SIMPLE LOAN OR MUTUUM court a quo rendered a decision ordering the appellant to pay

the appellee the sum of P2,377.23 as of December 31, 1959,

plus interest at the rate of 6% per annum compounded
quarterly from the date of the filing of the complaint until full
G.R. No. L-20240 December 31, 1965 payment was made. The appellant was also ordered to pay
the sum equivalent to 10% of the amount due as attorney's
fees and costs.
REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,
vs.
JOSE GRIJALDO, defendant-appellant. The appellant appealed directly to this Court. During the
pendency of this appeal the appellant Jose Grijaldo died.
Upon motion by the Solicitor General this Court, in a
FACTS:
resolution of May 13, 1963, required Manuel Lagtapon,
Jacinto Lagtapon, Ruben Lagtapon and Anita L. Aguilar, who
In the year 1943 appellant Jose Grijaldo obtained five loans are the legal heirs of Jose Grijaldo to appear and be
from the branch office of the Bank of Taiwan, Ltd. in Bacolod substituted as appellants in accordance with Section 17 of
City, in the total sum of P1,281.97 with interest at the rate of Rule 3 of the Rules of Court.
6% per annum, compounded quarterly. These loans are
evidenced by five promissory notes executed by the appellant
ISSUE:
in favor of the Bank of Taiwan, Ltd., as follows: On June 1,
1943, P600.00; on June 3, 1943, P159.11; on June 18, 1943,
P22.86; on August 9, 1943,P300.00; on August 13, 1943, Whether or not the obligation to pay is extinguished.
P200.00, all notes without due dates, but because the loans
were due one year after they were incurred. To secure the The appellant likewise maintains, in support of his contention
payment of the loans the appellant executed a chattel that the appellee has no cause of action, that because the
mortgage on the standing crops on his land, Lot No. 1494 loans were secured by a chattel mortgage on the standing
known as Hacienda Campugas in Hinigiran, Negros crops on a land owned by him and these crops were lost or
Occidental. destroyed through enemy action his obligation to pay the
loans was thereby extinguished.
By virtue of Vesting Order No. P-4, dated January 21, 1946,
and under the authority provided for in the Trading with the HELD:
Enemy Act, as amended, the assets in the Philippines of the
Bank of Taiwan, Ltd. were vested in the Government of the This argument is untenable. The terms of the promissory
United States. Pursuant to the Philippine Property Act of 1946 notes and the chattel mortgage that the appellant executed
of the United States, these assets, including the loans in in favor of the Bank of Taiwan, Ltd. do not support the claim
question, were subsequently transferred to the Republic of of appellant. The obligation of the appellant under the five
the Philippines by the Government of the United States under promissory notes was not to deliver a determinate thing
Transfer Agreement dated July 20, 1954. These assets were namely, the crops to be harvested from his land, or the value
among the properties that were placed under the of the crops that would be harvested from his land. Rather,
administration of the Board of Liquidators created under his obligation was to pay a generic thing — the amount of
Executive Order No. 372, dated November 24, 1950, and in money representing the total sum of the five loans, with
accordance with Republic Acts Nos. 8 and 477 and other interest. The transaction between the appellant and the Bank
pertinent laws. of Taiwan, Ltd. was a series of five contracts of simple loan of
sums of money. "By a contract of (simple) loan, one of the
On September 29, 1954 the appellee, Republic of the parties delivers to another ... money or other consumable
Philippines, represented by the Chairman of the Board of thing upon the condition that the same amount of the same
Liquidators, made a written extrajudicial demand upon the kind and quality shall be paid." (Article 1933, Civil Code) The
appellant for the payment of the account in question. The obligation of the appellant under the five promissory notes
record shows that the appellant had actually received the evidencing the loans in questions is to pay the value thereof;
written demand for payment, but he failed to pay. that is, to deliver a sum of money — a clear case of an
obligation to deliver, a generic thing. Article 1263 of the Civil
On January 17, 1961 the appellee filed a complaint in the Code provides:
Justice of the Peace Court of Hinigaran, Negros Occidental, to
collect from the appellant the unpaid account in question. In an obligation to deliver a generic thing, the loss or
The Justice of the Peace Of Hinigaran, after hearing, destruction of anything of the same kind does not
dismissed the case on the ground that the action had extinguish the obligation.
prescribed. The appellee appealed to the Court of First
Instance of Negros Occidental and on March 26, 1962 the

SECTRANS 2010/ ATTY. AGUINALDO 1

The chattel mortgage on the crops growing on appellant's  CA ruled that the P2 million downpayment shall include
land simply stood as a security for the fulfillment of interest computed at the time the disputed amount was
appellant's obligation covered by the five promissory notes, considered a loan. Thus, this petition.
and the loss of the crops did not extinguish his obligation to
pay, because the account could still be paid from other Issue:
sources aside from the mortgaged crops.
Whether or not the interest should be limited to the 1st six
months as contained in the MOA?
Frias vs San Diego-Sison
G.R. No. 155223 April 4, 2007 Ruling:

Facts
No. SC ruled in favour of Respondent.

 Petitioner is the owner of a house and lot in Ayala

 The SC opined that if the terms of an agreement are clear
Alabang.
and leave no doubt as to the intention of the contracting
 Petitioner and Dra. Flora San Diego-Sison (Respondent)
parties, the literal meaning of its stipulations shall
entered into a Memorandum of Agreement (MOA) over
prevail.
the cited property with the following terms:
 It is further required that the various stipulations of a
1. The land is to be sold for P 6.4 million.
contract shall be interpreted together.
2. Petitioner will receive P3 million from
 In this case, the phrase "for the last six months only"
respondent as downpayment.
should be taken in the context of the entire agreement.
3. In light of the downpayment, respondent had 6
 The MOA speaks of 2 periods of six months each.
months (1st) to notify the Petitioner of her
o The 1st six-months was given to Respondent to
intention to purchase the land. However, the
make up her mind whether or not to purchase
balance is to be paid within another 6 months.
Petitioner's property.
4. Prior to the first six months, the Petitioner may
o The 2nd six-months was given to Petitioner to
still offer the cited land to other persons
pay the P2 million loan (downpayment) in the
provided that the P3 million downpayment shall
event that Respondent decided not to buy the
be returned to the Respondent including
property in which case interest will be charged
interest based on prevailing compounded bank
"for the last six months only", referring to the
interest.
2nd six-month period.
5. Nevertheless, in case there are no other buyers
o This means that no interest will be charged for
within the first 6 months, no interest shall be
the 1st six-months while Respondent
charged on the P3 million.
contemplating on whether to buy the property,
6. However, in the event that on the 6th month
but only for the 2nd six-months after Respondent
the Respondent does not purchase the land, the
had decided not to buy the property. This is the
Petitioner has a period of another 6 months (2nd)
meaning of the phrase "for the last six months
within which to pay the sum of P3 million with
only".
interest for the last six months only. The
o Certainly, there is nothing in their agreement
downpayment shall be treated as loan granted
by the Respondent. that suggests that interest will be charged for 6
months only even if it takes defendant-appellant
an eternity to pay the loan
 Petitioner received from Respondent P2 million in cash
 This does NOT mean that interest will no longer be
and P1 million in a post-dated check which was
charged after the 2nd six-month period since such
subsequently considered as stale. Therefore, only P2
stipulation was made on the logical and reasonable
million was received as downpayment.
expectation that such amount would be paid within the
 Before the check became stale, Petitioner gave
date stipulated. Therefore, the monetary interest for the
Respondent the TCT and the Deed of Absolute Sale of the
last 6 months continued to accrue until actual payment
land.
of the loaned amount.
 Subsequently, Respondent decided not to purchase the
 It has been held that for a debtor to continue in
property and notified Petitioner of this reminding the
possession of the principal of the loan and to continue to
latter that the amount of P2 million should be considered
use the same after maturity of the loan without payment
as a loan payable within six months as stipulated in the
of the monetary interest, would constitute unjust
MOA with interest computed from such notification.
enrichment on the part of the debtor at the expense of
 Petitioner subsequently failed to return the P2 million
the creditor.
pesos.

SECTRANS 2010/ ATTY. AGUINALDO 2

 Art. 1956. No interest shall be due when not expressly Evidently, respondent chose the latter option, as the
stipulated in writing. condominium project was in fact already completed. The
payment of the 2% monthly interest, therefore, cannot be
ARWOOD INDUSTRIES, INC. vs. D.M. Consunji, Inc. jettisoned overboard.

FACTS: Petitioner and respondent, as owner and contractor, Since the Agreement stands as the law between the parties,
respectively entered into an Agreement for the construction this Court cannot ignore the existence of such provision
of petitioner’s condominium. Despite the completion of the providing for a penalty for every month’s delay. Facta legem
project, petitioner was not able to pay respondent the full facunt inter partes. Neither can petitioner impugn the
amount and left a balance. Repeated demands were left Agreement to which it willingly gave its consent. From the
unheeded prompting respondent to file a civil case against moment petitioner gave its consent, it was bound not only to
petitioner, with a prayer among others that the full amount fulfill what was expressly stipulated in the Agreement but
be paid with interest of 2% per month, from Nov. 1990 up to also all the consequences which, according to their nature,
the time of payment. RTC ruled in favor of respondent. may be in keeping with good faith, usage and law. Petitioner’s
Petitioner appealed to the CA, particularly opposing the attempt to mitigate its liability to respondent should thus fail.
imposition of the 2% interest. The CA ruled in favor of the 2%
interest. As a last-ditch effort to evade liability, petitioner argues that
the amount of P962,434.78 claimed by respondent and later
Petitioner’s contention- The imposition of the interest is awarded by the lower courts does not refer to “monthly
without basis because (1) although it was written in the progress billings,” the delayed payment of which would earn
Agreement, it was not mentioned by the RTC in the interest at 2% per month.
dispositive portion and (2) the interest does not apply to the
respondent’s claim but to the “monthly progress billing”.
Petitioner appears confused by a semantics problem.
“Monthly progress billings” certainly form part of the contract
ISSUE: WON the RTC and Ca is correct in imposing a 2% per
price. If the amount claimed by respondent is not the
month interest on the monetary award or the balance of the
“monthly progress billings” provided in the contract, what
contract price.
then does such amount represent? Petitioner has not in point
of fact convincingly supplied an answer to this query. Neither
HELD: Yes. The Agreement between the parties is the formal
has petitioner shown any effort to clarify the meaning of
expression of the parties’ rights, duties and obligations. It is
“monthly progress billings” to support its position. This
the best evidence of the intention of the parties.
leaves us no choice but to agree with respondent that the
Consequently, upon the fulfillment by respondent of its
phrase “monthly progress billings” refers to a portion of the
obligation to complete the construction project, petitioner
contract price payable by the owner (petitioner) of the
had the correlative duty to pay for respondent’s services.
project to the contractor (respondent) based on the
However, petitioner refused to pay the balance of the
percentage of completion of the project or on work
contract price. From the moment respondent completed the
accomplished at a particular stage. It refers to that portion of
construction of the condominium project and petitioner
the contract price still to be paid as work progresses, after the
refused to pay in full, there was delay on the part of
downpayment is made.”
petitioner.

This definition is, indeed, not without basis. Articles 6.02 and
Delay in the performance of an obligation is looked upon with
6.03 of the Agreement, which respectively provides that the
disfavor because, when a party to a contract incurs delay, the
“(b)alance shall be paid in monthly progress payments based
other party who performs his part of the contract suffers
on actual value of the work accomplished” and that “the
damages thereby. Obviously, respondent suffered damages
progress payments shall be reduced by a portion of the
brought about by the failure of petitioner to comply with its
downpayment made by the OWNER corresponding to the
obligation on time. And, sans elaboration of the matter at
value of the work completed” give sense to respondent’s
hand, damages take the form of interest. Accordingly, the
interpretation of “monthly progress billings.”
appropriate measure of damages in this case is the payment
of interest at the rate agreed upon, which is 2% interest for
every month of delay. SONCUYA V. AZARRAGA

It must be noted that the Agreement provided the contractor, ROYAL SHIRT FACTORY, INC. v CO
respondent in this case, two options in case of delay in
monthly payments, to wit: a) suspend work on the project FACTS:
until payment is remitted by the owner or b) continue the
work but the owner shall be required to pay interest at a rate - The parties entered into a contract wherein it is
of two percent (2%) per month or a fraction thereof. stipulated that 350 pairs of ballet shoes will be sold

SECTRANS 2010/ ATTY. AGUINALDO 3

 by Co and that Co had 9 days from delivery of the Manila) under a holding trust agreement, held the same
shoes to make his choice of 2 alternatives: a) position in Idelfonso D. Yap vs. OBM wherein it argued that
consider the sale for the shoes closed at a flat rate, "(I)n a suit against the receiver of a national bank for money
or b) return the remaining unsold ones to Royal. loaned to the Bank while it was a going concern, it was error
- Co failed to return the unsold pairs after 9 days and to permit plaintiff to recover interest on the loan after the
actually began making partial payments on account bank's suspension"
of the purchase price agreed upon.
- Co then contended that there was merely a A significant development of the case, the Government
consignment of the goods and he wanted to return Service Insurance System (GSIS) has acquired ownership of
the unsold shoes. Royal refused contending that it 99.93% of the outstanding capital stock of COMBANK. The
was an outright sale. Court's Resolution manifestly redounds to the benefit of
another government institution, the GSIS, and to the
ISSUE: WoN the sale was an outright sale / WoN Co is bound preservation of the banking system.
by the interest stipulated in the invoice.
LIRAG TEXTILE MILLS, INC. VS. SSS
SC: YES! / NO!
153 SCRA 338
- OUTRIGHT SALE
o Co accepted the invoice of the ballet shoes
Facts:
and he even noted down in his own
handwriting the partial payments that he
 SSS (respondent) and Lirag Textile Mills (Petitioner)
made.
entered into a Purchased Agreement which Respondent
o If the sale has been on consignment, a
agreed to purchase preferred stocks of Petitioner worth
stipulation as to the period of time for the P1 million subject to conditions:
return of the unsold shoes should have o For Petitioner to repurchase the shares of
been made, however, this was not done
stocks at a regular interval of one year and
- NOT BOUND BY THE INTEREST
to pay dividends.
o He did not sign the invoice slip the
o Failure to redeem and pay the dividend, the
stipulated interest was 20%, hence, not
entire obligation shall become due and
binding
demandable and it shall be liable for an
o However, he is bound by the legal interest
amount equivalent to 12% of the amount
of 6% then outstanding as liquidated damages.
- Hence, Co was ordered to pay the balance of the  Basilio Lirag (Basilio) as President of Lirag Textile Mills
purchase price for the ballet shoes + legal interest signed the Agreement as a surety to guarantee the
redemption of the stocks, the payment of dividends and
other obligations.
 Pursuant to the Agreement, Respondent paid Petitioner
EMERITO M. RAMOS, et al., petitioners, P500,000 on two occasions and the latter issued 5,000
vs. preferred stocks with a par value of P100 as evidenced by
CENTRAL BANK OF THE PHILIPPINES, respondents; Stock Certificate Nos. 128 and 139.
COMMERCIAL BANK OF MANILA, intervenor.  After sending Respondent sent demand letters,
Petitioner and Basilio still made no redemption nor made
Facts: This involves question as to applicability of Tapia ruling dividend payments.
wherein the Court held that "the obligation to pay interest on  Respondent filed an action for specific performance and
the deposit ceases the moment the operation of the bank is damages against Petitioner:
completely suspended by the duly constituted authority, the  Petitioner contends that there is no obligation on their
Central Bank," to loans and advances by the Central Bank part to redeem the stock certificates since Respondent is
still a preferred stock holder of the company and such
Held: Respondents have failed to adduce any cogent redemption is dependent upon the financial ability of the
argument to persuade the Court to reconsider its Resolution company.
at bar that the Tapia ruling is fully applicable to the non-  On the part of Basilio, he contends that his liability only
payment of interest, during the period of the bank's forcible arises only if the company is liable and does not perform
closure, on loans and advances made by respondent Central its obligations under the Agreement.
Bank.

Respondent Central Bank itself when it was then managing Issue:

the Overseas Bank of Manila (now Commercial Bank of
SECTRANS 2010/ ATTY. AGUINALDO 4
 1) Whether or not the Purchase Agreement entered Facts: Angel Warehousing sued Chelda for the
into by the Parties is a debt instrument? recovery of unpaid loans amounting to P20,880 because the
2) If so, Is Basilio liable as surety? post dated checks issued by Chelda were dishonored. Chelda
3) Whether or not Lirag is liable for the interest as said that Angel Warehousing charged usurious interests, thus
liquidated damages? they have no cause of action against them & can’t recover the
remaining balance.

Held: Issue: W/N illegal terms as to payment of interest

likewise renders a nullity the legal terms as to the payment of
1) YES, the Purchase Agreement is a debt instrument. The the principal debt?
terms and conditions of the Agreement show that parties
intended the repurchase of preferred shares on the Ruling: No. The contract of loan with usurious interest
respective scheduled dates to be an absolute obligation, consists of principal and accessory stipulations and the two
which does not depend on the financial ability of the stipulations are divisible in the sense that the principal debt
corporation. can stand without the usurious interest (accessory). These are
o This absolute obligation on the part of the Petitioner divisible contracts. In divisible contracts, if the illegal terms
corporation is made manifest by the fact that a can be separated from legal ones, the latter may be enforced.
surety was required to see to it that the obligation is Illegality lies only as to the prestation to pay interest, being
fulfilled in the event the principal debtor’s inability separable, thus should be rendered void. If the principal will
to do so. be forfeited this would unjustly enrich the borrower at the
o It cannot be said that SSS is a preferred stockholder. expense of the lender.
The rights given by the Purchase Agreement to SSS
are not rights enjoyed by ordinary stockholders. CU-UNJIENG V. MABALACAT
Since there was a condition that failure to
repurchase the stocks on the scheduled dates Facts: Cu Unjieng e Hijos loaned Mabalacat 163 k, for
renders the entire obligation due and demandable security, Mabalacat mortgaged its property.
with interest. These features clearly show that Mabalacat failed to pay, but Cu Unjieng extended the
intent of the parties to be bound therein as debtor payment. Cu Unjieng filed a case against Mabalacat for
and creditor and not as a corporation and foreclosure of property and payment of attorney's fees. It
stockholder. also claims interest over interest. Mabalacat insisted that the
agreement for the extension of the time of payment had the
effect of abrogating the stipulation of the original contract
2) YES, Basilio is liable as surety. Thus it follows that he with respect to the acceleration of the maturity of the debt
cannot deny liability for Lirag’s default. As surety, he is by non-compliance with the terms of the mortgage. The issue
bound immediately to pay SSS the amount then related on this case is the interest over interest.
outstanding.
Issue: WoN Cu-Unjieng is entitled to interest over interest.

3) The award of liquidated damages represented by 12% of Ruling: It is well settled that, under article 1109 of the Civil
the amount then outstanding is correct, considering that Code, as well as under section 5 of the Usury Law (Act No.
the petitioners in the stipulation of facts admitted having 2655), the parties may stipulate that interest shall be
failed to fulfill their obligations under the Agreement. compounded; and rests for the computation of compound
The grant of liquidated damages is expressly provided for interest can certainly be made monthly, as well as quarterly,
the Purchase Agreement in case of contractual breach. semiannually, or annually. But in the absence of express
stipulation for the accumulation of compound interest, no
interest can be collected upon interest until the debt is
Since Lirag did not deny its failure to redeem the judicially claimed, and then the rate at which interest upon
preferred shares and the non-payment of dividends accrued interest must be computed is fixed at 6 per cent per
which are overdue, they are bound to earn legal interest annum. In this case, there was no compound interest in the
from the time of demand, in this case, judicial i.e. the agreement.
time of filing the action.

DAVID vs. CA
G.R.No. 115821, October 13, 1999
ANGEL WAREHOUSING vs CHELDA
Facts:

SECTRANS 2010/ ATTY. AGUINALDO 5

 A writ of attachment over the real properties owned by the David no interest was mentioned. That being the case,
by Valentin Afable, Jr.. RTC ordered Afable, Jr. To pay David the interest should only be subject to a simple interest.
P66,500 plus interest from July 24, 1974, until fully paid. RTC
amended its decison and ruled that legal rate of interest
should be computed from January 4, 1966, instead of from
July 24, 1974. Topic: Simple Loan or Mutuum; Article 1960
Afable appealed to the Court of Appeals and then to Velez v. Balzarra
the Supreme Court. In both instances, the decision of the
lower court was affirmed. Entries of judgment were made FACTS:
and the record of the case was remanded to Branch 27 for  Plaintiff Velez filed a complaint for the return of
the final execution. parcels of land sold by Defendant to Plaintiff’s
husband. She further alleged that defendants had
An Alias Writ of Execution was issued by virtue of remained in possession of said land under Contract
which respondent Sheriff Melchor P. Peña conducted a public of Lease but for over 2 years defendants had not
auction. Sheriff Peña informed the petitioner that the total paid the agreed rentals.
amount of the judgment is P270,940.52. The amount  Defendant alleged that the real agreement was a
included a computation of simple interest. Afable, however, loan secured by a mortgage of those lands.
claimed that the judgment award should be P3,027,238.50,  Trial court found that the payments made by
because the amount due ought to be based on compounded defendants were not made by way of interest but as
interest. payments for the principal. Defendant overpaid
therefore Plaintiff should return excess.
Although the auctioned properties were sold to the
petitioner, Sheriff Peña did not issue the Certificate of Sale ISSUE: Whether payments were intended to be applied to the
because there was an excess in the bid price in the amount of principal OR were considered as rents, interests?
P2,941,524.47, which the petitioner failed to pay despite
notice. David filed a Motion praying that respondent Judge HELD:
Cruz issue an order directing respondent Sheriff Peña to  Payments were NOT rents, interests
prepare and execute a certificate of sale in his favor. His  Neri took possession of land and collected fruits. The
reason is that compound interest, which is allowed by Article creditor having enjoyed the beneficial use of the
2212 of the Civil Code, should apply in this case. lands delivered as security for the loan, it appears to
have been the intention of the parties that the
David claim that in computing the interest due of the creditor should be compensated thereby.
P66,500.00, interest should be computed at 6% on the  Though receipts, payments are called rents, they
principal sum of P66,500.00 pursuant to Article 2209 and were prepared by Neri (P’s husband) and Plaintiff,
then “interest on the legal interest” should also be computed and defendants in their ignorance did not look into
in accordance with the language of Article 2212 of the Civil the wording, being merely satisfied that they were
Code. proofs of payment.
 The liability of plaintiff to return the excess
Issue: Whether or not the amount due should be subject to a payments is in keeping with Article 1895 (Old Civil
simple interest or compounded interest. Code) which provides that, “when something is
received which there is no right to collect, and which
Ruling: by mistake has been unduly delivered, the obligation
to restore it arises.”
In cases where no interest stipulated, no compounded  The 2 requisites are present: 1) There is no right to
interest could be further earned collect these excess sums; and 2) the amounts have
been paid through mistake by defendants. Such
The Court ruled that Article 2212 contemplates the mistake is shown by the fact that their contracts
presence of stipulated or conventional interest which has never intended that either rents or interest should
accrued when demand was judicially made. In cases where be paid, and by the further fact that when these
no interest had been stipulated by the parties, as in the case payments were made, they were intended by
of Philippine American Accident Insurance, no accrued defendants to be applied to the principal, but they
conventional interest could further earn interest upon judicial overpaid the amounts loaned to them.
demand.

In this case, no interest was stipulated by the parties.

In the promissory note denominated “Compromise USURY LAW
Agreement” signed by the Afable, Jr. which was duly accepted
SECTRANS 2010/ ATTY. AGUINALDO 6
 G.R. No. 128990 September 21, 2000 (4) Lastly, to secure the payment of the receivables
under the Deed of Assignment, BARRETTO would
INVESTORS FINANCE CORPORATION, petitioner, mortgage the property subject of the sale to FNCB.
vs.
AUTOWORLD SALES CORPORATION, and PIO BARRETTO On 17 November 1980 FNCB informed AUTOWORLD that its
REALTY DEVELOPMENT Executive Committee approved the proposed "IPP"
CORPORATION,respondents. transaction. The lawyers of FNCB then drafted the contracts
needed and furnished Anthony Que with copies thereof.
FACTS:
On 9 February 1981 the parties signed three (3) contracts to
Petitioner Investors Finance Corporation, then known also as implement the "IPP" transaction:
FNCB Finance (now doing business under the name of
Citytrust Finance Corporation), is a financing company doing (1) Contract to Sell whereby BARRETTO sold a parcel
business with private respondent Autoworld Sales of land to AUTOWORLD, situated in San Miguel,
Corporation (AUTOWORLD) since 1975. Anthony Que, Manila, together with the improvements thereon,
president of AUTOWORLD, also held the same position at its covered by TCT No. 129763 for the price of
affiliate corporation, private respondent Pio Barretto Realty P12,999,999.60 payable in sixty (60) consecutive and
Corporation (BARRETTO). equal monthly installments of P216,666.66.

Sometime in August 1980 Anthony Que, in behalf of (2) Deed of Assignment whereby BARRETTO assigned
AUTOWORLD, applied for a direct loan with FNCB. However, and sold in favor of FNCB all its rights, title and
since the Usury Law imposed an interest rate ceiling at that interest to all the money and other receivables due
time, FNCB informed Anthony Que that it was not engaged in from AUTOWORLD under the Contract to Sell,
direct lending; consequently, AUTOWORLD's request for loan subject to the condition that the assignee (FNCB) has
was denied. the right of recourse against the assignor
(BARRETTO) in the event that the payor
But sometime thereafter, FNCB's Assistant Vice President, Mr. (AUTOWORLD) defaulted in the payment of its
Leoncio Araullo, informed Anthony Que that although it could obligations.
not grant direct loans it could extend funds to AUTOWORLD
by purchasing any of its outstanding receivables at a discount. (3) Real Estate Mortgage whereby BARRETTO, as
After a series of negotiations the parties agreed to execute an assignor, mortgaged the property subject of the
Installment Paper Purchase ("IPP") transaction to enable Contract to Sell to FNCB as security for payment of
AUTOWORLD to acquire the additional capital it needed. The its obligation under the Deed of Assignment.
mechanics of the proposed "IPP" transaction was —
After the three (3) contracts were concluded AUTOWORLD
(1) First, Pio Barretto (BARRETTO) would execute a started paying the monthly installments to FNCB.
Contract to Sell a parcel of land in favor of
AUTOWORLD for P12,999,999.60 payable in sixty On 18 June 1982 AUTOWORLD transacted with FNCB for the
(60) equal monthly installments of P216,666.66. second time obtaining a loan of P3,000,000.00 with an
Consequently, BARRETTO would acquire effective interest rate of 28% per annum. AUTOWORLD and
P12,999,999.60 worth of receivables from BARRETTO, as co-makers, then signed a promissory note in
AUTOWORLD; favor of FNCB worth P5,604,480.00 payable in sixty (60)
consecutive monthly installments of P93,408.00. To secure
(2) FNCB would then purchase the receivables worth the promissory note, AUTOWORLD mortgaged a parcel of
P12,999,999.60 from BARRETTO at a discounted land located in Sampaloc, Manila, to FNCB. Thereafter,
value of P6,980,000.00 subject to the condition that AUTOWORLD began paying the installments.
such amount would be "flowed back" to
AUTOWORLD; In December 1982, after paying nineteen (19) monthly
installments of P216,666.66 on the first transaction ("IPP"
(3) BARRETTO, would in turn, execute a Deed of worth P6,980,000.00) and three (3) monthly installments of
Assignment (in favor of FNCB) obliging AUTOWORLD P93,408.00 on the second transaction (loan worth
to pay the installments of the P12,999,999.60 P3,000,000.00), AUTOWORLD advised FNCB that it intended
purchase price directly to FNCB; and to preterminate the two (2) transactions by paying their
outstanding balances in full. It then requested FNCB to
provide a computation of the remaining balances. FNCB sent
AUTOWORLD its computation requiring it to pay a total

SECTRANS 2010/ ATTY. AGUINALDO 7

amount of P10,026,736.78, where P6,784,551.24 was the to reimburse AUTOWORLD P2,586,035.44 as excess interest
amount to settle the first transaction while P3,242,165.54 payments over the 12% ceiling rate. However, with regard to
was the amount to settle the second transaction. the second transaction, the appellate court ruled that at the
time it was executed the ceiling rates imposed by the Usury
On 20 December 1982 AUTOWORLD wrote FNCB that it Law had already been lifted thus allowing the parties to
disagreed with the latter's computation of its outstanding stipulate any rate of interest.
balances. On 27 December 1982 FNCB replied that it would
only be willing to reconcile its accounting records with ISSUE:
AUTOWORLD upon payment of the amounts
demanded. Thus, despite its objections, AUTOWORLD We stress at the outset that this petition concerns itself only
reluctantly paid FNCB P10,026,736.78 through its UCPB with the first transaction involving the alleged' "IPP" worth
account. P6,980,000.00, which was implemented through the three (3)
contracts of 9 February 1981. As to the second transaction,
On 5 January 1983 AUTOWORLD asked FNCB for a refund of which involves the P3,000,000.00 loan, we agree with the
its overpayments in the total amount of appellate court that it was executed when the ceiling rates of
P3,082,021.84. According to AUTOWORLD, it overpaid interest had already been removed, hence the parties were
P2,586,035.44 to settle the first transaction and P418,262.00 free to fix any interest rate.
to settle the second transaction.
The pivotal issue therefore is whether the three (3) contracts
The parties attempted to reconcile their accounting figures all dated 9 February 1981 were executed to implement a
but the subsequent negotiations broke down prompting legitimate Installment Paper Purchase ("IPP") transaction or
AUTOWORLD to file an action before the Regional Trial Court merely to conceal a usurious loan.
of Makati to annul the Contract to Sell, the Deed of
Assignment and the Real Estate Mortgage all dated 9 HELD:
February 1981. It likewise prayed for the nullification of
thePromissory Note dated 18 June 1982 and the Real Estate The three (3) contracts were executed to conceal a usurious
Mortgage dated 24 June 1982. loan.

In its complaint, AUTOWORLD alleged that the Generally, the courts only need to rely on the face of written
aforementioned contracts were only perfected to facilitate a contracts to determine the intention of the parties.
usurious loan and therefore should be annulled "However, the law will not permit a usurious loan to hide
itself behind a legal form. Parol evidence is admissible to
FNCB argued that the contracts dated 9 February 1981 were show that a written document though legal in form was in
not executed to hide a usurious loan. Instead, the parties fact a device to cover usury. If from a construction of the
entered into a legitimate Installment Paper Purchase ("IPP") whole transaction it becomes apparent that there exists a
transaction, or purchase of receivables at a discount, which corrupt intention to violate the Usury Law, the courts should
FNCB could legally engage in as a financing company. With and will permit no scheme, however ingenious, to becloud
regard to the second transaction, the existence of a usurious the crime of usury." The following circumstances show that
interest rate had no bearing on the P3,000,000.00 loan since such scheme was indeed employed:
at the time it was perfected on 18 January 1982 Central Bank
Circular No. 871 dated 21 July 1981 had effectively lifted the First, petitioner claims that it was never a party to
ceiling rates for loans having a period of more than three the Contract to Sell between AUTOWORLD and BARRETTO. As
hundred sixty-five (365) days. far as it was concerned, it merely purchased receivables at a
discount from BARRETTO as evidenced by the Deed of
On 11 July 1988 the Regional Trial Court of Makati ruled in Assignment dated 9 February 1981. Whether the Contract to
favor of FNCB declaring that the parties voluntarily and Sell was fictitious or not would have no effect on its right to
knowingly executed a legitimate "IPP" transaction or the claim the receivables of BARRETTO from AUTOWORLD since
discounting of receivables. AUTOWORLD was not entitled to the two contracts were entirely separate and distinct from
any reimbursement since it was unable to prove the existence each other.
of a usurious loan.
Curiously however, petitioner admitted that its lawyers were
The Court of Appeals modified the decision of the trial court the ones who drafted all the three (3) contracts
and concluded that the "IPP" transaction, comprising of the involved which were executed on the same day. Also,
three (3) contracts perfected on 9 February 1981, was merely petitioner was the one who procured the services of the
a scheme employed by the parties to disguise a usurious loan. Asian Appraisal Company to determine the fair market value
It ordered the annulment of the contracts and required FNCB of the land to be sold way back in September of 1980 or six

SECTRANS 2010/ ATTY. AGUINALDO 8

(6) months prior to the sale. If it were true that petitioner was need to cloak the exorbitant interest rate, the promissory
never privy to the Contract to Sell, then why was it interested note evidencing the second transaction glaringly bore the
in appraising the lot six (6) months prior to the sale? And why 28% interest rate on its face. We are therefore of the
did petitioner's own lawyers prepare the Contract to Sell? impression that had there been no interest rate ceilings in
Obviously, petitioner actively participated in the sale to 1981, petitioner would not have resorted to the fictitious
ensure that the appraised lot would serve as adequate "IPP" transaction; instead, it would have directly loaned the
collateral for the usurious loan it gave to AUTOWORLD. money to AUTOWORLD with an interest rate higher than
12%.
Second, petitioner insists that the 9 February 1981
transaction was a legitimate "IPP" transaction where it only Thus, although the three (3) contracts seemingly show at face
bought the receivables of BARRETTO from AUTOWORLD value that petitioner only entered into a legitimate
amounting to P12,999,999.60 at a discounted price of discounting of receivables, the circumstances cited prove that
P6,980,000.00. However, per instruction of petitioner in its the P6,980,000.00 was really a usurious loan extended to
letter to BARRETTO dated 17 November 1980 the whole AUTOWORLD.
purchase price of the receivables was to be "flowed back" to
AUTOWORLD. And in its subsequent letter of 24 February Petitioner anchors its defense on Sec. 7 of the Usury Law
1981 petitioner also gave instructions on how BARRETTO which states —
should apply the proceeds worth P6,980,000.00.
Provided, finally, That nothing herein contained shall
It can be seen that out of the nine (9) items of appropriation be construed to prevent the purchase by an
stated (in the letter), Item Nos. 2-8 had to be returned to innocent purchaser of a negotiable mercantile
petitioner. Thus, in compliance with the aforesaid letter, paper, usurious or otherwise, for valuable
BARRETTO had to yield P4,058,468.47 of the P6,980,000.00 to consideration before maturity, when there has been
petitioner to settle some of AUTOWORLD's previous debts to no intention on the part of said purchaser to evade
it. Any remaining amount after the application of the the provisions of the Act and said purchase was not
proceeds would then be surrendered to AUTOWORLD in a part of the original usurious transaction. In any
compliance with the letter of 17 November 1980; none went case however, the maker of said note shall have the
to BARRETTO. right to recover from said original holder the whole
interest paid by him thereon and, in any case of
The foregoing circumstances confirm that the P6,980,000.00 litigation, also the costs and such attorney's fees as
was really an indirect loan extended to AUTOWORLD so that may be allowed by the court.
it could settle its previous debts to petitioner. Had petitioner
entered into a legitimate purchase of receivables, then Indeed, the Usury Law recognizes the legitimate purchase of
BARRETTO, as seller, would have received the whole negotiable mercantile paper by innocent purchasers. But
purchase price, and free to dispose of such proceeds in any even the law has anticipated the potential abuse of such
manner it wanted. It would not have been obliged to follow transactions to conceal usurious loans. Thus, the law itself
the "Application of Proceeds" stated in petitioner's letter. made a qualification. It would recognize legitimate purchase
of negotiable mercantile paper, whether usurious or
Third, in its 17 November 1980 letter to BARRETTO, petitioner otherwise, only if the purchaser had no intention of evading
itself designated the proceeds of the "IPP" transaction as a the provisions of the Usury Law and that the purchase was
"loan." In that letter, petitioner stated that the "loan not a part of the original usurious transaction. Otherwise, the
proceeds" amounting to P6,980,000.00 would be released to law would not hesitate to annul such contracts. Thus, Art.
BARRETTO only upon submission of the documents it 1957 of the Civil Code provides —
required. And as previously mentioned, one of the required
documents was a letter agreement between BARRETTO and Contracts and stipulations, under any cloak or device
AUTOWORLD stipulating that the P6,980,000.00 should be whatever, intended to circumvent the laws on usury
"flowed back" to AUTOWORLD. If it were a genuine "IPP" shall be void. The borrower may recover in
transaction then petitioner would not have designated the accordance with the laws on usury.
money to be released as "loan proceeds" and BARRETTO
would have been the end recipient of such proceeds with no In the case at bar, the attending factors surrounding the
obligation to turn them over to AUTOWORLD. execution of the three (3) contracts on 9 February 1981
clearly establish that the parties intended to transact a
Fourth, after the interest rate ceilings were lifted on 21 July usurious loan. These contracts should therefore be declared
1981 petitioner extended on 18 June 1982 a direct loan of void. Having declared the transaction between the parties as
P3,000,000.00 to AUTOWORLD. This time however, with no void, we are now tasked to determine how much
more ceiling rates to hinder it, petitioner imposed a 28% reimbursement AUTOWORLD is entitled to. The Court of
effective interest rate on the loan. And no longer having a
SECTRANS 2010/ ATTY. AGUINALDO 9
Appeals, adopting the computation of AUTOWORLD in its mortgage. Also, Petitioner-spouses opined that the 6%
plaintiff-appellant's brief, ruled — monthly interest was unconscionable.
 The subsequent mortgages were merely continuations of
According to plaintiff-appellant, defendant-appellee the first one, which is null and void.
was able to collect P3,921,217.78 in interests from  Moreover, the Respondent assured them that he will not
appellant. This is not denied by the appellee. foreclose the mortgage as long as they pay the stipulated
Computed at 12% the effective interest should have interest upon maturity or within a reasonable time
been P1,545,400.00. Hence, appellant may recover thereafter. Petitioner-spouses substantially paid the
P2,586,035.44, representing overpayment arising loans with interest but were unable to pay it in full.
from usurious interest rate charged by appellee.  On the other hand, the Respondent claimed that the
mortgages were executed to secure 3 separate loans of
While we do not dispute the appellate court's finding that the and that the first two loans were paid, but the last one
first transaction was a usurious loan, we do not agree with was not.
the amount of reimbursement awarded to AUTOWORLD.  He denied having represented that he will not foreclose
Indeed, it erred in awarding only the interest paid in excess of the mortgage as long as the Petitioner-spouses pay
the 12% ceiling. In usurious loans, the creditor can always interest.
recover the principal debt. However, the stipulation on the  Lower courts ruled in favour of Respondent. Thus, this
interest is considered void thus allowing the debtor to claim petition.
the whole interest paid. In a loan of P1,000.00 with interest at
20% per annum or P200.00 per year, if the borrower pays Issue:
P200.00, the whole P200.00 would be considered usurious
interest, not just the portion thereof in excess of the interest Whether or not the 6% monthly interest is unconscionable?
allowed by law.
Ruling:
In the instant case, AUTOWORLD obtained a loan of
P6,980,000.00. Thereafter, it paid nineteen (19) consecutive Yes. The SC ruled that this is unconscionable.
installments of P216,666.66 amounting to a total of
P4,116,666.54, and further paid a balance of P6,784,551.24  While the Usury Law ceiling on interest rates was lifted
to settle it. All in all, it paid the aggregate amount of by C.B. Circular No. 905, nothing in the said circular
P10,901,217.78 for a debt of P6,980,000.00. For the 23- grants lenders carte blanche authority to raise interest
month period of the existence of the loan covering the period rates to levels which will either enslave their borrowers
February 1981 to January 1982, AUTOWORLD paid a total of or lead to a hemorrhaging of their assets.
P3,921,217.78 in interests. Applying the 12% interest ceiling  In Medel v. Court of Appeals, the Court decreed that the
rate mandated by the Usury Law, AUTOWORLD should have 5.5% interest or 66% per annum was not usurious but
only paid a total of P1,605,400.00 in interests. Hence, held that the same must be equitably reduced for being
AUTOWORLD is entitled to recover the whole usurious iniquitous, unconscionable and exorbitant , and hence,
interest amounting to P3,921,217.78. contrary to morals (‘contra bonos mores’), if not against
the law.
 In the case at bench, Petitioner-spouses stand on a worse
situation. They are required to pay the stipulated interest
Solangon vs Salazar rate of 6% per month or 72% per annum which is
definitely outrageous and inordinate.
G.R. No. 125944 June 29, 2001  Hence, the interest rate must be reduced equitably. An
interest of 12% per annum is deemed fair and
Facts: reasonable.

 Petitioner-spouses executed 3 real estate mortgages on a

parcel of land situated in Bulacan, in favor of the same
Respondent Salazar to secure payment of loans of P60 K,
P136 K and P230 K payable within 4 months, 1 year, and SPOUSES PASCUAL VS. RAMOS
4 months in that order, with 6% monthly interest on the
first loan, and legal interests on the others. FACTS: Petitioners executed a Deed of Absolute Sale with
 This action was initiated by the Petitioner-spouses to Right to Repurchase with respondent, in consideration of Php
prevent the foreclosure of the mortgaged property. 150,000. The petitioners did not exercise their right to
 They alleged that they obtained only one loan from the repurchase the property within the stipulated one-year
Respondent which was the P60 K secured by the first period; hence, respondent prayed that the title over the

SECTRANS 2010/ ATTY. AGUINALDO 10

parcels of land be consolidated in his favor. Petitioners aver EASTERN SHIPPING v CA
that what was really executed between them and the
respondent is a real estate mortgage and that there was no FACTS:
agreement limiting the period within which to exercise the
right to repurchase and that they have even overpaid - 2 Fiber drums of Riboflavin were shipped from Japan
respondent. for delivery vessel owned by Eastern Shipping (P)
and that the shipment was insured by Mercantile
Respondent offered in evidence a document denominated as Insurance (R)
Sinumpaang Salaysay which had a provision of an interest of - Upon arrival in Manila, it was discharged unto the
7% per month on the principal loan of Php 150,000. RTC ruled custody of Metro Port, which it stated in its survey
that the transaction was actually a loan and the payment was that 1 drum was in bad order.
secured by a mortgage of the property, and that the - It was then received by Allied Brokerage wherein it
petitioners had made payments which resulted in stated in its survey that one drum was opened and
overpayment as the interest was at 7% per annum. without seal
Respondent filed an MR alleging that the interest stipulated - Allied then delivered it to the consignee’s W/H,
in the Sinumpaang Salaysay was 7% per month. The RTC which it excepted that 1 drum contained spillages
ruled in favor of the respondent acknowledging that the while the rest was adulterated/fake
correct interest rate stipulated was 7% per month. However, - R then filed claims against P for the losses sustained
the RTC declared that the 7% per month interest is too by the consignee (which R subrogated).
burdensome and onerous and so the court unilaterally - LC ruled in favor of R and ordered P to pay damages,
reduced the interest rate from 7% per month to 5% per however, it failed to state when the interest rate
month. Petitioners filed an MR alleging that either 5% or 7% should commence – from date of filing of complaint
per month is exorbitant, unconscionable, unreasonable, at 12% or from date of judgment of TC at 6%
usurious and inequitable.
ISSUE: When should the interest rate commence and at what
ISSUE: WON the interest of 5% month is exorbitant, rate
unconscionable, unreasonable, usurious and inequitable.
SC: 6% from the date of decision and 12% from date of
HELD: NO. It is a basic principle in civil law that parties are finality of judgment until payment
bound by the stipulations in the contracts voluntarily entered
into by them. Parties are free to stipulate terms and - This case laid down the rules on the interest rates:
conditions which they deem convenient provided they are - A) when an obligation regardless of its source, is
not contrary to law, morals, good customs, public order, or breached, the contravenor can be held liable for
public policy. damages
- B) with regard particularly to an award of interest in
The interest rate of 7% per month was voluntarily agreed the concept of actual and compensatory damages,
upon by RAMOS and the PASCUALs. There is nothing from the rate of interest, as well as the accrual thereof,
the records and, in fact, there is no allegation showing that shall be as follows:
petitioners were victims of fraud when they entered into the - If it consists of payment of money
agreement with RAMOS. Neither is there a showing that in (loan/forbearance)
their contractual relations with RAMOS, the PASCUALs were o Interest due imposed = as stipulated in
at a disadvantage on account of their moral dependence, writing and the
ignorance, mental weakness, tender age or other handicap, o Interest due = earn legal interest from the
which would entitle them to the vigilant protection of the time it is judicially demanded
courts as mandated by Article 24 of the Civil Code. o No stipulation = 12% per annum from date
of default (judicial/extra judicial)
With the suspension of the Usury Law and the removal of - If it is not loan/forbearance
interest ceiling, the parties are free to stipulate the interest to o Interest on amount of damages = imposed
be imposed on loans. Absent any evidence of fraud, undue by discretion of court at 6%
influence, or any vice of consent exercised by RAMOS on the o No interest shall be ordered on
PASCUALs, the interest agreed upon is binding upon them. unliquidated claims/damages until demand
This Court is not in a position to impose upon parties can be established with reasonable
contractual stipulations different from what they have agreed certainty
upon o When demand is established with
reasonable certainty, interest shall begin to
REFORMINA V. TOMOL run from the time the claim is made
(judicially/extrajudicially)

SECTRANS 2010/ ATTY. AGUINALDO 11

 o But if it cannot be reasonably established at 7) In its appeal EASCO to the SC, it contended that the
the time demand was made = interest to CA wrongfully applied the aforecited paragraph 3 of
run from date of judgment of the court the suggested rules of thumb for future guidance [as
- If judgment becomes Final and Executory formulated in Eastern Shipping Lines, Inc. v. Court of
o Rate of legal interest = 12% Appeals, and unlawfully ignored or disregarded the
o From finality to satisfaction agreed cut-off date for the payment of the legal rate.
o Why? It is already considered as
forbearance Issue: When the judgment of the court awarding a
sum of money becomes final and executory what is
the rate to be imposed?

