Credit-transactions-case-digests.docx

CREDIT TRANSACTIONS (Case Digests) RP vs. Jose V. Bagtas, G.R. No. L-17474, October 25, 1962 (6 SCRA 262) Facts: Jose V. Bagtas borrowed from the RP through the Bureau of Animal Industry three bulls, a Red Sindhi, a Bhagnari, and a Sahiniwal, for a period of one year from 8 May 1948 to 7 May 1949 for breeding purposes subject to a government charge of breeding fee of 10% of the book value of the bulls. Upon the expiration on 7 May 1949 of the contract, the borrower asked for a renewal for another period of one year. However, the Secretary of Agriculture and Natural Resources approved a renewal thereof of only one bull for another year from 8 May 1949 to 7 May 1950 and requested the return of the other two. On 25 March 1950 Jose V. Bagtas wrote to the Director of Animal Industry that he would pay the value of the three bulls. On 17 October 1950 he reiterated his desire to buy them at a value with a deduction of yearly depreciation to be approved by the Auditor General. On 19 October 1950 the Director of Animal Industry advised him that the book value of the three bulls could not be reduced and that they either be returned or their book value paid not later than 31 October 1950. Jose V. Bagtas failed to pay the book value of the three bulls or to return them. So, on 20 December 1950 in the CFI of Manila, the RP commenced an action against him praying that he be ordered to return the three bulls loaned to him or to pay their book value in the total sum of P3,241.45 and the unpaid breeding fee in the sum of P499.62, both with interests, and costs. Bagtas countered that because of the bad peace and order situation in Cagayan Valley, and of the pending appeal he had taken to the Secretary of Agriculture and Natural Resources and the President of the Philippines from the refusal by the Director of Animal Industry to deduct from the book value of the bulls corresponding yearly depreciation of 8% from the date of acquisition, to which depreciation the Auditor General did not object, he could not return the animals nor pay their value and prayed for the dismissal of the complaint. The Court ruled in favor of the RP. The RP moved ex parte for a writ of execution which was granted. The surviving spouse of the now deceased Jose V. Bagtas filed a motion praying for the quashal of the writ of execution alleging that 2 bulls had already been returned while the third bull died from gunshot wounds inflicted during a Huks raid on Hacienda Felicidad Intal. The court denied her motion. Issue: Whether a bailee in commodatum is absolved of the obligation to return the thing if it is lost due to force majeure Held: Qualified No. Affirmed.

Ratio: The loan by the appellee to the late defendant Jose V. Bagtas of the three bulls for breeding purposes for a period of one year from 8 May 1948 to 7 May 1949, later on renewed for another year as regards one bull, was subject to the payment by the borrower of breeding fee of 10% of the book value of the bulls. The appellant contends that the contract was commodatum and that, for that reason, as the appellee retained ownership or title to the bull it should suffer its loss due to force majeure A contract of commodatum is essentially gratuitous. If the breeding fee were considered a compensation, then the contract would be a lease of the bull. Under article 1671 of the Civil Code, the lessee would be subject to the responsibilities of a possessor in bad faith, because she had continued possession of the bull after the expiry of the contract. And even if the contract be commodatum, still the appellant is liable, because article 1942 of the Civil Code provides that a bailee in a contract of commodatum is liable for loss of the thing, even if it should be through a fortuitous event: (2) If he keeps it longer than the period stipulated or (3) If the thing loaned has been delivered with appraisal of its value, unless there is a stipulation exempting the bailee from responsibility in case of a fortuitous event. The original period of the loan was from 8 May 1948 to 7 May 1949. The loan of one bull was renewed for another period of one year to end on 8 May 1950. But the appellant kept and used the bull until November 1953 when during a Huk raid it was killed by stray bullets. Furthermore, when lent and delivered to the deceased husband of the appellant, the bulls had each an appraised book value, to wit: the Sindhi, at P1,176.46; the Bhagnari, at P1,320.56 and the Sahiniwal; at P744.46. It was not stipulated that in case of loss of the bull due to fortuitous event the late husband of the appellant would be exempt from liability. Special proceedings for the administration and settlement of the estate of the deceased José V. Bagtas having been instituted in the Court of First Instance of Rizal (Q200), the money judgment rendered in favor of the appellee cannot be enforced by means of a writ of execution but must be presented to the probate court for payment by the appellant, the administratrix appointed by the court. RP (Bureau of Lands) vs. CA, Heirs of Domingo Baloy, G.R. No. L-46145, November 26, 1986. (146 SCRA 15) Facts: Domingo Baloy is the owner of a parcel of land whose title to the land dates back to Spanish times.. On November 26, 1902 pursuant to the executive order of the President of the U.S., the area was declared within the U.S. Naval Reservation. Under Act 627 as amended by Act 1138, a period was fixed within which persons affected thereby could file their application, (that is within 6 months from July 8, 1905) otherwise the said lands or interests therein will be conclusively adjudged to be public lands and all claims on the part of private individuals for such

