIABILITY IS
latter should fail to do so. If a person binds CONCERNED, IS NOT AFFECTED BY AN
himself solidarily with the principal debtor, the INSOLVENCY PROCEEDING INSTITUTED
provisions of Section 4, Chapter 3, Title I of BY OR AGAINST THE PRINCIPAL DEBTOR.
this Book shall be observed. In such case the
contract is called a suretyship. The same principle holds true with respect to
xxx the surety of a corporation in distress which is
A creditor’s right to proceed against the surety subject of a rehabilitation proceeding before
exists independently of his right to proceed the Securities and Exchange Commission
against the principal. Under Article 1216 of the (SEC). A surety of the distressed corporation
CC, the creditor may proceed against any can be sued separately to enforce his liability
one of the solidary debtors or some or all of as such, notwithstanding an SEC order
them simultaneously. declaring the former under a state of
suspension of payment.
The rule, therefore, is that if the obligation is
joint and several, the creditor has the right to 2. Geronimo’s Argument: As things stand, his
proceed even against the surety alone. Since, liability, as compared to that of Gateway, is
generally, it is not necessary for the creditor to contextually more onerous and burdensome,
proceed against a principal in order to hold the precluded as he is from seeking recourse
surety liable, where, by the terms of the against the insolvent corporation. From this
contract, the obligation of the surety is the premise, Geronimo claims that since
same as that of the principal, then soon as Gateway cannot, owing to the order of
the principal is in default, the surety is insolvency, be made to pay its obligation,
likewise in default, and may be sued he, too, being just a surety, cannot also be
immediately and before any proceedings are made to pay, obviously having in mind Art.
had against the principal. Perforce, x x x a 2054 of the CC, as follows:
surety is primarily liable, and with the rule
that his proper remedy is to pay the debt A guarantor may bind himself for less, but not
and pursue the principal for for more than the principal debtor, both as
reimbursement, the surety cannot at law, regards the amount and the onerous nature of
unless permitted by statute and in the absence the conditions. Should he have bound himself
of any agreement limiting the application of the for more, his obligations shall be reduced to
security, require the creditor or obligee, the limits of that of the debtor.
before proceeding against the surety, to
resort to and exhaust his remedies against SC’s Ruling:
the principal, particularly where both principal Provision does not free surety from liability.
and surety are equally bound. Liability may be less, but not free.

Clearly, Asianbank’s right to collect payment Art. 2054 pronounces the rule that the
for the full amount from Geronimo, as surety, obligation of a guarantor may be less, but
exists independently of its right against cannot be more than the obligation of the
Gateway as principal debtor; it could thus principal debtor. The rule, however, cannot
proceed against one of them or file separate possibly be stretched to mean that a
actions against them to recover the principal guarantor or surety is freed from liability as
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 81

such guarantor or surety in the event the On 26 November 1981, four (4) days prior to
principal debtor becomes insolvent or is the expiration of the period of effectivity of the
unable to pay the obligation. This P8M-Credit Loan Facility, SIMC made a first
interpretation would defeat the very drawdown from its credit line with SBTC in the
essence of a suretyship contract which, by amount of P6,100,000.00 To cover said
definition, refers to an agreement whereunder drawdown, SIMC duly executed promissory
one person, the surety, engages to be note. Sometime in 1985, Cuenca resigned as
answerable for the debt, default, or miscarriage President and Chairman of the Board of
of another known as the principal. Geronimo’s Directors of defendant-appellant Sta. Ines.
position that a surety cannot be made to pay Subsequently, the shareholdings of Cuenca in
when the principal is unable to pay is clearly Sta. Ines were sold at a public auction.
erroneous and must be rejected.
Subsequently, appellant SIMC repeatedly
* When a creditor goes after a debtor and its availed of its credit line and obtained six (6)
surety, and then the debtor is subsequently other loans from SBTC in the aggregate
declared insolvent by the court/SEC, such amount P6,369,019.50 which were covered by
declaration of insolvency neither invalidates promissory notes. SIMC, however,
the suretyship nor does it mean that the surety encountered difficulty in making the
is no longer liable to pay for the amount owed amortization payments on its loans and
by the debtor to the creditor. requested SBTC for a complete restructuring
of its indebtedness. SBTC accommodated
SIMC’s request and signified its approval in a
SECURITY BANK AND TRUST COMPANY, letter dated 18 February 1988 wherein SBTC
Inc. vs. RODOLFO M. CUENCA, and defendant appellant Sta. Ines, without
(341 SCRA 781, G.R. No. 138544, October 3, notice to or the prior consent of Cuenca,
2000) agreed to restructure the past due obligations
of Sta. Ines. Security Bank agreed to extend to
FACTS: Sta. Ines Melale (‘Sta. Ines’) is a Sta. Ines loans amounting to 8.8M and 3.4M. It
corporation engaged in logging operations. It should be pointed out that in restructuring Sta.
was a holder of a Timber License Agreement Ines’ obligations to Security Bank, Promissory
issued by DENR. November 10, 1980, Security Note in the amount P6,100,000.00, which was
Bank and Trust Co. granted Sta. Ines Melale the only loan incurred prior to the expiration of
Corporation [SIMC] a credit line in the amount the P8M-Credit Loan Facility on 30 November
of P8,000,000.00 to assist the latter in meeting 1981 and the only one covered by the
the additional capitalization requirements of its Indemnity Agreement dated 19 December
logging operations. 1980. Pursuant to the agreement to restructure
its past due obligations to Security Bank, Sta.
The Credit Approval Memorandum expressly Ines thus executed the 2 more promissory
stated that the P8M Credit Loan Facility shall notes (total: 12.2M), both dated 09 March 1988
be effective until 30 November 1981. To in favor of Security Bank.
secure the payment of the amounts drawn by
SIMC from the above-mentioned credit line, To formalize their agreement to restructure the
SIMC executed a Chattel Mortgage over some loan obligations of Sta. Ines, Security Bank
of its machinery and equipment in favor of and Sta. Ines executed a Loan Agreement
SBTC. As additional security for the payment dated 31 October 1989 the purpose of which is
of the loan, Rodolfo M. Cuenca executed an “The First Loan shall be applied to liquidate the
Indemnity Agreement dated 17 December principal portion of the Borrower’s present total
1980 in favor of SBTC whereby he solidarily outstanding indebtedness to the Lender (the
bound himself with SIMC stating by virtue of ‘indebtedness’) while the Second Loan shall be
aforesaid credit accommodation(s) including applied to liquidate the past due interest and
the substitutions, renewals, extensions, penalty portion of the Indebtedness.” SIMC
increases, amendments, conversions and defaulted in the payment of its restructured
revivals of the aforesaid credit loan obligations to SBTC despite demands
accommodation(s). made upon appellant SIMC and CUENCA.
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 82

Appellants individually and collectively refused

to pay the SBTC. Thus, SBTC filed a complaint It is emphasized that an essential alteration in
for collection of sum of money on 14 June the terms of the Loan Agreement without the
1993, resulting after trial on the merits in a consent of the surety extinguishes the latter’s
decision by the court a quo, x x x from which obligation. As the Court held in National Bank
Cuenca appealed. v. Veraguth, “[i]t is fundamental in the law of
suretyship that any agreement between the
The CA ruled that the 1989 Loan Agreement creditor and the principal debtor which
had novated the 1980 credit accommodation essentially varies the terms of the principal
earlier granted by the bank to Sta. Ines. It contract, without the consent of the surety, will
noted that the 1989 Loan Agreement had been release the surety from liability.”
executed without notice to, much less consent
from, Cuenca who at the time was no longer a While respondent held himself liable for the
stockholder of the corporation. It further held credit accommodation or any modification
that the restructuring of Sta. Ines’ obligation thereof, such clause should be understood in
under the 1989 Loan Agreement was the context of the P8 million limit and the
tantamount to a grant of an extension of time November 30, 1981 term. It did not give the
to the debtor without the consent of the surety. bank or Sta. Ines any license to modify the
Under Article 2079 of the Civil Code, such nature and scope of the original credit
extension extinguished the surety. accommodation, without informing or
getting the consent of respondent who was
ISSUE: WON the liability of Mr. Cuenca was solidarily liable.
extinguished by the extension granted to the
debtor. Taking the bank’s submission to the extreme,
respondent (or his successors) would be liable
HELD: YES. for loans even amounting to, say, P100 billion
obtained 100 years after the expiration of the
RELEASE WITHOUT CONSENT OF credit accommodation, on the ground that he
GUARANTOR consented to all alterations and extensions
The 1989 Loan Agreement expressly thereof. Indeed, it has been held that a
stipulated that its purpose was to “liquidate,” contract of surety “cannot extend to more than
not to renew or extend, the outstanding what is stipulated. It is strictly construed
indebtedness. Moreover, respondent did not against the creditor, every doubt being
sign or consent to the 1989 Loan resolved against enlarging the liability of the
Agreement, which had allegedly extended the surety.” In the absence of an unequivocal
original P8 million credit facility. Hence, his provision that respondent waived his right to be
obligation as a surety should be deemed notified of or to give consent to any alteration
extinguished, pursuant to Article 2079 of the of the credit accommodation, we cannot
Civil Code, which specifically states that “[a]n sustain petitioner’s view that there was such a
extension granted to the debtor by the creditor waiver.
without the consent of the guarantor
extinguishes the guaranty. x x x.” In an earlier It should also be observed that the Credit
case, the Court explained the rationale of this Approval Memorandum clearly shows that the
provision in this wise: “The theory behind bank did not have absolute authority to
Article 2079 is that an extension of time given unilaterally change the terms of the loan
to the principal debtor by the creditor without accommodation. Indeed, it may do so only
the surety’s consent would deprive the surety upon notice to the borrower.
of his right to pay the creditor and to be
immediately subrogated to the creditor’s The present controversy must be distinguished
remedies against the principal debtor upon the from Philamgen v. Mutuc, in which the Court
maturity date. The surety is said to be entitled sustained a stipulation whereby the surety
to protect himself against the contingency of consented to be bound not only for the
the principal debtor or the indemnitors specified period, “but to any extension
becoming insolvent during the extended thereafter made, an extension x x x that could
period.” be had without his having to be notified.”
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 83

may benefit third persons who did not give

In that case, the surety agreement contained their consent.”
this unequivocal stipulation: “It is hereby further
agreed that in case of any extension of CONTINUING SURETY
renewal of the bond, we equally bind ourselves In the present case, the Indemnity Agreement
to the Company under the same terms and was subject to the two limitations of the credit
conditions as herein provided without the accommodation: (1) that the obligation should
necessity of executing another indemnity not exceed P8 million, and (2) that the
agreement for the purpose and that we hereby accommodation should expire not later than
equally waive our right to be notified of any November 30, 1981. Hence, it was a
renewal or extension of the bond which may be continuing surety only in regard to loans
granted under this indemnity agreement.” obtained on or before the aforementioned
expiry date and not exceeding the total of P8
In the present case, there is no such express million. Accordingly, the surety of Cuenca
stipulation. At most, the alleged basis of secured only the first loan of P6.1 million
respondent’s waiver is vague and uncertain. It obtained on November 26, 1991. It did not
confers no clear authorization on the bank or secure the subsequent loans, purportedly
Sta. Ines to modify or extend the original under the 1980 credit accommodation, that
obligation without the consent of the surety or were obtained in 1986. Certainly, he could not
notice thereto. have guaranteed the 1989 Loan Agreement,
which was executed after November 30, 1981
NOVATION and which exceeded the stipulated P8 million
Clearly, the requisites of novation are present ceiling.
in this case. The 1989 Loan Agreement
extinguished the obligation obtained under the Petitioner, however, cites the Dino ruling in
1980 credit accomodation. This is evident from which the Court found the surety liable for the
its explicit provision to “liquidate” the principal loan obtained after the payment of the original
and the interest of the earlier indebtedness, as one, which was covered by a continuing surety
the following shows: agreement. At the risk of being repetitious, we
hold that in Dino, the surety Agreement
“1.02. Purpose. The First Loan shall be applied specifically provided that “each suretyship is a
to liquidate the principal portion of the continuing one which shall remain in full force
Borrower’s present total outstanding and effect until this bank is notified of its
Indebtedness to the Lender (the revocation.” Since the bank had not been
“Indebtedness”) while the Second Loan shall notified of such revocation, the surety was held
be applied to liquidate the past due interest liable even for the subsequent obligations of
and penalty portion of the Indebtedness. the principal borrower. No similar provision is
Furthermore, several incompatibilities between found in the present case. On the contrary,
the 1989 Agreement and the 1980 original respondent’s liability was confined to the 1980
obligation demonstrate that the two cannot credit accommodation, the amount and the
coexist. While the 1980 credit accommodation expiry date of which were set down in the
had stipulated that the amount of loan was not Credit Approval Memorandum.
to exceed P8 million, the 1989 Agreement
provided that the loan was P12.2 million. The
periods for payment were also different. CONSUELO P. PICZON, RUBEN O. PICZON
and AIDA P. ALCANTARA, , vs. ESTEBAN
Since the 1989 Loan Agreement had PICZON and SOSING-LOBOS & CO., INC.,
extinguished the original credit (G.R. No. L-29139, November 15, 1974)
accommodation, the Indemnity Agreement, an
accessory obligation, was necessarily FACTS: This an appeal from the decision of
extinguished also, pursuant to Article 1296 of the Court of First Instance of Samar in its Civil
the Civil Code, which provides that when the Case No. 5156, entitled Consuelo P. Piczon, et
principal obligation is extinguished in al. vs. Esteban Piczon, et al., sentencing
consequence of a novation, accessory defendants-appellees, Sosing Lobos and Co.,
obligations may subsist only insofar as they Inc., as principal, and Esteban Piczon, as
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 84

guarantor, to pay CONSUELO P. PICZON, trial court should have adhered to the terms of
RUBEN O. PICZON and AIDA P. the agreement which plainly provides that
ALCANTARA "the sum of P12,500.00 with Esteban Piczon had obligated Sosing-Lobos
12% interest from August 6, 1964 until said and Co., Inc. and himself to "return or pay (to
principal amount of P12,500.00 shall have Piczon and Co., Inc.) the same amount
been duly paid, and the costs." Annex "A", the (P12,500.00) with Twelve Per Cent (12%)
actionable document of appellants reads thus: interest per annum commencing from the date
of the execution hereof", Annex A, which was
AGREEMENT OF LOAN KNOW YE ALL MEN on September 28, 1956. Under Article 2209 of
BY THESE PRESENTS: That I, ESTEBAN the Civil Code
PICZON, of legal age, married, Filipino, and
resident of and with postal address in the "(i)f the obligation consists in the payment of a
municipality of Catbalogan, Province of Samar, sum of money, and the debtor incurs in delay,
Philippines, in my capacity as the President of the indemnity for damages, there being no
the corporation known as the "SOSINGLOBOS stipulation to the contrary, shall be the
and CO., INC.," as controlling stockholder, and payment of the interest agreed upon, and in
at the same time as guarantor for the same, do the absence of stipulation, the legal interest,
by these presents contract a loan of Twelve which is six per cent per annum."
Thousand Five Hundred Pesos (P12,500.00),
Philippine Currency, the receipt of which is In the case at bar, the "interest agreed upon"
hereby acknowledged, from the "Piczon and by the parties in Annex A was to commence
Co., Inc." another corporation, the main offices from the execution of said document.
of the two corporations being in Catbalogan,
Samar, for which I undertake, bind and agree b. Under the terms of the contract, Annex A,
to use the loan as surety cash deposit for Esteban Piczon expressly bound himself only
registration with the Securities and Exchange as guarantor, and there are no circumstances
Commission of the incorporation papers in the record from which it can be deduced that
relative to the "Sosing-Lobos and Co., Inc.," his liability could be that of a surety. A guaranty
and to return or pay the same amount with must be express, (Article 2055, Civil Code) and
Twelve Per Cent (12%) interest per annum, it would be violative of the law to consider a
commencing from the date of execution hereof, party to be bound as a surety when the very
to the "Piczon and Co., Inc., as soon as the word used in the agreement is "guarantor."
said incorporation papers are duly registered
and the Certificate of Incorporation issued by Moreover, as well pointed out in appellees'
the aforesaid Commission. brief, under the terms of the pre-trial order,
appellants accepted the express assumption of
IN WITNESS WHEREOF, I hereunto signed liability by Sosing-Lobos & Co., Inc. for the
my name in Catbalogan, Samar, Philippines, payment of the obligation in question, thereby
this 28th day of September, 1956. modifying their original posture that inasmuch
(signed)Esteban Piczon. as that corporation did not exist yet at the time
of the agreement, Piczon necessarily must
ISSUES: have bound himself as insurer.
(a) SHOULD THE PAYMENT OF 12%
INTEREST ON THE PRINCIPAL OF As already explained earlier, appellants' prayer
P12,500.00 FROM AUGUST 6, 1964, ONLY, for payment of legal interest upon interest due
OR FROM SEPTEMBER 28, 1956, WHEN from the filing of the complaint can no longer
ANNEX "A" WAS DULY EXECUTED? be entertained, the same not having been
SEPTEMBER 28, 1956 made an issue in the pleadings in the court
below. We do not believe that such a
(b) Is Esteban Piczon liable a guarantor or a substantial matter can be deemed included in
surety? a general prayer for "any other relief just and
GUARANTOR equitable in the premises", especially when, as
in this case, the pre-trial order does not
HELD: a. Instead of requiring appellees to pay mention it in the enumeration of the issues to
interest at 12% only from August 6, 1964, the be resolved by the court.
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 85

Hence, the burden is on Traders Royal Bank to

BA FINANCE vs. CA satisfactorily prove that the credit administrator
with whom they transacted acted within the
FACTS: Renato Gaytano, doing business authority given to him by his principal, BA
under the name Gebbs International, applied Finance Corporation.
for and was granted a loan with respondent
Traders Royal Bank in the amount of The only evidence presented by Traders Royal
P60,000.00. As security for the payment of Bank was the testimony of Philip Wong, credit
said loan, the Gaytano spouses executed a administrator, w ho testifiedthat he had
deed of suretyship whereby they agreed to pay authority to issue guarantees as can be
jointly and severally to Traders Royal Bank deducedfrom the wording of the memorandum
bank the amount of the loan including given to him by BA Finance Corporation on his
interests, penalty and other bank charges. lending authority. The said memorandum
allegedly authorized Wong not only to approve
In a letter addressed toTraders Royal Bank, and grant loans but also to enter into contracts
Philip Wong as credit administrator of BA of guaranty in behalf of the corporation.
Finance Corporation for and in behalf of the
latter, undertook to guarantee the loan of the Although Wong was clearly authorized to
Gaytano spouses. Partial payments were approve loans even up to P350,000.00 without
made on the loan leaving an unpaid balance in any security requirement, which is far above
the amount of P85,807.25. Since the Gaytano the amount subject of the guaranty in the
spouses refused to pay their obligation, amount of P60,000.00, nothing in the said
Traders Royal Bank filed with the trial court memorandum expressly vests on the credit
complaint for sum of money against the administrator power to issue guarantees. We
Gaytano spouses and petitioner BA Finance cannot agree with respondent's contention that
Corporation as alternative defendant. The the phrase "contingent commitment" set forth
Gaytano spouses did not present evidence for in the memorandum means guarantees.
their defense. BA Finance Corporation
corporation, on the other hand, raised the It has been held that a power of attorney or
defense of lack of authority of its credit authority of an agent should not be inferred
administrator to bind the corporation. from the use of vague or general words.
Guaranty is not presumed, it must be
The trial court rendered a decision in favor of expressed and cannot be extended beyond its
plaintiff and against defendants Gaytano specified limits (Director v. Sing Juco, 53 Phil.
spouses, ordering the latter to jointly and 205). In one case, where it appears that a wife
severally pay the plaintiff. Not satisfied with the gave her husband power of attorney to loan
decision, Traders Royal Bank appealed with money, this Court ruled that such fact did not
the Court of Appeals. Respondent appellate authorize him to make her liable as a surety for
court rendered judgment modifying the the payment of the debt of a third person (Bank
decision of the trial court. Hence, this petition. of Philippine Islands v. Coster, 47Phil. 594).

ISSUE: WON the letter of guaranty is ultra The sole allegation of the credit
vires and thus invalid and/or unenforceable. administrator in the absence of any other
YES proof that he is authorized to bind BA
Finance Corporation in a contract of
HELD: It is a settled rule that persons dealing guaranty with third persons should not be
with an assumed agent, whether the assumed given weight. The representation of one who
agency be a general or special one are bound acts as agent cannot by itself serve as proof of
at their peril, if they would hold the principal his authority to act as agent or of the extent of
liable, to ascertain not only the fact of agency his authority as agent (Velasco v. La Urbana,
but also the nature and extent of authority, and 58Phil. 681). Wong's testimony that he had
in case either is controverted, the burden of entered into similar transactions of guaranty in
proof is upon them to establish it (Harry Keeler the past for and in behalf of the BA Finance
v. Rodriguez, 4 Phil. 19). Corporation, lacks credence due to his failure
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 86

to show documents or records of the alleged 12th day of August, 1929.

past transactions.
The actuation of Wong in claiming and Leonor S. Bantug was declared in default as a
testifying that he has the authority is result of her failure to appear or answer, but
understandable. He would naturally take steps Tomas Alonso filed an answer setting up a
to save himself from personal liability for general denial and the special defenses that
damages to respondent bank considering that Leonor S. Bantug made him believe that he
he had exceeded his authority. The rule is clear was merely a co-security of one Vicente
that an agent who exceeds his authority is Palanca and he was never notified of the
personally liable for damages. acceptance of his bond by the Texas
Company.
Anent the conclusion of respondent appellate
court that BA Finance Corporation is estopped The CFI of Cebu sentenced Leonor S. Bantug
from alleging lack of authority due to its failure and Tomas Alonso to pay jointly and severally
to cancel or disallow the guaranty, the Court to the Texas Company the sum of P629, with
rules that said conclusion has no basis in fact. interest at the rate of six per cent (6%) from the
Respondent bank had not shown any evidence date of filing of the complaint, and with
aside from the testimony of the credit proportional costs. The CA modified the
administrator that the disputed transaction of judgment; Leonor S. Bantug was held solely
guaranty was in fact entered into the official liable for the payment of the aforesaid sum of
records or files of petitioner corporation, which P629 to the Texas Company, with the
will show notice or knowledge on the latter's consequent absolution of Tomas Alonso.
part and its consequent ratification of the said
transaction. In the absence of clear proof, it According to the petitioner, the CA erred in
would be unfair to hold BA Finance holding that there was merely an offer of
Corporation guilty of estoppel in allowing its guaranty on the part of the respondent, Tomas
credit administrator to act as though the latter Alonso, and that the latter cannot be held liable
had power to guarantee. thereunder because he was never notified by
the Texas Company of its acceptance.

TEXAS COMPANY vs ALONZO ISSUE: WON there was merely an offer

of guaranty on the part of Alonso? YES
FACTS: On November 5, 1935 Leonor S.
Bantug and Tomas Alonso were sued by the HELD: The CA has placed reliance upon our
Texas Company (P.I.), Inc. for the recovery of decision in National Bank vs. Garcia (47 Phil.,
the sum of P629, unpaid balance of the 662), while the petitioner invokes the case of
account of Leonora S. Bantug in connection National Bank vs. Escueta, (50 Phil., 991). In
with the agency contract with the Texas the first case, it was held that there was merely
Company for the faithful performance of which an offer to give bond and, as there was no
Tomas Alonso signed the following: acceptance of the offer, this court refused to
give effect to the bond. In the second case, the
For value received, we jointly and severally do sureties were held liable under their surety
hereby bind ourselves and each of us, in agreement which was found to have been
solidum, with Leonor S. Bantug the agent accepted by the creditor, and it was therein
named in the within and foregoing agreement, ruled that an acceptance need not always be
for full and complete performance of same express or in writing.
hereby waiving notice of non-performance by
or demand upon said agent, and the consent The Court of Appeals found as a fact, and that
to any and all extensions of time for the bond in question was executed at the
performance. Liability under this undertaking, request of the petitioner by virtue of the
however, shall not exceed the sum of P2,000, following clause of the agency contract:
Philippine currency.
Additional Security. — The Agent shall
Witness the hand and seal of the undersigned whenever requested by the Company in
affixed in the presence of two witness, this addition to the guaranty herewith provided,
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 87

furnish further guaranty or bond, conditioned FACTS: On February 1993, the spouses
upon the Agent's faithful performance of this Danilo Ibajan and Mila Ambe Ibajan (plantiffs)
contract, in such individuals of firms as joint filed with the RTC a complaint against spouses
and several sureties as shall be satisfactory Jun and Susan Bartolome (defendants), for
to the Company. replevin to recover from them the possession
of an Isuzu jeepney, with damages. Spouses
In view of the foregoing clause which should Ibajan alleged that they were the owners of an
be the law between the parties, it is obvious Isuzu jeepney which was forcibly and
that, before a bond is accepted by the unlawfully taken by Spouses Bartolome on
petitioner, it has to be in such form and amount December 1992, while parked at their
and with such sureties as shall be satisfactory residence.
hereto; in other words, the bond is subject to
petitioner's approval. The logical implication Spouses Ibajan filed a replevin bond through
arising from this requirement is that, if the petitioner Visayan Surety & Insurance
petitioner is satisfied with any such bond, Corporation. The contract of surety provided
notice of its acceptance or approval should thus: "WHEREFORE, we, sps. Danilo Ibajan
necessarily be given to the proper party in and Mila Ibajan and the VISAYAN SURETY &
interest, namely, the surety or guarantor. There INSURANCE CORP., jointly and severally bind
is no evidence in this case tending to show that ourselves in the sum of P300,000 for the return
the respondent, Tomas Alonso, ever had of the property to the defendant, if the return
knowledge of any act on the part of petitioner thereof be adjudged, and for the payment to
amounting to an implied acceptance, so as to the defendant of such sum as he/she may
justify the application of our decision in recover from the plaintiff in the action."
National Bank vs. Escueta.
RTC granted issuance of a writ of replevin and
The decision appealed of CA is affirmed. as such, the sheriff seized the subject vehicle
and turned over the same to spouses Ibajan.
POLICY: Where there is merely an offer of, or However on May 1993, Dominador Ibajan,
proposition for, a guaranty, or merely a father of Danilo Ibajan, filed a motion for leave
conditional guaranty in the sense that it of court to intervene, stating that he has a
requires action by the creditor before the right superior to the spouses Ibajan over the
obligation becomes fixed, it does not become a ownership and possession of the subject
binding obligation until it is accepted and, vehicle.
unless there is a waiver of notice of such
acceptance is given to, or acquired by, the RTC granted the motion to intervene. Then
guarantor, or until he has notice or knowledge later, RTC issued an order granting the motion
that the creditor has performed the conditions to quash the writ of replevin and ordered Mila
and intends to act upon the guaranty. The Ibajan to return the subject jeepney to the
acceptance need not necessarily be express or intervenor Dominador Ibajan.
in writing, but may be indicated by acts
amounting to acceptance. RTC thereafter ordered the issuance of a writ
of replevin in favor of the intervenor Dominador
Where, upon the other hand, the transaction is who was the registered owner. This writ of
not merely an offer of guaranty but amounts to replevin in favor of intervenor Dominador was
direct or unconditional promise of guaranty, however returned unsatisfied. Thus, in March
unless notice of acceptance is made a 1994, intervenor Dominador filed with RTC a
condition of the guaranty, all that is necessary motion/application for judgment against
to make the promise binding is that the spouses Ibajan’s bond.
promise should act upon it, and notice of
acceptance is not necessary, the reason being RTC ruled in favor of Dominador and ordered
that the contract of guaranty is unilateral. spouses Ibajan and Visayan Surety and
Insurance Corporation to pay the former jointly
and severally the value of the jeepney in the
VISAYAN SURETY vs CA amount of P150,000 and other damages. CA
affirmed RTC decision.
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 88

RELATIONSHIP AND OBLIGATION OF THE

ISSUE: WON the surety is liable to an SURETY IS LIMITED TO THE DEFENDANTS
intervenor on a replevin bond posted by SPECIFIED IN THE CONTRACT OF
Visayan Surety in favor of defendants. NO SURETY. Here, the defendants are the
spouses Bartolome.
HELD: Who is an intervenor?
SC ruled that Visayan Surety is not liable
An intervenor is a person, not originally under the replevin bond to the intervenor
impleaded in a proceeding, who has legal Dominador.
interest in the matter in litigation, or in the
success of either of the parties, or an interest POLICY: Recall in your OBLICON: Stipulations
against both, or is so situated as to be in the contract govern. Thus, you cannot
adversely affected by a distribution or other extend the obligations of a party beyond what
disposition of property in the custody of the is stipulated in the contract.
court or of an officer thereof.

An intervenor is not a party to a contract of ESTATE OF HEMADY VS. LUZON SURETY

surety which he did not sign and which was
executed by plaintiffs and defendants. It is a FACTS: The Luzon Surety Co. had filed a
basic principle in law that contracts can bind claim against the Estate based on twenty
only the parties who had entered into it; it different indemnity agreements, or counter
cannot favor or prejudice a third bonds, each subscribed by a distinct principal
person. Contracts take effect between the and by the deceased K. H. Hemady, a surety
parties, their assigns, and heirs, except in solidary guarantor) in all of them, in
cases where the rights and obligations arising consideration of the Luzon Surety Co.’s of
from the contract are not transmissible by their having guaranteed, the various principals in
nature, or by stipulation or by provision of law. favor of different creditors.

A contract of surety is an agreement where a The Luzon Surety Co., prayed for allowance,
party called the surety guarantees the as a contingent claim, of the value of the
performance by another party called the twenty bonds it had executed in consideration
principal or obligor of an obligation or of the counterbonds, and further asked for
undertaking in favor of a third person called the judgment for the unpaid premiums and
obligee. Specifically, suretyship is a contractual documentary stamps affixed to the bonds, with
relation resulting from an agreement whereby 12 per cent interest thereon.
one person, the surety, engages to be
answerable for the debt, default or miscarriage Before answer was filed, and upon motion of
of another, known as the principal. the administratrix of Hemady’s estate, the
lower court, by order of September 23, 1953,
The obligation of a surety cannot be extended dismissed the claims of Luzon Surety Co., on
by implication beyond its specified limits. two grounds: (1) that the premiums due and
"When a surety executes a bond, it does not cost of documentary stamps were not
guarantee that the plaintiff’s cause of action is contemplated under the indemnity agreements
meritorious, and that it will be responsible for to be a part of the undertaking of the guarantor
all the costs that may be adjudicated against (Hemady), since they were not liabilities
its principal in case the action fails. The extent incurred after the execution of the
of a surety’s liability is determined only by the counterbonds; and (2) that “whatever losses
clause of the contract of suretyship." A contract may occur after Hemady’s death, are not
of surety is not presumed; it cannot extend to chargeable to his estate, because upon his
more than what is stipulated. death he ceased to be guarantor.”

Since the obligation of the surety cannot be Lower Court’s ruling: The administratrix further
extended by implication, IT FOLLOWS THAT contends that upon the death of Hemady, his
THE SURETY CANNOT BE HELD LIABLE TO liability as a guarantor terminated, and
THE INTERVENOR WHEN THE therefore, in the absence of a showing that a
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 89

loss or damage was suffered, the claim cannot quoted. (See Art. 774 and 776)
be considered contingent. This Court believes
that there is merit in this contention and finds In Mojica vs. Fernandez, 9 Phil. 403, this
support in Article 2046 of the new Civil Code. It Supreme Court ruled: “Under the Civil Code
should be noted that a new requirement has the heirs, by virtue of the rights of succession
been added for a person to qualify as a are subrogated to all the rights and obligations
guarantor, that is: integrity. As correctly pointed of the deceased (Article 661) and cannot be
out by the Administratrix, integrity is something regarded as third parties with respect to a
purely personal and is not transmissible. Upon contract to which the deceased was a party,
the death of Hemady, his integrity was not touching the estate of the deceased (Barrios
transmitted to his estate or successors. vs. Dolor, 2 Phil. 44).
Whatever loss therefore, may occur after
Hemady’s death, are not chargeable to his The binding effect of contracts upon the heirs
estate because upon his death he ceased to of the deceased party is not altered by the
be a guarantor. Another clear and strong provision in our Rules of Court that money
indication that the surety company has debts of a deceased must be liquidated and
exclusively relied on the personality, character, paid from his estate before the residue is
honesty and integrity of the now deceased K. distributed among said heirs (Rule 89). The
H. Hemady, was the fact that in the printed reason is that whatever payment is thus made
form of the indemnity agreement there is a from the estate is ultimately a payment by the
paragraph entitled ‘Security by way of first heirs and distributees, since the amount of the
mortgage, which was expressly waived and paid claim in fact diminishes or reduces the
renounced by the security company. The shares that the heirs would have been entitled
security company has not demanded from K. to receive.
H. Hemady to comply with this requirement of
giving security by way of first mortgage. In the Under our law, therefore, the general rule is
supporting papers of the claim presented by that a party’s contractual rights and obligations
Luzon Surety Company, no real property was are transmissible to the successors. The rule is
mentioned in the list of properties mortgaged a consequence of the progressive
which appears at the back of the indemnity “depersonalization” of patrimonial rights and
agreement.” duties that, as observed by Victorio Polacco,
has characterized the history of these
ISSUE: WON the liability of Hemady as institutions.
guarantor terminated upon his death. NO
Of the three exceptions fixed by Article 1311,
HELD: We find this reasoning untenable. the nature of the obligation of the surety or
Under the present Civil Code (Article 1311), as guarantor does not warrant the conclusion that
well as under the Civil Code of 1889 (Article his peculiar individual qualities are
1257), the rule is that — contemplated as a principal inducement for the
“Contracts take effect only as between the contract. What did the creditor Luzon Surety
parties, their assigns and heirs, except in the Co. expect of K. H. Hemady when it accepted
case where the rights and obligations arising the latter as surety in the counterbonds?
from the contract are not transmissible by their Nothing but the reimbursement of the moneys
nature, or by stipulation or by provision of law.” that the Luzon Surety Co. might have to
disburse on account of the obligations of the
While in our successional system the principal debtors. This reimbursement is a
responsibility of the heirs for the debts of their payment of a sum of money, resulting from an
decedent cannot exceed the value of the obligation to give; and to the Luzon Surety
inheritance they receive from him, the principle Co., it was indifferent that the reimbursement
remains intact that these heirs succeed not should be made by Hemady himself or by
only to the rights of the deceased but also to someone else in his behalf, so long as the
his obligations. Articles 774 and 776 of the money was paid to it.
New Civil Code (and Articles 659 and 661 of
the preceding one) expressly so provide, The second exception of Article 1311, p. 1, is
thereby confirming Article 1311 already intransmissibility by stipulation of the parties.
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 90

Being exceptional and contrary to the general

rule, this intransmissibility should not be easily The foregoing concept is confirmed by the next
implied, but must be expressly established, or Article 2057, that runs as follows: “ART. 2057.
at the very least, clearly inferable from the — If the guarantor should be convicted in first
provisions of the contract itself, and the text of instance of a crime involving dishonesty or
the agreements sued upon nowhere indicate should become insolvent, the creditor may
that they are nontransferable. demand another who has all the qualifications
required in the preceding article. The case is
Because under the law (Article 1311), a person excepted where the creditor has required and
who enters into a contract is deemed to have stipulated that a specified person should be
contracted for himself and his heirs and guarantor.” From this article it should be
assigns, it is unnecessary for him to expressly immediately apparent that the supervening
stipulate to that effect; hence, his failure to do dishonesty of the guarantor (that is to say, the
so is no sign that he intended his bargain to disappearance of his integrity after he has
terminate upon his death. become bound) does not terminate the
contract but merely entitles the creditor to
Similarly, that the Luzon Surety Co., did not demand a replacement of the guarantor. But
require bondsman Hemady to execute a the step remains optional in the creditor: it is
mortgage indicates nothing more than the his right, not his duty; he may waive it if he
company’s faith and confidence in the financial chooses, and hold the guarantor to his bargain.
stability of the surety, but not that his obligation Hence Article 2057 of the present Civil Code is
was strictly personal. incompatible with the trial court’s stand that the
requirement of integrity in the guarantor or
The third exception to the transmissibility of surety makes the latter’s undertaking strictly
obligations under Article 1311 exists when they personal, so linked to his individuality that the
are “not transmissible by operation of law”. The guaranty automatically terminates upon his
provision makes reference to those cases death.
where the law expresses that the rights or
obligations are extinguished by death, as is the The contracts of suretyship entered into by K.
case in legal support (Article 300), parental H. Hemady in favor of Luzon Surety Co. not
authority (Article 327), usufruct (Article 603), being rendered intransmissible due to the
contracts for a piece of work (Article 1726), nature of the undertaking, nor by the
partnership (Article 1830 and agency (Article stipulations of the contracts themselves, nor by
1919). By contract, the articles of the Civil provision of law, his eventual liability
Code that regulate guaranty or suretyship thereunder necessarily passed upon his death
(Articles 2047 to 2084) contain no provision to his heirs. The contracts, therefore, give rise
that the guaranty is extinguished upon the to contingent claims provable against his
death of the guarantor or the surety. The lower estate under section 5, Rule 87.
court sought to infer such a limitation from Art.
2056, to the effect that “one who is obliged to “The most common example of the contigent
furnish a guarantor must present a person who claim is that which arises when a person is
possesses integrity, capacity to bind himself, bound as surety or guarantor for a principal
and sufficient property to answer for the who is insolvent or dead. Under the ordinary
obligation which he guarantees”. It will be contract of suretyship the surety has no claim
noted, however, that the law requires these whatever against his principal until he himself
qualities to be present only at the time of the pays something by way of satisfaction upon
perfection of the contract of guaranty. It is self- the obligation which is secured. When he does
evident that once the contract has become this, there instantly arises in favor of the surety
perfected and binding, the supervening the right to compel the principal to exonerate
incapacity of the guarantor would not operate the surety. But until the surety has contributed
to exonerate him of the eventual liability he has something to the payment of the debt, or has
contracted; and if that be true of his capacity performed the secured obligation in whole or in
to bind himself, it should also be true of his part, he has no right of action against anybody
integrity, which is a quality mentioned in the — no claim that could be reduced to judgment.
article alongside the capacity.
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 91

For Defendant administratrix it is averred that agreement with the petitioner Wise&Co. to pay
the above doctrine refers to a case where the for the sum of P640, payable at the rate of P80
surety files claims against the estate of the per month and he pledged the lot owned by the
principal debtorand it is urged that the rule Atty. Dionisio Tanglao as a guaranty for the
does not apply to the case before us, where balance.
the late Hemady was a surety, not a principal
debtor. The argument evinces a superficial David paid the sum of P343.47 to Wise & Co.,
view of the relations between parties. If under on account of the P640 which he bound
the Gaskell ruling, the Luzon Surety Co., as himself to pay leaving an unpaid balance of
guarantor, could file a contingent claim against P296.53.
the estate of the principal debtors if the latter
should die, there is absolutely no reason why it Wise & Co. now institutes this case against
could not file such a claim against the estate of Tanglao for the recovery of said balance of
Hemady, since Hemady is a solidary co-debtor P296.53.
of his principals. What the Luzon Surety Co.
may claim from the estate of a principal debtor ISSUE: WON Atty. Dionisio Tanglao is liable
it may equally claim from the estate of for the unpaid balance. NO.
Hemady, since, in view of the existing
solidarity, the latter does not even enjoy the HELD: NOTE: Exhibit A – power of attorney;
benefit of exhaustion of the assets of the Exhibit B- Compromise agreement.
principal debtor.
There is no doubt that under Exhibit A,
Our conclusion is that the solidary guarantor’s Tanglao empowered David, in his name, to
liability is not extinguished by his death, and enter into a contract of suretyship and a
that in such event, the Luzon Surety Co., had contract of mortgage of the property described
the right to file against the estate a contingent in the document, with Wise & Co. However,
claim for reimbursement. David used said power of attorney only to
mortgage the property and did not enter into
NOTE: The liability of the solidary contract of suretyship. Nothing is stated in
guarantor is not terminated by his death. Exhibit B to the effect that Tanglao became
David's surety for the payment of the sum in
question. Neither is this inferable from any of
III. Effects of Guaranty the clauses thereof, and even if this inference
might be made, it would be insufficient to
WISE CO. VS. TANGLAO create an obligation of suretyship which, under
the law, must be express and cannot be
FACTS: In the CFI of Manila, Wise & Co filed a presumed.
civil case against Cornelio C. David for the
It appears from the foregoing that defendant,
was an agent of Wise & Co. and the amount Tanglao could not have contracted any
claimed from him was the result of a liquidation personal responsibility for the payment of the
of accounts showing that he was indebted in sum of P640. The only obligation which Exhibit
said amount. B, in connection with Exhibit A, has created on
the part of Tanglao, is that resulting from the
In said case Wise & Co. asked and obtained a mortgage of a property belonging to him to
secure the payment of said P640. However, a
To avoid the execution of said attachment, foreclosure suit is not instituted in this case
David succeeded in having the defendant Atty. against Tanglao, but a purely personal action
Tanglao sign a power of attorney in his favor, for the recovery of the amount still owed by
with a clause (considered a special POA to
David) “ To sign as guarantor for himself in his defendant Tanglao may be considered as a
indebtedness to Wise & Company of Manila, surety under Exhibit B, the action does not yet
and to mortgage the Attorney’s lot” lie against him on the ground that all the legal
remedies against the debtor have not
Subsequently, David made a compromise previously been exhausted (art. 1830 of the
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 92

Civil Code, and decision of the Supreme Court Merchant Finance, Inc., Joseph L. G. Chua et.
of Spain of March 2, 1891). al. with the Regional Trial Court of Manila,
both for Sum of Money with Writ of Preliminary
The plaintiff has in its favor a judgment against Attachment where PBCOM was able to obtain
debtor David for the payment of debt. It does a notice of levy on the properties of Fortune
not appear that the execution of this judgment Motors (Phils.)
has been asked for and Exhibit B, on the other
hand, shows that David has two pieces of When plaintiff was able to locate Chua's former
property the value of which is in excess of the property situated in Dasmariñas, Makati, Metro
balance of the debt the payment of which is Manila, covered by TCT No. S-52808
sought of Tanglao in his alleged capacity as containing an area of 1,541 square meters
surety. which was already transferred to JALECO
Development, Inc., under TCT No. 126573 by
virtue of the Deed of Exchange dated October
PHILIPPINE BANK OF COMMUNICATIONS 24, 1983, PBCOM filed Civil Case No. 7889 for
VS. COURT OF APPEALS, JOSEPH L.G. annulment of Deed of Exchange with the
CHUA AND JALECO DEV’T, INC. Regional Trial Court of Makati, Metro Manila.

FACTS: On April 14, 1976, Fortune Motors Chua admitted the Deed of Exchange in favor
(Phils.), Inc. executed a Surety Agreement in of JALECO and contended that it was done in
favor of Philippine Bank of Communications good faith and in accordance with law.
(PBCOM for short) with Joseph L.G. Chua, as
one of the sureties. ISSUE: WON the Deed of Exchange should be
cancelled. YES
On March 6, 1981, Forte Merchant Finance,
Inc., executed a Surety Agreement in favor of HELD: For failure of both Fortune Motors
PBCOM with Joseph L.G. Chua as one of the (Phils), Inc. and Forte Merchant Finance, Inc.
sureties to pay their obligations with the petitioner, the
latter filed the two civil cases against Fortune
On October 24, 1983 Chua executed a Deed Motors (Phils.), Inc. and Forte Merchant
of Exchange transferring a parcel of land with Finance, Inc. and respondent Chua, among
improvements thereon covered by TCT No. S- others with the Regional Trial Court of Manila.
52808 (343721) to JALECO Development, Inc. The petitioner was granted a writ of attachment
As a result, TCT No. 126573 of the Register of as a result of which properties belonging to
Deeds of Rizal covering the aforementioned Fortune Motors (Phils.) were attached. It
parcel of land was issued in the name of turned out, however, that the attached
JALECO Development, Inc., on November 24, properties of Fortune Motors (Phils.), Inc. were
1983. already previously attached/mortgaged to prior
lien holders in the amount of about
On November 2, 1983, Chua sold 6,000 P70,000,000.00. As regards Forte Merchant
shares of JALECO Development, Inc., to Mr. Finance, Inc., it appears that it has no property
Chua Tiong King for P600,000.00 and another to satisfy the debts it incurred with PBCOM.
6,000 shares of JALECO Development, Inc. to The record further shows that as regards
Guillermo Jose, Jr. also for P600,000.00 and Chua, the property subject of the Deed of
Caw Le Ja Chua, wife of Chua sold the 6,000 Exchange between him and JALECO was his
share of JALECO Development, Inc., to Chua only property. Under these circumstances, the
Tiong King for P200,000.00 petitioner's petition for annulment of the deed
of exchange on the ground that the deed was
In the meanwhile, for failure of both Fortune executed in fraud of creditors, despite the
Motors (Phils.), Inc. and Forte Merchant pendency of the two (2) other civil cases is
Finance, Inc. to meet their respective financial well-taken.
obligations with PBCOM, the latter filed Civil
Case No. 84-25159 against Fortune Motors As surety for the financial obligations of
(Phils.), Inc., Joseph L. G. Chua et. al. and Fortune Motors (Phils.), Inc. and the Forte
Civil Case No. 84-25160 against Forte Merchant Finance, Inc., with the petitioner,
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 93

respondent Chua bound himself solidarily

liable with the two (2) principal debtors. (Article At the back of the trust receipt is a printed form
2047, Civil Code) The petitioner may therefore to be accomplished by two sureties who, by
demand payment of the whole financial the very terms and conditions thereof, were to
obligations of Fortune Motors (Phils.), Inc. and be jointly and severally liable to the Prudential
Forte Finance, Inc., from Chua, if the petitioner Bank should the defendant-appellant fail to pay
chooses to go directly after him. Hence, since the total amount or any portion of the drafts
the only property of Chua was sold to JALECO issued by Nissho and paid for by Prudential
after the debts became due, the petitioner has Bank. The defendant-appellant was able to
the right to file an annulment of the deed of take delivery of the textile machineries and
exchange between Chua and JALECO installed the same at its factory site at 69
wherein Chua sold his only property to Obudan Street, Quezon City.
JALECO to protect his interests and so as not
to make the judgments in the two (2) cases Sometime in 1967, the defendant-appellant
illusory. ceased business operation. On December 29,
1969, defendant-appellant's factory was leased
Parenthetically, the appellate court's by Yupangco Cotton Mills for an annual rental
observation that the petitioner's interests are of P200,000.00. The lease was renewed on
sufficiently protected by a writ of attachment on January 3, 1973. On January 5, 1974, all the
the properties of Fortune Finance (Phils.), Inc. textile machineries in the defendant-appellant's
has neither legal nor factual basis. factory were sold to AIC Development
Corporation for P300,000.00.

PRUDENTIAL BANK vs. INTERMEDIATE The obligation of the defendant-appellant

APPELLATE COURT, PHILIPPINE RAYON arising from the letter of credit and the trust
MILLS, INC. and ANACLETO R. CHI receipt remained unpaid and unliquidated.
Repeated formal demands for the payment of
FACTS: This case involves an action for the the said trust receipt yielded no result Hence,
recovery of sum of money representing the the present action for the collection of the
amount paid by Prudential Bank to Nissho principal amount of P956,384.95 was filed on
Company Ltd. of Japan for textile machinery October 3, 1974 against the defendant-
imported by Philippine Rayon Mills Inc. appellant and Anacleto R. Chi. In their
respective answers, the defendants interposed
On August 8, 1962, Philippine Rayon Mills Inc. identical special defenses, viz., the complaint
entered into a contract with Nissho Co., Ltd. of states no cause of action; if there is, the same
Japan for the importation of textile machineries has prescribed; and the plaintiff is guilty of
under a five-year deferred payment plan. laches.
Philippine Rayon applied for a commercial
letter of credit with the Prudential Bank and The trial court rendered judgment holding
Trust Company in favor of Nissho in the Philippine Rayon Mills Inc. liable for the sum of
amount of $128,548,78. Nissho withdrew P153,645.22 which represented the two drafts
twelve drafts against the letter of credit which accepted by Anacleto. The case against
Prudential Bank paid to the Bank of Tokyo but Anacleto Chi was dismissed.
only two of these drafts were accepted by
Anacleto Chi, the president of Philippine Petitioner appealed the decision to the then
Rayon. Intermediate Appellate Court. In urging the
said court to reverse or modify the decision,
Upon the arrival of the machineries, the petitioner alleged in its Brief that the trial court
Prudential Bank indorsed the shipping erred in (a) disregarding its right to
documents to the defendant-appellant which reimbursement from the private respondents
accepted delivery of the same. They executed, for the entire unpaid balance of the imported
by prior arrangenment, a trust receipt which machines, the total amount of which was paid
was signed by Anacleto Chi to enable to the Nissho Company Ltd., thereby violating
Philippine Rayon Mills to take delivery of the the principle of the third party payor's right to
machines. reimbursement provided for in the second
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 94

paragraph of Article 1236 of the Civil Code and were presented for payment. In fact, there was
under the rule against unjust enrichment; (b) no need for acceptance as the issued drafts
refusing to hold Anacleto R. Chi, as the are sight drafts. Presentment for acceptance is
responsible officer of defendant corporation, necessary only in the cases expressly provided
liable under Section 13 of P.D No 115 for the for in Section 143 of the Negotiable
entire unpaid balance of the imported Instruments Law (NIL). The said section
machines covered by the bank's trust receipt reads:
(c) finding that the solidary guaranty clause
signed by Anacleto R. Chi is not a guaranty at Sec. 143. When presentment for acceptance
all; (d) controverting the judicial admissions of must be made. — Presentment for acceptance
Anacleto R. Chi that he is at least a simple must be made:
guarantor of the said trust receipt obligation;
(e) contravening, based on the assumption that (a) Where the bill is payable after sight, or in
Chi is a simple guarantor, Articles 2059, 2060 any other case, where presentment for
and 2062 of the Civil Code and the related acceptance is necessary in order to fix the
evidence and jurisprudence which provide that maturity of the instrument; or
such liability had already attached; (f) (b) Where the bill expressly stipulates that it
contravening the judicial admissions of shall be presented for acceptance; or
Philippine Rayon with respect to its liability to (c) Where the bill is drawn payable elsewhere
pay the petitioner the amounts involved in the than at the residence or place of business of
draft; and (g) interpreting "sight" drafts as the drawee.
requiring acceptance by Philippine Rayon
before the latter could be held liable thereon. In no other case is presentment for acceptance
necessary in order to render any party to the
ISSUES:(only the 3rd issue is related to the bill liable.
topic)
1. Whether presentment for acceptance of the Obviously then, sight drafts do not require
drafts was indispensable to make Philippine presentment for acceptance.
Rayon liable thereon; - NO
2. Whether Philippine Rayon is liable on the The acceptance of a bill is the signification by
basis of the trust receipt; - YES the drawee of his assent to the order of the
3. Whether private respondent Chi is jointly drawer; this may be done in writing by the
and severally liable with Philippine Rayon drawee in the bill itself, or in a separate
for the obligation sought to be enforced - instrument.
NO and if not, whether he may be considered
a guarantor -YES; in the latter situation, ISSUE #2: The trial court and the public
whether the case should have been dismissed respondent likewise erred in disregarding the
on the ground of lack of cause of action as trust receipt and in not holding that Philippine
there was no prior exhaustion of Philippine Rayon was liable thereon. In People vs. Yu
Rayon's properties. -NO Chai Ho, this Court explains the nature of a
trust receipt by quoting In re Dunlap Carpet
HELD: Co., thus:
ISSUE #1: A letter of credit is defined as an
engagement by a bank or other person made By this arrangement a banker advances
at the request of a customer that the issuer will money to an intending importer, and thereby
honor drafts or other demands for payment lends the aid of capital, of credit, or of business
upon compliance with the conditions specified facilities and agencies abroad, to the
in the credit. Through a letter of credit, the enterprise of foreign commerce. Much of this
bank merely substitutes its own promise to pay trade could hardly be carried on by any other
for one of its customers who in return promises means, and therefore it is of the first
to pay the bank the amount of funds mentioned importance that the fundamental factor in the
in the letter of credit plus credit or commitment transaction, the banker's advance of money
fees mutually agreed upon. In the instant case and credit, should receive the amplest
then, the drawee was necessarily the herein protection. Accordingly, in order to secure that
petitioner. It was to the latter that the drafts the banker shall be repaid at the critical point
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 95

— that is, when the imported goods finally designated goods, documents or instruments
reach the hands of the intended vendee — the in trust for the entruster and to sell or otherwise
banker takes the full title to the goods at the dispose of the goods, documents or
very beginning; he takes it as soon as the instruments with the obligation to turn over to
goods are bought and settled for by his the entruster the proceeds thereof to the extent
payments or acceptances in the foreign of the amount owing to the entruster or as
country, and he continues to hold that title as appears in the trust receipt or the goods,
his indispensable security until the goods are instruments themselves if they are unsold or
sold in the United States and the vendee is not otherwise disposed of, in accordance with
called upon to pay for them. This security is not the terms and conditions specified in the trusts
an ordinary pledge by the importer to the receipt, or for other purposes substantially
banker, for the importer has never owned the equivalent to any one of the following: . . ."
goods, and moreover he is not able to deliver
the possession; but the security is the ISSUE #3: We also conclude, for the reason
complete title vested originally in the bankers, hereinafter discussed, and not for that adduced
and this characteristic of the transaction has by the public respondent, that private
again and again been recognized and respondent Chi's signature in the dorsal portion
protected by the courts. Of course, the title is of the trust receipt did not bind him solidarily
at bottom a security title, as it has sometimes with Philippine Rayon. The statement at the
been called, and the banker is always under dorsal portion of the said trust receipt, which
the obligation to reconvey; but only after his petitioner describes as a "solidary guaranty
advances have been fully repaid and after the clause", reads:
importer has fulfilled the other terms of the
contract. In consideration of the PRUDENTIAL BANK
AND TRUST COMPANY complying with the
As further stated in National Bank vs. Viuda e foregoing, we jointly and severally agree and
Hijos de Angel Jose, trust receipts: undertake to pay on demand to the
PRUDENTIAL BANK AND TRUST COMPANY
. . . [I]n a certain manner, . . . partake of the all sums of money which the said
nature of a conditional sale as provided by the PRUDENTIAL BANK AND TRUST COMPANY
Chattel Mortgage Law, that is, the importer may call upon us to pay arising out of or
becomes absolute owner of the imported pertaining to, and/or in any event connected
merchandise as soon an he has paid its price. with the default of and/or non-fulfillment in any
The ownership of the merchandise continues respect of the undertaking of the aforesaid:
to be vested in the owner thereof or in the
person who has advanced payment, until he PHILIPPINE RAYON MILLS, INC.
has been paid in full, or if the merchandise has
already been sold, the proceeds of the sale We further agree that the PRUDENTIAL BANK
should be turned over to him by the importer or AND TRUST COMPANY does not have to take
by his representative or successor in interest. any steps or exhaust its remedy against
aforesaid:
Under P.D. No. 115, otherwise known an the
Trust Receipts Law, which took effect on 29 before making demand on me/us.
January 1973, a trust receipt transaction is
defined as "any transaction by and between a (Sgd.) Anacleto R. Chi
person referred to in this Decree as the ANACLETO R. CHI
entruster, and another person referred to in
this Decree as the entrustee, whereby the Our own reading of the questioned solidary
entruster, who owns or holds absolute title or guaranty clause yields no other conclusion
security interests' over certain specified goods, than that the obligation of Chi is only that of
documents or instruments, releases the same a guarantor. This is further bolstered by the
to the possession of the entrustee upon the last sentence which speaks of waiver of
latter's execution and delivery to the entruster exhaustion, which, nevertheless, is ineffective
of a signed document called the "trust receipt" in this case because the space therein for the
wherein the entrustee binds himself to hold the party whose property may not be exhausted
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 96

was not filled up. Under Article 2058 of the however, when the law requires that a contract
Civil Code, the defense of exhaustion be in some form in order that it may be valid or
(excussion) may be raised by a guarantor enforceable, or that it be proved in a certain
before he may be held liable for the obligation. way, that requirement is absolute and
Petitioner likewise admits that the questioned indispensable. With respect to a guaranty,
provision is a solidary guaranty clause, thereby which is a promise to answer for the debt or
clearly distinguishing it from a contract of default of another, the law merely requires that
surety. it, or some note or memorandum thereof, be in
writing. Otherwise, it would be unenforceable
It, however, described the guaranty as solidary unless ratified. While the acknowledgement of
between the guarantors; this would have been a surety before a notary public is required to
correct if two (2) guarantors had signed it. The make the same a public document, under
clause "we jointly and severally agree and Article 1358 of the Civil Code, a contract of
undertake" refers to the undertaking of the two guaranty does not have to appear in a public
(2) parties who are to sign it or to the liability document.
existing between themselves. It does not refer
to the undertaking between either one or both The remaining issue to be resolved concerns
of them on the one hand and the petitioner on the propriety of the dismissal of the case
the other with respect to the liability described against private respondent Chi. The trial court
under the trust receipt. Elsewise stated, their based the dismissal, and the respondent Court
liability is not divisible as between them, i.e., it its affirmance thereof, on the theory that Chi is
can be enforced to its full extent against any not liable on the trust receipt in any capacity —
one of them. either as surety or as guarantor — because his
signature at the dorsal portion thereof was
Furthermore, any doubt as to the import, or useless; and even if he could be bound by
true intent of the solidary guaranty clause such signature as a simple guarantor, he
should be resolved against the petitioner. The cannot, pursuant to Article 2058 of the Civil
trust receipt, together with the questioned Code, be compelled to pay until
solidary guaranty clause, is on a form drafted after petitioner has exhausted and resorted to
and prepared solely by the petitioner; Chi's all legal remedies against the principal debtor,
participation therein is limited to the affixing of Philippine Rayon. The records fail to show that
his signature thereon. It is, therefore, a petitioner had done so. Reliance is thus placed
contract of adhesion; as such, it must be on Article 2058 of the Civil Code which
strictly construed against the party responsible provides:
for its preparation.
Art. 2058. The guarantor cannot be compelled
Neither can We agree with the reasoning of the to pay the credit unless the latter has
public respondent that this solidary guaranty exhausted all the property of the debtor, and
clause was effectively disregarded simply has resorted to all the legal remedies against
because it was not signed and witnessed by the debtor.
two (2) persons and acknowledged before a
notary public. While indeed, the clause ought Simply stated, there is as yet no cause of
to have been signed by two (2) guarantors, the action against Chi.
fact that it was only Chi who signed the same
did not make his act an idle ceremony or Excussion is not a condition sine qua non for
render the clause totally meaningless. By his the institution of an action against a guarantor.
signing, Chi became the sole guarantor. In Southern Motors, Inc. vs. Barbosa, this
Court stated:
The attestation by witnesses and the
acknowledgement before a notary public are Although an ordinary personal guarantor —
not required by law to make a party liable on not a mortgagor or pledgor — may demand the
the instrument. The rule is that contracts shall aforementioned exhaustion, the creditor may,
be obligatory in whatever form they may have prior thereto, secure a judgment against said
been entered into, provided all the essential guarantor, who shall be entitled, however, to a
requisites for their validity are present; deferment of the execution of said judgment
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 97

against him until after the properties of the

principal debtor shall have been exhausted to ISSUE: Whether or not Aglibot is a guarantor
satisfy the obligation involved in the case. and thus, can invoke the benefit of excussion -
NO, Aglibot is an accommodation party
However, Chi's liability is limited to the principal
obligation in the trust receipt plus all the HELD: The RTC in its decision held that
accessories thereof including judicial costs; Aglibot signed the promissory note on behalf of
with respect to the latter, he shall only be liable PLCC as manager and nowhere does it appear
for those costs incurred after being judicially that she signed as a accommodation party.
required to pay. Interest and damages, being The RTC further ruled that what Aglibot agreed
accessories of the principal obligation, should to do by issuing her personal checks was
also be paid; these, however, shall run only merely to guarantee the indebtedness of
from the date of the filing of the complaint. PLCC, and thus she must be accorded the
Attorney's fees may even be allowed in benefit of excussion- prior exhaustion of the
appropriate cases. property of the debtor- as provided under
Article 2058 of the Civil Code-