EASTERN ASSURANCE AND SURETY CORPORATION (EASCO), Held: Petitioner's contentions are without merit.
vs. Court of Appeals
The prior Eastern Shipping Lines, Inc. v. Court of Appeals, was
held:
Facts:
I. When an obligation, regardless of its source, i.e.,
1) On April 9, 1981, private respondent Vicente Tan law, contracts, quasi-contracts, delicts or quasi-
insured his building in Dumaguete City against fire delicts, is breached, the contravener can be held
with petitioner Eastern Assurance and Surety liable for damages. The provisions under "Damages"
Corporation (EASCO) for P250,000.00. of the Civil Code govern in determining the measure
2) On June 26, 1981, the building was destroyed by fire. of recoverable damages.
As his claim for indemnity was refused, private
respondent filed a complaint for breach of contract II. With regard particularly to an award of interest in
with damages against petitioner. The RTC Court, the concept of actual and compensatory damages,
decided in favour of Vicente Tan. In its ruling, the the rate of interest, as well as the accrual thereof, is
RTC court imposed the rate of interest at 12% per imposed, as follows:
annum, and decided that EASCO to pay immediately
to Vicente Tan the unpaid balance of interest of the
Par. 3: When the judgment of the court awarding a sum of
principal amount of P250,000.00 equivalent to 6%
money becomes final and executory, the rate of legal interest,
per annum from June 26, 1981 to September
whether the case falls under paragraph 1 or paragraph 2,
30,1994.
above, shall be 12% per annum from such finality until its
3) Petitioner EASCO appealed to the Court of Appeals,
satisfaction, this interim period being deemed to be by then
which, on July 30, 1993, affirmed the decision of the
an equivalent to a forbearance of credit.
trial court. The CA, on the authority of prior case,
Eastern Shipping Lines, Inc. v. Court of Appeals, that
the interest rate on the amount due should be 6% Unquestionably, this case falls under the rule stated in
per annum from June 26, 1981 to August 24, 1993, paragraph 3. The question is whether this rule can be applied
and 12% per annum beginning August 25, 1993 until to this case.
the money judgment is paid.
4) Thereafter, petitioner EASCO tendered payment of The prior Eastern Shipping Lines, case. did not lay down any
the money judgment in the amount of P250,000.00 new rules because it was just a a comprehensive summary of
plus interest of 6% per annum from June 26, 1981 to existing rules on the computation of legal interest.
July 30, 1993.
5) However, private respondent refused to accept As to the "cut-off date" for the payment of legal interest:
payment on the ground that the applicable legal rate
of interest was 12% per annum. Subsequently, The trial court's finding on this point is binding. Hence, the
private respondent brought the matter to the payment of 12% legal interest per annum should commence
Insurance Commission. from August 25, 1993, the date the decision of the trial court
6) Then in, 1995, the parties agreed before the hearing became final, up to September 30, 1994, the agreed "cut-off-
officer of the commission that the interest should be date" for the payment of legal interest. The decision of the CA
computed from June 26, 1981 to September 30, is affirmed.
1994. Petitioner would file with the trial court a
motion to fix the legal rate of interest attaching
thereto a check in the amount of P250,000.00 with
6% interest per annum. PILIPINAS BANK, petitioner,
vs.
SECTRANS 2010/ ATTY. AGUINALDO 12
THE HONORABLE COURT OF APPEALS, and LILIA R. ECHAUS, (2) the amount of P1,898,623.67 to be refunded by private
respondents. respondent to petitioner shall earn interest of 12% per
annum. - where money is transferred from one person to
Facts: private respondent filed a complaint against petitioner another and the obligation to return the same or a portion
and its president, Constantino Bautista, for collection of a thereof is subsequently adjudged.
sum of money. The complaint alleged: (1) that petitioner and
Greatland executed a "Dacion en Pago," wherein Greatland
conveyed to petitioner several parcels of land in
consideration of the sum of P7,776,335.69; (2) that Greatland PNB v CA
assigned P2,300,000.00 out of the total consideration in favor
of private respondent; and (3) that notwithstanding her FACTS:
demand for payment, petitioner refused and failed to pay the
said amount assigned to her. - Province of Isabela issued several checks drawn
against its account with PNB (P) in favor of Ibarrola
Petitioner claimed: (1) that its former president had no (R), as payments for the purchase of medicines.
authority (2) that it never ratified the same; and (3) that - The checks were delivered to R’s agents who turned
assuming arguendo that the agreement was binding, the them over to R, except 23 checks amounting to
conditions stipulated therein were never fulfilled. P98k.
- Due to failure to receive full amount, R filed case
The trial court ruled in favor of private respondent. against P
- LC, CA and SC ordered PNB to pay however, all 3
courts failed to specify the legal rate of interest – 6%
Court of Appeals modified the Order dated April 3, 1985, by
or 12%
limiting the execution pending appeal against petitioner to
P5,517.707.00 ISSUE: WoN the rate to be used is 6%

Trial court granted the new motion for execution pending SC: YES!
appeal. Petitioner complied with the writ of execution
pending appeal by issuing two manager's checks in the total - This case does not involve a loan, forbearance of
amount of P5,517,707.00 money or judgment involving a loan or forbearance
of money as it arose from a contract of sale whereby
The Court of Appeals rendered a decision in CA-G.R. No. CV- R did not receive full payment for her merchandise.
06017, which modified the judgment of the trial court - When an obligation arises “from a contract of
purchase and sale and not from a contract of loan or
Petitioner filed a motion in the trial court praying that private mutuum,” the applicable rate is 6% per annum as
respondent to refund to her the excess payment of provided in Art. 2209 of the NCC
P1,898,623.67 with interests at 6%. It must be recalled that - 6% from filing of complaint until full payment before
while private respondent was able to collect P5,517,707.00 finality of judgment
from petitioner pursuant to the writ of advance execution, - 12% from finality of judgment
the final judgment in the main case awarded to private
respondent damages in the total amount of P3,619,083.33
PLANTILLA vs. BALIWAG
358 SCRA 396
ISSUE: What interest rate applicable?
Facts:
HELD: Note that Circular No. 416, fixing the rate of interest at
12% per annum, deals with (1) loans; (2) forbearance of any
money, goods or credit; and
(3) judgments.  In a civil case, lower court rendered a decision ordering:
o Spouses Orga and Plantilla to reinstate Suiza as
(1) the amount of P2,300,000.00 adjudged to be paid by share tenant
petitioner to private respondent shall earn interest of 6% per o That they pay Suiza unrealized shares from the
annum - The said obligation arose from a contract of harvests of coconut fruits from August until
purchase and sale and not from a contract of loan or reinstated the amount of P1,000 with legal
mutuum. Hence, what is applicable is the rate of 6% per interest until fully paid.
annum as provided in Article 2209 of the Civil Code of the  The decision, however, did not state the interest to be
Philippines and not the rate of 12% per annum as provided in charged.
Circular No. 416.
SECTRANS 2010/ ATTY. AGUINALDO 13
 A writ of execution was issued addressed to Sheriff this case it’s valid because it was not excessive under the
Baliwag. Usury Law.
 Baliwag demanded payment from the spouses
representing the share of Suiza the amount of 480k, *Atty. Aguinaldo assigned this case because he just wanted to
representing the coconut harvest from Aug 1979 to Jan show us how to compute for the interest in long term deals.
1998 at P1,000 with 8 harvests per year with an interest He even made a diagram on the board. Di ko na ilalagay un sa
rate of 12% per annum or a total of 222% plus attorney’s digest because I assume that my industrious & responsible
fees. classmates took down notes... = p
 Col. Plantilla, administrator of the spouses, filed an
administrative complaint against Baliwag charging him of
serious irregularities in implementation of the writ of RODZSSEN SUPPLY V. FAR EAST
execution alleging that dispositive portion of the decision
did not contain 8 harvest per year and Baliwag took it
upon himself to specify the number of harvests. Facts: On January 15, 1979, defendant Rodzssen Supply, Inc.
opened with plaintiff Far East Bank and Trust Co. a 30-day
domestic letter of credit, in the amount of P190,000.00 in
Issue: Whether or not Sheriff is guilty of irregularities? favor of Ekman and Company, Inc. (Ekman) for the purchase
from the latter of five units of hydraulic loaders, to expire on
Held: February 15, 1979. The three loaders were delivered to
defendant for which plaintiff paid Ekman and which
Yes, Baliwag is guilty of malfeasance, not irregularities. The defendant paid plaintiff before expiry date of LC. The
determination of the amount due under the writ properly remaining two loaders were delivered to defendant but the
pertained to the Judge. Yet, respondent assumed the task. latter refused to pay. Ekman pressed payment to plaintiff.
For doing so instead of pointing out to the court the Plaintiff paid Ekman for the two loaders and later demanded
deficiency of the writ, he should be sanctioned. He should not from defendant such amount as it paid Ekman. Defendant
have arrogated unto himself judicial functions that were to be refused payment contending that there was a breach of
performed only by the judge. contract by plaintiff who in bad faith paid Ekman, knowing
that the two units of hydraulic loaders had been delivered to
defendant after the expiry date of subject LC.

The computation of the amount due under the writ is not the Issue: WON petitioner is liable to respondent.
duty of the sheriff. Such amount should have already been
specifically stated in the writ if execution issued by the court Ruling: The SC agrees with the CA that petitioner should pay
under Section 3 Rule 39 of the 1997 Rules of Court. All that respondent bank the amount the latter expended for the
the sheriff should do upon receipt of that writ is the equipment belatedly delivered by Ekman and voluntarily
ministerial duty of enforcing it. received and kept by petitioner. Equitable considerations
behoove us to allow recovery by respondent. True, it erred in
paying Ekman, but petitioner itself was not without fault in
the transaction. It must be noted that the latter had
RCBC vs ALFA voluntarily received and kept the loaders since October 1979.
When both parties to a transaction are mutually negligent in
Facts: Alfa on separate instances was granted by the performance of their obligations, the fault of one cancels
RCBC 4 letters of credit to facilitate the purchase of raw the negligence of the other and, as in this case, their rights
materials for their garments business. Alfa executed 4 trust and obligations may be determined equitably under the law
receipts and made comprehensive surety agreements proscribing unjust enrichment.
wherein the signatory officers of Alfa agreed in joint/several
capacity to pay RCBC in case the company defaulted. RCBC
filed a case versus Alfa for a sum of money. The CA awarded MENDOZA vs CA
only P3M (minimum amount) to RCBC instead of P18M as G.R.No. 116710, June 25,2001
stipulated in their contract.
Facts:
Issue: W/N the CA can deviate from the provisions
of the contract between the parties? PNB extended P500,000 credit line and P1 million
letter of credit infavor of Mendoza. As security for the credit
Ruling: No. Contracting parties may establish agreements accomodations, he mortgaged real and personal properties to
terms, deemed advisable provided they are not contrary to PNB. The real estate mortgage provided for an escalation
law/public policy. A contract is a law between the parties. In clause.

SECTRANS 2010/ ATTY. AGUINALDO 14

 He also executed 3 promissory notes covering the of mutuality of contract. Contract changes must be made
P500,000 credit line in 1979. The said notes also provided for with the consent of the contractiong parties. The minds of all
an interest at the rate of 12% per annum until paid , and that parties must meet as to the proposed modification, especially
PNB may raise the interest without further notice. wwhen it affects an important aspect of the agreement. No
one receiving a proposal to change a contract to which the
He also executed 11 Application and Agreement for party is obliged to answer the proposal, and his silence per se
the commercial letter of credit providing for 9% interest per cannot be construed as acceptance.
annum from the date of drafts until the arrival of payment in
New York and that the bank may increase the interest
without further notice. The bank sent a letter to Mendoza, DEPOSIT
informing him that the interest rates increased to 14% per
annum.
Topic: Deposit; Article 1962
Mendoza made some proposals for the restructuring Calibo v. CA
of his past due accounts into 5 year term loan and for an FACTS:
additional P2 million letter of credit. However, PNB did not  Respondent Abella’s son Mike rented for residential
approve his proposal and reduced the letter of credit to P 1 purposes the house of Petitioner Calibo.
million only.  Respondent left a tractor in his son’s garage for
safekeeping
Mendoza claimed that he was forced to sign 2 blank  Petitioner – Mike had not paid rentals, electric and
promissory notes and claimed that his proposal for 5 year water bills
restructuring of his past due accounts was approved . He also  Mike reassured Calibo that the tractor would stand
alleged taht PNB violated their agreement because PNB as guarantee for its payment
inserted 21% instead of 18% in the first promissory note and  Respondent wanted to take possession of his tractor
18% instead of 12% in the second promissory note. The 2 but Petitioner said that the Mike had left the tractor
promissory notes also provided escalation clauses. with him as security for the payment of Mike’s
obligation to him.
The 2 newly executed promissory notes novated the  Respondent issued postdated checks but Petitioner
three 1979 promissory notes and 11 Application and will only accept check if Respondent executes
Agreement for Commercial Letter of Credit executed by Promissory Note to cover payment for unpaid
Mendoza earlier. electric and water bills.
 Petitioner instituted an action for replevin claiming
After sometime, pursuant to the escalation clause, ownership of the tractor and seeking to recover
the interests in the two promissory notes were again possession thereof from petitioner. Likewise, he
increased. Due to Mendoza’s failure to pay the 2 promissory asserts that the tractor was left with him, in the
notes, PNB foreclosed the real and personal mortgages. concept of an innkeeper, on deposit and that he may
Mendoza filed for specific performance, nullification of validly hold on thereto until Mike Abella pays his
foreclosure and damages. obligations.
 TC and CA – Mike could not have validly pledged the
tractor because he was not the owner. NO DEPOSIT

Issue: Whether or not the interest rates imposed on the 2 ISSUE: WON there was a valid deposit?
newly executed promissory notes were valid.
HELD: NO
Ruling:  In a contract of deposit, a person receives an object
belonging to another with the obligation of safely
The Court upheld the validity of the 2 newly keeping it and of returning the same. Petitioner
executed promissory notes on the ground that private himself stated that he received the tractor not to
transactions are presumed to be fair and regular. safely keep it but as a form of security for the
payment of Mike Abella’s obligations. There is no
However, it ruled that interest rates imposed on the deposit where the principal purpose for receiving
2 newly executed promissory notes are not valid on the the object is not safekeeping.
ground that Mendoza was not informed beforehand by PNB  Consequently, petitioner had no right to refuse
of the change in the stipulated interest rates. delivery of the tractor to its lawful owner. On the
other hand, private respondent, as owner, had every
It held that unilateral determination and imposition right to seek to repossess the tractor including the
of increased interest rates by PNB is violative of the principle institution of the instant action for replevin.

SECTRANS 2010/ ATTY. AGUINALDO 15

  the full and absolute possession and control of the
SDB was not given to the joint renters — the
BISHOP OF JARO V. DELA PENA Petitioner and the Pugaos.
 The guard key of the box remained with the
CA Agro-Industrial vs CA Respondent Bank; without this key, neither of the
G.R. No. 90027 March 3, 1993 renters could open the box and vice versa.
 In this case, the said key had a duplicate which was
Facts made so that both renters could have access to the
box.
 Petitioner (through its President) purchased 2 parcels of  Moreover, the renting out of the SDBs is not
land from spouses Pugao for P350 K with a independent from, but related to or in conjunction
downpayment of P75 K. with, the principal function of a contract of deposit
 Per agreement, the land titles will be transferred upon the receiving in custody of funds, documents and
full payment and will be placed in a safety deposit box other valuable objects for safekeeping.
(SBDB) of any bank. Moreover, the same could be 2. NO. SC opined that it is void.
withdrawn only upon the joint signatures of a
representative of the Petitioner and the Pugaos upon full  Generally, the Civil Code provides that the
payment of the purchase price. depositary (Respondent Bank) would be liable if, in
 Thereafter, Petitioner and spouses placed the titles in performing its obligation, it is found guilty of fraud,
SDB of Respondent Security Bank and signed a lease negligence, delay or contravention of the tenor of
contract which substantially states that the Bank will not the agreement.
assume liability for the contents of the SDB.  In the absence of any stipulation, the diligence of a
 Subsequently, 2 renter's keys were given to the renters good father of a family is to be observed.
— one to the Petitioner and the other to the Pugaos. A  Hence, any stipulation exempting the depositary
guard key remained in the possession of the Respondent from any liability arising from the loss of the thing
Bank. The SDB can only be opened using these 2 keys deposited on account of fraud, negligence or delay
simultaneously. would be void for being contrary to law and public
 Afterwards, a certain Mrs. Ramos offered to buy from the policy (which is present in the disputed contract)
Petitioner the 2 lots that would yield a profit of P285K.  Said provisions are inconsistent with the Respondent
 Mrs. Ramos demanded the execution of a deed of sale Bank's responsibility as a depositary under Section
which necessarily entailed the production of the 72(a) of the General Banking Act.
certificates of title. Thus, Petitioner with the spouses
went to Respondent Bank to retrieve the titles. 3. NO. SC ruled that:
 However, when opened in the presence of the Bank's  no competent proof was presented to show that
representative, the SDB yielded no such certificates. Respondent Bank was aware of the private
 Because of the delay in the reconstitution of the title, agreement between the Petitioner and the Pugaos
Mrs. Ramos withdrew her earlier offer to purchase the that the Land titles were withdrawable from the
lots; as a consequence, the Petitioner allegedly failed to SDB only upon both parties' joint signatures,
realize the expected profit of P285K.  and that no evidence was submitted to reveal that
 Hence, Petitioner filed a complaint for damages against the loss of the certificates of title was due to the
Respondent Bank. fraud or negligence of the Respondent Bank.
 Lower courts ruled in favour of Respondent Bank. Thus,
this petition.

Issues: ART. 1977. OBLIGATION NOT TO MAKE USE OF THING

DEPOSITED UNLESS AUTHORIZED.
1. Whether or not the disputed contract is an ordinary
contract of lease? JAVELLANA VS. LIM
2. Whether or not the provisions of the cited contract are
valid? FACTS: Defendants executed a document in favor of plaintiff-
3. Whether or not Respondent Bank is liable for damages? appellee wherein it states that they have received, as a
deposit, without interest, money from plaintiff-appellee and
Ruling: agreed upon a date when they will return the money. Upon
the stipulated due date, defendants asked for an extension to
1. No. SC ruled that it is a special kind of deposit because: pay and binding themselves to pay 15% interest per annum
on the amount of their indebtedness, to which the plaintiff-
appellee acceded. The defendants were not able to pay the
SECTRANS 2010/ ATTY. AGUINALDO 16
full amount of their indebtedness notwithstanding the ISSUE: WoN there was deposit
request made by plaintiff-appellee. The lower court ruled in
SC: NO
favor of plaintiff-appellee for the recovery of the amount due.
- Art. 1978. When the depositary has permission to
ISSUE: Whether the agreement entered into by the parties is use the thing deposited, the contract loses the
one of loan or of deposit? concept of a deposit and becomes a loan or
commodatum, except where safekeeping is still the
HELD: The document executed was a contract of loan. Where principal purpose of the contract. The permission
money, consisting of coins of legal tender, is deposited with a shall not be presumed, and its existence must be
person and the latter is authorized by the depositor to use proved.
and dispose of the same, the agreement is not a contract of - The case does not depend precisely upon this
deposit, but a loan. A subsequent agreement between the explicit alternative; for even supposing that the
parties as to interest on the amount said to have been palay may have been delivered in the character of
deposited, because the same could not be returned at the deposit, subject to future sale or withdrawal at
time fixed therefor, does not constitute a renewal of an plaintiffs' election, nevertheless if it was understood
agreement of deposit, but it is the best evidence that the that the defendant might mill the palay and he has in
original contract entered into between therein was for a loan fact appropriated it to his own use, he is of course
under the guise of a deposit. bound to account for its value.
- In this connection we wholly reject the defendant's
pretense that the palay delivered by the plaintiffs or
G.R. Nos. L-26948 and L-26949 October 8, 1927 any part of it was actually consumed in the fire of
January, 1921. Nor is the liability of the defendant in
SILVESTRA BARON, plaintiff-appellant,
any wise affected by the circumstance that, by a
vs. custom prevailing among rice millers in this country,
persons placing palay with them without special
PABLO DAVID, defendant-appellant.
agreement as to price are at liberty to withdraw it
And later, proper allowance being made for storage and
shrinkage, a thing that is sometimes done, though
GUILLERMO BARON, plaintiff-appellant,
rarely.
vs.
PABLO DAVID, defendant-appellant.
FACTS: UNITED STATES, vs. IGPUARA
- The defendant owns a rice mill, which was well
patronized by the rice growers of the vicinity. Facts: The defendant Jose igpuara was entrusted with the
- On January 17, 1921, a fire occurred that destroyed amount of P2,498 by Montilla and Veraguth. Without the
the mill and its contents, and it was some time consent of Montilla and Veraguth however, Igpuara used the
before the mill could be rebuilt and put in operation said amount for his own ends. Thus, igpuara was charged and
again. convicted with estafa, for having swindled Juana Montilla and
- Silvestra Baron (P1) and Guillermo Baron (P2) each Eugenio Veraguth out of P2,498 which he had taken as
filed an action for the recovery of the value of palay deposit from the former to be at the his disposal. Igpuara was
from the defendant (D), alleged that: sentenced to pay Juana Montilla P2,498 . The instrument for
o The palay have been sold by both plaintiffs the deposit reads:
to the D in the year 1920
o Palay was delivered to D at his special We hold at the disposal of Eugenio Veraguth the sum of two
request, with a promise of compensation at thousand four hundred and ninety-eight pesos (P2,498), the
the highest price per cavan balance from Juana Montilla's sugar. — Iloilo, June 26, 1911,
- D claims that the palay was deposited subject to — Jose Igpuara, for Ramirez and Co
future withdrawal by the depositors or to some
future sale, which was never effected. D also Igpuara contended that the amount was not deposit for there
contended that in order for the plaintiffs to recover, was no certificate of deposit, there was no transfer or
it is necessary that they should be able to establish delivery of the P2,498 and what transpired was a loan. If
that the plaintiffs' palay was delivered in the assuming that it was deposit, this is negotiable.
character of a sale, and that if, on the contrary, the
defendant should prove that the delivery was made Issues: Whether or not it is necessary that there be transfer
in the character of deposit, the defendant should be or delivery in order to constitute a deposit.
absolved.
SECTRANS 2010/ ATTY. AGUINALDO 17
Held: No. six died from overfeeding, and they failed to make clear the
happening of any flood sufficient to destroy the others.
“A deposit is constituted from the time a person
receives a thing belonging to another with the HELD: If we consider the contract as one of deposit, then
obligation of keeping and returning it. (Art. 1758, under article 1183 of the Civil Code, the burden of
Civil Code.) “ explanation of the loss rested upon the depositary and under
article 1769 the fault is presumed to be his. The defendant
His contention is without merit because firstly, the defendant has not succeeded in showing that the loss occurred either
drew up a document declaring that they remained in his without fault on his part or by reason of caso fortuito.
possession. With the understanding that he would, for it has
no other purpose. If, however, the contract be not one strictly of deposit but
one according to a local custom for the pasturing of cattle,
The certificate of deposit in question is not negotiable the obligations of the parties remain the same.
because only instruments payable to order are negotiable.
Hence, this instrument not being to order but to bearer, it is
not negotiable.
GULLAS vs. NATIONAL BANK
As for the argument that the depositary may use or dispose 62 PHIL 519
oft he things deposited, the depositor's consent is required
thus, the rights and obligations of the depositary and of the Facts:
depositor shall cease and the rules and provisions applicable
to commercial loans, commission, or contract which took the  Atty. Gullas has a current account with PNB.
place of the deposit shall be observed. Igpuara however has  The treasury of the US issued a warrant in the amount of
shown no authorization whatsoever or the consent of the $361 payable to the order of Bacos. Gullas and Lopez
depositary for using or disposing of the P2,498. signed as indorsers of this warrant. Thereupon it was
cashed by PNB.
That there was not demand on the same or the next day after  The warrant was subsequently dishonored by the Insular
the certificate was signed, does not operate against the treasurer.
depositor, or signify anything except the intention not to  At that time, Gullas had a balance of P500 in PNB. From
press it. Failure to claim at once or delay for sometime in this balance, he also issued some checks which
demanding restitution of the things deposited, which was eventually could not be paid when it was sequestered by
immediately due, does not imply such permission to use the the Bank.
thing deposited as would convert the deposit into a loan.  When it learned of the dishonor, PNB sent notice to
Gullas stating that it applied the outstanding balances
Judgment appealed from is affirmed from his current account as payment of the dishonored
warrant. Such notice could not be delivered to him since
he was out of town.
 Without any action from Gullas, PNB applied the
dishonored warrant against his account.
ANICETA PALACIO, plaintiff-appellee,  Because of this, Gullas was unable to pay for the checks
vs. he issued before the application.
DIONISIO SUDARIO, defendant-appellant.  Gullas filed a complaint against PNB.

FACTS: The plaintiff made an arrangement for the pasturing

of eighty-one head of cattle, in return for which she has to Issue:
give one-half of the calves that might be born and was to pay
the defendant one-half peso for each calf branded. On Whether or not PNB has a right to apply a deposit to the debt
demand for the whole, forty-eight head of cattle were of a depositor to the bank?
afterwards returned to her and this action is brought to
recover the remaining thirty-three. Held:

Defendant in reply to the demand for the cattle, in which he Yes, PNB has a right to apply the payment against the account
seeks to excuse himself for the loss of the missing animals. of the depositor.

As a second defense it is claimed that the thirty-three cows The relation between a depositor and a bank is that if creditor
either died of disease or were drowned in a flood. The and debtor. The general rule is that a bank has a right to set
defendant's witnesses swore that of the cows that perished,
SECTRANS 2010/ ATTY. AGUINALDO 18
off of the deposit in its hands for the payment of any assignability.
indebtedness to it on the part of the depositor.
Issue: WoN the non-negotiable instrument is non
However, prior to the mailing of the notice of dishonor and transferrable/assignable
without waiting for any action by Gullas, the bank made use
of the money standing in his account to make good for the Ruling: Assignable is different from tranferrability. Negotiable
treasury warrant. At this point recall that Gullas was merely instruments can be indorsed. Non negotiable instrumets can
an indorser. Notice should have been given to him in order be assigned. Therefore, non negotiable instrument can be
that he might protect his interest. He should be awarded with assigned.
nominal damages because of the premature action of the
Bank.
DE LOS SANTOS vs TAN KHEY
O.G.No.26695-R, July 30, 1962

SERRANO vs CENTRAL BANK Facts:

Facts: Serrano had P350K worth of time deposits Tan Khey was the owner of International Hotel
in Overseas Bank of Manila. He made a series of encashment located in Iloilo city. Romeo de los Santos lodged in Tna
but was not successful. He filed a case against Overseas Bank Khey’s hotel. After arrival, he left the hotel, depositing his
& he also included the Central Bank so that the latter may revolver and his bag with the person in charge in the hotel.
also be jointly and severally liable. Serrano argued that the CB When he returned to the hotel, he took his revolver and his
failed to supervise the acts of Overseas Bank and protect the bag from the person in charge in the hotel and proceeded to
interests of its depositors by virtue of constructive trust. his room. He locked the door before sleeping.

Issue: W/N the Central Bank is liable? When he woke up, he discovered that the door in his
room was opened and his bag and pants, wherein he placed
Ruling: No. There is no breach of trust from a bank’s failure his revolver , was missing. He reported the matter to the
to return the subject matter of the deposit. Bank deposits are Assistant Manager of the hotel, who in turn informed Tan
in the nature of irregular deposits. All kinds of bank deposits Khey.
are to be treated as loans and are to be covered by the law
on loans Art.1980. In reality the depositor is the creditor A secret service agent was sent to investigate and it
while the bank is the debtor. Failure of the respondent bank was found that the wall of the room occupied by De los
to honor the time deposit is failure to pay its obligation as a Santos was only seven feet high with an open space above
debtor. through which one could enter from outside. De los Santos
told the detective that he lost his revolver.

Tan Khey disclaimed liability because De los Santos

did not deposit his properties with the manager despite a
notice to that effect was posted in the hotel.

SESBRENO V. CA Tan Khey contended that to be liable under Article

1998 of the Civil Code, the following conditions must concur:

Facts: Sesbreno entered into a money market, giving 300k to 1. Deposit of effects by travellers in hotel or inn
Philfinance. As an exchange, Philfinance gave checks and 2. Notice given to hotel keepers or employees of
confirmation of sale of Delta Motor Corp certificates. Checks the effects brought by guests
bounced. Sesbreno is running after Philipinas Bank (payee) 3. Guest or travellers take the precautions which
(Holder of security of primissory note) and Delta (maker). said hotel keepers or their substitutes advised
Delta contends that it is not liable because there was relative to the care and vigilance of their effects.
"reconstruction" of debt of Delta to Philfinance, the
promissory note is not valid anymore. It also contends that
the document cannot be assigned because its non negotiable. Issue: Whether the hotel owner should be held liable for the
RTC ruled that Philfinance is liable because Philfinance loss of the effects of the guest?
already knows that the liability was already waived and it still
issued the certificate. However, since Philfinance was not Rulng:
impleaded, judgment cannot be made against Philfinance.
The issue related in this case is regarding trasferrability and

SECTRANS 2010/ ATTY. AGUINALDO 19

 The Court ruled that the hotel owner should be the inkeeper ho his responsibility, to comply with any
liable for the loss of the revolver, pants and bag of the guest. regulation that is just and reasonable, when he is requested
to do so.
Deposit
However, in this case, the notice requiring actual
While the law speaks of “deposit” of effects by deposit of the effects with the manager was an unreasonable
travellers in hotels or inns, personal receipt by the innkeeper regulation. It was unreasonable to require the guest to
for safe keeping of effects is not necessaily meant thereby. deposit his bag ,pants and revolver to the manager. De los
The reason therefor is the fact that it is the nature of business Santos had exercised the necessary diligence with respect to
of an innkeeper to provide not only lodging for travellers but the care and vigilance of his effects.
also to security to their persons and effects. The secuity
mentioned is not confined to the effects actually delivered to
the innkeeper but also to all effects placed within the Topic: Deposit; Article 2003
premises of the hotel. This is because innkeepers by the YHT Realty v. CA
neture of their business, have supervision and controlof their
inns and the premises threof. FACTS:
 Respondent McLoughlin would stay at Tropicana
It is not necessary that the effect was actually Hotel every time he is here in the Philippines and
delivered but it is enough that they are within the inn. If a would rent a safety deposit box.
guest and goods are within the inn, that is sufficient to charge  The safety deposit box could only be opened
him. through the use of 2 keys, one of which is given to
the registered guest, and the other remaining in the
The owner of a hotel may exonerate himself from possession of the management of the hotel.
liability by showing that the guest has taken exclusive control  McLoughlin allegedly placed the following in his
of his own goods, but this must be exclusive custody and safety deposit box – 2 envelopes containing US
control of a guest, and must not be held under the Dollars, one envelope containing Australian Dollars,
supervision and care of the innkeeper,ey are kept in a room Letters, credit cards, bankbooks and a checkbook.
assigned to a guest or the other proper depository in the  When he went abroad, a few dollars were missing
house. and the jewelry he bought was likewise missing.
 Eventually, he confronted Lainez and Paiyam who
In this case, the guest deposited his effects in the admitted that Tan opened the safety deposit box
hotel because they are in his room and within the premises of with the key assigned to him. McLoughlin went up to
the hotel, and therefore, within the supervision and control his room where Tan was staying and confronted her.
of the hotel owner. Tan admitted that she had stolen McLouglin’s key
and was able to open the safety deposit box with the
assistance of Lopez, Paiyam and Lainez. Lopez alsto
told McLoughlin that Tan stole the key assigned to
Notice McLouglin while the latter was asleep.
 McLoughlin insisted that it must be the hotel who
The Court ruled that there was no doubt that the must assume responsibility for the loss he suffered.
person in charge had knowledge of his revolver, the bag, and  Lopez refused to accept responsibility relying on the
pants of the guest, De los Santos. conditions for renting the safety deposit box entitled
“Undertaking For the Use of Safety Deposit Box”
The requirement of notice being evidently for the
purpose of closing the door to fraudulent claims for non- ISSUE: Whether the hotel’s Undertaking is valid?
existent articles, the lack thereof was fatal to De los Santos’
claim for reparation for the loss of his eyeglass, ring, and HELD: NO
cash.  Article 2003 was incorporated in the New Civil Code
as an expression of public policy precisely to apply to
Precautions situations such as that presented in this case. The
hotel business like the common carrier’s business is
While an innkeeper cannot free himself from imbued with public interest. Catering to the public,
responsibility by posting notices, there can be no doubt of the hotelkeepers are bound to provide not only lodging
innkeeper’s right to make such regulations in the for hotel guests and security to their persons and
management of his inn as will more effectually secure the belongings. The twin duty constitutes the essence of
property of his guest and operate as protection to himself, the business. The law in turn does not allow such
and that it is incumbent upon the guest, if he means to hold duty to the public to be negated or diluted by any

SECTRANS 2010/ ATTY. AGUINALDO 20

 contrary stipulation in so-called “undertakings” that The storage of sugar is carried in the books of the company
ordinarily appear in prepared forms imposed by under Account No. 5000, denominated "Manufacturing Cost
hotel keepers on guests for their signature. Ledger Control"; the storage fees under Account No. 521620;
 In an early case (De Los Santos v. Tan Khey), CA ruled the expense accounts of the factory under Account No. 5200;
that to hold hotelkeepers or innkeeper liable for the and the so-called "Sugar Bodega Operations" under Account
effects of their guests, it is not necessary that they No. 5216, under which is a Sub-Account No. 20, captioned,
be actually delivered to the innkeepers or their "Credits". (Pp. 16-17, t.s.n., Exhibit "F".) The collections from
employees. It is enough that such effects are within storage after the lapse of the first 90 days period are entered
the hotel or inn. With greater reason should the in the company's books as debit to CASH, and credit to
liability of the hotelkeeper be enforced when the Expense Account No. 2516-20 (p. 18, t.s.n.).
missing items are taken without the guest’s
knowledge and consent from a safety deposit box The credit for storage charges decreased the deductible
provided by the hotel itself, as in this case. expense resulting in the corresponding increase of the
 Paragraphs (2) and (4) of the “undertaking” taxable income of the petitioner. This is reflected by the
manifestly contravene Article 2003, CC for they allow entries enclosed in parenthesis in Exhibit "G", under the
Tropicana to be released from liability arising from heading "Storage Charges". (P. 18, t.s.n.) The alleged reason
any loss in the contents and/or use of the safety for this accounting operation is that, inasmuch as the "Sugar
deposit box for any cause whatsoever. Evidently, the Bodega Operations" is considered as an expense account,
undertaking was intended to bar any claim against entries under it are "debits". Similarly, since "Storage
Tropicana for any loss of the contents of the safety Charges" constitute "credit", the corresponding figures (see
deposit box whether or not negligence was incurred Exhibit "C") are enclosed in parenthesis as they decrease the
by Tropicana or its employees. expenses of maintaining the sugar warehouses.

Upon investigation conducted by the Bureau, it was found

THE WAREHOUSE RECEIPTS LAW that during the years 1949 to 1957, the petitioner realized
from collected storage fees a total gross receipts of
P212,853.00, on the basis of which the respondent
determined the petitioner's liability for fixed and percentage
taxes, 25% surcharge, and administrative penalty in the
G.R. No. L-16315 May 30, 1964 aggregate amount of P8,411.99 (Exhibit "5", p. 11, BIR rec.)

COMMISSIONER OF INTERNAL REVENUE, petitioner, After due hearing the Court of Tax Appeals ordered the CIR to
vs. refund to respondent Hawaiian-Philippine Company the
HAWAIIAN-PHILIPPINE COMPANY, respondent. amount of P8,411.99 representing fixed and percentage taxes
assessed against it and which the latter had deposited with
FACTS: the City Treasurer of Silay, Occidental Negros

The petitioner, a corporation duly organized in accordance ISSUE:

with law, is operating a sugar central in the City of Silay,
Occidental Negros. It produces centrifugal sugar from Whether or notpetitioner is a warehouseman liable for the
sugarcane supplied by planters. The processed sugar is payment of the fixed and percentage taxes prescribed in
divided between the planters and the petitioner in the Sections 182 and 191 of the National Internal Revenue Code
proportion stipulated in the milling contracts, and thereafter
is deposited in the warehouses of the latter. (Pp. 4-5, t.s.n.) HELD:
For the sugar deposited by the planters, the petitioner issues
the corresponding warehouse receipts of "quedans". It does YES.
not collect storage charges on the sugar deposited in its
warehouse during the first 90 days period counted from the Respondent disclaims liability under the provisions quoted
time it is extracted from the sugarcane. Upon the lapse of the above, alleging that it is not engaged the business of storing
first ninety days and up to the beginning of the next milling its planters' sugar for profit; that the maintenance of its
season, it collects a fee of P0.30 per picul a month. warehouses is merely incidental to its business of
Henceforth, if the sugar is not yet withdrawn, a penalty of manufacturing sugar and in compliance with its obligation to
P0.25 per picul or fraction thereof a month is imposed. its planters. We find this to be without merit.
(Exhibits "B-1", "C-1", "D-1", "B-2", "C-2", p. 10, t.s.n.)
It is clear from the facts of the case that, after manufacturing
the sugar of its planters, respondent stores it in its
SECTRANS 2010/ ATTY. AGUINALDO 21
warehouses and issues the corresponding "quedans" to the but he was told to return after two days, which he did,
planters who own the sugar; that while the sugar is stored but Go Tiong again told him to come back.
free during the first ninety days from the date the it  A few days later, the warehouse burned to the ground.
"quedans" are issued, the undisputed fact is that, upon the  Before the fire, Go Tiong had been accepting deliveries of
expiration of said period, respondent charger, and collects palay from other depositors and at the time of the fire,
storage fees; that for the period beginning 1949 to 1957, there were 5,847 sacks of palay in the warehouse, in
respondent's total gross receipts from this particular excess of the 5,000 sacks authorized under his license.
enterprise amounted to P212,853.00.  After the burning of the warehouse, the depositors of
palay, including Plaintiff, filed their claims with the
A warehouseman has been defined as one who receives and Bureau of Commerce.
stores goods of another for compensation (44 Words and  However, according to the decision of the trial court,
Phrases, p. 635). For one to be considered engaged in the nothing came from Plaintiff's efforts to have his claim
warehousing business, therefore, it is sufficient that he paid.
receives goods owned by another for storage, and collects  Thereafter, Gonzales filed the present action against Go
fees in connection with the same. In fact, Section 2 of the Tiong and the Luzon Surety for the sum of P8,600, the
General Bonded Warehouse Act, as amended, defines a value of his palay, with legal interest, damages in the
warehouseman as "a person engaged in the business of sum of P5,000 and P1,500 as attorney's fees.
receiving commodity for storage."  While the case was pending in court, Gonzales and Go
Tiong entered into a contract of amicable settlement to
That respondent stores its planters' sugar free of charge for the effect that upon the settlement of all accounts due to
the first ninety days does not exempt it from liability under him by Go Tiong, he, Gonzales, would have all actions
the legal provisions under consideration. Were such fact pending against Go Tiong dismissed.
sufficient for that purpose, the law imposing the tax would be  Inasmuch as Go Tiong failed to settle the accounts,
rendered ineffectual. Gonzales prosecuted his court action

ISSUE:
Gonzalez vs Go Tiong
Whether or not Plaintiff’s claim is governed by the Bonded
Facts: Warehouse Act due to Go Tiong’s act of issuing to the former
ordinary receipts, not warehouse receipts?
 Go Tiong (respondent) owned a rice mill and warehouse,
located in Pangasinan. Thereafter, he obtained a license RULING:
to engage in the business of a bonded warehouseman.
 Subsequently, respondent Tiong executed a Guaranty YES. SC ruled in favor Plaintiff.
Bond with the Luzon Surety Co to secure the
performance of his obligations as such bonded  Act No. 3893 provides that any deposit made with
warehouseman, in the sum of P18,334, in case he was Respondent Tiong as a bonded warehouseman must
unable to return the same. necessarily be governed by the provisions of Act No.
 Afterwards, respondent Tiong insured the warehouse 3893.
and the palay deposited therein with the Alliance Surety  The kind or nature of the receipts issued by him for the
and Insurance Company. deposits is not very material much less decisive since said
 But prior to the issuance of the license to Respondent, he provisions are not mandatory and indispensable
had on several occasions received palay for deposit from  Under Section 1 of the Warehouse Receipts Act, the
Plaintiff Gonzales, totaling 368 sacks, for which he issued issuance of a warehouse receipt in the form provided by
receipts. it is merely permissive and directory and not obligatory. .
 After he was licensed as a bonded warehouseman, Go "Receipt", under this section, can be construed as any
Tiong again received various deliveries of palay from receipt issued by a warehouseman for commodity
Plaintiff, totaling 492 sacks, for which he issued the delivered to him
corresponding receipts, all the grand total of 860 sacks,  As the trial court well observed, as far as Go Tiong was
valued at P8,600 at the rate of P10 per sack. concerned, the fact that the receipts issued by him were
 Noteworthy is that the receipts issued by Go Tiong to the not "quedans" is no valid ground for defense because he
Plaintiff were ordinary receipts, not the "warehouse was the principal obligor.
receipts" defined by the Warehouse Receipts Act (Act  Furthermore, as found by the trial court, Go Tiong had
No. 2137). repeatedly promised Plaintiff to issue to him "quedans"
 On or about March 15, 1953, Plaintiff demanded from Go and had assured him that he should not worry; and that
Tiong the value of his deposits in the amount of P8,600, Go Tiong was in the habit of issuing ordinary receipts
(not "quedans") to his depositors.
SECTRANS 2010/ ATTY. AGUINALDO 22
 Furthermore, Section 7 of said law provides that as long negotiable” practically the same effect as a receipt which, by
as the depositor is injured by a breach of any obligation its terms, is negotiable provided the holder of such unmarked
of the warehouseman, which obligation is secured by a receipt acquired it for value supposing it to be negotiable,
bond, said depositor may sue on said bond. circumstances which admittedly exist in the present case.
 In other words, the surety cannot avoid liability from the Hence, the rights of the indorsee, ASIA, are superior to the
mere failure of the warehouseman to issue the vendor’s lien.
prescribed receipt.

WAREHOUSE RECEIPT: Failure to mark “non-negotiable.”