1

lands or interests therein not to presented will be forever barred. The U.S. Navy did occupy the land for some time as a recreation area. After the U.S. Navy abandoned the land, Baloy came in and asserted title once again, only to be troubled by first Crispiniano Blanco who however in due time, quitclaimed in favor of applicants, and then by private oppositors now, apparently originally tenants of Blanco. Baloy filed an application for land registration, but this was denied. CA reversed. Issue: Whether possession of land not in the concept of owner is a commodatum. Held: Yes. Affirmed. Ratio: Private land could be deemed to have become public land only by virtue of a judicial declaration after due notice and hearing. It runs contrary therefore to the contention of petitioners that failure to present claims set forth under Sec. 2 of Act 627 made the land ipso facto public without any need of judicial pronouncement. Petitioner in making such declaration relied on Sec. 4 of Act 627 alone. But in construing a statute the entire provisions of the law must be considered in order to establish the correct interpretation as intended by the law-making body. Act 627 by its terms is not self- executory and requires implementation by the Court of Land Registration. Act 627, to the extent that it creates a forfeiture, is a penal statute in derogation of private rights, so it must be strictly construed so as to safeguard private respondents' rights. Significantly, petitioner does not even allege the existence of any judgment of the Land Registration court with respect to the land in question. Without a judgment or order declaring the land to be public, its private character and the possessory information title over it must be respected. Since no such order has been rendered by the Land Registration Court it necessarily follows that it never became public land thru the operation of Act 627. To assume otherwise is to deprive private respondents of their property without due process of law. In fact it can be presumed that the notice required by law to be given by publication and by personal service did not include the name of Domingo Baloy and the subject land, and hence he and his land were never brought within the operation of Act 627 as amended. The procedure laid down in Sec. 3 is a requirement of due process. "Due process requires that the statutes under which it is attempted to deprive a citizen of private property without or against his consent must, as in expropriation cases, be strictly complied with, because such statutes are in derogation of general rights." (Arriete vs. Director of Public Works, 58 Phil. 507, 508, 511). The finding of respondent court that during the interim of 57 years from November 26, 1902 to December 17, 1959 (when the U.S. Navy possessed the area) the possessory rights of Baloy or heirs were merely suspended and not lost by prescription, is supported by Exhibit "U," a communication or letter No. 1108-63, dated June 24, 1963,

which contains an official statement of the position of the Republic of the Philippines with regard to the status of the land in question. Said letter recognizes the fact that Domingo Baloy and/or his heirs have been in continuous possession of said land since 1894 as attested by an "Informacion Possessoria" Title, which was granted by the Spanish Government. Hence, the disputed property is private land and this possession was interrupted only by the occupation of the land by the U.S. Navy in 1945 for recreational purposes. The U.S. Navy eventually abandoned the premises. The heirs of the late Domingo P. Baloy, are now in actual possession, and this has been so since the abandonment by the U.S. Navy. A new recreation area is now being used by the U.S. Navy personnel and this place is remote from the land in question. Clearly, the occupancy of the U.S. Navy was not in the concept of owner. It partakes of the character of a commodatum. It cannot therefore militate against the title of Domingo Baloy and his successors-in-interest. One's ownership of a thing may be lost by prescription by reason of another's possession if such possession be under claim of ownership, not where the possession is only intended to be transient, as in the case of the U.S. Navy's occupation of the land concerned, in which case the owner is not divested of his title, although it cannot be exercised in the meantime. Margarota Quintos & Angel A. Ansaldo vs. Beck, G.R. No. 46240, November 3, 1939 (69 Phil 108) Facts: The defendant was a tenant of the plaintiff and occupied the latter's house on M. H. del Pilar street, No. 1175. On January 14, 1936, upon the novation of the contract of lease between the plaintiff and the defendant, the former gratuitously granted to the latter the use of the furniture, subject to the condition that the defendant would return them to the plaintiff upon the latter's demand. The plaintiff sold the property to Maria Lopez and Rosario Lopez, and on September 14, 1936, these three notified the defendant of the conveyance, giving him 60 days to vacate the premises under one of the clauses of the contract of lease. Thereafter, the plaintiff required the defendant to return all the furniture transferred to him for his use. The defendant answered that she may call for them in the house where they are found. On November 5, 1936, the defendant, through another person, wrote to the plaintiff reiterating that she may call for the furniture in the ground floor of the house. On the 7th of the same month, the defendant wrote another letter to the plaintiff informing her that he could not give up the three gas heaters and the four electric lamps because he would use them until the 15th of the same month when the lease is due to expire. The plaintiff refused to get the furniture in view of the fact that the defendant had declined to deliver all of them. On November 15th, before vacating the house, the defendant deposited with the Sheriff all the furniture belonging to the plaintiff and they are now on deposit in the warehouse situated at No. 1521, Rizal Avenue in the custody of the said