FIDELIZA J. AGLIBOT vs. INGERSOL L. Art. 2058. The guarantor cannot be compelled
SANTIA to pay the creditor unless the latter has
G.R. No. 185945 (December 05, 2012) exhausted all the property of the debtor, and
has resorted to all the legal remedies against
FACTS: Engr. Ingersol L.Santia loaned the debtor.
P2,500,000 to Pacific Lending and Capital
Corporation, through its manager Fideliza J. However, in the present case, Aglibot's claim
Aglibot. The loan was evidence by a as a mere guarantor is bereft of merit for want
promisorry note date July 1, 2003 and payable of proof as provided under Article 1403(2) of
in one year subject to interest at 24% per the Civil Code, embodying the Statute of
annum. Aglibot then issued and delivered to Frauds which provides-
Santia eleven post-dated personal checks
drawn from her own demand account as a Art. 1403. The following contracts are
guaranty or security for the payment of the unenforceable, unless they are ratified:
note.
(2) Those that do not comply with the Statute
Upon presentation of the checks, they were of Frauds as set forth in this number. In the
dishonored by the bank for having been drawn following cases an agreement hereafter made
against insufficient funds or closed account. shall be unenforceable by action, unless the
Santia then demanded payment from PLCC same, or some note or memorandum thereof,
and Aglibot of the face value of the checks, but be in writing, and subscribed by the party
neither of them heeded his demand. As a charged, or by his agent; evidence, therefore,
result, eleven Informations for violation of BP of the agreement cannot be received without
22 were filed against Aglibot. the writing, or a secondary evidence of its
contents:
Aglibot, in her defense, admitted that she did
obtain the loan from Santia, but claimed that a) An agreement that by its terms is not to be
she did so in behalf of PLCC; that before performed within a year from the making
granting the loan, Santia demanded and thereof;
obtained from her a security for the repayment b) A special promise to answer for the debt,
thereof, but with the understanding that upon default, or miscarriage of another;
remittance in case of the face amount of the c) An agreement made in consideration of
checks, Santia would correspondingly return to marriage, other than a mutual promise to
her each check so paid. Aglibot also mainted marry;
that she was a mere guarantor of the PLCC's d) An agreement for the sale of goods, chattels
debt and Santia failed to exhaust all means to or things in action, at a price not less than five
collect the debt from PLCC and therefore she hundred pesos, unless the buyer accept and
is not subsidiary liable. receive part of such goods and chattels, or the
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 98

evidences, or some of them, or such things in manager merely to guarantee the investment
action, or pay at the time some part of the of Santia. It noted that she could have issued
purchase money; but when a sale is made by PLCC’s checks, but instead she chose to issue
auction and entry is made by the auctioneer in her own checks, drawn against her personal
his sales book, at the time of the sale, of the account with Metrobank. It concluded that
amount and kind of property sold, terms of Aglibot intended to personally assume the
sale, price, names of purchasers and person repayment of the loan, pointing out that in her
on whose account the sale is made, it is a Counter-Affidavit, she even admitted that she
sufficient memorandum; was personally indebted to Santia, and only
e) An agreement for the leasing of a longer raised payment as her defense, a clear
period than one year, or for the sale of real admission of her liability for the said loan.
property or of an interest therein;
f) A representation to the credit of a third The facts below present a clear situation where
person. Aglibot, as the manager of PLCC, agreed to
accommodate its loan to Santia by issuing her
Under the above provision, concerning a own post-dated checks in payment thereof.
guaranty agreement, which is a promise to She is what the Negotiable Instruments Law
answer for the debt or default of another, the calls an accommodation party.
law clearly requires that it, or some note or
memorandum thereof, be in writing. Otherwise,
it would be unenforceable unless ratified, BENJAMIN BITANGA vs PYRAMID
although under Article 1358 of the Civil Code, CONSTRUCTION ENGINEERING
a contract of guaranty does not have to appear CORPORATION
in a public document. G.R. No. 173526 (August 28, 2008)

Under Article 2055 of the Civil Code, it is FACTS: On March 26, 1997, Pyramid
provided that a guaranty is not presumed, but Construction Engineering Corporation entered
must be express and cannot extend to more into an agreement with Macrogen Realty, of
than what is stipulated therein. This is the which Benjamin Bitanga is the president, to
obvious rationale why a contract of guaranty is construct in favor of the latter, the Shoppers
unenforceable unless made in writing or Gold Building. Pyramid commenced the
evidenced by some writing. For as pointed out construction project on May 1997. However,
by Santia, Aglibot has not shown any proof, Macrogen Realty failed to settle Pyramid's
such as a contract, a secretary’s certificate or a progress billings, which resulted to the
board resolution, nor even a note or suspension of the work.
memorandum thereof, whereby it was agreed
that she would issue her personal checks in In August 1998, Pyramid once again
behalf of the company to guarantee the suspended the construction work because the
payment of its debt to Santia. Certainly, there conditions that is imposed for its continuation,
is nothing shown in the Promissory Note including payment of the unsettled accounts
signed by Aglibot herself remotely containing had not been complied with by Macrogen
an agreement between her and PLCC Realty. Pyramid then instituted a case with the
resembling her guaranteeing its debt to Santia. Construction Industry Association Commission
And neither is there a showing that PLCC against Macrogen Realty seeking payment
thereafter ratified her act of "guaranteeing" its from the latter for the unpaid billings and
indebtedness by issuing her own checks to project costs.
Santia.
On April 17, 2000, before the arbitration case
N.B.: Why Aglibot is an accommodation could be set for trial, both parties entered into a
party compromise agreement whereby Macrogen
The appellate court ruled that by issuing her Realty agreed to pay the total amount of
own post-dated checks, Aglibot thereby bound P6,000,000 in six equal monthly installments.
herself personally and solidarily to pay Santia, Bitanga guaranteed the obligations of
and dismissed her claim that she issued her Macrogen Realty under the compromise
said checks in her official capacity as PLCC’s agreement by executing a Contract of
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 99

Guaranty in favor of Pyramid, by virtue of is otherwise known as the benefit of

which he irrevocably and unconditionally excussion.
guaranteed the full and complete payment of
the principal liability of Macrogen Realty. Article 2060 of the Civil Code reads:

However, contrary to petitioner’s assurances, Art. 2060. In order that the guarantor may
Macrogen Realty failed and refused to pay all make use of the benefit of excussion, he must
the monthly installments agreed upon in the set it up against the creditor upon the latter’s
Compromise Agreement. Hence, on 7 demand for payment from him, and point out to
September 2000, respondent moved for the the creditor available property of the debtor
issuance of a writ of execution8 against within Philippine territory, sufficient to cover the
Macrogen Realty, which CIAC granted. amount of the debt.

On 29 November 2000, the sheriff9 filed a The afore-quoted provision imposes a

return stating that he was unable to locate any condition for the invocation of the defense of
property of Macrogen Realty, except its bank excussion. Article 2060 of the Civil Code
deposit of P20,242.33, with the Planters Bank, clearly requires that in order for the guarantor
Buendia Branch. to make use of the benefit of excussion, he
must set it up against the creditor upon the
Respondent then made, on 3 January 2001, a latter’s demand for payment and point out to
written demand on petitioner, as guarantor of the creditor available property of the debtor
Macrogen Realty, to pay the P6,000,000.00, or within the Philippines sufficient to cover the
to point out available properties of the amount of the debt.
Macrogen Realty within the Philippines
sufficient to cover the obligation guaranteed. It It must be stressed that despite having been
also made verbal demands on petitioner. Yet, served a demand letter at his office, petitioner
respondent’s demands were left unheeded. still failed to point out to the respondent
properties of Macrogen Realty sufficient to
As a special and affirmative defense, petitioner cover its debt as required under Article 2060 of
argued that the benefit of excussion was still the Civil Code. Such failure on petitioner’s part
available to him as a guarantor since he had forecloses his right to set up the defense of
set it up prior to any judgment against him. excussion.
According to petitioner, respondent failed to
exhaust all legal remedies to collect from
Worthy of note as well is the Sheriff’s return
Macrogen Realty the amount due under the
stating that the only property of Macrogen
Compromise Agreement, considering that
Realty which he found was its deposit
Macrogen Realty still had uncollected credits
of P20,242.23 with the Planters Bank.
which were more than enough to pay for the
same. Given these premise, petitioner could
not be held liable as guarantor. Article 2059(5) of the Civil Code thus finds
application and precludes petitioner from
ISSUE: Whether or not Benjamin Bitanga can interposing the defense of excussion. We
avail himself of the benefit of excussion - NO quote:

HELD: Under a contract of guarantee, the Art. 2059. This excussion shall not take place:
guarantor binds himself to the creditor to fulfill xxxx
the obligation of the principal debtor in case (5) If it may be presumed that an
the latter should fail to do so. The guarantor execution on the property of the
who pays for a debtor, in turn, must be principal debtor would not result in the
indemnified by the latter. However, the satisfaction of the obligation.
guarantor cannot be compelled to pay the
creditor unless the latter has exhausted all the Benjamin Bitanga had not genuinely
property of the debtor and resorted to all the controverted the return made by Sheriff Joseph
legal remedies against the debtor. This is what F. Bisnar, who affirmed that, after exerting
diligent efforts, he was not able to locate any
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 100

property belonging to the Macrogen Realty, 1. Whether or not PhilGuarantee’s payment to

except for a bank deposit with the Planter’s TRB amounts to a waiver of its right under
Bank at Buendia, in the amount of P20,242.23. Article 2058 of the Civil Code
It is axiomatic that the liability of the guarantor
arises when the insolvency or inability of the 2. Whether or not PhilGuarantee had no
debtor to pay the amount of debt is proven by obligation to pay TRB because of the
the return of the writ of execution that had not alleged expiration of contract of guarantee
been unsatisfied.
RULING:
1. Under a contract of guarantee, the
guarantor binds himself to the creditor to
fulfil the obligation of the principal debtor in
case the latter should fail to do so. The
guarantor who pays for a debtor, in turn,
JN DEVELOPMENT CORPORATION, and must be indemnified by the latter. Under
SPS. RODRIGO and LEONOR STA. ANA vs. Article 2058, the guarantor cannot be
PHILIPPINE EXPORT AND FOREIGN LOAN compelled to pay the creditor unless the
GUARANTEE CORPORATION latter has exhausted all the property of the
debtor and resorted to all the legal
FACTS: Traders Royal Bank (TRB) extended remedies against the debtor (benefit of
to JN Development Corporation (JN) an Export excussion). The creditor must first obtain a
Packing Credit Line for P2,000,000. The loan judgment against the principal debtor
was covered by a real estate mortgage and a before assuming to run after the alleged
letter of guarantee from respondent Philippine guarantor since the exhaustion of the
Export and Foreign Loan Guarantee principal’s property’ cannot begin to take
Corporation (PhilGuarantee). place before judgment has been obtained.
In order that the guarantor may make use
Upon JN’s failure to pay the loan when it of the benefit of excussion, he must set it
matured, PhilGuarantee, upon TRB’s request up against the creditor upon the latter’s
to make good its guarantee, paid the latter. demand for payment and point out to the
creditor available property of the debtor
Subsequently, PhilGuarantee made several within the Philippines sufficient to cover the
demands on JN, but the latter proposed to amount of the debt. Excussion is a right
settle the obligation by way of development granted to the guarantor by law and as
and sale of the mortgaged property instead, such he may opt to make use of it or waive
which PhilGuarantee rejected. it. PhilGuarantee’s waiver of the right of
excussion cannot prevent it from
PhilGuarantee thus filed a complaint for demanding reimbursement from
collection of money and damages against petitioners. While a guarantor enjoys the
herein petitioners. The RTC ruled that since benefit of excussion, nothing prevents him
TRB was able to foreclose the real estate from paying the obligation once demand is
mortgage executed by JN the obligation was made on him. The law clearly requires the
extinguished and thus the latter is not liable to debtor to indemnify the guarantor what the
reimburse PhilGuarantee. latter has paid.

In addition, the RTC held that since the 2. The guarantee was only up to December
guarantee was good for only one year, which 17, 1980. JN’s obligation with TRB fell due
was not renewed after the expiry of said on June 30, 1980, and demand on
period, PhilGuarantee had no more legal duty PhilGuarantee was made by TRB on
to pay TRB. October 8, 1980. That payment was
actually made only on March 10, 1981
On appeal, the CA reversed the RTC’s does not take it out of the terms of the
decision. guarantee. What is controlling is that
default and demand on PhilGuarantee had
ISSUES: taken place while the guarantee was still in
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 101

force. The benefit of excussion, as well as the payment of said sum.

the requirement of consent to extensions of
payment, is a protective device pertaining The Provident Insurance Co., paid only the
to and conferred on the guarantor. These sum of P1,363.67, which is 60% of the
may be invoked by the guarantor against amount owned by the Tobacconists to Mira
the creditor as defenses to bar the Hermanos, alleging that the remaining 40%
unwarranted enforcement of the guarantee. should be paid by the other surety, Manila
However, PhilGuarantee did not avail of Compañia de Seguros, in accordance with
these defenses when it paid its obligation Article 8137 of the Civil Code.
once demand was made on it.
The Manila Compañia de Seguros refused to
pay the balance, contending that so long as
MIRA HERMANOS, INC. vs. MANILA the liability of the Tobacconists did not exceed
TOBACCONISTS, INC., ET AL.,; P3,000, it was not bound to pay anything
PROVIDENT INSURANCE CO. because its bond referred only to the obligation
of the Tobacconists in excess of P3,000 and
FACTS: By virtue of a written contract entered up to P5,000.
into between Mira Hermanos, Inc., and
Manila Tobacconists, Inc., the former agreed Hence Mira Hermanos, Inc., brought this to
to deliver to the latter merchandise for sale on recover from
consignment under certain specified terms and them jointly and severally the sum of P909.12
the latter agreed to pay to the former on or with legal interest thereon from the date of the
before the 20th day of each month the invoice complaint.
value of all the merchandise sold during the
preceding month. ISSUE: WON Provident Insurance Co. is
entitled to the
Mira Hermanos, Inc., required of the Manila "benefit of division" provided in article 1837 of
Tobacconists, Inc., a bond of P3,000, which the Civil Code
was executed by the Provident Insurance Co.,
on September 2, 1939, to secure the fulfillment HELD: Article 1837 of the [Old] Civil Code
of the obligation of the Tobacconists under the reads as follows:
contract up to the sum of P3,000.
Art. 1837. Should there be several sureties of
In October, 1940, the volume of the business only one debtor for the same debt, the liability
of the Tobacconists having increased so that therefor shall be divided among them all. The
the merchandise received by it on consignment creditor can claim from each surety only his
from Mira Hermanos exceeded P3,000 in proportional part unless liability in solidum has
value, Mira Hermanos required of the been expressly stipulated.
Tobacconist an additional bond of P2,000, and
in compliance with that requirement the The right to the benefit of division against the
defendant Manila Compañia de Seguros, on co-sureties for their respective shares ceases
October 16, 1940, executed a bond of P2,000 in the same cases and for the same reason as
with the same terms and conditions (except as that to an exhaustion of property against the
to the amount) as the bond of the Provident principal debtor.
Insurance Co.
While on its face the bond given by the Manila
On June 1, 1941, a final and complete Compañia de Seguros contains the same
liquidation was made of the transactions terms and conditions (except as to the amount)
between Mira Hermanos and the as those of the bond given by the Provident
Tobacconists, as a result of which there was Insurance Co., nevertheless it was pleaded by
found a balance due from the latter to the the Manila Compañia de Seguros and found
former of P2,272.79, which indebtedness the proven by the trial court.
Tobacconists recognized but was unable to
pay. Thereupon Mira Hermanos made a As the trial court observed, there would have
demand upon the two surety companies for been no need for the additional bond of P2,000
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 102

if its purpose were to cover the first P2,000 one debtor for the same debt. In the instant
already covered by the P3,000 bond of the case, altho the two bonds on their face appear
Provident Insurance Co. to guarantee the same debt coextensively up
to P2,000 — that of the Provident Insurance
Indeed, if the purpose of the additional bond of Co. alone extending beyond that sum up to
P2,000 were to cover not the excess over and P3,000 — it was pleaded and conclusively
above P3,000 but the first P2,000 of the proven that in reality said bonds, or the two
obligation of the principal debtor like the bond sureties, do not guarantee the same debt
of P3,000 which covered only the first P3,000 because the Provident Insurance Co.
of said obligation, then it would result that had guarantees only the first P3,000 and the
the obligation of the Tobacconists exceeded Manila Compañia de Seguros, only the excess
P3,000, neither of the two bonds would have over and above said amount up to P5,000.
responded for the excess, and that was Article 1837 does not apply to this factual
precisely the event against which Mira situation.
Hermanos wanted to protect itself by
demanding the additional bond of P2,000.

For instance, suppose that the obligation of the

principal debtor, the Tobacconists, amounted TUASON, TUASON, INC. vs. ANTONIO
to P5,000; if both bonds were co-extensive up MACHUCA
to P2,000 — as would logically follow if
appellant's contention were correct — the FACTS: "Manila Compañia de Seguros"
result would be that the first P2,000 of the obtained from the Universal Trading Company
obligation would have to be divided between and Tuason, Tuason & Co., a solidary note for
and paid equally by the two surety companies, the sum of P9,663 executed by said
which should pay P1,000 each, and of the companies in its favor. Before signing said
balance of P3,000 the Provident Insurance Co. note, Tuason, Tuason & Co., in turn, caused
would have to pay only P1,000 more because the Universal Trading Company and its
its liability is limited to the first P3,000, thus president Antonio Machuca, personally, to sign
leaving the plaintiff in the lurch as to the a document (Exhibit B), wherein they bound
excess of P2,000. themselves solidarily to pay, reimburse, and
refund to the company all such sums or
That was manifestly not the intention of the amounts of money as it, or its representative,
parties. As a matter of fact, when the Provident may pay or become bound to pay, upon its
gave its bond and fixed the premiums thereon obligation with "Manila Compañia de Seguros,"
it assumed an obligation of P3,000 in solidum whether or not it shall have actually paid such
with the Tobacconists without any expectation sum or sums or any part thereof.
of any benefit of division with any other surety.
The Universal Trading Company having been
The additional bond of P2,000 was, more than declared insolvent, "Manila Compañia de
a year later, required by the creditor of the Seguros" brought an action in the lower court
principal debtor for the protection of said against Tuason, Tuason & Co. to recover the
creditor and certainly not for the benefit of the value of the note for P9,663 and obtained final
original surety, which was not entitled to expect judgment therein, which was affirmed by this
any such benefit. court on appeal, for the total sum of
P12,197.27, which includes the value of the
The foregoing considerations, which fortify the note with interest thereon.
trial court's conclusion as to the real intent and
agreement of the parties with regard to the Subsequently, all the rights of Tuason, Tuason
bond of P2,000 given by the Manila Compañia & Co. were transferred to the plaintiff Tuason,
de Seguros, destroys at the same time the Tuason, Inc.
theory of the appellant regarding the
applicability of article 1837 of the Civil Code. Later on Tuason, Tuason, Inc., brought this
action to recover of Antonio Machuca the sum
That article refers to several sureties of only of P12,197.27 which it was sentenced to pay in
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 103

the case filed against it by "Manila Compañia

de Seguros," plus P3,000 attorney's fees, and The defendant also contends that the
P155.92 court's costs and sheriff's fees, that is, document executed by Albina Tuason in favor
a total of P15,353.19. of "Manila Compañia de Seguros" assuming
and making hers the obligation of Tuason,
ISSUES: Tuason & Co., was a novation of the contract
a) WON Tuason, Tuason Inc. Is entitled to the by substitution of the debtor, and relieved
relief sought in view of the above facts? Tuason, Tuason & Co. from all obligation in
b) WON Tuason, Tuason Inc. has the right to favor of "Manila Compañia de Seguros."
recover from Machuca more than the value of
the note executed by Tuason, Tuason, Inc. in As to this, it is enough to say that if this was
favor of Manila Compania de Seguros? what Albina Tuason contemplated in signing
the document, evidently it was not what
HELD: The plaintiff company argues that, at all "Manila Compañia de Seguros" accepted. As
events, it is entitled to bring this action under above stated, "Manila Compañia de Seguros"
article 1843 of the Civil Code, which provides accepted this document only as additional
that the surety may, even before making security for its credit and not as a novation of
payment, bring action against the principal the contract.
debtor.
Our conclusion is that the plaintiff has the right
This contention of the plaintiff is untenable. to recover of the defendant the sum of P9,663,
The present action, according to the terms of the value of the note executed by the plaintiff in
the complaint, is clearly based on the fact of favor of "Manila Compañia de Seguros" which
payment. It is true that, under article 1843, an the plaintiff is under obligation to pay by virtue
action lies against the principal debtor even of final judgment. We do not believe, however,
before the surety pays the debt, but it clearly that the defendant must pay the plaintiff the
appears in the complaint that this is not the expenses incurred by it in the litigation
action brought by the plaintiff. Moreover this between it and "Manila Compañia de Seguros."
article 1843 provided several cumulative That litigation was originated by the plaintiff
remedies in favor of the surety, at his election, having failed to fulfill its obligation with "Manila
and the surety who brings an action under this Compañia de Seguros," and it cannot charge
article must choose the remedy and apply for it the defendant with expenses which it was
specifically. At any rate this article does not compelled to make by reason of its own fault. It
provide for the reimbursement of any amount, is entitled, however, to the expenses incurred
as is sought by the plaintiff. by it in this action brought against the
defendant, which are fixed at P1,653.65 as
But although the plaintiff has not as yet paid attorney's fees.
"Manila Compañia de Seguros" the amount of
the judgment against it, and even considering
that this action cannot be held to come under KUENZLE & STREIFF VS. TAN SUNCO
article 1843 of the Civil Code, yet the plaintiff is
entitled to the relief sought in view of the facts FACTS: Kuenzle & Streiff instituted an action
established by the evidence. The plaintiff against Chung Chu Sing for the recovery of
became bound, by virtue of a final judgment, to indebtedness. Before Kuenzle & Streiff could
pay the value of the note executed by it in secure judgment, Tan Sunco brought an action
favor of "Manila Compañia de Seguros." against Chung Chu Sing for the payment of
According to the document executed solidarily another obligation for which Tan Sunco acted
by the defendant and the Universal Trading as guarantor. Chung Chu Sing confessed
Company, the defendant bound himself to pay judgment in favor of Tan Sunco. Immediately
the plaintiff as soon as the latter may have after obtaining judgment, Tan Sunco caused to
become bound and liable, whether or not it be levied upon under execution all the
shall have actually paid. It is indisputable that properties of Chung Chu Sing. Kuenzle &
the plaintiff became bound and liable by a final Streiff commenced an action to set aside the
judgment to pay the value of the note to judgment, claiming it was obtained by the fraud
"Manila Compañia de Seguros." and collusion, and that Tan Sunco had not paid
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 104

the debt for which as guarantor he obtained Trial Court dismissed the case holding that
the judgment. provisions of article 2071 of the new Civil Code
may be availed of by a guarantor only and not
ISSUE: WON a guarantor who sues his by a surety the complaint, with costs against
principal debtor before paying the debt himself the plaintiff.
entitled to recover judgment for the debt?
ISSUE: The main question to determine is
HELD: No, while the surety has the right to whether the last paragraph of article 2071 of
obtain judgment against his principal debtor, the new Civil Code taken from article 1843 of
he will not be permitted to realize on said the old Civil Code may be a
judgment to the point of actual collection until vailed of by a surety.
he has satisfied, or caused to be satisfied, the
obligation the payment of the obligation of HELD: YES
which he assures. A guarantor who obtains Provision of law under guaranty available
judgment against his principal cannot execute to surety
said judgment against the latter’s property until In suretyship the surety becomes liable to the
he has paid the debt for which he stands as creditor without the benefit of the principal
guarantor. debtor's exclusion of his properties, for he (the
surety) maybe sued independently. So, he is
an insurer of the debt and as such he has
MANILA SURETY v BATU CONSTRUCTION assumed or undertaken a responsibility or
obligation greater or more onerous than that of
FACTS:` On July 8, 1950, the defendant Batu guarantor. Such being the case, the provisions
Construction & Company, as principal, and the of article 2071, under guaranty, are applicable
plaintiff Manila Surety & Fidelity Co. Inc., as and available to a surety. Hence, a surety,
surety, executed a surety bond for the sum of even before having paid, may proceed against
P8,812.00 to insure faithful performance of the the principal debtor to obtain release from the
former's obligation as contractor for the surety, or to demand a security that shall
construction of the Bacarra Bridge, Project PR- protect him from any proceedings by the
72 (No. 3) Ilocos Norte Province. On the same creditor or from the danger of insolvency of the
date, July 8,1950, the Batu Construction & debtor, when the surety is sued for payment.
Company and the defendants Carlos N.
Baquiran and Gonzales P. Amboy executed an
indemnity agreement to protect the Manila PNB VS MANILA SURETY
Surety & Fidelity Co. Inc.., against damage,
loss or expenses which it may sustain as a FACTS: PNB had opened a letter of credit and
consequence of the surety bond executed by it advanced thereon $120,000 to Edgington Oil
jointly with Batu Construction & Company. Refinery for 8,000 tons of hot asphalt. Of this
amount, 2,000 tons worth P279,000 were
On or about May 30, 1951, the plaintiff released and delivered to ATACO under a trust
received a notice from the Director of Public receipt guaranteed by Manila Surety and
Works (Exhibit B) annulling its contract with the Fidelity.
Government for the construction of the Bacarra
Bridge because of its failure to make To pay for the asphalt, ATACO constituted
satisfactory progress in the execution of the PNB its assignee and attorney-in-fact to
works, with the warning that ,any amount spent receive and collect for Bureau of Public Works
by the Government in the continuation of the the amount out of the funds payable to the
work, in excess of the contract price, will be assignor.
charged against the surety bond furnished by
the plaintiff. It also appears that a complaint by ATACO delivered to the Bureau of Public
the laborers in said project of the Batu Works and the latter accepted. Of this amount
Construction & Company was filed against it the Bank regularly collected. Thereafter for
and the Manila Surety and Fidelity Co., Inc., for unexplained reasons, the Bank ceased to
unpaid wages amounting to P5,960.10. collect from the bureau. It was later on
discovered that more money were payable to
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 105

ATACO from the Public Works office but the Appeals is thus not only conclusive on us but
bank allowed another creditor to collect the fully supported by the evidence.
funds due to ATACO.
Even if the Court of Appeals erred on the
Its demands on the principal debtor and the second reason it advanced in support of the
Surety having been refused, the Bank sued decision now under appeal, because the
both in the Court of First Instance of Manila to rules on application of payments, giving
recover the balance of P158,563.18 as of preference to secured obligations are only
February 15, 1950, plus interests and costs. operative in cases where there are several
distinct debts, and not where there is only
The bank contends that the power of attorney
one that is partially secured, the error is of no
obtained from ATACO was merely in additional
importance, since the principal reason based
security in its favor, and that it was the duty of
the surety, and not that of the creditor, owed on the Bank's negligence furnishes adequate
see to it that the obligor fulfills his obligation, support to the decision of the Court of
and that the creditor owed the surety no duty of Appeals that the surety was thereby
active diligence to collect any, sum from the released.
principal debtor.

ISSUE: W/N Manila Surety is released from

the obligation as surety.
HELD: Yes. Surety is released when
assigned funds permitted by the creditor to
be exhausted is made without notifying the
former.

By allowing the assigned funds to be

exhausted without notifying the surety, the
Bank deprived the former of any possibility of
recoursing against that security, therefore the
surety is released.

The appellant points out to its letter of

demand, Exhibit "K", addressed to the
Bureau of Public Works, on May 5, 1949,
and its letter to ATACO, Exhibit "G",
informing the debtor that as of its date,
October 31, 1949, its outstanding balance
was P156,374.83. Said Exhibit "G" has no
bearing on the issue whether the Bank has
exercised due diligence in collecting from the
Bureau of Public Works, since the letter was
addressed to ATACO, and the funds were to
come from elsewhere. As to the letter of
demand on the Public Works office, it does
not appear that any reply thereto was made;
nor that the demand was pressed, nor that
the debtor or the surety were ever apprised
that payment was not being made. The fact
remains that because of the Bank's inactivity
the other creditors were enabled to collect
P173,870.31, when the balance due to
appellant Bank was only P158,563.18. The
finding of negligence made by the Court of
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 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 111

STRONGHOLD VS. REPUBLIC Republic-Asahi then filed [a] complaint

(492 SCRA 179, G.R. No. 147561, June against JDS and SICI. It sought from JDS
22, 2006) payment of P3,256,874.00 representing
the additional expenses for the completion
FACTS: On May 24, 1989, [respondent] of the project using another contractor, and
Republic-Asahi Glass Corporation from JDS and SICI, jointly and severally,
(Republic-Asahi) entered into a contract payment of P750,000.00 as damages in
with Jose D. Santos, Jr., the proprietor of accordance with the performance bond.
JDS Construction (JDS), for the
construction of roadways and a drainage Summons were duly served on defendant-
system in Republic-Asahi’s compound. In appellee SICI. However, not in the case
order ‘to guarantee the faithful and Jose D. Santos, Jr. who already died and
satisfactory performance of its JDS Construction was no longer at its
undertakings’ JDS, shall post a address and its whereabouts were
performance bond of seven hundred ninety unknown. SICI filed its answer, alleging
five thousand pesos (P795,000.00). that the Republic- Asahi’s money claims
Hence, JDS executed, jointly and severally against SICI and JDS have been
with [petitioner] Stronghold Insurance Co., extinguished by the death of Jose D.
Inc (SICI). Santos, Jr.

Republic-Asahi’s engineers called the It further alleged that:

attention of JDS to the alleged alarmingly  Republic-Asahi can no longer prove
slow pace of the construction. However, its claim for damages in view of the
said reminders went unheeded by JDS. death of Santos.
Dissatisfied with the progress of the work  SICI was not informed by Republic-
undertaken by, Republic-Asahi Asahi of the death of Santos.
extrajudicially rescinded the contract  SICI was not informed by Republic-
pursuant to Article XIII of said contract, and Asahi of the unilateral rescission of
wrote a letter to JDS informing the latter of its contract with JDS, thus SICI was
such rescission. Such rescission, deprived of its right to protect its
according to Article XV of the contract shall interests as surety under the
not be construed as a waiver of Asahi’s performance bond, and therefore it
right to recover damages from JDS and the was released from all liability.
latter’s sureties.
Lower court dismissed the complaint of
Republic-Asahi alleged that, as a result of Republic- Asahi against JDS and SICI, on
JDS’s failure to comply with the provisions the ground that the claim against JDS did
of the contract, which resulted in the said not survive the death of its sole proprietor,
contract’s rescission, it had to hire another Jose D. Santos, Jr. Upon Motion for
contractor to finish the project, for which it Reconsideration the dismissal of the case
incurred an additional expense. against Stronghold Insurance Company,
Subsequently, Republic-Asahi sent a letter Inc., is reconsidered. However, the case
to Stronghold SICI filing its claim under the against defendant Jose D. Santos, Jr.
bond for not less than P795,000.00. On (deceased) remains undisturbed.
January 6, 1990, Republic-Asahi again
sent another letter reiterating its demand The CA ruled that SICI’s obligation under
for payment under the aforementioned the surety agreement was not extinguished
bond. Both letters allegedly went by the death of Jose D. Santos, Jr.
unheeded. Consequently, Republic-Asahi could still go
after SICI for the bond.
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 112

If a person binds himself solidarily with the

ISSUE: WON petitioner’s liability under the principal debtor, the provisions of Section
performance bond was automatically 4, Chapter 3, Title I of this Book shall be
extinguished by the death of Santos, the observed. In such case the contract is
principal. NO called a suretyship."
xxxxxxxxx

HELD: As a general rule, the death of "Art. 1216. The creditor may proceed
either the creditor or the debtor does not against any one of the solidary debtors or
extinguish the obligation. Obligations are some or all of them simultaneously. The
transmissible to the heirs, except when the demand made against one of them shall
transmission is prevented by the law, the not be an obstacle to those which may
stipulations of the parties, or the nature of subsequently be directed against the
the obligation. Only obligations that are others, so long as the debt has not been
personal or are identified with the persons fully collected."
themselves are extinguished by death.
Thus, the surety’s obligation is not an
Section 5 of Rule 86 of the Rules of Court original and direct one for the performance
expressly allows the prosecution of money of his own act, but merely accessory or
claims arising from a contract against the collateral to the obligation contracted by
estate of a deceased debtor. Evidently, the principal. Nevertheless, although the
those claims are not actually extinguished. contract of a surety is in essence
What is extinguished is only the obligee’s secondary only to a valid principal
action or suit filed before the court, which is obligation, his liability to the creditor or
not then acting as a probate court. promisee of the principal is said to be
direct, primary and absolute; in other
In the present case, whatever monetary words, he is directly and equally bound
liabilities or obligations Santos had under with the principal.
his contracts with respondent were not Under the law and jurisprudence,
intransmissible by their nature, by respondent may sue, separately or
stipulation, or by provision of law. Hence, together, the principal debtor and the
his death did not result in the petitioner herein, in view of the solidary
extinguishment of those obligations or nature of their liability. The death of the
liabilities, which merely passed on to his principal debtor will not work to convert,
estate. Death is not a defense that he or decrease or nullify the substantive right of
his estate can set up to wipe out the the solidary creditor. Evidently, despite the
obligations under the performance bond. death of the principal debtor, respondent
Consequently, petitioner as surety cannot may still sue petitioner alone, in
use his death to escape its monetary accordance with the solidary nature of the
obligation under its performance bond. latter’s liability under the performance
bond.
As a surety, petitioner is solidarily liable
with Santos in accordance with the Civil POLICY: A surety company’s liability under
Code, which provides as follows: the performance bond it issues is solidary.
"Art. 2047. By guaranty a person, called The death of the principal obligor does not,
the guarantor, binds himself to the creditor as a rule, extinguish the obligation and the
to fulfill the obligation of the principal solidary nature of that liability.
debtor in case the latter should fail to do
so.
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 113

SPOUSES TOH VS. SOLID BANK By November 17 1993, FBPC opened 13

(G.R. No. 154183, August 7, 2003) letters of credit and obtained loans totaling
P15,227,510.00. As the letters of credit
FACTS: RESPONDENT SOLID BANK were secured, FBPC through its officers
extended an "omnibus line" credit facility Kenneth Ng Li, Ma. Victoria Ng Li and
worth P10 million in favor of respondent Redentor Padilla as signatories executed a
First Business Paper Corporation (FBPC). series of trust receipts over the goods
A letter-advise dated May 16, 1993 was allegedly purchased from the proceeds of
sent to FBPC which stated the terms and the loans. But the Spouses Li had
conditions of the agreement as well as the fraudulently departed from their conjugal
checklist of documents among which is the home.
Continuing Guaranty for any and all
amounts signed by petitioner-spouses Luis The Bank served a demand letter upon
Toh and Vicky Tan Toh, and respondent- FBPC and petitioner Luis Toh invoking the
spouses Kenneth and Ma. Victoria Ng Li. acceleralation clause in the trust receipts of
The spouses Toh were then Chairman of FBPC and claimed payment for
the Board and Vice-President while P10,539,758.68 as unpaid overdue
respondent-spouses Li were President and accounts on the letters of credit plus
General Manager, respectively, of the interests and penalties. On 17 January
same corporation. 1994 respondent Bank filed a complaint for
sum of money with ex parte application for
On 10 May 1993, spouses Toh and a writ of preliminary attachment against
spouses Li signed the required Continuing FBPC, spouses Li, and spouses Toh.
Guaranty, which defined the contract Hence, properties of FBPC were
arising therefrom as a surety agreement impounded but was later released to third
and provided for the solidary liability of the party claimants.
signatories. The Continuing Guaranty set
forth no maximum limit on the Spouses Toh alleged that they were made
indebtedness that respondent FBPC may to sign papers in blank and the Continuing
incur and for which the sureties may be Guaranty could have been one of them , it
liable. was impossible and absurd for them to
have freely and consciously executed the
The surety also contained a de facto surety on 10 May 1993, the date appearing
acceleration clause if "default be made in on its face since beginning March of that
the payment of any of the instruments, year they had already divested their shares
indebtedness, or other obligation" in FBPC and assigned them in favor of
guaranteed by petitioners and respondent Kenneth Ng Li although the
respondents. So as to strengthen this deeds of assignment were notarized only
security, the Continuing Guaranty waived on 14 June 1993.
rights of the sureties against delay or
absence of notice or demand on the part of They also contended that through FBPC
respondent Bank, and gave future consent Board Resolution dated 12 May 1993
to the Bank's action to "extend or change petitioner Luis Toh was removed as an
the time payment, and/or the manner, authorized signatory for FBPC and
place or terms of payment," including replaced by spouses Li and Redentor
renewal, of the credit facility in such Padilla for all the transactions of FBPC with
manner and upon such terms as the Bank respondent Bank. They even resigned from
without notice to or further assent from the their respective positions in FBPC as
sureties. reflected in the 12 June 1993 Secretary's
Certificate submitted to the Securities and
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 114

Exchange Commission as petitioner Luis in an amount beyond the credit limit

Toh was succeeded as Chairman by of P10 million pesos;
respondent Ma. Victoria Ng Li, while one (v) the inordinate delay of the Bank in
Mylene C. Padilla took the place of demanding the payment of the
petitioner Vicky Tan Toh as Vice-President. indebtedness;
(vi) the presence of ghost deliveries and
Finally, Toh averred that sometime in June fictitious purchases using the Bank's
1993 they obtained from respondent letters of credit and trust receipts;
Kenneth Ng Li their exclusion from the (vii) the extension of the due
several surety agreements they had dates of the letters of credit without
entered into with different banks, i.e., the required 25% partial payment
Hongkong and Shanghai Bank, China per extension;
Banking Corporation, Far East Bank and (viii) the approval of another letter
Trust Company, and herein respondent of credit, L/C 93-0042, even after
Bank. As a matter of record, these other respondent- spouses Li had
banks executed written surety agreements defaulted on their previous
that showed respondent Kenneth Ng Li as obligations; and,
the only surety of FBPC's indebtedness. (ix) the unmistakable pattern of fraud.

TC-FBPC liable to pay Solid Bank ISSUE: WON the spouses Toh are liable
Corporation the principal of as sureties to Solidbank. NO
P10,539,758.68 plus twelve percent (12%)
interest per annum from finality of the HELD: The Continuing Guaranty is a valid
Decision until fully paid, but absolving and binding contract of petitioner-spouses
petitioner-spouses Toh of any liability. as it is a public document that enjoys the
presumption of authenticity and due
CA-modified the Decision and held that by execution. We are bound by the consistent
signing the Continuing Guaranty, finding of the courts a quo that petitioner-
petitioner-spouses became solidarily liable spouses Toh "voluntarily affixed their
with FBPC citing that they failed to execute signature[s]" on the surety agreement and
any written revocation of the Continuing were thus "at some given point in time
Guaranty with notice to respondent Bank, willing to be liable under those forms." In
the instrument remained in full force and the absence of clear, convincing and more
effect when the letters of credit were than preponderant evidence to the
availed of by respondent FBPC. contrary, our ruling cannot be otherwise.

Petitioner-spouses Luis Toh and Vicky Tan Similarly, there is no basis for petitioners to
Toh maintain that the Continuing Guaranty limit their responsibility so long as they
is not legally valid and binding against were corporate officers and stockholders of
them for having been executed long after FBPC. Nothing in the Continuing Guaranty
they had withdrawn from FBPC. Lastly, restricts their contractual undertaking to
they claim that the surety agreement has such condition or eventuality. In fact the
been extinguished by the material obligations assumed by them therein
alterations thereof and of the "letter-advise" subsist "upon the undersigned, the heirs,
which were allegedly brought about by: executors, administrators, successors and
(ii) the provision of an acceleration assigns of the undersigned, and shall inure
clause in the trust receipts; to the benefit of, and be enforceable by
(iii) the flight of their co-sureties, Li; you, your successors, transferees and
(iv) the grant of credit facility despite the assigns," and that their commitment "shall
non- payment of marginal deposits remain in full force and effect until written
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 115

notice shall have been received by [the extendible three (3) times for a period of
Bank] that it has been revoked by the thirty (30) days for each extension, subject
undersigned." to twenty-five percent (25%) partial
payment per extension. Any doubt on the
Verily, if petitioners intended not to be terms and conditions of the surety
charged as sureties after their withdrawal agreement should be resolved in favor of
from FBPC, they could have simply the surety.
terminated the agreement by serving the
required notice of revocation upon the Stated otherwise, an extension of the
Bank as expressly allowed therein. period for enforcing the indebtedness does
not by itself bring about the discharge of
In Garcia v. CA we ruled – the sureties unless the extra time is not
Regarding the petitioner's claim that he is permitted within the terms of the waiver,
liable only as a corporate officer of WMC, i.e., where there is no payment or there is
the surety agreement shows that he signed deficient settlement of the marginal deposit
the same not in representation of WMC or and the twenty-five percent (25%)
as its president but in his personal consideration, in which case the illicit
capacity. He is therefore personally bound. extension releases the sureties.
There is no law that prohibits a corporate
officer from binding himself personally to Under Art. 2055 of the Civil Code, the
answer for a corporate debt. While the liability of a surety is measured by the
limited liability doctrine is intended to terms of his contract, and while he is liable
protect the stockholder by immunizing him to the full extent thereof, his accountability
from personal liability for the corporate is strictly limited to that assumed by its
debts, he may nevertheless divest himself terms.
of this protection by voluntarily binding
himself to the payment of the corporate Respondent Bank extended several letters
debts. The petitioner cannot therefore take of credit were for 90 days with alarmingly
refuge in this doctrine that he has by his flawed and inadequate consideration - the
own acts effectively waived. Insofar as indispensable marginal deposit of fifteen
petitioners stipulate in the Continuing percent (15%) and the twenty-five percent
Guaranty that respondent Bank "may at (25%) prerequisite for each extension of
any time, or from time to time, in [its] thirty (30) days. It bears stressing that the
discretion x x x extend or change the time requisite marginal deposit and security for
payment," this provision even if understood every thirty (30) - day extension specified
as a waiver is confined per se to the grant in the "letter-advise" were not set aside or
of an extension and does not surrender the abrogated nor was there any prior notice of
prerequisites therefor as mandated in the such fact, if any was done.
"letter-advise."
The foregoing extensions of the letters of
In other words, the authority of the Bank to credit made by respondent Bank without
defer collection contemplates only observing the rigid restrictions for
authorized extensions, that is, those that exercising the privilege are not covered by
meet the terms of the "letter-advise." the waiver stipulated in the Continuing
Certainly, while the Bank may extend the Guaranty. Evidently, they constitute illicit
due date at its discretion pursuant to the extensions prohibited under Art. 2079 of
Continuing Guaranty, it should nonetheless the Civil Code, "[a]n extension granted to
comply with the requirements that the debtor by the creditor without the
domestic letters of credit be supported by consent of the guarantor extinguishes the
fifteen percent (15%) marginal deposit guaranty."
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 116

this security as a primary resource for the

This act of the Bank is not mere failure or payment of a debt, will discharge the
delay on its part to demand payment after surety to the extent of the value of the
the debt has become due, as was the case property or lien released x x x x [for] there
in unpaid five (5) letters of credit which the immediately arises a trust relation between
Bank did not extend, defer or put off, but the parties, and the creditor as trustee is
comprises conscious, separate and binding bound to account to the surety for the
agreements to extend the due date. As a value of the security in his hands.
result of these illicit extensions, petitioner-
spouses Luis Toh and Vicky Tan Toh are For the same reason, the grace period
relieved of their obligations as sureties of granted by respondent Bank represents
respondent FBPC under Art. 2079 of the unceremonious abandonment and
Civil Code. forfeiture of the fifteen percent (15%)
marginal deposit and the twenty-five
Further, we note several suspicious percent (25%) partial payment as fixed in
circumstances that militate against the the "letter-advise." These payments are
enforcement of the Continuing Guaranty unmistakably additional securities intended
against the accommodation sureties. to protect both respondent Bank and the
Firstly, the guaranty was executed more sureties in the event that the principal
than thirty (30) days from the original debtor FBPC becomes insolvent during the
acceptance period as required in the extension period. Compliance with these
"letter-advise." Thereafter, barely two (2) requisites was not waived by petitioners in
days after the Continuing Guaranty was the Continuing Guaranty. For this
signed, corporate agents of FBPC were unwarranted exercise of discretion,
replaced on 12 May 1993 and other respondent Bank bears the loss; due to its
adjustments in the corporate structure of unauthorized extensions to pay granted to
FBPC ensued in the month of June 1993, FBPC, petitioner-spouses Luis Toh and
which the Bank did not investigate Vicky Tan Toh are discharged as sureties
although such were made known to it. By under the Continuing Guaranty.
the same token, there is no explanation on
record for the utter worthlessness of the Finally, the foregoing omission or
trust receipts in favor of the Bank when negligence of respondent Bank in failing to
these documents ought to have added safe-keep the security provided by the
more security to the indebtedness of marginal deposit and the twenty-five
FBPC. The Bank has in fact no information percent (25%) requirement results in the
whether the trust receipts were indeed material alteration of the principal contract,
used for the purpose for which they were i.e., the "letter-advise," and consequently
obtained. releases the surety. This inference was
admitted by the Bank through the
The consequence of these omissions is to testimony of its lone witness that
discharge the surety, the spouses Toh,, "[w]henever this obligation becomes due
under Art. 2080 of the Civil Code, or at the and demandable, except when you roll it
very least, mitigate the liability of the surety over, (so) there is novation there on the
up to the value of the property or lien original obligations."
released – If the creditor x x x has acquired
a lien upon the property of a principal, the As has been said, "if the suretyship
creditor at once becomes charged with the contract was made upon the condition that
duty of retaining such security, or the principal shall furnish the creditor
maintaining such lien in the interest of the additional security, and the security being
surety, and any release or impairment of furnished under these conditions is
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 117

afterwards released by the creditor, the could sooner pay his outstanding
surety is wholly discharged, without regard obligation.
to the value of the securities released, for
such a transaction amounts to an alteration In January 1987 when a new tenant moved
of the main contract." into the house formerly leased to Mike,
Calibo had the tractor moved to the garage
Petition granted. Decision of CA is of his father’s house, also in Tagbilaran
reversed and set aside. Spouses Toh are City. After a long while, or on November
absolved. 22, 1988, Mike’s father, Pablo Abella,
came to Tagbilaran City to claim and take
possession of the tractor. Calibo, however,
CALIBO VS. CA informed Pablo that Mike left the tractor
(G.R. No. 120528, January 29, 2001) with him as security for the payment of
Mike’s obligation to him. Pablo offered to
FACTS: January 25, 1979, Dr. Pablo U. write Mike a check for P2,000.00 in
Abella purchased an MF 210 agricultural payment of Mike’s unpaid lease rentals, in
tractor which he used in his farm in addition to issuing postdated checks to
Dagohoy, Bohol. Sometime in October or cover the unpaid electric and water bills the
November 1985, Pablo Abella’s son, Mike correctness of which Pablo said he still had
Abella rented for residential purposes the to verify with Mike.
house of defendant-appellant Dionisio R.
Calibo, Jr., in Tagbilaran City. Calibo told Pablo that he would accept the
P2,000.00-check only if the latter would
In October 1986, Pablo Abella pulled out execute a promissory note in his favor to
his aforementioned tractor from his farm in cover the amount of the unpaid electric and
Dagohoy, Bohol, and left it in the water bills. Pablo was not amenable to this
safekeeping of his son, Mike Abella, in proposal. The two of them having failed to
Tagbilaran City. Mike kept the tractor in the come to an agreement, Pablo left and went
garage of the house he was leasing from back to Cebu City, unsuccessful in his
Calibo. attempt to take possession of the tractor.”