ROMAN V. ASIA BANKING CORPORATION

FACTS: U. de Poli, for value received, issued a quedan

convering the 576 bultos of tobacco to the Asia Banking Bank of P.I. v. Herridge
Corporation (claimant & appellant). It was executed as a
security for a loan. The aforesaid 576 butlos are part and FACTS:
parcel of the 2, 766 bultos purchased by U. de Poli from Felisa
Roman (claimant & appellee). The insolvent Umberto de Poli was for several years engaged
on an extensive scale in the exportation of Manila hemp,
The quedan was marked as Exhibit D which is a warehouse maguey and other products of the country.
receipt issued by the warehouse of U. de Poli for 576 bultos
of tobacco. In the left margin of the face of the receipt, U. de He was also a licensed public warehouseman, though most of
Poli certifies that he is the sole owner of the merchandise the goods stored in his warehouses appear to have been
therein described. The receipt is endorsed in blank; it is not merchandise purchased by him for exportation and deposited
marked”non-negotiable” or “not negotiable”. there by he himself.chanr

Since a sale was consummated between Roman and U. de In order to finance his commercial operations De Poli
Poli, Roman’s claim is a vendor’s lien. The lower court ruled in established credits with some of the leading banking
favor of Roman on the theory that since the transfer to Asia institutions doing business in Manila at that time, among
Banking Corp. (ASIA) was neither a pledge nor a mortgage, them the Hongkong & Shanghai Banking Corporation, the
but a security for a loan, the vendor’s lien of Roman should Bank of the Philippine Islands, the Asia Banking Corporation,
be accorded preference over it. the Chartered Bank of India, Australia and China, and the
American Foreign Banking Corporation.
However, if the warehouse receipt issued was non-
negotiable, the vendor’s lien of Roman cannot prevail against De Poli opened a current account credit with the bank against
the rights of ASIA as indorsee of the receipt. which he drew his checks in payment of the products bought
by him for exportation.
ISSUE: WON the quedan issued by U. de Poli in favor of ASIA.
is negotiable, despite failure to mark it as not negotiable? Upon the purchase, the products were stored in one of his
warehouses and warehouse receipts issued therefor which
HELD: YES. The warehouse receipt in question is negotiable. It were endorsed by him to the bank as security for the
recited that certain merchandise deposited in the ware house payment of his credit in the account current.
“por orden” of the depositor instead of “a la orden”, there
was no other direct statement showing whether the goods When the goods stored by the warehouse receipts were sold
received are to be delivered to the bearer, to a specified and shipped, the warehouse receipt was exchanged for
person, or to a specified order or his order. However, the use shipping papers, a draft was drawn in favor of the bank and
of “por orden” was merely a clerical or grammatical error and against the foreign purchaser, with bill of landing attached,
that the receipt was negotiable. and the entire proceeds of the export sale were received by
the bank and credited to the current account of De
As provided by the Warehouse Receipts Act, in case the Poli.chanroble
warehouse man fails to mark it as “non-negotiable”, a holder
of the receipt who purchase if for value supposing it to be De Poli was declared insolvent by the Court of First Instance
negotiable may, at his option, treat such receipt as imposing of Manila with liabilities to the amount of several million
upon the warehouseman the same liabilities he would have pesos over and above his assets. An assignee was elected by
incurred had the receipt been negotiable. This appears to the creditors and the election was confirmed by the court
have given any warehouse receipt not marked “non-

SECTRANS 2010/ ATTY. AGUINALDO 23

Among the property taken over the assignee was the - Nov and Dec 1918 – D issued negotiable quedans to
merchandise stored in the various warehouses of the Fiber for 15k++ piculs of Copra, which the terms
insolvent. This merchandise consisted principally of hemp, states that
maguey and tobacco. o D agreed to deliver that amount of copra to
Fiber or its order
The various banks holding warehouse receipts issued by De o D will deliver the packages noted therein
Poli claim ownership of this merchandise under their upon the surrender of the warrant to D
respective receipts, whereas the other creditors of the o No transfer of interest/ownership will be
insolvent maintain that the warehouse receipts are not recognized unless registered in the books of
negotiable, that their endorsement to the present holders D
conveyed no title to the property, that they cannot be o The words “negotiable warrant” were
regarded as pledges of the merchandise inasmuch as they are printed in red ink in the quedan
not public documents and the possession of the merchandise - Fiber then arranged for overdraft with P for P1M and
was not delivered to the claimants and that the claims of the to secure it, the subject quedans were endorsed in
holders of the receipts have no preference over those of the blank and delivered by Fiber to P, which became the
ordinary unsecured creditors.law lib owner and holder thereof.
- P later on requested D the delivery of copra
described in the quedans, however, D refused to
comply despite repeated requests of P, stating that it
ISSSUE: could not be delivered since the goods mentioned
are not in the warehouse.
Whether or not the warehouse receipts issued are - D stated that the quedans were invalid and
negotiable? wrongfully issued and that the copra was not in its
warehouse
HELD: - LC ruled in favor of D

Yes, a warehouseman who deposited merchandise in his own ISSUE: WoN the quedans were validly negotiated to P
warehouse, issued a warehouse receipts therefore and
thereafter negotiated the receipts by endorsement. The SC: YES!
receipt recites that the goods were deposited “por orden” of
the depositor, the warehouseman, but contained no - The quedans have legal force and effect
statement that the goods were to be delivered to the bearer o They were duly executed by Wicks, as
of the receipts or to a specified person. It is in the form of a treasurer and Torres as warehouseman, for
warehouse receipts and was not mark “nonnegotiable”. and in behalf of D.
o The said quedans were endorsed in blank
Therefore the receipts was negotiable warehouse receipts and physical possession was delivered to P
and the words “por orden” must be construed to mean “to as collateral security for the overdraft of
the order”. Fiber Company and
o That the quedans were in negotiable form.
- D cannot now deny the existence of the quedans

PNB v PRODUCER’S WAREHOUSE ASSOCIATION CRUZ vs. VALERO

FACTS:
Facts:
- PNB (P) is a bank in PH, Producer’s Warehouse
Association (D) is a domestic corporation doing Valero is president of the Luzon Sugar Co. while appellant
general warehouse business and Phil. Fiber and Cruz had a share amounting to 1,544.38 piculs export
Produce Company (Fiber) is another domestic centrifugal sugar, which was exchanged for an equal amount
corporation. of domestic centrifugal sugar. Cruz deposited in the Luzon
- D and Fiber entered into a written contract, wherein Sugar Company's warehouse within its compound, with the
Fiber would act as the general manager of the obligation on its part to deliver it to the appellant on demand,
business of D and that Fiber would exercise a general that the appellant was entitled to 238.20 piculs of domestic
and complete supervision over the management of centrifugal sugar as his share in the 1940-1941 crop. On
the business of D. different dates, the appellant had withdrawn several piculs of
sugar, reducing reducing the number of gallons of molasses.

SECTRANS 2010/ ATTY. AGUINALDO 24

Cruz claims that on December 1941, the Luzon Sugar delivered to DMG through a delivery permit which was
Company (LSC) did not have in its warehouse the sugar he presented by a certain Sandoval authorized by Alteza.
had stored in its warehouse for safekeeping and the number  DMG contends that it has no such employees. It
of gallons of molasses he had left in its possession contained demanded for the payment of such goods.
in cylindrical tanks, because the Valero had disposed of the
same without the knowledge and consent of appellant and
that when the appellant wanted to withdraw his sugar from Issue:
the warehouse of LSC, the amount of sugar stored in the
warehouse was not manufactured by the Luzon Sugar Whether or not Consolidated is liable to DMG?
Company but by a different company.
Held:
This was denied by LSC, contending that it had sufficient
amount of sugar manufactured by it and was in a position to Yes, Consolidated is liable to DMG.
deliver sugar. Its warehouse was however bombed by
Japanese and the warehouse damaged by shrapnel and some Consolidated did not faithfully comply with its duties and
piculs of centrifugal sugar were looted, some taken by the obligations. Section 9 of the Warehouse Receipts Law does
Japanese after the occupation and the remaining brought by not deem it sufficient as prerequisite for delivery the mere
the Japanese Army to Northern Luzon. Thus it became presentment of the receipt. It further requires that the
impossible the deliver the centrifugal sugar and molasses person to whom the goods should be delivered is “one who is
belonging of Cruz. either himself entitled to the property…or who has written
authority from the person so entitled.” Presentment of the
Issue: Whether or not the LSC still has the obligation to receipt must be couple with ascertainment that the person so
deliver the same amount and kind of sugar stored in its presenting it is rightfully entitled to take delivery of the goods
warehouse. covered by the receipt.

Consolidated did not ascertain the identity of Sandoval and

HELD: Since there was enough sugar to cover and deliver
Alteza. They have not called up DMG first and ascertained the
1,081.79 piculs of domestic, reserve and additional sugar
genuineness of the authority in writing before delivering the
belonging to the Cruz who, according to the milling contract,
articles considering that they did not know either Sandoval or
was in duty bound to take delivery thereof at the warehouse,
Alteza.
since it was established that the LSC compound was bombed
on December 1941 by the Japanese who also occupied it
Consolidated becomes liable under Section 10 of the WRL for
from 1 January to 20 February 1942, the loss was due to the
misdelivery. On the contention that DMG was negligent for
war or to a fortuitous event and therefore, the obligation of
allowing such permits to fall into the hands of unauthorized
the depositary to deliver what has been deposited in him has
persons, contributory negligence is not one of the defenses
been extinguished by the happening of a fortuitous event,
specified in its answer. In order to for it to be a defense, it
which in this case, is the pacific war. The judgment appealed
must previously show to have been committed. The burden
from is affirmed.
of proof is in himself who alleges it as a defense. It cannot be
inferred from the fact that persons other than the consignee
This is an appeal from a decision of the Court of First Instance or owner were able to take possession of the shipping
of Nueva Ecija which orders the defendant to pay to the documents or the permit papers which were supposed to be
plaintiff the sum of P3,000, with interest thereon at the rate in the latter’s custody.
of 6% per annum from June 26, 1940, and the costs of action.

ESTRADA V. CAR
CONSOLIDATED vs ARTEX
DMG INC. vs CONSOLIDATED TERMINALS INC.
63 OG 10 Facts: Consolidated Terminals Inc (CTI) operated a
customs warehouse in Manila. It received 193 bales of high
Facts: density compressed raw cotton worth P99k. It was
understood that CTI would keep the cotton on behalf of
 DMG ordered replacement parts for diesel conversion Luzon Brokerage until the consignee Paramount Textile had
engine from Germany. opened the corresponding letter of credit in favor of Adolph
 Upon arrival in Manila, the shipment was placed in the Hanslik Cotton. By virtue of forged permits, Artex was able to
warehouse of Consolidated Terminals. obtain the bales of cotton and paid P15k.
 When DMG demanded for the delivery of the goods,
Consolidated stated that it was already released and

SECTRANS 2010/ ATTY. AGUINALDO 25

Issue: W/N CTI as warehouseman was entitled to disputed by other creditors of the insolvent on the ground
the possession of the bales of cotton? that, among others, that the tobacco claimed, being Isabela
tobacco, was not correctly described in the warehouse
Ruling: No. CTI had no cause of action. It was not the owner receipt and that, therefore, the receipt was ineffective as
of the cotton. It was not a real party of interest in the case. against the general creditors.
CTI was not sued for damages by the real party in interest.
Issue: Whether the use of the word “Cagayan” instead of
“Isabela” in describing the tobacco in the quedan renders the
LUA KIAN VS. MANILA RAILROAD quedan null and void as negotiable warehouse receipt for the
tobacco intended to be covered by it.

Ruling:
Facts: Manila Railroad received into its custody a shipment of
cases of milk, of which 3.171 wwere marked for Cebu and The identity of the tobacco was sufficiently
1,829 for Lua Kia but according to the bills of lading in Manila established by the evidence. In the warehouse, there was no
Railroad's possession, Lua Kia was entitled to 2000 cases and other tobacco stored nut only the Isabela tobacco. The
Cebu was entitled to 3000 cases. Manila Railroad delivered debtor also said that Isabela tobacco was the tobacco which
1,913 cases to Lua Kia, which is 87 cases short in the bill of he transsfered to American Foreign Banking Corporation.
lading. Aside from that, when the subaccountant of the bank went to
the warehouse to check which tobacco was covered by the
Issue: WoN manila RailRoad is liable to Lua Kia for the warehouse receipt, the assignee and one of his accountants
underlivered cases of milk pointed to him the Isabela tobacco.

Ruling. Yes. The legal relationship between an arrastre The intention of the parties to the transaction must
operator and the consignee is akin to that of a depositor and prevail against such a technical objection to the sufficiency of
warehouseman. As custodian of the goods discharged from the description of the tobacco. It might be different if there
the vessel, it was A's duty like that of nay other depositary to had been Cagayan tobacco in the warehouse at the time of
take good care of the goods and turn them over to the party the issuance of the quedan, or if there were any doubt as to
entitled to their possession. Under this particular set of the identity of the tobacco intended to be covered by the
circumstances, A should have held delivery because of the quedan.
discrepancy between the bill of lading and the markings and
conducted its own investigation not unlike that under The quedan was a negotiable warehouse receipt
Sectopm 18 of the Warehouse Receipts law, or called upon which was duly issued and delivered by the debtor U. de Poli
the parties to interplead such ias in case under Section 17 of to American Foreign Banking Corporation and it divested him
the same law, in order to determint the rightful owner of the of his title to said tobacco and transferred the position and
goods. the title thereof the American Foreign Banking Corporation.

AMERICAN FOREIGN BANKING CORPORATION vs HERRIDGE Topic: Warehouse Receipts Law; sec. 38
G.R.No.21005, December 20, 1924 PNB v. Atendido
FACTS:
Facts:  Laureano Atendido obtained from PNB a loan of P3k
and pledged 2000 cavans of palay to guarantee
U. de Poli was a debtor of American Foreign Banking payment which were then deposited in the
Corporation. He issued a warehouse receipt, commonly warehouse of Cheng Siong Lam & Co and to that
known as quedan. The warehouse receipt of the mercahndise effect the borrower endorsed in favour of the bank
covered thereby was described as Cagayan tabacco en rama. the corresponding warehouse receipt.
It was indorsed in blank by U. De Poli to American Foreign  Before the maturity of the loan, the 2000 cavans of
Banking Corporation palay disappeared for unknown reasons in the
warehouse. When the loan matured, the borrower
As security for an overdraft. U. De Poli became insolvent and failed to pay obligation
the bank presented its claim for the delivery of the tobacco  Defendant claimed that the warehouse receipt
covered in the warehouse receipt. covering the palay which was given as security
having been endorsed in blank in favour of the bank
However, it was found that the tobacco had come and the palay having been lost or disappeared, he
from Isabela and not from Cagayan, and the bank’s claim was thereby became relieved of liability.

SECTRANS 2010/ ATTY. AGUINALDO 26

ISSUE: Whether the surrender of the warehouse receipt
covering 2000 cavans of palay given as security, endorsed in MARTINEZ V. PNB
blank, to PNB, has the effect of transferring their title or
ownership OR it should be considered merely as a guarantee Siy Cong Bien vs HSBC
to secure the payment of the obligation of Defendant?
FACTS
HELD:
 Nature of contract is Pledge supported by the
 Plaintiff is a corporation engaged in business generally,
stipulations embodied in the contract signed by
and that the Defendant HSBC is a foreign bank
Defendant when he secured the loan from PNB.
authorized to engage in the banking business in the
 The 2000 cavans of palay covered by the warehouse
Philippines.
receipt were given to PNB only as a guarantee to
 On June 25, 1926, Otto Ranft called the office of the
secure the fulfilment by Defendant in his obligation.
Plaintiff to purchase hemp (abaca), and he was offered
This clearly appears in the contract wherein it is
the bales of hemp as described in the contested
expressly stated that said 2000 cavanes of palay
negotiable quedans.
were given as collateral security.
 The parties agreed to the aforesaid price, and on the
 It follows that by the very nature of the transaction
same date the quedans, together with the covering
its ownership remains with the pledgor subject only
invoice, were sent to Ranft by the Plaintiff, without
to foreclosure in case of non-fulfillment of the
having been paid for the hemp, but the Plaintiff's
obligation.
understanding was
 By this we mean that if the obligation is not paid
o that the payment would be made against the
upon maturity the most that the pledge can do is to
sell the property and apply the proceeds to the same quedans,
payment of the obligation and to return the balance, o and it appear that in previous transaction of the
if any, to the pledgor. This is the essence of the same kind between the bank and the Plaintiff,
contract, for, according to law, a pledge cannot quedans were paid one or two days after their
become the owner of, nor appropriate to himself the delivery to them.
thing given in pledge.  Immediately these Quedans were pledged by Otto Ranft
 If by the contract of pledge, the pledgor continues to to the Defendant HSBC to secure the payment of his
be the owner of the thing pledged during the preexisting debts to the latter.
pendency of the obligation, it stands to reason that  The baled hemp covered by these warehouse receipts
in case of loss of the property, the loss should be was worth P31,635; 6 receipts were endorsed in blank by
borne by the pledgor. the Plaintiff and Otto Ranft, and 2 were endorsed in
 The fact that the warehouse receipt covering the blank, by Otto Ranft alone
palay was delivered, endorsed in blank, to the bank  On the evening of the said delivery date, Otto Ranft died
does not alter the situation, the purpose of such suddenly at his house in the City of Manila.
endorsement being merely to transfer the juridical  When the Plaintiff found out, it immediately demanded
possession of the property to the pledge and to the return of the quedans, or the payment of the value,
forestall any possible disposition thereof on the part but was told that the quedans had been sent to the
of the pledgor. herein Defendant as soon as they were received by
 Where a warehouse receipt or quedan is transferred Ranft.
or endorsed to a creditor only to secure the payment  Shortly thereafter the Plaintiff filed a claim for the
of a loan or debt, the transferee or endorsee does aforesaid sum of P31,645 in the intestate proceedings of
not automatically become the owner of the goods the estate of the deceased Otto Ranft, which on an
covered by the warehouse receipt or quedan but he appeal from the decision of the committee on claims,
merely retains the right to keep and with the was allowed by the CFI Manila.
consent of the owner to sell them so as to satisfy the  In the meantime, demand had been made by the Plaintiff
obligation from the proceeds of the sale. This is for on the Defendant bank for the return of the quedans, or
the simple reason that the transaction involved is their value, which demand was refused by the bank on
not a sale but only a mortgage or pledge, and that if the ground that it was a holder of the quedans in due
the property covered by the quedans or warehouse course.
receipts is lost without fault or negligence of the
mortgagee or pledge or the transferee or endorsee ISSUE
of the warehouse receipt or quedan, then said goods
are to be regarded as lost on account of the real Whether or not the Quedans endorsed in blank gave the
owner, mortgagor or pledgor. HSBC rightful and valid title to the goods?

SECTRANS 2010/ ATTY. AGUINALDO 27

HELD terms prescribed by law, to Rosa Sy and Teresita Ng.
Subsequently, some of the warehouse receipts were
YES. SC ruled in favour of Defendant HSBC. negotiated and indorsed to Luis Ramos and Cresencia Zoleta.
Ramos and Zoleta then used the quedans as security for loans
 It may be noted, obtained by them from PNB. Upon maturity, both failed to
o first, that the quedans in question were pay, prompting PNB to demand the delivery of the sugar
negotiable in form; covered by the quedans indorsed to it by Ramos and Zoleta.
o second, that they were pledged by Otto Ranft to Noah’s refused to comply with the demand, PNB filed a case
the Defendant bank to secure the payment of for Specific Performance.
his preexisting debts to said bank;
o third, that such of the quedans as were issued in The main contention of Noah’s was that it was still the owner
the name of the Plaintiff were duly endorsed in of the subject quedans and the quantity of sugar represented
blank by the Plaintiff and by Otto Ranft; thereon because the corresponding payment of Sy and Ng
o and fourth, that the two remaining quedans through checks were dishonoured and so they did not acquire
which were duly endorsed in blank by him. ownership. The it follows that the subsequent indorsers and
 The bank had a perfect right to act as it did, and its action plaintiff itself did not acquire a better right of ownership than
is in accordance with sections 47, 38, and 40 of the the original vendees or first indorsers.
Warehouse Receipts Act
 However, the pertinent provision regarding the rights In the answer of Sy and Ng, they alleged that the transaction
the Defendant bank acquired over the aforesaid quedans between them and Noah’s, concerning the quedans, was
after indorsement and delivery to it by Ranft, is found in bogus and simulated. It was part of a complex banking
section 41 of the Warehouse Receipts Act (Act No. 2137): scheme and financial maneuvers to avoid VAT payment and
other BIR assessments.
o SEC. 41. Rights of person to whom a receipt has
been negotiated. — A person to whom a ISSUES:
negotiable receipt has been duly negotiated 1. WON the non-payment of the purchase price for the sugar
acquires thereby: stock evidenced by the quedans, rendered invalid the
(a) Such title to the goods as the person negotiation of said quedans by Sy and Ng to indorsers Ramos
negotiating the receipt to him had or had and Zoleta and the subsequent negotiation of Ramos and
ability to convey to a purchaser in good Zoleat to PNB?
faith for value, and also such title to the 2. WON PNB as indorsee of quedans was entitled to delivery
goods as the depositor of person to whose of sugar stocks from the warehouseman, Noah’s Ark?
order the goods were to be delivered by the
terms of the receipt had or had ability to
convey to a purchaser in good faith for
value, and. . . .
 Therefore, the bank is not responsible for the loss; the
negotiable quedans were duly negotiated to the bank
and as far as the record shows, there has been no fraud
on the part of the Defendant.
 Moreover, Plaintiff is estopped to deny that the bank had
a valid title to the quedans for the reason that the
Plaintiff had voluntarily clothed Ranft with all the
attributes of ownership and upon which the Defendant
bank relied. Subsequently, Plaintiff in this case has
suffered the loss of the quedans, but as far as the court
sees it, there is now no remedy available to the Plaintiff
equitable estoppel place the loss upon him whose
misplaced confidence has made the wrong possible as
ruled in National Safe Deposit vs. Hibbs (a US case)

WAREHOUSE RECEIPT: Who may negotiate a receipt?

PNB v. NOAH’S ARK SUGAR REFINERY

FACTS: Defendant issued on several dates warehouse

receipts, which were substantial in form and contained the
SECTRANS 2010/ ATTY. AGUINALDO 28
HELD: The validity of the negotiation by RNS Merchandising - LC granted lien
and St. Therese Merchandising to Ramos and Zoleta, and by - PNB appealed
the latter to PNB to secure a loan cannot be impaired by the
fact that the negotiation between Noah's Ark and RNS ISSUE: WoN PNB is entitled to the stocks of sugar as the
Merchandising and St. Therese Merchandising was in breach endorsee of the quedans, without paying the lien
of faith on the part of the merchandising firms or by the fact
that the owner (Noah's Ark) was deprived of the possession SC: YES
of the same by fraud, mistake or conversion of the person to
whom the warehouse receipt/quedan was subsequently - While PNB is entitled to the stocks of sugar as the
negotiated if (PNB) paid value therefor in good faith without endorsee of the quedans, delivery to it shall be
notice of such breach of duty, fraud, mistake or conversion. effected only upon payment of the storage fees.
(See Article 1518, New Civil Code). And the creditor (PNB) - The warehouseman is entitled to the
whose debtor was the owner of the negotiable document of warehouseman’s lien that attaches to the goods
title (warehouse receipt) shall be entitled to such aid from the invokable against anyone who claims a right of
court of appropriate jurisdiction attaching such document or possession thereon.
in satisfying the claim by means as is allowed by law or in - However, in this case, the lien was lost when R
equity in regard to property which cannot be readily attached refused to deliver the goods, which were not
or levied upon by ordinary process. (See Art. 1520, New Civil anchored to a valid excuse (i.e. non satisfaction of
Code). If the quedans were negotiable in form and duly W/Hman Lien) but on an adverse claim of
indorsed to PNB (the creditor), the delivery of the quedans to ownership.
PNB makes the PNB the owner of the property covered by - The loss of W/H Man’s lien does not necessarily
said quedans and on deposit with Noah's Ark, the mean the extinguishment of the obligation to pay
warehouseman. (See Sy Cong Bieng & Co. vs. Hongkong & the W/H fees and charges which continues to be a
Shanghai Bank Corp., 56 Phil. 598). personal liability of the owners, PNB in this case.
However, such fees and charges have ceased to
In the case at bar, PNB's right to enforce the obligation of accrue from the date of the rejection by Noah’s Ark
Noah's Ark as a warehouseman, to deliver the sugar stock to to heed the lawful demand for the release of the
PNB as holder of the quedans, does not depend on the goods.
outcome of the third-party complaint because the validity of
the negotiation transferring title to the goods to PNB as
holder of the quedans is not affected by an act of RNS
Merchandising and St. Therese Merchandising, in breach of
trust, fraud or conversion against Noah's Ark.

PNB v SAYO, JR.

FACTS

- Noah’s Ark Sugar Refinery (Noah’s) issued several

warehouse receipts (quedans), which were
negotiated to Rosa, RNS and St. Therese (vendees),
which were again negotiated to Luis and Cresencia,
which they (Luis and Cresencia) endorsed to PNB as
security for 2 loan agreements.
o Transfer of quedans – Noah’s  Rosa, RNS
and St. Therese  Luis and Cresencia 
PNB
- Luis and Cresencia failed to pay their loans hence
PNB demanded delivery of sugar stocks, however,
Noah’s Ark refused, alleging ownership thereof.
- Noah’s Ark contended that the agreement made by
them with the vendees was stopped since the bank
dishonored the payments made by the vendees to
Noah’s Ark. As such, the vendees and the endorsers
of the quedans never acquired ownership thereof.
- Noah’s Ark claimed for warehouseman’s lien for the
storage of the goods.
SECTRANS 2010/ ATTY. AGUINALDO 29
 HELD:

A) Guarantor implies an undertaking of guaranty, as

distinguished from suretyship and in this case, it appears that
the contract is the guarantor's separate undertaking in which
the principal does not join, that its rests on a separate
consideration moving from the principal and that although it
is written in continuation of the contract for the construction
of the building, it is a collateral undertaking separate and
distinct from the latter. All of these circumstances are
distinguishing features of contracts of guaranty.

GUARANTY AND SURETYSHIP B) On the other hand, a surety undertakes to pay if the
principal does not pay, the guarantor only binds himself to
pay if the principal cannot pay. The one is the insurer of the
MACHETTI v HOSPICIO DE SAN JOSE debt, the other an insurer of the solvency of the debtor. This
latter liability is what the Fidelity Company assumed in this
FACTS: case. Thus, Fidelity having bound itself to pay only the event
its principal, cannot pay it follows that it cannot be compelled
1) In 1916, Romulo Machetti, agreed to construct a building in to pay until it is shown that Machetti is unable to pay. The
Manila for the Hospicio de San Jose, for P64,000. One of the judgment appealed from is therefore reversed.
conditions of the agreement was that the contractor should
obtain the "guarantee" of the Fidelity and Surety Company of
the Philippine Islands to the amount of P128,800. Said PHIL EXPORT v VP EUSEBIO
contract read:
FACTS: Respondent entered into contract with SOB for
“For value received we hereby guarantee compliance construction of Therapy Bldg. SOB demanded bonds to secure
with the terms and conditions as outlined in the performance. Project was delayed
above contract. “
DOCTRINE: By guaranty a person, called the guarantor,
2) Thereafter Machetti constructed the building and, as the binds himself to the creditor to fulfill the obligation of the
work progressed, payments were made to him from time to principal debtor in case the latter should fail to do so; if the
time, until the entire contract price, except the sum of person binds himself solidarily with the principal debtor, the
P4,978.08, was paid. contract is called suretyship.

That the guarantee issued by the petitioner is

3) Later on it was found that the work had not been carried
unconditional and irrevocable does not make the petitioner a
out in accordance with the specifications which formed part
surety. As a guaranty, it is still characterized by its subsidiary
of the contract and that the workmanship was not of the
and conditional quality because it does not take effect until
standard required, and thus the Hospicio presented a
the fulfillment of the condition. Unconditional guarantee is
counterclaim for damages for the partial noncompliance with
still subject to the condition that the principal debtor should
the terms of the agreement abovementioned, in the total
default in his obligation first before resort to the guarantor
sum of P71,350.
could be had.
4) During the duration of the trial however, Machetti,
declared insolvent and an order was entered suspending the MANILA RAILROAD v ALVENDIA
proceeding in the present case. Thus, the Hospicio filed a Facts:
motion asking that the Fidelity and Surety Company be made
cross-defendant to the exclusion of Machetti and that the  CFI sentenced Manila Railroad Co. (MRC) and Manila Port
proceedings be continued as to said company, which motion Service (MPS) to pay Bataan Refining Corp.
was granted and subsequently, the Hospicio filed a complaint  MPS filed a notice of appeal accompanied by an appeal
against the Fidelity and Surety Company for a judgement bond.
against the company upon its guaranty. The CFI rendered  Noticing that the appeal bond was only executed by MPS
judgment against Fidelity. signed by the manager and Standard Insurance (as
surety) signed by the vice-president, the trial court
ISSUE: Whether or not Fidelity is answerable to the Hospicio rejected the record on appeal.
as guaranty of Machetti.

SECTRANS 2010/ ATTY. AGUINALDO 30

 It is contended by MRC that the MPS, being a mere While referring to ITM as a guarantor, the Agreement
subsidiary or department of MRC, without legal specifically stated that the corporation was 'jointly and
personality of its own, the bond filed by the former severally liable. To put emphasis on the nature of that
should be a bond for the MRC and that the appeal of the liability, the Contract further stated that ITM was a primary
latter should have been given due course. obligor, not a mere surety. Those stipulations meant only one
thing: that at bottom, and to all legal intents and purposes, it
Issue: Whether or not the notice of appeal should be was a surety.
accepted?
Indubitably therefore, ITM bound itself to be solidarily.
Held:

No, the notice of appeal should be rejected. SEVERINO v SEVERINO

Where there is no principal debtor in the appeal bond, it is

void and unenforceable. The mere recital in the body of the F: upon the death of x, who left considerable property, a
instrument, “We, MRC et. al, as principal and the Standard litigation ensued between c, x’s widow, and other heirs of x. a
Insurance Co. Inc xxx as surety” does not suffice to make compromise was effected by which d, a son of x, took over
contract binding on the MRC unless it is shown that the same the property pertaining to the estate of x at the same time
was authorized by it. Neither the signature nor the agreeing to pay P100k to c, payable, first in P40k cash upon
acknowledgment indicates that the act of that of the MRC or the execution of the document of compromise and the
that the latter had empowered MPS to execute the bond in balance, in three equal installments. G. affixed his name as
its behalf. The result would be that the appeal bond is void guarantor
and unenforceable for lack of principal debtor or obligation.
Upon d’s failure to pay the balance, c instituted an action
While the surety bound itself to pay jointly and severally, against d and g, the latter contending that he received
such an undertaking presupposes that the obligation is to be nothing for affixing his signature as guarantor to the contract
enforceable against someone else besides the surety and the and that in effect the contract was lacking in consideration as
latter could always claim that it was never its intention to be to him.
the sole person obliged thereby.
Issue: is there a consideration for the guaranty?

IFC v IMPERIAL TEXTILE Ruling: a guarantor or surety is bound by the same

consideration that makes the contract effective between the
Facts: IFC extended to PPIC a loan of principal parties thereto. The compromise and dismissal of
US$7,000,000.00, payable in sixteen (16) semi- lawsuit is recognized in law as a valuable consideration; and
annual installments of US$437,500.00 each, the dismissal of the action which c instituted against d was an
beginning June 1, 1977 to December 1, 1984. On adequate consideration to support the promise on the part of
December 17, 1974, a “Guarantee Agreement” was d to pay the sums stipulated in the contract subject of the
executed with Imperial Textile Mills, Inc. (ITM). ITM action
agreed to guarantee PPIC's obligations under the
loan agreement. PPIC paid the installments due on It is neither necessary that the guarantor or surety should
June 1, 1977, December 1, 1977 and June 1, 1978. receive any part of the benefit, if such there be accruing to his
Despite the rescheduling of the installment principal. The true consideration of this contract was the
payments, however, PPIC defaulted. IFC demanded detriment suffered by c in the former action in dismissing the
ITM and Grandtex, as guarantors of PPIC, to pay the proceeding and it is immaterial that no benefit may have
outstanding balance. However, the outstanding accrued either to the principal or his guarantor
balance remained unpaid.

Issue: The issue is whether ITM is a surety, and thus solidarily LEE v CA
liable with PPIC for the payment of the loan.
FACTS: PBCOM was furnished by a board resolution stating
Ruling: Yes. The Agreement uses “guarantee and guarantors”, that they authorize President, Mr. Charles Lee, and the Vice-
prompting ITM to base its argument on those words. This President and General Manager, Mr. Mariano A. Sio to apply
Court is not convinced that the use of the two words limits for, negotiate and secure the approval of commercial loans
the Contract to a mere guaranty. The specific stipulations in and other banking facilities and accommodations, from the
the Contract show otherwise. Philippine Bank of Communications, in such sums as they
shall deem advantageous, the principal of all of which shall

SECTRANS 2010/ ATTY. AGUINALDO 31

not exceed the total amount of TEN MILLION PESOS unpaid balance of Five Million Four Hundred Forty-One
(P10,000,000.00), Philippine Currency, plus any interests. Thousand Six Hundred Sixty-Three Pesos and Ninety Centavos
exclusive of penalty and interest charges.
Mico availed of the loans and as security for the loans, MICO
through its Vice-President and General Manager, Mariano Aside from the unpaid balance, MICO likewise had another
Sio, executed on May 16, 1979 a Deed of Real Estate standing obligation and PBCom then demanded the
Mortgage over its properties situated in Pasig, Metro Manila. settlement of the aforesaid obligations from herein
petitioners-sureties who, however, refused to acknowledge
On March 26, 1979 Charles Lee, Chua Siok Suy, Mariano Sio, their obligations to PBCom under the surety agreements.
Alfonso Yap and Richard Velasco, in their personal capacities
executed a Surety Agreement in favor of PBCom whereby the Hence, PBCom filed a complaint with prayer for writ of
petitioners jointly and severally, guaranteed the prompt preliminary attachment, alleging that MICO was no longer in
payment on due dates of overdrafts, promissory notes, operation and had no properties to answer for its obligations.
discounts, drafts, letters of credit, bills of exchange, trust PBCom further alleged that petitioner Charles Lee has
receipts, and other obligations of every kind and nature, for disposed or concealed his properties with intent to defraud
which MICO may be held accountable by PBCom. It was his creditors. Except for MICO and Charles Lee, the sheriff of
provided, however, that the liability of the sureties shall not the RTC failed to serve the summons on herein petitioners-
at any one time exceed the principal amount of Three Million sureties since they were all reportedly abroad at the time. An
Pesos plus interest, costs, losses, charges and expenses alias summons was later issued but the sheriff was not able to
including attorney’s . serve the same to petitioners Alfonso Co and Chua Siok Suy
who was already sickly at the time and reportedly in Taiwan
On July 14, 1980, petitioner Charles Lee, in his capacity as where he later died.
president of MICO, wrote PBCom and applied for an
additional loan in the sum of Four Million Pesos). The loan Petitioners contend that there was no proof that the
was intended for the expansion and modernization of the proceeds of the loans or the goods under the trust receipts
company’s machineries. Upon approval of the said were ever delivered to and received by MICO. But the record
application for loan, MICO availed of the additional loan of shows otherwise. Petitioners-sureties further contend that
Four Million Pesos (as evidenced by Promissory Note TA No. assuming that there was delivery by PBCom of the proceeds
094. of the loans and the goods, the contracts were executed by
an unauthorized person, more specifically Chua Siok Suy who
As per agreement, the proceeds of all the loan availments acted fraudulently and in collusion with PBCom to defraud
were credited to MICO’s current checking account with MICO.
PBCom. To induce the PBCom to increase the credit line of
MICO, Charles Lee, Chua Siok Suy, Mariano Sio, Alfonso Yap, ISSUE: Whether or not the individual petitioners, as sureties,
Richard Velasco and Alfonso Co (hereinafter referred to as may be held liable under the two (2) Surety Agreements
petitioners-sureties), executed another surety agreement in executed on March 26, 1979 and July 28, 1980.
favor of PBCom on July 28, 1980, whereby they jointly and
severally guaranteed the prompt payment on due of RULING: Yes.
overdrafts, promissory notes, discounts, drafts, letters of
credit, bills of exchange, trust receipts and all other The court ruled that it is proven that MICO received the
obligations of any kind and nature for which MICO may be proceeds of the loan and that PBCom has the right to to
held accountable by PBCom. It was provided, however, that believe that Chua Siok Suy based on the Certificate issued by
their liability shall not at any one time exceed the sum of the Sectretary of MICO.
Seven Million Five Hundred Thousand Pesos including
interest, costs, charges, expenses and attorney’s fees incurred The court ruled that as regards petitioners-sureties
by MICO in connection therewith. contention that they obtained no consideration whatsoever
on the surety agreements, the court pointed that the
Upon maturity of all credit availments obtained by MICO consideration for the sureties is the very consideration for the
from PBCom, the latter made a demand for payment. For principal obligor, MICO, in the contracts of loan.
failure of petitioner MICO to pay the obligations incurred
despite repeated demands, private respondent PBCom In the case of Willex Plastic Industries Corporation vs. Court of
extrajudicially foreclosed MICO’s real estate mortgage and Appeals, we ruled that the consideration necessary to
sold the said mortgaged properties in a public auction sale support a surety obligation need not pass directly to the
held on November 23, 1982 and PBCom won and applied the surety, a consideration moving to the principal alone being
proceeds of the purchase price at public auction of Three sufficient. For a guarantor or surety is bound by the same
Million Pesos to the expenses of the foreclosure, interest and consideration that makes the contract effective between the
charges and part of the principal of the loans, leaving an parties thereto.
SECTRANS 2010/ ATTY. AGUINALDO 32
 the fact that the bond had been given without his
It is not necessary that a guarantor or surety should receive knowledge.
any part or benefit, if such there be, accruing to his  Any person who makes a payment for the account
principal. of another may recover from the debtor the
DE GUZMAN v SANTOS amount of the payment, unless it was made against
FACTS: the express will of the latter. In the latter case, he
 Jerry O. Toole, Antonio Abad and Anastacio Santos can only recover from the debtor in so far as the
formed a general mercantile partnership – Philippine payment has been beneficial to the latter.
American Construction Company with a capital of  It is evident that Defendant is bound to pay to the
P14k. plaintiff what the latter had advanced to the creditor
 P10k of which were taken by way of loan from upon the judgment, and this is more so because it
Paulino Candelaria. The partnership and the co- appears that although Lucero executed the bond
partners undertook and bound themselves to pay without his knowledge, nevertheless he did not
jointly and severally the indebtedness. object thereto or repudiate the same at any time.
 Upon default, Paulino filed civil case against Phil-Am
Construction Company and co-partners for the
recovery of loan MUNICIPALITY OF GASAN v MARASIGAN
 TC – ordered all Defendants to pay jointly and
severally; CA affirmed FACTS:
 Upon filing of complaint, Paulino obtained a writ of
attachment against Defendants. The Sheriff attached The plaintiff-appellee municipality, on December 9, 1930, put
properties of 3 partners. Partnership offered to post up at auction the privilege of gathering whitefish spawn in its
a bond of P10k. jurisdictional waters for the period of one year from January
 Phil-Am Construction Company as principal then 1, 1931. Two bidders, Graciano Napa and Miguel Marasigan,
represented by the partner Antonio Abad, Santiago appeared at the auction. Graciano Napa proposed to accept
Lucero and Meliton Carlos as guarantors executed a the privilege by paying P5,000 therefor, Miguel Marasigan
bond of P10k in favour of Paulino for the lifting of proposed to do likewise, but by paying only P4,200.
the attachment.
 After issuance of writ of execution, Sheriff found no
The council of the plaintiff-appellee municipality, in its
property of the judgment debtors. Paulino moved
resolution No. 161 (Exhibit 1) of December 11, 1930 rejected
for the issuance of writ of execution against the
Graciano Napa's bid and accepted that of the appellant
guarantors of Defendants.
Miguel Marasigan.
 Guarantor-Plaintiff and co-guarantor Meliton Carlos
later paid the creditor and were able to recover from
To secure his compliance with the terms of the contract
Antonio Abad a sum of P3800, which they divided
which was immediately formalized by him and the plaintiff,
equally.
and pursuant to the provisions of section 8 of resolution No.
 It appeared that the payment made by the plaintiff
128, series of 1925, of the council of said plaintiff, Miguel
to Paulino was reduced to the sum of P3665. Plaintiff
Marasigan filed the bond, Exhibit B, subscribed on December
now demands from Anastacio Santos the return of
15, 1930, by the defendants-appellants Angel R. Sevilla and
the aforesaid sum but Anastacio refused.
Gonzalo L. Luna, who bound themselves in said document to
pay to the plaintiff the sum of P8,400, if Miguel Marasigan
ISSUE: Whether or not Defendant is bound to pay Plaintiff
failed to deposit one-fourth of P4,200 quarterly in advance in
what he had advanced to Paulino?
the municipal treasury of Gasan.
HELD: YES
 Article 1838 provides that any guarantor who pays Graciano Napa forwarded a protest (Exhibit 4) to the
for the debtor shall be indemnified by the latter even provincial board, which protest was later indorsed by said
should the guaranty have been undertaken without provincial board to the Chief of the Executive Bureau, alleging
the knowledge of the debtor. that the plaintiff municipality violated the provisions of
 IN THIS CASE: The guarantor was the deceased section 2323 of the Administrative Code in rejecting his bid.
Santiago Lucero, now represented by the plaintiff in
her capacity as judicial administratrix, and the The provincial board, passing upon Graciano Napa's protest
debtor is the defendant-appellant. Applying the and acting under the authority which, in its opinion, was
provision cited, it is obvious that the Defendant is granted to it by section 2233 of the Administrative Code, held
legally bound to pay what the Plaintiff had advanced that resolution No. 161, series of 1930, by virtue of which the
to the creditor upon the judgment, notwithstanding municipal council of Gasan rejected Graciano Napa's bid and
accepted that of Miguel Marasigan, notwithstanding the fact

SECTRANS 2010/ ATTY. AGUINALDO 33

that the latter offered to pay less, was invalid, and suggested FACTS
that the privilege should be, awarded to Graciano Napa who,
in its opinion, appeared to be the highest bidder in  On April 1918, Fred M. Harden applied to Smith, to buy 8
accordance with the provisions of sections 2323 and 2319 of Anderson expellers end drive, latest model, for the price
the Administrative Code (Exhibit 9). The Executive Bureau, of P80,000, to be paid on delivery. This would be used for
concurring with the provincial board's points of view, the extraction of coconut oil.
declared, in turn, that the concession made to Marasigan was  It was understood that these expellers would be
illegal in view of the fact that Graciano Napa was the highest manufactured in the US and delivery would be in the
bidder (Exhibit 13). month of February or March of the ensuing year.
 In order to assure the prompt payment of the price upon
The plaintiff municipality decided to award the privilege of delivery, an arrangement was made between Harden and
gathering whitefish spawn within its waters to Graciano the Philippine National Bank (PNB) whereby the latter
Napa, giving him a period of seven days, from January 8, 1931 bound itself to Smith, Bell & Co. for the payment of the
(Exhibit 19-A), to deposit the sum of P500. contract price, but provided that the expellers would
delivered to them and must be new and in first class
Graciano Napa not only failed to make the deposit required working order.
by the plaintiff but he formally declared, through his duly  Shortly after the contract was made, Harden appeared in
authorized representative, that he yielded the privilege the office of Smith, Bell & Co. and requested them to
granted him to Miguel Marasigan or to any other person change the order for the expellers from "end-drive" to
selected by the municipal authorities. "side-drive;" and in obedience to this instruction, the
house cabled to its agent in New York to change the
One day later plaintiff-appellee municipality sent the letter order accordingly, which was done.
Exhibit 21 to Miguel Marasigan informing him that the  On July 1919, Smith, Bell & Co. informed both Harden
contract between them becomes effective on January 14, and PNB that the expellers had arrived.
1931.  Shortly thereafter Harden, having examined the
machinery in the Plaintiff's bodega, advised the Bank that
Prior to this, plaintiff informed Marasigan that the contract the expellers were not as ordered.
granting Marasigan the privilege is suspended & considered  Consequently, the Bank naturally refused to accept and
ineffective while the protest is pending. pay for the machinery, and the Plaintiff disposed of them
to the best advantage in the Manila market at a price
Plaintiff filed an action to recover from Marasigan, Sevilla and which was below the price at which Harden had agreed
Luana the sum of P 3,780 as part of license fees which they to take them.
failed to pay.  The ground upon which the defense is chiefly rested is
that the expellers tendered by the Plaintiff were "side-
ISSUE: w/n respondents are liable drive" instead of "end-drive" expellers, and in support of
this contention Harden was produced by the Defendant
HELD: as a witness, and he denied that the order for expellers
had been changed upon his instructions.
No. The contract was not only considered not consummated
but cancelled. Issue:

It ceased to be valid when it was cancelled Whether or not PNB is subsidiary liable?