2

sheriff. The plaintiff filed suit for the return of the furniture. The lower court ordered the return of the furniture which were already in the possession of the sheriff at the plaintiff’s expense and the payment of any fees for the deposit of the furniture to be share pro rata between the parties. Issue: Whether a bailee in commodatum is obligated to return the thing loaned at the premises of the bailor. Held: Yes. Reversed. Ratio: The contract entered into between the parties is one of commodatum, because under it the plaintiff gratuitously granted the use of the furniture to the defendant, reserving for herself the ownership thereof; by this contract the defendant bound himself to return the furniture to the plaintiff, upon the latter's demand. The obligation voluntarily assumed by the defendant to return the furniture upon the plaintiff's demand, means that he should return all of them to the plaintiff at the latter's residence or house. The defendant did not comply with this obligation when he merely placed them at the disposal of the plaintiff, retaining for his benefit the three gas heaters and the four electric lamps. The provisions of article 1169 of the Civil Code cited by counsel for the parties are not squarely applicable. The trial court, therefore, erred when it came to the legal conclusion that the plaintiff failed to comply with her obligation to get the furniture when they were offered to her. As the defendant had voluntarily undertaken to return all the furniture to the plaintiff, upon the latter's demand, the Court could not legally compel her to bear the expenses occasioned by the deposit of the furniture at the defendant's behest. The latter, as bailee, was not entitled to place the furniture on deposit; nor was the plaintiff under a duty to accept the offer to return the furniture, because the defendant wanted to retain the three gas heaters and the four electric lamps. As to the value of the furniture, we do not believe that the plaintiff is entitled to the payment thereof by the defendant in case of his inability to return some of the furniture, because under paragraph 6 of the stipulation of facts, the defendant has neither agreed to nor admitted the correctness of the said value. Should the defendant fail to deliver some of the furniture, the value thereof should be later determined by the trial court through evidence which the parties may desire to present. The costs in both instances should be borne by the defendant because the plaintiff is the prevailing party (section 487 of the Code of Civil Procedure). The defendant was the one who breached the contract of commodatum, and without any reason he refused to return and deliver all the furniture upon the plaintiff's demand. In these circumstances, it is just and equitable that he pay the legal expenses and other judicial costs which the plaintiff would not have otherwise defrayed.

The Consolidated Bank & Trust Corp (Solidbank) vs. CA, Continental Cement Corp, Gregory T. Lim & Spouse, G.R. No. 114286, April 19, 2001. (356 SCRA 671) Facts: On July 13, 1982, respondents Continental Cement Corporation (hereinafter, respondent Corporation) and Gregory T. Lim (hereinafter, respondent Lim) obtained from petitioner Consolidated Bank and Trust Corporation Letter of Credit No. DOM23277 in the amount of P1,068,150. On the same date, respondent Corporation paid a marginal deposit of P320,445 to petitioner. The letter of credit was used to purchase around five hundred thousand liters of bunker fuel oil from Petrophil Corporation, which the latter delivered directly to respondent Corporation in its Bulacan plant. In relation to the same transaction, a trust receipt for the amount of P1,001,520.93 was executed by respondent Corporation, with respondent Lim as signatory. Claiming that respondents failed to turn over the goods covered by the trust receipt or the proceeds thereof, petitioner filed a complaint for sum of money with application for preliminary attachment before the RTC of Manila. In answer to the complaint, respondents averred that the transaction between them was a simple loan and not a trust receipt transaction, and that the amount claimed by petitioner did not take into account payments already made by them. Respondent Lim also denied any personal liability in the subject transactions. In a Supplemental Answer, respondents prayed for reimbursement of alleged overpayment to petitioner of the amount of P490,228.90. The trial court dismissed the complaint and granted the respondents’ counterclaim. CA partially modified the decision with respect to the award of the counterclaim. Issue: Whether a provision of a floating interest rate which has no reference rate is valid. Held: No. Affirmed. Ratio: There is no error in setting aside the floating rate of interest in the trust receipt. The provision on interest states: “I, WE jointly and severally agree to any increase or decrease in the interest rate which may occur after July 1, 1981, when the Central Bank floated the interest rate, and to pay additionally the penalty of 1% per month until the amount/s or installment/s due and unpaid under the trust receipt on the reverse side hereof is/are fully paid.” The foregoing stipulation is invalid, there being no reference rate set either by it or by the Central Bank, leaving the determination thereof at the sole will and control of petitioner. While it may be acceptable, for practical reasons given the fluctuating economic conditions, for banks to stipulate that interest rates on a loan not be fixed and instead be made dependent upon prevailing market conditions, there should always be a

3

reference rate upon which to peg such variable interest rates. An example of such a valid variable interest rate was found in Polotan, Sr. v. Court of Appeals. In that case, the contractual provision stating that “if there occurs any change in the prevailing market rates, the new interest rate shall be the guiding rate in computing the interest due on the outstanding obligation without need of serving notice to the Cardholder other than the required posting on the monthly statement served to the Cardholder” was considered valid. The aforequoted provision was upheld notwithstanding that it may partake of the nature of an escalation clause, because at the same time it provides for the decrease in the interest rate in case the prevailing market rates dictate its reduction. In other words, unlike the stipulation subject of the instant case, the interest rate involved in the Polotan case is designed to be based on the prevailing market rate. On the other hand, a stipulation ostensibly signifying an agreement to “any increase or decrease in the interest rate,” without more, cannot be accepted by this Court as valid for it leaves solely to the creditor the determination of what interest rate to charge against an outstanding loan. Petitioner has also failed to convince us that its transaction with respondent Corporation is really a trust receipt transaction instead of merely a simple loan, as found by the lower court and the Court of Appeals. The recent case of Colinares v. Court of Appeals appears to be foursquare with the facts obtaining in the case at bar. There, we found that inasmuch as the debtor received the goods subject of the trust receipt before the trust receipt itself was entered into, the transaction in question was a simple loan and not a trust receipt agreement. Prior to the date of execution of the trust receipt, ownership over the goods was already transferred to the debtor. This situation is inconsistent with what normally obtains in a pure trust receipt transaction, wherein the goods belong in ownership to the bank and are only released to the importer in trust after the loan is granted. In the case at bar, as in Colinares, the delivery to respondent Corporation of the goods subject of the trust receipt occurred long before the trust receipt itself was executed. More specifically, delivery of the bunker fuel oil to respondent Corporation’s Bulacan plant commenced on July 7, 1982 and was completed by July 19, 1982. Further, the oil was used up by respondent Corporation in its normal operations by August, 1982. On the other hand, the subject trust receipt was only executed nearly two months after full delivery of the oil was made to respondent Corporation, or on September 2, 1982. The danger in characterizing a simple loan as a trust receipt transaction was explained in Colinares, to wit: The Trust Receipts Law does not seek to enforce payment of the loan, rather it punishes the dishonesty and abuse of confidence in the handling of money or goods to the prejudice of another regardless of whether the latter is the owner. Here, it is crystal clear that on the part of Petitioners there was neither dishonesty nor abuse of confidence in the handling of money to the prejudice of