Since he started renting Calibo’s house, On November 25, 1988, Dr. Abella
Mike had been religiously paying the instituted an action for replevin, claiming
monthly rentals therefor, but beginning ownership of the tractor and seeking to
November of 1986, he stopped doing so. recover possession thereof from petitioner.
The following month, Calibo learned that
Mike had never paid the charges for RTC: ruled in favor of Dr. Abella.
electric and water consumption in the
leased premises which the latter was duty- CA: sustained the ruling of the trial court
bound to shoulder. that Mike Abella could not have validly
Thus, Calibo confronted Mike about his pledged the subject tractor to petitioner
rental arrears and the unpaid electric and since he was not the owner thereof, nor
water bills. During this confrontation, Mike was he authorized by its owner to pledge
informed Calibo that he (Mike) would be the tractor.
staying in the leased property only until the
end of December 1986. Mike also assured ISSUE: WON the tractor in question was
Calibo that he would be settling his validly pledged to Atty. Calibo. NO.
account with the latter, offering the tractor
as security. Mike even asked Calibo to HELD: Atty. Calibo claims that the tractor
help him find a buyer for the tractor so he in question was validly pledged to him by
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 118

Dr. Abella’s son Mike Abella to answer for there is no valid pledge.
the latter’s monetary obligations to
petitioner. In the alternative, petitioner “He who is not the owner or proprietor of
asserts that the tractor was left with him, in the property pledged or mortgaged to
the concept of an innkeeper, on deposit guarantee the fulfillment of a principal
and that he may validly hold on thereto obligation, cannot legally constitute such a
until Mike Abella pays his obligations. guaranty as may validly bind the property
in favor of his creditor, and the pledgee or
He maintains that even if Mike Abella were mortgagee in such a case acquires no right
not the owner of the tractor, a principal- whatsoever in the property pledged or
agent relationship may be implied between mortgaged.”
Mike Abella and Dr. Abella. He contends
that the latter failed to repudiate the (Discussion regarding Agency)
alleged agency, knowing that his son is There also does not appear to be any
acting on his behalf without authority when agency in this case. We agree with the
he pledged the tractor to petitioner. Calibo Court of Appeals that:
argues that, under Article 1911 of the Civil “As indicated in Article 1869, for an agency
Code, Dr. Abella is bound by the pledge, relationship to be deemed as implied, the
even if it were beyond the authority of his principal must know that another person is
son to pledge the tractor, since he allowed acting on his behalf without authority. Here,
his son to act as though he had full appellee categorically stated that the
powers. onlypurpose for his leaving the subject
tractor in the care and custody of Mike
In a contract of pledge, the creditor is given Abella was for safekeeping, and definitely
the right to retain his debtor’s movable not for him to pledge or alienate the same.
property in his possession, or in that of a If it were true that Mike pledged appellee’s
third person to whom it has been delivered, tractor to appellant, then Mike was acting
until the debt is paid. For the contract to be not only without appellee’s authority but
valid, it is necessary that: without the latter’s knowledge as well.
the pledge is constituted to secure
the fulfillment of a principal (Discussion regarding Deposit)
obligation; There is likewise no valid deposit in this
the pledgor be the absolute owner case. In a contract of deposit, a person
of the thing pledged; and receives an object belonging to another
the person constituting the pledge with the obligation of safely keeping it and
has the free disposal of his property, of returning the same. Petitioner himself
and in the absence thereof, that he states that he received the tractor not to
be legally authorized for the safely keep it but as a form of security for
purpose. the payment of Mike Abella’s obligations.
There is no deposit where the principal
As found by the trial court and affirmed by purpose for receiving the object is not
respondent court, the pledgor in this case, safekeeping.
Mike Abella, was not the absolute owner of
the tractor that was allegedly pledged to
petitioner. The tractor was owned by his
father, Dr. Abella, who left the equipment
with him for safekeeping. Clearly, the
second requisite for a valid pledge, that the
pledgor be the absolute owner of the
property, is absent in this case. Hence,
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 119

DEVELOPMENT BANK OF THE For the failure of Litex to pay its obligation,
PHILIPPINES V PRUDENTIAL BANK DBP extra-judicially foreclosed on the real
estate and chattel mortgages, including the
Litex could not have subjected the goods articles claimed by Prudential Bank. During
under the trust receipt to a chattel the foreclosure sale held on April 19, 1983,
mortgage. Thus, the inclusion in the DBP acquired the foreclosed properties as
mortgage was void and had no legal effect. the highest bidder. Learning of the
There being no valid mortgage, there could intended public auction, Prudential Bank
also be no valid foreclosure or valid auction wrote a letter dated September 6, 1984 to
sale. Thus, DBP could not be considered DBP reasserting its claim over the items
either as a mortgagee or as a purchaser in covered by “trust receipts” in its name and
good faith. advising DBP not to include them in the
auction. It also demanded the turn-over of
FACTS: Lirag Textile Mills, Inc. (Litex) the articles or alternatively, the payment of
opened an irrevocable commercial letter of their value.
credit with respondent Prudential Bank for
US$498,000. This was in connection with ISSUE: Whether or not the chattel
its importation of 5,000 spindles for mortgage covers the goods under the trust
spinning machinery with drawing frame, receipt
simplex fly frame, ring spinning frame and
various accessories, spare parts and tool HELD: No. Article 2085 (2) of the Civil
gauge. These were released to Litex under Code requires that, in a contract of pledge
covering “trust receipts” it executed in favor or mortgage, it is essential that the pledgor
of Prudential Bank. Litex installed and used or mortgagor should be the absolute owner
the items in its textile mill located in of the things pledged or mortgaged. Article
Montalban, Rizal. 9 years later, DBP 2085 (3) further mandates that the person
granted a foreign currency loan in the constituting the pledge or mortgage must
amount of US$4,807,551 to Litex. have the free disposal of his property, and
in the absence thereof, that he be legally
To secure the loan, Litex executed real authorized for the purpose. Litex had
estate and chattel mortgages on its plant neither absolute ownership, free disposal
site in Montalban, Rizal, including the nor the authority to freely dispose of the
buildings and other improvements, articles. Litex could not have subjected
machineries and equipments there. Among them to a chattel mortgage. Their inclusion
the machineries and equipments in the mortgage was void and had no legal
mortgaged in favor of DBP were the effect. There being no valid mortgage,
articles covered by the “trust there could also be no valid foreclosure or
receipts.” Sometime in June 1982, valid auction sale. Thus, DBP could not be
Prudential Bank learned about DBP’s plan considered either as a mortgagee or as a
for the overall rehabilitation of Litex. In a purchaser in good faith.
July 14, 1982 letter, Prudential Bank
notified DBP of its claim over the various No one can transfer a right to another
items covered by the “trust receipts” which greater than what he himself has. Nemo
had been installed and used by Litex in the dat quod non habet. Hence, Litex could not
textile mill. Prudential Bank informed DBP transfer a right that it did not have over the
that it was the absolute and juridical owner disputed items. Corollarily, DBP could not
of the said items and they were thus not acquire a right greater than what its
part of the mortgaged assets that could be predecessor-in-interest had. The spring
legally ceded to DBP. cannot rise higher than its source. DBP
merely stepped into the shoes of Litex as
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 120

trustee of the imported articles with an CAVITE DEVELOPMENT vs. SPOUSES

obligation to pay their value or to return LIM
them on Prudential Bank’s demand. By its
failure to pay or return them despite FACTS: One Rodolfo Guansing obtained a
Prudential Bank’s repeated demands and loan in the amount of P90,000.00 from
by selling them to Lyon without Prudential Cavite Development Bank (CDB). As a
Bank’s knowledge and conformity, DBP security, he mortgaged a parcel of land
became a trustee ex maleficio. situated La Loma, Quezon City and
covered by TCT No. 300809 registered in
As a consequence of the release of the his name. Guansing defaulted on the
goods and the execution of the trust payment of the loan, which led CDB to
receipt, a two-fold obligation is imposed on foreclose the mortgage and later on
the entrustee, namely: emerged as the highest bidder and
(1) to hold the designated goods, subsequently, the owner of the lot after
documents or instruments in trust for the Guansing failed to redeem the same.
purpose of selling or otherwise disposing of
them and The Spouses Lim, through a broker,
(2) to turn over to the entruster either the offered to purchase the property from
proceeds thereof to the extent of the CDB. The formal written offer stated a
amount owing to the entruster or as payment of P30,000 (10% of P300,000) as
appears in the trust receipt, or the goods, option money, provided that the land be
documents or instruments themselves if cleared of illegal occupants. For payment
they are unsold or not otherwise disposed of the option money, CDB issued an official
of, in accordance with the terms and receipt. However, after following up on the
conditions specified in the trust receipt. sale, Lim discovered that the original
owner of the land is PERFECTO
In the case of goods, they may also be GUANSING, the father of Rodolfo. In a civil
released for other purposes substantially case instituted by Perfecto for the
equivalent to (a) their sale or the cancellation of Rodolfo’s title, the Supreme
procurement of their sale; or (b) their Court adjudged Perfecto as the real owner
manufacture or processing with the after proving that Rodolfo fraudulently
purpose of ultimate sale, in which case the obtained it. Thus, Rodolfo’s title was
entruster retains his title over the said cancelled and a new one was issued to
goods whether in their original or Perfecto.
processed form until the entrustee has
complied fully with his obligation under the Aggrieved, the Spouses Lim instituted an
trust receipt; or (c) the loading, unloading, action for specific performance and
shipment or transshipment or otherwise damages questioning the ability of CDB,
dealing with them in a manner preliminary and its mother company Far East Bank
or necessary to their sale. and Trust Company (FEBTC), to sell the
subject property.
Thus, in a trust receipt transaction, the
release of the goods to the entrustee, on The Regional Trial Court rendered a
his execution of a trust receipt, is decision in favor of the Spouses Lim, which
essentially for the purpose of their sale or was affirmed by the Court of Appeals.
is necessarily connected with their ultimate
or subsequent sale.
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 121

ISSUES: (3) NO. CDB cannot be considered as a

(1) What is the legal relation between the mortgagee in good faith.
parties?  CDB was remiss in its duty as
(2) Whether or not Rodolfo Guansing/CDB bank and failed to exercise the
was the absolute owner of the subject due diligence required of it. In
property as required under Art. 2085 to short, CDB was negligent.
effect a valid mortgage/sale?  Citing jurisprudence, it is
(3) Whether or not CDB is a “mortgagee in standard practice for banks,
good faith”? before approving a loan, to send
representatives to the premises
HELD: of the land offered as collateral
(1) The parties entered into a CONTRACT and to investigate who are the
OF SALE. real owners thereof, noting that
 The formal written offer of the banks are expected to exercise
Spouses Lim was accepted by more care and prudence than
CDB. private individuals in their
 The Spouses Lim paid the option dealings, even those involving
money, which left only the registered lands, for their
balance of the purchase price to business is affected with public
be paid. interest
 In the Law on Sales, one does  No evidence to the contrary.
not need to be the owner at the o Extrajudicial Settlement of
perfection of the contract. the Estate With Waiver, a
 HOWEVER, NEMO DAT QUOD self-executed deed by
NON HABET [One cannot give Rodolfo, should have
what he does not have]. At the placed CDB on guard.
consummation stage, it was o Report of the purported
impossible for CDB to comply ocular inspection by its
with its legal obligation. representatives was never
admitted into evidence.
(2) NO. The sale by CDB to Lim of the
property mortgaged in 1983 by
Rodolfo Guansing must, therefore, MAMERTA VDA. DE JAYME VS CA
be deemed a nullity for CDB did not
have a valid title to the said property. FACTS: The spouses Graciano and
 CDB never acquired a valid title Mamerta Jayme are the registered owners
to the property because the of Lot 2700, situated in the Municipality of
foreclosure sale, by virtue of Mandaue On January 8, 1973, they
which the property had been entered into a Contract of Lease 5 with
awarded to CDB as highest George Neri, president of Airland Motors
bidder, is likewise void since the Corporation (now Cebu Asiancars Inc.),
mortgagor was not the owner of covering one-half of Lot 2700. The lease
the property foreclosed was for twenty (20) years.
 A “forced sale” is still a sale
within the contemplation of the The terms and conditions of the lease
law. Thus, the principle that the contract stipulated that Cebu Asiancars
seller must be the owner of the Inc. (hereafter, Asiancars) may use the
thing sold also applies. leased premises as a collateral to secure
payment of a loan which Asiancars may
obtain from any bank, provided that the
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 122

proceeds of the loan shall be used solely Eventually, MBTC extrajudicially foreclosed
for the construction of a building which, the mortgage. A public auction was held on
upon the termination of the lease or the February 4, 1981. MBTC was the highest
voluntary surrender of the leased premises bidder for P1,067,344.35. A certificate of
before the expiration of the contract, shall sale was issued and was registered with
automatically become the property of the the Register of Deeds.
Jayme spouses (the lessors).
A Special Power of Attorney\7 dated Petitioners claim that Neri and Asiancars
January 26, 1974, was executed in favor of did not tell them that the indebtedness
respondent George Neri, who used the lot secured by the mortgage was for
to secure a loan of P300,000 from the P6,000,000 and that the security was the
General Bank and Trust Company. The whole of Lot 2700. Petitioners allege that
loan was fully paid on August 14, 1977. the deed presented to the Jayme spouses
was in blank, without explanation on the
In October 1977, Asiancars obtained a stipulations contained therein, except that
loan of P6,000,000 from the Metropolitan its conditions were identical to those of the
Bank and Trust Company (MBTC). The stipulations when they mortgaged half the
entire Lot 2700 was offered as one of lot’s area previously with General Bank.
several properties given as collateral for Petitioners also alleged that the Jayme
the loan. As mortgagors, the spouses spouses were illiterate and only knew how
signed a Deed of Real Estate to sign their names. That because they did
Mortgage dated November 21, 1977 in not know how to read nor write, and had
favor of MBTC. It stated that the deed was given their full trust and confidence to
to secure the payment of a loan obtained George Neri, the spouses were deceived
by Asiancars from the bank. into signing the Deed of Real Estate
Mortgage. Their intention as well as
To assure the Jayme spouses, Neri and consent was only to be bound as
the other officers of Asiancars, executed guarantors.
an undertaking .In it they promised, in their
personal capacities and/or in ISSUE: WON the dacion en pago by
representation of Cebu Asiancars, Inc., "to Asiancars in favor of MBTC is valid and
compensate Mr. & Mrs. Graciano Jayme binding despite the stipulation in the lease
for any and all or whatever damage they contract that ownership of the building will
may sustain or suffer by virtue and arising vest on the Jaymes at the termination of
out of the mortgage to MBTC. In addition, the lease.
Neri wrote a letter dated September 1,
1981 addressed to Mamerta Jayme HELD: In the case at bar, when Asiancars
acknowledging her "confidence and help" failed to pay its obligations with MBTC, the
extended to him, his family and Asiancars. properties given as security (one of them
He promised to pay their indebtedness to being the land owned by the Jaymes)
MBTC before the loan was due. became subject to foreclosure. When
several things are given to secure the
Meeting financial difficulties and incurring same debt in its entirety, all of them are
an outstanding balance on the loan, liable for the debt, and the creditor does
Asiancars conveyed ownership of the not have to divide his action by distributing
building on the leased premises to MBTC, the debt among the various things pledged
by way of "dacion en pago." Asiancars or mortgaged. Even when only a part of the
failed to pay. debt remains unpaid, all the things are
liable for such balance.
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 123

The debtor cannot ask for the release of Compania St., Interior Molo, respectively,
one or some of the several properties have this date mortgaged the said property
pledged or mortgaged (or any portion to my cousin Pio Servando, in the amount
thereof) or proportionate extinguishment of of TWENTY THOUSAND PESOS
the pledge or mortgage unless and until (P20,000.00), redeemable for a period not
the debt secured has been fully paid. exceeding ten (10) years, the mortgage
amount bearing an interest of 10% per
The alienation of the building by Asiancars annum.
in favor of MBTC for the partial satisfaction
of its indebtedness is, in our view, also I further certify that in case I fail to redeem
valid. The ownership of the building had the said properties within the period stated
been effectively in the name of the lessee- above, my cousin Pio Servando, shall
mortgagor (Asiancars), though with the become the sole owner thereof.
provision that said ownership be ISSUE: WON the sale can be annulled by
transferred to the Jaymes upon termination reason that a mortgages has been
of the lease or the voluntary surrender of constituted on the subject properties. NO
the premises. The lease was constituted
on January 8, 1973 and was to expire 20 HELD: Plaintiff has no standing to question
years thereafter, or on January 8, 1993. the validity of the deed of sale executed by
The alienation via dacion en pago was the deceased defendant Jose Servando in
made by Asiancars to MBTC on December favor of his co-defendants Hechanova and
18, 1980, during the subsistence of the Masa. No valid mortgage has been
lease. At this point, the mortgagor, constituted plaintiff's favor, the alleged
Asiancars, could validly exercise rights of deed of mortgage being a mere private
ownership, including the right to alienate it, document and not registered; moreover, it
as it did to MBTC. contains a stipulation (pacto comisorio)
which is null and void under Article 2088 of
the Civil Code. Even assuming that the
HECHANOVA vs ADIL property was validly mortgaged to the
plaintiff, his recourse was to foreclose the
FACTS: Pio Servando sought to annul the mortgage, not to seek annulment of the
sale made by Jose Servando of three sale.
parcels of land which according to him
were mortgaged in his favor. Alternatively,
if the sale is not annulled, to order the MANILA BANKING vs TEODORO
defendant Jose Servando to pay the
amount of P20,000.00, plus interests, and FACTS: On April 25, 1966, Anastacio Jr. &
to order defendants to pay damages. Grace Anna, together with Anastacio
Attached to the complaint was a copy of Teodoro, Sr., jointly and severally,
the private document evidencing the executed in favor of Manila Banking Copr.
alleged mortgage (Annex A), which is (MB) a Promissory Note (No. 11487) for
quoted hereunder: the sum of P10,420.00 payable in 120
days, or on August 25, 1966, at 12%
August 20, 1970 interest per annum. Teodoros failed to pay
This is to certify that I, Jose Yusay the said amount inspire of repeated
Servando, the sole owner of three parcel of demands and the obligation as of
land under Tax Declaration No. 28905, September 30, 1969 stood at P 15,137.11
44123 and 31591 at Lot No. 1, 1863- including accrued interest and service
Portion of 1863 & 1860 situated at Sto. charge.
Nino St., Arevalo, Compania St. &
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 124

On May 3, 1966 and June 20, 1966, due on the Promissory Note, this action
Anastacio Sr. (Father) and Anastacio, Jr. was instituted on November 13, 1969,
(Son) executed in favor of MB two originally against the Father, Son, and the
Promissory Notes (Nos. 11515 and 11699) latter's wife. The Father died. The action,
for P8,000.00 an P1,000.00 respectively, then is against Son and his wife for the
payable in 120 days at 12% interest per collection of the sum of P 15,037.11 on
annum. They made a partial payment on Promissory Note No. 14487; and against
the May 3, 1966 promissory Note but none Son for the recovery of P 8,394.7.4 on
on the June 20, 1966 Promissory Note, Promissory Notes Nos. 11515 and 11699,
leaving still an unpaid balance of plus interest on both amounts at 12% per
P8,934.74 as of September 30, 1969 annum from September 30, 1969 until fully
including accrued interest and service paid, and 10% of the amounts due as
charge. attorney's fees.

The three Promissory Notes stipulated that ISSUE 1: WON the assignment of
any interest due if not paid at the end of receivables has the effect of payment of all
every month shall be added to the total the loans contracted by appellants from
amount then due, the whole amount to appellee bank. NO
bear interest at the rate of 12% per annum
until fully paid. It appears that on January HELD 1: Assignment of credit is an
24, 1964, the Son executed in favor of agreement by virtue of which the owner of
plaintiff a Deed of Assignment of a credit, known as the assignor, by a legal
Receivables from the Emergency cause, such as sale, dation in payment,
Employment Administration in the sum of exchange or donation, and without the
P44,635.00. The Deed of Assignment need of the consent of the debtor, transfers
provided that it was for and in his credit and its accessory rights to
consideration of certain credits, loans, another, known as the assignee, who
overdrafts and other credit acquires the power to enforce it to the
accommodations extended to Teodoros as same extent as the assignor could have
security for the payment of said sum and enforced it against the debtor. ...
the interest thereon, and that they do
hereby remise, release and quitclaim all its It may be in the form of a sale, but at times
rights, title, and interest in and to the it may constitute a dation in payment, such
accounts receivables. as when a debtor, in order to obtain a
release from his debt, assigns to his
In their stipulations of Fact, it is admitted by creditor a credit he has against a third
the parties that MB extended loans to person, or it may constitute a donation as
Teodoros on the basis and by reason of when it is by gratuitous title; or it may even
certain contracts entered into by the be merely by way of guaranty, as when the
defunct Emergency Employment creditor gives as a collateral, to secure his
Administration (EEA) with Teodoros for the own debt in favor of the assignee, without
fabrication of fishing boats, and that the transmitting ownership. The character that
Philippine Fisheries Commission it may assume determines its requisites
succeeded the EEA after its abolition; that and effects. Its regulation, and the capacity
non-payment of the notes was due to the of the parties to execute it; and in every
failure of the Commission to pay Teodoros case, the obligations between assignor and
after the latter had complied with their assignee will depend upon the judicial
contractual obligations. relation which is the basis of the
assignment.
For failure of Teodoros to pay the sums
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 125

It is evident that the assignment of regarded by itself, appellate to have been

receivables executed by appellants on absolute, its object and character might still
January 24, 1964 did not transfer the be qualified and explained by a
ownership of the receivables to appellee contemporaneous writing declaring it to
bank and release appellants from their have been a deposit of the property as
loans with the bank incurred under collateral security. It has been Id that a
promissory notes Nos. 11487,11515 and transfer of property by the debtor to a
11699. creditor, even if sufficient on its farm to
make an absolute conveyance, should be
The Deed of Assignment provided that it treated as a pledge if the debt continues in
was for and in consideration of certain existence and is not discharged by the
credits, loans, overdrafts, and their credit transfer, and that accordingly, the use of
accommodations in the sum of P10,000.00 the terms ordinarily exporting conveyance,
extended to appellants by appellee bank, of absolute ownership will not be given that
and as security for the payment of said effect in such a transaction if they are also
sum and the interest thereon; that commonly used in pledges and mortgages
appellants as assignors, remise, release, and therefore do not unqualifiedly indicate
and quitclaim to assignee bank all their a transfer of absolute ownership, in the
rights, title and interest in and to the absence of clear and ambiguous language
accounts receivable assigned (lst or other circumstances excluding an intent
paragraph). It was further stipulated that to pledge. (Lopez v. Court of Appeals, 114
the assignment will also stand as a SCRA 671 [1982]).
continuing guaranty for future loans of
appellants to appellee bank and Definitely, the assignment of the
correspondingly the assignment shall also receivables did not result from a sale
extend to all the accounts receivable; transaction. It cannot be said to have been
appellants shall also obtain in the future, constituted by virtue of a dation in payment
until the consideration on the loans for appellants' loans with the bank
secured by appellants from appellee bank evidenced by promissory note Nos. 11487,
shall have been fully paid by them (No. 9). 11515 and 11699 which are the subject of
the suit for collection in Civil Case No.
The position of Teodoros, however, is that 78178. At the time the deed of assignment
the deed of assignment is a quitclaim in was executed, said loans were non-
consideration of their indebtedness to existent yet. The deed of assignment was
appellee bank, not mere guaranty, in view executed on January 24, 1964 (Exh. "G"),
of the provisions of the deed of while promissory note No. 11487 is dated
assignment. April 25, 1966 (Exh. 'A), promissory note
11515, dated May 3, 1966 (Exh. 'B'),
The character of the transactions between promissory note 11699, on June 20, 1966
the parties is not, however, determined by (Exh. "C"). At most, it was a dation in
the language used in the document but by payment for P10,000.00, the amount of
their intention. credit from appellee bank indicated in the
deed of assignment. At the time the
The characters of the transaction between assignment was executed, there was no
the parties is to be determined by their obligation to be extinguished except the
intention, regardless of what language was amount of P10,000.00. Moreover, in order
used or what the form of the transfer was. that an obligation may be extinguished by
If it was intended to secure the payment of another which substitutes the same, it is
money, it must be construed as a pledge. imperative that it be so declared in
However, even though a transfer, if unequivocal terms, or that the old and the
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 126

new obligations be on every point

incompatible with each other (Article 1292, MB did try to collect on the pledged
New Civil Code). receivables. As the Emergency
Employment Agency (EEA) which issued
Obviously, the deed of assignment was the receivables had been abolished, the
intended as collateral security for the bank collection had to be coursed through the
loans of appellants, as a continuing Office of the President which disapproved
guaranty for whatever sums would be the same. The receivable became virtually
owing by defendants to plaintiff, as stated worthless leaving Teodoros' loans from MB
in stipulation No. 9 of the deed. unsecured. It is but proper that after their
repeated demands made on appellants for
In case of doubt as to whether a the settlement of their obligations, appellee
transaction is a pledge or a dation in bank should proceed against appellants. It
payment, the presumption is in favor of would be an exercise in futility to proceed
pledge, the latter being the lesser against a defunct office for the collection of
transmission of rights and interests (Lopez the receivables pledged.
v. Court of Appeals, supra).

ISSUE 2: WON Manila Banking must first ALCANTARA vs ALINEA et al

exhaust all legal remedies against the
Philippine Fisheries Commission before it FACTS: Alcantara filed a complaint in the
can proceed against appellants for Court of First Instance of La Laguna,
collections of loan under the promissory praying that judgment be rendered in his
notes which are plaintiffs bases in the behalf ordering the defendants to deliver to
action for collection in Civil Case No. him the house and lot claimed, and to pay
78178. NO. him in addition thereto as rent the sum of 8
pesos per month from February of that
HELD 2: The obligation of Teodoros under year, and to pay the costs of the action.
the promissory notes not having been
released by the assignment of receivables, Alcantara alleged in effect that on the 29th
appellants remain as the principal debtors day of February, 1904, the defendants,
of MB rather than mere guarantors. The Ambrosio Alinea and Eudosia Belarmino,
deed of assignment merely guarantees borrowed from him the sum of 480 pesos,
said obligations. That the guarantor cannot payable in January of said year 1905 under
be compelled to pay the creditor unless the the agreement that if, at the expiration of
latter has exhausted all the property of the the said period, said amount should not be
debtor, and has resorted to all the legal paid it would be understood that the house
remedies against the debtor, under Article and lot, the house being constructed of
2058 of the New Civil Code does not strong materials, owned by the said
therefore apply to them. It is of course of defendants and located in the town of San
the essence of a contract of pledge or Pablo on the street of the same name,
mortgage that when the principal obligation Province of La Laguna, be considered as
becomes due, the things in which the absolutely sold to the plaintiff for the said
pledge or mortgage consists may be sum; that the superficial extent and
alienated for the payment to the creditor boundaries of said property are described
(Article 2087, New Civil Code). In the in the complaint; and that, notwithstanding
instant case, Teodooros are both the that the time for the payment of said sum
principal debtors and the pledgors or has expired and no payment has been
mortgagors. Resort to one is, therefore, made, the defendants refuse to deliver to
resort to the other. plaintiff the said property, openly violating
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 127

that which they contracted to do and in order to constitute a valid mortgage it is

depriving him to his loss of the rents which indispensable that the instrument be
plaintiff should receive, the same counting registered in the Register of Property, in
from February, 1905. accordance with article 1875 of the Civil
Code. In the case at bar, the transaction
After having taken the evidence of both does not constitute a mortgage, nor could it
parties and attaching the documents possibly be a mortgage, for the reason of
presented in evidence to the record, the said document is not vested with the
judge on November 27, 1905, rendered a character and conditions of a public
judgment ordering the defendants to instrument. Also, the said property could
deliver to the plaintiff the house and lot, the not be pledged, not being personal
object of this litigation, and to pay the costs property, and notwithstanding the said
of the action, not making any finding upon double contract the debtor continued in
the question of loss or damages by reason possession thereof and the said property
of the absence of proof on these points. has never been occupied by the creditor.
The defendants duly took exception to this
decision, and asked for a new trial of the Neither was there ever any contract of
case on the ground that the findings of the antichresis by reason of the said contract
court below in its decision were plainly of loan, inasmuch as the creditor plaintiff
contrary to law, which motion was has never been in possession thereof, nor
overruled and from which ruling defendants has he enjoyed the said property, nor for
also excepted. one moment ever received its rents;
therefore, there are no proper terms in law,
ISSUE: WON the two contracts entered taking into consideration the terms of the
into between the parties are void? NO conditions contained in the aforesaid
contract, whereby this court can find that
HELD: The fact that the parties have the contract was null, and under no
agreed at the same time, in such a manner consideration whatever would it be just to
that the fulfilment of the promise of sale apply to the plaintiff articles 1859 and 1884
would depend upon the non-payment or of the same code.
return of the amount loaned, has not
produced any charge in the nature and The contract (pactum commissorium),
legal conditions of either contract, or any indicates the existence of the contracts of
essential defect which would tend to nullify mortgage or of pledge or that of
the same. antichresis, none of which have coincided
in the loan indicated herein.
If the promise of sale is not vitiated
because, according to the agreement It is a principle in law, that the will of the
between the parties thereto, the price of contracting parties is the law of contracts. It
the same is to be the amount loaned and was agreed between plaintiff and
not repaid, neither would the loan be null or defendants herein that if defendants should
illegal, for the reason that the added not pay the loan of 480 pesos in
agreement provides that in the event of January1905, the property belonging to the
failure of payment the sale of property as defendants and described in the contract
agreed will take effect, the consideration should remain sold for the aforesaid sum.
being the amount loaned and not paid. The document of contract has been
recognized by the defendant Alinea and by
The property, the sale of which was agreed the witnesses who signed same with him,
to by the debtors, does not appear being therefore an authentic and
mortgaged in favor of the creditor, because efficacious document, in accordance with
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 128

article 1225 of the Civil Code; and as the and severally, to pay them the sum of
amount loaned has not been paid and P40,000.00, with interest at the legal rate
continues in possession of the debtor, it is from July 1, 1970 until full payment. In the
only just that the promise of sale be carried event of their failure to do so within 30
into effect, and the necessary instrument days from notice of this judgment, they are
be executed by the vendees. ordered to execute the corresponding deed
of absolute sale in favor of the plaintiff
Therefore, by virtue of the reasons given and/or the assignment of leasehold rights
above and accepting the findings given in over the defendant's apartment located at
the judgment appealed from, we affirm the 307 Ligaya Building,
said judgment herein, with the costs
against the appellants. Pursuant to said judgment, an order for
execution pending appeal was issued by
After expiration of twenty days from the the trial court and a deed of assignment
date of the notification of this decision let dated May 27, 1972, was executed by the
judgment be entered in accordance Spouses over Apartment of the Ligaya
herewith and ten days thereafter let the Building together with the leasehold right
case be remanded to the court from over the land on which the building stands.
whence it came for proper action.
Notwithstanding the execution of the deed
of assignment, the Spouses remained in
UY TONG VS. CA possession of the premises. This prompted
G.R. No. 77465, May 21, 1988 BAYANHAN to file an ejectment case
against the spouses.
FACTS: Uy Tong (also known as Henry
Uy) and Kho Po Giok (Spouses Uy) used Spouses contend that the deed of
to be the owners of Apartment No. 307 of assignment is null and void because it is in
the Ligaya Building, together with the the nature of a pactum commissorium
leasehold right for 99 years over the land and/or was borne out of the same.
on which the building stands. The land is
registered in the name of Ligaya ISSUE: WON the deed of assignment is
Investments, Inc. It appears that Ligaya void because it is in the nature of pactum
Investments, Inc. owned the building which commissorium? NO
houses the apartment units but sold
Apartment No. 307 and leased a portion of HELD: The prohibition on pactum
the land in which the building stands to the commissorium stipulations is provided for
Spouses. by Article 2088 of the Civil Code:
Art. 2088. The creditor cannot appropriate
1969, the Spouses purchased from the things given by way of pledge or
Bayanihan Automotive, Inc. (Bayanihan) 7 mortgage, or dispose of the same. Any
units of motor vehicles for a total amount of stipulation to the contrary is null and void.
P47,700.00 payable in 3 installments. After
making a down payment of P7,700.00, the The aforequoted provision furnishes the
Spouses failed to pay the balance of two elements for pactum commissorium to
P40,000.00. Due to these unpaid balances, exist:
Bayanihan filed an action for specific (1) that there should be a pledge or
performance against the Spouses. mortgage wherein a property is
pledged or mortgaged by way of
The trial court rendered a judgment in favor security for the payment of the
of Bayanihan, ordering the Spouses, jointly principal obligation; and
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 129

(2) that there should be a stipulation for SPOUSES ONG VS. ROBAN LENDING
an automatic appropriation by the 557 SCRA 516 ; G.R. No. 172592, July 9,
creditor of the thing pledged or 2008
mortgaged in the event of non-
payment of the principal obligation FACTS: Throughout 1999 and 2000,
within the stipulated period. spouses Ong borrowed through mutiple
loans a total of 4m from Roban Lending.
A perusal of the terms of the questioned These loans were covered by a real estate
agreement evinces no basis for the mortgage (REM) over the spouses’ parcels
application of the pactum commissorium of land in Tarlac.
provision. First, there is no indication of
any contract of mortgage entered into by In 2001, both parties consolidated their
the parties. It is a fact that the parties loans, which now totaled 5.9m. They then
agreed on the sale and purchase of trucks. executed two documents: a Dacion in
Payment agreement, where the sps
Second, there is no case of automatic assigned the properties covered by the
appropriation of the property by Bayanihan. REM to Roban Lending; and a
When the Spouses defaulted in their Memorandun of Agreement, which stated
payments of the second and third that if the sps fail to pay the restructured
installments of the trucks they purchased, loan, then Roban can validly enforce the
Bayanihan filed an action in court for Dacion en Pago.
specific performance. The trial court
rendered favorable judgment for In 2002, the sps moved to declare the
Bayanihan and ordered the Spouses to dacion en pago agreement and
pay the balance of their obligation and in memorandum of agreement executed in
case of failure to do so, to execute a deed 2001 were void for being pactum
of assignment over the property involved in commissorium.
this case. The Spouses elected to execute
the deed of assignment pursuant to said Roban Lending claimed that dacion en
judgment. pago is recognized under Art 1245, as a
special form of payment whereby the
Clearly, there was no automatic vesting of debtor-Plaintiffs alienates their property to
title on Bayanihan because it took the the creditor-Defendant in satisfaction of
intervention of the trial court to exact their monetary obligation.
fulfillment of the obligation, which, by its
very nature is "anathema to the concept of ISSUE: WON the memorandum of
pacto commissorio." And even granting agreement and dacion en pago agreement
that the original agreement between the amounted to pactum commissorium and
parties had the badges of pactum thus void? YES
commissorium, the deed of assignment
does not suffer the same fate as this was HELD: Both documents in effect
executed pursuant to a valid judgment in automatically allow Roban
Civil Case No. 80420 as can be gleaned Lending to acquire ownership of the
from its very terms and conditions. This properties should the sps fail to pay.
being the case, there is no reason to
impugn the validity of the said deed of The SC found that both documents worked
assignment. as a way to circumvent the prohibition
found in Article 2088:
“The creditor cannot appropriate the things
given by way of pledge or mortgage, or
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 130

dispose of them. Any stipulation to the respondent is of no moment, pactum

contrary is null and void." commissorium being void for being
prohibited by law.
The elements of pactum commissorium,
which enables the mortgagee to acquire Side issue on interest rate:
ownership of the mortgaged property The monthly interest rate of 3.5% per
without the need of any foreclosure month (42% annum) – found
proceedings, are: unconscionable and reduced to 12%
(1) there should be a property
mortgaged by way of security for the Penalty interest of 5% per month (60%
payment of the principal obligation, annum) – found iniquitous and reduced to
and 12% per annum from date of demand.
(2) there should be a stipulation for
automatic appropriation by the
creditor of the thing mortgaged in MCMICKING VS. MARTINEZ
case of nonpayment of the principal 15 Phil. 204, G.R. No. L-5219, February
obligation within the stipulated 15, 1910
period.
FACTS: Sometime during the year 1908,
In the case at bar, the Memorandum of Pedro Martinez, defendant, obtained
Agreement and the Dacion in Payment judgment in the CFI of the city of Manila
contain no provisions for foreclosure against one Maria Aniversario. Thereafter
proceedings nor redemption. Under the execution was issued upon said judgment
Memorandum of Agreement, the failure by and the sheriff levied upon a pailebot
the petitioners to pay their debt within the (“pilots boat”) alleged to be the property of
one-year period gives respondent the right said Maria Aniversario. Defendant Go Juna
to enforce the Dacion in Payment intervened and claimed a lien upon said
transferring to it ownership of the boat by virtue of a pledge of the same to
properties covered by the REM. him by the said Maria Aniversario made on
the 27th day of February, 1907, which said
Why there is no dacion in this case: the pledge was evidenced by a public
‘dacion’ did not extinguish the sps’ instrument bearing that date.
obligation
This action was brought by the sheriff
In a true dacion en pago, the assignment against Go Juna and Pedro Martinez to
of the property extinguishes the monetary determine the rights of the parties to the
debt. In the case at bar, the alienation of funds in his hands. Maria Aniversario was
the properties was by way of security, and not made a party. Pedro Martinez alleged
not by way of satisfying the debt. The as a defense that the pledge which said
Dacion in Payment did not extinguish document was intended to constitute had
petitioners’ obligation to respondent. On not been made effective by delivery of the
the contrary, under the Memorandum of property pledged, as required by article
Agreement executed on the same day as 1863 of the Civil Code, and that, therefore,
the Dacion in Payment, petitioners had to there existed no preference in favor of said
execute a promissory note for Go Juna.
P5,916,117.50 which they were to pay
within one year. The court declared a preference in favor of
Pedro Martinez, and ordered the sheriff to
That the questioned contracts were freely pay over the said funds in consonance
and voluntarily executed by petitioners and therewith. An appeal was taken from said
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 131

judgment. nevertheless, one appearing in a public

instrument under article 1924 of the Civil
ISSUE: WON there was a pledge. NO. Code, and such debt takes preference over
a judgment secured against the pledgor
HELD: The court concluded that the subsequent to the date of said public
property was not delivered in accordance instrument.
with the provisions of article 1863 of the
Civil Code. The pledge was ineffective The judgment is, therefore, reversed; and it
against Martinez. It appears, however, that is ordered that the cause be returned to the
the document of pledge is a public court below; that the plaintiff bring in Maria
document which contains an admission of Aniversario as a party to this action, and
indebtedness. In other words, while it is that she be given an opportunity to make
intended to be a pledge, it is also a credit her defense, if she has any, to the
which appears in a public document. document in question under proper
procedure.
Article 1924, paragraph 3, letter a, is
therefore applicable; and, said public POLICY: A pledge (not a chattel mortgage)
document antedating the judgment of of personal property to secure an
defendant Martinez, takes preference indebtedness is without force or effect
thereover. unless the property pledged is delivered to
the pledgee or to some third person agreed
The validity of that document in so far as it upon.
shows an indebtedness against Maria
Aniversario and its effectiveness against
her have not, however, been determined. CALTEX vs PNB (1992)
She is not a party to this action. No
judgment can be rendered affecting her FACTS: PNB issued 280 certificates of
rights or liabilities under said instrument. If time deposit (CTDs) in favor of Angel dela
said instrument is invalid or for any other Cruz who deposited with PNB the
cause unenforceable against her, it would aggregate amount of P1,120,000.00.
be wholly unjust, by declaring its Angel delivered the CTD to Caltex in
preference over a debt acknowledged by connection with his purchased of fuel
and conclusive against her, to require that products. Thereafter, Angel informed PNB
said funds be paid over to the holder of that she lost all the CTD. Ultimately 280
said document. That would be to require replacement CTDs were issued in favor of
her to pay a debt which has not only been Angel.
shown to be enforceable against her but
which, as a witness for the defendant Angel negotiated and obtained a loan from
Martinez on the trial of this cause, she PNB amounting toP875,000.00. Angel
expressly and vehemently repudiated as a executed a notarized Deed of Assignment
valid claim against her. of TD, surrendering to PNB "full control of
the indicated time deposits from and after
Where a pledge in the form of a public date" of the assignment and further
instrument, duly executed as such, authorizes said bank to pre-terminate, set-
contains an admission of the indebtedness off and "apply the said time deposits to the
in a specified amount to secure which debt payment of whatever amount or amounts
said pledge was made, and said pledge is may be due" on the loan upon its maturity.
void for failure to deliver to the creditor, or
to a third person agreed upon, the property Credit Manager Caltex went to PNB and
pledged, said indebtedness is, presented for verification the CTDs
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 132

declared lost by Angel alleging that the continues in inexistence and is not
same were delivered to Caltex "as discharged by the transfer, and that
security for purchases made with Caltex accordingly the use of the terms ordinarily
Philippines, Inc." by said Angel. importing conveyance of absolute
ownership will not be given that effect in
When the loan of Angel with PNB matured such a transaction if they are also
and fell due PNB set-off and applied the commonly used in pledges and mortgages
time deposits in question to the payment of and therefore do not unqualifiedly indicate
the matured loan a transfer of absolute ownership, in the
absence of clear and unambiguous
ISSUE: Whether CALTEX can rightfully language or other circumstances excluding
recover on the CTDs. NO an intent to pledge.

HELD: Although the CTDs are bearer Petitioner's insistence that the CTDs were
instruments, a valid negotiation thereof for negotiated to it begs the question. Under
the true purpose and agreement between it the Negotiable Instruments Law, an
and De la Cruz, as ultimately ascertained, instrument is negotiated when it is
requires both delivery and indorsement. transferred from one person to another in
However, the CTDs were delivered to such a manner as to constitute the
Caltex not as payment but as a security for transferee the holder thereof, and a holder
payment. may be the payee or indorsee of a bill or
note, who is in possession of it, or the
If it were true that the CTDs were delivered bearer thereof. In the present case,
as payment and not as security, however, there was no negotiation in the
petitioner's credit manager could have sense of a transfer of the legal title to the
easily said so, instead of using the words CTDs in favor of petitioner in which
"to guarantee" in the letter aforequoted. situation, for obvious reasons, mere
Had Caltex produced the receipt prayed for delivery of the bearer CTDs would have
by PNB, it could have proved, if such truly sufficed. Here, the delivery thereof only as
was the fact, that the CTDs were delivered security for the purchases of Angel de la
as payment and not as security. Cruz (and we even disregard the fact that
the amount involved was not disclosed)
The character of the transaction between could at the most constitute petitioner only
the parties is to be determined by their as a holder for value by reason of his lien.
intention, regardless of what language was Accordingly, a negotiation for such purpose
used or what the form of the transfer was. cannot be effected by mere delivery of the
If it was intended to secure the payment of instrument since, necessarily, the terms
money, it must be construed as a pledge; thereof and the subsequent disposition of
but if there was some other intention, it is such security, in the event of non-payment
not a pledge. However, even though a of the principal obligation, must be
transfer, if regarded by itself, appears to contractually provided for.
have been absolute, its object and
character might still be qualified and Where the holder has a lien on the
explained by contemporaneous writing instrument arising from contract, he is
declaring it to have been a deposit of the deemed a holder for value to the extent of
property as collateral security. It has been his lien. As such holder of collateral
said that a transfer of property by the security, he would be a pledgee but the
debtor to a creditor, even if sufficient on its requirements therefor and the effects
face to make an absolute conveyance, thereof, not being provided for by the
should be treated as a pledge if the debt Negotiable Instruments Law, shall be
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 133

governed by the Civil Code provisions on Mendoza guaranteed the payment of the
pledge of incorporeal rights, which debt.
inceptively provide:
Tan then delivered the cotton materials to
Art. 2095. Incorporeal rights, evidenced by the spouses. In view of the arrangement,
negotiable instruments, . . . may also be CBM Products (thru Mendoza) asked for
pledged. The instrument proving the right and received a post-dated check for the
pledged shall be delivered to the creditor, payment of the spouses’ debt.
and if negotiable, must be indorsed.
It was understood that Mendoza will retain
Art. 2096. A pledge shall not take effect the check until the cotton materials are
against third persons if a description of the finally manufactured into garments, after
thing pledged and the date of the pledge which Mendoza will sell the finished
do not appear in a public instrument. products for the spouses. Meanwhile, the
check matured without having been
Aside from the fact that the CTDs were cashed so Mendoza demanded for another
only delivered but not indorsed, the factual check without a date.
findings of respondent court quoted at the
start of this opinion show that petitioner Feb. 28, 1964, Mendoza issued two
failed to produce any document evidencing checks in favour of Tan. He told the
any contract of pledge or guarantee spouses of the same and told them they
agreement between it and Angel de la are indebted to him and asked the spouses
Cruz. Consequently, the mere delivery of to sign an instrument whereby Mendoza
the CTDs did not legally vest in petitioner assigned the said amount to Insular
any right effective against and binding Products, Inc..
upon respondent bank. The requirement
under Article 2096 aforementioned is not a Tan had the two checks discounted but
mere rule of adjective law prescribing the were later returned with words ‘stop
mode whereby proof may be made of the payment’. It appears it was ordered by
date of a pledge contract, but a rule of Mendoza for failure of the spouses to
substantive law prescribing a condition deposit sufficient funds for the check
without which the execution of a pledge issued by the spouses in his favour.
contract cannot affect third persons
adversely. Tan sued Mendoza while the spouses
brought an action for interpleader for not
knowing whom to pay. Pendente lite, Tan
ESTATE OF LITTON V MENDOZA AND assigned in favour of Littion, Sr his
CA | 1998 litigatious credit (in action of spouses)
against Mendoza, duly submitted to the
FACTS: In 1963, CMB Products, with court, with notice to the parties.
Mendoza as president, offered to sell
textile cotton materials to the Bernal TC ordered Mendoza to pay Tan 76k,
spouses, who were engaged in which was affirmed by the CA.
manufacture of embroidery, garments and
cotton materials. For this purpose, Mendoza entered into Compromise
Mendoza introduced the spouses to Agreement with Tan wherein the latter
Alfonso Tan. recognized that his claims against
Mendoza had been settled and because of
The spouses purchased on credit from Tan that, both waives any claim against the
cotton materials amounting to 80,000. other; with a provision that it no way affects
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 134

Tan’s right to go against the spouses. securing Tan’s obligation in favour of

Littion, Sr. does not affect the resolution of
Mendoza filed MFR saying that there was the matter. Also, the validity of
the compromise agreement which pledge/guaranty in favour of Liiton has not
absolved him from liability. been questioned.

Tan opposed this saying the Compromise Deed of assignment fulfils the
agreement was null and void because of requirements of a valid pledge or
the deed of assignment executed in favour mortgage.
of Litton, Sr.; he says that with such, he
has no more right to alienate said credit; Although it is true that Tan may validly
The compromise agreement was alienate the litigatious credit as ruled by the
approved: appellate court, citing Article 1634 of the
a. It said that the assignment was by Civil Code, said provision should not be
way of securing only his obligation taken to mean as a grant of an absolute
to Litton, Sr.; right on the part of the assignor Tan to
b. Thus, Tan retained possession and indiscriminately dispose of the thing or the
dominion over the credit (2085); right given as security. The Court rules that
c. Although considered as a litigatious the said provision should be read in
credit, such may be validly alienated consonance with Article 2097 of the same
by Tan; such alienation is subject to code. Although the pledgee or the
the remedies of Litton under 6 of CC assignee, Litton, Sr. did not ipso
whereby, the assignment if proven facto become the creditor of private
prejudicial to Litton, may entitle respondent Mendoza, the pledge being
Littion to pursue his remedies valid, the incorporeal right assigned by Tan
against Tan; in favor of the former can only be alienated
d. The alienation of a litigatious credit by the latter with due notice to and consent
is further subject to the debtor’s right of Litton, Sr. or his duly authorized
of redemption under 1634; representative. To allow the assignor to
dispose of or alienate the security without
ISSUE: Can a plaintiff in a case, who had notice and consent of the assignee will
previously assigned in favor of his creditor render nugatory the very purpose of a
his litigated credit in said case, by a deed pledge or an assignment of credit.
of assignment which was duly submitted to
the court, validly enter into a compromise Moreover, under Article 1634, the debtor
agreement thereafter releasing the has a corresponding obligation to
defendant therein from his claim without reimburse the assignee, Litton, Sr. for the
notice to his assignee? NO price he paid or for the value given as
consideration for the deed of assignment.
HELD: The purpose of compromise is to Failing in this, the alienation of the litigated
replace and terminate controverted claims. credit made by Tan in favor of private
Once approved, it has the force of res respondent by way of a compromise
judicata (except for vices of consent or agreement does not bind the assignee,
forgery). Petitioner seeks to set aside the petitioner herein.
compromise agreement since prior thereto,
Tan executed a deed of assignment in
favour of Littion, Sr. involving the same
litigated credit.

Fact that assignment was done by way of

 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 135

DIOSDADO YULIONGSIU vs. the two pledged vessels and Yuliongsiu's

PHILIPPINE NATIONAL BANK equity in FS-203, to PNB for
P30,042.72.The FS-203 was subsequently
FACTS: Yuliongsiu was the owner of two surrendered by PNB to the Philippine
(2) vessels, namely: The M/S Surigao, Shipping which rescinded the sale to
valued at P109,925.78 and the M/S Don Yuliongsiu, for failure to pay the remaining
Dino, valued at P63,000.00, and operated instalments on the purchase price.
the FS-203, valued at P210,672.24, which
was purchased by him from the Philippine The other two boats were sold by PNB to
Shipping Commission, by installment or on third parties. Yuliongsiu commenced action
account. As of January or February, 1943, in the CFI to recover the three vessels or
plaintiff had paid to the Philippine Shipping their value and damages from PNB. The
Commission only the sum of P76,500 and lower court rendered its decision ruling: (a)
the balance of the purchase price was that the bank's taking of physical
payable at P50,000 a year, due on or possession of the vessels was justified
before the end of the current year. by the pledge contract and the law; (b)
that the private sale of the pledged vessels
Yuliongsiu obtained a loan of P50,000 from by PNB to itself without notice to the
PNB. To guarantee its payment, plaintiff plaintiff-pledgor as stipulated in the pledge
pledged the M/S Surigao, M/S Don Dino contract was likewise valid; and (c) that the
and its equity in the FS-203, as evidenced PNB should pay the sums of P1,153.99
by the pledge contract , duly registered and P8,000, as his remaining account
with the office of the Collector of Customs balance, or set-off these sums against the
for the Port of Cebu. Yuliongsiu effected indemnity which Yuliongsiu was ordered to
partial payment of the loan in the sum of pay to it in the criminal cases.
P20,000. The remaining balance was
renewed by the execution of 2 promissory ISSUE: W/N the contract was a chattel
notes in the bank's favor. These two notes mortgage so that PNB cannot take
were never paid at all by Yuliongsiu on possession of the chattels until after there
their respective due dates. has been default. NO, PLEDGE

PNB filed criminal charges against HELD: The parties stipulated as a fact that
Yuliongsiu and two other accused for Exhibit "A" & "1-Bank" is a pledge contract.
estafa thru falsification of commercial Necessarily, this judicial admission binds
documents, and they were convicted by Yuliongsiu. Without any showing that this
the trial court and sentenced to indemnify was made thru palpable mistake, no
PNB in the sum of P184,000. CA affirmed amount of rationalization can offset it.
conviction. The corresponding writ of
execution issued to implement the order for PNB as pledgee was therefore entitled to
indemnification was returned unsatisfied as the actual possession of the vessels. While
Yuliongsiu was totally it is true that Yuliongsiu continued
insolvent .Meanwhile, together with the operating the vessels after the pledge
institution of the criminal action, PNB took contract was entered into, his possession
physical possession of three pledged was expressly made “subject to the order
vessels while they were at the Port of of the pledgee." The provision of Art. 2110
Cebu, and after the first note fell due and of the present Civil Code being new,
was not paid, the Manager of PNB, acting cannot apply to the pledge contract here
as attorney-in-fact of Yuliongsiu pursuant which was entered into on June 30, 1947.
to the terms of the pledge contract, On the other hand, there is an authority
executed a document of sale, transferring supporting the proposition that the pledgee
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 136

can temporarily entrust the physical 3. In the event of the failure of the
possession of the chattels pledged to the PLEDGOR to pay the amount within
pledgor without invalidating the pledge. In a period of six (6) months from the
such a case, the pledgor is regarded as date hereof, the PLEDGEE is hereby
holding the pledged property merely as authorized to foreclose the pledge
trustee for the pledgee. upon the said shares of stock hereby
created by selling the same at public
Yuliongsiu also urge Us to rule that or private sale …
constructive delivery is insufficient to make
pledge effective. The type of delivery will Respondent Guiok and Sy Lim endorsed
depend upon the nature and the peculiar their respective shares of stock in blank
circumstances of each case. The parties and delivered the same to the [p]etitioner.
here agreed that the vessels be delivered
by the "pledgor to the pledgor who shall However, Respondent Guiok and Sy Lim
hold said property subject to the order of failed to pay their respective loans and the
the pledgee."Considering the accrued interests thereon to the
circumstances of this case and the nature [p]etitioner. In October, 1990, the
of the objects pledged, i.e., a vessel used [p]etitioner filed a "Petition for Mandamus"
in maritime business, such delivery against Respondent Corporation, with the
is sufficient. Since PNB was, pursuant to SEC e praying that an order be issued
the terms of pledge contract, in full control directing the corporate secretary of
of the vessels thru Yuliongsiu, the [R]espondent Go Fay & Co., Inc. to register
former could take actual possession at any the stock transfers and issue new
time during the life of the pledge to make certificates in favor of Lim Tay.
more effective its security. Its taking of the
vessels therefore was not unlawful. Nor The corporate secretary of Respondent
was it unjustified considering that Corporation refused to record the transfer
Yuliongsiu had just defrauded the PNB in of the shares of stock of Respondent Guiok
the huge sum of P184,000 and Sy Lim in favor of and under the name
of the [p]etitioner and to issue new
certificates of stock to the [p]etitioner
LIM TAY vs. COURT OF APPEALS stating that the pledge entered by the
parties did not automatically vest [i]n
FACTS: On January 8, 1980, complainant ownership of the pledged
Respondent-Appellee Sy Guiok and shares.
Alfonso Sy Lim secured a loan from the
[p]etitioner in the amount of P40,000 each ISSUE: Whether or not the pledgor in this
payable within six (6) months. To secure case became the owner of the pledged
the payment of the aforesaid loan and share by virtue of the contract of pledge
interest thereon, Respondent Guiok entered by the parties. NO.
executed a Contract of Pledge in favor of
the [p]etitioner whereby he pledged his HELD: The contractual stipulation, which
three hundred (300) shares of stock in the was part of the Complaint, shows that
Go Fay & Company Inc., Respondent plaintiff was merely authorized to foreclose
Corporation, for brevity's sake. the pledge upon maturity of the loans, not
to own them. Such foreclosure is not
Under said "Contracts of Pledge," automatic, for it must be done in a public or
Respondent[s] Guiok and Sy Lim private sale. Nowhere did the Complaint
covenanted, that: mention that petitioner had in fact
foreclosed the pledge and purchased the
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 137

shares after such foreclosure. His status as thing is not sold, a second one with
a mere pledgee does not, under civil law, the same formalities shall be held;
entitle him to ownership of the subject and if at the second auction there is
shares. It is also noteworthy that no sale either, the creditor may
petitioner's Complaint did not aver that said appropriate the thing pledged. In
shares were acquired through this case he shall be obliged to give
extraordinary prescription, novation or an acquittance for his entire claim.
laches. Moreover, petitioner's claim,
subsequent to the filing of the Complaint, Furthermore, the contracts of pledge
that he acquired ownership of the said contained a common proviso, which we
shares through these three modes is not quote again for the sake of clarity:
indubitable and still has to be resolved. In
fact, as will be shown, such allegation-has 3. In the event of the failure of the
no merit. Manifestly, the Complaint by itself PLEDGOR to pay the amount within
did not contain any prima facie showing a period of six (6) months from the
that petitioner was the owner of the shares date hereof, the PLEDGEE is
of stocks. Quite the contrary, it hereby authorized to foreclose the
demonstrated that he was merely a pledge upon the said shares of
pledgee, not an owner. stock hereby created by selling the
same at public or private sale with
Without Foreclosure and Purchase at or without notice to the PLEDGOR,
Auction, Pledgor Is Not the Owner of at which sale the PLEDGEE may be
Pledged Shares. the purchaser at his option; and "the
Petitioner initially argued that ownership of PLEDGEE is hereby authorized and
the shares pledged had passed to him, empowered at his option to transfer
upon Respondents Sy Guiok and Sy Lim's the said shares of stock on the
failure to pay their respective loans. But on books of the corporation to his own
appeal, petitioner claimed that ownership name, and to hold the certificate
over the shares had passed to him, not via issued in lieu thereof under the
the contracts of pledge, but by virtue of terms of this pledge, and to sell the
prescription and by respondents' said shares to issue to him and to
subsequent acts which amounted to a apply the proceeds of the sale to the
novation of the contracts of pledge. We do payment of the said sum and
not agree. interest, in the manner hereinabove
provided;
At the outset, it must be underscored that
petitioner did not acquire ownership of the There is no showing that petitioner made
shares by virtue of the contracts of pledge. any attempt to foreclose or sell the shares
Article 2112 of the Civil Code states: through public or private auction, as
stipulated in the contracts of pledge and as
The creditor to whom the credit has required by Article 2112 of the Civil Code.
not been satisfied in due time, may Therefore, ownership of the shares could
proceed before a Notary Public to not have passed to him. The pledgor
the sale of the thing pledged. This remains the owner during the pendency of
sale shall be made at a public the pledge and prior to foreclosure and
auction, and with notification to the sale, as explicitly provided by Article 2103
debtor and the owner of the thing of the same Code:
pledged in a proper case, stating the
amount for which the public sale is
to be held. If at the first auction the
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 138

Unless the thing pledged is compliance with Article 2093 of the Civil
expropriated, the debtor continues Code, which requires that the thing
to be the owner thereof. pledged be placed in the possession of the
creditor or a third person of common
Nevertheless, the creditor may bring agreement; and Article 2095, which states
the actions which pertain to the that if the thing pledged are shares of
owner of the thing pledged in order stock, then the "instrument proving the
to recover it from, or defend it right pledged" must be delivered to the
against a third person. creditor.

No Novation in Favor of Petitioner. Moreover, the fact that respondents

Neither did petitioner acquire the shares by allowed the petitioner to receive dividends
virtue of a novation of the contract of pertaining to the shares was not meant to
pledge. Novation is defined as "the relinquish ownership thereof. As stated by
extinguishment of an obligation by a respondent corporation, the same was
subsequent one which terminates it, either done pursuant to an agreement between
by changing its object or principal the petitioner and Respondents Sy Guiok
conditions, by substituting a new debtor in and Sy Lim, following Article 2102 of the
place of the old one, or by subrogating a civil Code which provides:
third person to the rights of the creditor." 26
Novation of a contract must not be It the pledge earns or produces
presumed. "In the absence of an express fruits, income, dividends, or
agreement, novation takes place only interests, the creditor shall
when the old and the new obligations are compensate what he receives with
incompatible on every point." those which are owing him; but if
none are owing him, or insofar as
In the present case, novation cannot be the amount may exceed that which
presumed by (a) respondents' indorsement is due, he shall apply it to the
and delivery of the certificates of stock principal. Unless there is a
covering the 600 shares, (b) petitioner's stipulation to the contrary, the
receipt of dividends from 1980 to 1983, pledge shall extend to the interest
and (c) the fact that respondents have not and the earnings of the right
instituted any action to recover the shares pledged.
since 1980.
Novation cannot be inferred from the mere
Respondents' indorsement and delivery of fact that petitioner has not, since 1980,
the certificates of stock were pursuant to instituted any action to recover the shares.
paragraph 2 of the contract of pledge Such action is in fact premature, as the
which reads: loan is still outstanding. Besides, as
already pointed out, novation is never
2. The said certificates had been presumed or inferred.
delivered by the PLEDGOR
endorsed in blank to be held by the
PLEDGEE under the pledge as
security for the payment of the
aforementioned sum and interest
thereon accruing.

This stipulation did not effect the transfer of

ownership to petitioner. It was merely in
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 139

INSULAR LIFE vs. ROBERT YOUNG Insular Life in the same amount with an
interest rate of 26% per annum to mature
FACTS: In December, 1987, respondent 120 days from execution. The Credit
Robert Young, together with his associates Agreement further provides that Insular
and co-respondents, acquired by purchase Life shall have the prior right to purchase
Home Bankers Savings and Trust Co., now the Schedule I Shares (owned by Young)
petitioner Insular Savings Bank ("the and the Schedule II Shares (owned by the
Bank," for brevity), from the Licaros family other stockholders of the Bank), as well as
for P65,000,000.00. the 250,000 shares which will be issued
after the additional capital of
On December, 1990, Benito Araneta, a P25,000,000.00 (payable from the
stockholder of the Bank, signified his proceeds of the loan) shall have been
intention to purchase 99.82% of its infused.
outstanding capital stock for
P340,000,000.00, subject to the condition On October 1, 1991, Insular Life and
that the ownership of all the shares will be Insular Life Pension Fund formally
consolidated in Young's name. On informed Young of their intention to acquire
February 5, 1991, Araneta paid Young 30% and 12%, respectively, of the Bank's
P14,000,000.00 as part of the outstanding shares, subject to due
downpayment. diligence audit and proper documentation.

In order to carry out the intended sale to On October 11, 1991, Insular Life, through
Araneta, Young bought from Jorge Go and a team of auditors led by Mr. Wilfrido
his group their 45% equity in the Bank for Patawaran, conducted a due diligence
P153,000,000.00. In order to pay this audit on the Bank pursuant to the MOA.
amount, Young obtained a short-term loan The audit revealed several check-kiting
of P170,000,000.00 from International operations which amounted to
Corporate Bank ("Interbank") to finance the P340,000,000.00, an anomaly in which
purchase. Young took responsibility.