Neither the appellant nor his sureties were bound to comply Rulings:
with the terms of their respective contracts of fishing
privilege and suretyship.  NO. The SC ruled that PNB’s liability is primary in nature.
 The contract by which the Bank obligated itself is both in
This is so particularly with respect to the sureties, because
form and effect an independent undertaking on the part
suretyship cannot exist without a valid obligation.
of the Bank directly to the Plaintiff; and inasmuch as the
Plaintiff had compiled, or offered to comply, with the
Guaranty is not presumed.
terms of said contract, the Bank is bound by its promise
to pay the purchase price.
The elimination of the obligation for which said sureties
 Its obligation to the Plaintiff is direct and independent.
desired to answer with their bond also rendered the bond
The debt must be considered a liquidated debt, in the
also eliminated.
sense intended in article 1825 of the Civil Code; and the
action is now maintainable by the Plaintiff directly
SMITH BELL v PNB
SECTRANS 2010/ ATTY. AGUINALDO 34
 against the Bank without regard to the position of FACTS:
Harden.
 The Bank is to be considered strictly in the light of an  Residoro Chua and Enrique Go, Sr. executed a
independent promisor, a consequence would be that comprehensive surety agreements to guaranty
Harden had no authority to change the order from end- among others, any existing indebtedness of Davao
drive to side-drive expellers; in other words, that the Agricultural Industries Corporation provided that the
Bank should be held to be obligated according to the liability shall not exceed at any one time the
terms of the order as it stood when the Bank entered aggregate principal sum of P100,000.00.
into the undertaking which is the subject of the suit.  A promissory note in the amount of P100,000.00
was issued in favor of petitioner. Said note was
signed by Enrique Go, Sr. in his personal capacity and
in behalf of Daicor. The promissory note was not
WISE & CO. v KELLY fully paid despite repeated demands; hence
FACTS: Kelly bought goods and merchandise on credit from petitioner filed a complaint for a sum of money
Wise and Co., with the agreement that Kelly will apply the against Daicor, Enrique Go, Sr. and Residoro Chua
proceeds of its sale to the discharge of his indebtedness. Lim,
as surety for Kelly, guaranteed unto Wise & Co. the payment  Petitioner alleged that by virtue of the execution of
of a sum of money which Kelly owes to Wise for goods and the comprehensive surety agreement, private
merchandise received and purchased by Kelly, to be sold in respondent is liable because said agreement covers
his establishment, upon the condition that Kelly will pay over not merely the promissory note subject of the
to Wise at the end of each month all sums which he may complaint, but is continuing; and it encompasses
receive from the sale of said goods and merchandise, and every other indebtedness the Borrower may, from
that in the contrary event, the surety undertakes to pay Wise time to time incur with petitioner bank.
such sums as Kelly may fail to turn in.  The sole issue resolved by respondent court was the
interpretation of the comprehensive surety
As alleged by Wise, Kelly has not paid any money and thus agreement, particularly in reference to the
filed a collection case against Kelly and Lim. Lim interposed indebtedness evidenced by the promissory note
the defense that the obligation was conditional as to him, and involved in the instant case, said comprehensive
that the fact constituting the condition had not occurred. surety agreement having been signed by Enrique Go,
Lower court dismissed the case against Lim on the ground Sr. and private respondent, binding themselves as
that wise has not proven that Kelly had failed to turn over any solidary debtors of said corporation not only to
money and established the conclusion that Lim had incurred existing obligations but to future ones.
no liability.

ISSUE: WON Lim should be held liable.  Respondent court said that corollary to that
agreement must be another instrument evidencing
HELD: NO. Lim is not liable for the difference between the the obligation in a form of a promissory note or any
amount realized from the sale of the merchandise and the other evidence of indebtedness without which the
purchase price of the same. Lim as surety did not undertake said agreement serves no purpose; that since the
to pay the principal amount due. His agreement was limited promissory notes, which is primarily the basis of the
to respond for the performance by Kelly of one of the cause of action of petitioner, is not signed by private
accessory pacts, namely, the undertaking to deliver to Wise respondent, the latter can not be liable thereon.
the total proceeds of the sales of the merchandise for the
invoice value of which the promissory note was given. Wise
has not proved that it has NOT in fact received all the money ISSUE: whether private respondent is liable to pay the
derived from the sale of the merchandise mentioned in the obligation evidence by the promissory note?
note, it follows that there is no evidence of the existence of
the condition to which the obligation assumed by Lim was HELD:
subordinated. In obligations subject to a suspensive condition
the acquisitions of the right on the part of the creditor  YES, The comprehensive surety agreement was
depends upon the occurrence of the event constituting the jointly executed by Residoro Chua and Enrique Go,
conditions. Sr., President and General Manager, respectively of
Daicor, 1976 to cover existing as well as future
obligations which Daicor may incur with the
petitioner bank, subject only to the proviso that their
RCBC v ARRO liability shall not exceed at any one time the
aggregate principal sum of P100,000.00

SECTRANS 2010/ ATTY. AGUINALDO 35

  The agreement was executed obviously to induce TRADERS INSURANCE v DY
petitioner to grant any application for a loan Daicor
may desire to obtain from petitioner bank. The FACTS:
guaranty is a continuing one which shall remain in
full force and effect until the bank is notified of its 1) For several years Destilleria Lim Tuaco & Co., Inc. had one
termination. Dy Eng Giok as its provincial sales agent who has the duty of
 The surety agreement which was earlier signed by turning over the proceeds of his sales to the distillery
Enrique Go, Sr. and private respondent, is an company. In 1951, Dy’s outstanding running account was in
accessory obligation, it being dependent upon a the sum of P12,898.61. Thereafter, a surety bond was
principal one which, in this case is the loan obtained executed by Dy as principal and Traders Insurance as solidary
by Daicor as evidenced by a promissory note. guarantor, whereby they bound themselves, jointly and
 What obviously induced petitioner bank to grant the severally,
loan was the surety agreement whereby Go and
Chua bound themselves solidarily to guaranty the
“WHEREAS, the contract requires the above bounden
punctual payment of the loan at maturity. By terms
principal to give a good and sufficient bond in the
that are unequivocal, it can be clearly seen that the
above stated sum to secure the full and faithful
surety agreement was executed to guarantee future
fulfillment on its part of said contract; namely, to
debts which Daicor may incur with petitioner, as is
guarantee the full payment of the Principal's
legally allowable under the Civil Code
obligation not to exceed the above stated sum.”

2) On the same date, by Eng Giok, as principal, with Pedro

WILLEX PLASTICS v CA
Lopez Dee and Pedro Dy-Liacco, as counterboundsmen,
subscribed an indemnity agreement in favor of appellant
FACTS:
Surety Company, where, in consideration of its surety bond,
- Inter Resin opened a Letter of Credit with Manila
the three agreed to be obligated to the surety company.
Banking Corp. with security of “Continuing Surety
Thereafter, Dy contracted obligations in favor of the
Agreement signed by Inter Resin and Investment and
Destilleria in the amount of P41,449.93; and Dy made
Underwriting Corp (IUCP) wherein they bound
remittances of the same amount
themselves solidarily for the.
- Later Inter Resin together with Willex (P) executed a
continuing guaranty in favor of IUCP, stating that 3) The distillary, however, applied said remittances first to Dy
Inter Resin and P are solidarily liable. Due to this, Eng Giok's outstanding balance prior to August 4, 1951,
IUCP paid Manila Bank P4M (Letter of Credit) before the suretyship agreement was executed, in the sum
- IUCP then demanded payment of the amount, of P12,898.61; and the balance of P28,965.88 to Dy's
however, Inter Resin and P failed to do so. Hence, obligations between August 4, 1951 and August 3, 1952.
this case
- P contends that it should not be liable since P is 4) Then demanded payment of the remainder from Dy, and
merely a guarantor later, from the appellant Surety Company. The latter paid
P10,000.00 (the maximum of its bond) on July 17, 1953,
ISSUE: WoN P ma be held jointly and severally liable with apparently, without questioning the demand; and then
Inter Resin for the amount paid by Interbank to Manila Bank sought reimbursement from Dy Eng Giok and his counter
guarantors, who however failed to pay. Because of this the
SC: YES company brought an action to enforce collection.
- The amount had been paid by InterBank to Manila
bank 5) The CFI absolved the counter-guarantors on the theory
- The intention of the parties is to secure the payment that in so far as they are concerned, the payments made by
of the obligation. Dy from August 4, 1951 to August 3, 1952, should have been
o CA held-to secure the guarantee applied to his obligations during that period, which were the
undertaken by Interbank of the credit ones covered by the surety bond and the counter-guaranty;
accommodation granted to Inter Resin by and since these obligations only amounted to P41,449.93, the
Manila Bank, Interbank required P to sign a payments exceeding the obligations, the CFI concluded that
Continuing Guaranty the Surety Company incurred no liability and the
counterbondsmen in turn had nothing to answer for.
DOCTRINE: Although a contract of suretyship is ordinarily not
be construed retrospective, in the end the intention of the HELD:
parties as revealed by the evidence is controlling

SECTRANS 2010/ ATTY. AGUINALDO 36

A) The CFI is correct. There are two reasons why the surety was not even aware. A contract of suretyship is to be
remittances by Dy Eng Giok in the sum of P41,864.49 should strictly interpreted and is not to be extended beyond its
be applied to the obligation of P41,449.93 contracted by him terms.
during the period covered by the suretyship agreement:

a.. In the absence of express stipulation, a guaranty

or suretyship operates prospectively and not GARON v PROJECT MOVERS
retroactively; that is to say, it secures only the debts Facts:
contracted after the guaranty takes effect because a
guaranty is not presumed, but must be express, and  Project Movers Realty and Devt Corp (PMRDC) obtained
can not extend to more than what is stipulated. a loan from Garon. The loan was covered by a Promissory
note to mature on December 19. The stipulated interest
b.. Since the obligations of Dy between August 4, rate was 36% per annum.
1951 to August 4, 1952, were guaranteed, while his  To secure the payment of the loan, PMRDC undertook to
indebtedness prior to that period was not secured, assign to Garon its leasehold rights over a space at the
then in the absence of express application by the Monumento Plaza Commercial Complex.
debtor, any partial payments made by him should be  The parties stipulated that failure to pay the note or any
imputed or applied to the debts that were portion thereof, or any interest thereon, shall constitute
guaranteed, since they are regarded as the more as default and the entire obligation shall become due and
onerous debts from the standpoint of the debtor. demandable without need of demand.
 PMRDC obtained another loan from Garon at 17% per
annum to mature on December 31. It is covered by
B) In essence therefore debts covered by a guaranty are
another promissory note and secure a leasehold rights
deemed more onerous to the debtor than the simple
over another space in Monumento Plaza.
obligations because, in their case, the debtor may be
 To secure its obligations to assign the leasehold rights to
subjected to action not only by the creditor, but also by the
Garon, PMRDC procured a surety bond from Stronghold
guarantor, and this even before the guaranteed debt is paid
Insurance, which the liability of the surety will not exceed
by the guarantor; hence, the payment of the guaranteed debt
the sum of P12M and will expire on Nov 7.
liberates the debtor from liability to the creditor as well as to
 When PMRDC defaulted in the payment of its
the guarantor, while payment of the unsecured obligation
obligations, Garon sent a demand letter dated Nov 3
only discharges him from possible action by only one party,
requiring PMRDC to execute and deliver a unilateral
the unsecured creditor.
Deed of Assignment of its leasehold rights over the
commercial spaces.
C) Thus, payment voluntarily made by appellant was  Garon also sent a demand letter to the surety on Nov 6.
improper since it was not liable under its bond; consequently,  For failure to comply with the demand, Garon filed a
it can not demand reimbursement from the complaint for collection of the principal obligation
counterbondsmen but only from Dy. against PMRDC and the surety.
 The surety contends that the complaint stated no cause
D) Ultimately, the application by a creditor depends upon the of action and was prematurely filed. At the time Garon
debtor acquiescence thereto. In the present case, as already sent the demand letter, the obligation guaranteed by the
noted, there is no evidence that the receipts for payment bond had not yet matured.
expressed any imputation, or that the debtor agreed to the  On the part of PMRDC, it denied that it executed the
same. Judgment is affirmed. promissory noted and alleged instead that they were
mere roll-overs. It also alleged that it already complied
with its undertaking under the promissory notes when it
SOCONY v CHO SIONG put up a surety bond. And that when Garon chose to
demand from the surety, she effectively waived the right
FACTS: Cho Siong entered into contract of agency for to claim for it.
distribution of petroleum products, assumed liability of
former agent Tong Kuan. His agency bond was secured by Issue: Whether or not the surety is liable to Garon under
Ong Guan Can. Defaulted in the amount of P64.00 its surety bond.

DOCTRINE: Under the terms of the bond signed by the Held:

surety, he did not answer for the principal obligor save for the
Latter’s acts by virtue of the contract of agency. He cannot be Yes, the surety is liable in general. The principal obligation
held liable for the debt of a former agent, which the principal guaranteed by the surety bond is the assignment of leasehold
obligor assumed by virtue of another contract, of which said rights of PMRDC to Garon over the subject spaces. Garon

SECTRANS 2010/ ATTY. AGUINALDO 37

made a formal demand but PMRDC defaulted. As such, principal debt plus interest. Commonwealth refused.
PMRDC’s liability arose. Consequently, the surety’s liability Commonwealth appealed to CA and questions the ruling of
likewise arose. the lower court awarding interest. (focus on interest)
Issue: WoN Commonwealth whould pay principal and interest
Suretyship arises upon the solidary binding of a person with
the principal debtor, for the purpose of fulfilling an Ruling: Obviously, Commonwealth is obliged to pay the
obligation. A surety is considered in law as being the same principal being the surety. Regarding the interest, generally
party as the debtor in relation to whatever is adjudged as no. However because Commonwealth refused to pay the
touching the obligation of the latter and their liabilities are principal when the lower court ordered it to do so, it is now
interwoven as to be inseparable. Although a surety contract bound to pay the interest.
is secondary to the principal obligation, the liability of the
surety is direct, primary and absolute or equivalent to that NAMARCO v MARQUEZ
of a regular party to the undertaking.
FACTS: Properties, rights, obligations, and contracts of the
Note: Philippine Relief and Trade Rehabilitation Administration
(PRATRA) had been transferred to the Price Stabilization
Surety in this case was not held liable since its undertaking Corporation (PRISCO) and subsequently all rights and
under the surety bond was merely to guarantee the contracts of the PRISCO involving real estate, fixed assets and
assignment of PMRDC’s leasehold rights and not the payment stock in trade had been assumed by herein plaintiff, the
of the entire obligation and Garon is seeking to enforce her NAMARCO.
right to collect the principal debt rather than enforce the
security. Marquez secured from the PRATRA one tractor and one rice
thresher, with a total value of P20,000.00 for which the said
defendant paid thereon the sum of P8,000.00 as down
REPUBLIC v PAL-FOX LUMBER payment, thereby leaving a balance of P12,000.00. Marquez
executed a promissory note in the amount of P12,000.00
Facts: Pal-Fox Lumber Co., Inc. was indebted to the Bureau payable in installments commencing from June 24, 1951 to
of Internal Revenue for forest charges and surcharges June 25, 1952, with interest thereon at the rate of 7% per
amounting to P11,851.56, and that the Far Eastern Surety & annum from June 24, 1950 until finally paid.
Insurance Co., Inc. was jointly and severally liable with the
lumber company for the payment of said forest charges up to To guarantee full compliance with the aforementioned
P5,000.00. Republic moved for reconsideration, pointing out obligation, defendant Marquez, as principal, and defendant
that the surety company's correct liability under the appealed Plaridel Surety & Insurance Company, as surety, executed
decision was P5,000.00 plus legal interest from the filing of Guaranty Bond P. S. & I. No. 4220 in favor of the PRATRA,
the complaint. In other words, the Republic would want the wherein they bound themselves, jointly and severally, to pay
surety company to pay the legal interest adjudged by the trial the said amount of P12,000.00 (Exhibit C).
court before the case may finally be considered dismissed.
Far Eastern's denial of liability for such interest is based on In this guaranty bond, the surety expressly waives its right to
the stipulation in the bond that it was bound to the plaintiff demand payment and notice of non-payment and agrees that
"in the sum of P5,000.00." the liabilities of this guaranty shall be direct and immediate
and not contingent upon the exhaustion by the PRATRA of
Issue: W/N Far Eastern should also pay interest? whatever remedies it may have against the principal, and that
the same shall be valid and continuous until the obligation so
Ruling: Yes. Article 2055, paragraph 2, of the Civil Code of the guaranteed is paid in full.
Philippines is clearly applicable.
If it (the guaranty) be simple or indefinite, it shall comprise After making partial payment, Marquez defaulted in the
not only the principal obligation but also all its accessories, payment of the other installments. Plaintiff demanded from
including judicial costs. defendants Marquez and Plaridel Surety & Insurance
Company, payment of their outstanding obligation. The claim,
therefore, of defendant Plaridel Surety & Insurance Company
COMMONWEALTH v CA that they never received a demand for payment from plaintiff
must necessarily fail, considering that it is clearly shown in
This case is about SIGS and ELBA borrowing money from registry return receipts that the same had been received by
RCBC worth P4m. Commonwealth being the surety. SIGS and the addressee.
ELBA defaulted so RCBC went after Commonwealth.
Commonwealth insists on not paying. Lower Court ruled in
favor of RCBC and ordered Commonwealth to pay the

SECTRANS 2010/ ATTY. AGUINALDO 38

ISSUES: Whether the surety's liability can exceed the sum of
P12,000.00. HELD: Mere guarantor
 Nothing in the language of the receipt, Exh A, or in
RULING: Yes the proven circumstances attending its execution
While the guarantee was for the original amount of the debt can logically be considered as evidencing the
of Gabino Marquez, the amount of the judgment by the trial creation of an agency between Perlas, as principal,
court in no way violates the rights of the surety. The and Vizconde as agent, for the sale of the former’s
judgment on the principal was only for P10,000.00, while the ring.
remaining P9,990.91 represent the moratory interest due on  If any agency was established, it was one between
account of the failure to pay the principal obligation from and Perlas and Pagulayan only, this being the logical
after the same had fallen due, and default had taken place. conclusion from the use of the singular “I” in said
Appellant surety was fully aware that the obligation earned clause, in conjunction with the fact that the part of
interest, since the note was annexed to its contract, Exhibit the receipt in which the clause appears bears only
"C". the signature of Pagulayan.
 To warrant anything more than a mere conjecture
that the receipt also constituted Vizconde the agent
The contract of guaranty executed by the appellant Company of Perlas for the same purpose of selling the ring, the
nowhere excludes this interest, and Article 2055, paragraph cited clause should at least have used the plural
2, of the Civil Code of the Philippines is clearly applicable. “we,” or the text of the receipt containing that
clause should also have carried Vizconde’s signature.
If it (the guaranty) be simple or indefinite, it  The joint and several undertaking assumed by
shall comprise not only the principal obligation but Vizconde in a separate writing below the main body
also all its accessories, including judicial costs, of the receipt, Exhibit “A,” merely guaranteed the
provided with respect to the latter, that the civil obligation Pagulayan to pay Perlas the value of
guarantor shall only be liable for those costs the ring in the event of her (Pagulayan’s) failure to
incurred after he has been judicially required to return said article.
pay.  What is clear from Exh A is that the ring was
entrusted to Pagulayan to be sold on commission;
there is no mention therein that it was
Compensated sureties are not entitled to have their contracts
simultaneously delivered to and received by
interrupted strictissimi juris in their favor
Vizconde for the same purpose or, therefore, that
Vizconde was constituted, or agreed to act as, agent
VIZCONDE v IAC jointly with Pagulayan for the sale of the ring.
FACTS:  What Vizconde solely undertook was to guarantee
 Perlas called Vizconde and asked her to sell an 8 the obligation of Pagulayan to return the ring or
carat diamond ring on a commission for P85k deliver its value; and that guarantee created only a
 Vizconde later returned the ring. Afterwards, civil obligation, without more, upon default of the
Vizconde called on Perlas and claimed that there was principal.
a “sure buyer” for the ring, Pilar Pagulayan  Upon the evidence, Vizconde was a mere guarantor,
 Pagulayan gave a post-dated check; Perlas and a solidary one to be sure, of the obligation assumed
Vizconde signed a receipt (Exh. A) by Pagulayan to complainant Perlas for the return of
 The check was dishonoured. After 9 days, Pagulayan the latter’s ring or the delivery of its value. Whatever
paid Perlas P5k against the value of the ring and gave liability was incurred by Pagulayan for defaulting on
3 Certificates of Title to guarantee delivery of the such obligation – and this is not inquired into – that
balance of such value (Exh D) of Vizconde consequent upon such default was
 Perlas filed a complaint against Pagulayan and merely civil, not criminal.
Vizconde for estafa.
 TC and CA – Vizconde and Pagulayan had assumed a ESTATE OF HEMADY v LUZON SURETY
joint agency in favour of Perlas for the sale of the
latter’s ring, which rendered them criminally liable, FACTS:
upon failure to return the ring or deliver its agreed The Luzon Surety Co. had filed a claim against the Estate
value, under Art 315, par 1(b) of the Revised Penal based on twenty different indemnity agreements, or counter
Code bonds, each subscribed by a distinct principal and by the
 SOL GEN – disagreed; Vizconde can’t be convicted of deceased K. H. Hemady, a surety solidary guarantor) in all of
estafa based on the Exhibits presented them, in consideration of the Luzon Surety Co.’s of having
guaranteed, the various principals in favor of different
ISSUE: Whether Vizconde was considered as agent of Perlas creditors.
or mere guarantor of obligation of Pagulayan?
SECTRANS 2010/ ATTY. AGUINALDO 39
The Luzon Surety Co., prayed for allowance, as a contingent the conclusion that his peculiar individual qualities are
claim, of the value of the twenty bonds it had executed in contemplated as a principal inducement for the contract.
consideration of the counterbonds, and further asked for What did the creditor Luzon Surety Co. expect of K. H.
judgment for the unpaid premiums and documentary stamps Hemady when it accepted the latter as surety in the
affixed to the bonds, with 12 per cent interest thereon. counterbonds? Nothing but the reimbursement of the
moneys that the Luzon Surety Co. might have to disburse on
The lower court, by order of September 23, 1953, dismissed
account of the obligations of the principal debtors. This
the claims of Luzon Surety Co., on the ground that “whatever
reimbursement is a payment of a sum of money, resulting
losses may occur after Hemady’s death, are not chargeable to
from an obligation to give; and to the Luzon Surety Co., it
his estate, because upon his death he ceased to be
was indifferent that the reimbursement should be made by
guarantor.”
Hemady himself or by some one else in his behalf, so long as
The reasoning of the court below ran as follows: the money was paid to it.
“The administratrix further contends that upon the death of The second exception of Article 1311, p. 1, is intransmissibility
Hemady, his liability as a guarantor terminated, and by stipulation of the parties. Being exceptional and contrary
therefore, in the absence of a showing that a loss or damage to the general rule, this intransmissibility should not be easily
was suffered, the claim cannot be considered contingent. This implied, but must be expressly established, or at the very
Court believes that there is merit in this contention and finds least, clearly inferable from the provisions of the contract
support in Article 2046 of the new Civil Code. It should be itself, and the text of the agreements sued upon nowhere
noted that a new requirement has been added for a person indicate that they are non-transferable.
to qualify as a guarantor, that is: integrity. As correctly
Because under the law (Article 1311), a person who enters
pointed out by the Administratrix, integrity is something
into a contract is deemed to have contracted for himself and
purely personal and is not transmissible. Upon the death of
his heirs and assigns, it is unnecessary for him to expressly
Hemady, his integrity was not transmitted to his estate or
stipulate to that effect; hence, his failure to do so is no sign
successors. Whatever loss therefore, may occur after
that he intended his bargain to terminate upon his death.
Hemady’s death, are not chargeable to his estate because
Similarly, that the Luzon Surety Co., did not require
upon his death he ceased to be a guarantor.
bondsman Hemady to execute a mortgage indicates nothing
Another clear and strong indication that the surety company more than the company’s faith and confidence in the
has exclusively relied on the personality, character, honesty financial stability of the surety, but not that his obligation was
and integrity of the now deceased K. H. Hemady, was the fact strictly personal.
that in the printed form of the indemnity agreement there is
The third exception to the transmissibility of obligations
a paragraph entitled ‘Security by way of first mortgage, which
under Article 1311 exists when they are “not transmissible by
was expressly waived and renounced by the security
operation of law”. The provision makes reference to those
company. The security company has not demanded from K.
cases where the law expresses that the rights or obligations
H. Hemady to comply with this requirement of giving security
are extinguished by death, as is the case in legal support
by way of first mortgage. In the supporting papers of the
(Article 300), parental authority (Article 327), usufruct (Article
claim presented by Luzon Surety Company, no real property
603), contracts for a piece of work (Article 1726), partnership
was mentioned in the list of properties mortgaged which
(Article 1830 and agency (Article 1919). By contract, the
appears at the back of the indemnity agreement.” (Rec. App.,
articles of the Civil Code that regulate guaranty or suretyship
pp. 407-408).
(Articles 2047 to 2084) contain no provision that the guaranty
ISSUE: W/N the liability of the guarantor was terminated is extinguished upon the death of the guarantor or the surety.
upon his death
WISE & CO. v TANGLAO
HELD: NO.
Under the present Civil Code (Article 1311), as well as under FACTS
the Civil Code of 1889 (Article 1257), the rule is that —
“Contracts take effect only as between the parties, their  In the CFI of Manila, Wise & Co filed a civil case against
assigns and heirs, except in the case where the rights and Cornelio C. David for the recovery of a certain sum of
obligations arising from the contract are not transmissible by money.
their nature, or by stipulation or by provision of law.”  David was an agent of Wise & Co. and the amount
claimed from him was the result of a liquidation of
Under our law, therefore, the general rule is that a party’s accounts showing that he was indebted in said amount.
contractual rights and obligations are transmissible to the  In said case Wise & Co. asked and obtained a preliminary
successors. attachment of David's property.
Of the three exceptions fixed by Article 1311, the nature of  To avoid the execution of said attachment, David
the obligation of the surety or guarantor does not warrant succeeded in having the defendant Attorney Tanglao sign
a power of attorney in his favor, with a clause
SECTRANS 2010/ ATTY. AGUINALDO 40
 (considered a special POA to David) “ To sign as FACTS: Defendant Barbosa executed a real estate mortgage
guarantor for himself in his indebtedness to Wise & for the only purpose of guaranteeing – as surety and/or
Company of Manila, and to mortgage the Attorney’s lot” guarantor – the payment of the debt of one Alfredo Brillantes
 Subsequently, David made a compromise with the in favor of Southern Motors, Inc. due to the failure of
petitioner by paying P340 leaving an unpaid balance of Brillantes to settle his obligation; plaintiff filed an action
P296 and pledged the lot owned by the Atty as a against defendant to foreclose the real estate mortgage.
guaranty for the balance. Defendant filed an answer alleging that the plaintiff has no
 Wise & Co. now institutes this case against Tanglao for right of action against him because the plaintiff did not intent
the recovery of said unpaid amount. to exhaust all recourses to collect from the true debtor
 There is no doubt that under POA, Tanglao empowered (Brillantes), notwithstanding the fact that the latter is solvent
David, in his name, to enter into a contract of suretyship and has many properties within the Province of Iloilo.
and a contract of mortgage of the property described in
the document, with Wise & Co. ISSUE: WHETHER THE MORTGAGE IN QUESTION COULD BE
 However, David used said power of attorney only to FORECLOSED ALTHOUGH PLAINTIFF HAD NOT EXHAUSTED,
mortgage the property and did not enter into contract of AND DID NOT INTEND TO EXHAUST, THE PROPERTIES OF HIS
suretyship. PRINCIPAL DEBTOR.

ISSUE HELD: NO. The right of guarantors, under Art. 2058 of the
Civil Code, to demand exhaustion of the property of the
Whether or not Atty. Tanglao is liable? principal debtor, exists only when a pledge or a mortgage has
not been given as special security for the payment of the
principal obligation.
RULING
Although an ordinary personal guarantor – not a mortgagor
 NO. or pledgor – may demand exhaustion of the properties of the
 The SC ruled that there is nothing stated in the principal debtor, the creditor may, prior thereto, secure
Compromise Agreement to the effect that Tanglao judgment against said guarantor, who shall be entitled,
became David's surety for the payment of the sum in however, to a deferment of the execution of said judgment
question. Neither is this inferable from any of the clauses against him until after the properties of the principal debtor
thereof, and even if this inference might be made, it shall have been exhausted to satisfy the obligation involved
would be insufficient to create an obligation of in the case.
suretyship which, under the law, must be express and
cannot be presumed.
 The only obligation which the Compromise Agreement, in
connection with POA, has created on the part of Tanglao, SAAVEDRA v PRICE
is that resulting from the mortgage of a property FACTS:
belonging to him to secure the payment of said P640.
However, a foreclosure suit is not instituted in this case  This is a proceeding instituted by the petitioner to
against Tanglao, but a purely personal action for the annul the order of May 8, 1939, entered by the
recovery of the amount still owed by David. Court of First Instance of Leyte, which provided for
 At any rate, even granting that Defendant Tanglao may the sale at public auction of the real property
be considered as a surety under the cited Compromise described in Transfer Certificate of Title No. 395
the action does not yet lie against him on the ground that issued in favor of the petitioner, so that the
all the legal remedies against the debtor have not proceeds thereof may be applied to the payment of
previously been exhausted (art. 1830 of the Civil Code, the credit of the respondent W.S. Price in the sum of
and decision of the Supreme Court of Spain of March 2, P15,000
1891).
 The Plaintiff has in its favor a judgment against debtor
David for the payment of debt. It does not appear that
the execution of this judgment has been asked for and
the Compromise, on the other hand, shows that David
has two pieces of property the value of which is in excess
of the balance of the debt the payment of which is
sought of Tanglao in his alleged capacity as surety.

SOUTHERN MOTORS v BARBOSA

SECTRANS 2010/ ATTY. AGUINALDO 41

  In civil case No. 3707 of the Court of First Instance of the fact that she was sued not as a surety but as a
Leyte, W.S. Price, plaintiff vs. Ceferino Ibañez et al., mortgage debtor for being the owner of the
defendants, said court rendered judgment ordering mortgaged property
the defendants to pay the plaintiff within ninety days
the sum of P15,000, with the legal interest thereon ARROYO v JUNGSAY
from January 16, 1934, and in case of default on
their part, that the real property subject matter of FACTS:
the mortgage be sold at public auction so that the - Arroyo (P) is an appointed guardian of an imbecile,
proceeds thereof may be applied to the payment of while Jungsay et al (D) are the previous guardian and
the sum in question and the interest thereon. bondsmen who absconded.
- D, the former guardian of the ward, absconded with
the funds of his ward.
 After the period of ninety days has elapsed and - LC ordered D to pay P, which the bondsmen
Rafael Martinez and Ceferino Ibañez failed to pay appealed. D also pointed out properties of the
the sum in question with the interest thereon, the previous guardian which are now being adversely
respondent Price filed a motion praying that the real claimed by 3rd parties
property mortgaged be sold at public auction for the
payment of his mortgage credit and its interest. ISSUE: WoN the bondsmen are liable
 This was denied.
 The petitioner now claims that the respondent Judge SC: YES
acted with abuse of his discretion in not transferring - For the surety to be not liable, he must be able to
the hearing of the motion for the sale of the point out property of the principal debtor which are
mortgaged realty and that he exceeded his realizable and is situated within the Philippines – to
jurisdiction in ordering the sale of said property. insure the fulfillment of the obligation and furnish
the creditor with the means of obtaining its
ISSUE: Whether or not the order of sale of such property was fulfillment without delay
proper? - The property pointed out by the sureties is not
sufficient to pay the indebtedness; it is not salable; it
HELD: is encumbered to 3rd parties

 It is contended that since the petitioner is not the BITANGA v PYRAMID

debtor and as she, on the other hand is the owner of
the mortgaged realty, she merely acted as surety to FACTS:
Rafael Martinez, the principal debtor, and as such
she entitled to the benefit of the exhaustion of the 1) On March 26 1997, Pyramid entered into an agreement
property of the principal debtor, in accordance with with Macrogen Realty, of which Bitanga is the President, to
the provision of article 1830 of the Civil Code. construct for the latter a building, located in Sucat,
Parañaque. Pyramid then commenced civil, structural, and
architectural works on the construction project. However,
 We are of the opinion that this last contention is Macrogen Realty failed to settle respondent’s progress
likewise unfounded and untenable. billings. Bitanga, assured Pyramid that the outstanding
o In the first place, this alleged defense should account of Macrogen Realty would be paid.Thus, Pyramid
have been interposed before the judgment was continued the construction project.
rendered in this case and it is too late to raise it
for the first time as a ground for opposing the
2) In August 1998, Pyramid suspended work on the
motion to sell the real property in question.
construction project since the conditions that it imposed for
o In the second place, the contention that the
the continuation thereof, including payment of unsettled
mortgaged real property belonging to the
accounts, had not been complied with by Macrogen Realty
petitioner cannot be sold to pay the debt for the
and eventually, on 1 September 1999, respondent instituted
reason that she is a mere surety of Rafael
with the Construction Industry Arbitration Commission (CIAC)
Martinez, finds no support in the law.
a case for arbitration against Macrogen Realty seeking
payment by the latter of its unpaid billings and project costs.
Macrogen, chose to amicably settle the arbitration case and
 It is true that the petitioner is a surety with regard to
both parties entered into a Compromise Agreement, with
Rafael Martinez and as such surety she is entitled to
Bitanga acting as signatory for and in behalf of Macrogen
resort to the actions and remedies against him which
Realty.
the law affords her, but we should not lose sight of

SECTRANS 2010/ ATTY. AGUINALDO 42

3) Under the Agreement, Macrogen Realty agreed to pay (2) whether defendant wife Marilyn Bitanga is liable in this
Pyramid the total amount in six equal monthly installments, action;
that if it would default in the payment of two successive
monthly installments, immediate execution could issue HELD:
against it for the unpaid balance, without need of judgment
from any court or tribunal. Bitanga guaranteed the A) Under a contract of guarantee, the guarantor binds himself
obligations of Macrogen Realty under the Compromise to the creditor to fulfill the obligation of the principal debtor
Agreement by executing a Contract of Guaranty in favor of in case the latter should fail to do so. The guarantor who pays
respondent, by virtue of which he irrevocably and for a debtor, in turn, must be indemnified by the latter.
unconditionally guaranteed the full and complete payment of However, the guarantor cannot be compelled to pay the
the principal amount of liability of Macrogen Realty. creditor unless the latter has exhausted all the property of
the debtor and resorted to all the legal remedies against the
4) However, despite this, Macrogen Realty failed and refused debtor. This is what is otherwise known as the benefit of
to pay all the monthly installments agreed upon in the excussion.
Compromise Agreement. Thus, on 7 September 2000,
respondent moved for the issuance of a writ of execution Article 2060 of the Civil Code reads:
against Macrogen Realty, which was granted.
In order that the guarantor may make use of the
5) The sheriff however filed a return stating that he was benefit of excussion, he must set it up against the
unable to locate any property of Macrogen Realty, except its creditor upon the latter’s demand for payment from
bank deposit of P20,242.33, with the Planters Bank, Buendia him, and point out to the creditor available property
Branch. Respondent then made, on January 3, 2001, a written of the debtor within Philippine territory, sufficient to
demand on petitioner, as guarantor of Macrogen Realty, to cover the amount of the debt.
pay the P6,000,000.00, or to have properties of the Macrogen
Realty sufficient to cover the obligation guaranteed. Said
B) Said provision imposes a condition for the invocation of
demands met no reply.
the defense of excussion. Article 2060 of the Civil Code clearly
requires that in order for the guarantor to make use of the
6) As to Marilyn’s (bitanga’s wife) liability, Pyramid benefit of excussion, he must set it up against the creditor
contended that Macrogen Realty was owned and controlled upon the latter’s demand for payment and point out to the
by bitanga and Marilyn and/or by corporations owned and creditor available property of the debtor within the
controlled by them. On the theory that since the completion Philippines sufficient to cover the amount of the debt.
of the construction project would have redounded to the
benefit of both petitioner and Marilyn and/or their
C) In this case, despite having been served a demand letter at
corporations; and considering, Marilyn’s interest in a
his office, petitioner still failed to point out to the respondent
corporation which controls Macrogen Realty, Marilyn cannot
properties of Macrogen Realty sufficient to cover its debt.
be unaware of the obligations incurred by Macrogen Realty
Such failure on petitioner’s part forecloses his right to set up
and/or petitioner in the course of the business operations of
the defense of excussion.
the said corporation.
D) Article 2059(5) of the Civil Code thus finds application and
7) Pyramid filed suit that a judgment be rendered ordering
precludes petitioner from interposing the defense of
petitioner and Marilyn to comply with their obligation under
excussion. We quote:
the Contract of Guaranty by paying respondent the amount
of P6,000,000.000.
(5) If it may be presumed that an execution on the
property of the principal debtor would not result in
8) Marilyn contended that, since she did not co-sign the
the satisfaction of the obligation.
Contract of Guaranty with her husband; nor was she a party
to the Compromise Agreement between respondent and
E) Petition is DENIED.
Macrogen Realty. She had no part at all in the execution of
the said contracts. This was denied
ONG v PCIB
ISSUES:
FACTS: Cho Siong entered into contract of agency for
distribution of petroleum products, assumed liability of
(1) whether the defendants were liable under the contract of
former agent Tong Kuan. His agency bond was secured by
guarantee dated April 17, 2000 entered into between
Ong Guan Can. Defaulted in the amount of P64.00
Benjamin Bitanga and the plaintiff;

SECTRANS 2010/ ATTY. AGUINALDO 43

DOCTRINE: Under the terms of the bond signed by the Facts: On October 29, 1920, the National Sporting Club, of
surety, he did not answer for the principal obligor save for the Manila, obligated itself by a promissory note payable at four
Latter’s acts by virtue of the contract of agency. He cannot be months to pay to Jose Ma. Cacho. Below the signature of said
held liable for the debt of a former agent, which the principal National Sporting Club, as signed by the proper officers of the
obligor assumed by virtue of another contract, of which said Club, the following personal guaranty was written: "We
surety was not even aware. A contract of suretyship is to be guarantee this obligation." (Sgd.) J. A. Valles, J. L. Mateu, G. J.
strictly interpreted and is not to be extended beyond its Heffting, Ed. Chesley, Baldomero Roxas. This note was not
terms. paid at maturity. An action was instituted thereon against the
National Sporting Club and the guarantors. Baldomero Roxas
interposed a defence claiming the right of division as among
the co-sureties, and asking that in case he should be found
MIRA HERMANOS v MANILA TOBACCONISTS liable that he should be held responsible only for his aliquot
Facts: part of the debt.

 By virtue of a written contract, Mira Hermanos (MH) Issue: W/N in case of the insolvency of one or more of several
agreed to deliver to Manila Tobacconists (MT) simple sureties, those who remain solvent can be made to
merchandise for sale on consignment under certain pay the entire debt?
specified terms and MT agreed to pay MH on or before
the 20th day of each month the invoice value of all the Ruling: None of the sureties, so far as this record shows, has
merchandise sold during the preceding month. been declared bankrupt. The benefit of division therefore has
 MH required MT a bond of 3,000 which was executed by not been lost, and the rule declaring each surety liable only
Provident Insurance (PI). for his aliquot part of the guaranteed debt, must hold. The
 The volume of the business of MT increased so that the obligation of the surety cannot be extended beyond its
merchandise received by way of consignment from MH specified limits. A co-surety is entitled to the benefit of
exceeded 3,000 in value. division from the very moment that he contracts the
 MH required MT to post an additional bond of 2,000 obligation, except where there is stipulation to the contrary.
which MT complied, executing a bond with same
conditions with the Manila Compania de Seguros (MCS)
for the excess of 3,000 up to 5,000. TUASON v MACHUCA
 After liquidation of the transaction, a balance was due
from MT to MH for the amount of 2,200 which MT is F: Universal Trading Company was going to withdraw goods
unable to pay. from the Bureau of Customs to be delivered to BPI. To
 PI, as surety, only paid 1,300, alleging that the remaining withdraw, they gave a bond executed by Manila Compania de
40% should be paid by the other surety, MCS. Seguros. That bond was secured solidarily by Tuason Co. and
Machuca of Universal Trading. It was to be paid whether or
Issue: Whether or not MCS should be held liable for the not Manila Compania already paid CIR. Manila Compania
remaining 40% of the balance due? demanded payment from Tuason. Manila Compania filed a
case against tuason. Tuason later payed but incurred
Held: litigation expenses. Tuason now demands payment from
Machuca. Tuason filed a case for collection of money from
No, the bond of 3,000 filed by PI responded for the obligation Machuca. The lower court ruled that Machuca should pay the
of MT up to the some of 3,000, inasmuch as the bond of debt and the expenses incurred by Tuason in the case for
2,000 filed by MCS responded for the obligation of MT only collection of money.
insofar as it might exceed 3,000 and up to 5,000. Issue: Won Machuca should pay the expenses incurred by
Tuason in its case vs. Manila Compania
The provision in the NCC with regard to several sureties of
only one debtor for the same debt does not apply in this case. Ruling: NO! it was not Machuca’s fault why tuason incurred
Although the two bonds on their face appear to guarantee expenses in the litigation of Manila Compania and Tuason. If
the same debt coextensively up to 2,000 – that of PI alone tuason paid Manila compania, no litigation expenses will be
extending beyond that sum up to 3,000 – it was pleaded and paid.
conclusively proven that in reality said bonds, or the two
sureties, do not guarantee the same debt because PI
guarantees only the first 3,000 while MCS only the excess up AUTOCORP v INTRA STRATA
to 5,000.
FACTS: Autocorp Group, represented by its President,
CACHO v VALLES petitioner Peter Y. Rodriguez, secured two ordinary re-export
bond from private respondent Intra Strata Assurance

SECTRANS 2010/ ATTY. AGUINALDO 44

Corporation (ISAC) in favor of public respondent Bureau of It is worthy to note that petitioners did not impugn the
Customs (BOC) to guarantee the re-export of one unit of validity of the stipulation in the Indemnity Agreements
Hyundai Excel 4-door 1.5 LS and Hyundai Sonata 2.4 GLS, allowing ISAC to proceed against petitioners the moment the
and/or to pay the taxes and duties thereon. subject bonds become due and demandable, even prior to
actual forfeiture or payment thereof. Even if they did so, the
Petitioners executed and signed two Indemnity Agreements Court would be constrained to uphold the validity of such a
with identical stipulations in favor of ISAC, agreeing to act as stipulation for it is but a slightly expanded contractual
surety of the subject bonds. Petitioner Rodriguez signed the expression of Article 2071 of the Civil Code which provides,
Indemnity Agreements both as President of the Autocorp inter alia, that the guarantor may proceed against the
Group and in his personal capacity. principal debtor the moment the debt becomes due and
demandable.
In sum, ISAC issued the subject bonds to guarantee
compliance by petitioners with their undertaking with the Art. 2071. The guarantor, even before having paid, may
BOC to re-export the imported vehicles within the given proceed against the principal debtor:
period and pay the taxes and/or duties due thereon. In turn,
petitioners agreed, as surety, to indemnify ISAC for the (1) When he is sued for the payment;
liability the latter may incur on the said bonds.
(2) In case of insolvency of the principal debtor;
Petitioner Autocorp Group failed to re-export the items
guaranteed by the bonds and/or liquidate the entries or (3) When the debtor has bound himself to relieve him from
cancel the bonds, and pay the taxes and duties pertaining to the guaranty within a specified period, and this period has
the said items despite repeated demands made by the BOC, expired;
as well as by ISAC. By reason thereof, the BOC considered the
two bonds, with a total face value of P1,034,649.00, forfeited. (4) When the debt has become demandable, by reason of
the expiration of the period for payment;
Failing to secure from petitioners the payment of the face
value of the two bonds, despite several demands sent to each (5) After the lapse of ten years, when the principal obligation
of them as surety under the Indemnity Agreements, ISAC filed has no fixed period for its maturity, unless it be of such
with the RTC on 24 October 1995 an action against nature that it cannot be extinguished except within a period
petitioners. longer than ten years;

Petitioners contend that their obligation to ISAC is not yet (6) If there are reasonable grounds to fear that the principal
due and demandable. They cannot be made liable by ISAC in debtor intends to abscond;
the absence of an actual forfeiture of the subject bonds by
the BOC and/or an explicit pronouncement by the same (7) If the principal debtor is in imminent danger of becoming
bureau that ISAC is already liable on the said bonds. insolvent.