PBC. Petitioners continually endeavored to meet their obligations, as shown by several receipts issued by PBC acknowledging payment of the loan. The Information charges Petitioners with intent to defraud and misappropriating the money for their personal use. The mala prohibita nature of the alleged offense notwithstanding, intent as a state of mind was not proved to be present in Petitioners’ situation. Petitioners employed no artifice in dealing with PBC and never did they evade payment of their obligation nor attempt to abscond. Instead, Petitioners sought favorable terms precisely to meet their obligation. Also noteworthy is the fact that Petitioners are not importers acquiring the goods for re-sale, contrary to the express provision embodied in the trust receipt. They are contractors who obtained the fungible goods for their construction project. At no time did title over the construction materials pass to the bank, but directly to the Petitioners from CM Builders Centre. This impresses upon the trust receipt in question vagueness and ambiguity, which should not be the basis for criminal prosecution in the event of violation of its provisions. The practice of banks of making borrowers sign trust receipts to facilitate collection of loans and place them under the threats of criminal prosecution should they be unable to pay it may be unjust and inequitable, if not reprehensible. Such agreements are contracts of adhesion which borrowers have no option but to sign lest their loan be disapproved. The resort to this scheme leaves poor and hapless borrowers at the mercy of banks, and is prone to misinterpretation, as had happened in this case. Eventually, PBC showed its true colors and admitted that it was only after collection of the money, as manifested by its Affidavit of Desistance. Oscar D. Ramos & Luz Agudo vs. CA, Adelaida Ramos & Lazaro E. Meneses, G.R. No. 42108, December 29, 1989 (180 SCRA 635) Facts: Sometime in January, 1959, private respondent Adelaida Ramos borrowed from her brother, petitioner Oscar D. Ramos, the amounts of P5,000.00 and P9,000.00 in connection with her business transaction with one Flor Ramiro, Fred Naboa and Atty. Ruperto Sarandi involving the recovery of a parcel of land in Tenejeros, Malabon. The said amount was used to finance the trip to Hawaii of Ramiro, Naboa and Atty. Sarandi. As security for said loan, private respondent Adelaida Ramos executed in favor of petitioners two (2) deeds of conditional sale dated May 27, 1959 and August 30, 1959, of her rights, shares, interests and participation respectively over Lot No. 4033 covered by Original Certificate of Title No. 5125 registered in the name of their parents, Valente Ramos and Margarita Denoga, now deceased, and Lot No. 4221 covered by Transfer Certificate of Title No. 10788 then registered in the names of Socorro Ramos, Josefina Ramos and Adelaida Ramos. Upon the failure of said private respondent as

4

vendor a retro to exercise her right of repurchase within the redemption period, aforenamed petitioner filed a petition for consolidation and approval of the conditional sale of Lot No. 4033 in Special Proceedings No. 5174, entitled "Intestate Estate of the late Margarita Denoga," and a petition for approval of the pacto de retro sale of Lot No. 4221 in the former Court of First Instance of Tarlac acting as a cadastral court. The probate court and cadastral court granted the petitions. Private respondents had been and remained in possession of these properties until sometime in 1964 when petitioner took possession thereof. On February 28, 1968, private respondent filed Civil Case No. 4168 with the then Court of First Instance of Tarlac for declaration of nullity of orders, reformation of instrument, recovery of possession with preliminary injunction and damages. The complaint therein alleged that the deeds of conditional sale, dated May 27, 1959 and August 30, 1959, are mere mortgages and were vitiated by misrepresentation, fraud and undue influence and that the orders dated January 22, 1960 and April 18, 1960, respectively issued by the probate and cadastral courts, were null and void for lack of jurisdiction. The court ruled that the contract between the parties is a loan secured by a real estate mortgage, and set aside the titles issued in favor of the petitioner. CA affirmed. Issue: Whether a loan contract which is made to appear as a conditional sale can be interpreted as an equitable mortgage. Held: Yes. Affirmed. Ratio: Several undisputed circumstances persuade this Court that the questioned deeds should be construed as equitable mortgages: (1) plaintiff vendor remained in possession until 1964 of the properties she allegedly sold in 1959 to defendants; (2) the sums representing the alleged purchase price were actually advanced to plaintiff by way of loans; and (3) the properties allegedly purchased by defendant Oscar Ramos and his wife have never been declared for taxation purposes in their names. Such a conclusion is buttressed by the other circumstances catalogued by respondent court especially the undisputed fact that the two deeds were executed by reason of the loan extended by petitioner Oscar Ramos to private respondent Adelaida Ramos and that the purchase price stated therein was the amount of the loan itself. The above-stated circumstances are more than sufficient to show that the true intention of the parties is that the transaction shall secure the payment of said debt and, therefore, shall be presumed to be an equitable mortgage under Paragraph 6 of Article 1602 herein before quoted. Settled is the rule that to create the presumption enunciated by Article 1602, the existence of one circumstance is enough. The said article expressly provides therefor "in any of the following cases," hence the existence of any of the circumstances enumerated therein,