However, Araneta backed out from the On October 21, 1991, Young signed a
intended sale and demanded the return of letter prepared by Atty. Jacinto Jimenez,
his downpayment. counsel of Insular Life, addressed to Mr.
Vicente R. Ayllon, Chairman of the Bank's
Meanwhile, Young's loan from Interbank Board of Directors, stating that due to
became due, causing his serious financial business reverses, he shall not be able to
problem. pay his obligations under the Credit
Agreement between him and Insular Life.
On August 27, 1991, Young and Insular Consequently, Young "unconditionally and
Life entered into a Credit Agreement. irrevocably waive(s) the benefit of the
Under its provisions, Insular Life extended period" of the loan (up to December 26,
a loan to Young in the amount of 1991) and Insular "may consider (his)
P200,000,000.00. To secure the loan, obligations thereunder as defaulted." He
Young, acting in his behalf and as likewise interposes no objection to Insular
attorney-in-fact of the other stockholders, Life's exercise of its rights under the said
executed on the same day a Deed of agreement.
Pledge over 1,324,864 shares which
represented 99.82% of the outstanding Forthwith, Insular Life instructed its counsel
capital stock of the Bank. The next day, he to foreclose the pledge constituted upon
also executed a promissory note in favor of the shares. The latter then sent Young a
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 140

notice informing him of the sale of the public auction, and with notification to the
shares in a public auction scheduled on debtor and the owner of the thing pledged
October 28, 1991, and in the event that the in a proper case, stating the amount for
shares are not sold, a second auction sale which the public sale is to be held. If at the
shall be held the next day, October 29. first auction the thing is not sold, a second
one with the same formalities shall be held;
On October 28, 1991, only Insular Life and if at the second auction there is no
submitted a bid, hence, the shares were sale either, the creditor may appropriate
not sold on that day. The next day, a the thing pledged. In this case he shall be
second auction was held. Again, Insular obliged to give an acquittance for his entire
Life was the sole bidder. Since the shares claim."
were not sold at the two public auctions,
Insular Life appropriated to itself, not only Clearly, there is no prohibition contained in
the original 1,324,864 shares, but also the the law against the sending of one notice
250,000 shares subsequently issued by for the first and second public auction as
the Bank and delivered to Insular Life by was done here by petitioner Insular Life.
way of pledge. Thus, Insular Life gave The purpose of the law in requiring notice
Young an acquittance of his entire claim. is to sufficiently apprise the debtor and the
pledgor that the thing pledged to secure
Thereafter, title to the said shares was payment of the loan will be sold in a public
consolidated in the name of Insular Life. auction and the proceeds thereof shall be
On November 12, 1991, the Bangko applied to satisfy the debt. When petitioner
Sentral ng Pilipinas' Supervision and Insular Life sent a notice to Young
Examination Sector approved Insular Life's informing him of the public auction
request to maintain its present ownership scheduled on October 28, 1991, and a
of 99.82% of the Bank. second auction on the next day, October
29, in the event that the shares are not
On January 7, 1992, Young and his sold on the first auction, the purpose of the
associates filed a complaint against the law was achieved. We thus reject
Bank, Insular Life and its counsel, Atty. respondents' argument that the term
Jacinto Jimenez, petitioners, for annulment "second one" refers to a separate notice
of notarial sale. The complaint alleges, that which requires the same formalities as the
the notarial sale conducted by petitioner first notice.
Atty. Jacinto Jimenez is void as it does not
comply with the requirement of notice of
the second auction sale. MANILA SURETY vs. VELAYO

ISSUE: W/N the foreclosure of the pledge FACTS: In 1953, Manila Surety & Fidelity
is void. NO Co., upon request of Rodolfo Velayo,
executed a bond for P2,800.00 for the
HELD: It is as error to declare that the dissolution of a writ of attachment obtained
auction sale is void since petitioners failed by one Jovita Granados in a suit against
to send a separate notice for the second Rodolfo Velayo in the Court of First
auction. Instance of Manila. Velayo undertook to
pay the surety company an annual
Article 2112 of the Civil Code provides: premium of P112.00; to indemnify the
"The creditor to whom the credit has not Company for any damage and loss of
been satisfied in due time, may proceed whatsoever kind and nature that it shall or
before a Notary Public for the sale of the may suffer, as well as reimburse the same
thing pledged. The sale shall be made at a for all money it should pay or become
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 141

liable to pay under the bond including costs ISSUE: Whether or not the sale of the
and attorneys' fees. pledged jewelry extinguished Velayo’s
liability
As "collateral security and by way of
pledge" Velayo also delivered four pieces HELD: The core of the appealed decision
of jewelry to the Surety Company "for the is the following portion thereof:
latter's further protection", with power to It is thus crystal clear that the main
sell the same in case the surety paid or agreement between the parties is
become obligated to pay any amount of the Indemnity Agreement and if the
money in connection with said bond, pieces of jewelry mentioned by the
applying the proceeds to the payment of defendant were delivered to the
any amounts it paid or will be liable to pay, plaintiff, it was merely as an added
and turning the balance, if any, to the protection to the latter. There was
persons entitled thereto, after deducting no understanding that, should the
legal expenses and costs. same be sold at public auction and
the value thereof should be short of
Judgment having been rendered in favor of the undertaking, the defendant
Jovita Granados and against Rodolfo would have no further liability to the
Velayo, and execution having been plaintiff. On the contrary, the last
returned unsatisfied, the surety company portion of the said agreement
was forced to pay P2,800.00 that it later specifies that in case the said
sought to recoup from Velayo; and upon collateral should diminish in value,
the latter's failure to do so, the surety the plaintiff may demand additional
caused the pledged jewelry to be sold, securities. This stipulation is
realizing therefrom a net product of incompatible with the idea of pledge
P235.00 only. Thereafter and upon as a principal agreement. In this
Velayo's failure to pay the balance, the case, the status of the pledge is
surety company brought suit in Court. nothing more nor less than that of a
Velayo countered with a claim that the sale mortgage given as a collateral for
of the pledged jewelry extinguished any the principal obligation in which the
further liability on his part under Article creditor is entitled to a deficiency
2115 of the 1950 Civil Code, which recites: judgment for the balance should the
Art. 2115. The sale of the thing collateral not command the price
pledged shall extinguish the equal to the undertaking.
principal obligation, whether or not
the proceeds of the sale are equal It appearing that the collateral given
to the amount of the principal by the defendant in favor of the
obligation, interest and expenses in plaintiff to secure this obligation has
a proper case. If the price of the already been sold for only the
sale is more than said amount, the amount of P235.00, the liability of
debtor shall not be entitled to the the defendant should be limited to
excess, unless it is otherwise the difference between the amounts
agreed. If the price of the sale is of P2,800.00 and P235.00 or
less, neither shall the creditor be P2,565.00.
entitled to recover the deficiency,
notwithstanding any stipulation to The above quoted reasoning of the
the contrary. appealed decision is unsound. The
accessory character is of the essence of
pledge and mortgage. As stated in Article
2085 of the 1950 Civil Code, an essential
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 142

requisite of these contracts is that they be issued a certificate of sale on September

constituted to secure the fulfillment of a 17, 1970 by the sheriff. The certificate of
principal obligation, which in the present sale was entered in the Book of
case is Velayo's undertaking to indemnify Unregistered Property on September 23,
the surety company for any disbursements 1970. Pacifico Chica failed to redeem the
made on account of its attachment property, and DBP consolidated its
counterbond. Hence, the fact that the ownership over the same.
pledge is not the principal agreement is of
no significance nor is it an obstacle to the On October 14, 1980, respondent spouses
application of Article 2115 of the Civil offered to buy the property for P18,599.99.
Code. DBP made a counter-offer of P25,500.00
which was accepted by respondent
The reviewed decision further assumes spouses. The parties further agreed that
that the extinctive effect of the sale of the payment was to be made within six months
pledged chattels must be derived from thereafter for it to be considered as cash
stipulation. This is incorrect, because payment. On July 20, 1981, the deed of
Article 2115, in its last portion, clearly absolute sale, which is now being assailed
establishes that the extinction of the herein, was executed by DBP in favor of
principal obligation supervenes by respondent spouses. Said document
operation of imperative law that the parties contained a waiver of the seller's warranty
cannot override: against eviction.
If the price of the sale is less,
neither shall the creditor be entitled Thereafter, respondent spouses applied for
to recover the deficiency an industrial tree planting loan with DBP.
notwithstanding any stipulation to The latter required the former to submit a
the contrary. certification from the Bureau of Forest
Development that the land is alienable and
The provision is clear and unmistakable, disposable. However, on October 29,
and its effect cannot be evaded. By 1981, said office issued a certificate
electing to sell the articles pledged, instead attesting to the fact that the said property
of suing on the principal obligation, the was classified as timberland, hence not
creditor has waived any other remedy, and subject to disposition. The loan application
must abide by the results of the sale. No of respondent spouses was nevertheless
deficiency is recoverable. eventually approved by DBP in the sum of
P140,000.00, despite the aforesaid
certification of the
DEVELOPMENT BANK OF THE bureau, on the understanding of the parties
PHILIPPINES VS. COURT OF APPEALS, that DBP woul work for the release of the
CELEBRADA MANGUBAT AND ABNER land by the former Ministry of Natural
MANGUBAT Resources.
(G.R. No. 110053, October 16, 1995)
To secure payment of the loan, respondent
FACTS: On April 27, 1965, Pacifico Chica spouses executed a real estate mortgage
mortgaged the land to DBP to secure a over the land on March 17, 1982, which
loan of P6,000.00. However, he defaulted document was registered in the Registry of
in the payment of the loan, hence DBP Deeds pursuant to Act No. 3344. However,
caused the extrajudicial foreclosure of the DBP did not release the entire amount of
mortgage. In the auction sale held on the loan ostensibly because the release of
September 9, 1970, DBP acquired the the land from the then Ministry of Natural
property as the highest bidder and was Resources had not been obtained. On July
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 143

7, 1983, respondent spouses, as plaintiffs, petitioner their loan obligation amounting to

filed a complaint against DBP in the trial P118,540.00, we answer in the affirmative.
court seeking the annulment of the subject
deed of absolute sale on the ground that it In its legal context, the contract of loan
belongs to the lands of the public domain. executed between the parties is entirely
different and discrete from the deed of sale
DBP averred that the annulment of the sale they entered into. The annulment of the
and the return of the purchase price to sale will not have an effect on the
respondent spouses would redound to their existence and demandability of the loan.
benefit but would result in petitioner's One who has received money as a loan is
prejudice, since it had already released bound to pay to the creditor an equal
P118,540.00 to the former while it would amount of the same kind and quality.
be left without any security for
theP140,000.00 loan and that in the The fact that the annulment of the sale
remote possibility that the land is reverted will also result in the invalidity of the
to the public domain, respondent spouses mortgage does not have an effect on
should be made to immediately pay, jointly the validity and efficacy of the principal
and severally, the total amount of obligation, for even an obligation that is
P118,540.00 with interest. RTC rendered unsupported by any security of the
judgment in favor of respondent spouses, debtor may also be enforced by means
annulling the deed of absolute sale. CA of an ordinary action. Where a mortgage
affirmed. is not valid, as where it is executed by
one who is not the owner of the
ISSUE: [Main issues in this case] property, or the consideration of the
(1) WON private respondent spouses contract is simulated or false, the
Celebrada and Abner Mangubat should be principal obligation which it guarantees
ordered to pay petitioner DBP their loan is not thereby rendered null and void.
obligation due under the mortgage contract That obligation matures and becomes
executed between them and DBP. YES. demandable in accordance with the
stipulations pertaining to it.
(2) WON petitioner should reimburse
respondent spouses the purchase price of Under the foregoing circumstances,
the property and the amount of P11,980.00 what is lost is only the right to foreclose
for taxes and expenses for the relocation the mortgage as a special remedy for
Survey. (must be qualified) DBP should satisfying or settling the indebtedness
reimburse the spouses for the purchase which is the principal obligation. In case
price but not for taxes and expenses for of nullity, the mortgage deed remains as
recolaction. evidence or proof of a personal
obligation of the debtor, and the amount
HELD 1: due to the creditor may be enforced in
Considering that neither party questioned an ordinary personal action.
the legality and correctness of the
judgment of the court a quo, as affirmed by HELD 2:
respondent court, ordering the annulment A contract which the law denounces as
of the deed of absolute sale, such decreed void is necessarily no contract whatever,
nullification of the document has already and the acts of the parties in an effort to
achieved finality. create one can in no wise bring about a
change of their legal status. The parties
Turning now to the issue of whether or not and the subject matter of the contract
private respondents should be made to pay remain in all particulars just as they did
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 144

before any act was performed in relation affirmed by respondent court, ordering
thereto. the annulment of the deed of absolute
sale, such decreed nullification of the
An action for money had and received lies document has already achieved finality.
to recover back money paid on a contract, (2) Was there a contract of mortgage? NO,
the consideration of which has failed. As a the fact of
general rule, if one buys the land of annulment of the sale resulted in the
another, to which the latter is supposed to invalidity of themortgage, the subject
have a good title, and, in consequence of property being classified as timberland.
facts unknown alike to both parties, he has Hence, DBP had no title to the property.
no title at all, equity will cancel the (3) Will the invalidity of the contract of
transaction and cause the purchase money mortgage affect the principal loan
to be restored to the buyer, putting both obligation? NO, since it is an accessory
parties in status quo. contract.

Thus, on both local and foreign legal

principles, the return by DBP to respondent MARCELO R. SORIANO vs. SPOUSES
spouses of the purchase price, plus RICARDO and ROSALINA GALIT
corresponding interest thereon, is (G.R. No. 156295, September 23, 2003)
ineluctably called for. However, despite
that admission of respondent spouses’ list FACTS: Respondent Ricardo Galit
of damages as evidence, the Court agrees contracted a loan from petitioner Marcelo
with petitioner that the same cannot Soriano amounting to P480,000.00. This
constitute sufficient legal basis for an loan was secured by a REM over a parcel
award of P4,000.00 and P7,980.00 as of land covered by OCT. No. 569. When
reimbursement for land taxes and respondent defaulted in his obligation,
expenses for the relocation survey, Soriano filed a complaint for sum of money
respectively. The list of damages was against him with the RTC of Balanga City.
prepared extrajudicially by respondent
spouses by themselves without any Upon failure of the respondent spouses
supporting receipts as bases thereof or to Galit to file their answer, the trial court
substantiate the same. That list, per se, is declared the spouses in default and it
necessarily self-serving and, on that thereafter rendered judgment in favor of
account, should have been declared petitioner Soriano ordering the
inadmissible in evidence as the factum respondents to pay. The judgment became
probans. final and executory. Accordingly, the trial
court issued a writ of execution in due
In order that damages may be recovered, course, by virtue of which, Deputy Sheriff
the best evidence obtainable by the injured Renato E. Robles levied on the following
party must be presented. Actual or real properties of the Galit spouses: (1) A
compensatory damages cannot be parcel of land covered by OCT No. T-569
presumed, but must be duly proved, and (Homestead Patent No. 14692) situated in
so proved with a reasonable degree of the Bo. of Tapulac, Orani, Bataan;
certainty. (2)STORE/HOUSE – CONSTRUCTED on
Lot No. 1103 made of strong materials G.I.
[Other Possible questions:] roofing situated at Centro I, Orani, Bataan;
(1) Was the deed of sale void? YES. and (3)BODEGA – constructed on Lot
Considering that neither party 1103, made of strong materials, G.I.
questioned the legality and correctness roofing, situated in Centro I, Orani, Bataan.
of the judgment of the court a quo, as On December 23, 1998, petitioner
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 145

emerged as the highest and only bidder property even if dealt with
with a bid price of P483,000.00. separately and apart from the land.

Thus, on February 4, 1999, Deputy Sheriff In this case, considering that what was
Robles issued a Certificate of Sale of sold by virtue of the writ of execution
Execution of Real Property. On April 23, issued by the trial court was merely the
1999, petitioner caused the registration of storehouse and bodega constructed on the
the “Certificate of Sale on Execution of parcel of land covered by Transfer
Real Property” with the Registry of Deeds. Certificate of Title No. T-40785, which by
themselves are real properties of
Ten months from the time the Certificate of respondents spouses, the same should be
Sale on Execution was registered with the regarded as separate and distinct from the
Registry of Deeds, petitioner moved for the conveyance of the lot on which they stand.
issuance of a writ of possession which was
granted by the RTC. This was, however, (2) True, public documents by themselves
subsequently nullified by the Court of may be adequate to establish the
Appeals because it included a parcel of presumption of their validity. However, their
land (OCT No. T-40785) which was not probative weight must be evaluated not in
among those explicitly enumerated in the isolation but in conjunction with other
Certificate of Sale issued by the Deputy evidence adduced by the parties in the
Sheriff, but on which stand the immovables controversy, much more so in this case
(the BODEGA and STORE/HOUSE) where the contents of a copy thereof
covered by the said Certificate. Petitioner subsequently registered.
contends that the sale of these
immovables necessarily encompasses the ART. 415. The following are immovable
land on which they stand. property:
ISSUES: (1) Land, buildings, roads and
(1) WON the land on which the buildings constructions of all kinds adhered to the
levied upon in soil.
execution is necessarily included. NO. xxxxxx
(2) WON the cert. of sale on execution of (3) Everything attached to an immovable in
real property and the writ of possession are a fixed manner, in such a way that it
null and void despite the fact that they cannot be separated therefrom without
enjoy the presumption of regularity being breaking them material or deterioration of
public documents. YES. the object;
(4) Statues, reliefs, paintings or other
HELD: objects for use or ornamentation, placed in
(1) Art. 4151 of the Civil Code enumerates buildings or on lands by the owner of the
land and buildings separately. This can immovable in such a manner that it reveals
only mean that a building is, by itself, the intention to attach them permanently to
considered immovable. Thus, it has been the tenements;
held that while it is true that a mortgage (5) Machinery, receptacles, instruments or
of land necessarily includes, in the implements intended by the owner of the
absence of stipulation of the tenement for an industry or works which
improvements thereon, buildings, still a may be carried on in a building or on a
building by itself may be mortgaged piece of land, and which tend directly to
apart from the land on which it has been meet the needs of the said industry or
built. Such mortgage would be still a works;
real estate mortgage for the building (6) Animal houses, pigeon houses,
would still be considered immovable beehives, fish ponds or breeding places of
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 146

similar nature, in case their owner has the description of the properties renders
placed them or preserves them with the the enumeration in the certificate exclusive.
intention to have them permanently Thus, subsequently including properties
attached to the land, and forming a which have not been explicitly mentioned
permanent part of it; the animals in these therein for registration purposes under
places are also included; suspicious circumstances smacks of fraud.
xxxxxx The explanation that the land on which the
(9) Docks and structures which, though properties sold is necessarily included and,
floating, are intended by their nature and hence, was belatedly typed on the dorsal
object to remain at a fixed place on a river, portion of the copy of the certificate
lake or for documentation purposes is subsequently registered is at best a lame
being contested. No reason has been excuse unworthy of belief.
offered how and why the questioned entry
was subsequently intercalated in the copy The appellate court correctly observed that
of the certificate of sale subsequently there was a marked difference in the
registered with the Registry of Deeds. appearance of the typewritten words
Absent any satisfactory explanation as to appearing on the first page of the copy of
why said entry was belatedly inserted, the the Certificate of Sale registered with the
surreptitiousness of its inclusion coupled Registry of Deeds[38] and those appearing
with the furtive manner of its intercalation at the dorsal portion thereof.
casts serious doubt on the authenticity of
petitioner’s copy of the Certificate of Sale. Underscoring the irregularity of the
Thus, it has been held that while a public intercalation is the clearly devious attempt
document like a notarized deed of sale is to let such an insertion pass unnoticed by
vested with the presumption of regularity, typing the same at the back of the first
this is not a guarantee of the validity of its page instead of on the second page which
contents. was merely half-filled and could
accommodate the entry with room to
It must be pointed out in this regard that spare.
the issuance of a Certificate of Sale is DANILO D. MENDOZA, also doing
an end result of judicial foreclosure business under the name and style of
where statutory requirements are ATLANTIC EXCHANGE PHILIPPINES,
strictly adhered to; where even the vs. COURT OF APPEALS, PHILIPPINE
slightest deviations therefrom will NATIONAL BANK, FERNANDO
invalidate the proceeding and the sale. MARAMAG, JR., RICARDO G.
Among these requirements is an DECEPIDA and BAYANI A. BAUTISTA
explicit enumeration and correct (G.R. No. 116710, June 25, 2001)
description of what properties are to be .
sold stated in the notice. The stringence FACTS: Petitioner Danilo D. Mendoza is
in the observance of these requirements is engaged in the domestic and international
such that an incorrect title number together trading of raw materials and chemicals. He
with a correct technical description of the operates under the business name Atlantic
property to be sold and vice versa is Exchange Philippines (Atlantic). Sometime
deemed a substantial and fatal error which in 1978 he was granted by respondent
results in the invalidation of the sale. Philippine National Bank (PNB) a
500,000.00 credit line and a 1,000,000.00
The certificate of sale is an accurate record Letter of Credit/Trust Receipt (LC/TR) line.
of what properties were actually sold to
satisfy the debt. The strictness in the As security for the credit accommodations
observance of accuracy and correctness in and for those which may thereinafter be
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 147

granted, petitioner mortgaged to The petitioner testified that respondent

respondent PNB the following: 1) three (3) PNB Mandaluyong Branch found his
parcels of land with improvements 2) his proposal favorable and recommended the
house and lot and 3) several pieces of implementation of the agreement.
machinery and equipment in his Pasig However, Fernando Maramag, PNB
cocochemical plant. Executive Vice-President, disapproved the
proposed release of the mortgaged
Petitioner executed in favor of respondent properties and reduced the proposed new
PNB three (3) promissory notes covering LC/TR line to One Million Pesos
the Five Hundred Thousand Pesos (P1,000,000.00). Petitioner claimed he was
(P500,000.00) credit line. Petitioner made forced to agree to these changes and that
use of his LC/TR line to purchase raw he was required to submit a new formal
materials from foreign importers. proposal and to sign two (2) blank
promissory notes.
On March 9, 1981, he wrote a letter to
respondent PNB requesting for the According to petitioner, respondent PNB
restructuring of his past due accounts into approved his proposal. He further claimed
a five-year term loan and for an additional that he and his wife were asked to sign two
LC/TR line of Two Million Pesos (2) blank promissory note forms. According
(P2,000,000.00). According to the letter, to petitioner, they were made to believe
because of the shut-down of his end-user that the blank promissory notes were to be
companies and the huge amount spent for filled out by respondent PNB to conform
the expansion of his business, petitioner with the 5-year restructuring plan allegedly
failed to pay to respondent bank his LC/TR agreed upon.
accounts as they became due and
demandable. PNB Mandaluyong replied on Petitioner testified that respondent PNB
behalf of the respondent bank and required allegedly contravened their verbal
petitioner to submit documents its: agreement by 1) affixing dates on the two
1) Audited Financial Statements for 1979 (2) subject promissory notes to make them
and 1980; mature in two (2) years instead of five (5)
2) Projected cash flow (cash in - cash out) years as supposedly agreed upon.
for five (5) years detailed yearly; and
3) List of additional machinery and Upon their failure to make good of the said
equipment and proof of ownership thereof. loans Respondent PNB extra-judicially
foreclosed the real and chattel mortgages,
On September 25, 1981, petitioner sent and the mortgaged properties were sold at
another letter addressed to PNB Vice- public auction to respondent PNB, as
President Jose Salvador, regarding his highest bidder, for a total of Three Million
request for restructuring of his loans. He Seven Hundred Ninety Eight Thousand
offered respondent PNB the following Seven Hundred Nineteen Pesos and Fifty
proposals: 1) the disposal his house and Centavos (P3,798,719.50).
lot and a vacant lot in order to pay the
overdue trust receipts; 2) capitalization and ISSUE: WON the foreclosure sale was
conversion of the balance into a 5-year proper.
term loan payable semi-annually or on
annual installments; 3) a new Two Million HELD: (The court found out that PNB did
Pesos (P2,000,000.00) LC/TR line in order not categorically agree to petitioner’s
to enable Atlantic Exchange Philippines to proposal to extend the credit line to five
operate at full capacity. years.)To the substantive issue of
mortgate. Petitioner prays for the release
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 148

of some of his movables being withheld by respondent bank.

respondent PNB, alleging that they were
not included among the chattels he A stipulation in the mortgage, extending its
mortgaged to respondent bank. However, scope and effect to after-acquired property
petitioner did not present any proof as to is valid and binding where the after-
when he acquired the subject movables acquired property is in renewal of, or in
and hence it is not to be believe that the substitution for, goods on hand when the
same were "after acquired" chattels not mortgage was executed, or is purchased
covered by the chattel and real estate with the proceeds of the sale of such
mortgages. goods. More importantly, respondent bank
makes a valid argument for the retention of
In asserting its rights over the subject the subject movables. Respondent PNB
movables, respondent PNB relies on a asserts that those movables were in fact
common provision in the two (2) subject "immovables by destination" under Art. 415
Promissory Notes Nos. 127/82 and 128/82 (5) of the Civil Code. It is an established
which rule that a mortgage constituted on an
states: immovable includes not only the land but
In the event that this note is not paid also the buildings, machinery and
at maturity or when the same accessories installed at the time the
becomes due under any of the mortgage was constituted as well as the
provisions hereof, we hereby buildings, machinery and accessories
authorized the BANK at its option belonging to the mortgagor, installed after
and without notice, to apply to the the constitution thereof.
payment of this note, any and all
moneys, securities and things of
value which may be in its hands on SPOUSES VIOLA vs EQUITABLE (2008)
deposit or otherwise belonging to
me/us and for this purpose. We FACTS: March 31, 1997 Spouses
hereby, jointly and severally, Leopoldo and Mercedita Viola of Leo-Mers
irrevocably constitute and appoint Commercial, Inc. obtained a loan through a
the BANK to be our true Attorney-in- credit line facility in the maximum amount
Fact with full power and authority for of P 4,700,000.00 from the Philippine
us in our name and behalf and Commercial International Bank (PCI Bank),
without prior notice to negotiate, sell which was later merged with Equitable
and transfer any moneys securities Bank and became known as Equitable PCI
and things of value which it may Bank, Inc.
hold, by public or private sale and
apply the proceeds thereof to the The Credit Line Agreement stipulated that
payment of this note. the loan would bear interest at the
"prevailing PCI Bank lending rate" per
It is clear, however, from the above-quoted annum on the principal obligation and a
provision of the said promissory notes that "penalty fee of three percent (3%) per
respondent bank is authorized, in case of month on the outstanding amount."
default, to sell "things of value" belonging
to the mortgagor "which may be on its To secure the payment of the loan, a
hands for deposit or otherwise belonging to ―Real Estate Mortgage over their 2
me/us and for this purpose." Besides, the parcels of land in favor of PCI Bank was
petitioner executed not only a chattel executed. Spouses Viola made partial
mortgage but also a real estate mortgage payments which totaled P 3,669,210.67;
to secure his loan obligations to PCI Bank contends however, that Spouses
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 149

Viola made no further payments since Nov. obligation and P1,455,137.36 on the
24, 2000 despite demand they failed to pay interest, or a total of only P3,679,210.67
their outstanding obligation which as of as of April 15, 2003, but the mortgaged
September 30, 2002, totaled properties were sold to satisfy an
P14,024,623.22, broken down as follows: inflated and erroneous principal
obligation of P4,783,254.69, plus 3%
Principal obligation P4,783,254.6 penalty fee per month or 33% per year
9 and 15% interest per year, which
Past due interest amounted to P14,024,623.22 as of
from 11/24/00 to September 30, 2002;"
09/30/02 at 15% P1,345,290.3 4. that "the parties never agreed and
interest 8 stipulated in the real estate mortgage
Penalty at 3% per contract" that the 15% interest per
month from annum on the principal loan and the 3%
03/31/98 to P7,896,078.1 penalty fee per month on the
02/23/02 5 outstanding amount would be covered or
P14,024,623. secured by the mortgage;
22 5. that assuming respondent could impose
such interest and penalty fee, the same
Thus, PCI Bank extrajudicially foreclosed are "exorbitant, unreasonable, iniquitous
the mortgage before the Regional Trial and unconscionable, hence, must be
Court (RTC) and that the mortgaged reduced;" and that respondent is only
properties were sold at a public auction. allowed to impose the legal rate of
interest of 12% per annum on the
More than five months later or on October principal loan absent any stipulation
8, 2003, petitioners filed a complaint for thereon.
annulment of foreclosure sale. Petitioners
alleged, inter alia, that Respondent denied petitioners’ assertions,
1. they had made substantial payments of contending, inter alia, that the absence of
P3,669,210.67 receipts of which were stipulation in the mortgage contract
issued without respondent specifying securing the payment of 15% interest per
"whether the payment was for interest, annum on the principal loan, as well as the
penalty or the principal obligation;" that 3% penalty fee per month on the
based on respondent’s statement of outstanding amount, is immaterial since
account, not a single centavo of their the mortgage contract is "a mere
payments was applied to the principal accessory contract which must take its
obligation; bearings from the principal Credit Line
2. that every time respondent sent them a Agreement."
statement of account and demand The RTC upheld the position of the PCI
letters, they requested for a proper Bank but reduced the interest on the
accounting for the purpose of principal loan from 15% to 12% per annum
determining their actual obligation, but and the penalty fee per month on the
all their requests were unjustifiably outstanding amount from 3% to 1.5% per
ignored on account of which they were month. Accordingly, the court nullified the
forced to discontinue payment; foreclosure proceedings and the Certificate
3. that "the foreclosure proceedings and of Sale subsequently issued, "without
auction sale were not only irregularly prejudice" to the holding anew of
and prematurely held but were null and foreclosure proceedings based on the "re-
void because the mortgage debt is only computed amount" of the indebtedness, "if
P2,224,073.31 on the principal the circumstances so warrant."
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 150

incurred up to the date of full payment

Spouses Viola filed a Motion for thereon," which penalty as the above-
Reconsideration but it was denied. On quoted portion of the Credit Line
appeal, the Court of Appeals (CA) Agreement expressly stipulates.
dismissed the petition for lack of merit.
Since an action to foreclose "must be
ISSUE: WON the mortgage contract also limited to the amount mentioned in the
secured the penalty fee per month on the mortgage" and the penalty fee of 3% per
outstanding amount as stipulated in the month of the outstanding obligation is not
Credit Line Agreement? NO mentioned in the mortgage, it must be
excluded from the computation of the
HELD: A mortgage must "sufficiently amount secured by the mortgage.
describe the debt sought to be secured,
which description must not be such as to Regarding CA decision that the phrase
mislead or deceive, and an obligation is not "including the interest and bank
secured by a mortgage unless it comes charges" in the mortgage contract
fairly within the terms of the mortgage. "refers to the penalty charges stipulated
in the Credit Line Agreement" is
In the case at bar, the parties executed two unavailing.
separate documents on March 31, 1997 –
the Credit Line Agreement granting the "Penalty fee" is entirely different from "bank
Client a loan through a credit facility in the charges." The phrase "bank charges" is
maximum amount of P4,700,000.00, and normally understood to refer to
the Real Estate Mortgage contract compensation for services. A "penalty fee"
securing the payment thereof. is likened to a compensation for damages
Undisputedly, both contracts were in case of breach of the obligation. Being
prepared by respondent and written in fine penal in nature, such fee must be specific
print, single space. and fixed by the contracting parties, unlike
in the present case which slaps a 3%
The Real Estate Mortgage contract states penalty fee per month of the outstanding
its coverage, thus: amount of the obligation.
That for and in consideration of certain
loans, credit and other banking Moreover, the "penalty fee" does not
facilities obtained x x x from the belong to the species of obligation
Mortgagee, the principal amount of enumerated in the mortgage contract,
which is PESOS FOUR MILLION namely: "loans, credit and other banking
SEVEN HUNDERED THOUSAND facilities obtained x x x from the
ONLY (P4,700,000.00) Philippine Mortgagee, . . . including the interest and
Currency, and for the purpose of bank charges, . . . the costs of collecting
securing the payment thereof, the same and of taking possession of and
including the interest and bank keeping the mortgaged properties, and all
charges accruing thereon, xxx other expenses to which the Mortgagee
may be put in connection with or as an
The immediately-quoted provision of the incident to this mortgage . . ."
mortgage contract does not specifically
mention that, aside from the principal loan In Philippine Bank of Communications v.
obligation, it also secures the payment of Court of Appeals which raised a similar
"a penalty fee of three percent (3%) per issue, this Court held:
month of the outstanding amount to be The sole issue in this case is whether,
computed from the day deficiency is in the foreclosure of a real estate
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 151

mortgage, the penalties stipulated in Construing the ambiguity against the

two promissory notes secured by the petitioner, it follows that no penalty
mortgage may be charged against the was intended to be covered by the
mortgagors as part of the sums mortgage. Plainly, the petitioner can be
secured, although the mortgage as specific as it wants to be, yet it
contract does not mention the said simply did not specify nor even allude
penalties. to, that the penalty in the promissory
notes would be secured by the
The court held, Indeed, a mortgage mortgage. This can then only be
must sufficiently describe the debt interpreted to mean that the petitioner
sought to be secured, which had no design of including the penalty
description must not be such as to in the amount secured.
mislead or deceive, and an obligation
is not secured by a mortgage unless RTC decision AFFIRMED with
it comes fairly within the terms of the MODIFICATION in that the "penalty fee"
mortgage. Under the rule of ejusdem per month of the outstanding obligation is
generis, where a description of things of excluded in the computation of the amount
a particular class or kind is secured by the Real Estate Mortgage
"accompanied by words of a generic executed by petitioners in respondent’s
character, the generic words will usually favor.
be limited to things of a kindred nature
with those particularly enumerated . . . " POLICY: A mortgage must sufficiently
A penalty charge does not belong to describe the debt sought to be secured,
the species of obligations which description must not be such as to
enumerated in the mortgage, hence, mislead or deceive. An obligation is not
the said contract cannot be secured by a mortgage unless it comes
understood to secure the penalty. fairly within the terms of the mortgage.

Regarding Respondent’s contention

that absence of stipulation for the TAN vs VALDEHUEZA (1975)
penalty fee in the mortgage contract is
of no consequence as the deed of FACTS: The parcel of land described in
mortgage is merely an “accessory the first cause of action was the subject
contract” that "must take its bearings matter of the public auction sale held on
from the principal Credit Line May 6, 1955 at the Capitol Building in
Agreement,". Oroquieta, Misamis Occidental, wherein
the plaintiff was the highest bidder and as
Such absence is significant as it creates an such a Certificate of Sale was executed by
ambiguity between the two contracts, MR. VICENTE D. ROA who was then the
which ambiguity must be resolved in favor Ex-Officio Provincial Sheriff in favor of
of petitioners and against respondent who LUCIA TAN the herein plaintiff. Due to the
drafted the contracts. Again, as stressed failure of defendant Arador Valdehueza to
by the Court in Philippine Bank of redeem the said land within the period of
Communications: one year as being provided by law, MR.
A mortgage and a note secured by it VICENTE D. ROA who was then the Ex-
are deemed parts of one transaction Officio Provincial Sheriff executed an
and are construed together, thus, an ABSOLUTE DEED OF SALE in favor of
ambiguity is created when the notes the plaintiff LUCIA TAN.
provide for the payment of a penalty
but the mortgage contract does not. Defendants ARADOR VALDEHUEZA and
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 152

REDICULO VALDEHUEZA have executed said amount of payment;

two documents of DEED OF PACTO DE
RETRO SALE in favor of the plaintiff ISSUE: Was there a valid mortgage?
herein, LUCIA TAN of two portions of a (YES)
parcel of land which is described in the
second cause of action with the total HELD: The trial court treated the
amount of ONE THOUSAND FIVE registered deed of pacto de retro as an
HUNDRED PESOS (P1,500.00). equitable mortgage but considered the
unregistered deed of pacto de retro "as a
That from the execution of the Deed of mere case of simple loan, secured by the
Sale with right to repurchase mentioned in property thus sold under pacto de retro,"
the second cause of action, defendants on the ground that no suit lies to foreclose
Arador Valdehueza and Rediculo an unregistered mortgage. It would appear
Valdehueza remained in the possession of that the trial judge had not updated himself
the land; that land taxes to the said land on law and jurisprudence; he cited, in
were paid by the same said defendants. support of his ruling, article 1875 of the old
Civil Code and decisions of this Court circa
Tan filed a complaint forinjunction on July 1910 and 1912.
24, 1957 against the Valdehuezas, to
enjoin them "from entering the above- Under article 1875 of the Civil Code of
described parcel of land and gathering the 1889, registration was a necessary
nuts therein ...." This complaint and the requisite for the validity of a mortgage even
counterclaim were subsequently dismissed as between the parties, but under article
for failure of the parties "to seek for the 2125 of the new Civil Code (in effect since
immediate trial thereof, thus evincing lack August 30,1950), this is no longer so.
of interest on their part to proceed with the
case. If the instrument is not recorded, the
mortgage is nonetheless binding between
The Deed of Pacto de Retro referred to in the parties. (Article 2125, 2nd sentence).
stipulation of fact no. 5 as "Annex D"
(dated August 5, 1955) was not registered The Valdehuezas having remained in
in the Registry of Deeds, while the Deed of possession of the land and the realty taxes
Pacto de Retro referred to as "Annex E" having been paid by them, the contracts
(dated March 15, 1955) was registered. which purported to be pacto de retro
transactions are presumed to be equitable
On the basis of the stipulation of facts and mortgages, 5 whether registered or not,
the annexes, the trial court rendered there being no third parties involved.
judgment, as follows:
ISSUE ON THE PROCEEDS OF THE
Declaring Lucia Tan the absolute owner of HARVEST
the property described in the first cause of The Valdehuezas claim that their answer to
action of the amended complaint; the complaint of the plaintiff affirmed that
they remained in possession of the land
And as regards the land covered by deed and gave the proceeds of the harvest to
of pacto de retro annex 'D', the herein the plaintiff; it is thus argued that they
defendants Arador Valdehueza and would suffer double prejudice if they are to
Rediculo Valdehueza are hereby ordered pay legal interest on the amounts stated in
to pay the plaintiff the amount of P300 with the pacto de retro contracts, as the lower
legal interest of 6% from August 15, 1966, court has directed, and that therefore the
the said land serving as guaranty of the court should have ordered evidence to be
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 153

adduced on the harvest. costs.

The record does not support this claim.

Nowhere in the original and the amended STATE INVESTMENT vs CA (1996)
complaints is an allegation of delivery to
the plaintiff of the harvest from the land FACTS: On October 15, 1969, a contract
involved in the second cause of action. to sell was executed by Spouses Canuto
Hence, the defendants' answer had none and Ma. Aranzazu Oreta, and the Solid
to affirm. Homes, Inc. (SOLID), involving a parcel of
land in Capitol Park Homes Subd., in
In submitting their stipulation of facts, the Quezon City for a consideration of P
parties prayed "for its approval and maybe 39,347.00.
made the basis of the decision of this
Honorable Court. " (emphasis supplied) Upon signing of the contract, the spouses
This, the court did. It cannot therefore be made payment amounting to P 7,869.40,
faulted for not receiving evidence on who with the agreement that the balance shall
profited from the harvest. be payable in monthly installments of P
451.70, at 12% interest p.a.
ISSUE ON LEGAL INTEREST
The imposition of legal interest on the On November 4, 1976. SOLID executed
amounts subject of the equitable several real estate mortgage contracts in
mortgages, P1,200 and P300, respectively, favor of State Investment Homes, Inc.
is without legal basis, for, "No interest shall (STATE) over its subdivided parcels of
be due unless it has been expressly land, one of which is the subject lot. For
stipulated in writing." (Article 1956, new failure of SOLID to comply with its
Civil Code) Furthermore, the plaintiff did mortgage obligations contract, STATE
not pray for such interest; her thesis was a extrajudicially foreclosed the mortgaged
consolidation of ownership, which was properties including the subject lot on April
properly rejected, the contracts being 6, 1983, with the corresponding certificate
equitable mortgages. of sale issued therefore to STATE.

With the definitive resolution of the rights of On June 23, 1984; SOLID thru a MOA
the parties as discussed above, we find it negotiated for the deferment of
needless to pass upon the plaintiffs petition consolidation of ownership over the
for receivership. Should the circumstances foreclosed properties by committing to
so warrant, she may address the said redeem the properties from
petition to the court a quo. STATE.Thereafter, the spouses filed a
complaint before the HLURB, against
ACCORDINGLY, the judgment a quo is SOLID and STATE for failure on the part of
hereby modified, as follows: (a) the SOLID to execute the necessary absolute
amounts of P1,200 and P300 mentioned in deed of sale as well as to deliver the title to
Annexes E and D shall bear interest at six said property despite full payment of
percent per annum from the finality of this purchase price.
decision; and (b) the parcel of land covered
by Annex D shall be treated in the same In defense, SOLID alleged that the
manner as that covered by Annex E, obligation under the contract to sell has
should the defendants fail to pay to the become so difficult that they be released
plaintiff the sum of P300 within 90 days from the said obligation by substituting
from the finality of this decision. In all other subject lot with another suitable residential
respects the judgment is affirmed. No lot from another subdivision, which they
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 154

operate. STATE averred that unless aware of sufficient facts to induce a

SOLID pays the redemption price of P reasonably prudent man to inquire into the
125,195.00, it has a “right to hold on and status of the title of the property in
not release the foreclosed properties.” The litigation.
OAALA rendered a decision ordering
STATE to execute a deed of conveyance In this case, petitioner was well aware that
in favor of the spouses, and SOLID to pay it was dealing with SOLID, a business
STATE the portion of its loan, which entity engaged in the business of selling
corresponds to the value of the lot as subdivision lots. In fact, the OAALA found
collateral. that at the time the lot was mortgaged,
respondent State Investment House Inc.,
ISSUE: Who between the Spouses Oreta [now petitioner] had been aware of the lot's
and STATE have better right over the location and that the said lot formed part of
subject lot? (SPOUSES ORETA) Capital Park/Homes
Subdivision.” In Sunshine Finance and
HELD: STATE's registered mortgage right Investment Corp. v. Intermediate Appellate
over the property is inferior to that of Court, the Court noting petitioner therein to
respondents-spouses' unregistered right. be a financing corporation, deviated from
The unrecorded sale between the general rule that a purchaser or
respondents-spouses and SOLID is mortgagee of a land is not required to look
preferred for the reason that if the original further that what appears on the face of the
owner (SOLID, in this case) had parted Torrens Title. Thus:
with his ownership of the thing sold then he
no longer had ownership and free disposal Nevertheless, we have to deviate from the
of that thing so as to be able to mortgage it general rule because of the failure of the
again. Registration of the mortgage is of no petitioner in this case to take the necessary
moment since it is understood to be precautions to ascertain if there was any
without prejudice to the better right of third flaw in the title of the mortgage. The
parties. petitioner is an investment and financing
corporation. We presume it is experienced
Petitioner asserts that a purchaser or in its business. Ascertainment of the status
mortgagee of land/s covered under the and condition of properties offerred to it as
Torrens System "is not required to do more security for the loans it extends must be a
than rely upon the certificate of title for it is standard and indispensable part of its
enough that the purchaser or mortgagee operations. Surely, it cannot simply rely on
examines the pertinent certificate of title an examination of a Torrens certificate to
without need of looking beyond such title." determine what the subject property looks
like as its condition is not apparent in the
As a general rule, where there is nothing in document. The land might be in a
the certificate of title to indicate any cloud depressed area. There might be squatters
or vice in the ownership of the property, or on it. It might be easily inundated. It might
any encumbrance thereon, the purchaser be an interior lot, without convenient
is not required to explore further than what access. These and other similar factors
the Torrens Title upon its face indicates in determine the value of the property and so
quest for any hidden defect or inchoate should be of practical concern to the
right that may subsequently defeat his right petitioner.
thereto. This rule, however, admits of an xxx xxx xxx
exception as where the purchaser or
mortgagee, has knowledge of a defect or Our conclusion might have been different if
lack of title in his vendor, or that he was the mortgagee were an ordinary individual
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 155

or company without the expertise of the PHILIPPINE NATIONAL BANK, AS THE

petitioner in the mortgage and sale of ATTORNEY-IN-FACT OF OPAL
registered land or if the land mortgaged PORTFOLIO INVESTMENTS (SPV-AMC),
were some distance from the mortgagee INC. vs. MERCEDES CORPUZ,
and could not be conveniently inspected. REPRESENTED BY HER ATTORNEY-IN-
But there were no such impediments in this FACT VALENTINA CORPUZ
case. The facilities of the petitioner were
not so limited as to prevent it from making FACTS: On October 4, 1974 respondent
a more careful examination of the land to Mercedes Corpuz delivered her owner’s
assure itself that there were no duplicate copy of Transfer Certificate of
unauthorized persons in possession. Title (TCT) 32815 to Dagupan City Rural
Bank as security against any liability she
The above-enunciated rule should apply in might incur as its cashier. She later left her
this case as petitioner admits of being a job and went to the United States.
financing institution. 11We take judicial
notice of the uniform practice of On October 24, 1994 the rural bank where
financing institutions to investigate, she worked cancelled its lien on Corpuz’s
examine and assess the real property title, she having incurred no liability to her
offered as security for any loan employer. Without Corpuz’s knowledge
application especially where, as in this and consent, however, Natividad Alano,
case, the subject property is a the rural bank’s manager, turned over
subdivision lot located at Quezon City, Corpuz’s title to Julita Camacho and
M.M. It is a settled rule that a purchaser Amparo Callejo.
or mortgagee cannot close its eyes to
facts which should put a reasonable Conniving with someone from the
man upon his guard, and then claim assessor’s office, Alano, Camacho, and
that he acted in good faith under the Callejo prepared a falsified deed of sale,
belief that there was no defect in the making it appear that on February 23, 1995
title of the vendor or Corpuz sold her land to one "Mary Bondoc"
mortgagor. Petitioner's constructive for P50,000.00. They caused the
knowledge of the defect in the title of registration of the deed of sale, resulting in
the subject property, or lack of such the cancellation of TCT 32815 and the
knowledge due to its negligence, takes issuance of TCT 63262 in Bondoc’s name.
the place of registration of the rights of About a month later or on March 27, 1995
respondents-spouses. Respondent the trio executed another fictitious deed of
Court thus correctly ruled that sale with "Mary Bondoc" selling the
petitioner was not a purchaser or property to the spouses Rufo and Teresa
mortgagee in good faith; hence Palaganas for only P15,000.00. This sale
petitioner can not solely rely on what resulted in the issuance of TCT 63466 in
merely appears on the face of the favor of the Palaganases.
Torrens Title.
Nine days later or on April 5, 1995 the
Palaganases executed a deed of sale in
favor of spouses Virgilio and Elena
Songcuan for P50,000.00, resulting in the
issuance of TCT 63528. Finally, four
months later or on August 10, 1995 the
Songcuans took out a loan of P1.1 million
from petitioner Philippine National Bank
(PNB) and, to secure payment, they
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 156

executed a real estate mortgage on their of judicial notice that the standard practice
title. Before granting the loan, the PNB had for banks before approving a loan is to
the title verified and the property inspected. send a staff to the property offered as
collateral and verify the genuineness of the
On November 20, 1995 respondent Corpuz title to determine the real owner or owners.
filed, through an attorney-in-fact, a
complaint before the Dagupan Regional One of the CA’s findings in this case is that
Trial Court (RTC) against Mary Bondoc, in the course of its verification, petitioner
the Palaganases, the Songcuans, and PNB was informed of the previous TCTs
petitioner PNB, asking for the annulment of covering the subject property. And the PNB
the layers of deeds of sale covering the has not categorically contested this finding.
land, the cancellation of TCTs 63262, It is evident from the faces of those titles
63466, and 63528, and the reinstatement that the ownership of the land changed
of TCT 32815 in her name. from Corpuz to Bondoc, from Bondoc to
the Palaganases, and from the
On June 29, 1998 the RTC rendered a Palaganases to the Songcuans in less than
decision granting respondent Corpuz’s three months and mortgaged to PNB within
prayers. This prompted petitioner PNB to four months of the last transfer.
appeal to the Court of Appeals (CA). On
July 31, 2007 the CA affirmed the decision The above information in turn should have
of the RTC and denied the motion for its driven the PNB to look at the deeds of sale
reconsideration, prompting PNB to take involved. It would have then discovered
recourse to this Court. that the property was sold for ridiculously
low prices: Corpuz supposedly sold it to
ISSUE: The sole issue presented in this Bondoc for justP50,000.00; Bondoc to the
case is whether or not petitioner PNB is a Palaganases for just P15,000.00; and the
mortgagee in good faith, entitling it to its Palaganases to the Songcuans also for
lien on the title to the property in dispute. justP50,000.00. Yet the PNB gave the
property an appraised value
RULING: Petitioner PNB points out that, of P781,760.00. Anyone who deliberately
since it did a credit investigation, inspected ignores a significant fact that would create
the property, and verified the clean status suspicion in an otherwise reasonable
of the title before giving out the loan to the person cannot be considered as an
Songcuans, it should be regarded as a innocent mortgagee for value. The Court
mortgagee in good faith. PNB claims that finds no reason to reverse the CA decision.
the precautions it took constitute sufficient
compliance with the due diligence required
of banks when dealing with registered
lands.

As a rule, the Court would not expect a

mortgagee to conduct an exhaustive
investigation of the history of the
mortgagor’s title before he extends a
loan.1 But petitioner PNB is not an ordinary
mortgagee; it is a bank.2 Banks are
expected to be more cautious than
ordinary individuals in dealing with lands,
even registered ones, since the business
of banks is imbued with public interest. It is
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 157

CANLAS VS. CA RULING: By Atty. Canlas' own account,

"due to lack of paying capacity of
FACTS: The private respondent own respondent Herrera, no financing entity
several parcels of land located in Quezon was willing to extend him any loan with
City for which he is the registered owner. which to pay the redemption price of his
He secured loans from L and R mortgaged properties and petitioner's
corporations and executed deeds of P100,000.00 attorney's fees awarded in
mortgage over the parcels of land for the the Compromise Judgment," a
security of the same. Upon the maturity of development that should have tempered
said loans, the firm initiated an extrajudicial his demand for his fees. For obvious
foreclosure of the properties in question reasons, he placed his interests over and
after private respondent failed to pay until above those of his client, in opposition to
maturity. The private respondent filed a his oath to "conduct himself as a lawyer ...
complaint for injunction over the said with all good fidelity ... to [his] clients." The
foreclosure and for redemption of the Court finds the occasion fit to stress that
parcels of land. Two years after the filing of lawyering is not a moneymaking venture
the petition, private respondent and L and and lawyers are not merchants, a
R corporation entered into a compromise fundamental standard that has, as a matter
agreement that renders the former to be of judicial notice, eluded not a few law
insured another year for the said advocates. The petitioner's efforts
properties. Included in the stipulations partaking of a shakedown" of his own client
were the attorney’s fees amounting to Php are not becoming of a lawyer and certainly,
100,000.00. The private respondent do not speak well of his fealty to his oath to
however, remained to be in turmoil when it "delay no man for money."
came to finances and was apparently We are not, however, condoning the
unable to pay and secure the attorney’s private respondent's own shortcomings. In
fees, more so the redemption liability. condemning Atty. Canlas monetarily, we
Relief was discussed by petitioner and cannot overlook the fact that the private
private respondent executed a document respondent has not settled his liability for
to redeem the parcels of land and to payment of the properties. To hold Atty.
register the same to his name. Canlas alone liable for damages is to
enrich said respondent at the expense of
Allegations were made by the private his lawyer. The parties must then set off
respondent claiming the parcels of land to their obligations against the other.
his name but without prior notice, the
properties were already registered under
the petitioner’s name. The private AGRICULTURAL CREDIT
respondent calls for a review and for the COOPERATIVE ASSOCIATION OF
court to act on the said adverse claim by HINIGARAN vs. ESTANISLAO YULO
petitioner on said certificates for the YUSAY, ET AL.
properties consolidated by the redemption
price he paid for said properties. The FACTS: July 20, 1952, Rafaela Yulo
private respondent filed a suit for the executed in favor of the movant a
annulment of judgment in the Court of mortgage for P33,626.29, due from her,
appeals which ruled over the same. her mother, sisters, brothers, and others,
which amount she assumed to pay to the
ISSUE: whether the petitioner is on solid movant. A motion was presented to the
ground on the reacquisition over the said court by the movant demanding the
properties. surrender of the owner's duplicate
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 158

certificate of title that he may annotate said recorded only four months after the
mortgage at the back of the certificate. termination of said proceedings, so that the
Estanislao Yusay, a part owner of the lot, claim of movant has been reduced to the
opposed the petition on the ground that he character of a mere money claim, not a
is owner of a part of the property in mortgage, hence the mortgage may not be
question; that the granting of the motion registered. In the first place, as the judge
would operate to his prejudice, as he has below correctly ruled, the proceeding to
not participated in the mortgage cited in the register the mortgage does not purport to
motion; that Rafaela Yulo is dead; that the determine the supposed invalidity of the
motion is not verified and movant's rights mortgage or its effect. Registration is a
have lapsed by prescription. Finally it is mere ministerial act by which a deed,
argued that his opposition raises a contract or instrument is sought to be
controversial matter which the court has no inscribed in the records of the Office of the
jurisdiction to pass upon. Margarita, Maria, Register of Deeds and annotated at the
Elena and Pilar, all surnamed Yulo, joined back of the certificate of title covering the
the oppositor Estanislao Yusay, raising the land subject of the deed, contract or
same objections interposed by Yusay. instrument.

The existence of the mortgage is not The registration of a lease or mortgage, or

disputed, and neither is the fact that the the entry of a memorial of a lease or
mortgagor Rafaela Yulo is part owner of mortgage on the register, is not a
Lot No. 855 of the Cadastral Survey of declaration by the state that such an
Pontevedra. The oppositors do not dispute instrument is a valid and subsisting interest
that she is such a part owner, and their in land; it is merely a declaration that the
main objection to the petition is that as part record of the title appears to be burdened
owners of the property, the annotation of with the lease or mortgage described,
the mortgage on the common title will according to the priority set forth in the
affect their rights. certificate.

ISSUE: WON as part owners of the The mere fact that a lease or mortgage
property, the annotation of the mortgage was registered does not stop any party to it
on the common title will affect their (Yusay) from setting up that it now has no force or
rights. effect. (Niblack, pp. 134-135, quoted in
Francisco Land Registration Act, l950 ed.,
RULING: The court held that even if the p. 348.)
ownership of the deceased Rafaela Yulo
over the portion of the lot in question and The court below, in ordering the
the validity of the mortgage are disputed, registration and annotation of the
such invalidity of the mortgage is no proof mortgage, did not pass on its invalidity or
of the non-existence of the mortgage nor a effect. As the mortgage is admittedly an act
ground for objecting to its registration, of the registered owner, all that the judge
citing the case of Register of Deeds of below did and could do, as a registration
Manila vs. Maxima Tinoco Vda. de Cruz, court, is to order its registration and
et, al., 95 Phil., 818; 53 Off. Gaz., 2804. annotation on the certificate of title
covering the land mortgaged. By said order
In his Brief before this Court, counsel for the court did not pass upon the effect or
appellants argue that the mortgage sought validity of the mortgage — these can only
to be registered was not recorded before be determined in an ordinary case before
the closing of the intestate proceedings of the courts, not before a court acting merely
the deceased mortgagor, but was so as a registration court, which did not have
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 159

the jurisdiction to pass upon the alleged that the loan did not redound to the benefit
effect or validity. of the family.

Wherefore, the order appealed from is In its answer, PNB prays for the dismissal
hereby affirmed, with costs against of the complaint for lack of cause of action,
oppositors-appellants. So ordered. and insists that it was plaintiffs-appellees’
own acts of omission/connivance that bar
them from recovering the subject property
JOE A. ROS and ESTRELLA AGUETE on the ground of estoppel, laches,
vs. PHILIPPINE NATIONAL BANK - abandonment and prescription.
LAOAG BRANCH
G.R. No. 170166 (April 6, 2011) On 29 June 2001, the trial court rendered
its Decision in favor of petitioners. The trial
FACTS: On January 13, 1983, spouses court declared that Aguete did not sign
Jose A. Ros and Estrella Aguete filed a the loan documents, did not appear
complaint for the annulment of the Real before the Notary Public to
Estate Mortgage and all legal proceedings acknowledge the execution of the loan
taken thereunder against PNB, Laoag documents, did not receive the loan
Branch before the Court of First Instance, proceeds from PNB, and was not aware
Ilocos Norte. of the loan until PNB notified her in 14
August 1978 that she and her family
The averments in the complaint disclosed should vacate the mortgaged property
that plaintiff-appellee Joe A. Ros obtained because of the expiration of the
a loan of P115,000.00 from PNB Laoag redemption period. Under the Civil Code,
Branch on October 14, 1974 and as the effective law at the time of the
security for the loan, plaintiff-appellee Ros transaction, Ros could not encumber any
executed a real estate mortgage involving real property of the conjugal
a parcel of land – Lot No. 9161 of the partnership without Aguete’s consent.
Cadastral Survey of Laoag, with all the Aguete may, during their marriage and
improvements thereon described under within ten years from the transaction
Transfer Certificate of Title No. T-9646. questioned, ask the courts for the
annulment of the contract her husband
Upon maturity, the loan remained entered into without her consent,
outstanding. As a result, PNB instituted especially in the present case where her
extrajudicial foreclosure proceedings on consent is required.
the mortgaged property. After the lapse of
one (1) year without the property being On 17 October 2005, the appellate court
redeemed, the property was consolidated rendered its Decision and granted PNB’s
and registered in the name of PNB, Laoag appeal. The appellate court reversed the
Branch on August 10, 1978. trial court’s decision, and dismissed
petitioners’ complaint.
Claiming that she has no knowledge of the
loan obtained by her husband nor she The appellate court stated that the trial
consented to the mortgage instituted on court concluded forgery without
the conjugal property – a complaint was adequate proof. The appellate court
filed by Estrella Aguete to annul the declared that Aguete affixed her signatures
proceedings pertaining to the mortgage, on the documents knowingly and with her
sale and consolidation of the property – full consent.
interposing the defense that her signatures
affixed on the documents were forged and
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 160

Assuming arguendo that Aguete did not The documents disavowed by Aguete are
give her consent to Ros’ loan, the acknowledged before a notary public,
appellate court ruled that the conjugal hence they are public documents. Every
partnership is still liable because the instrument duly acknowledged and
loan proceeds redounded to the benefit certified as provided by law may be
of the family. The records of the case presented in evidence without further
reveal that the loan was used for the proof, the certificate of
expansion of the family’s business. acknowledgment being prima
Therefore, the debt obtained is chargeable facie evidence of the execution of the
against the conjugal partnership. instrument or document involved. The
execution of a document that has been
ISSUE: Whether or not the real estate ratified before a notary public cannot be
mortgage was valid? YES disproved by the mere denial of the
alleged signer. PNB was correct when it
HELD: The Civil Code was the applicable stated that petitioners’ omission to present
law at the time of the mortgage. The other positive evidence to substantiate
subject property is thus considered part of their claim of forgery was fatal to
the conjugal partnership of gains, as petitioners’ cause. Petitioners did not
provided under Articles 153, 160, 161, 166 present any corroborating witness, such as
and 173 of the Civil Code. a handwriting expert, who could
authoritatively declare that Aguete’s
There is no doubt that the subject property signatures were really forged.
was acquired during Ros and Aguete’s
marriage. There is also no doubt that Ros A notarized document carries the
encumbered the subject property when he evidentiary weight conferred upon it
mortgaged it for P115,000.00. PNB Laoag with respect to its due execution, and it
does not doubt that Aguete, as evidenced has in its favor the presumption of
by her signature, consented to Ros’ regularity which may only be rebutted
mortgage to PNB of the subject property. by evidence so clear, strong and
On the other hand, Aguete denies ever convincing as to exclude all
having consented to the loan and also controversy as to the falsity of the
denies affixing her signature to the certificate. Absent such, the
mortgage and loan documents. presumption must be upheld.