ISSUES: Whether actual forfeiture of the subject bonds is In all these cases, the action of the guarantor is to obtain
necessary for the petitioners to be liable to ISAC under the release from the guaranty, or to demand a security that shall
Indemnity Agreements? protect him from any proceedings by the creditor and from
the danger of insolvency of the debtor.
RULING: The liability of the guarantor already triggers the
liability of the debtor. Rodriguez’s liability
Petitioner Rodriguez posits that he is merely a guarantor, and
Autocrop’s liability that his liability arises only when the person with whom he
Actual forfeiture of the subject bonds is not necessary for guarantees the credit, Autocorp Group in this case, fails to
petitioners to be liable thereon to ISAC as surety under the pay the obligation. Petitioner Rodriguez invokes Article 2079
Indemnity Agreements. of the Civil Code on Extinguishment of Guaranty, which
states:
Petitioners' obligation to indemnify ISAC became due and Art. 2079. An extension granted to the debtor by the creditor
demandable the moment the bonds issued by ISAC became without the consent of the guarantor extinguishes the
answerable for petitioners' non-compliance with its guaranty. The mere failure on the part of the creditor to
undertaking with the BOC. Stated differently, petitioners demand payment after the debt has become due does not of
became liable to indemnify ISAC at the same time the bonds itself constitute any extension of time referred to herein.
issued by ISAC were placed at the risk of forfeiture by the
BOC for non-compliance by petitioners with its undertaking. The use of the term guarantee in a contract does not ipso
facto mean that the contract is one of guaranty. It thus ruled

SECTRANS 2010/ ATTY. AGUINALDO 45

that both petitioners assumed liability as a regular party and another has paid, and cannot exceed, except there is
obligated themselves as original promissors, i.e., sureties. an express agreement to the contrary, the amount
actually paid by the surety in place of the debtor.
The provisions of the Civil Code on Guarantee, other than the  IN THIS CASE: The following terms of an obligation
benefit of excussion, are applicable and available to the cannot be considered as an express agreement to
surety.[22] The Court finds no reason why the provisions of the contrary: “ x x x bind themselves as such
Article 2079 would not apply to a surety. conjointly to reimburse or pay whatever amounts
the latter (the surety) may have to pay or shall have
This, however, would not cause a reversal of the Decision of paid by reason of the judicial bond,” inasmuch as
the Court of Appeals. The Court of Appeals was correct that this manner of expressing the intention of the
even granting arguendo that there was a modification as to obligated parties does not constitute a true
the effectivity of the bonds, petitioners would still not be disjunctive proposition, but is merely explanatory of
absolved from liability since they had authorized ISAC to the obligation as if contracted by the debtor himself,
consent to the granting of any extension, modification, the only natural and logical interpretation.
alteration and/or renewal of the subject bonds  To ask an indemnity of P20k, when the loss to be
indemnified is only P8k is contrary to law.
 Vizmanos only entitled to an action against 4
SAENZ v YAP CHUAN Defendants for recovery of maximum P5k. He cannot
FACTS: collect more than the sum which he himself was
 Engracio Palanca – a judicial administrator gave actually compelled to pay.
bond to guarantee his administration of the estate of
Margarita Jose
 The bond was executed by Engracio, Plaintiff Saenz MANILA SURETY v BATU CONSTRUCTION
and two others in favour of the government for the
sum of P60k FACTS:
 On the same date, Engracio and 5 others executed a
bond in favour of Saenz; Yap Chuan P20k and the On July 8, 1950, the defendant Batu Construction &
other 4 P5k each Company, as principal, and the plaintiff Manila Surety &
 TC ordered Saenz, as surety in solidum of the ex- Fidelity Co. Inc., as surety, executed a surety bond for the
administrator Engracio to pay the estate the sum of sum of P8,812.00 to insure faithful performance of the
P41k former's obligation as contractor for the construction of the
 Saenz paid to the administrator of the estate P8k; He Bacarra Bridge, Project PR-72 (No. 3) Ilocos Norte Province.
filed sut against 5 sureties who executed the bond On the same date, July 8,1950, the Batu Construction &
 TC acquitted Defendant from the P20k claim and Company and the defendants Carlos N. Baquiran and
ordered the other 4 to pay P2k each. Gonzales P. Amboy executed an indemnity agreement to
 Both parties appealed. Defendants were claiming protect the Manila Surety & Fidelity Co. Inc.., against damage,
that they are only liable for P1k each only according loss or expenses which it may sustain as a consequence of the
to the terms of the contract. Plaintiff was claiming surety bond executed by it jointly with Batu Construction &
that he is entitled to maximum sum of P5k for which Company.
each one had bound himself in the contract.
On or about May 30, 1951, the plaintiff received a notice
ISSUE: Whether or not Vizmanos is entitled to P20k, a
from the Director of Public Works (Exhibit B) annulling its
reimbursement of P5k each from the Defendants?
contract with the Government for the construction of the
Bacarra Bridge because of its failure to make satisfactory
HELD: NO
progress in the execution of the works, with the warning
 The bond of a debtor to protect his surety is not a
that ,any amount spent by the Government in the
sub bond nor a second bond with respect to the
continuation of the work, in excess of the contract price, will
original creditor. It is nothing but a substitution of
be charged against the surety bond furnished by the plaintiff.
the obligation of the debtor with respect to his
It also appears that a complaint by the laborers in said project
surety, and is necessarily governed by the legal
of the Batu Construction & Company was filed against it and
provisions which regulate the right of action of the
the Manila Surety and Fidelity Co., Inc., for unpaid wages
surety against the party for whom he gave the bond,
amounting to P5,960.10.
that is, an action of subrogation which lies with the
surety to compel the debtor to comply with the
Trial Court dismissed the case holding that provisions of
obligation to reimburse.
article 2071 of the new Civil Code may be availed of by a
 This action arising out of subrogation is the remedy
guarantor only and not by a surety the complaint, with costs
for securing reimbursement of the amount that
against the plaintiff.
SECTRANS 2010/ ATTY. AGUINALDO 46
ISSUE: The main question to determine is whether the last But the plaintiff's cause of action comes under paragraph 1 of
paragraph of article 2071 of the new Civil Code taken from article 2071 of the new Civil Code, because the action
article 1843 of the old Civil Code may be availed of by a brought by Ricardo Fernandez and 105 persons in the Justice
surety. of the Peace Court of Laoag, province of Ilocos Norte, for the
collection of unpaid wages amounting to P5,960.10, is in
HELD: connection with the construction of the Bacarra Bridge,
Project PR-72 (3), undertaken by the Batu Construction &
A guarantor is the insurer of the solvency of the debtor; a Company, and one of the defendants therein is the herein
surety is an insurer of the debt. A guarantor binds himself to plaintiff, the Manila Surety and Fidelity Co., Inc., and
pay if the principal is unable to pay; a surety undertakes to paragraph 1 of article 2071 of the new Civil Code provides
pay if the principal does not pay. 1 The reason which could be that the guarantor, even before having paid, may proceed
invoked for the non-availability to a surety of the provisions against the principal debtor "to obtain release from the
of the last paragraph of article 2071 of the new Civil Code guaranty, or to demand a security that shall protect him from
would be the fact that guaranty like commodatum 2 is any proceedings by the creditor or from the danger of
gratuitous. But guaranty could also be for a price or insolvency of the debtor, when he (the guarantor) is sued for
consideration as provided for in article 2048. So, even if there payment. It does not provide that the guarantor be sued by
should be a consideration or price paid to a guarantor for him the creditor for the payment of the debt. It simply provides
to insure the performance of an obligation by the principal that the guarantor of surety be sued for the payment of an
debtor, the provisions of article 2071 would still be available amount for which the surety bond was put up to secure the
to the guarantor. In suretyship the surety becomes liable to fulfillment of the obligation undertaken by the principal
the creditor without the benefit of the principal debtor's debtor. So, the suit filed by Ricardo Fernandez and 105
exclusion of his properties, for he (the surety) maybe sued persons in the Justice of the Peace Court of Laoag, province
independently. So, he is an insurer of the debt and as such he of Ilocos Norte, for the collection of unpaid wages earned in
has assumed or undertaken a responsibility or obligation connection with the work done by them in the construction
greater or more onerous than that of guarantor. Such being of the Bacarra Bridge, Project PR-72(3), is a suit for the
the case, the provisions of article 2071, under guaranty, are payment of an amount for which the surety bond was put up
applicable and available to a surety. The reference in article or posted to secure the faithful performance of the obligation
2047 to, the provisions of Section 4, Chapter 3, Title 1, Book undertaken by the principal debtors (the defendants) in favor
IV of the new Civil Code, on solidary or several obligations, of the creditor, the Government of the Philippines.
does not mean that suretyship which is a solidary obligation is
withdrawn from the applicable provisions governing The order appealed from dismissing the complaint is reversed
guaranty. and set aside.

The plaintiff's cause of action does not fall under paragraph 2 GEN. INDEMNITY v ALVAREZ
of article 2071 of the new Civil Code, because there is no
proof of the defendants' insolvency. The fact that the FACTS:
contract was annulled because of lack of progress in the
construction of the bridge is no proof of such insolvency. It  On February 1954, Appellee General Indemnity Co., Inc.,
does not fall under paragraph 3, because the defendants filed a complaint in the CFI Manila against Appellant
have not bound themselves to relieve the plaintiff from the Estanislao Alvarez for the recovery of the sum of P2,000
guaranty within a specified period which already has expired, representing the amount of a loan allegedly taken by the
because the surety bond does not fix any period of time and Appellant from the PNB, which the Appellee guaranteed
the indemnity agreement stipulates one year extendible or with an indemnity bond, and for which Appellant, as
renewable until the bond be completely cancelled by the counter-guaranty, executed in Plaintiff's favor a
person or entity in whose behalf the bond was executed or by mortgage on his share of land in a parcel of land .
a Court of competent jurisdiction. It does not come under  The complaint further alleged that the Appellant failed to
paragraph 4, because the debt has not become demandable pay said loan, together with interest, to PNB as a result
by reason of the expiration of the period for payment. It does of which the bank deducted the amount thereof
not come under paragraph 5 because of the lapse of 10 years, Plaintiff's deposit.
when the principal obligation has no period for its maturity,  Thereafter, Appellant averred that the loan in question
etc., for 10 years have not yet elapsed. It does not fall under was secured by him only in accommodation of one Hao
paragraph 6, because there is no proof that "there are Lam, and that Plaintiff agreed not to take any steps
reasonable grounds to fear that the principal debtor intends against Appellant and the mortgage executed by him in
to abscond." It does not come under paragraph 7, because Plaintiff's favor until the latter had failed to obtain
the defendants, as principal debtors, are not in imminent payment from said Hao Lam.
danger of becoming insolvent, there being no proof to that  Eight months later, Plaintiff filed a motion for summary
effect. judgment saying that Appellang presented no real and
SECTRANS 2010/ ATTY. AGUINALDO 47
 meritorious defense and that it was entitled to a the imported goods without payment of taxes, duties, and
summary judgment in its favor, based on the affidavit of other charges; and (2) that their non-involvement in the
its comptroller Pedro R. Mendiola essentially saying that: active handling of the warehoused items from the time they
o That he has personal knowledge of the indebtedness were stored up to their withdrawals substantially increased
of the Defendant. the risks they assumed under the bonds they issued, thereby
o Notwithstanding said several demands by Plaintiff, releasing them from liabilities under these bonds.
Defendant has failed and refused and still fails and
refuses to pay the same. ISSUE: Whether the withdrawal of the stored goods, wares,
 The lower courts ruled in favour of Plaintiff. Thus this and merchandise – without notice to them as sureties –
petition. released them from any liability for the duties, taxes, and
charges they committed to pay under the bonds they issued?
Issue:
HELD: NO. By its very nature under the terms of the laws
Whether or not Defendant Alvarez is liable? regulating suretyship, the liability of the surety is joint and
several but limited to the amount of the bond, and its terms
are determined strictly by the terms of the contract of
Ruling:
suretyship in relation to the principal contract between the
obligor and the obligee. The definition and characteristics of a
 NO. The SC ruled that there exists a controversy in the suretyship bring into focus the fact that a surety agreement is
complaint and answer as to whether or not Appellee had an accessory contract that introduces a third party element in
actually paid Appellant's obligation to the Philippine the fulfillment of the principal obligation that an obligor owes
National Bank, a matter which should be decided in the an obligee. In short, there are effectively two (2) contracts
affirmative before Appellant, as surety, can claim involved when a surety agreement comes into play – a
reimbursement from Appellant, the principal debtor. principal contract and an accessory contract of suretyship.
 However, Appellee is correct in saying that said defense Under the accessory contract, the surety becomes directly,
is immaterial to its right to recovery, since the mortgage primarily, and equally bound with the principal as the original
deed executed by Appellant in its favor (the genuineness promissor although he possesses no direct or personal
and due execution of which Appellant admitted in his interest over the latter’s obligations and does not receive any
answer) shows Appellant to be the actual and only benefit therefrom.
debtor, and Appellant is precluded from varying this
representation by parol evidence.
Considered in relation with the underlying laws that are
 In ruling for the Appellant, the SC opined that the last
deemed read into these bonds, it is at once clear that the
paragraph of Art. 2071 of the New Civil Code, provides
bonds shall subsist – that is, “shall remain in full force and
that the only action the guarantor can file against the
effect” – unless the imported articles are “regularly and
debtor "to obtain release from the guaranty, or to
lawfully withdrawn. . .on payment of the legal customs duties,
demand a security that shall protect him from any
internal revenue taxes, and other charges to which they shall
proceeding by the creditor and from the danger of
be subject….” Fully fleshed out, the obligation to pay the
insolvency of the debtor."
duties, taxes, and other charges primarily rested on the
 An action by the guarantor against the principal debtor
principal Grand Textile; it was allowed to warehouse the
for payment, before the former has paid the creditor, is
imported articles without need for prior payment of the
premature.
amounts due, conditioned on the filing of a bond that shall
remain in full force and effect until the payment of the duties,
INTRA STRATA v REPUBLIC taxes, and charges due. Under these terms, the fact that a
FACTS: Grand Textile imported materials from other countries withdrawal has been made and its circumstances are not
which, upon arrival, were transferred to Customs Bonded material to the sureties’ liability, except to signal both the
Warehouse. Grand Textile was obliged to pay customs principal’s default and the elevation to a due and demandable
charges. To secure payment of these obligations, petitioners status of the sureties’ solidary obligation to pay. Under the
issued general warehousing bonds in favor of the Bureau of bonds’ plain terms, this solidary obligation subsists for as long
Customs (BOC). Without payment of any of the obligations as the amounts due on the importations have not been paid.
due, Grand Textile withdrew the imported goods from Thus, it is completely erroneous for the petitioners to say that
storage. BOC demanded payment from Grand Textile as they were released from their obligations under their bond
importer and from the petitioners as sureties. All three failed when Grand Textile withdrew the imported goods without
to pay. The government filed a collection suit against the payment of taxes, duties, and charges. From a
parties. commonsensical perspective, it may well be asked: why else
Lower Court ruled against petitioners, CA affirmed. would the law require a surety when such surety would be
Petitioners allege that: (1) they were released from their bound only if the withdrawal would be regular due to the
obligations under their bonds when Grand Textile withdrew payment of the required duties, taxes, and other charges?

SECTRANS 2010/ ATTY. AGUINALDO 48

 We note in this regard the rule that a surety is released from  The defendant Jesus R. Roa became indebted to the
its obligation when there is a material alteration of the Philippine Theatrical Enterprises, Inc., in the sum of
contract in connection with which the bond is given, such as a P28,400 payable in seventy-one equal monthly
change which imposes a new obligation on the promising installments at the rate of P400 a month
party, or which takes away some obligation already imposed, commencing thirty days after December 11, 1931,
or one which changes the legal effect of the original contract with five days grace monthly until complete
and not merely its form. A surety, however, is not released payment of said sum. On that same date the
by a change in the contract which does not have the effect of Philippine Theatrical Enterprises, Inc., assigned all its
making its obligation more onerous. right and interest in that contract to the Radio
Corporation of the Philippines.
We find under the facts of this case no significant or material  In the said contract there was an accelerating clause
alteration in the principal contract between the government that in case the vendee-mortgagor fails to make any
and the importer, nor in the obligation that the petitioners of the payments as hereinbefore provided, the
assumed as sureties. Specifically, the petitioners never whole amount remaining unpaid under this
assumed, nor were any additional obligation imposed, due to mortgage shall immediately become due and
any modification of the terms of importation and the payable and this mortgage on the property herein
obligations thereunder. The obligation, and one that never mentioned as well as the Luzon Surety Bond may be
varied, is – on the part of the importer, to pay the customs foreclosed by the vendor-mortgagee
duties, taxes, and charges due on the importation, and on the  Roa failed to pay the monthly installment and the
part of the sureties, to be solidarily bound to the payment of whole amount fell due.
the amounts due on the imported goods upon their  The defendant asked for an extension which was
withdrawal or upon expiration of the given terms. The granted.
petitioners’ lack of consent to the withdrawal of the goods, if  After the extension given, the surety now argued
this is their complaint, is a matter between them and the that they already release from their obligation.
principal Grand Textile; it is a matter outside the concern of
government whose interest as creditor-obligee in the ISSUE:
importation transaction is the payment by the importer-
obligor of the duties, taxes, and charges due before the  Whether or not the extension granted in the above
importation process is concluded. With respect to the copied letter by the plaintiff, without the consent of
sureties who are there as third parties to ensure that the the guarantors, the herein appellants, extinguishes
amounts due are paid, the creditor-obligee's active concern is the latter's liability not only as to the installments
to enforce the sureties’ solidary obligation that has become due at that time, as held by the trial court, but also
due and demandable. as to the whole amount of their obligation?

With regard to the issue on the notice, the surety does not, HELD:
by reason of the surety agreement, earn the right to
intervene in the principal creditor-debtor relationship; its role  NO, The rule that an extension of time granted to
becomes alive only upon the debtor’s default, at which time it the debtor by the creditor, without the consent of
can be directly held liable by the creditor for payment as a the sureties, extinguishes the latter's liability is
solidary obligor. A surety contract is made principally for the common both to Spanish jurisprudence and the
benefit of the creditor-obligee and this is ensured by the common law; and it is well settled in English and
solidary nature of the sureties’ undertaking. Under these American jurisprudence that where a surety is liable
terms, the surety is not entitled as a rule to a separate notice for different payments, such as installments of rent,
of default, nor to the benefit of excussion, and may be sued or upon a series of promissory notes, an extension of
separately or together with the principal debtor. Significantly, time as to one or more will not affect the liability of
nowhere in the petitioners’ bonds does it state that prior the surety for the others
notice is required to fix the sureties’ liabilities. Without such
express requirement, the creditor’s right to enforce
payment cannot be denied as the petitioners became bound
VILLA v GARCIA BOSQUE
as soon as Grand Textile, the principal debtor, defaulted.
FACTS:
Thus, the filing of the collection suit was sufficient notice to
the sureties of their principal’s default.
A sale of property was made by the attorney in fact for a
stated consideration, part of which was paid in cash and the
balance made payable in deferred instalments. The attorney
RADIO CORP. OF THE PHILS. v ROA
in fact then executed a substituted power of attorney in favor
FACTS:
of a third person to enable the latter to collect the deferred
instalments.
SECTRANS 2010/ ATTY. AGUINALDO 49
 Bureau of Public Works (BPW) the amount aforesaid out
SC: of funds payable to the assignor under a purchase order.
- Extension of time by Creditor to Principal Debtor;  ATACO delivered to BPW and the latter accepted the
Effect on liability of sureties asphalt to the total value of 400K.
- Where the purchase price of property is payable in  After this, PNB regularly collected for 8 months.
various installments, an extension of time granted by Thereafter, it ceased to collect until after 4 years, its
the creditor to the debtor with respect to one investigators found that more money were payable to
instalment will discharge the sureties, whether ATACO from BPW, because the latter allowed other
simple or solidary, from ALL liability as to such creditors to collect funds due to ATACO under the same
instalment bit it DOES NOT AFFECT their liability for purchase order.
other instalments unconnected with the extension  PNB demanded from ATACO and MSFC for payment but
of time. both refused.
 PNB filed a complaint against ATACO and MSFC to
HOSPICIO DE SAN JOSE v FIDELITY recover the balance with interests and costs.
 PNB contends that the power of attorney obtained from
SECURITY BANK v CUENCA ATACO was merely an additional security in its favor and
DOCTRINE: An extension granted to the debtor by the that it was the duty of the surety not that of the creditor
creditor without the consent of the guarantor extinguishes to see to it that the obligor fulfills his obligations and that
the guaranty. The 1989 Loan Agreement expressly stipulated the creditor owed the surety no duty of active diligence
that its purpose was to “liquidate,” not to renew or extend, to collect any sum from the principal debtor.
the outstanding indebtedness. Moreover, respondent did not
sign or consent to the 1989 Loan Agreeement, which had
alledgedly extended the original P8 million credit facility. Issue: Whether or not MFSC should be held liable for the
Hence, his obligation as a surety should be deemed unpaid balance?
extinguished, pursuant to Article 2079 of the Civil Code,
which specifically states that “[a]n extension granted to the Held: No, MFSC is not liable.
debtor by the creditor without the consent of the guarantor
extinguishes the guaranty. PNB is not negligent in failing to collect from the principal
debtor but is negligent for its failure in collecting the sums
An essential alteration in the terms of a Loan due to the debtor from the Bureau of Public Works, contrary
Agreement without the consent of the surety extinguishes to its duty as holder of an exclusive and irrevocable power of
the latter’s obligation. The submission that only the attorney to make such collections, since an agent is required
borrower, not the surety, is entitled to be notified of any to act with care of a good father of the family and becomes
modification in the original loan accommodation is liable for damages which the principal may suffer through
untenable-such theory is contrary to the to the principle that non-performance.
a surety cannot assume an obligation more onerous than that
of the principal. That the Indemnity Agreement is a Even if the assignment with power of attorney from the
continuing surety does not authorize the lender to extend the principal debtor were considered as mere additional security,
scope of the principal obligation inordinately; A continuing still by allowing the assigned funds to be exhausted without
guaranty is one which covers all transaction, including those notifying the surety, PNB deprived the former of any
arising in the future, which are within the description or possibility of recoursing against that security. Article 2080 of
contemplation of the contract of guaranty, until the the Civil Code provides that guarantors even though they
expiration or termination thereof. are solidary, are released from their obligation whenever
some act of the creditor they cannot be subrogated to the
rights, mortgages and preferences of the latter.

PNB v MANILA SURETY

Facts: PROVISIONS COMMON TO PLEDGE AND MORTGAGE

 PNB had opened a letter of credit and advanced thereon ARENAS v RAYMUNDO
$120K to Edgingtom Oil Refinery for 8,000 tons of hot
asphalt. Of this amount, 2,000 tons were released and Facts: Estanislaua Arenas and Julian La O, brought suit against
delivered to Adams & Taguba Corp (ATACO) under a trust Fausto O. Raymundo (pawnshop owner). The plaintiffs
receipt guaranteed by Manila Surety & Fidelity Co. alleged that the said jewelry, during the last part of April or
(MSFC) up to the amount of 75K. the beginning of May, 1908, was delivered to Elena de Vega
 To pay for the asphalt, ATACo constituted PNB its to sell on commission, and that the latter, in turn, delivered it
assignee and atty-in-fact to receive and collect from the to Conception Perello, likewise to sell on commission, but

SECTRANS 2010/ ATTY. AGUINALDO 50

that Perello, instead of fulfilling her trust, pledged the jewelry  R Lim offered to purchase the property from CDB
in the defendant's pawnshop. The said jewelry was then and paid P30k as option money. She later on
under the control and in the possession of the defendant, as discovered that the subject property was originally
a result of the pledge by Perello, and that the former refused registered in the name of Perfecto Guansing, father
to deliver it to the plaintiffs. of Rodolfo Guansing.
 R filed an action for specific performance and
Issue: W/N the pawnshop should return the jewelry to the damages against CDB for serious misrepresentation
plaintiffs?  CDB denied that a contract of sale was ever
perfected between them and R. R’s letter offer
Ruling: Yes. In the present suit, it was not proven that clearly states that the sum of P30k was given as
Estanislaua Arenas authorized Perello to pawn the jewelry option money NOT earnest money; therefore only
given to her by Arenas to sell on commission. Conception an option contract
Perello was not the legitimate owner of the jewelry which she
pledged to the defendant Raymundo, for a certain sum that ISSUE: WON there was a valid foreclosure of the mortgage
she received from the latter as a loan, the contract of pledge and subsequently a contract of sale?
entered the jewelry so pawned cannot serve as security for
the payment of the sum loaned, nor can the latter be HELD: NO
collected out of the value of the said jewelry. The Civil Code  NEMO DAT QUOD NON HABET
prescribes as one of the essential requisites of the contracts  The sale by CDB to Lim of the property mortgaged by
of pledge and of mortgage, that the thing pledged or Rodolfo Guansing is deemed a nullity for CDB did not
mortgaged must belong to the person who pledges or have a valid title to the said property.
mortgages it. This essential requisite for the contract of  CDB never acquired a valid title to the property
pledge between Perello and the defendant being absent as because the foreclosure sale, by virtue of which, the
the former was not the owner of the jewelry given in pledge. property had been awarded to CDB as highest
bidder, is likewise void since the mortgagor was not
UNION MOTOR CORP. v CA the owner of the property foreclosed.

This case is about the spouses respondents who bought a DE LEON v CALALO
jeepney worth 30k. to finance the purchase, the spouses
entered into a chattel mortgage with Union Motors wherein FACTS:
the security will be the jeepney. Union motors then
transferred the mortgage to a financing company. Receipts
and other documents of ownership were issued however, the
jeep is still not in the possession of the spouses. The spouses
tried to have possession of the jeep but failed. Frustrated,
they did not continue the payment. LC ruled in favor of the
spouses saying that they are not liable because there is still
no delivery. Finance Co. claimed there was constructive
delivery because how can the spouses mortgage the property
if they do not own the it.

Issue: WoN there was delivery

Ruling: Non! Chattel mortgage do not prove delivery.

DBP v PRUDENTIAL

CAVITE DEVELOPMENT v SPOUSES LIM

FACTS:
 Rodolfo Guansing obtained a loan in the amount of
P90k from Cavite Devt Bank (CDB) and mortgaged a
parcel of land covered by TCT in his name to secure
the loan.
 When Guansing defaulted in the payment of his
loan, CDB foreclosed the mortgage and consolidated
the title to the property in its name
SECTRANS 2010/ ATTY. AGUINALDO 51
This case was brought below by respondent Eduardo Calalo believe that the land did not belong to Augorio. Persons
for the annulment of the mortgage executed by his brother, dealing with property covered by a torrens certificate of title,
Augorio Calalo, in favor of petitioner Roberto de Leon as buyers or mortgagees, are not required to go beyond what
covering a piece of land and the improvements thereon, appears on the face of the title. The public interest in
consisting of a residential house and a commercial building upholding the indefeasibility of torrens titles, as evidence of
located at 45/4th Street, East Tapinac, Olongapo City. the lawful ownership of the land or of any encumbrance
Respondent Eduardo alleged that he was the owner of the thereon, protects buyers or mortgagees who, in good faith,
property mortgaged, having bought it for P306,000.00 from rely upon what appears on the face of the certificate of
the spouses Federico and Marietta Malit on September 13, title.4 Petitioner De Leon is a mortgagee in good faith.
1984. He claimed that, as he was then a member of the
merchant marines and stayed abroad, the Deed of Absolute Whether the money used in acquiring the property from the
Sale covering the land was made in favor of his brother, original owners came from respondent Eduardo Calalo and
Augorio Calalo; that on April 8, 1985, Augorio executed a the title to the property was placed in the name of his
Deed of Donation in favor of the minor Julsunthie Calalo, brother Augurio Calalo only because respondent thought he
herein respondent’s son, who, from the time the property was not qualified to acquire lands in the Philippines because
was purchased until the filing of the complaint, had been he had become an American citizen, and that the land was
receiving the fruits of the property; that on September 14, subsequently donated to respondent Eduardo’s son,
1988, Augorio mortgaged the said property to petitioner Julsunthie, are matters not known to petitioner. Hence,
Roberto de Leon without his [respondent’s] knowledge and whether Augorio Calalo committed a breach of trust and
consent; that the mortgage was amended on September 30, whether the property was validly donated to petitioner’s son
1988; that Augorio did not have any right to mortgage the Julsunthie are questions which must be resolved in a separate
property because he was not the owner thereof; and that he proceeding.
(respondent Eduardo) learned only in June 1992 that the
property was the subject of an extrajudicial foreclosure. CEBU INTERNATIONAL v CA
Named defendants in the action were petitioner Roberto de
Leon, Augorio Calalo and Benjamin Gonzales, the sheriff ERENA v QUERRA-KAUFFMAN
conducting the foreclosure proceeding. FACTS: Respondent is the owner of a lot with house, with the
TCT kept in a safety deposit box. She left the key of the box to
In due time, petitioner De Leon filed an answer in which he her husband as she was leaving for the US. Later on, the
claimed to be a mortgagee in good faith, having previously daughter of respondent as well as her husband left for the
ascertained the ownership of Augorio who occupied and US, and the key was entrusted to the sister of her husband,
possessed the land in question and in whose name the land Mira Bernal. After a few months, respondent asked her sister
was registered in the Register of Deeds and in various other to get the TCT in the safety deposit box to be able to sell the
documents. He pointed out that even the deed of sale property. When the safe was broken, the items inside were
attached to respondent’s complaint showed that the land was missing, including the title to the lot and tax declarations, as
in Augorio’s name, clearly proving that the latter owned the well as jewelry.
property. Petitioner De Leon averred that the mortgage in his
favor was registered with the Register of Deeds and that it
had been amended four times.
Respondent discovered from Bernal that she and Jennifer
ISSUE: W/N the mortgage executed by Augorio Calalo in favor Ramirez, Victor’s daughter took the title and mortgaged it to
of petitioner De Leon is valid. petitioner. There was a woman who pretended to be the
owner of the lot, showing the TCT in her name as “Vida Dana
HELD: Querrer and identification card. Petitioner verified with the
Office of the Register of Deeds that the property was in the
There is no dispute that the land subject of the mortgage is name of Vida Dana Querrer and that it was free of any lien or
titled in the name of Augorio Calalo. Nor is there any question encumbrance. Subsequently, petitioner was convinced to
that petitioner De Leon did not know of the claim of enter into a Real Estate Mortgage Contract which was later
ownership of respondent Eduardo Calalo until after the on notarized and filed with the Office of the Register of Deeds
present action was instituted. As the trial court found, and annotated on the TCT.
petitioner De Leon examined the relevant documents
pertaining to the land, consisting of the transfer certificate of
title, the tax declarations in the City Assessor’s Office and
information on the records in the barangay, and found that Respondent filed a complaint against petitioner, Bernal and
the land was registered in the name of Augorio Calalo. Upon Ramirez for Nullification of Deed of Real Estate Mortgage.
due inspection of the property, he also found it to be
occupied by Augorio Calalo. Petitioner had no reason to
SECTRANS 2010/ ATTY. AGUINALDO 52
The RTC ruled in favor of petitioner and declared the Deed of Vda. DE JAYME v CA
Real Estate Mortgage valid. The CA rendered judgment in FACTS:
favor of defendant on the ground that in a Real Estate - Spouses Jayme (P) are the registered owners of a
Mortgage contract, it is essential that the mortgagor be the parcel of land. They entered into a contract of lease
absolute owner of the property to be mortgaged; otherwise with Asian Cars (R) covering half of the lot for 20
the mortgage is void. years
- The contract allows R to mortgage the property as
long as the proceeds will be for the construction of a
building on the land.
ISSUE: WON THE REAL ESTATE MORTGAGE CONTRACT IS - R mortgaged the property for P6M to MetroBank,
VALID? covering the whole lot, and in which P signed the
documents. R also executed an undertaking wherein
the officers of R are liable personally to the
mortgage
HELD: NO. One of the essential requisites of a mortgage - R defaulted and MetroBank foreclosed the property.
contract is that the mortgagor must be the absolute owner of - P filed for annulment of mortgage as it was acquired
the thing mortgaged. A mortgage is, thus, invalid if the through fraud
mortgagor is not the property owner. In this case, the trial - RTC and CA declared the mortgage and undertaking
court and the CA are one in finding that based on the valid
evidence on record the owner of the property is respondent
who was not the one who mortgaged the same to the ISSUE: WON Mortgage allowing R to mortgage the property
petitioner. was valid

SC: YES
- It has long been settled that it is valid so long as valid
Petitioner cannot be considered an innocent purchaser for consent was given. In consenting thereto even
value, relying on the Torrents title. While a Torrens title granting that petitioner may not be assuming
serves as evidence of an indefeasible title to the property in personal liability for the debt, her property shall
favor of the person whose name appears therein, when the nevertheless secure and respond for the
instrument presented for registration is forged, even if performance of the principal obligation
accompanied by the owner’s duplicate certificate of title, the - The law recognizes instances when persons not
registered owner does not thereby lose his title, and neither directly parties to a loan agreement may give as
does the assignee of the mortgagee, for that matter, acquire security their own properties for the principal
any right or title to the property. In such a case, the transaction.
transferee or the mortgagee, based on a forged instrument, is - In this case, the spouses should not be allowed to
not even a purchaser or a mortgagee for value protected by disclaim the validity of a transaction they voluntarily
law. and knowingly entered into for the simple reason
that such transaction turned out prejudicial to them
later on.
- Records show that P voluntarily agreed to use their
Petitioner cannot also invoke the doctrine of a mortgagee on property as collateral for R’s loan, hence, no fraud
good faith. Said doctrine speaks of a situation where, despite - The undertaking made by R and its officers are valid,
the fact that the mortgagor is not the owner of the hence they are liable to reimburse P for the damages
mortgaged property, his title being fraudulent, the mortgage they suffered by reason of the mortgage
contract or any foreclosure sale arising therefrom are given
effect by reason of public policy. The doctrine of mortgagee in SPOUSES BELO v PNB
good faith presupposes that the mortgagor, who is not the
rightful owner of the property, has already succeeded in FACTS:
obtaining a Torrens title over the property in his name and
that, after obtaining the said title, he succeeds in mortgaging
1) Eduarda Belo owned an agricultural land with an area of
the property to another who relies on what appears on the
661,288 square meters in Panitan, Capiz, which she leased a
said title- it does not apply to a situation where the title is still
portion to respondents spouses Eslabon, for a period of 7
in the name of the rightful owner and the mortgagor is a
years at the rate of P7,000.00 per year.
different person pretending to be the owner.
2) Respondents spouses Eslabon obtained a loan from PNB
PNB v AGUDELO
secured by a real estate mortgage on their own 4 residential
houses located in Roxas City, as well as on the agricultural
SECTRANS 2010/ ATTY. AGUINALDO 53
land owned by Eduarda Belo. The assent of Eduarda Belo to PNB are valid. It is stipulated in paragraph three (3) of the SPA
the mortgage was acquired through a special power of that Eduarda Belo appointed the Eslabon spouses "to make,
attorney which was executed in favor of respondent Marcos sign, execute and deliver any contract of mortgage or any
Eslabon on June 15, 1982. other documents of whatever nature or kind . . . which may be
necessary or proper in connection with the loan herein
3) The spouses Eslabon failed to pay their loan obligation, and mentioned, or with any loan which my attorney-in-fact may
so extrajudicial foreclosure proceedings against the contract personally in his own name”
mortgaged properties were instituted by PNB and was the
highest bidder of the foreclosed properties at P447,632.00. C) ThisSPA was not meant to make her a co-obligor to the
principal contract of loan between respondent PNB, as
4) Meanwhile, Eduarda Belo sold her right of redemption to lender, and the spouses Eslabon, as borrowers. Eduarda Belo
petitioners spouses Enrique and Florencia Belo under a deed consented to be an accommodation mortgagor in the sense
of absolute sale of proprietary and redemption rights. Before that she signed the SPA to authorize respondents spouses
the expiration of the redemption period, petitioners spouses Eslabons to execute a mortgage on her land.
Belo tendered payment for the redemption of the agricultural
land which includes the bid price of respondent PNB, plus D) An accommodation mortgage isn’t void simply because
interest and expenses. the accommodation mortgagor did not benefit from the
same. The validity of an accommodation mortgage is allowed
5) However, PNB rejected the tender of payment of under Article 2085 of the New Civil Code which provides that
petitioners spouses Belo contending that the redemption "(t)hird persons who are not parties to the principal obligation
price should be the total claim of the bank on the date of the may secure the latter by pledging or mortgaging their own
auction sale and custody of property plus charges accrued and property."
interests amounting to P2,779,978.72 to which the spouses
disagreed and refused to pay the said total claim of E) An accommodation mortgagor, ordinarily, is not himself a
respondent PNB. Thereafter the\ spouses Belo filed in the recipient of the loan.
RTC an action for declaration of nullity of mortgage, with an
alternative cause of action, in the event that the F) There is no doubt that Eduarda Belo, assignor of the
accommodation mortgage be held to be valid, to compel petitioners, is an accommodation mortgagor. Section 25 of
respondent PNB to accept the redemption price tendered by P.D. No. 694 provides that "the mortgagor shall have the right
petitioners spouses Belo which is based on the winning bid to redeem the property by paying all claims of the Bank
price of respondent PNB in the extrajudicial foreclosure. The against him". From said provision can be deduced that the
RTC ruled in favour of the spouses belo. mortgagor referred to by that law is one from whom the bank
has a claim in the form of outstanding or unpaid loan; he is
6) On appeal, the CA ruled that the petitioners spouses Belo also called a borrower or debtor-mortgagor.
should pay the entire amount due to PNB under the mortgage
deed at the time of the foreclosure sale plus interest, costs G) PNB has no claim against accommodation mortgagor
and expenses. Eduarda Belo inasmuch as she only mortgaged her property
to accommodate the Eslabon spouses who are the loan
ISSUE: whether or not the SPA the real estate mortgage borrowers of the PNB. The principal contract is the contract
contract, the foreclosure proceedings and the subsequent of loan between the Eslabon spouses, as borrowers/debtors,
auction sale involving Eduarda Belo's property are valid. And and the PNB as lender. The accommodation real estate
assuming they are valid, whether or not the petitioners are mortgage which secures the loan is only an accessory
required to pay, as redemption price, the entire claim of contract. Thus, the term "mortgagor" in Section 25 of P.D. No.
respondent PNB in the amount of P2,779,978.72 as of the 694 pertains only to a debtor-mortgagor and not to an
date of the public auction sale on June 10, 1991. accommodation mortgagor.

HELD: H) Moreover, the mortgage contract provides that ". . . the

mortgagee may immediately foreclose this mortgage
A) The validity of the SPA and the mortgage contract cannot judicially in accordance with the Rules of Court or
anymore be assailed due to petitioners Belo failure to appeal extrajudicially in accordance with Act No. 3135, as amended
the same after the trial court rendered its decision affirming and Presidential Decree No. 385 “ Thus, since the mortgage
their validity. contract in this case is in the nature of a contract of adhesion
as it was prepared solely by respondent, it has to be
B) Also, the SPA executed by Eduarda Belo in favor of the interpreted in favor of petitioners.
respondents spouses Eslabon and the Real Estate Mortgage
executed by the respondents spouses in favor of respondent

SECTRANS 2010/ ATTY. AGUINALDO 54

J) While the petitioners, as assignees of Eduarda Belo, are not It is also not an antichresis by reason that as the creditor
required to pay the entire claim of respondent PNB against has never been in possession of the property nor has
the principal debtors, they can only exercise their right of enjoyed the said property nor for one moment received
redemption with respect to the parcel of land belonging to its rents.
Eduarda Belo, the accommodation mortgagor. Thus, they
have to pay the bid price less the corresponding loan value of 2) Yes. The will of the parties are controlling, In this case, a
the foreclosed 4 residential lots of the spouses Eslabon. Thus, contract of loan and a promise of sale of a house and lot,
petitioners are allowed to redeem only the property the price of which should be the amount loaned, if within
registered in the name of Eduarda Belo, by paying only the a fixed period of time such amount should not be paid by
bid price less the corresponding loan value of the foreclosed the debtor-vendor of the property to the creditor-vendee
(4) residential lots of the respondents spouses Eslabon. of same. The fact that the parties have agreed at the
same time, in such a manner that the fulfillment of the
promise of sale would depend upon the nonpayment or
BUSTAMANTE v ROSEL return of the amount loaned, has not produced any
change in the nature and legal conditions of either
ALCANTARA v ALINEA contract, or any essential defect which would tend to
Facts: nullify the same.

 Alinea and Belarmino loaned P480 from Alcantara.

 According to the loan agreement, if the period has MAHONEY v TUASON
expired without payment of the loan, the house and lot
of Alinea and Belarmino will be considered sold to Facts: P. Blanc, the owner of the jewels, entered into a
Alcantara. contract of pledge, delivering to the creditor Mariano Tuason
 Alinea and Belarmino failed to pay. several jewels and other merchandise for the purpose of
 They refused to deliver the property to Alcantara. securing the fulfillment of the obligation which he (Blanc) had
 Alcantara filed an action against them. contracted in favor of the latter who had guaranteed the
 The defendants contend that the amount claimed by payment of a considerable amount of money which Blanc
Alcantara included the interest and that the principal owed to the Chartered Bank. Creditor Tuason paid to the
borrowed was only 200 and that the interest was 280. Chartered Bank the sum of sixteen thousand pesos (P16,000)
 They also alleged as their special defense that they which the debtor Blanc owed and failed to pay, and that the
offered to pay Alcantara the sum of 480 but the latter latter did not reimburse Tuason the amount paid to the bank
had refused to accept the same. together with interests thereon.

Issue: Issue: W/N Tuason can appropriate the things given by way of
pledge?
1) WON there was a valid mortgage?
2) WON the defendants should deliver the property to Ruling: No. Tuason is entitled to retain and appropriate to
Alcantara? himself the merchandise received in pledge is null and
indefensible, because he can only recover his credit,
according to law, from the proceeds of the sale of the same.
Held: Art. 2088.

1) No. The property, the sale of which was agreed to by the

debtors does not appear mortgaged in favor of the LANUZA v DE LEON
creditor because in order to constitute a valid mortgage
it is indispensable that the instrument be registered in Spouses lanuza executed a deed of sale with a right to
the Register of Property and the document contract does repurchase to Reyes. Upon expiration of term to repurchase,
not constitute a mortgage nor it could possibly be a the time was extended without the wife of lanuza signing the
mortgage, for the reason that the said document is not document. A stipulation to the effect that the ownership will
vested with the character and conditions of a public only be passed to the vendee if the vendor fails to repurchase
instrument. the property was included. The spouses then mortgage the
property to respondent to secure a debt. The debt was
The contract is not a pledge since the said property is not unpaid and respondent filed a case to foreclose the mortgage
personal property and the debtor continued in which was granted. Reyes filed a case for consolidation,
possession thereof and was never been occupied by the claiming she has the right to the property. Reyes claims the
creditor. ownership in the property automatically passes immediately

SECTRANS 2010/ ATTY. AGUINALDO 55

to him after the sale and not after the end of the period to such indivisibility likewise unaffected by the fact that the
repurchase. debtors are not solidarily liable.

Issue: won reyes contention valid YU v PCIB

FACTS:
Ruling: yes. a stipulation in a purported pacto de retro sale  P mortgaged their title, interest, and participation
that the ownership over the property sold would over several parcels of land located in Dagupan City
automatically pass to the vendee in case no redemption was and Quezon City in favour of PCIB (R) as security for
effected within the stipulated period is contrary to the nature the payment of a loan in the amount of P9mill
of a true pacto de retro sale, under which the vendee  P failed to pay the loan; R filed a Petition for
acquires ownership of the thing sold immediately upon the Extrajudicial Foreclosure of Real Estate Mortgage on
execution of the sale, subject only to the vendors rights of the Dagupan City properties. A Certificate of Sale
redemption. The said stipulation is a pactum commissorium was issued in favour of R. Subsequently, R filed an
which enables the mortgagee to acquire ownership of the Ex-Parte Petition for Writ of Possession before RTC
mortgaged property without need of forclosure. It is void. Its Dagupan
insertion in the contract is an avowal of the intention to  P filed a Motion to Dismiss. They argued that the
mortgage rather than to sell the property. Certificate of Sale is void because the real estate
mortgage is indivisible, the mortgaged properties in
DAYRIT v CA Dagupan City and Quezon City cannot be separately
foreclosed.
FACTS: Dayrit, Sumbillo and Angeles entered into a contract  R – the filing of two separate foreclosure
with Mobil Oil Phil, entitled LOAN & MORTGAGE proceedings did not violate Article 2089 of the Civil
AGREEMENT. Defendants violated the LOAN & MORTGAGE Code on the indivisibility of a real estate mortgage
AGREEMENT because they only paid one installment. They since Section 2 of Act No. 3135 expressly provides
also failed to buy the quantities required in the Sales that extra-judicial foreclosure may only be made in
Agreement. the province or municipality where the property is
situated. R further submits that the filing of separate
The plaintiff made a demand, Dayrit answered acknowledging applications for extra-judicial foreclosure of
his liability. Trial Court ruled in favor of plaintiff and also ruled mortgage involving several properties in different
that each of the three defendants shall pay 1/3 of the cost. locations is allowed by A.M. No. 99-10-05-0, the
No appeal had been taken so the decision became final and Procedure on Extra-Judicial Foreclosure of Mortgage,
executor. as further amended on August 7, 2001.
 TC denied Motion
Mobil filed for the execution of the judgment. Dayrit opposed
alleging that they had an agreement with Mobil, that he ISSUE: WON a real estate mortgage over several properties
would not appeal anymore but Mobil would release the located in different localities can be separately foreclosed in
mortgage upon payment of his 1/3 share. different places?