not a concurrence nor an overwhelming number of such circumstances, suffices to give rise to the presumption that the contract with the right of repurchase is an equitable mortgage. On the faces thereof, the contracts purport to be sales with pacto de retro; however, since the same were actually executed in consideration of the aforesaid loans said contracts are indubitably equitable mortgages. The rule is firmly settled that whenever it is clearly shown that a deed of sale with pacto de retro, regular on its face, is given as security for a loan, it must be regarded as an equitable mortgage. Article 1602 of the Civil Code is designed primarily to curtail the evils brought about by contracts of sale with right of repurchase, such as the circumvention of the laws against usury and pactum commissorium. In the present case before us, to rule otherwise would contravene the legislative intent to accord the vendor a retro maximum safeguards for the protection of his legal rights under the true agreement of the parties. In re Liquidation of the Mercantile Bank of China. Gopoco Grocery (Gopoco) et al. vs. Pacific Coast Biscuit Co., et al., G.R. No. 43697 and 44200, March 31, 1938 (65 Phil 443) Facts: The Bank Commissioner, on petition, found, after an investigation, that the Mercantile Bank of China could not continue operating as such without running the risk of suffering losses and prejudicing its depositors and customers. With the requisite approval of the corresponding authorities, he took charge of all the assets thereof. The CFI of Manila declared the said bank in liquidation; approved all the acts theretofore executed by the commissioner; prohibited the officers and agents of the bank from interfering with said commissioner in the possession of the assets thereof, its documents, deeds, vouchers, books of account, papers, memorandums, notes, bonds, bonds and accounts, obligations or securities and its real and personal properties; required its creditors and all those who had any claim against it, to present the same in writing before the commissioner within ninety days; and ordered the publication, as was in fact done, of the order containing all these provisions, for two consecutive weeks in two newspapers of general circulation in the City of Manila, at the expense of the aforesaid bank. After these publications, and within the period of ninety days, the following creditors, among others, presented their claims: Tiong Chui Gion, Gopoco Grocery, Tan Locko, Woo & Lo & Co., Sy Guan Huat, and La Bella Tondeña. To better resolve not only these claims but also the many others which were presented against the bank, the lower court, on July 15, 1932, appointed Fulgencio Borromeo as commissioner and referee to receive the evidence which the interested parties may desire to present; and the commissioner and referee thus named, after qualifying for the office and receiving the evidence

5

presented to him, resolved the aforesaid six claims by recommending that the same be considered as an ordinary credit only, and not as a preferred credit as the interested parties wanted, because they were at the same time debtors of the bank. The lower court approved all the recommendations of the commissioner and referee. Not agreeable to the decision of the lower court, each of the interested parties appealed therefrom. Issue: Whether bank deposits are considered preferred credits. Held: No. Affirmed. Ratio: The parties themselves admit that the bank had been paying them interest and that even now the bank owes them interest which should have been paid to them before it was declared in a state of liquidation. This fact undoubtedly destroys the character which they would impress upon their deposits on current account, and nullifies their contention that the same be considered as irregular deposits, because the payment of interest only takes place in the case of loans. On the other hand, as we stated with respect to the claim of Tan Tiong Tick (In re Liquidation of Mercantile Bank of China, G. R. No. 43682), the provisions of the Code of Commerce, and not those of the Civil Code, are, applicable to cases of the nature of those at bar, which have to do with parties who are both merchants. (Articles 303 and 309, Code of Commerce.) We there said, and it is not amiss to repeat now, that the socalled current account and savings deposits have lost their character of deposits, properly so-called, and are converted into simple commercial loans because, in cases of such deposits, the bank has made use thereof in the ordinary course of its transactions as an institution engaged in the banking business, not because it so wishes, but precisely because of the authority deemed to have been granted to it by the appellants to enable them to collect the interest which they had been and they are now collecting, and by virtue further of the authority granted to it by section 125 of the Corporation Law (Act No. 1459), as amended by Acts Nos. 2003 and 3610 and section 9 of the Banking Law (Act No. 3154), without considering of course the provisions of article 1768 of the Civil Code. Wherefore, it is held that the deposits on current account of the appellants in the bank under liquidation, with the right on their part to collect interest, have not created and could not create a juridical relation between them except that of creditors and debtor, they being the creditors and the bank the debtor. The question of set-off raised by them cannot be resolved except in the same way that we resolved a like question in the said case, G. R. No. 43672, entitled "In re Liquidation of Mercantile Bank of China. Tan Tiong Tick, claimant." It is proper that set- offs be made, inasmuch as the appellants and the bank being reciprocally debtors and creditors, the same is only just and according to law (art. 1195, Civil Code), particularly as none of the appellants falls within the exceptions mentioned in section