The husband cannot alienate or Ros himself cannot bring action against
encumber any conjugal real property PNB, for no one can come before the
without the consent, express or implied, courts with unclean hands. In their
of the wife. Should the husband do so, memorandum before the trial court,
then the contract is voidable. Article 173 petitioners themselves admitted that Ros
of the Civil Code allows Aguete to forged Aguete’s signatures.
question Ros’ encumbrance of the
subject property. Annulment will be The application for loan shows that the
declared only upon a finding that the loan would be used exclusively "for
wife did not give her consent. In the additional working [capital] of buy & sell of
present case, we follow the conclusion of garlic & virginia tobacco." In her testimony,
the appellate court and rule that Aguete Aguete confirmed that Ros engaged in
gave her consent to Ros’ encumbrance of such business, but claimed to be unaware
the subject property. whether it prospered. Aguete was also
aware of loans contracted by Ros, but did
not know where he "wasted the money."
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 161

Debts contracted by the husband for Letter of Credit No. M3411610NS2970

and in the exercise of the industry or dated 14 October 1986. Kwang Ju Bank,
profession by which he contributes to Ltd. of Seoul, Korea issued the letter of
the support of the family cannot be credit through its correspondent bank, the
deemed to be his exclusive and private Bank of the Philippine Islands, in the
debts. amount of US$23,000.00. T.L. World
Development Corporation, who was the
If the husband himself is the principal original beneficiary of the letter of
obligor in the contract, i.e., he directly credit, transferred to respondent all its
received the money and services to be rights and obligations under the said letter
used in or for his own business or his own of credit.
profession, that contract falls within the Petitioner approved respondent’s
term "x x x x obligations for the benefit of application for a packing credit line in the
the conjugal partnership." Here, no actual amount of P300,000.00, of which
benefit may be proved. It is enough that about P96,000.00 in principal remained
the benefit to the family is apparent at the outstanding. Respondent executed the
signing of the contract. From the very corresponding promissory notes
nature of the contract of loan or services, evidencing the indebtedness.
the family stands to benefit from the loan
facility or services to be rendered to the Prior to the application for the packing
business or profession of the husband. It is credit line, respondent had obtained a loan
immaterial, if in the end, his business or from petitioner in the form of a bill
profession fails or does not succeed. discounted and secured credit
Simply stated, where the husband accommodation in the amount
contracts obligations on behalf of the of P200,000.00, of which P110,000.00 was
family business, the law presumes, and outstanding at the time of the approval of
rightly so, that such obligation will the packing credit line. The loan was
redound to the benefit of the conjugal secured by a real estate mortgage dated
partnership. 05 December 1986 over respondent’s
properties.
Thus, Ros' loan redounded to the benefit of
the family and thus, the debt is chargeable The real estate mortgage contained the
to the conjugal partnership. following clause:
For and in consideration of those certain
loans, overdraft and/or other credit
PRODUCERS BANK OF THE accommodations on this date obtained
PHILIPPINES vs. EXCELSA from the MORTGAGEE, and to secure the
INDUSTRIES, INC. payment of the same, the principal of all of
G.R. No. 152071 (May 8, 2009) which is hereby fixed at P500,000,
Philippine Currency, as well as those that
FACTS: Respondent Excelsa Industries, the MORTGAGEE may hereafter extend to
Inc. is a manufacturer and exporter of fuel the MORTGAGOR, including interest and
products, particularly charcoal briquettes, expenses or any other obligation owing to
as an alternative fuel source. Sometime in the MORTGAGEE, the MORTGAGOR
January 1987, respondent applied for a does hereby transfer and convey by way of
packing credit line or a credit export mortgage unto the MORTGAGEE, its
advance with petitioner Producers Bank of successors or assigns, the parcels of land
the Philippines, a banking institution duly which are described in the list inserted on
organized and existing under Philippines the back of this document, and/or
laws. The application was supported by appended hereto, together with all the
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 162

buildings and improvements now existing estate mortgage over respondent’s

or which may hereafter be erected or properties.
constructed thereon, of which the
MORTGAGOR declares that he/it is the At the public auction held on 05 January
absolute owner, free from all liens and 1988, the Sheriff of Antipolo, Rizal issued a
encumbrances. Certificate of Sale in favor of petitioner as
the highest bidder. The certificate of sale
On 17 March 1987, respondent presented was registered on 24 March
for negotiation to petitioner drafts drawn 1988. Subsequently, petitioner executed
under the letter of credit and the an affidavit of consolidation over the
corresponding export documents in foreclosed properties after respondent
consideration for its drawings in the failed to redeem the same. As a result, the
amounts of US$5,739.76 and Register of Deeds of Marikina issued new
US$4,585.79. Petitioner purchased the certificates of title in the name of petitioner.
drafts and export documents by paying
respondent the peso equivalent of the On 17 November 1989, respondent
drawings. The purchase was subject to the instituted an action for the annulment of the
conditions laid down in two separate extrajudicial foreclosure with prayer for
undertakings by respondent dated 17 preliminary injunction and damages
March 1987 and 10 April 1987. against petitioner and the Register of
Deeds of Marikina. Docketed as Civil Case
On 24 April 1987, Kwang Ju Bank, Ltd. No. 1587-A, the complaint was raffled to
notified petitioner through cable that the Branch 73 of the RTC of Antipolo, Rizal.
Korean buyer refused to pay respondent’s The complaint prayed, among others, that
export documents on account of the defendants be enjoined from causing
typographical discrepancies. Kwang Ju the transfer of ownership over the
Bank, Ltd. returned to petitioner the export foreclosed properties from respondent to
documents. petitioner.

Upon learning about the Korean importer’s On 18 December 1997, the RTC rendered
non-payment, respondent sent petitioner a a decision upholding the validity of the
letter dated 27 July 1987, informing the extrajudicial foreclosure and ordering the
latter that respondent had brought the issuance of a writ of possession in favor of
matter before the Korea Trade Court and petitioner. The Court of Appeals then
that it was ready to liquidate its past due rendered the assailed decision reversing
account with petitioner. Respondent sent the decision of the RTC.
another letter dated 08 September 1987,
reiterating the same assurance. In a letter ISSUE:
05 October 1987, Kwang Ju Bank, Ltd. 1) Whether or not Excelsa is liable for the
informed petitioner that it would be dishonor of the draft and export - YES
returning the export documents on account 2) Whether or not the real estate mortgage
of the non-acceptance by the importer. also served as security for respondent's
drafts that were not accepted and paid by
Petitioner demanded from respondent the Kwang Ju Bank, Ltd. - YES
payment of the peso equivalent of the 3) Whether or not extrajudicial foreclosure
export documents, plus interest and other of the mortgage may be invalidated for lack
charges, and also of the other due and of notice to respondent - NO
unpaid loans. Due to respondent’s failure 4) Whether or not respondent may still
to heed the demand, petitioner moved for question the foreclosure sale - NO
the extrajudicial foreclosure on the real
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 163

HELD: draft(s), nor proceed in any way against

1) Excelsa is liable. the drawee, the issuing bank or any
Much of the discussion has revolved endorser thereof, before making a demand
around who should be liable for the on us for the payment of the whole or any
dishonor of the draft and export unpaid balance of the draft(s).
documents. In the two undertakings
executed by respondent as a condition for In Velasquez v. Solidbank Corporation,
the negotiation of the drafts, respondent where the drawer therein also executed a
held itself liable if the drafts were not separate letter of undertaking in
accepted. The two undertakings signed by consideration for the bank’s negotiation of
respondent are similarly-worded and its sight drafts, the Court held that the
contained respondent’s express drawer can still be made liable under the
warranties, to wit: letter of undertaking even if he is
discharged due to the bank’s failure to
In consideration of your negotiating the protest the non-acceptance of the drafts.
above described draft(s), we hereby The Court explained, thus:
warrant that the said draft(s) and
accompanying documents thereon are Petitioner, however, can still be made
valid, genuine and accurately represent liable under the letter of undertaking. It
the facts stated therein, and that such bears stressing that it is a separate
draft(s) will be accepted and paid in contract from the sight draft. The
accordance with its/their tenor. We liability of petitioner under the letter of
further undertake and agree, jointly and undertaking is direct and primary. It is
severally, to defend and hold you free and independent from his liability under the
harmless from any and all actions, claims sight draft. Liability subsists on it even
and demands whatsoever, and to pay on if the sight draft was dishonored for
demand all damages actual or non-acceptance or non-payment.
compensatory including attorney’s fees,
costs and other awards or be adjudged to 2) The real estate mortgage served as
pay, in case of suit, which you may suffer security for respondent's drafts.
arising from, by reason, or on account of Respondent executed a real estate
your negotiating the above draft(s) mortgage containing a "blanket mortgage
because of the following discrepancies or clause," also known as a "dragnet
reasons or any other discrepancy or clause." It has been settled in a long line
reason whatever. of decisions that mortgages given to
secure future advancements are valid and
We hereby undertake to pay on demand legal contracts, and the amounts named as
the full amount of the above draft(s) or consideration in said contracts do not limit
any unpaid balance thereof, the the amount for which the mortgage may
Philippine perso equivalent converted at stand as security if from the four corners of
the prevailing selling rate (or selling rate the instrument the intent to secure future
prevailing at the date you negotiate our and other indebtedness can be gathered.
draft, whichever is higher) allowed by the
Central Bank with interest at the rate In Union Bank of the Philippines v.
prevailing today from the date of Court of Appeals, the nature of a dragnet
negotiation, plus all charges and expenses clause was explained, thus:
whatsoever incurred in connection Is one which is specifically
therewith. You shall neither be obliged to phrased to subsume all debts of past
contest or dispute any refusal to accept or and future origins. Such clauses are
to pay the whole or any part of the above "carefully scrutinized and strictly
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 164

construed." Mortgages of this character demands against the plaintiff for the
enable the parties to provide continuous payment of plaintiff’s outstanding loans and
dealings, the nature or extent of which may advances with the defendant as early as
not be known or anticipated at the time, July 1997.
and they avoid the expense and
inconvenience of executing a new security Plaintiff acknowledged such outstanding
on each new transaction. A "dragnet loans and advances to the defendant bank
clause" operates as a convenience and and committed to liquidate the same. For
accommodation to the borrowers as it failure of the plaintiff to pay its obligations
makes available additional funds on maturity, defendant bank foreclosed the
without their having to execute mortgage on subject properties on January
additional security documents, thereby 5, 1988 the certificate of sale was
saving time, travel, loan closing costs, annotated on March 24, 1988 and there
costs of extra legal services, recording being no redemption made by the plaintiff,
fees, et cetera. title to said properties were consolidated in
the name of defendant in July 1989.
Petitioner, therefore, was not precluded Undeniably, subject foreclosure was
from seeking the foreclosure of the real done in accordance with the prescribed
estate mortgage based on the unpaid rule.
drafts drawn by respondent. PRUDENTIAL BANK vs. DON A. ALVIAR
& GEORGIA B. ALVIAR
3) Extrajudicial foreclosure was valid. G.R. No. 150197 (July 28, 2005)
Under paragraph 12 of the real estate
mortgage, personal notice of the FACTS: Don A. Alviar and Georgia B.
foreclosure sale is not a requirement to Alviar, are the registered owners of a
the validity of the foreclosure sale. parcel of land in San Juan, Metro Manila.
On 10 July 1975, they executed a deed of
A perusal of the records of the case shows real estate mortgage in favor of petitioner
that a notice of sheriff’s sale was sent by Prudential Bank to secure the payment of a
registered mail to respondent and received loan worth P250,000.00. On 4 August
in due course. Yet, respondent claims that 1975, respondents executed the
it did not receive the notice but only corresponding promissory note, PN
learned about it from petitioner. In any BD#75/C-252, covering the said loan,
event, paragraph 12 of the real estate which provides that the loan matured on 4
mortgage requires petitioner merely to August 1976 at an interest rate of 12% per
furnish respondent with the notice and annum with a 2% service charge, and that
does not oblige petitioner to ensure that the note is secured by a real estate
respondent actually receives the notice. mortgage as aforementioned.
On this score, the Court holds that
petitioner has performed its obligation The real estate mortgage contained the
under paragraph 12 of the real estate following clause:
mortgage. That for and in consideration of certain
loans, overdraft and other credit
4) Respondent cannot question the accommodations obtained from the
foreclosure sale. Mortgagee by the Mortgagor and/or
Plaintiff is estopped from questioning the hereinafter referred to, irrespective of
foreclosure. The plaintiff is guilty of number, as DEBTOR, and to secure the
laches and cannot at this point in time payment of the same and those that may
question the foreclosure of the subject hereafter be obtained, the principal or all of
properties. Defendant bank made which is hereby fixed at Two Hundred Fifty
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 165

Thousand (P250,000.00) Pesos, Philippine be used to liquidate the outstanding loan

Currency, as well as those that the of P545,000.00 TOD. The letter likewise
Mortgagee may extend to the Mortgagor mentioned that the securities for the loan
and/or DEBTOR, including interest and were the deed of assignment on two
expenses or any other obligation owing to promissory notes executed by Bancom
the Mortgagee, whether direct or indirect, Realty Corporation with Deed of Guarantee
principal or secondary as appears in the in favor of A.U. Valencia and Co. and the
accounts, books and records of the chattel mortgage on various heavy and
Mortgagee, the Mortgagor does hereby transportation equipment.
transfer and convey by way of mortgage
unto the Mortgagee, its successors or On 06 March 1979, respondents paid
assigns, the parcels of land which are petitioner P2,000,000.00, to be applied to
described in the list inserted on the back of the obligations of G.B. Alviar Realty and
this document, and/or appended hereto, Development, Inc. and for the release of
together with all the buildings and the real estate mortgage for
improvements now existing or which may the P450,000.00 loan covering the two lots
hereafter be erected or constructed located at Vam Buren and Madison
thereon, of which the Mortgagor declares Streets, North Greenhills, San Juan, Metro
that he/it is the absolute owner free from all Manila. The payment was acknowledged
liens and encumbrances. (this is a by petitioner who accordingly released the
blanket mortgage clause or dragnet mortgage over the two properties.
clause)
On 15 January 1980, petitioner moved for
On 22 October 1976, Don Alviar executed the extrajudicial foreclosure of the
another promissory note, PN BD#76/C-345 mortgage on the property covered by TCT
for P2,640,000.00, secured by D/A SFDX No. 438157. Per petitioner’s computation,
#129, signifying that the loan was secured respondents had the total obligation
by a "hold-out" on the mortgagor’s foreign of P1,608,256.68, covering the three
currency savings account with the bank promissory notes plus assessed past due
under Account No. 129, and that the interests and penalty charges. The public
mortgagor’s passbook is to be surrendered auction sale of the mortgaged property was
to the bank until the amount secured by the set on 15 January 1980.
"hold-out" is settled.
Respondents filed a complaint for
On 27 December 1976, respondent damages with a prayer for the issuance of
spouses executed for Donalco Trading, a writ of preliminary injunction with the
Inc., of which the husband and wife were RTC of Pasig, claiming that they have paid
President and Chairman of the Board and their principal loan secured by the
Vice President, respectively, PN BD#76/C- mortgaged property, and thus the
430 covering P545,000.000. As provided in mortgage should not be foreclosed. For its
the note, the loan is secured by "Clean- part, petitioner averred that the payment
Phase out TOD CA 3923," which means of P2,000,000.00 made on 6 March 1979
that the temporary overdraft incurred by was not a payment made by respondents,
Donalco Trading, Inc. with petitioner is to but by G.B. Alviar Realty and Development
be converted into an ordinary loan. Inc., which has a separate loan with the
bank secured by a separate mortgage.
On 16 March 1977, petitioner wrote
Donalco Trading, Inc., informing the latter ISSUES:
of its approval of a straight loan of 1) Whether or not the blanket mortgage
P545,000.00, the proceeds of which shall clause or dragnet clause is valid - VALID
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 166

2) Whether or not the blanket mortgage Under American jurisprudence, two

clause applies even to subsequent schools of thought have emerged on this
advancements for which other securities question. One school advocates that a
were intended - NO "dragnet clause" so worded as to be
3) Whether or not the foreclosure of the broad enough to cover all other debts in
property was proper - NO addition to the one specifically secured
will be construed to cover a different
HELD: A "blanket mortgage clause," also debt, although such other debt is
known as a "dragnet clause" in American secured by another mortgage. The
jurisprudence, is one which is specifically contrary thinking maintains that a
phrased to subsume all debts of past or mortgage with such a clause will not
future origins. Such clauses are secure a note that expresses on its face
"carefully scrutinized and strictly that it is otherwise secured as to its
construed." Mortgages of this character entirety, at least to anything other than
enable the parties to provide a deficiency after exhausting the
continuous dealings, the nature or security specified therein, such
extent of which may not be known or deficiency being an indebtedness within
anticipated at the time, and they avoid the meaning of the mortgage, in the
the expense and inconvenience of absence of a special contract excluding
executing a new security on each new it from the arrangement.
transaction.
A "dragnet clause" operates as a The latter school represents the better
convenience and accommodation to the position. The parties having conformed to
borrowers as it makes available additional the "blanket mortgage clause" or "dragnet
funds without their having to execute clause," it is reasonable to conclude that
additional security documents, thereby they also agreed to an implied
saving time, travel, loan closing costs, understanding that subsequent loans
costs of extra legal services, recording need not be secured by other securities,
fees, et cetera. Indeed, it has been settled as the subsequent loans will be secured
in a long line of decisions that mortgages by the first mortgage. In other words, the
given to secure future advancements sufficiency of the first security is a
are valid and legal contracts, and the corollary component of the "dragnet
amounts named as consideration in clause." But of course, there is no
said contracts do not limit the amount prohibition, as in the mortgage contract in
for which the mortgage may stand as issue, against contractually requiring other
security if from the four corners of the securities for the subsequent loans. Thus,
instrument the intent to secure future when the mortgagor takes another loan
and other indebtedness can be for which another security was given it
gathered. could not be inferred that such loan was
made in reliance solely on the original
On the basis of the blanket mortgage security with the "dragnet clause," but
clause contained in the real estate rather, on the new security given. This
mortgage, petitioner and respondents is the "reliance on the security test."
intended the real estate mortgage to
secure not only the P250,000.00 loan from It was therefore improper for petitioner
the petitioner, but also future credit in this case to seek foreclosure of the
facilities and advancements that may be mortgaged property because of non-
obtained by the respondents. payment of all the three promissory
notes. While the existence and validity of
the "dragnet clause" cannot be denied,
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 167

there is a need to respect the existence of contracts of adhesion. Being of such

the other security given for PN BD#76/C- nature, the same should be interpreted
345. The foreclosure of the mortgaged strictly against petitioner and with even
property should only be for more reason since having been
the P250,000.00 loan covered by PN accomplished by respondents in the
BD#75/C-252, and for any amount not presence of petitioner’s personnel and
covered by the security for the second approved by its manager, they could not
promissory note. While the "dragnet have been unaware of the import and
clause" subsists, the security extent of such contracts.
specifically executed for subsequent
loans must first be exhausted before Petitioner, however, is not without
the mortgaged property can be resorted recourse. Both the Court of Appeals and
to. the trial court found that respondents have
not yet paid the P250,000.00, and gave no
It is important to note that the mortgage credence to their claim that they paid the
contract, as well as the promissory said amount when they paid
notes subject of this case, is a contract petitioner P2,000,000.00. Thus, the
of adhesion, to which respondents’ only mortgaged property could still be properly
participation was the affixing of their subjected to foreclosure proceedings for
signatures or "adhesion" thereto. A the unpaid P250,000.00 loan, and as
contract of adhesion is one in which a mentioned earlier, for any deficiency after
party imposes a ready-made form of D/A SFDX#129, security for PN BD#76/C-
contract which the other party may 345, has been exhausted, subject of
accept or reject, but which the latter course to defenses which are available to
cannot modify. respondents.

The real estate mortgage in issue appears N.B. In the absence of clear, supportive
in a standard form, drafted and prepared evidence of a contrary intention, a
solely by petitioner, and which, according mortgage containing a "dragnet clause"
to jurisprudence must be strictly construed will not be extended to cover future
against the party responsible for its advances unless the document
preparation. If the parties intended that evidencing the subsequent advance
the "blanket mortgage clause" shall refers to the mortgage as providing
cover subsequent advancement security therefor.
secured by separate securities, then the
same should have been indicated in the
mortgage contract. Consequently, any PHILIPPINE CHARITY SWEEPSTAKES
ambiguity is to be taken contra OFFICE (PCSO) vs. NEW DAGUPAN
proferentum, that is, construed against the METRO GAS CORPORATION, PURITA
party who caused the ambiguity which E. PERALTA and PATRICIA P. GALANG
could have avoided it by the exercise of a
little more care. To be more emphatic, any FACTS: Purita E. Peralta is the registered
ambiguity in a contract whose terms are owner of a parcel of land located at
susceptible of different interpretations must Bonuan Blue Beach Subdivision, Dagupan
be read against the party who drafted City. In 1989, a real estate mortgage was
it, which is the petitioner in this case. constituted over such property in favor of
PCSO to secure the payment of the
Even the promissory notes in issue were sweepstakes tickets purchased Patricia P.
made on standard forms prepared by Galang (provincial distributor).
petitioner, and as such are likewise
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 168

However on July 31, 1990, Peralta sold, October 28, 1993, notifying the latter of its
under a conditional sale, the subject complaint against Peralta and its claim
property to New Dagupan. over the subject property and suggesting
that PCSO intervene and participate in the
The conveyance to be absolute (full case.
payment of the price of P800,000.00), New
Dagupan paid Peralta P200,000.00 upon The RTC rendered a Decision (for the
the execution of the corresponding deed specific performance case), approving the
and the balance of P600,000.00 by compromise agreement between Peralta
monthly instalments of P70,000.00. and New Dagupan. When the decision
became final and executory, New Dagupan
Peralta showed to New Dagupan a once again demanded Peralta’s delivery of
photocopy of TCT, which bore no liens and the owner’s duplicate of TCT.
encumbrances, and undertook to deliver
the owner’s duplicate within three (3) In a letter dated March 29, 1994, New
months from the execution of the contract. Dagupan made a similar demand from
PCSO, who in response, stated that it had
In view of Peralta’s failure to deliver the already foreclosed the mortgage on the
owner’s duplicate of TCT and to execute a subject property and it has in its name a
deed of absolute sale in its favor, New certificate of sale for being the highest
Dagupan withheld payment of the last bidder in the public auction that took place
instalment and through its President, Julian on June 15, 1993.
Ong Cuña, executed an affidavit of
adverse claim, which was annotated on Thus, New Dagupan filed with the RTC a
October 1, 1991. petition against PCSO for the annulment of
TCT or surrender of the owner’s duplicate
Due to Peralta’s continued failure to deliver thereof.
a deed of absolute sale and the owner’s
duplicate of the title, New Dagupan filed a The RTC Branch 42 rendered a Decision in
complaint for specific performance her. New Dagupan’s favor and ordered PCSO
to deliver the owner’s duplicate copy of
On the other hand, on May 20, 1992, TCT in its possession to the Registry of
during the pendency of New Dagupan’s Deeds of Dagupan City for the purpose of
complaint against Peralta, PCSO caused having the decision to be annotated at the
the registration of the mortgage. PCSO back thereof.
filed an application for the extrajudicial
foreclosure sale of the subject property in PCSO’s appeal from the foregoing adverse
view of Galang’s failure to fully pay the decision was dismissed. By way of its
sweepstakes she purchased in 1992. A assailed decision, the CA did not agree
public auction took place on June 15, 1993 with PCSO’s claim that the subject
where PCSO was the highest bidder. A mortgage is in the nature of a continuing
certificate of sale was correspondingly guaranty, holding that Peralta’s
issued to PCSO. undertaking to secure Galang’s liability to
PCSO is only for a period of one year and
New Dagupan obtained from the ROD of was extinguished when Peralta completed
Dagupan City for its use in Civil Case a payment on the sweepstakes tickets she
certified true copy of TCT that reflected purchased in 1989.
PCSO’s mortgage lien, claiming that it is
only then that it was informed of the ISSUE: Who between New Dagupan and
subject mortgage, sent a letter to PCSO on PCSO has a better right to the property in
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 169

question – NEW DAGUPAN fees, et cetera. x x x.29 (Citations omitted)

RULING: As a general rule, a mortgage A mortgage that provides for a dragnet

liability is usually limited to the amount clause is in the nature of a continuing
mentioned in the contract. However, the guaranty and constitutes an exception to
amounts named as consideration in a the rule than an action to foreclose a
contract of mortgage do not limit the mortgage must be limited to the amount
amount for which the mortgage may stand mentioned in the mortgage contract. Its
as security if from the four corners of the validity is anchored on Article 2053 of the
instrument the intent to secure future and Civil Code and is not limited to a single
other indebtedness can be gathered. transaction, but contemplates a future
course of dealing, covering a series of
Alternatively, while a real estate mortgage transactions, generally for an indefinite
may exceptionally secure future loans or time or until revoked. It is prospective in its
advancements, these future debts must be operation and is generally intended to
specifically described in the mortgage provide security with respect to future
contract. An obligation is not secured by a transactions within certain limits, and
mortgage unless it comes fairly within the contemplates a succession of liabilities, for
terms of the mortgage contract. which, as they accrue, the guarantor
becomes liable. In other words, a
The stipulation extending the coverage of a continuing guaranty is one that covers all
mortgage to advances or loans other than transactions, including those arising in the
those already obtained or specified in the future, which are within the description or
contract is valid and has been commonly contemplation of the contract of guaranty,
referred to as a "blanket mortgage" or until the expiration or termination
"dragnet" clause. thereof.30

In Prudential Bank v. Alviar,28 this Court In this case, PCSO claims the subject
elucidated on the nature and purpose of mortgage is a continuing guaranty.
such a clause as follows: According to PCSO, the intent was to
secure Galang’s ticket purchases other
A "blanket mortgage clause," also known than those outstanding at the time of the
as a "dragnet clause" in American execution of the Deed of Undertaking with
jurisprudence, is one which is specifically First Real Estate Mortgage on March 8,
phrased to subsume all debts of past or 1989 such that it can foreclose the subject
future origins. Such clauses are "carefully mortgage for Galang’s non-payment of her
scrutinized and strictly construed." ticket purchases in 1992. PCSO does not
Mortgages of this character enable the deny and even admits that Galang had
parties to provide continuous dealings, the already settled the amount of P450,000.00.
nature or extent of which may not be
known or anticipated at the time, and they However, PCSO refuses to concede that
avoid the expense and inconvenience of the subject mortgage had already been
executing a new security on each new discharged, claiming that Galang had
transaction. A "dragnet clause" operates as unpaid ticket purchases in 1992 and these
a convenience and accommodation to the are likewise secured as evidenced by the
borrowers as it makes available additional following clause in the Deed of
funds without their having to execute Undertaking with First Real Estate
additional security documents, thereby Mortgage.
saving time, travel, loan closing costs,
costs of extra legal services, recording As the CA correctly observed, the use of
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 170

the terms "outstanding" and "unpaid"

militates against PCSO’s claim that future Therefore, since the subject mortgage is
ticket purchases are likewise secured. That not in the nature of a continuing guaranty
there is a seeming ambiguity between the and given the automatic termination
provision relied upon by PCSO containing thereof, PCSO cannot claim that Galang’s
the phrase "after each draw" and the other ticket purchases in 1992 are also secured.
provisions, which mention with particularity From the time the amount of P450,000.00
the amount of P450,000.00 as Galang’s was fully settled, the subject mortgage had
unpaid and outstanding account and already been cancelled such that Galang’s
secured by the subject mortgage, should subsequent ticket purchases are
be construed against PCSO. The subject unsecured. Simply put, PCSO had nothing
mortgage is a contract of adhesion as it to register, much less, foreclose.
was prepared solely by PCSO and the only
participation of Galang and Peralta was the Consequently, PCSO’s registration of its
act of affixing their signatures thereto. non-existent mortgage lien and subsequent
foreclosure of a mortgage that was no
Considering that the debt secured had longer extant cannot defeat New
already been fully paid, the subject Dagupan’s title over the subject property.
mortgage had already been discharged
and there is no necessity for any act or
document to be executed for the purpose. ASIA TRUST DEVELOPMENT BANK vs.
As provided in the Deed of Undertaking CARMELO H. TUBLE
with First Real Estate Mortgage:
FACTS: Carmelo H. Tuble, who served as
15. Upon payment of the principal amount the vice-president of petitioner Asia trust
together with interest and other expenses Development Bank availed himself of the
legally incurred by the MORTGAGEE, the car incentive plan and loan privileges
above-undertaking is considered offered by the bank. He was also entitled to
terminated. the Senior Managers Deferred Incentive
Plan (DIP)
Section 6234 of Presidential Decree (P.D.)
No. 1529 appears to require the execution Tuble acquired a Nissan Vanette through
of an instrument in order for a mortgage to the company’s car incentive plan. The
be cancelled or discharged. However, this arrangement was made to appear as a
rule presupposes that there has been a lease agreement requiring only the
prior registration of the mortgage lien prior payment of monthly rentals. Accordingly,
to its discharge. the lease would be terminated in case of
the employee’s resignation or retirement
In this case, the subject mortgage had prior to full payment of the price.
already been cancelled or terminated upon
Galang’s full payment before PCSO As regards the loan privileges, Tuble
availed of registration in 1992. obtained three separate loans.
a.) First, a real estate loan evidenced by
As the subject mortgage was not the January 18 1993 Promissory note with
annotated on TCT No. 52135 at the time it maturity date of January 1, 1999 was
was terminated, there was no need for secured by a mortgage over his property
Peralta to secure a deed of cancellation in covered by transfer certificate.
order for such discharge to be fully b.) Second was a consumption loan,
effective and duly reflected on the face of evidenced by the January 10, 1994
her title. c.) Third, a salary loan.
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 171

payment, he was released from his

He resigned on March 30, 1995 and was accountabilities and had his clearance. The
subsequently given the option to either bank then issued the clearance necessary
return the vehicle without any further for the release of his DIP share. Tuble
obligation or retain the unit or pay its received a manager’s check in the amount
remaining book value. of 166,049 representing his share in the
DIP funds.
Tuble had the following obligations to the
bank after his retirement Tuble paid the redemption price but
a.) The purchase or return of the disputed its costing. He filed a complaint
Nissan for recovery of a sum of money and
b.) 100,000 as consumption loan damages before the RTC. The RTC ruled
c.) 421,800 as real estate loan in favor of Tuble. They held that the value
d.) 16,250 as salary loan of the car should not have been included
given that it was already returned. The CA
Moreover, the bank also owed Tuble his affirmed the RTC.
pro-rata share in the DIP which was to be
issued after the bank had given the ISSUES:
resigned employees clearance and 25,797 ISSUE 1: Whether or not the bank is
representing his final salary and entitled to include these items in the
corresponding 13th month pay. redemption price: the 18% annual interest
on the bid price of P421,800.
He claimed that since he and the bank
were debtors and creditors of each other, RULING: The 18% Annual Interest on the
the offsetting of loans could legally take Bid Price of P421,800
place. He then asked the bank to simply
compute his DIP and apply his receivables The Applicable Law
to his loans. The bank refused and sent The bank argues that instead of referring to
him a demand letter and required him to the Rules of Court to compute the
return the Nissan Vanette. redemption price, the courts a quo should
have applied the General Banking Law,
On August 14, 1995, Tuble wrote the bank considering that petitioner is a banking
again to follow up his request to offset the institution.
loans. This was not immediately acted
upon, and it was only on October 13, 1995 The statute referred to requires that in the
that the bank finally allowed the offsetting event of judicial or extrajudicial foreclosure
of his various claims and liabilities. As a of any mortgage on real estate that is used
result, his liabilities were reduced to 970 as security for an obligation to any bank,
thousand plus the unreturned value of the banking institution, or credit institution, the
vehicle. mortgagor can redeem the property by
paying the amount fixed by the court in the
The bank then filed a complaint for replevin order of execution, with interest thereon at
against tuble. The judgement was the rate specified in the mortgage.18
favorable for the bank. To collect the
liabilities of Tuble, it also filed a petition for Petitioner is correct.
extra-judicial foreclosure of real estate
mortgage over his property. It was based From the plethora of cases, the SC held
on his real estate loan. that the General Banking Act – being a
special and subsequent legislation – has
He redeemed the property. With this the effect of amending Section 6 of Act No.
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 172

3135, insofar as the redemption price is Consequently, since the Real Estate
concerned, when the mortgagee is a bank. Mortgage Contract is already extinguished,
Thus, the amount to be paid in redeeming petitioner can no longer rely on it or invoke
the property is determined by the General its provisions, including the dragnet clause
Banking Act, and not by the Rules of Court stipulated therein. It follows that the bank
in Relation to Act 3135. cannot refer to the 18% annual interest
charged in Promissory Note No. 0143, an
The Remedy of Foreclosure obligation allegedly covered by the terms
Firstly, at the time respondent resigned, of the Contract.
which was chronologically before the
foreclosure proceedings, he had several Neither can the bank use the
liabilities to the bank. Secondly, when the consummated contract to collect on the
bank later on instituted the foreclosure rest of the obligations, which were not
proceedings, it foreclosed only the included when it earlier instituted the
mortgage secured by the real estate loan foreclosure proceedings. It cannot be
of P421,800.22 It did not seek to include, in allowed to use the same security to collect
the foreclosure, the consumption loan on the other loans. To do so would be akin
under Promissory Note No. 0143 or the to foreclosing an already foreclosed
other alleged obligations of respondent. property.
Thirdly, on 28 February 1996, the bank
availed itself of the remedy of foreclosure Rather than relying on an expired
and, in doing so, effectively gained the contract, the bank should have
property. collected on the excluded loans by
instituting the proper actions for
As a result of these established facts, one recovery of sums of money. Simply put,
evident conclusion surfaces: the Real petitioner should have run after Tuble
Estate Mortgage Contract on the separately, instead of hostaging the
secured property is already same property to cover all of his
extinguished. liabilities.

In foreclosures, the mortgaged property is The Dragnet Clause

subjected to the proceedings for the In any event, assuming that the Real
satisfaction of the obligation. As a result, Estate Mortgage Contract subsists, the SC
payment is effected by abnormal means ruled that the dragnet clause therein does
whereby the debtor is forced by a judicial not justify the imposition of an 18% annual
proceeding to comply with the presentation interest on the redemption price.
or to pay indemnity.
The Court has recognized that, through
Once the proceeds from the sale of the a dragnet clause, a real estate mortgage
property are applied to the payment of the contract may exceptionally secure
obligation, the obligation is already future loans or advancements. But an
extinguished. obligation is not secured by a
mortgage, unless, that mortgage comes
Thus, in Spouses Romero v. Court of fairly within the terms of the mortgage
Appeals, the SC held that the mortgage contract.
indebtedness was extinguished with the
foreclosure and sale of the mortgaged Moreover, the mortgage agreement, being
property, and that what remained was the a contract of adhesion, is to be carefully
right of redemption granted by law. scrutinized and strictly construed against
the bank, the party that prepared the
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 173

agreement. refers to the mortgage as providing

security therefor.
The Court finds that there is no specific
mention of interest to be added in case of In this regard, the Court adopted the
either default or redemption. The Real "reliance on the security test", the test as
Estate Mortgage Contract itself is silent on follows:
the computation of the redemption price.
Although it refers to the Promissory Notes A mortgage with a "dragnet clause" is
as constitutive of Tuble’s secured an "offer" by the mortgagor to the bank
obligations, the said contract does not to provide the security of the mortgage
state that the interest to be charged in case for advances of and when they were
of redemption should be what is specified made. Thus, it was concluded that the
in the Promissory Notes. "offer" was not accepted by the bank
when a subsequent advance was made
Thus, an ambiguity results as to which because (1) the second note was
interest shall be applied, for to apply an secured by a chattel mortgage on
18% interest per annum based on certain vehicles, and the clause therein
Promissory Note No. 0143 will negate the stated that the note was secured by
existence of the 0% interest charged by such chattel mortgage; (2) there was no
Promissory Note No. 0142. Notably, it is reference in the second note or chattel
this latter Promissory Note that refers to mortgage indicating a connection
the principal agreement to which the between the real estate mortgage and
security attaches. the advance; (3) the mortgagor signed
the real estate mortgage by her name
In resolving this ambiguity, the SC refer to alone, whereas the second note and
a basic principle in the law of contracts: chattel mortgage were signed by the
"Any ambiguity is to be taken contra mortgagor doing business under an
proferentem, that is, construed against assumed name; and (4) there was no
the party who caused the ambiguity allegation by the bank, and apparently
which could have avoided it by the no proof, that it relied on the security of
exercise of a little more care." the real estate mortgage in making the
advance. (Emphasis supplied)
Therefore, the ambiguity in the mortgage
deed whose terms are susceptible of The second loan agreement, or Promissory
different interpretations must be read Note No. 0143, referring to the
against the bank that drafted it. consumption loan makes no reference to
the earlier loan with a real estate
Furthermore, the Court refuses to be mortgage. Neither does the bank make any
blindsided by the dragnet clause in the allegation that it relied on the security of
Real Estate Mortgage Contract to the real estate mortgage in issuing the
automatically include the consumption consumption loan to Tuble.
loan, and its corresponding interest, in
computing the redemption price. Tuble was Asia Trust’s previous vice-
president, as one of the senior officers, the
In the absence of clear and supportive consumption loan was given to him not as
evidence of a contrary intention, a an ordinary loan, but as a form of
mortgage containing a dragnet clause accommodation or privilege. The bank’s
will not be extended to cover future grant of the salary loan to Tuble was
advances, unless the document apparently not motivated by the creation of
evidencing the subsequent advance a security in favor of the bank, but by the
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 174

fact the he was a top executive of default since by way of legal

petitioner. compensation, he effectively paid his
liabilities on time.
Thus, the bank cannot claim that it relied
on the previous security in granting the The court held that there was no legal
consumption loan to Tuble. For this compensation. In order for legal
reason, the dragnet clause will not be compensation to take effect, article 1279
extended to cover the consumption loan. It requires that the debts be liquidated and
follows, therefore, that its corresponding demandable.
interest – 18% per annum – is inapplicable.
a. Requisites for legal compensation:
ISSUE 2: Whether or not the bank is i.) That each one of the obligors be
entitled to interest charges on Promissory bound physically, and that he be at
Note 0142 the same time a principal creditor of the
other.
RULING: In addition to the 18% annual ii.) That both debts consist in a sum
interest, the bank also claims a 12% per of money, or if the things due are
annum on the consumption loan. consumable, they be of the same
Notwithstanding that promissory note kind, and also of the same quality if the
contains no stipulation on interest latter has been stated.
payments, the bank still claims that Tuble iii.) That the two debts be due
is liable to pay the legal interest pursuant iv.) That they be liquidated and
to article 2209 of the family code: demandable
v.) That over neither of them there
Article 2209 – If the obligation consists in be any retention, or controversy,
the payment of a sum of money and the commenced by third persons and
debtor incurs in delay, the indemnity for communicated n due time to the debtor.
damages, there being no stipulation shall
be the payment of the interest agreed upon Liquidated debts are those who exact
and in the absence of stipulation, the legal amount has already been determined. In
interest, which is six per cent per annum. this case, the receivable of Tuble, including
his DIP share was not yet determined. It
While Article 2209 allows the recovery of was the bank’s policy to compute and
interest sans stipulation, this charge is issue the computation only after the retired
provided not as a form of monetary interest employee had been cleared by the bank.
but as one of compensatory interest. Thus, Tuble incorrectly invoked legal
a.) Monetary interest refers to the compensation.
compensation set by the parties
for the use or forbearance of
money. SPOUSES ANTONIO & LETICIA VEGA
b.) Compensatory interest refers to VS SSS & PILAR DEVELOPMENT
the penalty or indemnity for CORPORATION
damages imposed by law or
courts. This is due only if the FACTS: Magdalena Reyes owned a piece
obligor is proven to have of titled land in Pilar Village, Las Piñas
defaulted in paying the loan. CIty. On August 17, 1979, she got a
housing Loan from SSS for which she
A default must exist before the bank can mortgaged her land.
collect the compensatory legal interest of
12% per annum. Tuble denies being in Late 1979, Reyes asked the Sps Vega to
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 175

assume the loan and buy her house and lot Apex assigned Reyes' credit to PDC on
since she was to emigrate. December 29, 1992.

An employee at SSS said, however, that RTC: Reyes must pay the PDC the loan of
SSS did not approve of members P46,398 plus interest and penalties
transferring their mortgaged homes. beginning April 11, 1979 as well as
attorney's fees and costs. Unable to pay,
But the Spouses Vega (Vegas) could make RTC issued a writ of execution against
a private arrangement with Reyes provided Reyes and its Sheriff levied on the property
that they pay the monthly amortizations on in Pilar Village.
time. Vegas agreed for Reyes to execute in
their favor a deed of assignment of real On Feb 16, 1994, the Vegas requested the
property with assumption of mortgage and SSS to acknowledge their status as
paid Reyes P20,000 after she undertook to subrogees and to give them an update of
update the amortizations before leaving the the account so they could settle it in full.
country. The Vegas took possession of the SSS did not reply. RTC sheriff published a
house in January 1981. Reyes did not notice for the auction sale of the property
execute the deed of assignment. She left on Feb 24, March 3 and 10, 1994. He also
the country and left her sister (Julieta gave notice to the Vegas on March 20. The
Ofilada) a special power of attorney to Vegas filed an affidavit of third party
convey ownership of property. claimant and a motion to quash the levy on
the property. However, RTC directed the
Sometime between 1983 and 1984, sheriff to proceed with the execution.
Ofilada executed the deed of assignment
in favor of the Vegas, kept the original and The Vegas got a telegram informing them
gave the Vegas two copies, one to be that the SSS intended to foreclose on the
given to the Home Development Mortgage property to satisfy the unpaid debt of
Fund and kept the other. A storm in 1984 P38,789.58. The Vegas requested from the
resulted in flood and destroyed their SSS in writing for the exact amount of the
personal copy. indebtedness and for assurance that they
would be entitled to the discharge of the
In 1992, the Vegas learned that Reyes did mortgage and delivery of the proper
not update the amortizations because they subrogation documents upon payment.
received a notice to Reyes from the SSS. They also sent a P37,521.95 manager's
They told the SSS that they already gave check that SSS refused to accept.
the payment to Reyes but, since it
appeared indifferent, on January 6, 1992, The Vegas filed an action for consignation,
the Vegas updated the amortization and damages, and injunction with application
paid P115,738.48 to the SSS. They for preliminary injunction and TRO against
negotiated seven additional remittances SSS, PDC, the RTC sheriff and the
and the SSS accepted P8,681 more from Register of Deeds before the RTC in Las
the Vegas. Piñas. While the case was pending, SSS
released the mortgage to PDC. A writ of
On April 16, 1993, PDC filed an action for possession evicted the Vegas from the
sum of money against Reyes before the property. RTC decided in favor of the
RTC of Manila, claiming that Reyes Vegas. CA reversed.
borrowed from Apex Mortgage and Loans
Corporation (Apex) P46,500 to buy the lot ISSUE :WON Reyes validly sold her SSS-
and construct a house on it. mortgaged property to the Vegas
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 176

HELD: Reyes acquired the property in this SSS cannot be compelled while the loan
case through a loan from the SSS in was unpaid to recognize the sale, it cannot
whose favor she executed a mortgage as be interpreted as absolutely forbidding her,
collateral for the loan. Although the loan as owner of the mortgaged property, from
was still unpaid, she assigned the property selling the same while her loan remained
to the Vegas without notice to or the unpaid. Such stipulation contravenes
consent of the SSS. The Vegas continued public policy, being an undue impediment
to pay the amortizations apparently in or interference on the transmission of
Reyes’ name. Meantime, Reyes apparently property.
got a cash loan from Apex, which assigned
the credit to PDC. This loan was not Besides, when a mortgagor sells the
secured by a mortgage on the property but mortgaged property to a third person, the
PDC succeeded in getting a money creditor may demand from such third
judgment against Reyes and had it person the payment of the principal
executed on the property. Such property obligation. The reason for this is that the
was still in Reyes’ name but, as pointed out mortgage credit is a real right, which
above, the latter had disposed of it in favor follows the property wherever it goes, even
of the Vegas more than 10 years before if its ownership changes. Article 2129 of
PDC executed on it. the Civil Code gives the mortgagee, here
the SSS, the option of collecting from the
The question is: was Reyes’ disposal of the third person in possession of the
property in favor of the Vegas valid given a mortgaged property in the concept of
provision in the mortgage agreement that owner. More, the mortgagor-owner’s sale
she could not do so without the written of the property does not affect the right of
consent of the SSS? the registered mortgagee to foreclose on
the same even if its ownership had been
The CA ruled that, under Article 1237 of transferred to another person. The latter is
the Civil Code, the Vegas who paid the bound by the registered mortgage on the
SSS amortizations except the last on title he acquired.
behalf of Reyes, without the latter’s
knowledge or against her consent, cannot After the mortgage debt to SSS had been
compel the SSS to subrogate them in her paid, however, the latter had no further
rights arising from the mortgage. Further, justification for withholding the release of
said the CA, the Vegas’ claim of the collateral and the registered title to the
subrogation was invalid because it was party to whom Reyes had transferred her
done without the knowledge and consent right as owner.
of the SSS as required under the mortgage
agreement. Under the circumstance, the Vegas had
the right to sue for the conveyance to them
But Article 1237 cannot apply in this case of that title, having been validly subrogated
since Reyes consented to the transfer of to Reyes’ rights.
ownership of the mortgaged property to the
Vegas. Reyes also agreed for the Vegas to
assume the mortgage and pay the balance
of her obligation to SSS. Of course,
paragraph 4 of the mortgage contract
covering the property required Reyes to
secure SSS’ consent before selling the
property. But, although such a stipulation is
valid and binding, in the sense that the
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 177

PINEDA VS. CA
HELD:
FACTS: Spouses Benitez mortgaged a Mojica’s Title is Void Since the TCT of the
house and lot in favor of Juanita P. Pineda property was not actually lost but was in
(“Pineda”) and Leila P. Sayoc (“Sayoc”) the possession of Pineda, the
which was not registered . With the reconstitution proceeding and the second
consent of Pineda, spouses Benitez sold TCT issue in favor of Mojica by virtue of
the house, which was part of the Property, the sale were void.
to Olivia G. Mojica (“Mojica”). On the same
date, Mojica filed a petition for the issuance However, the prior mortgage of the
of a second owner’s duplicate alleging that Property by the Spouses Benitez to Pineda
she “purchased a parcel of land” and the and Sayoc did not prevent the Spouses
“owner’s duplicate copy was lost.” The Benitez, as owners of the Property, from
same was granted. selling the Property to Mojica. A mortgage
is merely an encumbrance on the property
The lot was also subsequently sold to and does not extinguish the title of the
Mojica. Mojica executed a deed of debtor who does not lose his principal
mortgage over the same property in favor attribute as owner to dispose of the
of Gonzales which deed was registered. property. The law even considers void a
Pineda and Sayoc filed a complaint against stipulation forbidding the owner of the
the Spouses Benitez and Mojica. The property from alienating the mortgaged
complaint prayed for the cancellation of the immovable.
second owner’s duplicate. During the
pendency of the case, Pineda caused the Since the Spouses Benitez were the
annotation of a notice of lis pendens. The undisputed owners of the Property, they
Court ruled that the second owner’s could validly sell and deliver the Property
duplicate was void. to Mojica. The execution of the notarized
deed of sale between the Spouses Benitez
Meanwhile, Mojica defaulted in paying the and Mojica had the legal effect of actual or
obligation to Gonzales so the latter physical delivery. Ownership of the
foreclosed the mortgaged and purchased it Property passed from the Spouses Benitez
at the auction sale. A new TCT was issued to Mojica. The nullity of the second owner’s
in the name of Gonzales. duplicate of TCT did not affect the validity
of the sale as between the Spouses
Pineda and Sayoc filed a motion with the Benitez and Mojica.
trial court for the issuance of an order
requiring Gonzales to surrender the Gonzales is an Innocent Purchaser for
owner’s duplicate of TCT to the ROD. Value The nullity of MOjica’s title does not
automatically carry with it the nullity of the
The Trial Court declared the title of annotation of Gonzales’ mortgage. The
Gonzales as void and ordered the rule is that a mortgage annotated on a void
reinstatement of the TC in the name of title is valid if the mortgagee registered the
Spouses Benitez. The CA ruled in favor of mortgage in good faith.
Gonzales
Gonzales registered her mortgage in good
ISSUES: faith. Gonzales had no actual notice of the
1.WON the mortgage to Gonzales is valid. prior unregistered mortgage in favor of
YES Pineda and Sayoc. To bind third parties to
2.WON Gonzales is an innocent an unregistered encumbrance, the law
purchaser/ mortgagee for value. YES requires actual notice. The fact that Mojica,
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 178

who sold the Property to Gonzales, had question, as an equitable mortgage;

actual notice of the unregistered mortgage (2) Declaring the parties Erlinda Sibug
did not constitute actual notice to and Ricardo Rosales, within 90 days from
Gonzales, absent proof that Gonzales finality of this Decision, to deposit with the
herself had actual notice of the prior Clerk of Court, for payment to the parties
mortgage. Thus, Gonzales acquired her Felicisimo Macaspac and Elena Jiao, the
rights as a mortgagee in good faith. sum of P65,000.00, with interest at nine (9)
percent per annum from September 30,
When Mojica defaulted in paying her debt, 1982 until payment is made, plus the sum
Gonzales caused the extrajudicial of P219.76 as reimbursement for real
foreclosure of the mortgaged Property. estate taxes;
Gonzales purchased the mortgaged (3) Directing the parties Felicisimo
Property as the sole bidder at the public Macaspac and Elena Jiao, upon the
auction sale. For Mojica’s failure to deposit on their behalf of the amounts
redeem the foreclosed Property within the specified in the foregoing paragraph, to
prescribed period, Gonzales consolidated execute a deed of reconveyance of the
her title to the Property. Absent property in question to Erlinda Sibug,
anyevidence to the contrary, the sale at married to Ricardo Rosales, and the
public auction of the Property to Gonzales Register of Deeds of Manila shall cancel
was valid. Thus, the title or ownership of Transfer Certificate of Title No. 150540 in
the Property passed from Mojica to the name of the Macaspacs (Exh. E) and
Gonzales. At this point, therefore, issue new title in the name of Sibug;
Gonzales became the owner of the (4) For non-compliance by Sibug and
Property. When Gonzales purchased the Rosales of the directive in paragraph (2) of
Property at the auction sale, Pineda and this dispositive portion, let the property be
Sayoc had already annotated the lis sold in accordance with the Rules of Court
pendens on the original of TCT 8361, for the release of the mortgage debt and
which remained valid. However, the the issuance of title to the purchaser.
mortgage of Gonzales was validly
registered prior to the notation of the lis The decision became final and executor.
pendens. The subsequent annotation of Spouses Rosales, judgment debtors and
the lis pendens could not defeat the rights petitioners failed to comply with par 2
of the mortgagee or the purchaser at the (deposit with Clerk of Court 65k). This
auction sale who derived their rights under prompted Macaspac, as judgment creditor,
a prior mortgage validly registered. The to file a motion for execution. On May 15,
settled rule is that the auction sale 1998, an auction sale of the property was
retroacts to the date of the registration of held, wherein petitioners participated. The
the mortgage, putting the auction sale property was sold for 285k to spouses
beyond the reach of any intervening lis Suba (respondents), being the highest
pendens, sale or attachment. bidders.

Respondents thereafter filed with the court

SPOUSES ROSALES VS. SPOUSES a motion for writ of possession, contending
SUBA that the confirmation of the sale “effectively
cut of petitioners’ equity of redemption.”
FACTS: On June 13, 1997, RTC rendered RTC ruled that petitioners have no right to
a decision in two Civil Cases, the redeem since the case is for judicial
dispositive portion of which reads: foreclosure of mortgage. Hence,
(1) Declaring the Deed of Sale of Exhibit respondents as purchasers are entitled to
D, G and I, affecting the property in possession. CA affirmed: no right of
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 179

redemption in judicial foreclosure of

mortgage. “Where the foreclosure is judicially
effected, however, no equivalent right of
ISSUE: WON petitioners have the right to redemption exists. The law declares that a
redeem the subject property. NO judicial foreclosure sale, ‘when confirmed
by an order of the court, x x x shall operate
HELD: The decision of the trial court, to divest the rights of all the parties to the
which is final and executory, declared the action and to vest their rights in the
transaction between petitioners and purchaser, subject to such rights of
Macaspac an equitable mortgage. The redemption as may be allowed by law.’
Court defined an equitable mortgage as Such rights exceptionally ‘allowed by law’
“one which although lacking in some (i.e., even after the confirmation by an
formality, or form or words, or other order of the court) are those granted by the
requisites demanded by a statute, charter of the Philippine National Bank (Act
nevertheless reveals the intention of the Nos. 2747 and 2938), and the General
parties to charge real property as security Banking Act (R.A.337). These laws confer
for a debt, and contains nothing impossible on the mortgagor, his successors in
or contrary to law.” An equitable mortgage interest or any judgment creditor of the
is not different from a real estate mortgage, mortgagor, the right to redeem the property
and the lien created thereby ought not to sold on foreclosure–after confirmation by
be defeated by requiring compliance with the court of the foreclosure sale–which
the formalities necessary to the validity of a right may be exercised within a period of
voluntary real estate mortgage.[6] Since one (1) year, counted from the date of
the parties’ transaction is an equitable registration of the certificate of sale in the
mortgage and that the trial court ordered its Registry of Property.
foreclosure, execution of judgment is
governed by Sections 2 and 3, Rule 68 of “But, to repeat, no such right of redemption
the 1997 Rules of Civil Procedure, as exists in case of judicial foreclosure of a
amended. mortgage if the mortgagee is not the PNB
or a bank or banking institution. In such a
In Huerta Alba Resort, Inc. vs. Court of case, the foreclosure sale, ‘when
Appeals,[7] we held that the right of confirmed by an order of the court, x x x
redemption is not recognized in a judicial shall operate to divest the rights of all the
foreclosure, thus: parties to the action and to vest their rights
“The right of redemption in relation to a in the purchaser.’ There then exists only
mortgage– understood in the sense of a what is known as the equity of redemption.
prerogative to re-acquire mortgaged This is simply the right of the defendant
property after registration of the foreclosure mortgagor to extinguish the mortgage and
sale– exists only in the case of the retain ownership of the property by paying
extrajudicial foreclosure of the mortgage. the secured debt within the 90-day period
No such right is recognized in a judicial after the judgment becomes final, in
foreclosure except only where the accordance with Rule 68, or even after the
mortgagee is the Philippine National bank foreclosure sale but prior to its
or a bank or a banking institution. confirmation.