Mobil claimed that the agreement was that it would only HELD: YES
release the mortgage if the whole principal mortgaged debt  What the law proscribes is the foreclosure of only a
plus the whole accrued interest were fully paid. portion of the property or a number of the several
properties mortgaged corresponding to the unpaid
ISSUE: Whether or not the CFI erred in ordering the sale at portion of the debt where, before foreclosure
public auction of the mortgaged properties to answer for the proceedings, partial payment was made by the
entire principal obligation of Dayrit, Sumbillo and Angeles. debtor on his total outstanding loan or obligation.
 This also means that the debtor cannot ask for the
RULING: release of any portion of the mortgaged property or
of one or some of the several lots mortgaged unless
While it is true that the obligation is merely joint and each of and until the loan thus secured has been fully paid,
the defendant is obliged to pay his 1/3 share of the joint notwithstanding the fact that there has been partial
obligation, the undisputed fact remains that the intent and fulfillment of the obligation. Hence, it is provided
purpose of the LOAN & MORTGAGE AGREEMENT was to that the debtor who has paid a part of the debt
secure the entire loan. cannot ask for the proportionate extinguishment of
the mortgage as long as the debt is not completely
The court ruled that a mortgage directly and immediately satisfied. In essence, indivisibility means that the
subjects the property upon which it is imposed, the same mortgage obligation cannot be divided among the
being indivisible even though the debt may be divided, and

SECTRANS 2010/ ATTY. AGUINALDO 56

 different lots, that is, each and every parcel under property and title and for the declaration of nullity of
mortgage answers for the totality of the debt mortgage. A similar complaint filed by SLGT followed three (3)
 A.M. No. 99-10-05-0,the Procedure on Extra-Judicial days later. At this time, it appears that the ASB Group of
Foreclosure of Mortgage, lays down the guidelines Companies, which included ASB, had already filed with the
for extra-judicial foreclosure proceedings on Securities and Exchange Commission a petition for
mortgaged properties located in different provinces. rehabilitation and a rehabilitation receiver had in fact been
It provides that the venue of the extra-judicial appointed.
foreclosure proceedings is the place where each of
the mortgaged property is located. Relevant portion What happened next are laid out in the OP decision adverted
provides: to above, thus:

Where the application concerns the extrajudicial In response to the above complaints, ASB alleged …
foreclosure of mortgages of real estates and/or that it encountered liquidity problems sometime in
chattels in different locations covering one … 2000 after its creditors [UCPB and Metrobank]
indebtedness, only one filing fee corresponding simultaneously demanded payments of their loans…;
to such indebtedness shall be collected. The that on May 4, 2000, the … Commission (SEC)
collecting Clerk of Court shall, apart from the granted its petition for rehabilitation; that it
official receipt of the fees, issue a certificate of negotiated with UCPB and Metrobank … but nothing
payment indicating the amount of indebtedness, came out positive from their negotiation ….
the filing fees collected, the mortgages sought
to be foreclosed, the real estates and/or chattels On the other hand, Metrobank claims that
mortgaged and their respective locations, which complainants [Dylanco and SLGT] have no
certificate shall serve the purpose of having the personality to ask for the nullification of the
application docketed with the Clerks of Court mortgage because they are not parties to the
of the places where the other properties are mortgage transaction …; that the complaints must
located and of allowing the extrajudicial be dismissed because of the ongoing rehabilitation
foreclosures to proceed thereat. (Emphasis of ASB; xxx that its claim against ASB, including the
supplied) mortgage to the [Project] have already been
transferred to Asia Recovery Corporation; xxx.
 The indivisibility of the real estate mortgage is not
violated by conducting two separate foreclosure UCPB, for its part, denies its liability to SLGT [for lack
proceedings on mortgaged properties located in of privity of contract] … [and] questioned the
different provinces as long as each parcel of land is personality of SLGT to challenge the validity of the
answerable for the entire debt mortgage reasoning that the latter is not party to the
mortgage contract … [and] maintains that the
mortgage transaction was done in good faith….
METROBANK v SLGT Finally, it prays for the suspension of the
proceedings because of the on-going rehabilitation
FACTS: of ASB.

On October 25, 1995, Dylanco and SLGT each entered into a In resolving the complaint in favor of Dylanco and
contract to sell with ASB for the purchase of a unit (Unit 1106 SLGT, the Housing Arbiter ruled that the mortgage
for Dylanco and Unit 1211 for SLGT) at BSA Towers then being constituted over the lots is invalid for lack of
developed by the latter. As stipulated, ASB will deliver the mortgage clearance from the HLURB.
units thus sold upon completion of the construction or before
December 1999. Relying on this and other undertakings, ISSUE: W/N The declaration of nullity of the entire mortgage
Dylanco and SLGT each paid in full the contract price of their constituted on the project land site and the improvements
respective units. The promised completion date came and was valid. and
went, but ASB failed to deliver, as the Project remained
unfinished at that time. To make matters worse, they learned
HELD:
that the lots on which the BSA Towers were to be erected had
been mortgaged6 to Metrobank, as the lead bank, and
Both petitioners do not dispute executing the mortgage in
UCPB7 without the prior written approval of the Housing and
question without the HLURB’s prior written approval and
Land Use Regulatory Board (HLURB).
notice to both individual respondents. Section 18 of
Presidential Decree No. (PD) 957 – The Subdivision and
Alarmed by this foregoing turn of events, Dylanco, on August
Condominium Buyers’ Protective Decree – provides:
10, 2004, filed with the HLURB a complaint for delivery of
SECTRANS 2010/ ATTY. AGUINALDO 57
 SEC. 18. Mortgages. - No mortgage of any unit or lot The situation obtaining in the case at bench is within the
shall be made by the owner or developer without purview of the aforesaid rule on the indivisibility of mortgage.
prior written approval of the [HLURB]. Such It may be that Section 18 of PD 957 allows partial redemption
approval shall not be granted unless it is shown that of the mortgage in the sense that the buyer is entitled to pay
the proceeds of the mortgage loan shall be used for his installment for the lot or unit directly to the mortgagee so
the development of the condominium or subdivision as to enable him - the said buyer - to obtain title over the lot
project …. The loan value of each lot or unit covered or unit after full payment thereof. Such accommodation
by the mortgage shall be determined and the buyer statutorily given to a unit/lot buyer does not, however,
thereof, if any, shall be notified before the release render the mortgage contract also divisible. Generally, the
of the loan. The buyer may, at his option, pay his divisibility of the principal obligation is not affected by the
installment for the lot or unit directly to the indivisibility of the mortgage. The real estate mortgage
mortgagee who shall apply the payments to the voluntarily constituted by the debtor (ASB) on the lots or
corresponding mortgage indebtedness secured by units is one and indivisible. In this case, the mortgage
the particular lot or unit being paid for …. (Emphasis contract executed between ASB and the petitioner banks is
and word in bracket added) considered indivisible, that is, it cannot be divided among the
different buildings or units of the Project. Necessarily, partial
There can thus be no quibbling that the project lot/s and the extinguishment of the mortgage cannot be allowed. In the
improvements introduced or be introduced thereon were same token, the annulment of the mortgage is an all or
mortgaged in clear violation of the aforequoted provision of nothing proposition. It cannot be divided into valid or invalid
PD 957. And to be sure, Dylanco and SLGT, as Project unit parts. The mortgage is either valid in its entirety or not valid
buyers, were not notified of the mortgage before the release at all. In the present case, there is doubtless only one
of the loan proceeds by petitioner banks. mortgage to speak of. Ergo, a declaration of nullity for
violation of Section 18 of PD 957 should result to the
As it were, PD 957 aims to protect innocent subdivision lot mortgage being nullified wholly.
and condominium unit buyers against fraudulent real estate
practices. Its preambulatory clauses say so and the Court It will not avail the petitioners any to feign ignorance of PD
need not belabor the matter presently. Section 18, supra, of 957 requiring prior written approval of the HLURB, they being
the decree directly addresses the problem of fraud and other charged with knowledge of such requirement since granting
manipulative practices perpetrated against buyers when the loans secured by a real estate mortgage is an ordinary part of
lot or unit they have contracted to acquire, and which they their business.
religiously paid for, is mortgaged without their knowledge, let
alone their consent. The avowed purpose of PD 957 compels, CENTRAL BANK v CA
as the OP correctly stated, the reading of Section 18 as
prohibitory and acts committed contrary to it are void. Any PLEDGE
less stringent construal would only accord unscrupulous
developers and their financiers unbridled discretion to follow YULIONGSIU v PNB
or not to follow PD 957 and thus defeat the very lofty FACTS: Yulongsiu owned 2 vessels and equity in FS-203, which
purpose of that decree. It thus stands to reason that a were purchased by him from the Philippine Shipping
mortgage contract executed in breach of Section 18 of the Commission, by installment. Plaintiff obtained a loan from
decree is null and void. defendant and to guarantee payment, plaintiff pledged the 2
vessels and the equity on FS-203, as evidenced by a pledge
The next question to be addressed turns on whether or not contract. Plaintiff made a partial payment and the remaining
the nullity extends to the entire mortgage contract. balance was renewed by the execution of 2 promissory notes
in the bank’s favor. These two notes were never paid at all by
The poser should be resolved, as the CA and OP did resolve it, plaintiff on their respective due dates.
in the affirmative. This disposition stems from the basic
postulate that a mortgage contract is, by nature, indivisible.
Consequent to this feature, a debtor cannot ask for the
release of any portion of the mortgaged property or of one or Defendant bank filed a criminal case against plaintiff charging
some of the several properties mortgaged unless and until the latter with estafa through falsification of commercial
the loan thus secured has been fully paid, notwithstanding documents, and the trial court convicted the plaintiff and was
the fact that there has been partial fulfillment of the sentenced to indemnify the defendant. The corresponding
obligation. Hence, it is provided that the debtor who has paid writ of execution issued to implement the order for
a part of the debt cannot ask for the proportionate indemnification was returned unsatisfied as plaintiff was
extinguishments of the mortgage as long as the debt is not totally insolvent.
completely satisfied.

SECTRANS 2010/ ATTY. AGUINALDO 58

Meanwhile, together with the institution of the criminal - Phase 1 of the Bonifacio Global City in Taguig,
action, defendant took physical possession of the 2 vessels Metro Manila
and transferred the equity on FS-203 to the defendant. Later  Two provisions in the lease contract are pertinent to
on, the 2 vessels were sold by defendant to third parties. the present case: Section 20, which is about the
consequences in case of default of the lessee, and
Section 22, which is about the lien on the properties
of the lease.
Plaintiff commenced an action for recovery on the pledged
items, and alleges, among others, that the contract executed  Tirreno began to default in its lease payments in
was a chattel mortgage so the creditor defendant could not 1999. By July 2000, Tirreno was already in arrears by
take possession of the chattel object thereof until after there P5,027,337.91. FBDC and Tirreno entered into a
has been default. settlement agreement on 8 August 2000. Despite the
execution of the settlement agreement, FBDC found
need to send Tirreno a written notice of termination
dated 19 September 2000 due to Tirreno's alleged
ISSUE: Whether the contract entered into between plaintiff failure to settle its outstanding obligations
and defendant is a chattel mortgage or a valid contract of  FBDC entered and occupied the leased premises.
pledge? FBDC also appropriated the equipment and
properties left by Tirreno pursuant to Section 22 of
their Contract of Lease as partial payment for
Tirreno's outstanding obligations.
HELD: It’s a contract of pledge. The contract itself provides  Yllas Lending Corporation and Jose S. Lauraya, in his
that it is a contract of pledge and the judicial admission that it official capacity as President, (respondents) caused
is a pledge contract cannot be offset without showing of the sheriff of Branch 59 of the trial court to serve an
palpable mistake. alias writ of seizure against FBDC. On the same day,
FBDC served on the sheriff an affidavit of title and
third party claim
 Despite FBDC's service upon him of an affidavit of
The pledgee defendant was therefore entitled to the actual title and third party claim, the sheriff proceeded with
possession of the vessels. The plaintiff’s continued operation the seizure of certain items from FBDC's premises
of the vessels after the pledge contract was entered into  The sheriff delivered the seized properties to
places his possession subject to the order of the pledge. The respondents. FBDC questioned the propriety of the
pledge can temporarily entrust the physical possession of the seizure and delivery of the properties to respondents
chattels pledged to the pledgor without invalidating the without an indemnity bond before the trial court.
pledge. In this case, the pledgor is regarded as holding the FBDC argued that when respondents and Tirreno
pledge merely as a trustee for the pledge. entered into the chattel mortgage agreement on 9
November 2000, Tirreno no longer owned the
mortgaged properties as FBDC already enforced its
lien on 29 September 2000.
As to the validity of the pledge contract with regard to
delivery, plaintiff alleges that constructive delivery is
ISSUE: Whether or not the dismissal of FBDC's third party
insufficient to make pledge effective. The Court ruled that
claim upon the trial court's erroneous interpretation that
type of delivery will depend on the nature and peculiar
FBDC has no right of ownership over the subject properties
circumstances of each case. Since the defendant bank was,
because Section 22 of the contract of lease is void for being a
pursuant to the pledge contract, in full control of the vessels
pledge and a pactum commissorium?
through plaintiff, the former could take actual possession at
any time during the life of the pledge to make more effective
its security. HELD:

 No, This stipulation is in the nature of a resolutory

FBDC v YLLAS LENDING condition, for upon the exercise by the [lessor] of his
right to take possession of the leased property, the
FACTS: contract is deemed terminated. This kind of
contractual stipulation is not illegal, there being
nothing in the law proscribing such kind of
 FBDC executed a lease contract in favor of Tirreno,
agreement.
Inc. (Tirreno) over a unit at the Entertainment Center
 Judicial permission to cancel the agreement was not,
therefore necessary because of the express
SECTRANS 2010/ ATTY. AGUINALDO 59
 stipulation in the contract of [lease] that the [lessor], 2) The bank made no effort to exercise any active ownership
in case of failure of the [lessee] to comply with the over said merchandise until the April 16, when it discovered
terms and conditions thereof, can take-over the that the amount of sugar stored in the said warehouse was
possession of the leased premises, thereby much less than what was mentioned in the contract. The
cancelling the contract of sub-lease. Resort to agreement between the bank and Chua Teng Chong with
judicial action is necessary only in the absence of a respect to the alleged pledge of the sugar was never recorded
special provision granting the power of cancellation. in a public instrument.
 We allow FBDC's forfeiture of Tirreno's properties in
the leased premises. By agreement between FBDC 3) On March 24, 1914, the plaintiff partnership Ocejo, Perez
and Tirreno, the properties are answerable for any and Co., entered into contract with Chua for the sale to him
unpaid rent or charges at any termination of the of sugar where the delivery should be made in April. The
lease. Such agreement is not contrary to law, morals, delivery was completed April 16, 1914, and the sugar was
good customs, or public policy. Forfeiture of the stored in the buyer's warehouse situated at Muelle de la
properties is the only security that FBDC may apply Industria. On this same date, the bank sent an employee to
in case of Tirreno's default in its obligations inspect the sugar described in the pledge agreement, which
should have been stored in the Calle Toneleros warehouse. It
PNB v ATENDIDO was discovered that the amount of sugar in that warehouse
(Re Incorporeal Rights) did not exceed 1,800 piculs, it was supposed to have 5,000
FACTS: piculs of sugar. Eventually, the employee was informed that
Laureano Atendido (LA) obtained from PNB (P) a loan payable the rest of the sugar covered by the pledge agreement was
in 120 days with interest. To guarantee its payment LA pledge stored in the warehouse at No. 119, Muelle de la Industria.
to the bank 2,000 cavans of palay which were deposited in a The bank's representative immediately went to this
warehouse and to that effect endorsed in favor of the bank warehouse, found 3,200 piculs of sugar, of which he took
the corresponding WH receipt. Before the maturity of the immediate possession, closing the warehouse with the bank's
loan, the cavans of rice dissappeared from the WH. LA failed padlocks.
to pay the loan upon matrity and so the present action was
instituted. LA set up the defense that the quedan covering 4) On April 17, 1914, partnership Ocejo presented, for
the palay which was given as security having been endorsed collection, its account for the purchase price of the sugar, but
in blank in favor of the bank and the palay having been lost or chua refused to make payment, and up to the present time
disappeared, he thereby became relieved of liability. the sellers have been unable to collect the purchase price of
the merchandise in question.
ISSUE: WoN LA is relieved from liability
5) The partnership Ocejo made a demand on the bank for the
SC: NO! delivery of the sugar, to which demand the bank refused to
The surrender of the warehouse receipt fiven as security, accede. A suit was filed by Ocejo alleging that said defendant
endorsed in blank was NOT that of a final transfer or that WH was unlawfully holding the seized sugar, the property of the
receipt but merely as a guaranty to the fulfillment of the plaintiff firm Ocejo, which the bank had received from Chua
obligation of P3k. This being so, the ownership remains with Teng Chong, and prayed for the judgment for the possession
the pledgor subject only to foreclosure in case of of said sugar.
nonfulfillment of obligation. The pledgor, continuing to be the
owner of the goods pledged during the pendency of the
6) Subsequently, by agreement of the parties, the sugar was
obligation in case of the loss of the property, the loss is borne
sold and the proceeds of the deposited in the bank.
by him.
Afterwards, a complaint in intervention was filed by Chua
Seco, the assignee of the insolvency of Chua Teng Chong,
OCEJO PEREZ v INTERNATIONAL BANK
asserting a preferential right to the sugar, or to the proceeds
of its sale contending that the sugar is the property of the
FACTS: insolvent estate represented by him. The lower court
rendered judgment in favor of the Oceja
1) On March 7, 1914, Chua Teng Chong, executed to the
International Banking Corporation a promissory note, payable ISSUES:
one month after date, for the sum of P20,000 which note was
also attached to another private document, signed by Chua,
(a) Did title to the sugar pass to the buyer upon its delivery to
which stated that he had deposited with the bank, as security
him (chua seco)?
for the said note, 5,000 piculs of sugar, which were said
stored in a warehouse in Binondo, Manila.

SECTRANS 2010/ ATTY. AGUINALDO 60

(b) Assuming to pay that the title passed to the buyer, did his with the agreement, the pledge so established would be void
failure to pay the purchase price authorize the seller to as against third persons since it is provided Article 1865 of the
rescind the sale? Civil Code that a pledge is without effect as against third
persons "if the certainty of the date does not appear by public
(c) Can the pledge of the sugar to the bank be sustained instrument."
upon the evidence as to the circumstances under which it
obtained physical possession thereof? E) As to assignee Chua Seco: He filed a complaint in
intervention in this suit, in which he contends that by reason
HELD: of its sale and delivery by plaintiff to the insolvent, title to the
sugar passed to the latter and that the pledge set up by the
A) The SC agreed with Chua’s contention that he was entitled bank is void as to third persons. The title to the sugar having
to demand payment of the sugar at any time after the been commenced against him before the declaration of
delivery. No term having been stipulated within which the insolvency, the assignee, Chua Seco, has a better right to its
payment should be made, payment was demandable at the possession or to the product of its sale during the pendency
time and place of the delivery of the thing sold. The seller did of this action. The decision of the court below is therefore
not avail himself of his right to demand payment as soon as reversed, and it is decided that the assignee of the
the right to such payment arose, but as no term for payment bankruptcy of Chua Teng Chong is entitled to the product of
was stipulated, he was entitled, to require payment to be the sale of the sugar here in question, to wit, P10,826.76,
made at any time after delivery, and it was the duty of the together with the interest accruing thereon, reserving
buyer to pay the price immediately upon demand. In essence, proceedings. So ordered.
the delivery had the effect of transmitting the title of the
sugar to the buyer. CRUZ v LEE

B) Failure on the part of the buyer to pay the price on SARMIENTO v JAVELLANA
demand: Article 1506 of the Civil Code provides that the Facts:
contract of sale may be rescinded for the same causes as all
other obligations, in addition to the special causes  Spouses Villasenor obtained a loan from Javellana to be
enumerated in the preceding articles. It is also observed that paid within one year with an interest of 25% p.a.
the article does not distinguish the consummated sale from evidenced by to documents.
the merely perfected sale. In the contract of the sale the  They pledged 4,000 worth of jewels.
obligation to pay the price is correlative to the obligation to  Upon maturity, the Spouses requested for an extension.
deliver the thing sold. Nonperformance by one of the parties  After 7 years, Villasenor offered to pay the loan and
authorizes the other to exercise the right, conferred upon redeem the jewels.
him by the law, to elect to demand the performance of the  Javellana refused on the ground that redemption period
obligation or its rescission. has already expired and he has already bought the jewels
from the wife of Villasenor.
 Villasenor brought an action against Javellana to compel
C) The sugar here in question could not be possibly have been
the return of the jewels pledged.
the subject matter of the contract of pledge which the parties
undertook to create by the private document, inasmuch as it
Issues:
was not at the time the property of the bank, and this
constitutes an indispensable requisite for the creation of a
1) WON Villasenor can still redeem the jewels?
pledge.
2) WON the right to redeem has already expired?
D) It is not shown that an effort was made to pledge the
sugar, the subject matter of this case. Though it happened Held:
that the day the sugar was delivered, the Chua gave the
bank's representative the keys of the warehouse on the 1) Yes. As the jewels in question were in the possession of
Muelle de la Industria in which the sugar was stored, it was the defendant to secure the payment of a loan of 1,500
not because of an agreement concerning the pledge of the with interest thereon and for having subsequently
sugar. From the facts, no attempt was made to enter into any extended the term of the loan indefinitely, and so long as
agreement for the pledge of the sugar here in question. The the value of the jewels pledged was sufficient to secure
bank took possession of that sugar under the erroneous the payment of the capital and the accrued interest, the
belief, based upon the false statement of Chua Teng Chong, defendant is bound to return the jewels or their value to
that it was a part of the lot mentioned in the private the plaintiffs, and the plaintiffs have the right to demand
document. Even assuming that an attempt was made to the same upon the payment by them of the sum of 1,500
pledge the sugar and that delivery was made in accordance plus interest.

SECTRANS 2010/ ATTY. AGUINALDO 61

 Manila. Velayo undertook to pay the surety company an
2) An action for recovery of the goods which were pledged annual premium of P112.00 and provided collateral jewelry
to secure the payment of a loan evidenced by a with the authority to sell in case Manila Surety will be obliged
document is an action on a written contract which has a to pay. Judgment having been rendered in favor of Jovita
prescriptive period of 10 years from the date on which Granados and against Rodolfo Velayo, and execution having
the debtor may have paid the debt and demanded the been returned unsatisfied, the surety company was forced to
return of the goods pledged. pay P2,800.00 that it later sought to recoup from Velayo; and
upon the latter's failure to do so, the surety caused the
In this case, the expiration of the contract was in 1912 pledged jewelry to be sold, realizing therefrom a net product
and the action to recover was filed in 1920, therefore, of P235.00 only The surety files a claim against Velayo
the action has not yet prescribed. because the security Is insufficient. Velayo claims the sale of
the jewelry even if insufficient extinguishes the principal
obligation.
PARAY v RODRIGUEZ
Issue: Won Velayo’s contention is correct
Facts: Respondents were the owners, in their respective
personal capacities, of shares of stock in a corporation known Ruling: Yes! The sale of the thing pledged shall extinguish the
as the Quirino-Leonor-Rodriguez Realty Inc.1 Sometime principal obligation, whther or not the proceeds of the sale
during the years 1979 to 1980, respondents secured by way are equal to the amount of the principal obligation, interest
of pledge of some of their shares of stock to petitioners and expenses in a proper case.
Bonifacio and Faustina Paray ("Parays") the payment of
certain loan obligations. When the Parays attempted to REAL MORTGAGE
foreclose the pledges on account of respondents’ failure to
pay their loans, respondents filed complaints with the VIOLA v EPCIB
Regional Trial Court (RTC) of Cebu City and , sought the
declaration of nullity of the pledge agreements. However the FACTS: Via a contract denominated as “CREDIT LINE AND
RTC, in its decision3 dated 14 October 1988, dismissed the REAL ESTATE MORTGAGE AGREEMENT FOR PROPERTY LINE”
complaint and gave "due course to the foreclosure and sale at (Credit Line Agreement) executed on March 31, 1997, Leo-
public auction of the various pledges. Respondents then Mers Commercial, Inc., as the Client, and its officers spouses
received Notices of Sale which indicated that the pledged Leopoldo and Mercedita Viola (petitioners) obtained a loan
shares were to be sold at public auction. However, before the through a credit line facility in the maximum amount of
scheduled date of auction, all of respondents caused the P4,700,000.00 from the Philippine Commercial International
consignation with the RTC Clerk of Court of various amounts. Bank (PCI Bank), which was later merged with Equitable Bank
It was claimed that respondents had attempted to tender and became known as Equitable PCI Bank, Inc.
these payments to the Parays, but had been rebuffed.
Notwithstanding the consignations, the public auction took To secure the payment of the loan, petitioners executed also
place as scheduled, with petitioner Vidal Espeleta successfully on March 31, 1997 a “Real Estate Mortgage” in favor of
bidding. Respondents instead filed on 13 November 1991 a PCIBank over their two parcels of land.
complaint seeking the declaration of nullity of the concluded
public auction. Petitioners now argue that the essential Petitioners availed of the full amount of the loan.
procedural requisites for the auction sale had been satisfied. Subsequently, they made partial payments and made no
further payments and despite demand, they failed to pay
Issue: W/N the the essential procedural requisites for the their outstanding obligation.
auction sale had been satisfied?
Respondent thus extrajudicially foreclosed the mortgage
Ruling: Yes. Under the Civil Code, the foreclosure of a pledge before the Office of the Clerk of Court & Ex-Officio Provincial
occurs extrajudicially, without intervention by the courts. All Sheriff of the Regional Trial Court (RTC) of Marikina City. The
the creditor needs to do, if the credit has not been satisfied in mortgaged properties were sold on April 10, 2003 for
due time, is to proceed before a Notary Public to the sale of P4,284,000.00 at public auction to respondent, after which a
the thing pledged. Certificate of Sale dated April 21, 2003 was issued.

MANILA SURETY v VELAYO More than five months later or on October 8, 2003,
petitioners filed a complaint for annulment of foreclosure
F: Manila Surety & Fidelity Co., upon request of Rodolfo sale. They claim that:
Velayo, executed a bond for P2,800.00 for the dissolution of a a) they had made substantial payments
writ of attachment obtained by one Jovita Granados in a suit b) the foreclosure proceedings and auction sale were
against Rodolfo Velayo in the Court of First Instance of not only irregularly and prematurely held but were

SECTRANS 2010/ ATTY. AGUINALDO 62

 null and void because the mortgage debt is only
P2,224,073.31 on the principal obligation and DILAG v HEIRS OF RESSURECCION
P1,455,137.36 on the interest, or a total of only FACTS:
P3,679,210.67 as of April 15, 2003, but the  BEFORE 1936: Laureano Marquez (LM) was indebted
mortgaged properties were sold to satisfy an inflated to Fortunato Resurreccion (FR) in the sum of P5k as
and erroneous principal obligation of P4,783,254.69, the balance of purchase price of a parcel of land
plus 3% penalty fee per month or 33% per year and which LM bought and received from FR.
15% interest per year, which amounted to  FR was in turn indebted to Luzon Surety Company in
P14,024,623.22 as of September 30, 2002;” the same amt, secured by a mortgage on 3 parcels of
c) that “the parties never agreed and stipulated in the land – one of which was bought by LM from him
real estate mortgage contract” that the 15% interest  AS EARLY AS 193: LM had agreed to pay FR’s
per annum on the principal loan and the 3% penalty indebtedness to Luzon Surety Company by way of
fee per month on the outstanding amount would be satisfaction of his own indebtedness to FR in the
covered or secured by the mortgage; same amt
 LM failed to pay indebtedness of FR to the Luzon
Surety Company, and the latter foreclosed judicially
ISSUE: whether the mortgage contract also secured the the mortgage executed in its favour by FR
penalty fee per month on the outstanding amount as  Since LM did not fulfil his promise, FR commenced
stipulated in the Credit Line Agreement. an action against LM to recover the value of lost
properties
RULING: A mortgage must “sufficiently describe the debt  LM – sale at public auction of 5 parcels of land
sought to be secured, which description must not be such as mentioned in FR’s complaint is invalid because they
to mislead or deceive, and an obligation is not secured by a are not specifically described in the mortgage deed.
mortgage unless it comes fairly within the terms of the LM acquired those parcels of land subsequent to the
mortgage. execution of mortgage deed.
 In the fifth clause of said document Laureano
In the case at bar, the parties executed two separate Marquez stipulated that inasmuch as the five parcels
documents on March 31, 1997 – the Credit Line Agreement of land described in the fourth clause were not
granting the Client a loan through a credit facility in the sufficient to cover all his obligations in favor of
maximum amount of P4,700,000.00, and the Real Estate Fortunato Resurreccion, he also constituted a
Mortgage contract securing the payment thereof. mortgage in favor of the latter and his assignees on
Undisputedly, both contracts were prepared by respondent any other property he then might have and on those
and written in fine print, single space. he might acquire in the future.

The provision of the mortgage contract does not specifically ISSUE: WON such a stipulation constitute a valid mortgage on
mention that, aside from the principal loan obligation, it also the 5 other parcels of land which LM subsequently acquired?
secures the payment of “a penalty fee of three percent (3%)
per month of the outstanding amount to be computed from HELD: NO
the day deficiency is incurred up to the date of full payment  LM could not legally mortgage any property he did
thereon,” which penalty was expressly stipulates in the Credit not yet own. In order that a mortgage may be validly
Line Agreement. constituted the instrument by which it is created
must be recorded in the Registry of Deeds and so far
Since an action to foreclose “must be limited to the amount as the additional parcels of land are concerned, the
mentioned in the mortgage” and the penalty fee of 3% per registration of Deed of Mortgage did not affect and
month of the outstanding obligation is not mentioned in the could not have affected them because they were not
mortgage, it must be excluded from the computation of the specifically described therein.
amount secured by the mortgage.
PBCOM v MACADAEG
Penalty fee” is entirely different from “bank charges.” The
phrase “bank charges” is normally understood to refer to FACTS:
compensation for services. A “penalty fee” is likened to a
compensation for damages in case of breach of the On September 30, 1950, respondents Pedro B. Bautista,
obligation. Being penal in nature, such fee must be specific Dativa Corrales Bautista, Inocencio C. Campos, and the Flash
and fixed by the contracting parties, unlike in the present Taxi Company jointly and severally applied for and obtained a
case which slaps a 3% penalty fee per month of the credit accommodation from the petitioner bank in the sum of
outstanding amount of the obligation. P100,000.00, and as a security therefor executed in favor of
the bank, in one single document, a real estate mortgage
SECTRANS 2010/ ATTY. AGUINALDO 63
over four parcels of land, and a chattel mortgage on some the execution sale being personal property, and a certificate
movie equipment and thirty taxicabs. Respondents having of sale having already been delivered to it by the sheriff, the
failed to pay the total amount of P128,902.42 due on the court could no longer set aside said sale
credit accommodation referred to, the petitioner bank
procured the extrajudicial foreclosure of the real estate ISSUE: W/N the sheriff’s sale was irregular and therefore null
mortgage in accordance with Act No. 3135, as amended, and and void.
at the foreclosure sale on January 9, 1956, the bank acquired
the properties mortgaged as the highest bidder for the sum HELD:
of P68,365.60.
The alleged nullity is claimed to arise from the fact that the
Claiming a balance of P62, 749.72 still due, the petitioner real estate and chattel mortgage executed by respondents to
bank, instead of foreclosing respondents' chattel mortgage, secure their credit accommodation with the petitioner bank
filed against them on may 22, 1956, Civil Case No. 29752 for was indivisible, and that consequently, the bank had no legal
the collection of said balance. The lower court, on June 30, right to extra judicially foreclose only the real estate
1956, rendered judgment ordering defendants to pay the mortgage and leave out the chattel mortgage, and then sue
plaintiff bank, jointly and severally, the sum of P62, 749.72, respondents for a supposed deficiency judgement; and for
with interest thereon at the rate of 7% per annum from May this reason, respondents assert that the judgement in the
22, 1956 until the said amount is fully paid. bank's favor for such deficiency in Civil Case No. 29752 is a
nullity.
On September 18,1956, the court issued an order to execute
said judgment; it does not appear, though, that plaintiff The argument is fallacious because the mere embodiment of
sought the enforcement of the writ of execution. the real estate mortgage and the chattel mortgage in one
document does not fuse both securities into an indivisible
On April 24, 1957, the court issued another order for the whole. Both remain distinct agreements, differing not only in
execution of the judgement, pursuant to which the sheriff of the subject-matter of the contract but in the but in the
Manila published a "Notice of Sale," setting for sale at public governing legal provisions. Petitioner bank, therefore, had
auction on May 13, 1957 the rights, interest or participation every right to foreclose the real estate mortgage and waive
of respondents on the certificate of public convenience the chattel mortgage, and maintain instead a personal action
registered in the name of the Flash Taxi Co. in cases Nos. for the recovery of the unpaid balance of its credit (De la
32578 of the Public Service Commission. Rama vs. Sajo, 45 Phil., 703; Salomon vs. Dantees, 63 Phil.,
522; Brancharch Motor Co. vs. Rangal, et al., 68 Phil., 287,
On May 13, 1957, the sheriff sold the rights, interests, or 290). This petitioner did by filing civil Case No. 29752 for the
participation of respondents in the certificate of public collection of the unpaid balance of respondents'
convenience in question to the plaintiff bank as the highest indebtedness; and the validity and correctness of the action
bidder for the amount of P60,371.25, and two days later, on was admitted by respondents themselves when they
May 15, the sheriff issued to plaintiff the corresponding confessed judgement thereto. The court in fact decision
certificate of sale. pursuant to such confession of judgement, and the decision
has long since been final and executory.
Respondents Pedro B. Bautista, et al., filed in the court below
a "Petition To Set Aside Order dated June 8, 1957, Confirming PRUDENTIAL BANK v PANIS
Sheriffs Sale of may 15, 1957 and to Declare its Nullity,"
claiming, as grounds for the petitions, that they had other HOME BANKERS v CA
properties which they had pointed out to the plaintiff bank Facts:
with which the judgement could be satisfied that the law
grants to the judgement debtor the right to direct which of  Private respondents entered into a Contract to Sell
his properties should be sold in execution of a judgement; Agreement with TransAmerican through Engr. Garcia
that the sale of the certificate of public convenience in over portions of land with one unit three-storey
question would mean irreparable damage to them and would townhouse to be built on each portion.
prove of work about forth drivers employed in their taxicab  Engr. Garcia obtained a loan from petitioner and as
business; and that defendants had no objection to bearing security executed a mortgage over the property
the expenses of the sale sought to be revoked and of any subject to the Contract to Sell with the private
subsequent execution sales in satisfaction of the judgement. respondents. Petitioner registered its mortgage on
these titles without any other encumbrance or lien
Plaintiff bank opposed the petition, contending that there annotated therein.
was no showing that the sheriff's sale in question was  When the loan was due, Engr. Garcia failed to pay
irregular or not in accordance with law; that the subject of hence petitioner instituted an extrajudicial
foreclosure on the subject lots.
SECTRANS 2010/ ATTY. AGUINALDO 64
  Private respondents prayed for the annulment of the development of the eight-unit townhouses.
mortgage in favor of petitioner. Petitioner’s insistence that prior to the approval of
 Petitioner filed its Answer contending that private the loan, it undertook a thorough check on the
respondents have no cause of action against it; that property and found the titles free from liens and
at the time of the loan application and execution of encumbrances would not suffice. It was incumbent
the promissory note and real estate mortgage by upon petitioner to inquire into the status of the lots
Garcia, there were no known individual buyers of the which includes verification on whether Garcia had
subject land nor annotation of any contracts, liens or secured the authority from the HLURB to mortgage
encumbrances of third persons on the titles of the the subject lots. Petitioner failed to do so. We
subject lots; that the loan was granted and released likewise find petitioner negligent in failing to even
without notifying HLURB as it was not necessary. ascertain from Garcia if there are buyers of the lots
 CA ruled in favor of private respondents saying that who turned out to be private respondents.
despite the contracts to sell, Garcia/TransAmerican Petitioner’s want of knowledge due to its negligence
did not apprise petitioner of the existence of these takes the place of registration - thus it is presumed
contracts nor did petitioner exhaust any effort to to know the rights of respondents over the lot - and
inquire into their existence since petitioner merely the conversion of its status as mortgagee to buyer-
relied on the purported clean reconstituted titles in owner will not lessen the importance of such
the name of Garcia; that the mortgage of the subject knowledge.
lots without the consent of the buyers and the
authorization of the HLURB is a clear violation of P.D. SAMANILLA v CAJUCOM
No. 957; that the mortgage contract is void and
unenforceable against private respondents. MOBIL PHILIPPINES v DIOCARES
FACTS:
ISSUES: The parties Mobil and Diocares entered an agreement
wherein on cash basis, Mobil will deliver minimum of 50k
1. WON HLURB has jurisdiction over the case? liters of petroleum a month. To secure this, diocares
2. WON the mortgage is valid? executed a Real Mortgage. Diocares failed to pay the balance
3. WON petitioner is a mortgagee in good faith and of their indebtedness and Mobil filed an action for the
since the titles on their face were free from any collection of the balance of the purchase amount or that the
claims, liens and encumbrances at the time of the Real Property mortgaged by Diocares be sold to a public
mortgage, it is not obliged under the law to go auction and the proceeds be applied to the payment of the
beyond the certificates of title registered under the obligation. LC did not grant foreclosure on the ground that
Torrens system and had every reason to rely on the the mortgage was not validly executed (not registered).
correctness and validity of those titles.?
ISSUE: WON failure to register the Real Mortgage would
HELD: render it invalid

1. HLURB has jurisdiction. The Court ruled in a prior SC: NO!

case that “the jurisdiction of the HLURB to regulate - If the instrument is not recorded, the mortgage is
the real estate trade is broad enough to include nevertheless binding between the parties. Its
jurisdiction over complaints for specific performance conclusion, however, is that what was thus created
of the sale, or annulment of the mortgage, of a was merely a “personal obligation but did not
condominium unit, with damages.” establish a real estate mortgage.”
2. THE MORTGAGE IS VOID. Under Section 18 of P.D. - The mere fact that there is as yet no compliance
No. 957, it is provided that no mortgage on any unit with the requirement that it be recorded cannot be a
or lot shall be made by the owner or developer bar to foreclosure
without prior written approval of the HLURB Such
approval shall not be granted unless it is shown that MCCULLOUGH v VELOSO
the proceeds of the mortgage loan shall be used for
the development of the condominium or subdivision FACTS:
project and effective measures have been provided
to ensure such utilization. Without the prior written 1) On March 23, 1920, the plaintiff McCullough & Co., sold to
approval of the HLURB, the latter has the jurisdiction Mariano Veloso the "McCullough Building," and the land
to annul the mortgage for being void. thereon, for the price of P700,000. Veloso paid P50,000 cash
3. Petitioner is NOT A MORTGAGEE IN GOOD FAITH. on account at the execution of the contract, leaving a balance
Petitioner knew that the loan it was extending to of P650,000 to be paid.
Garcia/TransAmerican was for the purpose of the

SECTRANS 2010/ ATTY. AGUINALDO 65

2) Veloso assumed also the obligation to insure the property B) The Mortgage Law in force at the promulgation of the Civil
for not less than P500,000, as well as to pay all legal taxes Code and referred to in the latter, provided, among other
that might be imposed upon the property, and in the event of things, that the debtor should not pay the debt upon its
his failure to do so, the plaintiff should pay said taxes at the maturity after a judicial or notarial demand for payment has
expense of Veloso, with the right to recover of him the been made by the creditor upon him. Accordingly, the
amounts thus paid, with interest at 7 per cent per year. To obligation of the new possessor to pay the debt originated
secure the payment of these amounts, Veloso mortgaged the only from the right of the creditor to demand payment of
property purchased him, it being necessary that a demand for payment should
have previously been made upon the debtor and the latter
3) It was, also, stipulated that in case of failure on the part of should have failed to pay.
Veloso to comply with any of the stipulations contained in the
mortgage deed, all the installments with the interest thereon C) The Civil Code imposes the obligation of the debtor to pay
shall become due, and the creditor shall then have the right the debt stand although the property mortgaged to secure
to bring the proper action for the collection of the unpaid the payment of said debt may have been transferred to a
part of the debt. third person.

4) On August 21, 1920, Mariano Veloso, in turn, sold the

property, with the improvements thereon for P100,00 to
Joaquin Serna, who agreed to respect the mortgage of the SANTIAGO v DIONISIO
property in favor of the plaintiff and to assume Mariano
Veloso's obligation to pay the plaintiff the balance due of the DOCTRINE: All persons having or claiming an interest in
price of the estate on the respective dates when payments the mortgaged premises subordinate in right to that of the
should be made according to the contract between Mariano holder of the mortgage should be made defendants in the
Veloso and the plaintiff. action for the foreclosure of the mortgage. Intervening as a
subordinate lienholder in a foreclosure case merely to oppose
5) Veloso paid P50,000 on account of the P650,000, and the confirmation of the sale upon learning that such a sale
Serna made several payments up to the total sum of had been made, is no the same as being a party to the suit to
P250,000. Subsequently, however, neither Veloso, nor Serna, the extent of being bound by the judgement in the
made any payment upon the last installments, by virtue of foreclosure suit.
which delay, the whole obligation became due, and Veloso
lost the right to the installments stipulated in his contract The effect of the failure to implead a subordinate
with the plaintiff. lienholder or subsequent purchaser or both is to render the
foreclosure ineffective as against them, with the result that
6) Upon a liquidation of the debt of Mariano Veloso in favor there remains in their favor the unforeclosed equity of
of the plaintiff, including the interest due, with the result that redemption.
Veloso owed exactly P510,047.34. Thus, the plaintiff brings
this action to recover of the defendant the sum due of
P510,047.34. The defendant contends however that having
sold the property to Serna, and the latter having assumed the PADERES v CA
obligation to pay the plaintiff the unpaid balance of the price Facts:
secured by the mortgage upon the property, he no more
obligation and it is upon Serna to pay the plaintiff.  Manila International Construction Corporation (MICC)
mortgaged 21 properties in favor of Banco Filipino (BF)
for a loan of P1.8M. The mortgaged was registered with
HELD:
the Registry of Deeds.
 2 of the lots were later sold to Spouses Paderes and
A) The mortgage is merely an encumbrance upon the Spouses Bergardo.
property and does not extinguish the title of the debtor, who  MICC failed to pay the loan.
does not, therefore, lose his principal attribute as owner, that  Without any redemption having been made within the
is, the right to dispose. the fact that the plaintiff recognized reglementary period, Banco Filipino foreclosed the
the efficaciousness of that sale cannot prejudice him, which properties extra judicially.
sale the defendant had the right to make and the plaintiff  BF won as the highest bidder in the auction sale.
cannot oppose and which, at all events, could not affect the  Paderes and Bergardo filed a petition stating that their
mortgage, since it follows the property whoever the right is superior than BF since they are buyers in good
possessor may be. faith and are still entitled to redeem.