58 of the Insolvency Law (Act No. 1956) which states, “(i)n all cases of mutual debts and mutual credits between the parties, the account between them shall be stated, and one debt set off against the other, and the balance only shall be allowed and paid. But no set-off or counterclaim shall be allowed of a claim in its nature not provable against the estate: Provided, That no set-off or counterclaim shall be allowed in favor of any debtor to the insolvent of a claim purchased by or transferred to such debtor within thirty days immediately preceding the filing, or after the filing of the petition by or against the insolvent.” The question of whether they are entitled to interest should be resolved in the same way that we resolved the case of the claimant Tan Tiong Tick. The circumstances in these two cases are certainly the same as those in the said case with reference to the said question. the Mercantile Bank of China owes to each of the appellants the interest claimed by them, corresponding to the year ending December 4, 1931, the date it was declared in a state of liquidation, but not those which the appellants claim should be earned by their deposits after said date and until the full amounts thereof are paid to them. And with respect to the question of set-off, this should be deemed made, of course, as of the date when the Mercantile Bank of China was declared in a state of liquidation, that is, on December 4, 1931, for then there was already a reciprocal concurrence of debts, with respect to said bank and the appellants. United Coconut Planters Banks vs. Sps. Samuel and Odette Beluso, G.R. No. 159912, August 17, 2007 (530 SCRA 567) Facts: On April 16, 1996, UCPB granted spouses Beluso a Promissory Notes Line under a Credit Agreement whereby the latter could avail from the former credit of up to a maximum amount of P1.2 million for 1 year. A real estate mortgage was executed as an additional security. The credit agreement was subsequently amended to increase the amount to a maximum of P2.35 million and to extend the term to Feb. 28, 1998. The spouses Beluso fully availed of the credit at varying times and upon execution of promissory notes, although they would later deny the receipt of P350,000. UCPB applied interest rates on the different promissory notes ranging from 18% to 34%. The spouses Beluso were able to pay the total sum of P763,692 up to Feb. 28, 1998. They were unable to pay afterwards. Their loans were still being charged interest at varying rates from 28% to 33%. On September 2, 1998, UCPB demanded the payment of the total obligation of P2,932,543 plus 25% atty’s fees. On December 28 1998, UCPB foreclosed the properties mortgaged by the spouses Beluso due to the non-payment of their debt which had ballooned to P3,784,603. On February 9, 1999, the spouses Beluso filed a Petition for Annulment, Accounting and Damages against UCPB with the RTC of Makati City. RTC ruled in favor of

6

the spouses Beluso, although they were still made to pay P1,560,308 to the bank. CA affirmed. Issue: Whether a provision that sets the interest at the rate “indicative of DBD retail rate or as determined by the Branch Head” is void. Held: Yes. Modified. Ratio: The promissory notes stated that the interest thereon shall be “at the rate indicative of DBD retail rate or as determined by the Branch Head.” In the case of PNB vs. CA (196 SCRA 536), in order that obligations arising from contracts may have the force of law between the parties, there must be a mutuality between the parties based on their essential equality. A contract containing a condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one of the contracting parties, is void. Hence, even assuming that the loan agreement between the PNB and the private respondent gave PNB a license to increase the interest rate at will during the term of the loan, that license would have been null and void for being violative of the principle of mutuality essential in contracts. It would have invested the loan agreement with the character of a contract of adhesion, where the parties do not bargain on equal footing, the weaker party’s participation being reduced to the alternative “to take it or leave it”. Such a contract is a veritable trap for the weaker party whom the courts of justice must protect against abuse and imposition. The provision stating that interest rate shall be at the rate indicative of DBD retail rate or as determined by the Branch Head is indeed dependent solely on the will of UCPB. Under such provision, UCPB has 2 choices on what interest rate shall be: (1) a rate indicative of the DBD retail rate; or (2) a rate as determined by the branch head. As UCPB is given this choice, the rate should be categorically determined in both choices. If either of these 2 choices presents an opportunity for UCPB to fix the rate at will, the bank can easily choose such an option, thus making the entire interest rate provision violative of the principle of mutuality of contracts. Not just one, but rather both, of these choices are dependent solely on the will of UCPB. Clearly, a rate “as determined by the Branch Head” gives the latter unfettered discretion on what the rate may be. The Branch Head may choose any rate he or she desires. As regards the rate “indicative of the DBD retail rate,” the same cannot be considered as valid for being akin to a “prevailing rate” or “prime rate” allowed by this Court in Polotan vs CA (296 SCRA 247). The interest rate in Polotan reads: The Cardholder agrees to pay interest per annum at 3% plus the prime rate of Security Bank and Trust Company. In this provision in Polotan, there is a fixed margin over the reference rate: 3%. Thus, the parties can easily determine the interest rate by applying simple arithmetic. On the other hand, the provision in the case at bar does not specify any margin above or below the DBD retail rate.