“Where a mortgage is foreclosed “This is the mortgagor’s equity (not right) of

extrajudicially, Act 3135 grants to the redemption which, as above stated, may
mortgagor the right of redemption within be exercised by him even beyond the 90-
one (1) year from the registration of the day period ‘from the date of service of the
sheriff’s certificate of foreclosure sale. order,’ and even after the foreclosure sale
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 180

itself, provided it be before the order of immediately foreclose the same judicially
confirmation of the sale. After such order or extrajudicially, in accordance with law.
of confirmation, no redemption can be
effected any longer.” On 30 June 1993, after her efforts to
collect proved futile, respondent
Clearly, as a general rule, there is no right Carmencita San Diego filed a petition for
of redemption in a judicial foreclosure of the extrajudicial foreclosure of the
mortgage. The only exemption is when the mortgage. Property was sold in a public
mortgagee is the Philippine National Bank auction with Carmencita San Diego as the
or a bank or a banking institution. Since highest bidder for P2,000,000.00.
the mortgagee in this case is not one of
those mentioned, no right of redemption With the petitioners having failed to
exists in favor of petitioners. They merely redeem their property within the 1-year
have an equity of redemption, which, to redemption period from the date of
reiterate, is simply their right, as inscription of the sheriff’s certificate of sale,
mortgagor, to extinguish the mortgage and as provided for in Act No. 3135, as
retain ownership of the property by paying amended, the San Diegos caused the
the secured debt prior to the confirmation consolidation of title over the foreclosed
of the foreclosure sale. However, instead property in their names.
of exercising this equity of redemption,
petitioners chose to delay the proceedings Then, on 09 November 1994, petitioners
by filing several manifestations with the filed their complaint for annulment of the
trial court. Thus, they only have extrajudicial foreclosure and auction sale,
themselves to blame for the consequent with damages. Petitioners alleged that (1)
loss of their property. said foreclosure and auction sale were null
and void for failure to comply with the
requirements of notice and publication, as
SPOUSES LANDRITO VS. CA mandated by Act 3135, as amended; (2)
the mortgaged property was illegally
FACTS : In July 1990, spouses Landrito foreclosed in the light of the settled rule
obtained a loan of P350,000.00 from that an action to foreclose a mortgage
respondent Carmencita San Diego. To must be limited to the amount mentioned in
secure payment thereof, petitioners the mortgage document, in this case,
executed on 02 August 1990 a deed of P1,000,000.00, which amount was
real estate mortgage over their parcel of allegedly bloated by respondent
land located at Bayanan, Muntinlupa, Carmencita San Diego to P1,950,000.00;
Rizal. and (3) the San Diegos’ application for
consolidation of title was premature
After making substantial payments, because the husband, Benjamin San
petitioners again obtained and were Diego, allegedly granted them an
granted by Carmencita San Diego an extension of the period of redemption up to
additional loan of One Million Pesos. To 11 November 1994.
secure this additional loan, the parties
executed on 13 September 1991 an TC- the latter’s cause of action is already
"Amendment of Real Estate Mortgage", barred by laches on account of their failure
whereunder they stipulated that the loan or neglect for an unreasonable length of
shall be paid within six (6) months from 16 time to do that which, by exercising due
September 1991, and if not paid within said diligence, could or should have been done
period, the mortgagee shall have the right earlier. Also that petitioners’ inaction
to declare the mortgage due and may constituted a waiver on their part.
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 181

despite due notice and publication of the

ISSUE: WON the extra-judicial foreclosure same in a newspaper of general
and public auction sale of the subject circulation, petitioners did not bother to
parcel of land are valid and lawful when the attend the foreclosure sale nor raise any
amount stated in letter-request or the question regarding the propriety of the
petition for extrajudicial foreclosure and in sale. It was only on November 9, 1994, or
the notice of sheriff sale doubled the more than one year from the registration of
amount stipulated in the Amendment of the Sheriff’s Certificate of Sale, that
Real Estate Mortgage. NO [petitioners] filed the instant complaint.
Clearly, [petitioners] had slept on their
HELD: At the time of the foreclosure sale rights and are therefore guilty of laches,
on 11 August 1993, petitioners were which is defined as the failure or neglect
already in default in their loan obligation. for an unreasonable or explained length of
time to do that which, by exercising due
Much earlier, or on 27 April 1993, a final diligence, could or should have been done
notice of demand for payment had been earlier, failure of which gives rise to the
sent to them, despite which they still failed presumption that the person possessed of
to pay. Hence, respondent Carmencita San the right or privilege has abandoned or has
Diego’s resort to extrajudicial foreclosure, declined to assert the same.
provided no less in the parties’
"Amendment of Real Estate Mortgage". The law on redemption of mortgaged
property is clear. Republic Act No. 3135
The rule has been, and still is, that in real (An Act to Regulate the Sale of Property
estate mortgage, when the principal Under Special Powers Inserted In Or
obligation is not paid when due, the Annexed to Real Estate Mortgages), as
mortgagee has the right to foreclose on the amended by Republic Act No. 4118,
mortgage and to have the mortgaged provides in Section 6 thereof, thus:
property seized and sold with the view of
applying the proceeds thereof to the "Sec. 6. In all cases in which an
payment of the obligation. extrajudicial sale is made under the special
power hereinbefore referred to, the debtor,
Here, the validity of the extrajudicial his successors in interest or any judicial
foreclosure on 11 August 1993 was creditor or judgment creditor of said debtor,
virtually confirmed by the trial court when it or any person having a lien on the property
dismissed petitioners’ complaint, and subsequent to the mortgage or deed of
rightly so, what with the fact that petitioners trust under which the property is sold, may
failed to exercise their right of redemption redeem the same at any time within the
within the 1-year period therefore counted term of one year from and after the date of
from the registration of the sheriff’s the sale; xxx"
certificate of sale.
In a long line of cases, this Court has
We do not take issue with petitioners’ consistently ruled that the one-year
submission that a mortgage may be redemption period should be counted not
foreclosed only for the amount appearing from the date of foreclosure sale, but from
in the mortgage document, more so where, the time the certificate of sale is registered
as here, the mortgage contract entered into with the Register of Deeds. Here, it is not
by the parties is evidently silent on the disputed that the sheriff’s certificate of sale
payment of interest. was registered on 29 October 1993.

It appears from the evidence on record that From the foregoing, it is clear as day that
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 182

even the complaint filed by the petitioners condition precedent prescribed by law and
with the trial court on 09 November 1994 may thereafter bring an action to enforce
was instituted beyond the 1-year redemption. If the period is allowed to
redemption period. In fact, petitioners no lapse before the right of redemption is
less acknowledged that their complaint for exercised, then the action to enforce
annulment of extrajudicial foreclosure and redemption will not prosper, even if the
auction sale was filed about eleven (11) action is brought within the ordinary
days after the redemption period had prescriptive period. Moreover, the period
already expired on 29 October 19947. within which to redeem the property sold at
They merely harp on the alleged increase a sheriff’s sale is not suspended by the
in the redemption price of the mortgaged institution of an action to annul the
property as the reason for their failure to foreclosure sale.
redeem the same. However, and as
already pointed out herein, they chose not,
despite notice, to appear during the GOLDENWAY MERCHANDISING
foreclosure proceedings. Of course, CORPORATION vs. EQUITABLE PCI
petitioners presently insist that they BANK
requested for and were granted an
extension of time within which to redeem
their property, relying on a handwritten FACTS: Goldenway Merchandising
note allegedly written by Mrs. San Diego’s Corporation (petitioner) executed a Real
husband on petitioners’ statement of Estate Mortgage in favor of Equitable PCI
account, indicating therein the date 11 Bank (respondent) over its real properties
November 1994 as the last day to pay their situated in Valenzuela, Bulacan (now
outstanding account in full. Even Valenzuela City). The mortgage secured
assuming, in gratia argumenti, that they the P2,000,000.00 loan granted by
were indeed granted such an extension, respondent to petitioner and was duly
the hard reality, however, is that at no time registered.
at all did petitioners make a valid offer to
redeem coupled with a tender of the As Goldenway failed to settle its loan
redemption price. obligation, Equitable extrajudicially
For, in Lazo v. Republic Surety & foreclosed the mortgage. During the public
Insurance Co., Inc., this Court has made it auction, the mortgaged properties were
clear that it is only where, by voluntary sold for P3,500,000.00 to Equitable and a
agreement of the parties, consisting of Certificate of Sale was issued.
extensions of the redemption period,
followed by commitment by the debtor to Goldenway’s counsel offered to redeem
pay the redemption price at a fixed date, the foreclosed properties by tendering a
will the concept of legal redemption be check in the amount of P3,500,000.00. It’s
converted into one of conventional counsel met with Equitable’s counsel
redemption. reiterating their intention to exercise the
right of redemption. However, Goldenway
POLICY: Period of redemption is not a was told that such redemption is no longer
prescriptive period but a condition possible because the certificate of sale had
precedent provided by law to restrict the already been registered.
right of the person exercising redemption.
Correspondingly, if a person exercising the Goldenway filed a complaint for specific
right of redemption has offered to redeem performance and damages against
the property within the period fixed, he is Equitable, asserting that it is the one-year
considered to have complied with the period of redemption under Act No. 3135
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 183

which should apply and not the shorter be a substantial impairment of its vested
redemption period provided in R.A. No. right of redemption under the real estate
8791. Goldenway argued that applying mortgage contract. Such impairment would
Section 47 of R.A. 8791 to the real estate be violative of the constitutional
mortgage executed in 1985 would result in proscription against impairment of
the impairment of obligation of contracts obligations of contract.
and violation of the equal protection clause
under the Constitution. ISSUES: Whether or not the redemption
period should be the 1-year period
Additionally, Goldenway faulted Equitable provided under Act 3135, and not the
for allegedly failing to furnish it and the shorter period under RA 8791 as the
Office of the Clerk of Court with a parties expressly agreed that
Statement of Account as directed in the foreclosure would be in accordance
Certificate of Sale, due to which with Act 3135. (The shorter period under
Goldenway was not apprised of the RA 8791 should apply.)
assessment and fees incurred by
Equitable, thus depriving Goldenway of the May the foregoing amendment be
opportunity to exercise its right of validly applied in this case when the
redemption. real estate mortgage contract was
executed in 1985 and the mortgage
Equitable pointed out that Goldenway foreclosed when R.A. No. 8791 was
cannot claim that it was unaware of the already in effect? Yes
redemption price which is clearly provided
in Section 47 of R.A. No. 8791, and that
Goldenway had all the opportune time to HELD: The law governing cases of
redeem the foreclosed properties. As to the extrajudicial foreclosure of mortgage is Act
check payment tendered by Goldenway, No. 3135,14 as amended by Act No. 4118.
Equitable said that even assuming Section 6 thereof provides:
arguendo such redemption was timely
made, it was not for the amount as SEC. 6. In all cases in which an
required by law. extrajudicial sale is made under the special
power hereinbefore referred to, the debtor,
RTC rendered its decision dismissing the his successors-in-interest or any judicial
complaint. CA which affirmed RTC’s creditor or judgment creditor of said debtor,
decision. or any person having a lien on the property
subsequent to the mortgage or deed of
In the present petition, Goldenway trust under which the property is sold, may
contended that Section 47 of R.A. No. redeem the same at any time within the
8791 is inapplicable considering that the term of one year from and after the date of
contracting parties expressly and the sale; and such redemption shall be
categorically agreed that the foreclosure of governed by the provisions of sections four
the real estate mortgage shall be in hundred and sixty-four to four hundred and
accordance with Act No. 3135. It sixty-six, inclusive, of the Code of Civil
contended that the right of redemption is Procedure, in so far as these are not
part and parcel of the Deed of Real Estate inconsistent with the provisions of this Act.
Mortgage itself and attaches thereto upon
its execution. The one-year period of redemption is
counted from the date of the registration of
It also argues that applying Section 47 of the certificate of sale. In this case, the
R.A. No. 8791 to the present case would parties provided in their real estate
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 184

mortgage contract that upon petitioner’s pursuant to an extrajudicial foreclosure,

default and the latter’s entire loan shall have the right to redeem the property
obligation becoming due, respondent may in accordance with this provision until, but
immediately foreclose the mortgage not after, the registration of the
judicially in accordance with the Rules of certificate of foreclosure sale with the
Court, or extrajudicially in accordance with applicable Register of Deeds which in no
Act No. 3135, as amended. case shall be more than three (3)
months after foreclosure, whichever is
However, Section 47 of R.A. No. 8791 earlier. Owners of property that has been
otherwise known as "The General sold in a foreclosure sale prior to the
Banking Law of 2000" which took effect effectivity of this Act shall retain their
on June 13, 2000, amended Act No. redemption rights until their expiration.
3135. Said provision reads:
Under the new law, an exception is thus
SECTION 47. Foreclosure of Real Estate made in the case of juridical persons which
Mortgage. — In the event of foreclosure, are allowed to exercise the right of
whether judicially or extrajudicially, of any redemption only "until, but not after, the
mortgage on real estate which is security registration of the certificate of foreclosure
for any loan or other credit accommodation sale" and in no case more than 3 months
granted, the mortgagor or debtor whose after foreclosure, whichever comes first.
real property has been sold for the full or
partial payment of his obligation shall have Petitioner’s contention that Section 47 of
the right within one year after the sale of R.A. 8791 violates the constitutional
the real estate, to redeem the property by proscription against impairment of the
paying the amount due under the mortgage obligation of contract has no basis. The
deed, with interest thereon at the rate purpose of the non-impairment clause of
specified in the mortgage, and all the costs the Constitution is to safeguard the
and expenses incurred by the bank or integrity of contracts against unwarranted
institution from the sale and custody of said interference by the State. There is an
property less the income derived impairment if a subsequent law changes
therefrom. However, the purchaser at the the terms of a contract between the
auction sale concerned whether in a parties, imposes new conditions,
judicial or extrajudicial foreclosure shall dispenses with those agreed upon or
have the right to enter upon and take withdraws remedies for the enforcement of
possession of such property immediately the rights of the parties.
after the date of the confirmation of the
auction sale and administer the same in Section 47 did not divest juridical persons
accordance with law. Any petition in court of the right to redeem their foreclosed
to enjoin or restrain the conduct of properties but only modified the time for
foreclosure proceedings instituted pursuant the exercise of such right by reducing the
to this provision shall be given due course one-year period originally provided in Act
only upon the filing by the petitioner of a No. 3135. The new redemption period
bond in an amount fixed by the court commences from the date of foreclosure
conditioned that he will pay all the sale, and expires upon registration of the
damages which the bank may suffer by the certificate of sale or three months after
enjoining or the restraint of the foreclosure foreclosure, whichever is earlier. There is
proceeding. likewise no retroactive application of the
new redemption period because Section
Notwithstanding Act 3135, juridical 47 exempts from its operation those
persons whose property is being sold properties foreclosed prior to its effectivity
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 185

and whose owners shall retain their UNIONBANK OF THE PHILIPPINES VS.
redemption rights under Act No. 3135. THE COURT OF APPEALS and
FERMINA S. DARIO and REYNALDO S.
We agree with the CA that the legislature DARIO
clearly intended to shorten the period of
redemption for juridical persons whose FACTS: This case stemmed from a real
properties were foreclosed and sold in estate mortgage executed by spouses
accordance with the provisions of Act No. Leopoldo and Jessica Dario (hereafter
3135. mortgagors) in favor of UNIONBANK to
secure a P3 million loan, including interest
The difference in the treatment of juridical and other charges. The mortgage covered
persons and natural persons was based on a Quezon City property in Leopoldo Dario’s
the nature of the properties foreclosed – name and was annotated on the title on 18
whether these are used as residence, for December 1991. For non-payment of the
which the more liberal one-year principal obligation, UNIONBANK
redemption period is retained, or used for extrajudicially foreclosed the property
industrial or commercial purposes, in which mortgaged on 12 August 1993 and sold the
case a shorter term is deemed necessary same at public auction, with itself posting
to reduce the period of uncertainty in the the highest bid.
ownership of property and enable
mortgagee-banks to dispose sooner of On 4 October 1994, one week before the
these acquired assets. one-year redemption period expired, the
DARIOs filed a complaint with the RTC of
It must be underscored that the General Quezon City against the mortgagors,
Banking Law of 2000 sought to reform the UNIONBANK, the Register of Deeds and
General Banking Act of 1949 to maintain a the City Sheriff of Quezon City. The
safe and sound banking system. The complaint was for annulment of sale and
amendment introduced by Section 47 real estate mortgage with reconveyance
embodied one of such safe and sound and prayer for restraining order and
practices aimed at ensuring the solvency prohibitory injunction. A notice of lis
and liquidity of our banks. pendens was annotated on the title.

The right of redemption must be exercised On 10 October 1994, RTC issued a

in the manner prescribed by the statute, temporary restraining order (TRO)
and within the prescribed time limit, to enjoining the redemption of property within
make it effective. Furthermore, as with the statutory period and its consolidation
other individual rights to contract and to under UNIONBANK’s name.
property, it has to give way to police power
exercised for public welfare. In the meantime, without notifying the
DARIOs, UNIONBANK consolidated its title
Having ruled that the assailed Section 47 over the foreclosed property on 24 October
of R.A. No. 8791 is constitutional, we find 1994. TCT No. 41828 was cancelled and
no reversible error committed by the CA in TCT No. 120929 in UNIONBANK’s name
holding that petitioner can no longer was issued in its stead.
exercise the right of redemption over its
foreclosed properties after the certificate of The DARIOs filed an amended complaint
sale in favor of respondent had been on 9 December 1994, alleging that they,
registered. not the mortgagors, are the true owners of
the property mortgaged and insisting on
the invalidity of both the mortgage and its
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 186

subsequent extrajudicial foreclosure. They result thereof the transfer of title was
claimed that the original title, TCT No. vitiated by non-adherence to procedural
61571, was entrusted to a certain Atty. due process.
Reynaldo Singson preparatory to its
administrative reconstitution after a fire On 26 June 1997, CA nullified the
gutted the Quezon City Hall building. consolidation of ownership, ordered the
Mortgagor Leopoldo, private respondent Register of Deeds to cancel the certificate
Fermina’s son, obtained the property from of title in UNIONBANK’s name and to
Atty. Singson, had the title reconstituted reinstate TCT No. 41828 with the notice of
under his name without the DARIOs’ lis penden sannotated at the back. The CA
knowledge, executed an ante-dated deed also set aside the portion of the assailed
of sale in his favor and mortgaged the RTC Orders that declared the DARIOs’
property to UNIONBANK. prayer for writ of preliminary injunction as
moot and academic. UNIONBANK’s
The CA upheld Judge Capulong’s order motion for reconsideration of the above-
admitting the amended complaint on 24 mentioned decision was likewise rejected
April 1995, UNIONBANK thereafter for lack of merit on 7 April 1998.
elevated its cause to this Court.
UNIONBANK’s contention: came to this
Meanwhile, on 9 February 1995 Court claiming to be a mortgagee in good
UNIONBANK filed its answer ad cautelam faith and for value with a right to
asserting its status as an innocent consolidate ownership over the foreclosed
mortgagee for value whose right or lien property with the redemption period having
upon the property mortgaged must be expired and there having been no
respected even if the mortgagor obtained redemptioners. UNIONBANK contends that
his title through fraud. It also averred that the TRO which provisionally enjoined the
the action had become “moot and tolling of the redemption period was
academic by the consolidation of the automatically dissolved upon dismissal of
foreclosed property on 24 October 1994” in the complaint on 17 October 1994.
its name, resulting to the issuance of TCT Conformably, consolidation of title in its
No. 120929 by the Register of Deeds of name and the issuance of TCT No. 120929
Quezon City. rendered further proceedings on the
In its 19 August 1995 Order, the RTC held application for injunction academic.
the mortgagors and the City Sheriff of Moreover, the alleged fraudulent mortgage
Quezon City in default and sustained was facilitated through the DARIOs’
UNIONBANK’s contention that the act negligence so they must bear the loss. It
sought to be enjoined had been enforced, also contends that since the DARIOs had
negating the need of hearing the filed several pleadings, due process, being
application for preliminary injunction. an opportunity to be heard either through
pleadings or oral arguments, was
After considering the arguments presented observed.
by the parties, the CA ruled that despite its
knowledge that the ownership of the Dario’s contention: that UNIONBANK’s
property was being questioned, consolidation of the title in its name was in
UNIONBANK took advantage of the bad faith, vitiated a standing court order, is
DARIOs’ procedural error by consolidating against the law, thus void ab initio. The
title to the property, which “smacked of bad application for preliminary injunction was
faith” and “evinced a reprobate disposition not rendered moot and academic by
of the part of its counsel to advance his consolidation, which took place during the
client’s cause by fair means or foul.” As a lifetime of the TRO, and did not follow the
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 187

proper legal procedure due to the dismissing an action on the merits, the
surreptitious manner it was accomplished. appeal does not suspend the judgment,
By treating the application for preliminary hence the general rule applies that a
injunction as moot and academic and temporary injunction terminates
denying the motion for indirect contempt automatically on the dismissal of the
without hearing, the RTC order ran afoul action.
with the requirements of due process.
We disagree with the appellate court’s
ISSUE: Whether or not the observation that consolidation deprived the
consolidation of title in UNIONBANK’s DARIOs of their property without due
name proper. YES process. It is settled that the buyer in a
foreclosure sale becomes the absolute
HELD: UNIONBANK’s consolidation of title owner of the property purchased if it is not
over the property on 24 October 1994 was redeemed during the period of one year
proper, though precipitate. Contrary to the after the registration of the sale.
DARIOs’ allegation UNIONBANK violated Consolidation took place as a matter of
no standing court order. The only bar to right since there was no redemption of the
consolidation was the temporary foreclosed property and the TRO expired
restraining order issued by Justice Lipana- upon dismissal of the complaint.
Reyes on 10 October 1994 which UNIONBANK need not have informed
effectively halted the tolling of the private respondent that it was consolidating
redemption period 7 days short of its its title over the property, upon the
expiration. When the DARIOs’ original expiration of the redemption period, without
complaint was dismissed on 17 October the judgment debtor having made use of
1994 for failure to append a certification of his right of redemption, the ownership of
non-forum shopping, the TRO, as an the property sold becomes consolidated in
ancillary order that cannot stand the purchaser. Notice to the mortgagors
independent of the main proceeding, and with more reason, to the DARIOs who
became functus officio. Thus the tolling of are not even parties to the mortgage
the 12-month redemption period, contract nor to the extrajudicial sale is not
interrupted by the filing of the complaint necessary.
and the TRO, recommenced and
eventually expired 7 days thereafter or on In real estate mortgage, when the principal
24 October 1994, the date of the disputed obligation is not paid when due, the
consolidation. mortgage has the right to foreclose the
mortgage and to have the property seized
The motion for reconsideration and to and sold with a view to applying the
amend complaint filed by private proceeds to the payment of the principal
respondent on 20 October 1994 was of no obligation. Foreclosure may be effected
moment, this Court recognizing that “a either judicially or extrajudicially.
dismissal, discontinuance or non-suit of an
action in which a restraining order or In a public bidding during extra-judicial
temporary injunction has been granted foreclosure, the creditor-mortgagee,
operates as a dissolution of the restraining trustee, or other person authorized to act
order or temporary injunction,” regardless for the creditor may participate and
of whether the period for filing a motion for purchase the mortgaged property as any
reconsideration of the order dismissing the other bidder. Thereafter the mortgagor has
case or appeal therefrom has expired. The one year within which to redeem the
rationale therefor is that even in cases property from and after registration of sale
where an appeal is taken from a judgment with the Register of Deeds. In case of non-
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 188

redemption, the purchaser at foreclosure matter of right on the part of the auction
sale shall file with the Register of Deeds, buyer, and the issuance of a certificate of
either a final deed of sale executed by the title in favor of the purchaser becomes
person authorized by virtue of the power of ministerial upon the Register of Deeds.
attorney embodied in the deed or
mortgage, or his sworn statement attesting
to the fact of non-redemption; whereupon, PHILBANCOR FINANCE, INC. AND
the Register of Deeds shall issue a new VICENTE HIZON, JR. VS. COURT OF
certificate of title in favor of the purchaser APPEALS
after the owner’s duplicate of the certificate
has been previously delivered and FACTS: On July 14, 1992, private
cancelled. Thus, upon failure to redeem respondents Alfredo Pare, Pablo Galang
foreclosed realty, consolidation of title and Amado Vie, filed with the Provincial
becomes a matter of right on the part of the Agrarian Reform Adjudication Board
auction buyer, and the issuance of a (PARAB) a complaint for maintenance of
certificate of title in favor of the purchaser possession with redemption and tenancy
becomes ministerial upon the Register of right of pre-emption against petitioners
Deeds. Philbancor Finance, Inc. and Vicente
Hizon, Jr.
DOCTRINE: In real estate mortgage, when
the principal obligation is not paid when Hizon is the owner of the disputed
due, the mortgages has the right to agricultural lands located in San Fernando,
foreclose the mortgage and to have the Pampanga and that private respondents
property seized and sold with a view to are the legitimate and bona fide tenants on
applying the proceeds to the payment of the lots for more than fifty (50) years.
the principal obligation. Foreclosure may
be effected either judicially or In October 1983, Hizon, without their
extrajudicially. In a public bidding during knowledge, mortgaged the disputed lots to
extra-judicial foreclosure, the creditor- Philbancor Finance, Inc. Hizon failed to
mortgagee, trustee, or other person pay his obligations to Philbancor, which
authorized to act for the creditor may eventually led to the sale of the mortgaged
participate and purchase the mortgaged lots to the latter. The certificate of sale of
property as any other bidder. Thereafter the subject property, which was sold at
the mortgagor has one year within which to public auction, was registered with the
redeem the property from and after ROD of Pampanga on July 31, 1985.
registration of sale with the Register of
Deeds. In case of non-redemption, the Private respondents came to know of the
purchaser at foreclosure sale shall file with transaction only when they were notified by
the Register of Deeds, either a final deed Philbancor to vacate the lots, and
of sale executed by the person authorized Philbancor threatened to take from them
by virtue of the power of attorney the actual or physical possession of the
embodied in the deed or mortgage, or his agricultural lots.
sworn statement attesting to the fact of
non-redemption; whereupon, the Register Philbancor alleged, among others, that it
of Deeds shall issue a new certificate of has no tenancy or agricultural relationship
title in favor of the purchaser after the with private respondents considering that it
owner’s duplicate of the certificate has acquired ownership over the disputed lots
been previously delivered and cancelled. by virtue of an extra-judicial foreclosure
Thus, upon failure to redeem foreclosed sale pursuant to Act 3135, as amended;
realty, consolidation of title becomes a that it is not an agricultural lessor as
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 189

contemplated in Section 10 of R.A. No. five (5) years after expiration of the
3844, as amended; that assuming private redemption period prescribed by law.
respondents have the right to redeem the Private respondents may still continue
lots in question, such right has already possession of the lots Nonetheless, private
expired in accordance with Section 12 of respondents may continue in possession
R.A. 3844, which states that the right of and enjoyment of the land in question as
redemption may be exercised within two legitimate tenants because the right of
(2) years from the registration of the sale. tenancy attaches to the landholding by
operation of law. The leasehold relation is
Decision was rendered in favor of private not extinguished by the alienation or
respondents. transfer of the legal possession of the
landholding. SC GRANTED petition.
ISSUE: Whether or not the private
respondents could still exercise their
right of redemption of the parcels of CITY MAYOR, CITY TREASURER, CITY
land sold at public auction due to ASSESSOR, ALL OF QUEZON CITY, and
foreclosure of the mortgages thereon ALVIN EMERSON S. YU vs RIZAL
considering that they invoked their right COMMERCIAL BANKING
to redeem only on July 14, 1992, seven CORPORATION
years after the date of registration of the
certificate of sale with the Register of FACTS: The spouses Roberto and
Deeds. – NO Monette Naval obtained a loan from
respondent Rizal Commercial Banking
HELD: Redemption period already elapsed Corporation, secured by a real estate
R.A. No. 3844, Section 12, provides as mortgage of properties. In 1998, the real
follows: estate mortgage was later foreclosed and
the properties were sold at public auction
In case the landholding is sold to a third with respondent as the highest bidder. The
person without the knowledge of the corresponding Certificates of Sale were
agricultural lessee, the latter shall have the issued in favor of respondent on August 4,
right to redeem the same at a reasonable 1998. However, the certificates of sale
price and consideration. Provided, that the were allegedly registered only on February
entire landholding sold must be redeemed. 10, 2004.
Provided further, that where there are two
or more agricultural lessees, each shall be On May 30, 2003, an auction sale of tax
entitled to said right of redemption only to delinquent properties was conducted by
the extent of the area actually cultivated by the City Treasurer of Quezon City.
him. The right of redemption under this Included in the properties that were
section may be exercised within two (2) auctioned were two (2) townhouse units
years from the registration of the sale and and the parcel of land. For these
shall have priority over any other right of delinquent properties, Alvin Emerson S. Yu
legal redemption. was adjudged as the highest bidder. Upon
payment of the tax delinquencies, he was
In this case, the certificate of sale of the issued the corresponding Certificate of
subject property, which was sold at public Sale of Delinquent Property.
auction, was registered with the ROD of
Pampanga on July 31, 1985. The 2-year On February 10, 2004, the Certificate of
redemption period thus expired on July 31, Sale of Delinquent Property was registered
1987. The complaint for redemption was with the Office of the Register of Deeds of
filed by respondents only on July 14, 1992, Quezon City.
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 190

provisions of Quezon City tax ordinance

On June 10, 2004, respondent tendered number sp-91-93, otherwise known as
payment for all of the assessed tax Quezon City revenue code of 1993,
delinquencies, interest, and other costs of including section 14 thereof,
the subject properties with the Office of the promulgated pursuant to r.a. 7160;
City Treasurer, Quezon City. However, the
Office of the City Treasurer refused to HELD:
accept said tender of payment. 1. The issue of whether or not R.A No.
7160 or the Local Government Code,
Undeterred, on June 15, 2004, respondent repealed P.D. No. 464 or the Real Property
filed before the Office of the City Treasurer Tax Code has long been laid to rest by this
a Petition for the acceptance of its tender of Court. Jurisdiction thrives to the effect that
payment and for the subsequent issuance R.A. No. 7160 repealed P.D. No. 464.
of the certificate of redemption in its favor. From January 1, 1992 onwards, the proper
Nevertheless, respondents subsequent basis for the computation of the real
tender of payment was also denied. property tax payable, including penalties or
interests, if applicable, must be R. A. No.
Petitioners argue: 7160.
that the RTC erred when it ruled that P.D.
No. 464 was not repealed by R.A. No. As such, it is apparent that in case of sale
7160 and when it concluded that the of tax delinquent properties, R.A. No. 7160
phrase from the date of sale as appearing is the general law applicable.
in Section 261 of R.A. No. 7160 means Consequently, as regards redemption of
that the counting of the one (1) year tax delinquent properties sold at public
redemption period of tax delinquent auction, the pertinent provision is Section
properties sold at public action shall 261 of R.A. No. 7160, which provides:
commence from the date of registration of
the certificate of sale. Section 261. Redemption of Property
Sold. Within one (1) year from the date
Respondent argues: of sale, the owner of the delinquent real
the RTC did not rule that P.D. No. 464 was property or person having legal interest
not repealed by R.A. No. 7160, it merely therein, or his representative, shall have
made reference to Section 78 of P.D. No. the right to redeem the property upon
464. payment to the local treasurer of the
amount of delinquent tax, including the
ISSUES: interest due thereon, and the expenses
 W/N section 78 of p.d. 464 was of sale from the date of delinquency to
repealed by republic act no. 7160 the date of sale, plus interest of not
known as the local government code of more than two percent (2%) per month
1991. on the purchase price from the date of
 Whether the period of redemption in a sale to the date of redemption. Such
realty tax sale in Quezon City [h]as to payment shall invalidate the certificate of
be reckoned from the date of sale issued to the purchaser and the
annotation of the certificate of sale owner of the delinquent real property or
pursuant to paragraph 7, section 14 of person having legal interest therein shall
Quezon City tax ordinance no. Sp-91- be entitled to a certificate of redemption
93 or from the date of sale pursuant to which shall be issued by the local
section 261 of r.a. 7160. treasurer or his deputy.
 Whether or not the respondent is
entitled to the protection of all the From the date of sale until the expiration
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 191

of the period of redemption, the at the proper registry, the owner of the
delinquent real property shall remain in delinquent real property or person having
the possession of the owner or person legal interest therein, or his representative,
having legal interest therein who shall shall have the right to redeem the property
remain in the possession of the owner or by paying to the City Treasurer the amount
person having legal interest therein who of the delinquent tax, including interest due
shall be entitled to the income and other thereon, and the expenses of sale plus
fruits thereof. interest of two percent (2) per month on the
purchase price from the date of sale to the
The local treasurer or his deputy, upon date of redemption. Such payment shall
receipt from the purchaser of the invalidate the certificate of sale issued to
certificate of sale, shall forthwith return the purchaser and the owner of the
to the latter the entire amount paid by delinquent real property or person having
him plus interest of not more than two legal interest therein shall be entitled to a
percent (2%) per month. Thereafter, the certificate of redemption which shall be
property shall be free from all lien of issued by the City Treasurer.
such delinquent tax, interest due xxxx
thereon and expenses of sale. Verily, the ordinance is explicit that the
one-year redemption period should be
2. From the foregoing, the owner of the counted from the date of the annotation of
delinquent real property or person having the sale of the property at the proper
legal interest therein, or his representative, registry. At first glance, this provision runs
has the right to redeem the property within counter to that of Section 261 of R.A. No.
one (1) year from the date of sale upon 7160 which provides that the one year
payment of the delinquent tax and other redemption period shall be counted from
fees. Verily, the period of redemption of tax the date of sale of the tax delinquent
delinquent properties should be counted property. There is, therefore, a need to
not from the date of registration of the reconcile these seemingly conflicting
certificate of sale, as previously provided provisions of a general law and a special
by Section 78 of P.D. No. 464, but rather law.
on the date of sale of the tax delinquent
property, as explicitly provided by Section To harmonize the provisions of the two
261 of R.A. No. 7160. laws and to maintain the policy of the law
to aid rather than to defeat the owners right
Nonetheless to redeem his property, Section 14 (a),
the government of Quezon City, pursuant Paragraph 7 of City Ordinance No. SP-91,
to the taxing power vested on local S-93 should be construed as to define the
government units by Section 5, Article X of phrase one (1) year from the date of sale
the 1987 Constitutions and R.A. No. as appearing in Section 261 of R.A. No.
7160, enacted City Ordinance No. SP-91, 7160, to mean one (1) year from the date
S-93, otherwise known as the Quezon City of the annotation of the sale of the property
Revenue Code of 1993, providing, among at the proper registry.
other things, the procedure in the collection
of delinquent taxes on real properties 3. Consequently, the counting of the one
within the territorial jurisdiction of Quezon (1) year redemption period of property sold
City. Section 14 (a), Paragraph 7, the Code at public auction for its tax delinquency
provides: should be counted from the date of
annotation of the certificate of sale in the
Within one (1) year from the date proper Register of Deeds. Applying the
of the annotation of the sale of the property foregoing to the case at bar, from the date
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 192

of registration of the Certificate of Sale of

Delinquent Property on February 10, 2004, ISSUE: Whether the writ of possession
respondent had until February 10, 2005 to was properly issued despite the pendency
redeem the subject properties. Hence, its of a case questioning the validity of the
tender of payment of the subject properties extrajudicial foreclosure sale even when
tax delinquencies and other fees on June petitioners were declared in default.
10, 2004, was well within the redemption
period, and it was manifest error on the HELD: The Supreme Court held that since
part of petitioners to have refused such the private respondent had purchased the
tender of payment. property at the foreclosure sale, their right
over the said property became absolute,
vesting in it the corollary right of
CUA LAI CHU, CLARO G. CASTRO, and possession.
JUANITA CASTRO vs. HON. HILARIO L.
LAQUI Petitioners cannot oppose or appeal the
court’s order granting the writ of
“The right to possession of a purchaser at possession in an ex parte proceeding. The
an extrajudicial foreclosure sale is not remedy of petitioners is to have the sale
affected by a pending case questioning the set aside and the writ of possession
validity of the foreclosure proceeding. The cancelled in accordance with Section 8 of
latter is not a bar to the former.” Act No. 3135, as amended:

FACTS: November 1994: Philippine Bank SEC. 8. The debtor may, in the
of Communication (respondent) loaned proceedings in which possession was
P3,200,000 to the petitioners. To secure requested, but not later than thirty days
the loan, petitioners executed in favor of after the purchaser was given possession,
private respondent a Deed of Real Estate petition that the sale be set aside and the
Mortgage. writ of possession cancelled, specifying the
damages suffered by him, because the
August 1997: the mortgage was amended, mortgage was not violated or the sale was
and the loan was increased by P1,800,000, not made in accordance with the provisions
making the amount P5,000,000. For failure hereof.
of petitioners to pay the full amount of the
outstanding loan upon demand, private
respondent applied for the extrajudicial MALLARI vs. GOVERNMENT SERVICE
foreclosure of the real estate mortgage. INSURANCE SYSTEM

TRIAL COURT: Granted respondent’s FACTS: In 1968, the petitioner obtained

motion for a declaration of general default two loans totaling P34,000.00 from
and allowed them to present evidence ex respondent GSIS. To secure the
parte. performance, he mortgaged two parcels of
land registered under his and his wife
COURT OF APPEALS: Petitioners Marcelina Mallari’s names. However, he
appealed. However, it was dismissed paid GSIS about ten years after contracting
since the counsel for petitioners failed to the obligations only P10,000.00
indicate the updated PTR Number in the and P20,000.00.
said petition, which is a ground for outright
dismissal under B.M 1132. The court held Nearly three years later (1984), GSIS
that a proceeding for the issuance of a writ applied for the extrajudicial foreclosure
of possession is ex parte in nature. of the mortgage by reason of his failure
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 193

to settle his account. He requested an possession.

updated computation of his outstanding
account. He persuaded the sheriff to hold A writ of possession, which commands the
the publication of the foreclosure to await sheriff to place a person in possession of
action on his pending request for final real property, may be issued in:
accounting (that is, taking his payments
of P30,000.00 made in 1978 into (1) Land registration proceedings under
account). GSIS responded to his request. Section 17 of Act No. 496;
It finally commenced extrajudicial (2) Judicial foreclosure, provided the
foreclosure proceedings against him debtor is in possession of the mortgaged
because he had meanwhile made no property, and no third person, not a party
further payments. to the foreclosure suit, had intervened;
(3) Extrajudicial foreclosure of a real estate
The petitioner sued GSIS (prelim mortgage, pending redemption under
injunction). The RTC decided in his favor, Section 7 of Act No. 3135, as amended by
nullifying the extrajudicial foreclosure and Act No. 4118; and
auction sale. GSIS appealed to the CA, (4) Execution sales, pursuant to the last
which reversed the RTC. Petitioner paragraph of Section 33, Rule 39 of the
elevated the CA decision to this Court via Rules of Court.31
petition for review on certiorari.
Anent the redemption of property sold in an
This Court denied his petition for review extrajudicial foreclosure sale made
and motion for reconsideration. As a result, pursuant to the special power referred to in
the CA decision became final and Section 132 of Act No. 3135,33 as amended,
executory, rendering unassailable both the debtor, his successor-in-interest, or any
the extrajudicial foreclosure and judicial creditor or judgment creditor of said
auction sale. debtor, or any person having a lien on the
property subsequent to the mortgage or
Because of the petitioner’s request for an deed of trust under which the property is
extension of time to vacate the properties, sold has the right to redeem the property at
GSIS acceded to the request. Yet, the anytime within the term of one year from
petitioner did not voluntarily vacate the and after the date of the sale, such
properties, but instead filed a MR and/or to redemption to be governed by the
quash the writ of execution and motion to provisions of Section 464 to Section 466 of
hold GSIS in contempt of court for painting the Code of Civil Procedure, to the extent
the fence of the properties during the that said provisions were not inconsistent
pendency of his said motion. with the provisions of Act 3135.34

ISSUE: W/N the petitioner, as defaulting In this regard, we clarify that the
mortgagor, was not entitled under Act redemption period envisioned under Act
3135, as amended, and its pertinent 3135 is reckoned from the date of the
jurisprudence to any prior notice of the registration of the sale, not from and after
application for the issuance of the writ of the date of the sale, as the text of Act 3135
possession. shows. Although the original Rules of Court
(effective on July 1, 1940) incorporated
HELD: No. The petitioner, as defaulting Section 464 to Section 466 of the Code of
mortgagor, was not entitled under Act Civil Procedure as its Section 25 (Section
3135, as amended, and its pertinent 464); Section 26 (Section 465); and
jurisprudence to any prior notice of the Section 27 (Section 466) of Rule 39, with
application for the issuance of the writ of Section 27 still expressly reckoning the
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 194

redemption period to be "at any time within redemptioner, other than the judgment
twelve months after the sale;" and although under which such purchase was made,
the Revised Rules of Court (effective on the amount of such other lien, with
January 1, 1964) continued to provide in interest.
Section 30 of Rule 39 that the redemption
be made from the purchaser "at any time Property so redeemed may again be
within twelve (12) months after the sale,"35 redeemed within sixty (60) days after the
the 12-month period of redemption came to last redemption upon payment of the
be held as beginning "to run not from the sum paid on the last redemption, with
date of the sale but from the time of two per centum thereon in addition, and
registration of the sale in the Office of the the amount of any assessments or taxes
Register of Deeds."36 This construction which the last redemptioner may have
was due to the fact that the sheriff’s sale of paid thereon after redemption by him,
registered (and unregistered) lands did not with interest on such last-named
take effect as a conveyance, or did not amount, and in addition, the amount of
bind the land, until the sale was registered any liens held by said last redemptioner
in the Register of Deeds.37 prior to his own, with interest. The
property may be again, and as often as
Desiring to avoid any confusion arising a redemptioner is so disposed,
from the conflict between the texts of the redeemed from any previous
Rules of Court (1940 and 1964) and Act redemptioner within sixty (60) days after
No. 3135, on one hand, and the the last redemption, on paying the sum
jurisprudence clarifying the reckoning of paid on the last previous redemption,
the redemption period in judicial sales of with two per centum thereon in addition,
real property, on the other hand, the Court and the amounts of any assessments or
has incorporated in Section 28 of Rule 39 taxes which the last previous
of the current Rules of Court (effective on redemptioner paid after the redemption
July 1, 1997) the foregoing judicial thereon, with interest thereon, and the
construction of reckoning the redemption amount of any liens held by the last
period from the date of the registration of redemptioner prior to his own, with
the certificate of sale, to wit: interest.

Sec. 28. Time and manner of, and Written notice of any redemption must
amounts payable on, successive be given to the officer who made the
redemptions; notice to be given and sale and a duplicate filed with the
filed. — The judgment obligor, or registry of deeds of the place, and if any
redemptioner, may redeem the property assessments or taxes are paid by the
from the purchaser, at any time within redemptioner or if he has or acquires
one (1) year from the date of the any lien other than that upon which the
registration of the certificate of sale, by redemption was made, notice thereof
paying the purchaser the amount of his must in like manner be given to the
purchase, with one per centum per officer and filed with the registry of
month interest thereon in addition, up to deeds; if such notice be not filed, the
the time of redemption, together with the property may be redeemed without
amount of any assessments or taxes paying such assessments, taxes, or
which the purchaser may have paid liens. (30a) (Emphasis supplied).
thereon after purchase, and interest on
such last named amount at the same Accordingly, the mortgagor or his
rate; and if the purchaser be also a successor-in-interest must redeem the
creditor having a prior lien to that of the foreclosed property within one year from
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 195

the registration of the sale with the in nature, brought for the benefit of one
Register of Deeds in order to avoid the title party only and without notice being sent by
from consolidating in the purchaser. By the court to any person adverse in interest.
failing to redeem thuswise, the mortgagor The relief is granted even without giving an
loses all interest over the foreclosed opportunity to be heard to the person
property.38 The purchaser, who has a right against whom the relief is sought. 43 Its
to possession that extends beyond the nature as an ex parte petition under Act
expiration of the redemption period, No. 3135, as amended, renders the
becomes the absolute owner of the application for the issuance of a writ of
property when no redemption is made,39 possession a non-litigious proceeding.44
that it is no longer necessary for the
purchaser to file the bond required under It is clear from the foregoing that a non-
Section 7 of Act No. 3135, as amended, redeeming mortgagor like the petitioner
considering that the possession of the land had no more right to challenge the
becomes his absolute right as the land’s issuance of the writ of execution cum writ
confirmed owner.40 The consolidation of of possession upon the ex parte
ownership in the purchaser’s name and the application of GSIS. He could not also
issuance to him of a new TCT then entitles impugn anymore the extrajudicial
him to demand possession of the property foreclosure, and could not undo the
at any time, and the issuance of a writ of consolidation in GSIS of the ownership of
possession to him becomes a matter of the properties covered by TCT No.
right upon the consolidation of title in his 284272-R and TCT No. 284273-R, which
name. consolidation was already irreversible.
Hence, his moves against the writ of
The court can neither halt nor hesitate to execution cum writ of possession were
issue the writ of possession. It cannot tainted by bad faith, for he was only too
exercise any discretion to determine aware, being his own lawyer, of the dire
whether or not to issue the writ, for the consequences of his non-redemption
issuance of the writ to the purchaser in an within the period provided by law for that
extrajudicial foreclosure sale becomes a purpose.
ministerial function.41 Verily, a marked
distinction exists between a discretionary
act and a ministerial one. A purely DEVELOPMENT BANK OF THE
ministerial act or duty is one that an officer PHILIPPINES VS CA and EMERAL
or tribunal performs in a given state of RESORT HOTEL CORP. (G.R. No.
facts, in a prescribed manner, in obedience 125838, June 10, 2003)
to the mandate of a legal authority, without
regard to or the exercise of his own FACTS: Emerald Resort Hotel Corporation
judgment upon the propriety or impropriety ("ERHC") obtained a loan from petitioner
of the act done. If the law imposes a duty Development Bank of the Philippines
upon a public officer and gives him the ("DBP"). To secure the loan, ERHC
right to decide how or when the duty shall mortgaged its personal and real properties
be performed, such duty is discretionary, to DBP. On 18 March 1981, DBP approved
not ministerial. The duty is ministerial only a restructuring of ERHC’s loan subject to
when its discharge requires neither the certain conditions.
exercise of official discretion nor the
exercise of judgment.42 On 5 June 1986, alleging that ERHC failed
to pay its loan, DBP filed with the Office of
The proceeding upon an application for a the Sheriff, Regional Trial Court of Iriga
writ of possession is ex parte and summary City, an Application for Extra-judicial
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 196

Foreclosure of Real Estate and Chattel 1986 auction sale.

Mortgages.
ISSUE: W/N DBP complied with the
Deputy Provincial Sheriffs Abel Ramos and posting and publication requirements under
Ruperto Galeon issued the required applicable laws for a valid foreclosure.
notices of public auction sale of the
personal and real properties. However, HELD: POSTING REQUIREMENT:
Sheriffs Ramos and Galeon failed to COMPLIED WITH
execute the corresponding certificates of This Court ruled in Cristobal v. Court of
posting of the notices. On 10 July 1986, Appeals that a certificate of posting is not
the auction sale of the personal properties required, much less considered
proceeded. indispensable for the validity of an
extrajudicial foreclosure sale of real
The Office of the Sheriff scheduled on 12 property under Act No. 3135. In the
August 1986 the public auction sale of the present case, the foreclosing sheriffs failed
real properties. The Bicol Tribune to execute the certificate of posting of the
published on 18 July 1986, 25 July 1986 auction sale notices. However, this fact
and 1 August 1986 the notice of auction alone does not prove that the sheriffs failed
sale of the real properties. However, the to post the required notices. As held
Office of the Sheriff postponed the auction before, "the fact alone that there is no
sale on 12 August 1986 to 11 September certificate of posting attached to the
1986 at the request of ERHC. DBP did not sheriff's records is not sufficient to prove
republish the notice of the rescheduled the lack of posting."
auction sale because DBP and ERHC
signed an agreement to postpone the 12 Based on the records, DBP presented
August 1986 auction sale. ERHC, however, sufficient evidence to prove that the
disputes the authority of Jaime Nuevas sheriffs posted the notices of the
who signed the agreement for ERHC. extrajudicial sale. A careful examination of
these two documents clearly shows that
On 22 December 1986, ERHC filed with the foreclosing sheriffs posted the required
the Regional Trial Court of Iriga City a notices of sale.
complaint for annulment of the foreclosure
sale of the personal and real properties. Deputy Sheriff Galeon also testified that
he, together with Sheriff Ramos, actually
ERHC alleged that the foreclosure was posted the notices of sale. Indisputably,
void mainly because (1) DBP failed to there is clear and convincing evidence of
comply with the procedural requirements the posting of the notices of sale. What the
prescribed by law; and (2) the foreclosure law requires is the posting of the notice of
was premature. sale, which is present in this case, and not
the execution of the certificate of posting.
DBP’s CONTENTION: DBP maintains that
it complied with the mandatory posting Moreover, ERHC bore the burden of
requirement under applicable laws. DBP presenting evidence that the sheriffs failed
insists that the non-execution of the to post the notices of sale. In the absence
certificate of posting of the auction sale of contrary evidence, as in this case, the
notices did not invalidate the foreclosure. presumption prevails that the sheriffs
DBP also maintains that when upon their performed their official duty of posting the
(DBP and ERHC) agreement to postpone notices of sale. Consequently, we hold that
the auction sale, there was no more need the non-execution of the certificate of
to publish the notice for the September 11, posting cannot nullify the foreclosure of the
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 197

chattel and real estate mortgages in the of sale.

instant case.
The form of the notice of extrajudicial sale
PUBLICATION REQUIREMENT: NOT is now prescribed in Circular No. 7-200226
COMPLIED issued by the Office of the Court
The Court held recently in Ouano v. Court Administrator on 22 January 2002. Section
of Appeals that republication in the 4(a) of Circular No. 7-2002 provides that:
manner prescribed by Act No. 3135 is XXX
necessary for the validity of a postponed "In the event the public auction should
extrajudicial foreclosure sale. Another not take place on the said date, it shall
publication is required in case the auction be held on ___________,______ without
sale is rescheduled, and the absence of further notice."
such republication invalidates the
foreclosure sale. The Court also ruled in The last paragraph of the prescribed notice
Ouano that the parties have no right to of sale allows the holding of a rescheduled
waive the publication requirement in Act auction sale without reposting or
No. 3135. republication of the notice. However, the
rescheduled auction sale will only be valid
Publication, therefore, is required to if the rescheduled date of auction is clearly
give the foreclosure sale a specified in the prior notice of sale. The
reasonably wide publicity such that absence of this information in the prior
those interested might attend the notice of sale will render the rescheduled
public sale. To allow the parties to auction sale void for lack of reposting or
waive this jurisdictional requirement republication. If the notice of auction sale
would result in converting into a contains this particular information,
private sale what ought to be a whether or not the parties agreed to such
public auction. rescheduled date, there is no more need
for the reposting or republication of the
The Court also ruled on DBP’s argument notice of the rescheduled auction sale.
that Sec. 24, Rule 39 of the Rules of Court
does not apply in the present case. Act No. In the instant case, there is no information
3135, as amended by Act No. 4118 in the notice of auction sale of any date of
otherwise known as "An Act to Regulate a rescheduled auction sale. Even if such
the Sale of Property under Special Powers information were stated in the notice of
Inserted in or Annexed to Real Estate sale, the reposting and republication of the
Mortgages" applies in cases of extrajudicial notice of sale would still be necessary
foreclosure sale. A different set of law because Circular No. 7-2002 took effect
applies to each class of sale mentioned. only on 22 April 2002. There were no such
The cited provision in the Rules of guidelines in effect during the questioned
Court hence does not apply to an foreclosure.
extrajudicial foreclosure sale.
Clearly, DBP failed to comply with the
As to DBP’s contention that ERHC’s act of publication requirement under Act No.
requesting postponement of the 12 August 3135. There was no publication of the
1986 auction sale estops ERHC from notice of the rescheduled auction sale of
challenging the absence of publication of the real properties. Therefore, the
the notice of the rescheduled auction sale, extrajudicial foreclosure of the real estate
the records are bereft of any evidence that mortgage is void.
ERHC requested the postponement
without need of republication of the notice
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 198

JOSE RAMIREZ vs THE MANILA mortgage was violated for he was not
BANKING CORP. (G.R. No. 198800, notified of the foreclosure and auction sale.
December 11, 2013)
In its answer, respondent claimed that the
FACTS: Jose T. Ramirez mortgaged two foreclosure proceedings were valid.
parcels of land located at Bayanbayanan,
Marikina City in favor of The Manila ISSUE: W/N Paragraph N of the Real
Banking Corporation to secure his Estate Mortgage was violated by Manila
P265,000 loan. The real estate mortgage Bank and What is its effect?
provides that all correspondence relative to
the mortgage including notifications of HELD: YES. Paragraph N was violated
extrajudicial actions shall be sent to by Manila Bank.
petitioner Ramirez at his given address, to
wit: The Court ruled that when respondent
N) All correspondence relative to this failed to send the notice of extrajudicial
MORTGAGE, including demand foreclosure sale to Ramirez, it committed a
letters, summons, subpoenas or contractual breach of said paragraph N
notifications of any judicial or sufficient to render the extrajudicial
extrajudicial actions shall be sent to the foreclosure sale on September 8, 1994 null
MORTGAGOR at the address given and void.
above or at the address that may
hereafter be given in writing by the In Carlos Lim, et al. v. Development Bank
MORTGAGOR to the MORTGAGEE, of the Philippines, we held that unless the
and the mere act of sending any parties stipulate, personal notice to the
correspondence by mail or by personal mortgagor in extrajudicial foreclosure
delivery to the said address shall be proceedings is not necessary because
valid and effective notice to the Section 3 of Act No. 3135 only requires the
MORTGAGOR for all legal purposes posting of the notice of sale in three public
and the fact that any communication is places and the publication of that notice in
not actually received by the a newspaper of general circulation. In this
MORTGAGOR, or that it has been case, the parties stipulated in paragraph N
returned unclaimed to the of the real estate mortgage that all
MORTGAGEE, or that no person was correspondence relative to the mortgage
found at the address given, or that the including notifications of extrajudicial
address is fictitious or cannot be actions shall be sent to mortgagor Ramirez
located, shall not excuse or relieve the at his given address. Respondent had no
MORTGAGOR from the effects of such choice but to comply with this contractual
notice. provision it has entered into with Ramirez.
The contract is the law between them.
Manila Bank filed a request for extrajudicial Hence, we cannot agree with the bank that
foreclosure of real estate mortgage on the paragraph N of the real estate mortgage
ground that Ramirez failed to pay his loan does not impose an additional obligation
despite demands. During the auction sale upon it to provide personal notice of the
on September 8, 1994, respondent was the extrajudicial foreclosure sale to the
only bidder for the mortgaged properties. mortgagor Ramirez.

Ramirez sued respondent for annulment of As we explained in Metropolitan Bank v.

sale and prayed that the certificate of sale Wong, the bank’s violation of paragraph N
be annulled on the ground, among others, of the real estate mortgage is sufficient to
that paragraph N of the real estate invalidate the extrajudicial foreclosure sale.
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 199

510.50.
ALFREDO OUANO vs CA and HEIRS OF
JULIETA OUANO (G.R. No. 129729, Julieta failed to redeem the properties
March 4, 2003) within the one year period from registration
of sale. PNB later conveyed the properties
FACTS: On June 8, 1977, Julieta M. to Alfredo Ouano, the brother of Julieta.
Ouano (Julieta), now deceased, obtained a
loan from the PNB in the amount of On March 28, 1983, Julieta sent demand
P104,280.00. As security for said loan, she letters to PNB and petitioner, pointing out
executed a real estate mortgage over two irregularities in the foreclosure sale.On
parcels of land located at Opao, Mandaue April 18, 1983, Julieta filed a complaint with
City. She defaulted on her obligation. On the Regional Trial Court (RTC) of Cebu for
September 29, 1980, PNB filed a petition the nullification of the May 29, 1981
for extrajudicial foreclosure with the City foreclosure sale.
Sheriff of Mandaue City.
ISSUE: W/N the requirements of Act No.
On November 4, 1980, the sheriff prepared 3135 were complied with in the May 29,
a notice of sale setting the date of public 1981 foreclosure sale.
auction of the two parcels of land on
December 5, 1980 at 9:00 a.m. to 4:00 HELD: The governing law for extrajudicial
p.m. He caused the notice to be published foreclosures is Act No. 3135 as amended
in the Cebu Daily Times, a newspaper of by Act No. 4118. The provision relevant to
general circulation in Mandaue City, in its this case is Section 3, which provides:
issues of November 13, 20 and 27, 1980. SEC. 3. Notice shall be given by
He likewise posted copies thereof in public posting notices of the sale for not
places in Mandaue City and in the place less than twenty (20) days in at least
where the properties are located. three public places of the
municipality or city where the
However, the sale as scheduled and property is situated, and if such
published did not take place as the parties, property is worth more than four
on four separate dates, executed hundred pesos, such notice shall
Agreements to Postpone Sale also be published once a week for
(Agreements). These Agreements were at least three consecutive weeks in
addressed to the sheriff, requesting the a newspaper of general circulation
latter to defer the auction sale to another in the municipality of city.
date at the same time and place, "without
any further republication of the Notice." In a number of cases, we have consistently
held that failure to advertise a mortgage
There was however no sale that took place foreclosure sale in compliance with
and was repeatedly postponed and in all statutory requirements constitutes a
these postponements, no new notice of jurisdictional defect invalidating the sale.
sale was issued, nor was there any Consequently, such defect renders the
republication or reposting of notice for the sale absolutely void and no title passes.
rescheduled dates.
Petitioner, however, insists that there was
Finally, on May 29, 1981, the sheriff substantial compliance with the publication
conducted the auction sale, awarding the requirement, considering that prior
two parcels of land to PNB, the only bidder. publication and posting of the notice of the
He executed a Certificate of Sale certifying first date were made.
the sale for and in consideration of P195,
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 200

In Tambunting v. Court of Appeals, we held known as "An Act to Regulate the Sale of
that republication in the manner prescribed Property under Special Powers Inserted in
by Act No. 3135 is necessary for the or Annexed to Real Estate Mortgages"
validity of a postponed extrajudicial applies in cases of extrajudicial foreclosure
foreclosure sale. sale. A different set of law applies to each
class of sale mentioned.
Publication, therefore, is required to give
the foreclosure sale a reasonably wide Next, petitioner maintains that Julieta's act
publicity such that those interested might of requesting the postponement and
attend the public sale. To allow the parties repeatedly signing the Agreements had
to waive this jurisdictional requirement placed her under estoppel, barring her
would result in converting into a private from challenging the lack of publication of
sale what ought to be a public auction. the auction sale.

Moreover, assuming arguendo that the We rule otherwise. Julieta did request for
written waivers are valid, we find the postponement of the foreclosure sale
noticeable flaws that would nevertheless to extend the period to settle her obligation.
invalidate the foreclosure proceedings. The However, the records do not show that she
Agreements are clearly defective for requested the postponement without need
having been belatedly executed and filed of republication and reporting of notice of
with the sheriff. The party who may be said sale.
to be at fault for this failure, and who
should bear the consequences, is no other In addition, we observe herein that the
than PNB, the mortgagee in the case at Agreements prepared by the counsel of
bar. It is the mortgagee who causes the PNB were in standard forms of the bank,
mortgaged property to be sold, and the labeled as "Legal Form No. We therefore
date of sale is fixed upon his instruction. held that said agreement partakes of the
We have held that the mortgagee's right to nature of a contract of adhesion, i.e., one
foreclose a mortgage must be exercised in which one of the contracting parties
according to the clear mandate of the law. imposes a ready-made form of contract
Every requirement of the law must be which the other party may accept or reject,
complied with, lest the valid exercise of the but cannot modify. One party prepares the
right would end. PNB's inaction on the stipulation in the contract, while the other
scheduled date of sale and belated filing of party merely affixes his signature or his
requests to postpone may be deemed as "adhesion" thereto, giving no room for
an abandonment of the petition to negotiation, and depriving the latter of the
foreclose it filed with the sheriff. opportunity to bargain on equal footing. As
Consequently, its right to foreclose the such, their terms are construed strictly
mortgage based on said petition lapsed. against the party who drafted it.