SECTRANS 2010/ ATTY. AGUINALDO 66

Issue: WON Paderes and Bergardo has still rights over the After developing the area, on December 4, 1969,
properties? Laigo entered into a contract with Amable
Lumanlan, one of the petitioners, to construct for
Held:
the home buyers, 20 houses on the subdivision.
No. Sale or transfer cannot affect or release the mortgage. A Petitioner Lumanlan allegedly constructed 20
purchaser is necessarily bound to acknowledge and respect houses for the home buyers and for which he claims
the encumbrance to which is subjected the purchased thing a balance of P309,187.76 from the home buyers and
and which is at the disposal of the creditor in order that he, Laigo. Out of his claim, petitioner Lumanlan admits
under the terms of the contract, may recover the amount of that Mrs. Rhody Laigo paid him in several checks
his credit therefrom. totalling P124,855.00 but which checks were all
dishonoured. On December 29, 1969, Laigo entered
For a recorded real estate mortgage is a right in rem, a lien on
the property whoever its owner may be because the into a contract with petitioner Pepito Velasco to
personality of the owner is disregarded. The mortgage construct houses for the home buyers who agreed
subsists notwithstanding changes of ownership. The last with Velasco on the prices and the downpayment.
transferee is just as much of a debtor as the first one. A Petitioner Velasco constructed houses for various
mortgage lien is inseparable from the property mortgaged. home buyers, who individually agreed with
All subsequent purchasers thereof must respect the Velasco, as to the prices and the downpayment to be
mortgage, whether the transfer to them be with or without paid by the individual home buyers.When neither
the consent of the mortgagee. For the mortgage until
discharged, follows the property.
Laigo nor the individual home buyers paid for the
home constructed, Velasco wrote the GSIS to
With regard to the redemption period, it is settled that the intercede for the unpaid accounts of the home
buyer in a foreclosure sale becomes the absolute owner of buyers.
the property purchased if it is not redeemed during the
period of one year after the registration of the sale. As such, Issue: W/N GSIS is liable to the petitioners for the
he is entitled to the possession of the said property and can cost of the materials and labor furnished by them in
demand it any time following the consolidation of ownership
construction of the 63 houses now owned by the
in his name and the issuance to him of a new TCT. If the buyer
demands the possession of the property before the GSIS?
expiration period, he has to post a bond. No bond is required
after the redemption period if the property is not redeemed. Ruling: Yes. GSIS should pay the petitioners. GSIS
assumed ownership of the houses built by
petitioners and was benefited by the same. Art.
VELASCO v CA 2127, the mortgage extends to the natural
accessions, to the improvements, growing fruits,
Facts: November 10, 1965, Alta Farms secured rents.
from the GSIS a Three Million Two Hundred Fifty
Five Thousand Pesos (P3,255,000.00) loan and an
additional loan of Five Million Sixty-Two AFABLE v BELANDO
Thousand Pesos (P5,062,000.00) on October 5,
1967, to finance a piggery project. Alta Farms Afable brought a suit against Belando for an unpaid
promissory note. Judgment was rendered in favor of him and
defaulted in the payment because of this that Alta
because Belando has no money, the rents in her property was
Farms executed a Deed of Sale With Assumption of given to Afable. It turns out, before Afable filed a case for the
Mortgage with Asian Engineering Corporation on collection of money, another creditor of Belando, La Urbana,
July 10, 1969 but without the previous consent or already had a lien on the property because Belando borrowed
approval of the GSIS and in direct violation of the money from La Urbana and as a security, Belando mortgaged
provisions of the mortgage contracts. Even without the property being rented to La Urbana. La Urbana filed a
the approval of the Deed of Sale With Assumption petition to intervene in the case of Afable v Belando and
of Mortgage by the GSIS, Asian Engineering claims that since the property was mortgaged to them, they
also own the rents and the rents cannot be given to Afable.
Corporation executed an Exclusive Sales Agency, Issue: Won the contention of La Urbana is valid
Management and Administration Contract in favor
of Laigo Realty Corporation, with the intention of Ruling: Yes. The mortgage extends to the rents not yet
converting the piggery farm into a subdivision. received when the obligation becomes due. In this case,
SECTRANS 2010/ ATTY. AGUINALDO 67
because the property was mortgaged to La Urbana, they also Washington D.C. — a deed of mortgage covering five parcels
own the rents of the mortgaged property. of land together with all the buildings and other
improvements existing thereon and all the personal
Bank of America v American Realty properties of the mortgagor located in its place of business.

F: Petitioner Bank of America NT & SA (BANTSA) is an On the same date, DALCO executed a second mortgage on
international banking and financing institution Bank of the same properties in favor of ATLANTIC to secure payment
America International Limited (BAIL), on the other hand, is a of the unpaid balance of the sale price of the lumber
limited liability company organized and existing under the concession.
laws of England.
Both deeds contained the following provision extending the
BANTSA and BAIL on several occasions granted three major mortgage lien to properties to be subsequently acquired —
multi-million United States (US) Dollar loans to the following referred to hereafter as "after acquired properties" — by the
corporate borrowers and which are foreign affiliates of mortgagor:
private respondent. 3
All property of every nature and description taken in
Due to the default in the payment of the loan amortizations, exchange or replacement, and all buildings,
BANTSA and the corporate borrowers signed and entered machinery, fixtures, tools equipment and other
into restructuring agreements. As additional security for the property which the Mortgagor may hereafter
restructured loans, private respondent ARC (American Realty) acquire, construct, install, attach, or use in, to, upon,
as third party mortgagor executed two real estate or in connection with the premises, shall
mortgages, over its parcels of land including improvements immediately be and become subject to the lien of
thereon, located at Bulacan. this mortgage in the same manner and to the same
extent as if now included therein, and the Mortgagor
Eventually, the corporate borrowers defaulted in the shall from time to time during the existence of this
payment of the restructured loans prompting petitioner mortgage furnish the Mortgagee with an accurate
BANTSA to file civil actions before foreign courts for the inventory of such substituted and subsequently
collection. This includes the property of American Realty. acquired property.
Petitioners already filed collection cases in foreign courts. It
also filed an extrajudicial foreclosure on the property in Both mortgages were registered in the Office of the Register
Bulacan in which American Realty question because the of Deeds. In addition thereto DALCO and DAMCO pledged to
petitioners cannot file a case for collection and a case for the BANK 7,296 shares of stock of DALCO and 9,286 shares of
extrajudicial foreclosure at the same time. DAMCO to secure the same obligations.

Issue: Won the contention of respondents are valid Upon DALCO's and DAMCO's failure to pay the fifth
promissory note upon its maturity, the BANK paid the same
to the Export-Import Bank of Washington D.C., and the latter
Ruling: yes! The mortgagee cannot have both remedies. He
assigned to the former its credit and the first mortgage
has only one cause of action, i.e., non-payment of the
securing it. Subsequently, the BANK gave DALCO and DAMCO
mortgage debt; hence, he cannot split up his cause of action
up to April 1, 1953 to pay the overdue promissory note.
by filing a compliant for payment of the and another
complaint for foreclosure.
After July 13, 1950 — the date of execution of the mortgages
mentioned above — DALCO purchased various machineries,
PEOPLE’S BANK v DAHICAN LUMBER
equipment, spare parts and supplies in addition to, or in
replacement of some of those already owned and used by it
FACTS: On September 8, 1948, Atlantic Gulf & Pacific
on the date aforesaid. Pursuant to the provision of the
Company of Manila, a West Virginia corporation licensed to
mortgage deeds quoted theretofore regarding "after acquired
do business in the Philippines— hereinafter referred to as
properties," the BANK requested DALCO to submit complete
ATLANTIC — sold and assigned all its rights in the Dahican
lists of said properties but the latter failed to do so.
Lumber concession to Dahican Lumber Company —
hereinafter referred to as DALCO. Thereafter, to develop the
The alleged sales of equipment, spare parts and supplies by
concession, DALCO obtained various loans from the People's
CONNELL and DAMCO to It, was subsequently rescinded by
Bank & Trust Company.
the parties.
As security for the payment of the abovementioned loans,
The BANK, in its own behalf and that of ATLANTIC, demanded
DALCO executed in favor of the BANK — the latter acting for
that said agreements be cancelled but CONNELL and DAMCO
itself and as trustee for the Export-Import Bank of

SECTRANS 2010/ ATTY. AGUINALDO 68

refused to do so. As a result, ATLANTIC and the BANK that they were purchased in addition to, or in
commenced foreclosure proceedings. replacement of those already existing in the
premises on July 13, 1950. In Law, therefore, they
Main contentions of plaintiffs as appellants are the following:
must be deemed to have been immobilized, with the
that the "after acquired properties" were subject to the
deeds of mortgage mentioned heretofore; that said result that the real estate mortgages involved herein
properties were acquired from suppliers other than DAMCO — which were registered as such — did not have to
and CONNELL; that even granting that DAMCO and CONNELL be registered a second time as chattel mortgages in
were the real suppliers, the rescission of the sales to DALCO order to bind the "after acquired properties" .
could not prejudice the mortgage lien in favor of plaintiffs.

The defendants-appellants contend that the mortgages

aforesaid were null and void as regards the "after acquired PHIL SUGAR ESTATE v CAMPS
properties" of DALCO because they were not registered in FACTS:
accordance with the Chattel Mortgage Law.  Defendant executed and delivered to Plaintiff a
mortgage on certain real estate, which is particularly
ISSUES: described therein, including “the building erected
thereon,” in order to guarantee the payment of
1. are the so-called "after acquired properties" covered certain sum of money; Another mortgage upon the
by and subject to the deeds of mortgage subject of same property to secure the payment of an
foreclosure? additional sum of money
2. assuming that they are subject thereto, are the  Plaintiff commenced an action to recover said sums
and to foreclose said mortgages when neither of said
mortgages valid and binding on the properties
sums of money secured by said mortgages was fully
aforesaid inspite of the fact that they were not paid and satisfied
registered in accordance with the provisions of the  Def – denied; alleged that the sum of P3k included in
Chattel Mortgage Law? said mortgages for the payment of expenses was
excessive
RULING:  TC Judge Ostrand – ordered foreclosure of said
mortgages
1. it is crystal clear that all property of every nature and  While Sheriff tried to sell the property included in
description taken in exchange or replacement, as said mortgages, Def interposed an objection that a
well as all buildings, machineries, fixtures, tools, certain cinematograph which had been constructed
equipments, and other property that the mortgagor upon the property mortgaged was not included
therein and that it should not, therefore, be sold
may acquire, construct, install, attach; or use in, to
under said execution.
upon, or in connection with the premises — that is,  Despite objection, Sheriff sold the property
its lumber concession — "shall immediately be and mortgaged “together with the buildings erected
become subject to the lien" of both mortgages in the thereon”
same manner and to the same extent as if already  Def objected to the confirmation of said sale; said
included therein at the time of their execution. cinematograph in question was created by simply
Such stipulation is neither unlawful nor immoral, its reforming a building located on the land at the time
obvious purpose being to maintain, to the extent said mortgage was executed and delivered; that it
allowed by circumstances, the original value of the was not a new structure on said land; that it was the
properties given as security. Indeed, if such result of changing and altering a building already
properties were of the nature already referred to, it upon the land, for the purpose of making it into a
would be poor judgment on the part of the creditor cinematograph
who does not see to it that a similar provision is  TC Judge Harvey confirmed said sale
included in the contract.
2. the chattels were placed in the real properties ISSUE: WON the sale under execution by the sheriff of certain
real property including the buildings thereon should be
mortgaged to plaintiffs, they came within the
confirmed?
operation of Art. 415, paragraph 5 and Art. 2127 of
the New Civil Code. It is not disputed in the case at HELD: YES
bar that the "after acquired properties" were  Questions presented by Camps have been discussed
purchased by DALCO in connection with, and for use by this court and decided against his contention in
in the development of its lumber concession and
SECTRANS 2010/ ATTY. AGUINALDO 69
 the case of Bischoff v. Pomar and Compania General act of its registration, and entirely independent of such
de Tabacos. formality to such an extent that, if any question should arise
 In that case, this court discussed the very articles of over the contract between the assignor and the assignee, it
the Mortgage Law upon which Camps now seeks would have to be decided according to common law without
relief. In that case the Court said: need of previous registration of the title, which shows that a
credit secured by a mortgage may be assigned or alienated,
So that even though no mention had been and is a perfectly valid contract even if it were not registered.
made of said machinery and tramway in the
mortgage instrument, the mortgage of the Also, the registration of the assignment or alienation of a
property whereon they are located in credit secured by mortgage, required, among others, of the
understood by law to extend to them and Mortgage Law, is only necessary in order that it may be
they must be considered as included effectual as against third parties.
therein, as well as all other improvements,
unless there was an express stipulation
between the parties that they should be BPI v CONCEPCION
excluded.
LITONJUA v L&R CORPORATION
 IN THIS CASE: the buildings erected thereon" were
expressly included in the mortgage. Nothing in the FACTS:
form of buildings was exclude. The buildings, - Spouses Litonjua (P) obtained a loan from L & R
therefore, were manifestly included in the mortgage. Corporation (R) – Aug 6, 1974 (P200k) and Mar 27,
1978 (P200k) – which are secured by a mortgage on
TADY-Y v PNB 2 parcels of land owned by P
- However, P sold to Phil White House Auto Supply
PRUDENTIAL BANK v ALVIAR (PWHAS) the subject parcels of land, without prior
written consent of R, pursuant to the Mortgage
LOPEZ v ALVAREZ agreement that they have.
FACTS: Appellee Evaristo holds a lien over the estate of one - Upon default of P, R initiated an extrajudicial sale
Vicente Lopez as the latter executed a mortgage deed in favor and won the bidding.
of Evaristo. On April 5, 1904, Evaristo assigned his lien on the - P later on filed for redemption of the property but R
estate to appellant Manuel Lopez through a public refused to do accept the payment contending that P
instrument but the same was not registered in the Registry of violated the contract
Deeds. Appellee Grindrod is a creditor of Evaristo, to whom - R informed the Sheriff and Register of Deeds, stating:
the latter promised to pay his obligation through the sugar (1) that the sale of the mortgaged properties to
yielded by the hacienda, said agreement was entered into PWHAS was without its consent, in contravention of
July 7, 1900. But the hacienda was not able to increase the their Deed of Real Estate Mortgage; and (2) that it
sugar it yielded and defendant On August 5, 1904, Grindrod was not the spouses Litonjua, but PWHAS, who was
who feared of not getting paid obtained a preliminary seeking to redeem the foreclosed properties,
attachment over all the property of Evaristo including the lien - Register of Deeds issued TCT in favor of R
that was assigned to appellant. The same was registered on - A complaint for Quieting of Title, Annulment of Title
August 12, 1904. A dispute arised over the rightful owner of and Damages with preliminary injunction was filed
the lien, defendant’s main contention is that since the by the spouses Litonjua and PWHAS against R
assignment made to Lopez was not registered it is not binding - LC ruled in favor of R and affirmed by CA
and has no effect.
ISSUE: WON paragraphs 8 and 9 of the Real Estate Mortgage
ISSUE: WON THE ASSIGNMENT OF A MORTGAGE CREDIT are valid and enforceable;
NEED TO BE REGISTERED FOR IT TO BE VALID AND
EFFECTIVE? SC: NO!
- Art. 2130 – stipulation forbidding alienation of
HELD: NO. Although the Civil Code provides that “ A mortgage mortgaged property is VOID
credit may be alienated or assigned to a third person, wholly - A real mortgage is merely an encumbrance; it does
or partially, with the formalities required by law”, the fact not extinguish the title of the debtor, whose right to
that such assignment was not registered in the property dispose — a principal attribute of ownership — is
register is no obstacle to the transfer of the dominion or not thereby lost. Thus, a mortgagor had every right
ownership of said credit in the sum therein stated in favor of to sell his mortgaged property, which right the
Lopez. In as much as the assignment or alienation of a credit, mortgagee cannot oppose.
made by the owner thereof in favor of another, is prior to the
SECTRANS 2010/ ATTY. AGUINALDO 70
 - Although the provision does not absolutely prohibit claimed that the original title, was entrusted to a certain Atty.
the mortgagor from selling his mortgaged property; Reynaldo Singson preparatory to its administrative
but what it does not outrightly prohibit, it reconstitution after a fire gutted the Quezon City Hall
nevertheless achieves. building. Mortgagor Leopoldo, private respondent Fermina's
- For all intents and purposes, the stipulation son, obtained the property from Atty. Singson, had the title
practically gives the mortgagee the sole prerogative reconstituted under his name without private respondents'
to prevent any sale of the mortgaged property to a knowledge, executed an ante-dated deed of sale in his favor
third party. and mortgaged the property to UNIONBANK.
- The mortgagee can simply withhold its consent and
thereby, prevent the mortgagor from selling the 6) On December 1994, the RTC admitted the aforementioned
property. This creates an unconscionable advantage amended complaint. UNIONBANK filed its answer ad
for the mortgagee and amounts to a virtual cautelam asserting its status as an innocent mortgagee for
prohibition on the owner to sell his mortgaged value whose right or lien upon the property mortgaged must
property. In other words, stipulations like those be respected even if, the mortgagor obtained his title through
covered by paragraph 8 (requiring P to acquire prior fraud. It also averred that the action had become "moot and
consent of R before alienating the property) of the academic by the consolidation of the foreclosed property on
subject Deed of Real Estate Mortgage circumvent 24 October 1994" in its name.
the law, specifically, Article 2130 of the New Civil
Code. 7) On appeal, the CA nullified the consolidation of ownership,
- Being contrary to law, paragraph 8 of the subject which was the prior judgment in the RTC, ordered the
Deed of Real Estate Mortgage is not binding upon Register of Deeds to cancel the certificate of title in
the parties. UNIONBANK's name and to reinstate TCT of respondents.

ISSUE: Whether UNIONBANK is a mortgagee in good faith and

UNION BANK v CA for value with a right to consolidate ownership over the
foreclosed property with the redemption period having
FACTS: expired and there having been no redemptioners.

1) A real estate mortgage was executed on December 1991 HELD:

by spouses Dario (hereafter mortgagors) in favor of
UNIONBANK to secure a P3 million loan which covered a A) The SC disagrees with the CA’s judgment that
Quezon City property in Leopoldo Dario's name and was consolidation deprived private respondents of their property
annotated on the title. For non-payment of the principal without due process. Because the buyer in a foreclosure sale
obligation, UNIONBANK extrajudicially foreclosed the becomes the absolute owner of the property purchased if it is
property mortgaged on August 1993 and sold the same at not redeemed during the period of one year after the
public auction, with itself posting the highest bid. registration of the sale. In effect, consolidation took place as a
matter of right since there was no redemption of the
2) One week before the one-year redemption period expired, foreclosed property and the TRO expired upon dismissal of
private respondents filed a complaint with the RTC against the complaint.
the mortgagors, UNIONBANK and the Register of Deeds
annulment of sale and real estate mortgage reconveyance C) UNIONBANK need not have informed private respondent
and prayer for restraining notice of lis pendens was annotated that it was consolidaint its title over the property, upon the
on the title. expiration of the redemption period, without the judgment
debtor having made use of his right of redemption, the
3) On October 1994, the RTC issued a TRO enjoining the ownership of the property sold becomes consolidated in the
redemption of property within the statutory period and its purchaser. Upon failure to redeem foreclosed realty,
consolidation under UNIONBANK's name. consolidation of title becomes a matter of right on the part of
the auction buyer, and the issuance of a certificate of title in
4) Without notifying private respondents, UNIONBANK favor of the purchaser becomes ministerial upon the Register
consolidated its title over the foreclosed property on October of Deeds.
1994, UNIONBANK's name was issued in the new TCT.
C) At any rate, the consolidation of ownership over the
5) Private respondents filed an amended complaint, alleging mortgaged property in favor of UNIONBANK and the issuance
that they, not the mortgagors, are the true owners of the of a new title in its name during the pendency of an action for
property mortgaged and insisting on the invalidity of both the annulment and reconveyance will not cause injury to private
mortgage and its subsequent extrajudicial foreclosure. They respondents because as purchaser at a public auction,

SECTRANS 2010/ ATTY. AGUINALDO 71

UNIONBANK is only substituted to and acquires the right, Held:
title, interest and claim of the judgment debtors or
mortgagors to the property at the time of levy. With the main Yes. The mortgage contract states that petitioner may resort
action for reconveyance pending before the RTC, the notice to either judicial or extrajudicial foreclosure in case of default.
of lis pendens, sufficiently protects private respondents Petitioner opted for extrajudicial foreclosure. However, both
interest over the property. Thus the Decision of the Court of the trial court and the CA declared that the extrajudicial
Appeals is REVERSED and SET ASIDE. The order of the trial foreclosure void for being premature. For all intents and
court dated 7 August 1999, declaring UNIONBANK's prayer purposes, there has been no foreclosure. Therefore, this
for writ of preliminary injunction moot and academic, is Court or any court cannot issue a writ of execution to
hereby REINSTATED. Let this case be remanded to the judicially foreclose the property.
Regional Trial Court for trial on the merits.
FIESTAN v CA
DBP v LICUANAN
Facts: Dionisio Fiestan and Juanita Arconada
DOCTRINE: All persons having or claiming an interest in owners of a parcel of land (Lot No. 2B) situated in
the mortgaged premises subordinate in right to that of the Ilocos Sur covered by TCT T-13218 which they
holder of the mortgage should be made defendants in the
mortgaged to the Development Bank of the
action for the foreclosure of the mortgage. Intervening as a
subordinate lienholder in a foreclosure case merely to oppose Philippines (DBP) as security for their P22,400.00
the confirmation of the sale upon learning that such a sale loan. Lot No. 2-B was acquired by the DBP as the
had been made, is no the same as being a party to the suit to highest bidder at a public auction sale on August 6,
the extent of being bound by the judgement in the 1979 after it was extrajudicially foreclosed by the
foreclosure suit. DBP in accordance with Act No. 3135, as amended
by Act No. 4118, for failure of petitioners to pay
The effect of the failure to implead a subordinate their mortgage indebtedness. On April 13,1982, the
lienholder or subsequent purchaser or both is to render the
foreclosure ineffective as against them, with the result that
DBP sold the lot to Francisco Peria in a Deed of
there remains in their favor the unforeclosed equity of Absolute Sale. Francisco Peria mortgaged said lot to
redemption. the PNB Vigan Branch as security for his loan of
P115,000.00 as required by the bank to increase his
original loan from P49,000.00 to P66,000.00 until it
DBP v GO finally reached the approved amount of
Facts: P115,000.00. Since petitioners were still in
possession of Lot No. 2-B, the Provincial Sheriff
 In 1982, Go obtained a loan from DBP evidenced by two
promissory notes, one for 194K payable quarterly for 5 ordered them to vacate the premises.
years and the other 300K payable quarterly for 7 years.
 He mortgaged his real and personal property. Issue: W/N there was a valid extrajudicial
 A contract provision states that DBP can unilaterally foreclosure sale?
increase the interest rate and requires Go to insure the
mortgaged properties. Ruling: Yes. The formalities of a levy, as an
 DBP increased its interest rate to 35% then lowered it to
essential requisite of a valid execution sale under
29%.
 Go failed to pay the loan.
Section 15 of Rule 39 and a valid attachment lien
 In 1986, DBP extrajudicially foreclosed the property and under Rule 57 of the Rules of Court, are not basic
was declared the winner as the highest bidder in the requirements before an extrajudicially foreclosed
auction sale. property can be sold at public auction. The case at
 Go filed an action to annul the auction sale. bar, as the facts disclose, involves an extrajudicial
 Both RTC and CA declared that the extrajudicial foreclosure sale. Act No. 3135, as amended by Act
foreclosure was void because loan has not yet mature at No. 4118 otherwise known as "An Act to Regulate
the time of the foreclosure sale (the foreclosure was
the Sale of Property under Special Powers Inserted
done less than 5 years from the execution of the
contract). in or Annexed to Real Estate Mortgages" applies in
cases of extrajudicial foreclosure sale.

Issue: WON the extrajudicial foreclosure should be

declared null and void?

SECTRANS 2010/ ATTY. AGUINALDO 72

 of the Executive Judge. Dismissal of the subject
BANK OF AMERICA v AMERICAN REALTY petition is recommended

CHIENG v SPOUSE SANTOS  TC – denied request for extrajudicial foreclosure of

the subject condo unit and dismissed the petition; It
FIRST MARBELLA v GATMAYTAN not within the authority of Exec. Judge to supervise
FACTS: and approve the extrajudicial foreclosures of
 R is the registered owner of Fontavilla No. 501 mortgage
(condo unit), Marbella I Condominium, Roxas Blvd
under CCT No. 1972 ISSUE: WON P has a right to file a petition for extrajudicial
 P filed a Petition for Extradudicial foreclosure of the foreclosure?
condominium unit of R and alleged that P is a duly
organized association of the tenants and HELD: NO
homeowners of Marbella I Condominium; that R is a  In order to avail itself of a writ of mandamus,
member thereof but has unpaid association dues petitioner must establish that it has a clear right to
amounting to P3.2mill; that R refused to to pay his the extrajudicial foreclosure sale of the
dues despite demand condominium unit of respondent. Under Circular No.
 P - that it is expressly provided under Section 20 of 7-2002, implementing Supreme Court Administrative
Republic Act (R.A.) No. 4726 that it has the right to Matter No. 99-10-05-0, it is mandatory that a
cause the extrajudicial foreclosure of its annotated petition for extrajudicial foreclosure be supported by
lien on the condominium unit. Its petition then is evidence that petitioner holds a special power or
cognizable by the RTC under Administrative Matter authority to foreclose
No. 99-10-05  Without proof of petitioner's special authority to
 R – objected to P's right to file the petition for extra- foreclose, the Clerk of Court as Ex-Oficio Sheriff is
judicial foreclosure, pointing out that the latter does precluded from acting on the application for
not hold a real estate mortgage on the condominium extrajudicial foreclosure
unit or a special power of attorney to cause the  IN THIS CASE: the only basis of petitioner for causing
extra-judicial foreclosure sale of said unit. the extrajudicial foreclosure of the condominium
- there is even a pending litigation regarding the unit of respondent is a notice of assessment
validity of petitioner's constitution as a annotated on CCT No. 1972 in accordance with
homeowners association and its authority to Section 20 of R.A. No. 4726. However, neither
assess association dues, annotate unpaid annotation nor law vests it with sufficient authority
assessments on condominium titles and enforce to foreclose on the property
the same through extrajudicial foreclosure sale  The notice of assessment contains no provision for
 Clerk of Court, as Ex-Officio Sheriff, recommended to the extrajudicial foreclosure of the condominium
RTC Exec. Judge : unit. All that it states is that the assessment of
petitioner against respondent for unpaid association
Under the facts given, no mortgage exists between dues constitutes a "first lien against [the]
the petitioner and respondent. Evidently, it is not condominium unit
one of those contemplated under Act 3135 as  Section 20 of RA 4726 does not grant P special
amended by Act 4118. The allegation simply does authority to foreclose. It merely prescribes the
not show a mortgagor-mortgagee relationship since procedure by which petitioner's claim may be
respondent liability arises from his failure to pay treated as a superior lien - i.e., through the
dues, assessments and charges due to the petitioner. annotation thereof on the title of the condominium
unit.
As clearly stated, the authority of the Executive  While the law also grants petitioner the option to
Judge under Administrative Matter No. 99-10-05-0, enforce said lien through either the judicial or
as amended dated March 1, 2001, covers extra- extrajudicial foreclosure sale of the condominium
judicial foreclosure of real estate mortgages under unit, Section 20 does not by itself, ipso facto,
R.A. No. 3135 and chattel mortgages under P.D. No. authorize judicial as extra-judicial foreclosure of the
1508. There is nothing in the above mentioned condominium unit. Petitioner may avail itself of
Circular which authorizes the Executive Judge and/or either option only in the manner provided for by the
the Ex-Officio Sheriff to extra judicially foreclose governing law and rules. As already pointed out,
properties covered by obligations other than the said A.M. No. No. 99-10-05-0, as implemented under
mortgages. Hence, the subject petition is not proper Circular No. 7-2002, requires that petitioner furnish
for extra-judicial foreclosure under the supervision evidence of its special authority to cause the
extrajudicial foreclosure of the condominium unit.

SECTRANS 2010/ ATTY. AGUINALDO 73

 LANGKAAN REALTY v UCPB precluded from exacting additional requirements. In
the case at bar, it was stipulated that notice should
BOHANAN v CA be served to the mortgagor. When petitioner failed
to send the notice of foreclosure sale to respondent,
METROBANK v WONG he committed a contractual breach sufficient to
FACTS: Mindanao Grains, Inc. applied for a credit render the foreclosure sale null and void.
accommodation with petitioner. As security for such credit 2. The general rule is that non-compliance with the
accommodation, respondent Wong executed a real estate posting requirement is fatal to the validity of the
mortgage in favor of petitioner. Due to MGI’s failure to pay foreclosure proceedings. The Olizon case was an
the obligation, petitioner filed an application for extrajudicial exception due to the unusual nature of the
foreclosure which was published in Pagadian Times once, for attendant facts and peculiarity of the confluent
three consecutive weeks setting the date for the auction sale. circumstances which are not present in the instant
No notice was posted in the municipality or city where the case. While the law recognizes the right of the bank
mortgaged property was situated. The auction sale to foreclose a mortgage upon the mortgagor’s
proceeded and petitioner was adjudged as the sole and failure to pay his obligation, it is important that such
highest bidder. After the expiration of the one year right be exercised according to its clear mandate.
redemption period, ownership was consolidated and TCT Each and every requirement of the law must be
correspondingly issued in the name of petitioner. complied with

PNB v CA

Respondent unaware of the foregoing developments, applied PNB v NEPOMUCENO PRODUCTIONS, INC.
for a credit accommodation with another bank, only to find FACTS:
out that his property was already foreclosed by petitioner. PNB granted respondents (R) a credit line to finance the
Respondent filed a case assailing the validity of the filming of the movie “Pacific Connection”. The loan was
extrajudicial foreclosure on the ground that petitioner did not secured by mortgages on R’s real and personal properties
comply with the procedural requirements of law. (Malugay property, Forbes Park Property and motion picture
equipments). However, R defaulted in their obligation. PNB
sought foreclosure of the mortgaged properties where pNB
was the highest bidder. R filed for annulment of foreclosure
Petitioner on the other hand justifies his claim by citing Olizon sale since it is null and void for lack of publication of the
v. CA, (1) that its failure to comply with the posting notice of sale. LC annulled foreclosure.
requirement did not necessarily result in the nullification of
the foreclosure sale since it complied with the publication ISSUE: WoN the foreclosure sale was valid despite lack of
requirement; and (2) that personal notice of the foreclosure publication
proceedings to respondent is not a condition sine qua non for
its validity. SC: NO!
- Act 3135, governing EJF of mortgages on real
property is specific with regard to the posting and
publication requirements of the notice of sale, which
ISSUE: 1. WON PERSONAL NOTICE TO RESPONDENT IS A requires:
CONDITION SINE QUA NON TO THE VALIDITY OF THE o Posting of notices of sale in 3 public places
FORECLOSURE PROCEEDINGS? o Publication of the same in a newspaper of
general circulation.
2. WON PETITIONER’S NON-COMPLIANCE WITH THE o FAILURE TO PUBLISH the notice of sale
POSTING REQUIREMENT IS FATAL TO THE VALIDITY OF THE constitutes a jurisdictional defect, which
FORECLOSURE PROCEEDINGS? INVALIDATES the sale.
- RE: WAIVER OF PUBLICATION REQUIREMENTS
o PNB and R have absolutely NO RIGHT to
waive the posting and publication
HELD: requirements of the law.
o The principal object of a notice of sale in a
1. Section 3 of Act no. 3135 only requires: (1) the foreclosure of mortgage is not so much to
posting of notices of sale in three public places, and notify the mortgagor as to inform the public
(2) the publication of the same in a newspaper of generally of the nature and condition of the
general circulation. Personal notice to the mortgagor property to be sold, and of the time, place
is not necessary. Nevertheless, the parties are not and terms of the sale

SECTRANS 2010/ ATTY. AGUINALDO 74

 - Notice is given to secure bidders and prevent a period provided by law is valid, without regard to the
sacrifice of the property duration or length of time it took the auctioneer to conduct
- Statutory requirement of Publication is mandatory the proceedings. Since it was conducted within the time
not for the mortgagor’s benefit, but for the public or frame provided by law, the sale was valid.
3rd persons.

PNB v SPOUSES CABATINGAN MONZON v RELOVA

FACTS:
DOCTRINE: Any person having a lien on the property
1) Respondent spouses Cabatingan obtained two loans, subsequent to the mortgage or deed of trust under which the
secured by a real estate mortgage, in the total amount of property is sold, may redeem the same at any time within the
P421,200 from petitioner PNB. They were unable to fully pay term of one year from and after the date of sale.
their obligation despite having been granted more than
enough time to do so. Even if, for the sake of argument, Rule 68 is to be
applied to extrajudicial foreclosure of mortgages, such right
2) Thus, PNB extrajudicially foreclosed on the mortgage. can only be given to second mortgagees who are made
Thereafter, a notice of extrajudicial sale was issued. Pursuant parties to the (judicial) foreclosure. While a second
to this, the properties were sold at public auction on mortgagee is a proper and in a sense even a necessary party
November 5, 1991. PNB was the highest bidder. to a proceeding to foreclose a first mortgage on real
property, he is not an indispensable party, because a valid
3) On March 16, 1993, respondent spouses filed in decree may be made, as between the mortgagor and the first
the RTC a complaint for annulment of extrajudicial mortgagee, without regard to the second mortgagee; but the
foreclosure of real estate mortgage and the consequence of a failure to make the second mortgagee a
November 5, 1991 auction sale. party to the proceeding is that the lien of the second
mortgagee on the equity of redemption is not affected by the
4) Petitioners claimed that the provisions of ACT no. 3135 decree of foreclosure.
must be observed strictly. Thus, because the public auction of
the foreclosed properties was held for only 20 minutes SAGUAN v PBCOM
(instead of seven hours as required by law), the consequent Facts:
sale was void. Thus, the RTC issued an order annulling the
sale at public auction.  Saguan obtained a loan of 3M from PBC and mortgaged
his 5 lands.
ISSUE: Whether a sale at public auction, to be valid, must be  Saguan defaulted.
conducted the whole day from 9:00 a.m. until 4:00 p.m. of  PBC extrajudicially foreclosed the property and won as
the scheduled auction day. the highest bidder in the auction sale.
 Because Saguan failed to redeem, the properties were
HELD: consolidated in the name of PBC which later on filed a
writ of possession.
A) Section 4 of Act 3135 provides that the sale must  Saguan filed an opposition since PBC failed to return the
take place between the hours of nine in the excess amount of the extrajudicial foreclosure sale.
morning and four in the afternoon.  PBC points to Saguan’s remaining unsecured obligations
with the former to which the excess or surplus proceeds
B) A creditor may foreclose on a real estate mortgage only if were applied.
the debtor fails to pay the principal obligation when it falls
due. But the foreclosure of a mortgage does not extinguish a Issue:
debtor’s obligation to his creditor. The proceeds of a sale at
public auction may not be sufficient to extinguish the liability 1) WON the writ of possession should be issued?
of the former to the latter. For this reason, Section 4 of Act 2) WON PBC may unilaterally apply the excess proceeds to
3135 should be construed in such a way that affords the petitioner’s remaining unsecured obligations?
creditor greater opportunity to satisfy his claim without
unduly rewarding the debtor for not paying his just debt.
Held:
C) The word “between” ordinarily means “in the time interval
that separates.” Thus, “between the hours of nine in the 1) Yes. A writ of possession is an order enforcing a
morning and four in the afternoon” merely provides a time judgment to allow a person’s recovery of possession of
frame within which an auction sale may be conducted. real or personal property. This writ may be issued either
Therefore, a sale at public auction held within the intervening 1) within the one-year redemption period, upon filing of

SECTRANS 2010/ ATTY. AGUINALDO 75

 the bond, 2) after the lapse of the redemption period, Issue: Whether or not the cause of action is barred by
without the need of a bond. prescription.

Held: An action upon a written contract, an obligation created

In this case, the issuance of RTC of a writ of possession in by law, and a judgment must be brought within 10 years from
favor of PBC is proper since the redemption period has the time the right of action accrues.
already expired. The duty of the trial court to grant a writ The finding of the trial court that more than ten years had
of possession in such instances is ministerial, and the elapsed since the right to bring an action on the Bank’s first to
court may not exercise discretion or judgment. Even if sixth causes had arisen is not disputed. The Bank contends,
the excess proceeds were not returned to the petitioner, however, that the notices of foreclosure sale in the
the writ is still valid. foreclosure proceedings of 1965 are tantamount to formal
demands upon petitioners for the payment of their past due
loan obligations with the Bank; hence, said notices of
foreclosure sale interrupted the running of the prescriptive
A party may file a petition to set aside the foreclosure period.
sale to cancel the writ of possession in the same The Bank’s contention has no merit. Prescription of actions is
proceeding where the writ was requested. However, in interrupted when they are filed before the court, when there
this case, petitioners do not challenge the validity of the is a written extrajudicial demand by the creditors, and when
foreclosure only the contention that the excess proceeds there is any written acknowledgment of the debt by the
were not returned to them. debtor.
The law specifically requires a written extrajudicial demand
by the creditor which is absent in the case at bar. The
contention that the notices of foreclosure are tantamount to
2) No. The foreclosure of petitioner’s properties was meant a written extrajudicial demand cannot be appreciated, the
to answer only the obligation secured by the mortgage. contents of said notices not having been brought to light.
Even if the petitioners have remaining obligations with But even assuming that the notices interrupted the running of
the respondent, these obligations were not collateralized the prescriptive period, the argument would still not lie for
by the foreclosed mortgage. the following reasons:
The Bank seeks the recovery of the deficient amount of the
obligation after the foreclosure of the mortgage. Such suit is
The petitioners’ remedy lies in a separate civil action for in the nature of a mortgage action because its purpose is to
collection of a sum of money and not an action to set enforce the mortgage contract. A mortgage action prescribes
aside the foreclosure sale. after ten years from the time the right of action accrued.
The law gives the mortgagee the right to claim for the
SUICO v CA deficiency resulting from the price obtained in the sale of the
property at public auction and the outstanding obligation
QUIRINO GONZALES v CA proceedings. In the present case, the Bank, as mortgagee,
had the right to claim payment of the deficiency after it had
Facts: Petitioners applied for credit accommodations with foreclosed the mortgage in 1965. as it filed the complaint
respondent bank, which the bank approved granting a credit only on January 27, 1977, more than ten years had already
line of Php900,000.00. Petitioner’s obligations were secured elapsed, hence, the action had then prescribed.
by a real estate mortgage on four parcels of land. Also,
petitioners had made certain advances in separate
transactions from the bank in connection with QGLC’s PIANO v CAYANONG
exportation of logs and executed a promissory note in 1964.
Due to petitioner’s long default in the payment of their FACTS: On March 17, 1952, the plaintiffs commenced an
obligations under the credit line, the bank foreclosed the action to foreclose a mortgage executed by the defendant in
mortgage and sold the properties covered to the highest favor of the plaintiffs upon a parcel of land. The parties-
bidder in the auction. Respondent bank, alleging non- litigant submitted a compromise agreement.
payment of the balance of QGLC’s obligation after the The defendant failed to pay the obligation within the period
proceedings of the foreclosure sale were applied and non- set by the Court; so the property in question was sold at
payment of promissory notes despite repeated demands, public auction on Jan. 30, 1952(should be 1953) per order of
filed a complaint for sum of money against petitioners. the court, by the deputy sheriff of Maasin, Leyte, to the
Petitioners, on the other hand, asserted that the complaint plaintiffs, they being the only bidders for P2,475.
states no cause of action and assuming that it does, the same The certificate of sheriff's sale contained the provision that
is barred by prescription or void for want of consideration. the said property is subject "to redemption within one year
from the date hereof in the manner provided by the law

SECTRANS 2010/ ATTY. AGUINALDO 76

applicable to the case." On March 11, 1953, the plaintiffs filed mortgage of their parcel of land at Muntinlupa;
a motion for the confirmation of the sale executed by the obtained again another loan P 1mill and was granted
sheriff, which was unopposed by the defendant. The sale was by R with an amendment of real estate mortgage
confirmed by the Court on March 21, 1953.  P defaulted and refused to comply with their
Thereafter, the plaintiffs filed a petition for writ of obligation despite repeated demands
possession; by virtue of such petition the court adjudicated  R filed a petition for the extrajudicial foreclosure of
possession to the plaintiffs on Aug. 15, 1953. On Aug. 20, the mortgage. Mortgaged property was sold in a
1953, the deputy clerk issued the writ of possesion prayed for public auction with R as highest bidder. R registered
by the plaintiffs. sheriff’s certificate of sale.
On Jan. 26, 1954, the defendant deposited with the court the  P filed a complaint for annulment of the extrajudicial
sum of P2,783.93, P2,772 of which was in the concept of foreclosure and auction sale and alleged that said
redemption deposit to be delivered to Generosa Cayanong foreclosure and auction sale were null and void for
and her husband. failure to comply with requirements of notice and
The oppositor Francisco Pilapil, on Feb. 11, 1954, filed an publication; the mortgaged property was illegally
opposition to the defendants' motion of Jan. 26, 1954, foreclosed; application for consolidation of title was
claiming that the property, subject of foreclosure, having premature because the R’s Husband granted them
been sold at a judicial foreclosure sale, was not subject to an extension of the period of redemption
redemption after the judicial sale was confirmed, title thereto  TC – granted R’s Motion to Dismiss; action already
having been fully vested and consolidated in favor of barred by laches. CA affirmed
Cayanong and Bellones, their assignees and successors-in-
interest. ISSUE: WON the extrajudicial foreclosure and public auction
sale of the subject parcel of land are valid and lawful?