UCPB can peg the interest at any percentage above or below the DBD retail rate, again giving it unfettered discretion in determining the interest rate. The stipulation in the promissory notes subjecting the interest rate to review does not render the imposition by UCPB of interest rates on the obligations of the spouses Beluso valid. It should be pointed out that the authority to review the interest rate was given UCPB alone as the lender. Moreover, UCPB may apply the considerations enumerated in this provision as it wishes. As worded in the above provision, UCPB may give as much weight as it desires to each of the following considerations: (1) the prevailing financial and monetary condition; (2) the rate of interest and charges which other banks or financial institutions charge or offer to charge for similar accommodations; and/or (3) the resulting profitability to the LENDER (UCPB) after due consideration of all dealings with the BORROWER (the spouses Beluso). Again, as in the case of the interest rate provision, there is no fixed margin above or below these considerations. The interest rate provisions in the case at bar are illegal not only because of the provisions of the Civil Code on mutuality of contracts, but also, as shall be discussed later, because they violate the Truth in Lending Act. Not disclosing the true finance charges in connection with the extensions of credit is, furthermore, a form of deception which we cannot countenance. It is against the policy of the State as stated in the Truth in Lending Act: Sec. 2. Declaration of Policy. – It is hereby declared to be the policy of the State to protect its citizens from a lack of awareness of the true cost of credit to the user by assuring a full disclosure of such cost with a view of preventing the uninformed use of credit to the detriment of the national economy. Moreover, while the spouses Beluso indeed agreed to renew the credit line, the offending provisions are found in the promissory notes themselves, not in the credit line. In fixing the interest rates in the promissory notes to cover the renewed credit line, UCPB still reserved to itself the same two options – (1) a rate indicative of the DBD retail rate; or (2) a rate as determined by the Branch Head. As for the claim of UCPB that, in lieu of the bank’s interest rate, legal interest rate should apply, the court upheld this claim. The excess amount in such a demand does not nullify the demand itself, which is valid with respect to the proper amount. A contrary ruling would put commercial transactions in disarray, as validity of demands would be dependent on the exactness of the computations thereof, which are too often contested. There being a valid demand on the part of UCPB, albeit excessive, the spouses Beluso are considered in default with respect to the proper amount and, therefore, the interests and the penalties began to run at that point. As regards the award of 12% legal interest in favor of petitioner, the RTC actually recognized that said legal interest should be imposed, thus: “There being no valid stipulation as to interest, the legal rate of interest shall be charged.” It seems that the RTC inadvertently overlooked its non-inclusion in its computation.

7

The contract stipulation providing the compounding of interest is likewise upheld because it was neither nullified by the lower court nor assailed by the spouses Beluso. The penalty imposed by UCPB, ranging from 30.41% to 36% was held to be iniquitous. It was reduced to 12% per annum. Since both parties were compelled to litigate and both parties were legally entitled to atty’s fees, their claims are set off and neither are given any award for such. The foreclosure is valid because there was a valid demand on the spouses Beluso, although excessive, and the spouses Beluso were in default. The proceeds of the foreclosure sale should be applied to the extent of the amounts to which UCPB is rightfully entitled. The grounds for the proper annulment of the foreclosure sale are not present in this case such as (1) fraud, collusion, accident, mutual mistake, breach of trust or misconduct by the purchase; (2) sale had not been fairly and regularly conducts; or (3) the price was inadequate and the inadequacy was so great as to shock the conscience of the court. The fine of P26,000 issued against UCPB for violation of RA 3765 of the Truth in Lending Act is affirmed. Even though the spouses Beluso did not categorically charge UCPB of violating such Act in their complaint, the allegations in the complaint, much more than the title thereof, are controlling. The allegation that the promissory notes grant UCPB the power to unilaterally fix the interest rates certainly also means that the promissory notes do not contain a “clear statement in writing” of “(6) the finance charge expressed in terms of pesos and centavos; and (7) the percentage that the finance charge bears to the amount to be financed expressed as a simple annual rate on the outstanding unpaid balance of the obligation.” Furthermore, the spouses Beluso’s prayer “for such other reliefs just and equitable in the premises” should be deemed to include the civil penalty provided for in Section 6(a) of the Truth in Lending Act. UCPB’s contention that this action to recover the penalty for the violation of the Truth in Lending Act has already prescribed is likewise without merit. The penalty for the violation of the act is P100 or an amount equal to twice the finance charge required by such creditor in connection with such transaction, whichever is greater, except that such liability shall not exceed P2,000.00 on any credit transaction. As this penalty depends on the finance charge required of the borrower, the borrower’s cause of action would only accrue when such finance charge is required. In the case at bar, the date of the demand for payment of the finance charge is 2 September 1998, while the foreclosure was made on 28 December 1998. The filing of the case on 9 February 1999 is therefore within the oneyear prescriptive period. UCPB argues that a violation of the Truth in Lending Act, being a criminal offense, cannot be inferred nor implied from the allegations made in the complaint. As can be gleaned from Section 6(a) and (c) of the Truth in

Lending Act, the violation of the said Act gives rise to both criminal and civil liabilities. Section 6(c) considers a criminal offense the willful violation of the Act, imposing the penalty therefor of fine, imprisonment or both. Section 6(a), on the other hand, clearly provides for a civil cause of action for failure to disclose any information of the required information to any person in violation of the Act. In the case at bar, therefore, the civil action to recover the penalty under Section 6(a) of the Truth in Lending Act had been jointly instituted with (1) the action to declare the interests in the promissory notes void, and (2) the action to declare the foreclosure void. This joinder is allowed under Rule 2, Section 5 of the Rules of Court. Petitioner further posits that it is the Metropolitan Trial Court which has jurisdiction to try and adjudicate the alleged violation of the Truth in Lending Act, considering that the present action allegedly involved a single credit transaction as there was only one Promissory Note Line. We disagree. We have already ruled that the action to recover the penalty under Section 6(a) of the Truth in Lending Act had been jointly instituted with (1) the action to declare the interests in the promissory notes void, and (2) the action to declare the foreclosure void. There had been no question that the above actions belong to the jurisdiction of the RTC. Furthermore, opening a credit line does not create a credit transaction of loan or mutuum, since the former is merely a preparatory contract to the contract of loan or mutuum. Under such credit line, the bank is merely obliged, for the considerations specified therefor, to lend to the other party amounts not exceeding the limit provided. The credit transaction thus occurred not when the credit line was opened, but rather when the credit line was availed of. In the case at bar, the violation of the Truth in Lending Act allegedly occurred not when the parties executed the Credit Agreement, where no interest rate was mentioned, but when the parties executed the promissory notes, where the allegedly offending interest rate was stipulated. UCPB further argues that since the spouses Beluso were duly given copies of the subject promissory notes after their execution, then they were duly notified of the terms thereof, in substantial compliance with the Truth in Lending Act. Once more, we disagree. Section 4 of the Truth in Lending Act clearly provides that the disclosure statement must be furnished prior to the consummation of the transaction. The rationale of this provision is to protect users of credit from a lack of awareness of the true cost thereof, proceeding from the experience that banks are able to conceal such true cost by hidden charges, uncertainty of interest rates, deduction of interests from the loaned amount, and the like. The law thereby seeks to protect debtors by permitting them to fully appreciate the true cost of their loan, to enable them to give full consent to the contract, and to properly evaluate their options in arriving at business decisions. Upholding UCPB’s claim of substantial compliance would defeat these purposes of the Truth in Lending Act. The belated discovery of the true cost of credit will too often not be able