In a vain attempt to uphold the validity of More importantly, the waiver being void for
the aforesaid waiver, petitioner asserts that being contrary to the express mandate of
the Court of Appeals should have applied Act No. 3135, such cannot be ratified by
Rule 39, Section 24 of the Rules of Court, estoppel. Estoppel cannot give validity to
which allows adjournment of execution an act that is prohibited by law or one that
sales by agreement of the parties. The is against public policy. Neither can the
cited provision in the Rules of Court hence defense of illegality be waived.
does not apply to an extrajudicial
foreclosure sale. Act No. 3135, as
amended by Act No. 4118 otherwise
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 201

VR Enterprise.
DARCEN V. V.R. GONZALES CREDIT
ENTERPRISES, INC. Petitioners say that they “immediately
G.R. No. 199747; April 03, 2013 noted that the purported signatures of their
mother on the 3 mortgage contracts were
FACTS: Spouses MamertoDarcen and actually forgeries, and that the mortgage
Flora De Guzman begot 7 children, contracts did not state when the supposed
namely: Teodoro, Mamerto, Jr., Nestor, loan obligations would become due and
Benilda, and Elenita (petitioners), and their demandable.”
brothers Arturo and Manuel.
They maintain that their mother did not
Mamerto died in 1986, leaving behind 3 contract the loans, and they point to their
titled parcels of land located in Bulacan, all brothers Manuel and Arturo, whose
under the name “Mamerto Darcen married signatures appear as witnesses on the
to Flora de Guzman.” mortgage documents, as guilty of forging
her signatures and of receiving the
According to the petitioners, sometime in proceeds of the loans. The petitioners also
1990, their brother Manuel borrowed disclaim any knowledge of the loans, or of
money from Veronica Gonzales their consent thereto, either before or after.
(Gonzales), president of V.R. Gonzales
Credit Enterprises. Manuel sought their VR Enterprise extrajudicially foreclosed the
consent in constituting a mortgage over the mortgage over the lots, but meanwhile,
above properties of their father, but the petitioners filed for “Annulment of
petitioners refused. Manuel then caused Mortgage, Extra-Judicial Foreclosure,
the execution of an Extra-Judicial Auction Sale, Certificate of Sale, and
Settlement of Estate with Waiver (ESEW) Damages,” seeking to void the real estate
by forging the signatures of the petitioners mortgages, the extrajudicial foreclosure
and their mother Flora. and the auction sale of the lots.

In the said instrument, the petitioners were The three properties were sold, with the
said to have waived their shares in their VR Enterprise as the highest bidder. The
father’s estate in favor of their mother, thus one-year period to redeem lapsed. VR
making Flora the sole owner of the 3 lots. Enterprise executed an affidavit of
consolidation of ownership, and a writ of
Meanwhile, fire had razed part of the ROD possession was issued against petitioners.
of Bulacan and destroyed the titles to the
lots. After reconstitution of the titles, new Contention of Petitioners:
titles were issued in the name of “Flora de They are adverse claimants who are third
Guzman, Filipino, of legal age, widow.” parties and strangers to the real estate
mortgages executed by their mother. The
Petitioners further claim that on the day issuance of a writ of possession in favor of
that the new titles were issued, they the purchaser in an extrajudicial
caused the annotation thereon of their foreclosure sale ceases to be ministerial
hereditary claim in their father’s estate. In where the property is in the possession of
2000, Flora died. a third party who holds the property under
a claim adverse to that of the
In 2007, Gonzales demanded payment debtor/mortgagor.
from the petitioners of several loans
allegedly taken out by Flora, claiming that The petitioners maintain that they knew
the latter had mortgaged the properties to nothing about the mortgage contracts,
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 202

whose validity is now the subject of their possession becomes absolute. The basis
appeal. They further claim that their of this right to possession is the
signatures in the ESEW were forged. As purchaser’s ownership of the
co-heirs and co-owners with their mother of property.There is even no need for him to
the subject lots, they have a claim directly post a bond, and it is the ministerial duty of
adverse to hers, and therefore, also the courts to issue the same upon proper
directly adverse to her successor-in- application and proof of title.
interest, VR Enterprise. Thus they should
be entitled to retain possession of the The nature of an ex parte petition for
properties until the claim for ownership is issuance of the possessory writ is a non-
resolved. litigious proceeding and summary in
nature. As an ex parte proceeding, it is
ISSUE: WON the petitioners are adverse brought for the benefit of one party only,
claimants entitled to retain possession of and without notice to or consent by any
the properties. NO person adversely interested.

HELD: The long-settled rule in extrajudicial Furthermore, it is settled that a pending

foreclosure of real estate mortgage is that action for annulment of mortgage or
after consolidation of ownership of the foreclosure sale does not stay the issuance
foreclosed property, it is the ministerial of the writ of possession.
duty of the court to issue, as a matter of
right, an ex parte writ of possession to Nonetheless, the ministerial duty of the
the buyer. court to issue an ex parte writ of
possession ceases once it appears that
The established rule is that the purchaser there is a third party in possession of
in an extrajudicial foreclosure sale the property, who is a stranger to the
becomes the absolute owner of the mortgage and who claims a right
property if no redemption is made within 1 adverse to that of the debtor/
year from the registration of the certificate mortgagor.
of sale.
Section 33, Rule 39 of the Rules of Court
Possession, being a recognized essential provides that in an execution sale, the
attribute of ownership after consolidation of possession of the property shall be given
title, the purchaser may demand to the purchaser or last
possession as a matter of right. redemptioner, unless a third party is
actually holding the property adversely
The possession may be granted to the to the judgment obligor. The application
buyer either of the above Section has been extended to
(a) within the one-year redemption extrajudicial foreclosure sales pursuant to
period, upon the filing by the Section 6 of Act No. 3135.
purchaser of a bond, or
(b) after the lapse of the redemption The petitioners have persisted in making
period, without need of a bond. the point that they are strangers to the
mortgage contracts executed by their
It is a time-honored legal precept that after mother over their father’s lots, which they
the consolidation of titles in the buyer’s claim to co-own with her, an interest
name, for failure of the mortgagor to adverse to that of the VR Enterprise.
redeem, entitlement to a writ of possession
becomes a matter of right. As the Thus, as an exception, the possession of
confirmed owner, the purchaser’s right to the mortgaged property may be awarded to
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 203

a purchaser in the extrajudicial foreclosure their Opposition to the ex parte petition for
unless a third party is actually holding the writ of possession. All that they could say
property adversely to the judgment debtor. about this “oversight” is that they “were
never able to insist on the presentation of
The purchaser’s right of possession is the said document because they were
recognized only as against the judgment never parties in the case for writ of
debtor and his successor-in-interest but not possession. Besides, the case for writ of
against persons whose right of possession possession is summary and non-
is adverse to the latter. adversarial.”

However, the SC finds no proof that the But this is a lie and an obvious subterfuge,
petitioners are adverse third-party for the fact is that they appeared with their
claimants entitled to be retained in lawyer, and had an opportunity to lay out
possession. the complete facts and present whatever
pertinent documents were in their
The chief consideration for granting to VR possession. They did no such thing.
Enterprise a writ of possession was that
the assailed mortgages executed by Flora Not only did petitioners not sue to annul
in 1995 were constituted on properties the extrajudicial settlement, but on the very
covered by titles issued solely in her day that the new titles were issued to
name. Flora, an inscription appears in the said
titles announcing that one-half (½) of the
It will be noted that it was only in June lots would be bound for the next two years
2007, after VR Enterprise had threatened to possible claims by other heirs or
them with extrajudicial foreclosure and unknown creditors against the estate of
eviction, or after 12 years had passed, that Mamerto. All three titles bear this same
the petitioners brought an action to annul inscription, which the petitioners admit that
the real estate mortgages, and meanwhile, they themselves had caused to be
Flora had obtained several loans totaling annotated on their mother’s titles.
P7.5 million fromVR Enterprise. It took
petitioners even longer, 15 years, to assail All the above leave little doubt that the
the validity of the ESEW, which gave Flora petitioners had always known about, and
sole title to the subject lots under the new had consented to, the extrajudicial
reconstituted titles issued to her. settlement of the estate of their father
Mamerto, as well as waiver by them of
Realizing that their claim of forgery of their their shares therein in favor of their mother
mother’s signature in the mortgage Flora. For this very reason, they cannot
contracts was tenuous, the petitioners now now be permitted to interpose an adverse
claim that an earlier instrument, the ESEW, claim in the subject mortgaged lots and
was falsified by their brothers Manuel and defeat the writ of possession issued to VR
Arturo who forged their signatures. Yet the Enterprise.
petitioners did not explain why the said
instrument named neither Manuel nor Note: Any question regarding the validity of
Arturo but their mother Flora as the sole the mortgage or its foreclosure cannot be a
beneficiary of the heirs’ waiver. legal ground for the refusal to issue a writ
of possession. Regardless of whether or
Considering that the petitioners are now not there is a pending suit for the
asserting that their signatures in the annulment of the mortgage or the
ESEW had been forged, it is inexplicable foreclosure itself, the purchaser is entitled
why they failed to attach a copy thereof to to a writ of possession without prejudice, of
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 204

course, to the eventual outcome of the  Juan Antonio Jr., then executor of his
pending annulment case. deceased father Juan Antonio Sr.,
declaring himself to be the absolute
owner of all the hacienda of Balintagac,
BARRETTO VS. BARRETTO borrowed money in the sum of P11,000
G.R. No. L-11933; December 1, 1917 from Antonio Vicente Barretto for the
expenses of the hacienda with the
FACTS: Juan Antonio Barretto, Sr.  obligation to pay P1,000 for
succeeded by his children  Juan Antonio, delinquency, and interests at 8% per
Jr. (debtor), Leonardo (Atty. of debtor) and annum, payable quarterly in advance
other heirs  Juan Antonio Jr. borrowed  As guaranty for said loan, he
money from  Antonio Vicente Barretto mortgaged the cultivated half of the
(creditor)  mortgaged the hacienda  hacienda and other properties.
failed to pay  Antonio took possession of  For the failure of the debtor to pay his
the hacienda  Antonio succeeded by debt, the creditor Antonio Vicente
Alberto (son, plaintiff)  Alberto in present brought an action to foreclose the
possession  Leonardo usurped the mortgage in order to recover the money
hacienda loaned, against Juan Antonio Jr. in his
own behalf and as executor of his
Alberto’s case father.
 Alberto Barretto alleges that he is the  Half of the mortgaged hacienda was
owner of the whole hacienda called levied upon and a judgment to sell the
Balintagac. property was rendered, but it could not
 He was in possession of the said be sold in spite of the fact that it was
hacienda quietly, peacefully, and placed at auction three times.
continuously, as were his predecessors  Antonio Vicente prayed for the
since the year 1884 until 1912. adjudication of all the property attached
 Leonardo Barretto, alleging himself to to the payment of his credit of P7,648,
be the owner of a certain part of said to which Leonardo voluntarily agreed
hacienda, illegally and unduly usurped and consented as attorney in fact of
a portion thereof. Juan Antonio Jr.
 Leonardo refused to return that portion  Juan Antonio Jr. and his brothers, not
of land usurped together with the fruits being able to pay the debt, interests,
received, or their value, in spite of the and costs, delivered and conveyed all
fact that he has been required to do so the hacienda of Balintagac to the
in writing by the Alberto. creditor.
 From then, the brothers of Juan Antonio
Leonardo’s case Jr. administered, by the appointment
 The hacienda of Balintagac was owned and exclusive account of Antonio
and possessed by Juan Antonio Vicente, the entire hacienda,
Barretto, Sr., who died in 1881 and left acknowledging him as the owner of all
7 children: Juan Antonio, Angelica of it and delivering to him all its
Maria, Leonardo, Francisca, Bartolome, products till April 1896.
Jose and Leopoldo.
 The 7 children of Juan Antonio, Sr. ISSUES:
succeeded him in all his rights and 1. WON there was a contract of
actions and became owners with the antichresis. YES
right of possession of hacienda 2. WON the creditor acquires through
Balintagac. possession the ownership of the real
property in antichresis when debtor fails
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 205

to pay debt within the stipulated time.

NO. Since it is not shown that the debtors have
delivered the whole hacienda to the
HELD: Antonio Vicente Barretto as creditor creditor by assignment of the property, it is
— not being able to collect his credit of to be presumed that the debtors delivered
P11,000 and interest at 8%, nor obtain the not only one half, but the whole hacienda
adjudication in his favor of half of hacienda with a view that the creditor might collect
of Balintagac which was mortgaged for the by usufruct his credit with the accrued
security of the debt, and there having been interests.
no bidders on the three occasions in which
it was offered for public auction — took In spite of the fact that the agreement
possession of all the hacienda, and from between the creditor and the debtors was
that time on received through his not set down in any document, due to the
administrators the products of the same for relationship which exists between them, it
the purpose of collecting his credit may safely be asserted that the debtors
interests. have limited themselves to give to the
creditor the right to collect his credit
It may be established that he took from the fruits of the hacienda of
possession of said hacienda by virtue of Balintagac, conferring upon him the
voluntary assignment with the express possession of the property, but not
consent of heirs of Juan Antonio Sr., owner transferring to him the dominion of the
of one-half of the hacienda and of Juan same, since such transfer was not
Antonio Jr., owner of the other half. proved in the present action.

It does not fully appear which contract has The agreement or verbal stipulation is an
been entered into between the creditor and antichresis as defined by Article 1881 of
the heirs of Juan Antonio, Sr., and his son the Civil Code, which says:
Juan Antonio Jr; but from the facts that By the antichresis a creditor
have been fully established it is inferred acquires a right to receive the fruits
that once the foreclosure proceedings were of real property of his debtor, with
suspended, because the creditor had not the obligation to apply them to the
been able to obtain the adjudication of the payment of the interest, if due, and
hacienda in his favor, the creditor took afterwards to the principal of his
possession of the hacienda of credit.
Balintagac, and held it in usufruct with
the knowledge and express consent of The perusal of articles 1882-1886 shows
its legitimate owners; there has not been that the possession of the hacienda
any opposition or protest against the enjoyed by the creditor Antonio Vicente
possession, which by usufruct the creditor and his successors up to the present time
and his successors enjoyed. was conferred to them by virtue of the
stated contract or agreement in antichresis.
Considering that from the facts proved,
which refer to the possession and usufruct One of the administrators of the hacienda
enjoyed by Antonio Vicente and then his presented the sworn declaration of
successors, one of whom is Alberto ownership for the purposes of tax
Barretto, it is logically deduced that such assessment and paid the land tax in the
facts were accomplished by virtue of a name of the creditor who possessed and
verbal contract, and not by written one, held the hacienda in usufruct.
entered into between the owners of the
hacienda and the creditor Antonio Vicente. Although article 1884 states that the
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 206

creditor does not acquire through lawful contractual act called by law a
possession the ownership of the real covenant in antichresis — the debtors
property delivered by virtue of an cannot, while the debt exists and is not
antichresis for failure to pay the debt within fully paid, recover or reacquire the
the stipulated time, nevertheless, the possession and use of the real property
debtor cannot recover the use of the real delivered to the creditor, without the latter
property given in antichresis to the creditor, giving his consent;
without previously fully paying the creditor.
In case of insolvency, the creditor may ask Consequently, Leonardo, without the
for the sale of the real property which he knowledge or consent Alberto Barretto,
possesses in antichresis, unless the who succeeded in the possession and use
pending debt is paid. of the hacienda, could not have
recovered, by usurpation, the
It appears that defendant Leonardo, possession and use of a portion of the
without the consent of Alberto, took over hacienda.
and usurped a portion of land of the
hacienda, withholding and refusing to
deliver them to the creditor in antichresis MACAPINLAC VS. REPIDE
on the pretext that he is the owner of the G.R. No. 18574; September 20, 1922
whole hacienda. Although it appears that
the debt has been paid, Leonardo still FACTS: On and prior to August 22, 1916,
acted without just reason and in Jose Macapinlac was the owner of the
contravention of article 1883 when he Hacienda Dolores, a property located in
effected the usurpation. Pampanga. This property had been
registered and a Torrens certificate of title
It is known that the action to recover a had been issued.
thing, where a legitimate possessor has
been deprived of his possession, takes On the date above stated, Macapinlac was
place in accordance with the law even indebted to Bachrach Motor Company for
against the owner himself, who can never the price of an automobile and its
be protected by the law even on his right of accessories, purchased upon credit; and
ownership, without first restoring what as evidence of this indebtedness he
he acquired through an illegal act of executed 14 promissory notes (PNs)
dispossession. payable to Bachrach amounting to the sum
of P12,960.
Though Alberto Barretto has no title of Contemporaneously with the delivery of the
ownership over the hacienda of Balintagac, PNs, Macapinlac executed what purports
and therefore, he cannot be declared to be a deed of sale, with privilege of
owner of the same, nevertheless, his claim repurchase, to be exercised on or before
that a judgment be rendered ordering the October 2, 1917 (due date of the debt).
return to him of the portion usurped by This transfer covered the Hacienda
Leonardo is in conformity with the law. Dolores. In this conveyance E. M.
Bachrach is named as transferee.
Alberto being in the legitimate possession
and use of all the hacienda of Balintagac On November 8, 1917, Francisco Repide
which was voluntarily delivered to him by acquired, for the sum of P5,000, all the
Juan Antonio, Jr. and his co-heirs, with the rights of E. M. Bachrach in the property
object that the creditor Antonio Vicente which had been conveyed to the latter.
might collect the capital and interests Repide was well aware that the transfer of
which they owed and still owe him — a the property to Bachrach had been made
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 207

by the Macapinlac for the purpose of execution of the contract of sale with pacto
securing a debt owing to Bachrach de retro between Macapinlac and
Company, and he was furthermore aware Bachrach Company. In this connection the
that part of the debt has been paid and first and most obvious proposition to be
there was only balance of less than one- laid down is that since the conveyance is
half of the sum of P12,960. After Repide alleged to have been executed as security
had acquired the interest in the hacienda in for a debt owing by Macapinlac to
question, he processed the certificate of Bachrach, it follows that in equity, said
title to be transferred to his own name. conveyance must be treated as a mere
security or substantially as a mortgage, as
To accomplish this, it was necessary to creating a mere equitable charge in favor
make it appear that the contract of sale of the creditor or person named as the
with pacto de retro noted in the original purchaser therein.
Torrens certificate was really and truly In this connection the cardinal rule is that a
what it appeared to be, that is, a contract of party who acquires any interest in property
sale, not a mere mortgage, and that the with notice of an existing equity takes
ownership had consolidated in the subject to that equity. In other words,
purchaser by reason of the failure of the having acquired the interest of Bachrach in
seller to repurchase the property before the the Hacienda Dolores, with knowledge that
expiration of the time allowed for the contract has been executed as security
redemption. Inasmuch as it appeared that for a debt, Francisco Repide must be
the ownership had then consolidated in the understood to stand in exactly the same
purchaser, he directed the ROD of position occupied by Bachrach, if the
Pampanga to register the property in the transfer to Repide had never been
name of Francisco Gutierrez Repide and to effected.
issue to him a new certificate of transfer,
which was accordingly done. Repide’s contention:
Repide insisted that his title has become
At the time of the filing of this complaint, indefeasible and the action of Macapinlac
Repide was in actual possession of the already prescribed, owing to the fact that
property in question, and that he had in the conveyance of the land to him has
effect been enjoying possession since been followed by the issuance of a TCT in
August 1917. his name, and the original certificate in the
name of Macapinlac has been cancelled —
ISSUES: all of which had been accomplished more
1. WON the contract executed between than one year before the present action
Macapinlac and Bachrach Motor, the was begun.
sale with pacto de retro, was a deed of
sale or an equitable mortgage. In the first place, it must be borne in mind
Equitable Mortgage(EM) that the equitable doctrine, to the effect
2. What contract govern between that any conveyance intended as security
Macapinlac and Repide (as successor for a debt will be held in effect to be
in interest of Bachrach) if the original amortgage, whether so actually expressed
contract executed by plaintiff with in the instrument or not, operates
Bachrach was an EM. Contract of regardless of the form of the agreement
Antichresis. chosen by the contracting parties as the
repository of their will.
HELD:
1. In taking up these problems we Equity looks through the form and
begin with the situation created by the considers the substance; and no kind of
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 208

engagement can be adopted which will mortgagor and mortgagee, were

enable the parties to escape from the essentially the same as under the contract
equitable doctrine to which reference is of antichresis.
made. In other words, a conveyance of
land, accompanied by registration in the By reference to the appropriate provisions
name of the transferee and the issuance of of theCivil Code (arts. 1881-1884), in the
a new certificate, is no more secured from chapter dealing with antichresis, it will be at
the operation of this equitable doctrine than once seen that while non-payment of the
the most informal conveyance that could debt does not vest the ownership of the
be devised. property in the creditor, nevertheless
the debtor cannot recover the
In the second place, the circumstance that enjoyment of the property without first
the land has been registered under the paying in full what he owes to his
Torrens system does not change or affect creditor. At the same time, however, the
civil rights and liabilities with respect creditor is under obligation to apply the
thereto. An ordinary transfer of land, fruits derived from the estate in
effected in any of the ways allowed by law, satisfaction, first, of the interest on the
even when followed by registration and debt, and secondly, to the payment of the
that issuance of a new certificate of the principal. From this is necessarily deduced
Land Registration Act, has a different the obligation of the creditor to account to
character. the debtor for said fruits and the
corresponding right of the debtor to have
Applying said provision to the facts of the the same applied in satisfaction of the
present case, it must follow that the cause mortgage debt.
of action of the plaintiff to annul the
registration of this property in the name of The respective rights and obligations of the
Francisco Repide did not prescribe at one parties to a contract of antichresis may be
year, and the plaintiff's cause of action taken to be established, namely:
upon this branch of the case had not in fact  that if the mortgagee acquires
been barred at all when the present action possession in any lawful manner, he
was begun. is entitled to retain such possession
until the indebtedness is satisfied
2. Discussion on antichresis: and the property redeemed;
The preceding discussion conducts us to  that the non-payment of the debt within
the conclusion that the estate of Francisco the term agreed does not vest the
Repide occupies substantially the position ownership of the property in the
of a mortgagee in possession. The creditor;
question then arises as to what are the  that the general duty of the mortgagee
legal rights of the plaintiff as against the in possession towards the premises is
Repide estate. that of the ordinary prudent owner;
The solution of this problem is to be found  that the mortgagee must account for
in the application of the doctrine formulated the rents and profits of the land, or its
in Barretto vs. Barretto. In that case the value for purposes of use and
heirs of a mortgagee of an estate were occupation, any amount thus realized
found in possession of mortgaged property going towards the discharge of the
more than thirty years after the mortgage mortgage debt;
had been executed; and it was shown that  that if the mortgagee remains in
the mortgage had never been foreclosed. possession after the mortgage debt
Upon this state of facts it was in effect held has been satisfied, he becomes a
that the rights of the parties, heirs of the trustee for the mortgagor as to the
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 209

excess of the rents and profits over

such debt; and HELD: The terms of the contract it is
 that the mortgagor can only enforce his clearly a sale with the right to repurchase.
rights to the land by an equitable action It speaks in unequivocal terms of a sale
for an account and to redeem. and the conveyance of land with the right
to repurchase, and the character of the
contract is that of a sale with the right to
ALOJADO VS SIONCO repurchase. The contract is very defective
in its wording, especially so where it refers
FACTS: Juana Mabaquiao sold the land- to the period within which to exercise the
in-dispute described in the complaint to right to repurchase. But examining it as a
Nicolas Alegata . Alegata died. Settlement whole, it clearly appears that it was the
proceedings of his estate was instituted, parties' intention that the vendor could
his property, which included the land-in- repurchase the land without delay when he
dispute was adjudicated to Lim Kang Sang had the means to pay the purchase price.
and Lim Eng Teeng, his only heirs. Lim
Kang and Lim Eng sold the land to Lim What characterizes a contract or
Ponso & Co., with the right to repurchase antichresis is that the creditor acquires
for the period of one year Period expired the right to receive the fruits of the
without this right having exercised. property of his debtor with the
obligation to apply them to the payment
Lim Ponso & Co. transferred this land of interests, if any is due, and then to
unconditionally to Lim Siongco and Lim the principal of his credit. Nowhere in the
Kingko. contract in question does this character of
a contract of antichresis appear. The only
Juana Mabaquiao dies. Intestate substantial thing agreed upon between the
proceedings took place and Ambrosio T. parties was that Juana Mabaquiao could
Alojado was appointed administrator. repurchase the land when she had the
Ambrosio, as administration, brought this means.
action against Lim Sionco, Lim Kingko and
Lim Ponso & Co. prays that he be declared ISSUE: Whether or not the title to the land
the absolute owner of this land with the conveyed by Juana Mabaquiao has been
improvements thereon, and that the consolidated.? YES
defendants be ordered to restore and
respect his right of ownership, possession HELD: This action was brought in January,
and usufruct of the property; 1922, fifteen years after the contract was
entered into. The contract, as been noted,
RTC: in favor of Lim Sionco, Lim Kingko, fixes the period for the exercise of the right
Lim Ponso &Co. of redemption until Juana Mabaquiao, or
her heirs has the means.
Ambrosio contends that the contract
executed by Juana Mabaquiao with Whether or not this is considered a period,
Nicolas Alegata was not a contract of sale it is clear that the title transmitted to
with the right to repurchase, but a contract Nicolas Alegata has been consolidated.
or antichrises
According to article 1508 of the Civil Code,
ISSUE: WON the contract was a contract when no period of redemption is fixed it
of antichresis or contract of sale with right shall last four years, and it is fixed, it shall
to redemption? Contract of sale with not exceed ten years. The right of
right to remdemption redemption not having been exercised the
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 210

period of ten years, the title of Nicolas possessor in the concept of owner but a
Alegata, or his heirs, has by this fact alone mere holder placed in possession of the
been consolidated any events. land by its owners. Thus, possession of an
antichretic creditor cannot serve as a title
for acquiring dominion. The court, from
RAMIREZ v. CA other cases like Trillana v. Manansala,
G.R. No. L-38185. September 24, 1986 Valencia v. Acala and Barretto v. Barretto,
held that the antichretic creditor cannot
FACTS: On September 15, 1959, ordinarily acquire by prescription the land
petitioners-spouses Hilario Ramirez and surrendered to him by the debtor. Holding:
Valentina Bonifacio filed an application for The decision appealed from is affirmed
registration of a parcel of riceland in with a modification that the respondents
Pamplona, Las Pinas, Rizal. After notice are ordered to pay the petitioners the
and publication, nobody appeared to amount of P400.00 as principal for the
oppose the application. An order of general contract of antichresis, the fruits obtained
default was issued and the court allowed from the possession of the land having
the petitioners to present evidence in been applied to the interests on the loan.
support of their claim. Thereafter, the
petitioners presented parole evidence that
they acquired the land in question by ANCIETO BANGIS V HEIRS OF
purchase from Gregoria Pascual during the SERAFIN AND SALUD ADOLFO
early part of the American regime but the GR 190875 June 13 2012
corresponding contract of sale was lost
and no copy or record of the same was FACTS: Spouses Serafin, Sr. and
available. On January 30, 1960, the court Saludada Adolfo were the original
ordered the issuance of the decree of registered owners of a lot which was
registration and consequently, Original mortgaged to the DBP. Upon default in the
Certificate of Title No. 2273 of the Registry payment of the loan obligation, it was
of Deeds of Rizal was issued in the foreclosed and ownership was
petitioners’ names. On March 30, 1960, consolidated in DBP’s name under a TCT.
private respondents filed a petition to Serafin Adolfo, Sr. repurchased the same
review the decree of registration on the and was issued a TCT a year after his wife
ground of fraud. The respondents alleged died. He allegedly mortgaged the subject
among others that they obtained a loan of property to Ancieto Bangis who took
P400.00 from the petitioners in which they possession of the land but their transaction
secured with a mortgage on the land in was not reduced into writing. When Adolfo
question by way of antichresis and that died, his heirs executed a deed of
there were several attempts to redeem the extrajudicial partition covering the subject
land but were refused by the petitioners. property and TCT issued to them. The
said property was subdivided and separate
The trial court ordered the cancellation of titles were issued in names of the heirs of
the original certificate of title. The Court of Adolfo. The heirs of Adolfo filed a
Appeals affirmed the decision. complaint for annulment of the deed of sale
and declaration of the purported contract of
ISSUE: Can an antichretic creditor acquire sale as antichresis, accounting and
land of debtor by prescription? NO. redemption of property and damages
against Bangis. The RTC rendered a
HELD: An antichretic creditor cannot decision in favor of the heirs of Adolfo
acquire the land of a debtor by declaring that the contract as an
prescription. An antichretic creditor is not a antichresis, ordering the defendant to
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 211

deliver the possession of the property in OLAF N. BORLOUGH vs. FORTUNE

question to the plaintiffs and the TCT under ENTERPRISES, INC.
Bangis as null and void. Thus, the heirs of
Bangis appealed before the CA. FACTS: Fortune Enterprises, Inc. sold to
Salvador Aguinaldo a Chevrolet sedan,
CA affirmed the RTC finding that the which it from United Car Exchange, and for
contract between the parties was a not having paid it in full, the latter executed
mortgage, not a sale. It noted that while on the same date a promissory note in the
Bangis was given possession of the amount of P2,400 payable in 20
subject property, the certificate of title installments.
remained in the custody of Adolfo and was
never cancelled. To secure the payment of this note,
Aguinaldo executed a deed of chattel
ISSUE: WON the transaction between the mortgage over said car. The deed was duly
parties was one of sale and not a mortgage registered in the office of the Register of
or antichresis. NEITHER Deeds of Manila.

HELD: There was neither an antichresis As the buyer-mortgagor defaulted in the

nor sale. For the contract of antichresis to payment of the installments due, counsel
be valid, Article 2134 of the Civil Code for Fortune Enterprises Inc. addressed a
requires that “the amount of the principal letter on May 16, 1952, requesting him to
and of the interest shall be specified in make the necessary payment and to keep
writing; otherwise the contract of his account up to date, so that no court
antichresis shall be void.” In this case, the action would be resorted to.
Heirs of Adolfo were indisputably unable to
produce any document in support of their The above-described car found its way
claim that the contract between Adolfo and again into the United Car Exchange which
Bangis was an antichresis, hence, the CA sold the same in cash for P4,000 to one O.
properly held that no such relationship N. Borlough. Accordingly, he registered it
existed between the parties. on the following day with the Motor
Vehicles Office.
The bare testimony of one of the Heirs of
Bangis, Rodolfo Bangis, that the subject 0. N. Borlough took possession of the
document was only handed to him by his vehicle from the time he purchased it, On
father, Aniceto, with the information that July 10, 1952, Fortune Enterprises, Inc.
the original thereof “could not be found” brought action against Salvador Aguinaldo
was insufficient to justify its to recover the balance of the purchase
admissibility. The identification made by price.
Notary Public Atty. Valentin Murillo that he
notarized such document cannot be given Borlough filed a third-party complaint,
credence as his conclusion was not claiming the vehicle. Thereupon, Fortune
verified against his own notarial records. Enterprises, Inc. amended its complaint,
including Borlough as a defendant and
In sum, the Heirs of Bangis failed to alleging that he was in connivance with
establish the existence and due execution Salvador Aguinaldo and was unlawfully
of the subject deed on which their claim of hiding and concealing the vehicle in order
ownership was founded. to evade seizure by judicial process.
Borlough answered alleging that he was in
legal possession thereof, having
purchased it in good faith and for the full
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 212

price of P4,000, and that he had a registration and recording of mortgage are
certificate of registration of the vehicle not incompatible with a mortgage under the
issued by the Motor Vehicles Office, and Chattel Mortgage Law. The section merely
he prayed for the dismissal of the requires report to the Motor Vehicles Office
complaint, the return of the vehicle and for of a mortgage; it does not state that the
damages against the plaintiff. registration of the mortgage under the
Chattel Mortgage Law is to be dispensed
ISSUE: Whether or not the mortgage binds with. We have, therefore, an additional
Borlough who is a purchaser in good faith. requirements in the Revised Motor
NO. Vehicles Law, aside from the registration of
a chattel mortgage, which is to report a
HELD: Two recording laws are here being mortgage to the Motor Vehicles Office, if
invoked, one by each contending party — the subject of the mortgage is a motor
the Chattel Mortgage Law (Act No. 1508), vehicle; the report merely supplements or
by the mortgagor and the Revised Motor complements the registration.
Vehicles Law (Act No. 3992), by a
purchaser in possession. The recording provisions of the Revised
The Revised Motor Vehicles Law is a Motor Vehicles Law, therefore, are merely
special legislation enacted to "amend and complementary to those of the Chattel
compile the laws relative to motor Mortgage Law. A mortgage in order to
vehicles," whereas the Chattel Mortgage affect third persons should not only be
Law is a general law covering mortgages registered in the Chattel Mortgage
of all kinds of personal property. The Registry, but the same should also be
former is the latest attempt to assemble recorded in the motor Vehicles Office as
and compile the motor vehicle laws of the required by section 5 (e) of the Revised
Philippines, all the earlier laws on the Motor Vehicles Law [Whenever any owner
subject having been found to be very hypothecates or mortgage any motor
deficient in form as well as in substance; it vehicle as surety for a debt or other
had been designed primarily to control the obligation, the creditor or person in whose
registration and operation of motor favor the mortgage is made shall, within
vehicles. seven days, notify the Chief of the Motor
Vehicles Office in writing]. And the failure
Counsel for petitioner contends that the of the respondent mortgage to report the
passage of the Revised Motor Vehicles mortgage executed in its favor had the
Law had the effect of repealing the Chattel effect of making said mortgage ineffective
Mortgage Law, as regards registration of against Borlough, who had his purchase
motor vehicles and of the recording of registered in the said Motor Vehicles
transaction affecting the same. We do not Office.
believe that it could have been the
intention of the legislature to bring about One holding a lien on a motor vehicle, in so
such a repeal. In the first place, the far as he can reasonably do so, must
provisions of the Revised Motor Vehicles protect himself and others thereafter
Law on registration are not inconsistent dealing in good faith by complying and
with does of the Chattel Mortgage Law. In requiring compliance with the provisions of
the second place, implied repeals are not the laws concerning certificates of title to
favored; implied repeals are permitted only motor vehicles, such as statutes providing
in cases of clear and positive for the notation of liens or claims against
inconsistency. The first paragraph of the motor vehicle certificate of title or
section 5 indicates that the provisions of manufacturer's certificate, or for the
the Revised Motor Vehicles Law regarding issuance to the mortgagee of a new
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 213

certificate of ownership. premises the subject of the said

lease;
The holder of a lien who is derelict in his (2) The building, property of the
duty to comply and require compliance with mortgagor, situated on the aforesaid
the statutory provisions acts at his own leased premises.
peril, and must suffer the consequence of
his own negligence; and accordingly, he is After said document had been duly
not entitled to the lien as against a acknowledge and delivered, the petitioner
subsequent innocent purchaser filed as caused the same to be presented to the
provided by other chattel mortgage respondent, Joaquin Jaramillo, as register
statutes. of deeds of the City of Manila, for the
purpose of having the same recorded in
The above authorities leave no room for the book of record of chattel mortgages.
doubt that purchaser O. N. Borlough's right Upon examination of the instrument, the
to the vehicle should be upheld as against respondent was of the opinion that it was
the previous and prior mortgage Fortune not a chattel mortgage, for the reason that
Enterprises, Inc., which failed to record its the interest therein mortgaged did not
lien in accordance with the Revised Motor appear to be personal property, within the
Vehicles Law. meaning of the Chattel Mortgage Law, and
registration was refused on this ground
only.
STANDARD OIL COMPANY vs.
JARAMILLO ISSUE: Whether or not the RoD may
refuse registration of the mortgage. NO
FACTS: Gervasia de la Rosa, Vda. de
Vera, was the lessee of a parcel of land HELD: The duties of a register of
situated in the City of Manila and owner of deeds in respect to the registration of
the house of strong materials built thereon, chattel mortgage are of a purely ministerial
upon which date she executed a document character; and no provision of law can be
in the form of a chattel mortgage, cited which confers upon him any judicial
purporting to convey to the petitioner by or quasi-judicial power to determine the
way of mortgage both the leasehold nature of any document of which
interest in said lot and the building which registration is sought as a chattel
stands thereon. mortgage.

The clauses in said document describing His duties in respect to such instruments
the property intended to be thus mortgage are ministerial only. The efficacy of the act
are expressed in the following words: of recording a chattel mortgage consists in
Now, therefore, the mortgagor the fact that it operates as constructive
hereby conveys and transfer to the notice of the existence of the contract, and
mortgage, by way of mortgage, the the legal effects of the contract must be
following described personal discovered in the instrument itself in
property, situated in the City of relation with the fact of notice. Registration
Manila, and now in possession of adds nothing to the instrument, considered
the mortgagor, to wit: as a source of title, and affects nobody's
(1) All of the right, title, and interest rights except as a specifies of notice.
of the mortgagor in and to the
contract of lease hereinabove Articles 334 and 335 of the Civil Code
referred to, and in and to the supply no absolute criterion for
discriminating between real property and
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 214

personal property for purpose of the issued as a result of a civil case instituted
application of the Chattel Mortgage Law. by Hospital de San Juan de Dios against
Those articles state rules which, Josefina Eleazar; whereupon the following
considered as a general doctrine, are law properties of Josefina Eleazar were levied
in this jurisdiction; but it must not be upon:
forgotten that under given conditions 8 Tables with 4 (upholstered) chairs
property may have character different from each.
that imputed to it in said articles. It is 1 Table with 4 (wooden) chairs.
undeniable that the parties to a contract 1 Table (large) with 5 chairs.
may by agreement treat as personal 1 Radio-phono (Zenith, 8 tubes).
property that which by nature would be real 2 Showcases (big, with mirrors).
property; and it is a familiar phenomenon 1 Rattan sala set with 4 chairs, 1 table
to see things classed as real property for and 3 sidetables .
purposes of taxation which on general 1 Wooden drawer.
principle might be considered personal 1 Tocador (brown with mirror).
property. Other situations are constantly 1 Aparador .
arising, and from time to time are 2 Beds (single type).
presented to this court, in which the proper 1 Freezer (deep freeze).
classification of one thing or another as 1 Gas range (magic chef, with 4
real or personal property may be said to be burners).
doubtful. 1 Freezer (G.E.).

On January 31, 1957, the plaintiff-appellant

SALDANA vs. PHILIPPINE GUARANTY Saldana filed a third-party claim asserting
that the above-described properties levied
FACTS: in order to secure an are subject to his chattel mortgage of May
indebtedness of P15,000.00, Josefina Vda. 8, 1953. In virtue thereof, the sheriff
de Aleazar executed in favor of the released only some of the property
plaintiff-appellant Buenaventura Saldana a originally included in the levy of January
chattel mortgage covering properties 28, 1957, to wit:
described as follows: 1 Radio, Zenith, cabinet type.
A building of strong materials, used for 8 Tables, stateside.
restaurant business, located in front of 32 Chromiun chairs, stateside.
the San Juan de Dios Hospital at Dewey 1 G.E. Deep freezer.
Boulevard, Pasay City, and the following
personal properties therein contained: Appellants claims that the phrase in the
1 Radio, Zenith, cabinet type. chattel mortgage contract — "and all other
1 Cooler. furnitures, fixtures and equipment found in
1 Electric range, stateside, 4 burners. the said premises", validly and sufficiently
1 Frigidaire, 8 cubic feet. covered within its terms the personal
1 G.E. Deepfreezer. properties disposed of in the auction sale,
8 Tables, stateside.
32 Chromium chairs, stateside. ISSUE: Whether or not the properties
1 Sala set upholstered, 6 pieces. levied are covered by the mortgage. YES.
1 Bedroom set, 6 pieces.
And all other furniture's, fixtures or HELD: Section 7 of Act No. 1508,
equipment found in the said premises. commonly and better known as the Chattel
Mortgage Law, does not demand a minute
Subsequent to the execution of the and specific description of every chattel
mortgage, a writ of execution was duly mortgaged in the deal of mortgage but only
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 215

requires that the description of the Company’s train. They sustained

properties be such "as to enable the lifethreatening wounds, fractures and other
parties in the mortgage, or any other injuries, which left them permanently
person, after reasonable inquiry and disfigured. The Supreme Court ruled in
investigation to identify the same". Gauged favor of Aleko Lilius, et al, awarding them
by this standard, general description have in the amount of P33,525.03 as damages,
been held by this Court. including interest and costs.

the description in the mortgage must point In G.R. No. 42551, herein case, Laura
out its subject matter so that such person Lindley Shuman, the Manila Wine
may identify the chattels observed, but it is Merchants, Ltd., the Bank of the Philippine
not essential that the description be so Islands and the Manila Motor Co.,
specific that the property may be identified Inc(creditors of the spouses Lilius)., have
by it alone, if such description or means of appealed from an order of the Court of
identification which, if pursued will disclose First Instance of Manila fixing the degree of
the property conveyed. preference of the claimants and distributing
the proceeds of the judgment of this court
The specifications in the chattel mortgage in the case of Lilius vs. Manila Railroad Co.
contract in the instant case, we believe, in
substantial compliance with the APPEAL OF LAURA LINDLEY SHUMAN
"reasonable description rule" fixed by the :The lower court erred in holding that Dr.
chattel Mortgage Act. We may notice in the W.H. Waterous and Dr. M. Marfori had a
agreement, moreover, that the phrase in claim against the plaintiff, Aleko E. Lilius
question is found after an enumeration of superior to the claim of the appellant,
other specific articles. It can thus be Laura Lindley Shuman, against him."
reasonably inferred therefrom that the
"furnitures, fixture and equipment" referred One of the contentions of this appellant
to are properties of like nature, similarly under this assignment of error is that her
situated or similarly used in the restaurant claim, having been made the basis of the
of the mortgagor located in front of the San plaintiffs' action and of the award for
Juan de Dos Hospital at Dewey Boulevard, damages, as shown in the original decision
Pasay City, which articles can be definitely herein, should constitute, and does
pointed out or ascertain by simple inquiry constitute a superior lien against the funds
at or about the premises. A contrary view awarded said plaintiffs, to those of any
would unduly impose a more rigid condition other claimants, except the two doctors,
than what the law prescribes, which is that the hospital and the other nurse, and that
the description be only such as to enable as to the claims of the two doctors, the
identification after a reasonable inquiry and hospital and the other nurse the claim of
investigation. this appellant has equal preference with
their claims.

ALEKO E. LILIUS vs. MANILA APPEAL OF THE MANILA WINE

RAILROAD COMPANY MERCHANTS, LTD., AND THE BANK OF
(G.R. No. 42551, September 4, 1935) THE PHILIPPINE ISLANDS. :The
appellants, the Manila Wine Merchants.
FACTS: In G.R. No. L-39587, Aleko E. Ltd., and the Bank of the Philippine islands
Lilius, and his wife Sonja Maria Lilius, and also contend that the sum separately
Brita Marianne Lilius, met an accident, awarded Sonja Maria Lilius is conjugal
wherein their Studebaker car, collided with property and therefore liable for the
locomotive No. 713, Manila Railroad payment of the private debts of her
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 216

husband, Aleko E. Lilius, contracted during not have to be acknowledged before a

her marriage. notary public. As against creditors and
APPEAL OF THE THE MANILA MOTOR subsequent encumbrances, the law
CO., INC.: For its part, Manila Motor Co., does require an affidavit of good faith
Inc. claims that the lower court erred in not appended to the mortgage and recorded
holding their claims, evidenced by public with it. A chattel mortgage may, however,
instruments and final judgment, as be valid as between the parties without
preferred over all other claims against such an affidavit of good faith. In 11
Aleko E. Lilius. In support of its claim of Corpus Juris, 482, the rule is expressly
preference against the fund of Aleko E. stated that as between the parties and as
Lilius was a certified copy of its judgment to third persons who have no rights against
against him in civil case No. 41159 of the the mortgagor, no affidavit of good faith is
Court of First Instance of Manila, together necessary. It will thus be seen that under
with a certified copy of the writ of execution the law, a valid mortgage may exist
and the garnishment issued by virtue of between the parties without its being
said judgment. The alleged public evidenced by a public document.
document evidencing its claim was not
offered in evidence but, in their brief in this This court would not be justified, merely
court, counsel for the Motor Co., Inc., from the reference by the lower court in
merely assume that its credit is evidenced that case to a mortgage, in assuming that
by a public document dated may 10, 1931, its date appears in a public document. if
because the court, in its judgment in said the Manila motor Co., Inc., desired to rely
civil case No. 41159, refers to a mortgage upon a public document in the form of a
appearing in the evidence as Exhibit A, as mortgagor as establishing its preference in
the basis of its judgment, without this case, it should have offered that
mentioning the date of the execution of the document in evidence, so that the court
exhibit. might satisfy itself as to its nature and
unquestionably fix the date of its execution.
ISSUE: WON the reference to a mortgage There is nothing either in the judgment
appearing in a public document in a relied upon or in the evidence to show the
judgment, entitled to preference under date of said mortgage. The burden was
article 1924 of the Civil Code. NO upon the claimant to prove that it actually
had a public Code.
HELD: This reference in said judgment to
a mortgage is not competent or satisfactory It is essential that the nature and the date
evidence as against third persons upon of the document be established by
which to base a finding that the Manila competent evidence before the court can
Motor Company's credit evidenced by a allow a preference as against the other
public document within the meaning of parties to this proceeding. Inasmuch as the
article 1924 of the Civil Code. If the Manila claimant failed to establish its preference,
motor Co., Inc., desired to rely upon a based on a public document, the lower
public document in the form of a mortgage court properly held that its claim against
as establishing its preference in this case, the said Aleko E. Lilius was based on the
it should have offered that document in final judgment in civil case No. 41159 of
evidence, so that the court might satisfy the Court of First Instance of Manila of May
itself as to its nature and unquestionably fix 3, 1932. The court, therefore, committed
the date of its execution. no error in holding that the claim of the
Manila Motor Co., Inc., was inferior in
Under section 5 of Act No. 1507 as preference to those of the appellees in this
amended by Act No. 2496, a chattel does case.
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 217

Register over the subject vessel on 27 May

1987. Ong also succeeded in having the
CEBU INTERNATIONAL FINANCE name of the vessel changed to LCT “Orient
CORPORATION, petitioner,vs. COURT Hope.”
OF APPEALS, ROBERTO ONG AND
ANGTAY, respondents On 29 October 1987, Ong acquired a loan
(268 SCRA 178, G.R. No. 107554, from petitioner in the amount of
February 13, 1997) P496,008.00 to be paid in instalments as
evidenced by a promissory note of even
FACTS: On 4 March 1987, Jacinto Dy date.
executed a Special Power of Attorney in
favor of private respondent Ang Tay, As security for the loan, Ong executed a
authorizing the latter to sell the cargo chattel mortgage over the subject
vessel Owned by Dy and christened LCT vessel, which mortgage was registered
“Asiatic.” with the Philippine Coast Guard and
annotated on the Certificate of Ownership.
On 28 April 1987, through a Deed of
Absolute Sale, Ang Tay sold the subject In paragraph 3 of the Deed of Chattel
vessel to private respondent Robert Ong Mortgage, it was stated that:
(Ong) for P900,000.00. Ong paid the 3. The said sum of 496,008.00 represents
purchase price by issuing three (3) checks the balance due on of MORTGAGOR(S)
in the following amounts: P150,000.000, from the MORTGAGEE and is payable in
P600,000.00 and P150,000.00. However, the office of the MORTGAGEE at Cebu
since the payment was not made in cash, it City or in the office of the latter’s assignee,
was specifically stipulated in the deed of in case the rights and interests of the
sale that the “LCT Asiatic shall not be MORTGAGEE in the foregoing mortgage
registered or transferred to Robert Ong are assigned to a third person, under the
until complete payment.” terms of said promissory note, as follows:
(a)(P20,667.00 on or before…...and (b) the
Thereafter, Ong obtained possession of balance in Twenty Four (24) equal
the subject vessel so he could begin successive monthly instalments on the . . .
deriving economic benefits therefrom. He, . . . day of each and every succeeding
likewise, obtained copies of the month thereafter until the amount is fully
unnotarized deed of sale allegedly to be paid. The interest on the foregoing
shown to the banks to enable him to instalments shall be paid on the same date
acquire a loan to replenish his (Ong’s) that the instalments become payable and
capital. The aforequoted condition, additional interest at the rate of fourteen
however, which was handwritten on the (14%) per cent per annum will be charged
original deed of sale, does not appear on on all amounts, principal and interest, not
Ong’s copies. paid on due date.

Contrary to the aforementioned Ong defaulted in the payment of the

agreements and without the knowledge of monthly instalments. Consequently, on 11
Ang Tay, Ong had his copies of the deed May 1988, petitioner sent him a letter
of sale (on which the aforementioned demanding delivery of the mortgaged
prohibition does not appear) notarized on vessel for foreclosure or in the alternative
18 May 1987. Ong presented the notarized to pay the balance of P437,802.00
deed to the Philippine Coast Guard which pursuant to paragraph 11 of the deed of
subsequently issued him a Certificate of chattel mortgage.
Ownership and a Certificate of Philippine
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 218

Meanwhile, the two checks (worth and not owner-seller.

P600,000.00 and P150,000.00) paid by
Ong to Ang Tay for the purchase of the It is paragraph 2 of the mortgage contract
subject vessel bounced. Ang Tay’s search which accurately expresses the true nature
for the elusive Ong and all attempts to of the transaction between petitioner and
confer with him proved to be futile. Ong--that it is a simple loan with chattel
mortgage. The amount petitioner loaned to
A subsequent investigation and inquiry with Ong does not represent the balance of any
the Office of the Coast Guard revealed that purchase price since the aforementioned
the subject vessel was already in the name documents state that Ong is already the
of Ong, in violation of the express absolute owner of the subject vessel.
undertaking contained in the original deed
of sale. Obviously, therefore, paragraph 3 of the
said contract was filled up by mistake.
As a result thereof, on 13 January 1988, Considering that petitioner used a form
Ang Tay and Jacinto Dy filed a civil case contract, it is not improbable that such an
for rescission and replevin with damages oversight may have been committed--
against Ong and his wife. negligently but unintentionally and without
malice.
ISSUES:
1. WON the chattel mortgage contract Accordingly, the chattel mortgage contract
between petitioner and Ong is valid. between
2. WON petitioner is a mortgagee in good petitioner and Ong is valid and subsisting.
faith whose lien over the mortgaged vessel
should be respected. 2. As to the good faith of Cebu
International as mortgagee whose lien
HELD: over the mortgaged vessel should be
1. As to validity of the mortgage respected:
contract between Cebu International
and Ong: The prevailing jurisprudence is that “a
mortgagee has a right to rely in good faith
The key lies in the certificate of ownership on the certificate of title of the mortgagor to
issued in Ong's name (which, along with the property given as security and in the
the deed of sale, he submitted to petitioner absence of any sign that might arouse
as proof that he is the owner of the ship he suspicion, has no obligation to undertake
gave as security for his loan). It was plainly further investigation. Hence, even if the
stated therein that the ship LCT "Orient mortgagor is not the rightful owner of or
Hope" ex "Asiatic," by means of a Deed of does not have a valid title to the mortgaged
Absolute Sale dated 28 April 1987, was property, the mortgagee or transferee in
"sold and transferred by Jacinto Dy to good faith is nonetheless entitled to
Robert Ong." protection.” Although this rule generally
pertains to real property, particularly
There can be no dispute then that it was registered land, it may also be applied
Dy who was the seller and Ong the buyer by analogy to personal property, in this
of the subject vessel. Coupled with the fact case specifically, since ship owners are,
that there is no evidence euphony likewise, required by law to register
transaction between Jacinto Dy or Ang Tay their vessels with the Philippine Coast
and petitioner, it follows, therefore, that Guard.
petitioner's role in the picture is properly
and logically that of a creditor-mortgagee ANG TAY’S CONTENTIONS:
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 219

That the above rule is not applicable in the investigation since it had the necessary
case at bar in the face of the numerous documents to prove Ong's ownership. In
"badges of bad faith" on the part of addition petitioner even took pains to
petitioner. inspect the subject vessel which was in
Ong's possession.
Ang Tay's contentions are unmeritorious.
As previously discussed, paragraph 3 of Although Ang Tay may also be an innocent
the chattel mortgage contract was person, a similar victim of Ong's fraudulent
erroneously but unintentionally filled up. machinations, it was his act of confidence
The failure of petitioner to exercise due which led to the present fiasco. Ang Tay
care in filling up the necessary provisions readily agreed to execute a deed of
in the chattel mortgage contract does not, absolute sale in Ong's favor even though
however, amount to bad faith. It was a Ong had yet to make a complete payment
mere oversight and not a deliberate and of the purchase price. It is true that in the
malicious act. copy of the said deed submitted by Ang
Tay there was an undertaking that
ISSUE ON AFFIDAVIT OF GOOD FAITH ownership will not vest in Ong until full
That petitioner's bad faith is further payment.
demonstrated by its failure to comply with
the special affidavit of good faith as However, Ong was able to obtain several
required in Sec. 4 of P.D. No. 1521. copies of the deed with Ang Tay's
signature and had these notarized without
The special affidavit of good faith, on the aforementioned undertaking as
the other hand, is required only for the evidenced by the copy of the deed of sale
purpose of transforming an already presented by petitioner. The Deed of
valid mortgage into a "preferred Absolute Sale consisted of two (2) pages.
mortgage." Thus, the abovementioned The signatures of Ang Tay and Ong
affidavit is not necessary for the validity appeared only on the first page of the
of the chattel mortgage itself but only to deed. The Second page contained the
give it a preferred status. continuation of the acknowledgment and
*** the undertaking. Ong could have easily
Petitioner had every right to rely on the reproduced the second page without the
Certificate of Ownership and Certificate of undertaking since this page was not signed
Philippine Register duly issued by the by the contracting parties. To complete the
Philippine Coast Guard in Ong's name. deception, Ang Tay unwittingly allowed
Ong to have possession of the ship.
Petitioner had no reason to doubt Ong's Hence, in consonance with our ruling that:
ownership over the subject vessel. The ... as between two innocent persons, the
documents presented by Ong, upon mortgagee and the owner of the
petitioner's insistence before accepting the mortgaged property, one of whom must
said vessel as loan security, were all in suffer the consequence of a breach of
order and properly issued by the duly trust, the one who made it possible by his
constituted authorities. There was no act of confidence must bear the loss, it is
circumstance that might have aroused Ang Tay and his principal Jacinto Dy who
petitioner's suspicion or alerted it to any must, unfortunately, suffer the
infirmity committed by Ong. It had no consequences thereof. They are
participation in and was not privy to the considered bound by the chattel mortgage
sale transaction between Jacinto Dy on the subject vessel.
(through Ang Tay) and Ong. Petitioner,
thus, had no obligation to undertake further
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 220

PAMECA WOOD TREATMENT PLANT, P322,350.00 at which respondent bank bid

INC., HERMINIO G. TEVES, VICTORIA V. for and purchased the mortgaged
TEVES and HIRAM DIDAY R. PULIDO vs properties was unconscionable and
HON. COURT OF APPEALS and inequitable considering that, at the time of
DEVELOPMENT BANK OF THE the public sale, the mortgaged properties
PHILIPPINES had a total value of more than
(310 SCRA 281, G.R. No. 106435, July P2,000,000.00.
14, 1999)
According to petitioners, this is evident
FACTS: On April 17, 1980, petitioner from an inventory which valued the
PAMECA obtained 2Mworth loan from properties at P2,518,621.00, in accordance
respondent Bank. By virtue of this loan, with the terms of the chattel mortgage
petitioner PAMECA, through its President, contract between the parties that required
petitioner Teves, executed a promissory that the inventories "be maintained at a
note for the said amount, promising to pay level no less than P2 million".
the loan by installment. As security for the
said loan, a chattel mortgage was also Petitioners argue that respondent bank's
executed over PAMECA's properties in act of bidding and purchasing the
Dumaguete City, consisting of inventories, mortgaged properties for P322,350.00 or
furniture and equipment, to cover the only about 1/6 of their actual value in a
whole value of the loan. public sale in which it was the sole bidder
was fraudulent, unconscionable and
On January 18, 1984, and upon petitioner inequitable, and constitutes sufficient
PAMECA's failure to pay, respondent bank ground for the annulment of the auction
extrajudicially foreclosed the chattel sale.
mortgage, and, as sole bidder in the public
auction, purchased the foreclosed ISSUE: WON the auction sale is null and
properties. void on grounds of fraud and inadequacy
of price. – NO
On June 29, 1984, respondent bank filed a
complaint for the collection of the balance HELD: There is no merit in petitioners'
against petitioner PAMECA and private submission that the public auction sale is
petitioners herein, as solidary debtors with void on grounds of fraud and inadequacy
PAMECA under the promissory note. of price.