ISSUE: Whether the property subject of foreclosure, having HELD: YES

been sold at a judicial foreclosure sale is subject to  Records indubitably show that at the time of the
redemption after the judicial sale was confirmed. foreclosure sale on 11 August 1993, petitioners were
already in default in their loan obligation to
RULING: respondent Carmencita San Diego.
In a foreclosure of mortgage under Rule 70 of the Rules of  A final notice of demand for payment had been sent
Court, there is no right of redemption after the sale is to them, despite which they still failed to pay.
confirmed, although there is an equity of redemption in favor Hence, respondent Carmencita San Diego’s resort to
of the mortgagor or junior encumbrancer, consisting in the extrajudicial foreclosure, provided no less in the
right to redeem the mortgaged property within the 90-day parties’ “Amendment of Real Estate Mortgage”.
period, or even thereafter, but before the confirmation of the  The rule has been, and still is, that in real estate
sale. mortgage, when the principal obligation is not paid
when due, the mortgagee has the right to foreclose
It is only in cases of foreclosures of mortgages in favor of on the mortgage and to have the mortgaged
banking and credit institutions (Sec. 76, General Banking Act property seized and sold with the view of applying
[Rep. Act 337]), to the Philippine National Bank (Acts Nos. the proceeds thereof to the payment of the
2747, and 2938), and in extrajudicial foreclosures (Act 3135 obligation
as amended by Act 4118), where, by express provision, the  IN THIS CASE: The validity of the extrajudicial
law allows redemption. In all other foreclosure cases, there is foreclosure on 11 August 1993 was virtually
no legal redemption. confirmed by the trial court when it dismissed
petitioners’ complaint, and rightly so, what with the
The sheriff, therefore, has no authority to grant or insert a fact that petitioners failed to exercise their right of
period of redemption in the certificate of sale, when the redemption within the 1-year period therefor
same is conducted pursuant to Rule 70 and, wanting in said counted from the registration of the sheriff’s
authority, any insertion therein has no validity and effect. certificate of sale.
Once the judicial sale is confirmed by the court, the rights are  It appears from the evidence on record that despite
vested in the purchaser (Sec. 3, Rule 70). due notice and publication of the same in a
newspaper of general, P did not bother to attend the
foreclosure sale nor raise any question regarding the
propriety of the sale.
LANDRITO v CA  It was only on November 9, 1994, or more than one
FACTS: year from the registration of the Sheriff’s Certificate
 P obtained a loan of P350k from R and secured of Sale, that P filed the instant complaint. Clearly, P
payment by executing a deed of real estate had slept on their rights and are therefore guilty of

SECTRANS 2010/ ATTY. AGUINALDO 77

 laches, which is defined as the failure or neglect for mortgaged property to which petitioner Ramirez filed an
an unreasonable or explained length of time to do adverse claim.
that which, by exercising due diligence, could or
should have been done earlier, failure of which gives ISSUE:
rise to the presumption that the person possessed of
the right or privilege has abandoned or has declined 1. Whether Ramirez had acquired any right by virtue of
to assert the same. her having redeemed the property in question
 In Lazo v. Republic Surety & Insurance Co., Inc., this beyond the one-year redemption period?
Court has made it clear that it is only where, by 2. What will be the effect of the redemption by
voluntary agreement of the parties, consisting of Ramirez on private respondent Marmeto?
extensions of the redemption period, followed by
commitment by the debtor to pay the redemption HELD:
price at a fixed date, will the concept of legal
redemption be converted into one of conventional 1. Yes, by accepting the redemption price after the
redemption. statutory period for redemption had expired, PNB is
 IN THIS CASE: There is no showing whatsoever that considered to have waived the one (1) year period
petitioners agreed to pay the redemption price on or within which Ramirez could redeem the property.
before 11 November 1994, as allegedly set by Mrs. There is nothing in the law which prevents such a
San Diego’s husband. On the contrary, their act of waiver. Allowing a redemption after the lapse of the
filing their complaint on 09 November 1994 to statutory period, when the buyer at the foreclosure
declare the nullity of the foreclosure sale is does not object but even consents to the
indicative of their refusal to pay the redemption redemption, will uphold the policy of the law. Thus,
price on the alleged deadline set by the husband. At there is no doubt that the redemption made by
the very least, if they so believed that their loan petitioner Ramirez is valid.
obligation was only for P1,000,000.00, petitioners 2. The rule is well settled that a second mortgagee
should have made an offer to redeem within one (1) merely takes what is called an equity of redemption
year from the registration of the sheriff’s certificate and thus a second mortgagee has to wait until after
of sale, together with a tender of the same amount. the debtor's obligation to the first mortgagee has
This, they never did. been fully settled. The rights of a second mortgagee
are strictly subordinate to the superior lien of the
METROBANK v TAN first mortgagee. In the case at bar, the proper
foreclosure of the first mortgage gave, not only the
IBAAN RURAL BANK v CA first mortgagor, but also subsequent lien holders like
Marmeto, the right to redeem the property within
RAMIREZ v CA the statutory period. Marmeto failed to make the
FACTS: One Ronnie Garcia executed a first mortgage over a redemption but instead it was the petitioner who
parcel of land in favor of PNB as a security for a loan granted made such redemption.
by PNB. The deed was registered with the Register of Deeds
and annotated in the title of the mortgaged property. During
the subsistence of the first mortgage, Ronnie executed a TOLENTINO v CA
second mortgage over the same property in favor of private
respondent Marmeto which was also recorded on the title. SPOUSES OLIVEROS v PRESIDING JUDGE
For failure to pay his loan, PNB extra-judicially foreclosed the FACTS:
mortgage and a Certificate of Sale was issued in its favor on The mortgagors (P) obtained 2 loans for the construction of
Nov. 8, 1977. The second mortgage was also extra-judicially the Cabuyao Commercial Complex for P58M as evidenced by
foreclosed and a Certificate of Sale was issued in favor of promissory notes from Metrobank (R). To secure the loans,
Marmeto on June 27, 1978. Spouses Oliveros and Nevalga executed a Deed of Real Estate
Mortgage in favor of Metrobank over the 3 parcels of land
On February 1980, Ronnie executed a “Waiver and together with all the buildings and improvements existing
Renunciation of Rights” with respect to his right of thereon. Due to the failure of mortgagors to pay their loan,
redemption with respect to the first mortgage in favor of his Metrobank instituted an EJF over the Real Estate Mortgage.
father. The latter assigned his right to petitioner Nimfa Metrobank won the bid. Mortgagors failed to redeem the
Ramirez, who in turn paid the total redemption price to PNB property hence, Metrobank consolidated its title to the
which accepted it. Meanwhile, Ronnie having not exercised subject property. Metrobank demanded P to turn over the
his right of redemption over the second mortgage, Marmeto actual possession of the property but the mortgagors failed
filed in court for the Consolidation of Ownership over the and refused to do so. Metrobank filed a writ of possession
which the Petitioner Spouses opposed claiming thata pending

SECTRANS 2010/ ATTY. AGUINALDO 78

case was in another court for nullification of foreclosure A) Under Section 7 of Act No. 3135, the purchaser in a
proceedings. foreclosure sale is entitled to possession of the property.
Thus the writ prayed for by petitioner granting it possession
ISSUE: WoN a writ of possession is proper when there is a has to be issued as a matter of course, being a ministerial
pending case to nullify the foreclosure sale duty of the trial court to grant such writ of possession. No
discretion is left for the trial court.
SC: YES!
- Metrobank purchased the properties at a public B) Under the Rules of Court a third-party claimant or a
auction following the EJF of the subject properties. stranger to the foreclosure suit, like respondents herein, can
Certificate of sale over the properties were issued in opt to file a remedy known as terceria against the sheriff or
favor of Metrobank and registered with RD. P as officer effecting the writ by serving on him an affidavit of his
mortgagors failed to redeem the properties within title and a copy thereof upon the judgment creditor. By the
the 1 year period of redemption hence Metrobank terceria, the officer shall not be bound to keep the property
consolidated its ownership over the subject and could be answerable for damages. A third-party claimant
properties. may also resort to an independent "separate action," the
- Metrobank having consolidated its title to the object of which is the recovery of ownership or possession of
mortgaged properties is even more entitled now to the property seized by the sheriff, as well as damages arising
possession thereof and makes more unmistakable its from wrongful seizure and detention of the property despite
right to file an ex parte motion for the issuance of a the third-party claim. If a "separate action" is the recourse,
writ of possession. the third-party claimant must institute in a forum of
- The issuance of the writ of possession becomes a competent jurisdiction an action, distinct and separate from
mere ministerial duty on the part of the judge, the action in which the judgment is being enforced, even
regardless of WoN there is a pending action for before or without need of filing a claim in the court that
nullification of the sale at public auction or issued the writ. Both remedies are cumulative and may be
foreclosure itself availed of independently of or separately from the other.
Availment of the terceria is not a condition sine qua non to
CHINA BANK v ORDINARIO the institution of a "separate action."

FACTS: C) In essence, the Court of Appeals committed palpable error

when it granted Spouses Ordinario’s motion for
1) Petitioner ChinaBank granted 3 loans to TransAmerican reconsideration and set aside the orders dated April 10, 1991
owned by spouses Garcia, secured by real estate mortgages and September 21, 1992 of the RTC. Thus, the appealed
constituted by Jesus Garcia 45 parcels of land The contracts Decision and Resolution of the Court of Appeals are
of mortgage were all registered in the same Registry. REVERSED and SET ASIDE. The orders of the RTC, Branch 90,
Subsequently for failure of TransAmerican to pay its loans, Quezon City, directing the issuance of a writ of possession in
Chinabank foreclosed extrajudicially the three real estate favor of petitioner bank are AFFIRMED.
mortgages which were then sold at public auction for
P38,004,205.01 to the same bank. The Certificate of Sale was ANTICHRESIS
then registered in the Registry of Deeds of Quezon City.

2) Thereafter Chinabank filed with the RTC a petition for DELA VEGA v BALLILOS
issuance of a writ of possession, which was granted, thus
placing Chinabank in possession of the 45 parcels of land. BARRETTO v BARRETTO
Then, spouses Ordinario, filed a motion for reconsideration
praying that the parcel of land be excluded from the above Facts:
order alleging, that they purchased the land covered on
which was constructed their townhouse and that the  After the death of Juan Antonio Barretto, Sr., his son Juan
mortgage foreclosure cannot prevail over their superior right Antonio Grandpre, in his own behalf and as the executor
as legitimate buyers of the area. of his father, mortgaged, the cultivated half of said
hacienda in favor of Antonio Vicente Barretto as security
3) To this, Chinabank filed its opposition to respondents’ for the amount of P11,000 which the latter loaned to
motion for reconsideration. The trial court denied Sps him.
Ordinario’s motion for reconsideration. On appeal, this was  By verbal agreement, Antonio will collect his credit from
overturned by the CA. the products of the property.
 His three children and heirs Antonio Ma Barretto, Ricardo
HELD: Esteban Barretto, and Guadalupe Barretto came to
succeed after the death of Antonio.
SECTRANS 2010/ ATTY. AGUINALDO 79
 Guadalupe made a donation inter vivos in favor of the
plaintiff Alberto Barretto of the undivided one-third part
of the hypothecary credit and of the rights belonging to When in the record of an action it is fully established that the
her deceased father Antonio Vicente Barretto, assigning parties indebted in a certain amount, which is secured with a
to the donee all the rights and actions which she might mortgage over ½ of their hacienda, having delivered to the
have in the foreclosure proceedings exhibited at the trial creditor not only the mortgaged half but the whole hacienda,
of the present action, on the condition that as soon as not in the nature of an assignment of property in payment of
the donee Alberto Barretto could collect the said one- a debt, still unpaid, but with the object that the creditor may
third part of the credit or should obtain the assignment collect by means of usufruct his credit and the interest agreed
of the property of the debtor, he would divide what was upon, the verbal contract which is inferred from such facts
donated, into nine equal parts among the donee himself and presumed to have been entered into between the
and six living brothers and the heirs of their two brothers parties, although not set in any document, deserves in law
now dead, each receiving one-ninth part. the name of antichresis as defined in Article 1881 of the Civil
 Alberto Barretto, complying with the condition imposed Code.
in said document of the donation paid to each of his
brothers and nephews, and in exchange for the sums
received as such price his co-donees assigned and
conveyed to him one-eight part of the third of the said By the antichresis a creditor acquires a right to
hacienda and whatever rights and interests the grantors receive the fruits of real property of his debtor,
might have by virtue of the said donation in favor of the with the obligation to apply them to the payment
plaintiff Barretto. of the interest, if due, and afterwards to the
 It is to be noted that the plaintiff bought one-eight principal of his credit.
undivided part of the third of the whole hacienda of
Balintagac and paid to every claimant the price of the
eight part sold to him. The third part of the ownership of
the hacienda was transferred to the plaintiff by the donor The creditor in antichresis cannot by mere possession of the
Guadalupe Barretto. real property which he received by virtue of an antichresis
 Antonio and Ricardo, as grantors, sold and conveyed all acquire ownership over the same for failure of the debtor to
their rights and actions included and derived from the pay the debt within the stipulated time, any agreement to the
said hypothecary credit for the price of P14,000 which contrary being void; and the debtor on his part cannot
would be paid by the grantee and vendee by installments recover the enjoyment and use of the real property given in
and in the manner prescribed in the said deed, assigning antichresis to the creditor, without having previously paid the
to him, besides, all the rights which the said brothers had latter all his debt and interests thereon, the creditor being
over the two-third parts of the said hacienda. entitled to ask the courts that the said real property be sold
to satisfy his credit.

Issue: WON there was a transfer of ownership to Alberto?

Held: With regard to prescription, the creditor in antichresis can

never by prescription acquire the ownership of the real
No. the plaintiff did not obtain by assignment, sale, or property received in antichresis, as he entered into the
transfer, as expressed in said deeds, the ownership of the possession of the same not as an owner but as a creditor with
said hacienda of Balintagac, but only the hypothecary credit right only to collect his credit from the fruits of said real
which the heirs of the deceased creditor Antonio Vicente property.
Barretto had inherited from the latter, after the plaintiff had
obtained from his other brothers the conveyance of their
respective rights to the donation.
The extinguishment of the right as creditor and the
termination of his use and possession of the real property
given in antichresis depend upon the full payment of the debt
The rights acquired by the creditor were transmitted by and its interests, after the liquidation of the amounts entered
hereditary title through operation of law to the heirs of the on the account of the debtors and received by the creditor.
same Antonio M.a, Ricardo Esteban, and Guadalupe, Barretto
y Rocha and these in turn assigned, sold and transferred the
credit with all their rights as hypothecary creditors, as well as LEGAZPI & SALCEDO v CELESTIAL
the right to the usufruct of all the hacienda of Balintagac to
the plaintiff Alberto Barretto. ANGELES v SEC. OF JUSTICE

SECTRANS 2010/ ATTY. AGUINALDO 80

 ISSUE: Whether or not the the administration of the property
PANDO v GIMENEZ in question assumed by the plaintiff toward the end of
October, 1925 is antichretic in character.
FACTS: This action was instituted for the purpose of
foreclosing a mortgage executed by defendant Antonio RULING:
Gimenez. Massy Teague was also impleaded for having
purchased at public auction one of the mortgaged properties. Taking into account the language of the letter Exhibit 1 and
the appellant's unimpeached testimony, we are constrained
In order to secure the payment of P8,000 which the to hold that it has been proved by a preponderance of
defendant Gimenez owed the plaintiff, he mortgaged the evidence, that even though at first the plaintiff had only
house at No. 655 Santa Mesa, Manila, and the leasehold right undertaken to collect the rents of the house, later on,
on the lot upon which it stands (Exhibit A). This was payable towards the end of October, 1925, he assumed the obligation
on October 27, 1925, but, in spite of nonpayment, the to pay both the tax on the house, and the rent of the lot.
creditor, who is the plaintiff herein, did not foreclose the
mortgage. As to the consideration contained in the judgment appealed
from to the effect that, in view of the reduction of the rent of
The defendant was leaving the City of Manila in order to the house in May, 1926, the plaintiff would not have accepted
attend to his business in the Province of Cagayan, and at the the administration under the conditions alleged by the
special instance and request of the herein plaintiff, said defendant-appellant, it must be remembered that the
defendant gave to the plaintiff the full control, and complete plaintiff took over such complete administration months
and absolute administration of the building and the parcel of before such reduction of rents, and it does not appear that
land on which said building was erected, situated in Santa the reduction was foreseen.
Mesa, District of Santa Mesa, mortgaged to the plaintiffIt and
it was agreed between them that the plaintiff would collect From all these circumstances it follows that the
the rents of said house, in order to apply them to the administration of the property in question assumed by the
payment of interest on the amount of the indebtedness. plaintiff toward the end of October, 1925 is antichretic in
character, and therefore justice and equity demand that
For default in the payment of taxes for the years 1925 and application be here made of the Civil Code provisions
1926, the house was on November 23, 1926 sold at public touching the obligations of the antichretic creditor, to wit:
auction, and, for failure to exercise the right of legal
redemption, the City of Manila, the attachment creditor and The creditor is obliged to pay the taxes and charges
vendor of the property, executed a final deed of sale in favor which burden the estate, in the absence of an
of the purchaser, the other defendant Massy Teague. agreement to the contrary.

Furthermore, for default in the payment of the rents due on He shall also be obliged to pay any expenses
the lot of said house for the years 1925 to 1928, the Santa necessary for its preservation and repair.
Mesa estate, the lessor of said land, cancelled the lease on
July 13, 1928, pursuant to the terms of the contract. Any sums he may expend for such purposes shall be
chargeable against the fruits. (Art. 1882, Civil Code.)
The appellant Gimenez contends that the plaintiff was
responsible for the delinquency in the payment of both the These obligations arise from the very nature of the covenant,
tax on the house and the rent of the lot, which caused him and are correlated with the plaintiff's acquired right to take
the loss of the said house and the leasehold right on the lot, charge of the property and collect the fruits for himself.
because the plaintiff was at that time in charge of the
administration of the premises with the obligation to attend
to the payment of the tax and the rents.
PERALTA v QUIMPO
The plaintiff denied that he had such obligation, alleging that 51 OG No. 3 p. 1383, Sept 1954
his duties were confined to the collection of the rents of the NO COPY AVAILABLE
house in order to apply them to the payment of the interest
on the mortgage.
VILLANUEVA v IPONDO
Such was in fact the original agreement; but the appellant
asserts that it was modified by the letter. CHATTEL MORTGAGE

SECTRANS 2010/ ATTY. AGUINALDO 81

 ALEMAN v CATERA to that of the creditor who has in his favor an instrument of
mortgage executed with the formalities of law, in good faith,
ALLIED BANK v SALAS and without the least indication of fraud. 8
FACTS: Petitioner-bank (through petitioner’s predecessor)
granted Gencor Marketing, Inc. a time loan and was secured Applying the foregoing principle to the case at bar, the Court
by a Deed of Chattel Mortgage over certain printing finds the lien of petitioner's chattel mortgage over the
machineries and equipments; said deed was recorded in the mortgaged properties in question superior to the levy on
Chattel Mortgage Registry in Feb. 7, 1974. Gencor failed to attachment made on the same by private respondent as
pay prompting petitioner to extra judicially foreclose the creditor of chattel mortgagor Clarencio Yujuico. What may be
mortgage and requested the Sheriff of Quezon City to effect attached by private respondent as creditor of said chattel
the said foreclosure. Upon issuance of the Notice of Sheriff’s mortgagor is only the equity or right of redemption of the
sale, private respondent filed a motion in court to enjoin the mortgagor.
public auction alleging that the properties have been
previously levied and attached by the Sheriff of Rizal. MAKATI LEASING v WEAREVER TEXTILES

Metrobank is a creditor of Gencor’s president and claims the TSAI v CA

properties as the exclusive property of the president doing FACTS:
business under the firm name of Gencor Printing and as such - Ever Textile (R) obtained a P3M loan from PBCOM
may not be foreclosed and sold at auction. During the trial it (P), with Real Property and Chattel Mortgage over
was admitted by petitioner that the properties belonged to the lot, where its factory stands and the chattels
the president and not to Gencor. located therein as enumerated in its attached
schedule
ISSUE: WHO between the two claimants has a better right - A 2nd loan was obtained secured by a Chattel
over the property. Mortgage over personal properties listed in its
attached list, which is similar to the attached list to
HELD: Petitioner has the better right. Even though petitioner the 1st mortgage.
admitted that it was the president and not gencor who - On the same date of the 2nd loan, R purchased
owned the properties, the Court nevertheless finds that the various machines and equipments
chattel mortgage over the printing machineries and - Later, R filed insolvency proceedings
equipment was ratified and approved by Clarencio Yujuico. As - P commenced an extrajudicial foreclosure (EJF),
earlier stated and as pointed out by petitioner, it was wherein P won the bid and the properties were
Clarencio Yujuico as president of Gencor Marketing, Inc., who leased and later sold to Tsai. P sold the factory,
signed the promissory note evidencing the time loan granted properties and the contested machineries of R.
by petitioner's predecessor General Bank and Trust Company - R filed for annulment of sale contending that the
in favor of Gencor Marketing, Inc. machineries bought by R which are not included in
the list should be excluded from the sale to TSAI
Finding the chattel mortgage to be valid, the Court takes - P contended that the machineries, which are
special note of the fact that said chattel mortgage was connected to the land, are part of the real estate
registered and duly recorded in the Chattel Mortgage Registry stated in the Mortgage.
of Quezon City on February 7, 1974, prior to April 22, 1977, - RTC and CA ruled in favor of R.
the date the writ of attachment of the properties in question
was issued. This is a significant factor in determining who of ISSUE: WoN the contested machineries (property bought by R
two contending claimants should be given preference over on the same day that the 2 nd loan was executed) should be
the same properties in question. inlcluded in the auction sale and sale to TSAI

The registration of the chattel mortgage more than three SC: NO!
years prior to the writ of attachment issued by respondent - Based on the pieces of evidence, the true intention
judge is an effective and binding notice to other creditors of of P and R is to treat machinery and equipment as
its existence and creates a real right or a lien, which being chattels.
recorded, follows the chattel wherever it goes. 7 The chattel - The controverted machineries are not covered by or
mortgage lien attaches to the property wherever it may be. included in either of the 2 mortgages
Thus, private respondent as attaching creditor acquired the - The machineries were not included in the Notice of
properties in question subject to petitioner's mortgage lien as Sale
it existed thereon at the time of the attachment. - An immovable may be considered a personal
property if there is a stipulation as when it is used as
In this regard, it must be stressed that the right of those who security in the payment of an obligation where a
so acquire said properties should not and cannot be superior
SECTRANS 2010/ ATTY. AGUINALDO 82
 chattel mortgage is executed over it, as in the case at suretyship, the faithful performance of the obligation by the
bar. principal debt or is secured by the personal commitment of
another.
DOCTRINE: a chattel mortgage shall be deemed to cover only
the property described therein and not like or substituted B) In contracts of real security, such as a pledge, a mortgage
property thereafter acquired by the mortgagor and placed in or an antichresis, that fulfillment is secured by an
the same depository as the property originally mortgaged. encumbrance of property — in pledge, the placing of movable
property in the possession of the creditor; in chattel
ACME SHOE v CA mortgage, by the execution of the corresponding deed
substantially in the form prescribed by law; in real estate
FACTS: mortgage, by the execution of a public instrument
encumbering the real property covered thereby; and in
1) Petitioner Chua Pac, the president and general manager of antichresis, by a written instrument granting to the creditor
co-petitioner Acme Shoe, executed on June 1978, for and in the right to receive the fruits of an immovable property with
behalf of the company, a chattel mortgage in favor of private the obligation to apply such fruits to the payment of interest,
respondent Producers Bank of the Philippines as security for if owing, and thereafter to the principal of his credit — upon
petitioner's corporate loan of P3,000,000.00. It was stated the essential condition that if the obligation becomes due and
that: the debtor defaults, then the property encumbered can be
alienated for the payment of the obligation, but that should
“In case the MORTGAGOR executes subsequent promissory the obligation be duly paid, then the contract is automatically
note or notes either as a renewal of the former note, as an extinguished proceeding from the accessory character 8 of the
extension thereof, or as a new loan, or is given any other kind agreement.
of accommodations such as overdrafts, letters of credit,
acceptances and bills of exchange, releases of import C) While a pledge, real estate mortgage, or antichresis may
shipments on Trust Receipts, etc., this mortgage shall also secure after-incurred obligations so long as these future
stand as security for the payment of the said promissory note debts are accurately described, a chattel mortgage, can only
or notes and/or accommodations without the necessity of cover obligations existing at the time the mortgage is
executing a new contract and this mortgage shall have the constituted.
same force and effect as if the said promissory note or notes
and/or accommodations were existing on the date thereof. D) Although a promise expressed in a chattel mortgage to
This mortgage shall also stand as security for said obligations include debts that are yet to be contracted can be a binding
and any and all other obligations of the MORTGAGOR to the commitment that can be compelled upon, the security itself,
MORTGAGEE of whatever kind and nature, whether such however, does not come into existence or arise until after a
obligations have been contracted before, during or after the chattel mortgage agreement covering the newly contracted
constitution of this mortgage” debt is executed either by concluding a fresh chattel
mortgage or by amending the old contract. Refusal on the
2) On 10 and 11 January 1984, the bank yet again extended to part of the borrower to execute the agreement so as to cover
petitioner corporation a loan of P1,000,000.00 covered by the after-incurred obligation can constitute an act of default
four promissory notes for P250,000.00 each. Due to financial on the part of the borrower of the financing agreement
constraints, the loan was not settled at maturity. The bank whereon the promise is written but the remedy of
then applied for an extra judicial foreclosure of the chattel foreclosure can only cover the debts extant at the time of
mortgage, with the Sheriff of prompting Acme to file an constitution and during the life of the chattel mortgage
injunction, which was dismissed. The court also ordered the sought to be foreclosed.
foreclosure of the chattel mortgage. It held petitioner
corporation bound by the stipulations. E) A chattel mortgage, as hereinbefore so intimated, must
comply substantially with the form prescribed by the Chattel
Mortgage Law itself. One of the requisites, under Section 5
thereof, is an affidavit of good faith. The fact, .that the statute
ISSUE: Whether it is valid and effective to have a clause in a has provided that the parties to the contract must execute an
chattel mortgage that purports to likewise extend its oath that “the mortgage is made for the purpose of securing
coverage to obligations yet to be contracted or incurred. the obligation specified in the conditions thereof, and for no
other purpose, and that the same is a just and valid
obligation, and one not entered into for the purpose of fraud”
HELD:
means that the debt referred to in the law is a current, not an
obligation that is yet merely contemplated.
A) Contracts of security are either personal or real. In
contracts of personal security, such as a guaranty or a

SECTRANS 2010/ ATTY. AGUINALDO 83

F) In the chattel mortgage here involved, the only obligation 1) No. Article 1484, paragraph 3, provides that if the vendor
specified in the chattel mortgage contract was the has availed himself of the right to foreclose the chattel
P3,000,000.00 loan which petitioner corporation later fully mortgage, he shall have no further action against the
paid. By virtue of Section 3 of the Chattel Mortgage Law, the purchaser to recover any unpaid balance of the purchase
payment of the obligation automatically rendered the chattel price. Any agreement to the contrary shall be void. In
mortgage void or terminated. In other words, “A mortgage other words, in all proceedings for the foreclosure of
that contains a stipulation in regard to future advances in the chattel mortgages executed on chattels which have been
credit will take effect only from the date the same are made sold on the installment plan, the mortgagee is limited to
and not from the date of the mortgage.” the property included in the mortgage.

Petitioner resolutely declared that it has opted for the

CERNA v CA remedy provided under Article 1484(3) of the Civil Code,
that is, to foreclose the chattel mortgage. The
MAGNA FINANCIAL v COLARINA petitioner’s prayer contains two remedies, payment of
unpaid balance and foreclosure of chattel mortgage.
Facts: Such a scheme is not only irregular but is a flagrant
circumvention of the prohibition of the law. By praying
 Elias Colarina bought on installment from Magna for the foreclosure of the chattel, Magna Financial
Financial Services (MFS) one Suzuki Multicab. Services Group, Inc. renounced whatever claim it may
 After making a down payment, Colarina executed a have under the promissory note.
promissory note for the balance of P229,284.00 payable
in 36 equal monthly installments. To secure payment, 2) No. In the case at bar, there is no dispute that the subject
Colarina executed an integrated promissory note and vehicle is already in the possession of the petitioner,
deed of chattel mortgage over the motor vehicle. Magna Financial Services Group, Inc. However, actual
 Colarina failed to pay the monthly amortization foreclosure has not been pursued, commenced or
accumulating an unpaid balance of P131,607.00. concluded by it. Where the mortgagee elects a remedy of
 Despite repeated demands, he failed to make the foreclosure, the law requires the actual foreclosure of
necessary payment. the mortgaged chattel. It is the actual sale of the
 MFS filed a Complaint for Foreclosure of Chattel mortgaged chattel that would bar the creditor (who
Mortgage with Replevin. chooses to foreclose) from recovering any unpaid
 Upon the filing of a Replevin Bond, a Writ of Replevin balance. And it is deemed that there has been
was issued. Summons, together with a copy of the Writ foreclosure of the mortgage when all the proceedings of
of Replevin, was served on Colarina who voluntarily the foreclosure, including the sale of the property at
surrendered physical possession of the vehicle to the public auction, have been accomplished.
Sheriff.
 The motor vehicle was turned over by the sheriff to
Magna Financial Services Group, Inc. Be that as it may, although no actual foreclosure as
 The trial court rendered judgment in favor of MFS and contemplated under the law has taken place in this case,
asked Coralina to pay the unpaid balance and foreclose since the vehicle is already in the possession of Magna
the chattel mortgage. Financial Services Group, Inc. and it has persistently and
 Colarina appealed to the Regional Trial Court which consistently avowed that it elects the remedy of
affirmed in toto the decision of the MTCC. foreclosure, the Court of Appeals, thus, ruled correctly in
 CA reversed the decision of MTCC and RTC stating that directing the foreclosure of the said vehicle without
MTC and the RTC erred in ordering the defendant to pay more.
the unpaid balance of the purchase price of the subject
vehicle irrespective of the fact that the instant complaint
was for the foreclosure of its chattel mortgage. BA FINANCE v CA

Issue: BICOL SAVINGS v GUINHAWA

1) WON MFS can avail of the two remedies, payment of F: Victorio Depositario together with private respondent
unpaid balance and foreclosure of chattel mortgage? Jaime Guinhawa, acting as solidary co-maker, took a loan
2) WON there was actual foreclosure? from petitioner Bicol Savings and Loan Association (BISLA)
payable every 19th day of each month. To secure the
payment of the foregoing loan obligation, the principal
Held: borrower Victorio Depositario put up as security a chattel
mortgage which was a Yamaha Motorcycle. Said motorcycle

SECTRANS 2010/ ATTY. AGUINALDO 84

was eventually foreclosed by reason of the failure of foreclosure sale have been complied with, thus giving rise to
Depositario and private respondent Guinhawa to pay the the presumption of regularity in the performance of public
loan. There was a deficiency in the amount of P5,158.06 duties.
where BISLA made a demand to pay the same. Petitioner
BISLA (plaintiff therein) filed a complaint for the recovery of a The effects of foreclosure under the Chattel Mortgage Law
sum of money constituting the deficiency after foreclosure of run inconsistent with those of pledge under Article 2115.
the chattel mortgage put up by the principal borrower Whereas, in pledge, the sale of the thing pledged extinguishes
Depositario against the latter and his solidary co-maker the entire principal obligation, such that the pledgor may no
Guinhawa (herein private respondent) as defendants. longer recover proceeds of the sale in excess of the amount
Eventually, a stipulation of facts was entered into between of the principal obligation, Section 14 of the Chattel Mortgage
BISLA and Guinhawa. They agreed to drop Depositario, as "his Law expressly entitles the mortgagor to the balance of the
whereabouts being unknown now and he could not be served proceeds, upon satisfaction of the principal obligation and
with summons". The creditor claims that he can maintain an costs.
action for deficiency and claim P5k balance.
Since the Chattel Mortgage Law bars the creditor-mortgagee
Issue: WoN creditor can claim remaining balance from retaining the excess of the sale proceeds there is a
corollary obligation on the part of the debtor-mortgagee to
Ruling: Yes! The creditor may maintain an action for pay the deficiency in case of a reduction in the price at public
deficiency although the chattel mortgage law Is silent on this auction.
point. The reason is tat a chattel mortgage is only given as a
security and not as payment for the debt in case of failure of As correctly pointed out by the trial court, the said article
payment applies clearly and solely to the sale of personal property the
price of which is payable in installments. Although Article
PAMECA WOOD v CA 1484, paragraph (3) expressly bars any further action against
FACTS: On April 17, 1980, petitioner PAMECA Wood the purchaser to recover an unpaid balance of the price,
Treatment Plant, Inc. (PAMECA) obtained a loan of where the vendor opts to foreclose the chattel mortgage on
US$267,881.67, or the equivalent of P2,000,000.00 from the thing sold, should the vendee's failure to pay cover two or
respondent Bank. By virtue of this loan, petitioner PAMECA, more installments, this provision is specifically applicable to a
through its President, petitioner Herminio C. Teves, executed sale on installments.
a promissory note for the said amount, promising to pay the
loan by installment. SUPERLINES v ICC
FACTS:
As security for the said loan, a chattel mortgage was also  Superlines decided to acquire five (5) new buses
executed over PAMECA's properties in Dumaguete City, from the Diamond Motors Corporation for the price
consisting of inventories, furniture and equipment, to cover of P10k. However, Superlines lacked financial
the whole value of the loan. resources for the purpose so by virtue of a board
resolution, it authorized its President and Gen Mgr
On January 18, 1984, and upon petitioner PAMECA's failure to Lavides to look for a loan for the purchase of said
pay, respondent bank extrajudicially foreclosed the chattel buses.
mortgage, and, as sole bidder in the public auction,  Lavides negotiated with ICC Leasing. ICC agreed to
purchased the foreclosed properties for a sum of P322, finance the purchase of the new buses via a loan and
350.00. proposed a 3-yr term for the payment. The new
buses to be purchased were to be used by Superlines
On June 29, 1984, respondent bank filed a complaint for the as security for the loan.
collection of the balance.  Diamond Motors sold to Superlines 5 new buses and
was registered under the name of Superlines.
Petitioners submit that Articles 1484 and 2115 of the Civil  Superlines executed 2 docus – Deed of Chattel
Code be applied in analogy to the instant case to preclude the Mortgage over said buses a security for the purchase
recovery of a deficiency claim. price of buses in P13mill loaned by ICC to Superlines;
a Continuing Guaranty to pay jointly and severally in
ISSUES: Whether the foreclosure of the chattel mortgage favour of ICC the amount of P13mill
valid  After paying only 7 monthly amortizations,
Superlines defaulted in the payment of its obligation
RULING: to ICC.
The court did not find anything irregular or fraudulent in the  ICC filed a complaint for collection of sum of money
circumstance that respondent bank was the sole bidder in the with a prayer for a writ of replevin
sale, as all the legal procedures for the conduct of a
SECTRANS 2010/ ATTY. AGUINALDO 85
  TC dismissed; ICC and Superlines forged a consumer purchase of the buses and the payment of the
loan agreement and not an amortized commercial purchase price thereof.
loan.  The evidence on record shows that under the
 CA reversed; Promissory Note, Chattel Mortgage and Continuing
- ICC and Superlines entered into an amortized Guaranty, respondent was the creditor-mortgagee of
commercial loan agreement with ICC as petitioner Superlines and not the vendor of the new
creditor-mortgagee and Superlines as debtor- buses. Hence, petitioners cannot find refuge in
mortgagor, and ordered Superlines and Lavides Article 1484(3) of the New Civil Code.
to pay jointly and severally the sum of P5mill as  What should apply was the Chattel Mortgage
deficiency executed by petitioner Superlines and R in relation
- It was Diamond Motors Corporation and not ICC to the Chattel Mortgage Law.
which sold the subject buses to Superlines. It  This Court had consistently ruled that if in an extra-
held that no evidence had been presented by judicial foreclosure of a chattel mortgage a
Superlines to show that ICC bought the said deficiency exists, an independent civil action may be
buses from Diamond Motors Corporation under instituted for the recovery of said deficiency. To
a special arrangement and that ICC sold the deny the mortgagee the right to maintain an action
buses to Superlines. The appellate court also to recover the deficiency after foreclosure of the
ruled that Article 1484(3) is applicable only chattel mortgage would be to overlook the fact that
where there is vendor-vendee relationship the chattel mortgage is only given as security and
between the parties and since ICC did not sell not as payment for the debt in case of failure of
the buses to Superlines, the latter cannot invoke payment. Both the Chattel Mortgage Law and Act
said law. 3135 governing extra-judicial foreclosure of real
estate mortgage, do not contain any provision,
ISSUE: WON there was an amortized commercial loan expressly or impliedly, precluding the mortgagee
agreement? from recovering deficiency of the principal
obligation.
HELD: YES
 DIAMOND is the seller of the five units of buses and
not the plaintiff ESGUERRA v CA
 No convincing evidence, except the self-serving
testimony of defendant Manolet Lavides, was BPI CREDIT v CA
presented to prove that there was an internal
arrangement between the plaintiff, as financing SERVICEWIDE v CA
agent, and Diamond, as seller of the buses. In fact, FACTS:
defendant Lavides admitted under oath that
DIAMOND and plaintiff did not enter into transaction  Respondents executed a promissory note and a
over the sale of the buses chattel mortgage over a vehicle they bought from
 The evidence shows that the transaction between the mortgagee itself, C. R. Tecson Enterprises, for
the parties was an "amortized commercial loan" to the payment in installments of the vehicle. C. R.
be paid in installments Tecson Enterprises, on the same date, assigned in
 P failed to adduce a preponderance of evidence to favor of Filinvest Credit Corporation. The
prove that R and Diamond Motors Corporation respondents were aware that the new mortagee is
entered into a special arrangement relative to the Filinvest.
issuance of certificates of registration over the buses  Respondent spouses by way of Deed of Sale with
under the name of petitioner Superlines. Assumption of Mortgage transferred and delivered
 P were also unable to prove that respondent the vehicle to Conrado Tecson.
purchased from Diamond Motors Corporation the  Subsequently, Filinvest assigned all its rights as
new buses. In contrast, the vehicle invoices of mortgagee to petitioner.
Diamond Motors Corporation irrefragably show that  Respondents failed to pay the installments and
it sold the said buses to petitioner Superlines. The despite demands from petitioner-mortgagee to pay
net proceeds of the loan were remitted by or to return the vehicle.
respondent to petitioner Superlines and the latter  Petitioner filed a complaint for Replevin but the
remitted the same to Diamond Motors Corporation respondents alleged in their Answer that they can no
in payment of the purchase price of the buses. In longer be held liable as they had already conveyed
fine, respondent and Diamond Motors Corporation the car to Conrado Tecson.
had no direct business transactions relative to the
ISSUE:
SECTRANS 2010/ ATTY. AGUINALDO 86
 1. WON the assignment of credit by the creditor- owner thereof, due to the contract between P and
mortgagee quires the notice and consent of the Capitol in which it stated that all permanent
debtor- mortgagor? improvements made by lessee shall belong to the
2. WON the assignment of credit by the debtor- lessor and that said improvements hav been
mortgagor requires the notice and consent of the considered as part of the monthly rentals.
creditor-mortgagee? - The fact that Capitol failed to pay R the purchase
price of the items levied upon did not prevent the
HELD: transfer of ownership to Capitol and then to P.

1. Only notice to the debtor-mortgagor of the

assignment of credit is required. His consent is not UY v ZAMORA
required.
2. In contrast, consent of the creditor-mortgagee to FACTS:
the alienation of the mortgaged property is
necessary in order to bind said creditor. Since the 1) At the instance of plaintiff Uy, the MTC ordered the
assignee of the credit steps into the shoes of the attachment of a vehicle belonging to Zamora. The writ was
creditor-mortgagee to whom the chattel was levied on the vehicle on August 11, 1960. Subsequently, the
mortgaged, it follows that the assignee's consent is Municipal Court rendered judgment for the plaintiff Uy and
necessary in order to bind him of the alienation of ordered defendant Zamora to pay the sum of P1,740. Zamora
the mortgaged thing by the debtor-mortgagor. This appealed to the CFI.
is tantamount to a novation. As the new assignee,
petitioner's consent is necessary before respondent 2) While the case was pending appeal, the Allied Finance, Inc.
spouses' alienation of the vehicle can be considered intervene. According to it, the vehicle, which was attached by
as binding against third persons. Petitioner is the Sheriff, had previously been mortgaged to it by Zamora to
considered a third person with respect to the sale secure the payment of a loan and that at the time of the filing
with mortgage between respondent spouses and of the complaint in intervention, a balance of P2,451.93
third party defendant Conrado Tecson. remained in its favor. Allied, prayed that Zamora be ordered
to pay P2,451.93 as principal.

CONCURRENCE AND PREFERENCE OF CREDITS 3) On January 12, 1961, Uy and Zamora, submitted to the
court a compromise agreement wherein Zamora admitted
being indebted to Uy. Since the motor vehicle had already
DE BARRETTO v VILLANUEVA been sold on order of the Court for P2,500 to prevent
depreciation, defendant Zamora agreed to have plaintiff Uy's
SAMPAGUITA PICTURES v JALWINDOR credit paid out of the proceeds of the sale.
FACTS:
- Sampaguita (P) is the owner of a building which its 4) The court found defendant Zamora to be liable to plaintiff
roofdeck was leased to Capitol 300 (Capitol), Uy in the amount of P2,500, and to the intervenor in the
wherein it was agreed that whatever improvements amount of P2,451.93, plus interest. Uy claims preference on
introduced therein by Capitol will later be owned by the basis of a lien arising from the attachment of the vehicle
P. on August 11, 1960. On the other hand, allied bases its claim
- Capitol purchased on credit from Jalwindor (R) glass to preference on a Deed of Chattel Mortgage covering the
and wooden jalousies which were DELIVERED and same motor vehicle.
INSTALLED in the leased premises by R, replacing the
existing windows of P. ISSUE: Which of the two credits is preferred?
- Capitol failed to pay and R filed an action for
collection of sum of money against Capitol. HELD:
- R made a levy on the glass and wooden jalousies in
question, which P intervened in the case alleging
A) Considering the fact that Allied Finance, Inc. registered its
that it cannot be levied upon since it is already the
mortgage only on August 24, 1960, or subsequent to the date
owner of the subject jalousies.
of the writ of attachment obtained by plaintiff Uy on August
11, 1960, the credit of the intervenor cannot prevail over that
ISSUE: WoN R may levy the jalousies
of the plaintiff.
SC: NO!
- When the glass and wooden jalousies were delivered B) The SC disagreed with the lower court’s decision upheld
and installed in the leased premises, P became the Allied’s credit on the ground that, being embodied in a public
SECTRANS 2010/ ATTY. AGUINALDO 87
instrument of an earlier date (June 20, 1960), it should take the bank was declared insolvent, is a preferred claim against
precedence over plaintiff's lien by attachment (August 11, the bank?
1960), pursuant to Article 2244 of the Civil Code, for the
reason that, as already stated, the credit of the Allied cannot Held:
be considered as preferred until the same has been recorded
in the Motor Vehicles Office. No. It should be noted that fixed, savings, and current
deposits of money in banks and similar institutions are not
C) A mortgage of motor vehicles, in order to affect third true deposits. They are considered simple loans and, as such,
persons, should not only be registered in the Chattel are not preferred credits.
Mortgage Registry, but the same should also be recorded in
the Motor Vehicles Office The decision of the lower court is The aforequoted section 29 of the Central Bank's charter
reversed, without pronouncement as to costs. explicitly provides that when a bank is found to be insolvent,
the Monetary Board shall forbid it to do business and shall
take charge of its assets. Evidently, one purpose in prohibiting
the insolvent bank from doing business is to prevent some
CORDOVA v REYES depositors from having an undue or fraudulent preference
over other creditors and depositors.
CENTRAL BANK v MORFE
We are of the opinion that such judgments cannot be
Facts: considered preferred and that article 2244(14)(b) does not
apply to judgments for the payment of the deposits in an
 The Monetary Board found the Fidelity Savings Bank to insolvent savings bank which were obtained after the
be insolvent. The Board directed the Superintendent of declaration of insolvency.
Banks to take charge of its assets, forbade it to do
business and instructed the Central Bank Legal Counsel In the Rohr case, the general principle of equity that the
to take legal actions. assets of an insolvent are to be distributed ratably among
 Prior to the institution of the liquidation proceeding but general creditors applies with full force to the distribution of
after the declaration of insolvency, the spouses Elizes the assets of a bank. A general depositor of a bank is merely a
filed a complaint in the CFI against the Fidelity Savings general creditor, and, as such, is not entitled to any
Bank for the recovery of the balance of their time preference or priority over other general creditors.
deposits.
 In the judgment rendered in that case, the Fidelity The assets of a bank in process of liquidation are held in trust
Savings Bank was ordered to pay the Elizes spouses the for the equal benefit of all creditors, and one cannot be
sum plus accumulated interest. permitted to obtain an advantage or preference over another
 In another case, the spouses Padilla secured a judgment by an attachment, execution or otherwise.
against the Fidelity Savings Bank for the sums as the
balance of their time deposits, plus interests, moral and Considering that the deposits in question, in their inception,
exemplary damages and attorney's fees. were not preferred credits, it does not seem logical and just
 The lower court (having cognizance of the liquidation that they should be raised to the category of preferred credits
proceeding), upon motions of the Elizes and Padilla simply because the depositors, taking advantage of the long
spouses and over the opposition of the Central Bank, interval between the declaration of insolvency and the filing
directed the latter as liquidator, to pay their time of the petition for judicial assistance and supervision, were
deposits as preferred judgments, evidenced by final able to secure judgments for the payment of their time
judgments, within the meaning of article 2244(14)(b) of deposits.
the Civil Code.
MANABAT v LAGUNA FED
 Central Bank contends that the final judgments secured
by the Elizes and Padilla spouses do not enjoy any
PHIL SAVINGS BANK v LANTIN
preference because (a) they were rendered after the
Fidelity Savings Bank was declared insolvent and (b)
F: c built a duplex apartment house on a registered lot of
under the charter of the Central Bank and the General
spouses x and y, using his own money, P25k to finish the
Banking Law, no final judgment can be validly obtained
construction. Meanwhile, x and y obtained from psb a loan
against an insolvent bank.
secured by a mortgage to complete construction. At the time
of the registration of the mortgage, the transfer certificate of
Issue: Whether a final judgment for the payment of a time title over the property was free from all liens and
deposit in a savings bank which judgment was obtained after encumbrances. PSB foreclosed the mortgage, and being the

SECTRANS 2010/ ATTY. AGUINALDO 88

highest bidder a new certificate of title was subsequently
issued in its favor

C filed an action against the spouses to collect the unpaid cost

of construction. As x and y did not have any properties to
satisfy the judgment rendered in his favor, c demanded from
psb a pro rata share in the value of the duplex apartment in
accordance with article 2242.

Issue: is c entitled to claim pro rata share in the value of the

property in question.

Ruling: no. the action filed by c to collect the unpaid cost of

the construction of the duplex apartment is far from being a
general liquidation of the estate of x and y.

Although the lower court found that there were no known

creditors other than c and psb, this cannot be conclusive. It
will not bar other creditors in the event they show up and
present their claims against psb, claiming they have also
preferred claims against the property. Consequently, the
transfer certificate of title issued to psb which is supposed to
be indefeasible would remain constantly unstable and
questionable. Such could not have been the intention of
article 2243 of the civil code although it considers claims and
credits under article 2242 as statutory liens. Neither does the
de barreto caes sanction such instability.

SECTRANS 2010/ ATTY. AGUINALDO 89