RTC ruled in favor of respondent Bank. CA Petitioners never assailed the validity of
affirmed RTC’s decision. the sale in the RTC, and only in the Court
of Appeals did they attempt to prove
Petitioners now claim that respondent inadequacy of price.
appellate court gravely erred in not holding
that the public auction sale of petitioner Having nonetheless examined the
PAMECA's chattels were tainted with inventory and chattel mortgage document
fraud, as the chattels of the said petitioner as part of the records, We are not
were bought by private respondent as sole convinced that they effectively prove that
bidder in only 1/6 of the market value of the the mortgaged properties had a market
property, hence unconscionable and value of at least P2,000,000.00 on January
inequitable (P322,350.00 from 2M), and 18, 1984, the date of the foreclosure sale.
therefore null and void.
At best, the chattel mortgage contract only
Petitioners contend that the amount of indicates the obligation of the mortgagor to
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 221

maintain the inventory at a value of at least of Tanuya’s promissory note and his
P2,000,000.00, but does not evidence having defaulted in the payment thereof,
compliance therewith. Cabral spouses filed their complaint
against Tanuya and the Evangelista
Furthermore, the mere fact that respondent spouses, alleging that the Evangelista
bank was the sole bidder for the spouses had refused their demands to pay
mortgaged properties in the public sale the amount due to Tanuya’s promissory
does not warrant the conclusion that the note or to exercises their right of
transaction was attended with fraud. Fraud redemption and praying for judgment,
is a serious allegation that requires full and ordering Tanuya and Evangelista spouses,
convincing evidence, and may not be jointly and solidarily, to pay them the
inferred from the lone circumstance that it amounts stipulated on the note, and in
was only respondent bank that bid in the case of the failure to make such payment,
sale of the foreclosed properties. to order them to deliver to the Sheriff the
mortgaged chattels for sale at public
NOTE: The mere fact that the mortgagee auction to satisfy their mortgage credit.
was the sole bidder for the mortgaged
property in the public sale does not warrant The trial court rendered a decision in favor
the conclusion that the transaction was of the Cabral spouses. Upon appeal, the
attended with fraud. CA ordered Tanuya and the Evengelista
spouses to pay the Cabral spouses jointly
and severally the amount plus interest as
CABRAL vs EVANGELISTA provided in the promissory note.

FACTS: On 12 Dec 1959, George had Evangelista spouses now claim that their
executed in favor of Cabral Spouses a right over the mortgaged chattels as
chattel mortgage covering a Morrison purchasers at the public sale in execution
English piano and a Frigidaire GM Electric of their judgment against their debtor,
Stove as security for payment to the latter defendant Tunaya, should not be held
of a promissory note in the sum of P1k subordinate to the mortgage lien of
executed on the same date in the Chattel plaintiffs-appellees as mortgagees, by
Mortgage Register of Rizal on 14 Dec virtue of prescription and laches on the part
1959. Meanwhile, the Evangelista spouses of said mortgagees as well as of their
obtained a final money judgment against having purchased the chattels at a public
Tanuya in a Civil Case. They caused the sheriffs sale.
levy in execution on Tanuya’s personal
properties, including the piano and the ISSUES:
stove mortgaged to Cabral spouses. (1) Has the right of the Cabral spouses to
recover the properties prescribed?
The said mortgage chattels, together with NO.
other personal properties of the judgment (2) Did the certificate of sale give the
debtor, were sold at public auction to Evangelista spouses superior right
Evangelista spouses as the highest against the Cabral spouses? NO.
bidders. The judgment credit of (3) Are the Evangelista spouses jointly
Evangelista spouses, as creditors in the and severally liable with Tunaya to
said Civil Case, was considered paid up the Cabral spouses? YES
and the Sheriff issued the corresponding
certificate of sale in their favor. HELD:
(1) This thirty-day period is the
Subsequently, 8 months after the maturity minimum period after violation of the
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 222

mortgage condition for the mortgage

creditor to cause the sale at public auction This is all the more true in the present
of the mortgaged chattels, with at least ten case, because, when the plaintiff
days notice to the mortgagor and posting purchased the automobile in question on
of public notice of the time, place and August 22, 1933, he knew, or at least, it is
purpose of such sale, and is a period of presumed that he knew, by the mere fact
grace for the mortgagor, who has no right that the instrument of mortgage, Exhibit 2,
of redemption after the sale is held, to was registered in the office of the register
discharge the mortgage obligation. 5 of deeds of Manila, that said automobile
was subject to a mortgage lien. In
The prescription period for recovery of purchasing it, with full knowledge that such
movables for foreclosure purposes such as circumstances existed, it should be
in the present case is eight years as presumed that he did so, very much willing
provided in Article 1140 of the Civil to respect the lien existing thereon, since
Code, 6 and here plaintiffs had timely filed he should not have expected that with the
their action within 8 months from the purchase, he would acquire a better right
mortgage debtor's default. than that which the vendor then had."

By the same token, neither could laches In another case between two mortgagees,
properly be imputed against plaintiffs, who we held that "As between the first and
filed their action promptly after they had second mortgagees, therefore, the second
been advised by their debtor, defendant mortgagee has at most only he right to
Tunaya, of the public auction sale on June redeem, and even when the second
24, 1960 of the chattels at the instance of mortgagee goes through the formality of an
defendants-appellants as his judgment extrajudicial foreclosure, the purchaser
creditors. acquires no more than the right of
redemption from the first mortgagee." 9
(2) Defendants-appellants' purchase of
the mortgaged chattels at the public The superiority of the mortgagee's lien
sheriff's sale and the delivery of the over that of a subsequent judgment
chattels to them with a certificate of sale creditor is now expressly provided in Rule
did not give them a superior right to the 39, section 16 of the Revised Rules of
chattels as against plaintiffs-mortgagees. Court, which states with regard to the
effect of levy on execution as to third
Rule 39, section 22 of the old Rules of persons that "The levy on execution shall
Court (now Rule 39, section 25 of the create a lien in favor of the judgment
Revised Rules), cited by appellants creditor over the right, title and interest of
precisely provides that "the sale conveys to the judgment debtor in such property at the
the purchaser all the right which the debtor time of the levy, subject to liens or
had in such property on the day the incumbrances then existing."
execution or attachment was levied."
(3) Article 559 of the Civil Code
It has long been settled by this Court that providing that "If the possessor of a
"The right of those who so acquire said movable lost or of which the owner has
properties should not and cannot be been unlawfully deprived, has acquired it in
superior to that of the creditor who has in good faith at a public sale, the owner
his favor an instrument of mortgage cannot obtain its return without reimbursing
executed with the formalities of the law, in the price paid therefor..." cited by
good faith, and without the least indication appellants has no application in the
of fraud. present case, for as pointed above, they
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 223

acquired the chattels subject to the existing MYT failed to pay its loan so On December
mortgage lien of plaintiffs thereon. 12 1974, Sheriff then levied upon 20
Appellants state in their brief that they paid taxicabs in favor of Tropical, 8 of which are
for the chattels the amount of security for the chattel mortgage. Northern
P2,373.00. 10 Motors filed an intervention on December
18, 1974; however, the levied taxicabs
As pointed out by appellees, the record were sold the same day at 2pm although
shows that defendants-appellants had agreement shows that it should have
disposed of the mortgaged chattels "to happened at 4pm. Indemnity bond was
other persons at a discounted rate" 11 and posted by TROPICAL, but the bond was
had, therefore, appropriated the same as if cancelled after the sale without notice to
the chattels were of their absolute Northern Motors.
ownership, in complete derogation of
plaintiffs' superior mortgage lien and in A second levy was made upon 35
disregard of plaintiffs' demands to them taxicabs, 7 of which are mortgaged to
prior to the filing of their complaint on Northern Motors. The taxies were levied
October 11, 1960, to pay or exercise their and sold at an auction sale. The auction
right of redemption. sale proceeded and the purchasers were
of unknown addresses, hence the 8
Appellants by their act of disposition of the taxicabs cannot be recovered. The
mortgaged chattels, whose value were proceeds of the auction were contested by
admittedly more than adequate to secure Northern Motors. Moreover the sheriff
Tunaya's mortgage obligation, have thus deducted the expenses of the execution
practically nullified plaintiffs' superior right sale from the proceeds.***
to foreclose the mortgage and collect the
amount due them. Considering the long Honesto Ong and City Sheriff of Manila
period that has elapsed since October 11, filed a motion for the reconsideration of this
1960 when plaintiffs tried to enforce their Court's resolution which held that the lien
claim and defendants-appellants' adamant of Northern Motors, Inc., as chattel
resistance thereof and unjust refusal to mortgagee, over certain taxicabs is
recognize plaintiffs' clearly superior right to superior to the levy made on the said cabs
the chattels, which appellants admittedly by Honesto Ong, the assignee of the
disposed of without lawful right to other unsecured judgment creditor of the chattel
unknown persons obviously to defeat mortgagor, MYT.
plaintiffs' right over the same, we are
satisfied that justice and equity justify the On the other hand, Northern Motors, Inc. in
lower court's judgment holding the its motion for the partial reconsideration
defendants-appellants solidarily liable for prayed for the reversal of the lower court's
the amount due plaintiffs-appellees orders cancelling the bond filed by
Filwriters Guaranty Assurance Corporation.
It further prayed that the sheriff should be
NORTHERN MOTORS vs COQUIA required to deliver to it the proceeds of the
execution sale of the mortgaged taxicabs
FACTS: ***Manila Yellow Taxicab, without deducting the expenses of
executed a chattel mortgage over several execution.
taxicabs in favor of Northern Motors.
TROPICAL is a judgment creditor of Yellow ISSUES:
Taxicab which assigned the credit to 1. WON the expenses for the execution
ONG. sale should be deducted from the
proceeds thereof. NO
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 224

2. WON the purchaser has a better right for in section 17, Rule 39 of the Rules of
than the creditor/mortgagee. NO Court is not correct. Such action was filed
on April 14, 1975 in the Court of First
HELD: Instance of Rizal, Pasig Branch XIII, in Civil
The motion for reconsideration of Ong and Case No. 21065 entitled "Northern Motors,
the sheriff should be denied. Those cabs Inc. vs. Filwriters Guaranty Assurance
cannot be sold at an execution sale Corporation, et al.". However, instead of
because the levy thereon was wrongful. Honesto Ong, his assignor, Tropical
Commercial Corporation, was impleaded
Ong had no right to levy upon the as a defendant therein. That might explain
mortgaged taxicabs and that he could have his unawareness of the pendency of such
levied only upon the mortgagor's equity of action.
redemption. The essence of the chattel
mortgage is that the mortgaged chattels Ong admits "that the mortgagee's right to
should answer for the mortgage credit and the mortgaged property is superior to that
not for the judgment credit of the of the judgment creditor". But he contends
mortgagor's unsecured creditor. The that the rights of the purchasers of the cars
mortgagee is not obligated to file an at the execution sale should be respected.
"independent action" for the enforcement He reasons out they were not parties to the
of his credit. To require him to do so would mortgage and that they acquired the cars
be a nullification of his lien and would prior to the mortgagee's assertion of its
defeat the purpose of the chattel mortgage rights thereto.
which is to give him preference over the
mortgaged chattels for the satisfaction of The third-party claim filed by Northern
his credit. (See art. 2087, Civil Code). Motors, Inc. should have alerted the
purchasers to the risk which they were
Intervenor Filinvest Credit Corporation, the taking when they took part in the auction
assignee of a portion of the chattel sale. Moreover, at an execution sale the
mortgage credit, realized that to vindicate buyers acquire only the right of the
its claim by independent action would be judgment debtor which in this case was a
illusory. Thus, it was constrained to enter mere right or equity of redemption. The
into a compromise with Honesto Ong by sale did not extinguish the pre-existing
agreeing to pay him P145,000. That mortgage lien.
amount was characterized by Northern
Motors, Inc. as the "ransom" for the As to Petitioners motion for partial
taxicabs levied upon by the sheriff at the reconsideration. — The lower court in its
behest of Honesto Ong. order of January 3, 1975 cancelled the
indemnity bonds for P480,000 filed by
Ong's theory that Manila Yellow Taxicab's Filwriters Guaranty Assurance Corporation
breach of the chattel mortgage should not for Tropical Commercial Co., Inc. The
affect him because he is not privy of such bonds were cancelled without notice to
contract is untenable. The registration of Northern Motors, Inc. as third-party
the chattel mortgage is an effective and claimant. Bond should be reinstated.
binding notice to him of its existence or a Purpose of surety-that the surety be
lien which, being recorded, follows the ordered to pay damages in the event that
chattel wherever it goes. the eight taxicabs could not be surrendered
to the mortgagee.
His contention that Northern Motors, Inc.,
was negligent because it did not sue the We already held that the execution was
sheriff within the 120-day period provided not justified and that Northern Motors,
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 225

Inc., as mortgagee, was entitled to the against private respondents in the

possession of the eight taxicabs. Those receivership proceedings with the SEC for
cabs should not have been levied upon the return of the shares.
and sold at public auction to satisfy the
judgment credit which was inferior to In 1998, SEC dismissed the petition, but
the chattel mortgage. Since the cabs granted it upon reconsideration. It held that
could no longer be recovered because Cordova was the owner of the CSPI shares
they had been transferred to persons by virtue of a confirmation sale (which was
whose addresses are unknown, the considered as a deed of assignment)
proceeds of the execution sale may be issued to him by Philfinance. But since the
regarded as a partial substitute for the shares had already been sold and
unrecoverable cabs . Northern Motors, proceeds commingled with other assets of
Inc. is entitled to the entire proceeds Philfinance, Cordova’s status was
without deduction of the expenses of converted into that of an ordinary creditor
execution. for the value of such shares.

POLICY: The mortgagee has a better right Therefore, it ordered private respondents
over the thing mortgaged than the to pay Cordova the amount of P5,062,500,
judgment creditors of the mortgagor. It is representing the 15% of monetary value of
improper to deduct the expenses of an his CSPI shares plus interest at the legal
illegal auction from the proceeds of thereof. rate from the time of their unauthorized
Proceeds of the must be delivered to the sale.
mortgagee in full.
ISSUES:
1. WON petitioner should be considered
CORDOVA vs REYES as preferred (and secured) creditor of
Philfinance NO
FACTS: Sometime in 1977 and 1978, 2. WON petitioner can recover the full
petitioner Jose Cordova bought from value of his CSPI shares or merely 15%
Philfinance certificates of stock of Celebrity thereof like all other ordinary creditors
Sports Plaza Inc (CSPI) and shares of of Philfinance only 15%
stock of other corporations. He was issued 3. WON petitioner is entitled to legal
a confirmation of sale. CSPI shares were interest NO
delivered to former Filmanbank and
Philtrust Banks (as custodian banks to hold HELD:
the shares in behalf of Cordova). To resolve the issues, we have to
determine if petitioner was indeed a
In 1981, Philfinance was placed under creditor of Philfinance. – SC held that
receivership by SEC. Thereafter, private petitioner had become an ORDINARY
respondents Reyes and Atty Wendell creditor of Philfinance. Certainly, petitioner
Coronel were appointed as liquidators. In had the right to demand the return of the
1991, without the knowledge and consent shares. He filed a complaint in the
of Cordova and without authority from liquidation proceedings. He sought instead
SEC, private respondents withdrew the to recover their monetary value.
CSPI shares from the custodian banks.
They subsequently sold the shares to The CSPI shares were specific or
Northeast Corporation and included the determinate movable properties. But after
proceeds thereof in the funds of they were sold, the money raised from the
Philfinance. Cordova learned about the sale became generic and were
sale only in 1996. He filed a complaint commingled with other assets of
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 226

Philfinance. Unlike shares of stock, money not specific or determinate. Considering

is generic. This means that once a certain that petitioner did not fall under any of the
amount is added to the cash balance, one provisions applicable to preferred creditors,
can no longer pinpoint the specific amount he was deemed an ordinary creditor under
included which then becomes part of a Article 2245:
whole mass of money.
Credits of any other kind or class, or
It thus became impossible to identify the by any other right or title not
exact proceeds of the sale of the CSPI comprised in the four preceding
shares. Petitioner’s only remedy was to file articles, shall enjoy no preference.
a claim on the whole mass of these assets, This being so, Article 2251 (2)
to which unfortunately all other creditors of states that:
Philfinance also had a claim.
Common credits referred to in Article 2245
Petitioner’s right of action against shall be paid pro rata regardless of dates.
Philfinance was a “claim” properly to be
litigated in the liquidation proceedings. He Like all the other ordinary creditors or
had a right to the payment of the value of claimants against Philfinance, he was
his shares. His demand was of a pecuniary entitled to a rate of recovery of only 15% of
nature since he was claiming the monetary his money claim.
value of his shares. It was in this sense
that he was a creditor of Philfinance. Was petitioner entitled to interest?

Petitioner argues that he was a preferred Petitioner is not entitled to legal interest of
creditor because private respondents 12% per annum because the amount
illegally withdrew his CSPI shares from the owing to him was not a loan or forbearance
custodian banks and sold them without his of money. Neither was he entitled to legal
knowledge and consent and without interest of 6% per annum under Art 2209 of
authority from the SEC. He quotes Article the Civil Code since it applies only when
2241 (2) of the Civil Code: there is a delay in the payment of a sum of
money.
With reference to specific movable
property of the debtor, the following
claims or liens shall be preferred: DE BARRETO vs VILLANUEVA

(2) Claims arising from FACTS: Rosario Cruzado sold all her right,
misappropriation, breach of trust, or title, and interest and that of her children in
malfeasance by public officials the house and lot herein involved to
committed in the performance of Villanueva for P19K. The purchaser paid
their duties, on the movables, P1,500 in advance, and executed a
money or securities obtained by promissory note for the balance. However,
them; the buyer could only pay P5,500 On
account of the note, for which reason the
He asserts that, as a preferred creditor, he vendor obtained judgment for the unpaid
was entitled to the entire monetary value of balance. In the meantime, the buyer
his shares. Petitioner’s argument is Villanueva was able to secure a clean
incorrect. Article 2241 refers only to certificate of title and mortgaged the
specific movable property. His claim was property to appellant Barretto to secure a
for the payment of money, which, as loan of P30K, said mortgage having been
already discussed, is generic property and duly recorded.
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 227

foreclosure sale.
Villanueva defaulted on the mortgage loan
in favor of Barretto. The latter foreclosed ISSUE: Appellant’s argument: inasmuch as
the mortgage in her favor, obtained the unpaid vendor's lien in this case was
judgment, and upon its becoming final not registered, it should not prejudice the
asked for execution. Cruzado filed a said appellants' registered rights over the
motion for recognition for her "vendor's property.
lien" invoking Articles 2242, 2243, and
2249 of the new Civil Code. After hearing, HELD: There is nothing to this argument.
the court below ordered the "lien" Note must be taken of the fact that article
annotated on the back of the title, with the 2242 of the new Civil Code enumerating
proviso that in case of sale under the the preferred claims, mortgages and liens
foreclosure decree the vendor's lien and on immovables, specifically requires that.
the mortgage credit of appellant Barretto Unlike the unpaid price of real property
should be paid pro rata from the proceeds. sold. mortgage credits, in order to be given
preference, should be recorded in the
Appellants insist that: Registry of Property. If the legislative intent
1. The vendor's lien, under Articles was to impose the same requirement in the
2242 and 2243 of the new, Civil Code of case of the vendor's lien, or the unpaid
the Philippines, can only become effective price of real property sold, the lawmakers
in the event of insolvency of the vendee, could have easily inserted the same
which has not been proved to exist in the qualification which now modifies the
instant case; and . mortgage credits. The law, however, does
2. That the Cruzado is not a true not make any distinction between
vendor of the foreclosed property. registered and unregistered vendor's lien,
which only goes to show that any lien of
Article 2242 of the new Civil Code that kind enjoys the preferred credit status.
enumerates the claims, mortgage and liens
that constitute an encumbrance on specific As to the point made that the articles of the
immovable property, and among them are: Civil Code on concurrence and preference
. of credits are applicable only to the
(2) For the unpaid price of real property insolvent debtor, suffice it to say that
sold, upon the immovable sold; and nothing in the law shows any such
(5) Mortgage credits recorded in the limitation. If we are to interpret this portion
Registry of Property." of the Code as intended only for insolvency
cases, then other creditor-debtor
Article 2249 of the same Code provides relationships where there are concurrence
that "if there are two or more credits with of credits would be left without any rules to
respect to the same specific real property govern them, and it would render
or real rights, they shall be satisfied pro- purposeless the special laws on
rata after the payment of the taxes and insolvency.
assessment upon the immovable property
or real rights. Resolution on Motion to Consider
(1962)
HELD: Application of the above-quoted Appellants, spouses Barretto, have filed a
provisions to the case at bar would mean motion vigorously urging that our decision
that the herein appellee Rosario Cruzado be reconsidered and set aside, and a new
as an unpaid vendor of the property in one entered declaring that their right as
question has the right to share pro-rata mortgagees remain superior to the
with the appellants the proceeds of the unrecorded claim of herein appellee for the
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 228

balance of the purchase price of her rights, is settled by Article 2243. The preferences
title, and interests in the mortgaged named in Articles 2261 and 2262 (now
property. 2241 and 2242) are to be enforced in
accordance with the Insolvency Law."
We have reached the conclusion that our
original decision must be reconsidered and RULE:
set aside: Thus, it becomes evident that one
preferred creditor's third-party claim to the
Under the system of the Civil Code of the proceeds of a foreclosure sale (as in the
Philippines, only taxes enjoy a similar case now before us) is not the proceeding
absolute preference. All the remaining contemplated by law for the enforcement of
thirteen classes of preferred creditors preferences under Article 2242, unless the
under Article 2242 enjoy no priority among claimant were enforcing a credit for taxes
themselves, but must be paid pro-rata i.e., that enjoy absolute priority. If none of the
in proportion to the amount of the claims is for taxes, a dispute between two
respective credits. Thus, Article creditors will not enable the Court to
2249 provides: ascertain the pro-rata dividend
If there are two or more credits with corresponding to each, because the rights
respect to the same specific real property of the other creditors likewise" enjoying
or real rights, they, shall be satisfied pro- preference under Article 2242 can not be
rata after the payment of the taxes and ascertained.
assessments upon the immovable property
or real rights." HELD: There being no insolvency or
liquidation, the claim of the appellee, as
The full application of Articles 2249 and unpaid vendor, did not require the
2242 demands that there must be first character and rank of a statutory lien co-
some proceedings where the claims of all equal to the mortgagee's recorded
the preferred creditors may be bindingly encumbrance, and must remain
adjudicated, such as: subordinate to the latter.
1. insolvency,
2. the settlement of decedents
estate under Rule 87 of the Rules PHILIPPINE SAVINGS vs LANTIN
of Court, or
3. other liquidation proceedings of FACTS: Involved in this case is a duplex-
similar import. apartment house on a lot covered by TCT
No. 86195 situated at San Diego Street,
This explains the rule of Article 2243 of Sampaloc, Manila, and owned by the
the new Civil Code that — spouses Filomeno and Socorro Tabligan.
The claims or credits enumerated in the
two preceding articles" shall be considered The duplex-apartment house was built for
as mortgages or pledges of real or the spouses by private respondent
personal property, or liens within the Candido Ramos, a duly licensed architect
purview of legal provisions governing and building contractor, at a total cost of
insolvency. P32,927.00. The spouses paid private
respondent the sum of P7,139.00 only.
And the rule is further clarified in the Hence, the latter used his own money,
Report of the Code Commission, as P25,788.50 in all, to finish the construction
follows: of the duplex-apartment.
The question as to whether the Civil Code
and the insolvency Law can be harmonized Meanwhile, on December 16, 1966,
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 229

February 1, 1967, and February 28, 1967, pursuant thereto, had the property in
the spouses Tabligan obtained from question attached. Consequently, a notice
petitioner Philippine Savings Bank three (3) of adverse claim was annotated at the
loans in the total amount of P35,000.00, back of Transfer Certificate of Title No.
the purpose of which was to complete the 86195.
construction of the duplex-apartment. To
secure payment of the l2oans, the spouses On August 26, 1968, a decision was
executed in favor of the petitioner three (3) rendered in Civil Case No. 69228 in favor
promissory notes and three (3) deeds of of the private respondent and against the
real estate mortgages over the property spouses. A writ of execution was
subject matter of this litigation. accordingly issued but was returned
unsatisfied.
On December 19, 1966, the petitioner
registered the December 16, 1966 deed of As the spouses did not have any properties
real estate mortgage with the Register of to satisfy the judgment in Civil Case No.
Deeds of Manila. The subsequent 69228, the private respondent addressed a
mortgages of February 1, 1967, and letter to the petitioner for the delivery to
February 28, 1967, were registered with him (private respondent) of his pro-rata
the Register of Deeds of Manila on share in the value of the duplex-apartment
February 2, 1967 and March 1, 1967, in accordance with Article 2242 of the Civil
respectively. At the time of the registration Code. The petitioner refused to pay the
of these mortgages, Transfer Certificate of pro-rata value prompting the private
Title No. 86195 was free from all liens and respondent to file the instant action. A
encumbrances. decision was rendered in favor of the
private Respondent.
The spouses failed to pay their monthly
amortizations. As a result thereof, the ISSUE: whether or not the private
petitioner bank foreclosed the mortgages, respondent is entitled to claim a pro-rata
and at the public auction held on July 23, share in the value of the property in
1969, was the highest bidder. question.

On August 5, 1969, the petitioner bank RULING: NO. The conclusions of the lower
registered the certificate of sale issued in court are not supported by the law and the
its favor. On August 9, 1970, the bank facts.
consolidated its ownership over the
property in question, and Transfer Concurrence of credits occurs when the
Certificate of Title No. 101864 was issued same specific property of the debtor or all
by the Register of Deeds of Manila in the of his property is subjected to the claims of
name of the petitioner bank. several creditors. The concurrence of
credits raises no questions of consequence
Upon the other hand, the private were the value of the property or the value
respondent filed an action against the of all assets of the debtor is sufficient to
spouses to collect the unpaid cost of the pay in fall all the creditors. However, it
construction of the duplex-apartment becomes material when said assets are
before the Court of First Instance of insufficient for then some creditors of
Manila, Branch I, which case was docketed necessity will not be paid or some creditors
therein as Civil Case No. 69228. During its will not obtain the full satisfaction of their
pendency, the private respondent claims. In this situation, the question of
succeeded in obtaining the issuance of a preference will then arise, that is to say
writ of preliminary attachment, and who of the creditors will be paid the all of
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 230

the others. the market was to be funded by the

Economic Support Fund Secretariat
The proceedings in the court below do not (ESFS), a government agency working
partake of the nature of the insolvency with the USAID. Under ESFS "grant-loan-
proceedings or settlement of a decedent’s equity" financing program, the funding for
estate. The action filed by Ramos was only the market would be composed of a (a)
to collect the unpaid cost of the grant from ESFS, (b) loan extended by
construction of the duplex apartment. It is ESFS to the Municipality of San Antonio,
far from being a general liquidation of the and (c) equity or counterpart funds from
estate of the Tabligan spouses. the Municipality.

Insolvency proceedings and settlement of It is claimed by petitioners Santiago R.

a decedent’s estate are both proceedings Sugay, Edwin A. Sugay, Fernando S.A.
in rem which are binding against the whole Erana and J.L. Bernardo Construction, a
world. All persons having interest in the single proprietorship owned by Juanito L.
subject matter involved, whether they were Bernardo, that they entered into a business
notified or not, are equally bound. venture for the purpose of participating in
Consequently, a liquidation of similar the bidding for the public market. It was
import or "other equivalent general agreed by petitioners that Santiago Sugay
liquidation’ must also necessarily be a would take the lead role and be
proceeding in rem so that all interested responsible for the preparation and
persons whether known to the parties or submission of the bid documents, financing
not may be bound by such proceeding. the entire project, providing and utilizing his
own equipment, providing the necessary
In the case at bar, although the lower court labor, supplies and materials and making
found that "there were no known creditors the necessary representations and doing
other than the plaintiff and the defendant the liaison work with the concerned
herein", this can not be conclusive. It will government agencies.
not bar other creditors in the event they
show up and present their claims against On April 20, 1990, J.L. Bernardo
the petitioner bank, claiming that they also Construction, thru petitioner Santiago
have preferred liens against the property Sugay, submitted its bid together with other
involved. Consequently, Transfer qualified bidders. After evaluating the bids,
Certificate of Title No. 101864 issued in the municipal pre-qualification bids and
favor of the bank which is supposed to be awards committee, headed by respondent
indefeasible would remain constantly Jose L. Salonga (then incumbent municipal
unstable and questionable. Such could not mayor of San Antonio) as Chairman,
have been the intention of Article 2243 of awarded the contract to petitioners. On
the Civil Code although it considers claims June 8, 1990, a Construction Agreement
and credits under Article 2242 as statutory was entered into by the Municipality of San
liens. Neither does the De Barretto case Antonio thru respondent Salonga and
sanction such instability. petitioner J.L. Bernardo Construction.

It is claimed by petitioners that under this

J.L. BERNARDO VS CA Construction Agreement, the Municipality
agreed to assume the expenses for the
FACTS: Sometime in 1990, the municipal demolition, clearing and site filling of the
government of San Antonio, Nueva Ecija construction site in the amount of
approved the construction of the San P1,150,000 and, in addition, to provide
Antonio Public Market. The construction of cash equity of P767,305.99 to be remitted
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 231

directly to petitioners.
Articles 2241 and 2242 of the Civil Code
Petitioners allege that, although the whole enumerates certain credits which enjoy
amount of the cash equity became due, the preference with respect to specific
Municipality refused to pay the same, personal or real property of the debtor.
despite repeated demands and Specifically, the contractor’s lien claimed
notwithstanding that the public market was by petitioners is granted under the third
more than ninety-eight percent (98%) paragraph of Article 2242 which provides
complete as of July 20, 1991. that the claims of contractors engaged in
the construction, reconstruction or repair of
Furthermore, petitioners maintain that buildings or other works shall be preferred
Salonga induced them to advance the with respect to the specific building or other
expenses for the demolition, clearing and immovable property constructed.
site filling work by making representations
that the Municipality had the financial However, Article 2242 only finds
capability to reimburse them later on. application when there is a concurrence of
However, petitioners claim that they have credits, i.e. when the same specific
not been reimbursed for their expenses. property of the debtor is subjected to the
claims of several creditors and the value of
On July 31, 1991, J.L. Bernardo such property of the debtor is insufficient to
Construction, Santiago Sugay, Edwin pay in full all the creditors. In such a
Sugay and Fernando Erana, with the latter situation, the question of preference will
three bringing the case in their own arise, that is, there will be a need to
personal capacities and also in determine which of the creditors will be
representation of J.L. Bernardo paid ahead of the others. Fundamental
Construction, filed a complaint for breach tenets of due process will dictate that this
of contract, specific performance, and statutory lien should then only be enforced
collection of a sum of money, with prayer in the context of some kind of a proceeding
for preliminary attachment and where the claims of all the preferred
enforcement of contractors lien against the creditors may be bindingly adjudicated,
Municipality of San Antonio, Nueva Ecija such as insolvency proceedings.
and Salonga, in his personal and official
capacity as municipal mayor. After This is made explicit by Article 2243 which
defendants filed their answer, the Regional states that the claims and liens
Trial Court held hearings on the ancillary enumerated in articles 2241 and 2242 shall
remedies prayed for by plaintiffs. be considered as mortgages or pledges of
real or personal property, or liens within the
On September 5, 1991, the Regional Trial purview of legal provisions governing
Court issued the writ of preliminary insolvency.
attachment prayed for by plaintiffs. It also
granted J.L. Bernardo Construction the The action filed by petitioners in the trial
right to maintain possession of the public court does not partake of the nature of an
market and to operate the same. insolvency proceeding. It is basically for
specific performance and damages. Thus,
ISSUE: Whether or not the grant of writ of even if it is finally adjudicated that
attachment and the contractor’s lien petitioners herein actually stand in the
proper? position of unpaid contractors and are
entitled to invoke the contractor’s lien
HELD: There is no contractor’s lien in favor granted under Article 2242, such lien
of petitioners. cannot be enforced in the present action
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 232

for there is no way of determining whether were securities or properties under

or not there exist other preferred creditors execution.)
with claims over the San Antonio Public
Market. The records do not contain any On January 30, 1998, respondent and a
allegation that petitioners are the only certain Ernest L. Escaler, filed a Motion to
creditors with respect to such property. The Dismiss petitioner's Complaint for lack of
fact that no third party claims have been jurisdiction and for failure to state a cause
filed in the trial court will not bar other of action. They claimed that the Makati
creditors from subsequently bringing RTC has no jurisdiction over the subject
actions and claiming that they also have matter of the case because the parties'
preferred liens against the property Construction Contract contained a clause
involved. requiring them to submit their dispute to
arbitration. The case against respondent
was dismissed because of failure to
ATLANTIC ERECTORS, INC. vs. comply with the arbitration clause. Under
HERBAL COVE REALTY the law, a prior resort to arbitration is a
CORPORATION condition precedent for filing a court action.
G.R. No. 148568 (March 20, 2003) Thus, in effect, the court admitted it had no
jurisdiction to hear and decide the case.
FACTS: On June 20, 1996, Herbal Cove
Realty Corporation and Atlantic Erectors, On April 24, 1998, respondent filed a
Inc. entered into a Construction Contract Motion to Cancel Notice of Lis Pendens. It
whereby the former agreed to construct argued that the notices of lis pendens are
four (4) units of townhouses designated without basis because petitioner's action is
and one (1) single detached unit for an a purely personal action to collect a sum of
original contract price of P15,726,745.19 money and recover damages and does not
which was later adjusted to directly affect title to, use or possession of
P16,726,745.19 as a result of additional real property. This motion was granted.
works. Respondent was not able to finish
the construction in time and as a However, the notices of lis pendens were
consequence petitioner filed a complaint subsequently reinstated after judge
for sum of money with damages. Petitioner Ranada claimed that a notice of lis
won the suit and the RTC ordered pendens serves only as a precautionary
respondent to pay around 24 million in measure or warning to prospective buyers
damages and fees. (The cause of action in of a property that there is a pending
this case is a money claim by one creditor) litigation involving the case. Respondent
then made an appeal to the CA which
On November 21, 1997, petitioner filed a rendered a decision in favor of the former.
notice of lis pendens for annotation of the
pendency of Civil Case No. 97-707 on titles Claims of each party:
TCTs nos. T-30228, 30229, 30230, 30231 petitioner- the money claim constitutes a
and 30232. When the lots covered by said lien that can be enforced to secure
titles were subsequently subdivided into 50 payment for the said obligations. The lien
lots, the notices of lis pendens were carried on respondent's property was necessary to
over to the titles of the subdivided lots, i.e., preserve the alleged improvement it had
Transfer Certificate of Title Nos. T-36179 made on the subject land.
to T-36226 and T-36245 to T-36246 of the
Register of Deeds of Tagaytay City. (The respondent- the annotation is bereft of any
case does not explain the existence of factual or legal basis because the action
these TCT's. It was not mentioned if these does not directly affect the title to the
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 233

property, or the use or possession thereof. 2242 of the Civil Code. This provision
The annotation is baseless and cannot be describes a contractor's lien over an
made through the enforcement of a immovable property as follows:
contractor's lien under Art. 2242 as said Art. 2242. With reference to specific
provision applies only to cases in which immovable property and real rights of
there are several creditors carrying on a the debtor, the following claims,
legal action against an insolvent debtor. mortgages and liens shall be preferred,
and shall constitute an encumbrance
ISSUE: on the immovable or real right:
1. Whether or not money claims xxx xxx xxx
representing cost of materials and labor on (3) Claims of laborers, masons,
the houses constructed on a property are a mechanics and other workmen, as
proper lien for annotation of lis pendens on well as of architects, engineers and
the property title contractors, engaged in the
2. Whether or not the trial court, after construction, reconstruction or
having declared itself without jurisdiction to repair of buildings, canals or other
try the case, may still decide on works, upon said buildings, canals
thesubstantial issue of the case\ or other works;
(4) Claims of furnishers of materials
used in the construction,
HELD: reconstruction, or repair of buildings,
1.NO, the lis pendens annotations were canals or other works, upon said
improper. buildings, canals or other works.

As a general rule, the only instances in However, a careful examination of

which a notice of lis pendens may be petitioner's Complaint, as well as the reliefs
availed of are as follows: (a) an action to it seeks, reveals that no such lien or
recover possession of real estate; (b) an interest over the property was ever alleged.
action for partition; and (c) any other court The Complaint merely asked for the
proceedings that directly affect the title to payment of construction services and
the land or the building thereon or the use materials plus damages, without
or the occupation thereof. Additionally, this mentioning -- much less asserting -- a lien
Court has held that resorting to lis or an encumbrance over the property.
pendens is not necessarily confined to Verily, it was a purely personal action and
cases that involve title to or possession of a simple collection case. It did not contain
real property. This annotation also applies any material averment of any enforceable
to suits seeking to establish a right to, or right, interest or lien in connection with the
an equitable estate or interest in, a specific subject property. Even if a party initially
real property; or to enforce a lien, a charge avails itself of a notice of lis pendens upon
or an encumbrance against it. the filing of a case in court, such notice is
rendered nugatory if the case turns out to
Petitioner's money claim is not a be a purely personal action.
contractor's lien
Apparently, petitioner proceeds on the As it is, petitioner's money claim cannot be
premise that its money claim involves the characterized as an action that involves the
enforcement of a lien. Since the money enforcement of a lien or an encumbrance,
claim is for the nonpayment of materials one that would thus warrant the annotation
and labor used in the construction of of the Notice of Lis Pendens. Indeed, the
townhouses, the lien referred to would nature of an action is determined by the
have to be that provided under Article allegations of the complaint.
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 234

Even assuming that petitioner had Clearly then, neither Article 2242 of the
sufficiently alleged such lien or Civil Code nor the enforcement of the lien
encumbrance in its Complaint, the thereunder is applicable here, because
annotation of the Notice of Lis petitioner's Complaint failed to satisfy the
Pendens would still be unjustified, foregoing requirements. Nowhere does it
because a complaint for collection and show that respondent's property was
damages is not the proper mode for the subject to the claims of other creditors or
enforcement of a contractor's lien. was insufficient to pay for all concurring
debts. Moreover, the Complaint did not
Contractor's lien and the proper pertain to insolvency proceedings or to any
methods of enforcing it other action in which the adjudication of
In J.L. Bernardo Construction v. Court of claims of preferred creditors could be
Appeals, the Court explained the concept ascertained.
of a contractor's lien under Article 2242 of
the Civil Code and the proper mode for its 2.The trial court still had jurisdiction to
enforcement as follows: decide on the substantial issue of the case
Articles 2241 and 2242 of the Civil
Code enumerates certain credits which The trial court lost jurisdiction over the
enjoy preference with respect to case only on August 31, 1998, when
specific personal or real property of the petitioner filed its Notice of Appeal. Thus,
debtor. Specifically, the contractor's any order issued by the RTC prior to that
lien claimed by the petitioners is date should be considered valid, because
granted under the third paragraph of the court still had jurisdiction over the case.
Article 2242 which provides that the Accordingly, it still had the authority or
claims of contractors engaged in the jurisdiction to issue the July 30, 1998 Order
construction, reconstruction or repair of canceling the Notice of Lis Pendens. On
buildings or other works shall be the other hand, the November 4,
preferred with respect to the specific 1998Order that set aside the July 30, 1998
building or other immovable property Order and reinstated that Notice should be
constructed. considered without force and effect,
However, Article 2242 finds because it was issued by the trial court
application when there is a after it had already lost jurisdiction.
concurrence of credits, i.e., when the
same specific property of the debtor is Finally, petitioner vehemently insists that
subjected to the claims of several the trial court had no jurisdiction to cancel
creditors and the value of such the Notice. Yet, the former filed before the
property of the debtor is insufficient to CA an appeal, docketed as CA-GR CV No.
pay in full all the creditors. In such a 65647, questioning the RTC's dismissal of
situation, the question of preference the Complaint for lack of jurisdiction.
will arise, that is, there will be a need to Moreover, it must be remembered that it
determine which of the creditors will be was petitioner which had initially invoked
paid ahead of the others. Fundamental the jurisdiction of the trial court when the
tenets of due process will dictate that former sought a judgment for the recovery
this statutory lien should then only be of money and damages against
enforced in the context of some kind of respondent. Yet again, it was also
a proceeding where the claims of all petitioner which assailed that same
the preferred creditors may be jurisdiction for issuing an order unfavorable
bindingly adjudicated, such as to the former's cause. Indeed, parties
insolvency proceedings. cannot invoke the jurisdiction of a court to
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 235

secure affirmative relief, then repudiate or On April 27, 1984, Marinduque Mining
question that same jurisdiction after executed in favor of PNB and DBP an
obtaining or failing to obtain such relief. Amendment to Mortgage Trust Agreement
by virtue of which Marinduque Mining
mortgaged in favor of PNB and DBP all
other real and personal properties and
DEVELOPMENT BANK OF THE other real rights subsequently acquired by
PHILIPPINES vs. HONORABLE COURT Marinduque Mining.
OF APPEALS & REMINGTON
INDUSTRIAL SALES CORPORATION For failure of Marinduque Mining to settle
G.R. No. 126200 (August 16, 2001) its loan obligations, PNB and DBP
instituted sometime on July and August
FACTS: Marinduque Mining-Industrial 1984 extrajudicial foreclosure proceedings
Corporation (MMIC) obtained from the over the mortgaged properties.
Philippine National Bank (PNB) various
loan accommodations. To secure the In the ensuing public auction sale
loans, Marinduque Mining executed on conducted on August 31, 1984, PNB and
October 9, 1978 a Deed of Real Estate DBP emerged and were declared the
Mortgage and Chattel Mortgage in favor of highest bidders over the foreclosed real
PNB. The mortgage covered all of properties, buildings, mining claims,
Marinduque Mining's real properties, leasehold rights together with the
located at Surigao del Norte, Sipalay, improvements thereon as well as
Negros Occidental, and at Antipolo, Rizal, machineries and equipments of MMIC.
including the improvements thereon. As of
November 20, 1980, the loans extended by PNB and DBP thereafter thru a Deed of
PNB amounted to P4 Billion, exclusive of Transfer dated August 31, 1984 and June
interest and charges. 6 1994, purposely, in order to ensure the
continued operation of the Nickel refinery
On July 13, 1981, Marinduque Mining plant and to prevent the deterioration of the
executed in favor of PNB and the assets foreclosed, assigned and
Development Bank of the Philippines transferred to Nonoc Mining and Industrial
(DBP) a second Mortgage Trust Corporation amd Maricalum Mining Corp.
Agreement. In said agreement, respectively, all their rights, interest and
Marinduque Mining mortgaged to PNB and participation over the foreclosed properties
DBP all its real properties located at of MMIC.
Surigao del Norte, Sipalay, Negros
Occidental, and Antipolo, Rizal, including On February 27, 1987, PNB and DBP,
the improvements thereon. The mortgage pursuant to Proclamation No. 50 as
also covered all of Marinduque Mining's amended, again assigned, transferred and
chattels, as well as assets of whatever conveyed to the National Government thru
kind, nature and description which the Asset Privatization Trust (APT) all its
Marinduque Mining may subsequently existing rights and interest over the assets
acquire in substitution or replenishment or of MMIC, earlier assigned to Nonoc Mining
in addition to the properties covered by the and Industrial Corporation, Maricalum
previous Deed of Real and Chattel Mining Corporation and Island Cement
Mortgage dated October 7, 1978. Corporation.
Apparently, Marinduque Mining had also
obtained loans totaling P2 Billion from In the meantime, between July 16, 1982 to
DBP, exclusive of interest and charges. October 4, 1983, Marinduque Mining
purchased and caused to be delivered
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 236

construction materials and other sale of the thing together with other
merchandise from Remington Industrial property for a lump sum, when the price
Sales Corporation (Remington) worth thereof can be determined proportionally;
P921,755.95. The purchases remained
unpaid as of August 1, 1984 when (4) Credits guaranteed with a pledge so
Remington filed a complaint for a sum of long as the things pledged are in the hands
money and damages against Marinduque of the creditor, or those guaranteed by a
Mining for the value of the unpaid chattel mortgage, upon the things pledged
construction materials and other or mortgaged, up to the value thereof;
merchandise purchased by Marinduque
Mining, as well as interest, attorney's fees In Barretto vs. Villanueva, the Court had
and the costs of suit. occasion to construe Article 2242,
governing claims or liens over specific
Remington's original complaint was later immovable property.
amended to implead additional defendants
and in the end, the co-defendants were In its decision upholding the order of the
MMIC, PNB, DBP, Nonoc Mining, lower court, the Court ratiocinated thus:
Maricalum Mining, Island Cement and Article 2242 of the new Civil Code
Asset Privatization Trust. enumerates the claims, mortgages and
liens that constitute an encumbrance on
The RTC ruled in favor of Remington, specific immovable property, and among
whose decision was later affirmed by the them are:
CA. The CA held that there exists in "(2) For the unpaid price of real property
Remington's favor a lien on the unpaid sold, upon the immovable sold"; and
purchases of MMIC and as transferee, "(5) Mortgage credits recorded in the
DBP must be held liable for the value Registry of Property."
thereof.
Article 2249 of the same Code provides
ISSUE: Whether or not Remington can that "if there are two or more credits with
enforce its claim for unpaid purchases respect to the same specific real property
made by MMIC against DBP or real rights, they shall be satisfied pro-
rata, after the payment of the taxes and
HELD: No, in the absence of liquidation assessments upon the immovable property
proceedings, Remington's claim cannot or real rights."
be enforced against DBP.
Application of the above-quoted provisions
ARTICLE 2241. With reference to specific to the case at bar would mean that the
movable property of the debtor, the herein appellee Rosario Cruzado as an
following claims or liens shall be preferred: unpaid vendor of the property in question
xxx xxx xxx has the right to share pro-rata with the
(3) Claims for the unpaid price of movables appellants the proceeds of the foreclosure
sold, on said movables, so long as they are sale.
in the possession of the debtor, up to the xxx xxx xxx
value of the same; and if the movable has As to the point made that the articles of the
been resold by the debtor and the price is Civil Code on concurrence and preference
still unpaid, the lien may be enforced on of credits are applicable only to the
the price; this right is not lost by the insolvent debtor, suffice it to say that
immobilization of the thing by destination, nothing in the law shows any such
provided it has not lost its form, substance limitation. If we are to interpret this portion
and identity, neither is the right lost by the of the Code as intended only for insolvency
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 237

cases, then other creditor-debtor (or such of them as have credits

relationships where there are concurrence outstanding) must necessarily be
of credits would be left without any rules to convened, and the import of their claims
govern them, and it would render ascertained. It is thus apparent that the full
purposeless the special laws on application of Articles 2249 and 2242
insolvency. demands that there must be first some
proceeding where the claims of all the
Upon motion by appellants, however, the preferred creditors may be bindingly
Court reconsidered its decision. Justice adjudicated, such as insolvency, the
J.B.L. Reyes, speaking for the Court, settlement of decedent's estate under Rule
explained the reasons for the reversal: 87 of the Rules of Court, or other
liquidation proceedings of similar import.
The previous decision failed to take fully
into account the radical changes This explains the rule of Article 2243 of
introduced by the Civil Code of the the new Civil Code that —
Philippines into the system of priorities "The claims or credits enumerated
among creditors ordained by the Civil Code in the two preceding articles shall be
of 1889. considered as mortgages or pledges of
real or personal property, or liens within the
Pursuant to the former Code, conflicts purview of legal provisions governing
among creditors entitled to preference as insolvency.
to specific real property under Article 1923 And the rule is further clarified in the
were to be resolved according to an order Report of the Code Commission, as follows
of priorities established by Article 1927, "The question as to whether the
whereby one class of creditors could Civil Code and the Insolvency Law can be
exclude the creditors of lower order until harmonized is settled by this Article (2243).
the claims of the former were fully satisfied The preferences named in Articles 2261
out of the proceeds of the sale of the real and 2262 (now 2241 and 2242) are to be
property subject of the preference, and enforced in accordance with the Insolvency
could even exhaust proceeds if necessary. Law."

Under the system of the Civil Code of the Thus, it becomes evident that one
Philippines, however, only taxes enjoy a preferred creditor's third-party claim to the
similar absolute preference. All the proceeds of a foreclosure sale (as in the
remaining thirteen classes of preferred case now before us) is not the proceeding
creditors under Article 2242 enjoy no contemplated by law for the enforcement of
priority among themselves, but must be preferences under Article 2242, unless the
paid pro rata, i.e., in proportion to the claimant were enforcing a credit for taxes
amount of the respective credits. Thus, that enjoy absolute priority. If none of the
Article 2249 provides: claims is for taxes, a dispute between two
"If there are two or more credits with creditors will not enable the Court to
respect to the same specific real property ascertain the pro rata dividend
or real rights, they shall be satisfied pro corresponding to each, because the rights
rata, after the payment of the taxes and of the other creditors likewise enjoying
assessments upon the immovable property preference under Article 2242 cannot be
or real rights." ascertained.

But in order to make this prorating fully Although Barretto involved specific
effective, the preferred creditors immovable property, the ruling therein
enumerated in Nos. 2 to 14 of Article 2242 should apply equally in this case where
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 238

specific movable property is involved. As separation from employment computed on

the extrajudicial foreclosure instituted by the basis of the number of years the
PNB and DBP is not the liquidation laborer was employed by the SEC.
proceeding contemplated by the Civil
Code, Remington cannot claim its pro rata 1. Requirements for Issuance of License.
share from DBP. Every applicant for license to operate a
private employment agency or manning
Thus, Remington cannot enforce its lien agency shall submit a written application
against DBP because there was no together with the following requirements:
liquidation proceeding. The liquidation xxx xxx
proceeding contemplated by the Civil Code
is not the extrajudicial foreclosure done by f. A verified undertaking stating that the
DBP. The proceeding contemplated is applicant:
where the claims of all the preferred
creditors may be bindingly adjudicated xxx xxx xxx(3) Shall assume joint and
such as insolvency, settlement of solidary liability with the employer for all
decedent's estate or other similar claims and liabilities which may arise in
proceedings. connection with the implementation of the
contract; including but not limited to
payment of wages, health and disability
REPUBLIC VS. PERALTA compensation and reparation.
[150 SCRA 37(1987)]
employer; it is a form of penalty or damage
FACTS: The Republic of the Philippines against the employer in favor of the
seeks the review on certiorari of the Order employee for the latter's dismissal or
of the CFI of Manila in its Civil Case No. separation from service
108395 entitled "In the Matter of Voluntary
Insolvency of Quality Tobacco Corporation, ISSUE: WON separation pay of their
Quality Tobacco.” respective members embodied in final
awards of the NLRC were to be preferred
In its questioned Order, the trial court held over the claims of the Bureau of Customs
that the above enumerated claims of USTC and the BIR (WON separation pay is
and FOITAF (hereafter collectively referred included in the term “wages”)
to as the "Unions") for separation pay of
their respective members embodied in final HELD: YES. For the specific purposes of
awards of the NLRC were to be preferred Article 1109 and in the context of
over the claims of the Bureau of Customs insolvency termination or separation pay is
and the BIR. The trial court, in so ruling, reasonably regarded as forming part of the
relied primarily upon Article 110 of the remuneration or other money benefits
Labor Code. accruing to employees or workers by
reason of their having previously rendered
The Solicitor General, in seeking the services to their employer; as such, they
reversal of the questioned Orders, argues fall within the scope of "remuneration or
that Article 110 of the Labor Code is not earnings — for services rendered or to be
applicable as it speaks of "wages," a term rendered — ."
which he asserts does not include the
separation pay claimed by the Unions. Liability for separation pay might indeed
have the effect of a penalty, so far as the
"Separation pay," the Solicitor General employer is concerned. So far as concerns
contends: is given to a laborer for a the employees, however, separation pay is
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 239

additional remuneration to which they commission basis, or other method of

become entitled because, having calculating the same, which is payable by
previously rendered services, they are an employer to an employee under a
separated from the employer's service. written or unwritten contract of employment
for work done or to be done, or for services
Reasoning rendered or to be rendered, and includes
We note, in this connection, that in the fair and reasonable value, as
Philippine Commercial and Industrial Bank determined by the Secretary of Labor, of
(PCIB) us. National Mines and Allied board, lodging, or other facilities
Workers Union, the Solicitor General took customarily furnished by the employer to
a different view and there urged that the the employee. 'Fair and reasonable value'
term "wages" under Article 110 of the shall not include any profit to the employer
Labor Code may be regarded as or to any person affiliated with the
embracing within its scope severance pay employer.(emphasis supplied)
or termination or separation pay. In PCIB,
this Court agreed with the position Article 110. Worker preference in case
advanced by the Solicitor General. We see of bankruptcy — In the event of
no reason for overturning this particular bankruptcy or liquidation of an
position. employer's business, his workers shall
enjoy first preference as regards wages
The resolution of the issue of priority due them for services rendered during
among the several claims filed in the the period prior to the bankruptcy or
insolvency proceedings instituted by the liquidation, any provision of law to the
Insolvent cannot, however, rest on a contrary notwithstanding. Union paid
reading of Article 110 of the labor Code wages shall be paid in full before other
alone. creditors may establish any claim to a
share in the assets of the employer.
Article 110 of the Labor Code, in (emphasis supplied).
determining the reach of its terms, cannot
be viewed in isolation. Rather, Article 110
must be read in relation to the provisions of DEVELOPMENT BANK OF THE
the Civil Code concerning the PHILIPPINES VS. NLRC
classification, concurrence and preference [242 SCRA 59 (1995)]
of credits, which provisions find particular
application in insolvency proceedings FACTS: PSC obtained a loan in 1983 from
where the claims of all creditors, preferred the DBP to finance its iron smelting and
or non-preferred, may be adjudicated in a steel manufacturing business. To secure
binding manner. said loan, PSC mortgaged to DBP real
properties with all the buildings and
Disposition improvements thereon and chattels. By
MODIFIED and REMANDED to the trial virtue of the said loan agreement, DBP
court for further proceedings in insolvency. became the majority stockholder of PSC,
with stockholdings. Subsequently, it took
Article 97 (f) of the Labor Code defines over the management of PSC. When PSC
"wages" in the following terms: failed to pay its obligation with DBP, DBP
Wage' paid to any employee shall mean foreclosed and acquired the mortgaged
the remuneration or earnings, however real estate and chattels of PSC in the
designated, capable of being expressed in auction sales in 1987. Petitioners filed a
terms of money, whether fixed or Petition for Involuntary Insolvency in the
ascertained on a time, task, piece, or RTC against PSC and DBP, impleading as
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 240

co-respondents therein Olecram Mining in which credits should be paid in the final
Corporation and Jose Panganiban Ice distribution of the proceeds of the
Plant and Cold Storage, with said insolvent's assets. The DBP anchors its
petitioners representing themselves as claim on a mortgage credit, which directly
unpaid employees of said private and immediately subjects the property
respondents. Herein private respondents upon which it is imposed, whoever the
filed a complaint with the Department of possessor may be, to the fulfillment of the
Labor against PSC, including later on DBP, obligation for whose security it was
for non-payment of salaries, 13th month constituted (Art. 2176, CC). It creates a
pay, incentive leave pay and separation real right which is enforceable against the
pay. DBP submits that when it foreclosed whole world. It is a lien on an identified
the assets of PSC, it did so as a immovable property, which a preference is
foreclosing creditor. not.

ISSUE: Whether DBP, as foreclosing Even if Article 110 and its Implementing
creditor, could be held liable for the unpaid Rule, as amended, should be interpreted to
wages, 13th month pay, incentive leave mean `absolute preference,' the same
pay and separation pay of the employees should be given only prospective effect in
of PSC line with the cardinal rule that laws shall
have no retroactive effect, unless the
The terms 'declaration' of bankruptcy or contrary is provided (Art. 4, CC). Thereby,
'judicial' liquidation in Article 110 of the any infringement on the constitutional
Labor Code have been eliminated by RA guarantee on non-impairment of obligation
6715, which took effect on March 21, 1989. of contracts (Sec. 10, Art. III, 1987 Consti.)
Does this mean then that liquidation is also avoided. In point of fact, DBP's
proceedings have been done away with? mortgage credit antedated by several
years the amendatory law, RA 6715. To
RULING: We opine in the negative. give Article 110 retroactive effect would be
Because of its impact on the entire system to wipe out the mortgage in DBP's favor
of credit, Article 110 of the Labor Code and expose it to a risk which it sought to
cannot be viewed in isolation but must be protect itself against by requiring a
read in relation to the Civil Code scheme collateral in the form of real property.
on classification and preference of credits.
In fine, the right to preference given to
In the event of insolvency, a principal workers under Article 110 of the Labor
objective should be to effect an equitable Code cannot exist in any effective way
distribution of the insolvent's property prior to the time of its presentation in
among his creditors. To accomplish this distribution proceedings. It will find
there must first be some proceeding where application when, in proceedings such as
notice to all of the insolvent's creditors may insolvency, such unpaid wages shall be
be given and where the claims of preferred paid in full before the `claims of the
creditors may be bindingly adjudicated. Government and other creditors' may be
paid. But, for an orderly settlement of a
The right of first preference as regards debtor's assets, all creditors must be
unpaid wages recognized by Article 110 convened, their claims ascertained and
does not constitute a lien on the property of inventoried, and thereafter the preference
the insolvent debtor in favor or workers. It determined in the course of judicial
is but a preference of credit in their favor, a proceedings which have for their object the
preference in application. It is a method subjection of the property of the debtor to
adopted to determine and specify the order the payment of his debts or other lawful
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 241

obligations. Thereby, an orderly

determination of preference of creditors'
claims is assured; the adjudication made
will be binding on all parties-in-interest,
since those proceedings are proceedings
in rem; and the legal scheme of
classification, concurrence and preference
of credits in the Civil Code, the Insolvency
Law, and the Labor Code is preserved in
harmony.

Isaiah 41:10

“So do not fear, for I am with you; do not

be dismayed, for I am your God. I will
strengthen you and help you; I will uphold
you with my righteous right hand.”