8

to reverse the ill effects of an already consummated business decision. There was no forum shopping when the spouses Beluso first filed an action for injunction which was dismissed due to improper venue and later filed an action for annulment. Even assuming there was forum shopping, the rule that the later action should be dismissed is not absolute. The more appropriate case may prevail. Pilipinas Bank vs. CA & Lilia R. Echaus, G.R. No. 97873, August 12, 1993 (225 SCRA 268) Facts: The petitioner and Greatland Realty Corporation (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. Greatland assigned P2,300,000.00 out of the total consideration of the Dacion en Pago, in favor of private respondent. Notwithstanding her demand for payment, petitioner, in bad faith, refused and failed to pay the said amount assigned to her. Private respondent sued. Petitioner, while admitting the execution of the Dacion en Pago, claimed: (1) that its former president had no authority to enter into such agreement; (2) that it never ratified the same; and (3) that assuming arguendo that the agreement was binding, the conditions stipulated therein were never fulfilled. Trial court ruled in favor of private respondent. The case was appealed. A motion for execution pending appeal was filed and approved by the lower court. The CA modified the execution pending appeal by deferring the execution of the award for moral, exemplary and nominal damages to await the final judgment of the main case. The SC affirmed the CA. The CA eventually ruled in favor of private respondent. The decision awarded interest at the legal rate from the date when the demand was first made. The decision became final and executory. The petitioner sought for payment of interest at the rate of 6% per annum only. The private respondent sought for interest at the rate of 12% per annum pursuant to CB Circular No. 416. The court ruled that the proper interest rate was 12%. A clarification was sought with the CA which ruled that the proper interest rate was 12%. Issue: Whether an obligation arising from a contract of sale is such a forbearance that would merit an award for interest of 12% per annum. Held: No. Reversed. Ratio: The Court of Appeals was of the theory that the action in Civil Case No. 239-A filed by private respondent against petitioner "involves forbearance of money, as the principal award to plaintiff-appellee (private respondent)

in the amount of P2,300,000.00 was the overdue debt of defendant-appellant to her since July 1981. The case is, in effect, a simple collection of the money due to plaintiffappellee, as the unpaid creditor from the defendant bank, the debtor" (Resolution, p. 3; Rollo, p. 33). Applying Central Bank Circular No. 416, the Court of Appeals held that the applicable rate of interest is 12% per annum. Petitioner argues that the applicable law is Article 2209 of the Civil Code, not the Central Bank Circular No. 416. Said Article 2209 provides that if the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon, and in the absence of stipulation, the legal interest, which is six per cent per annum. In Reformina v. Tomol, Jr., 139 SCRA 260 [1985], the Court held that the judgments spoken of and referred to in Circular No. 416 are "judgments in litigation involving loans or forbearance of any money, goods or credits. Any other kind of monetary judgment which has nothing to do with nor involving loans or forbearance of any money, goods or credits does not fall within the coverage of the said law for it is not, within the ambit of the authority granted to the Central Bank." Reformina was affirmed in Philippine Virginia Tobacco Administration v. Tensuan, 188 SCRA 628 [1990], which emphasized that the "judgments" contemplated in Circular No. 417 "are judgments involving said loans or forbearance only and not in judgments in litigation that have nothing to do with loans . . ." We held that Circular No. 416 does not apply to judgments involving damages (Reformina v. Tomol, Jr., supra; Philippine Virginia Tobacco Administration v. Tensuan, supra) and compensation in expropriation proceedings (National Power Corporation v. Angas, 208 SCRA 542 [1992]). We also held that Circular No. 416 applies to judgments involving the payment of unliquidated cash advances to an employee by his employer (Villarica v. Court of Appeals, 123 SCRA 259 [1983]) and the return of money paid by a buyer of a leasehold right but which contract was voided due to the fault of the seller (Buisier v. Court of Appeals, 154 SCRA 438 [1987]). What then is the nature of the judgment ordering petitioner to pay private respondent the amount of P2,300,000.00? The said amount was a portion of the P7,776,335.69 which petitioner was obligated to pay Greatland as consideration for the sale of several parcels of land by Greatland to petitioner. The amount of P2,300,000.00 was assigned by Greatland in favor of private respondent. The said obligation therefore arose from a contract of purchase and sale and not from a contract of loan or mutuum. Hence, what is applicable is the rate of 6% per annum as provided in Article 2209 of the Civil Code of the Philippines and not the rate of 12% per annum as provided in Circular No. 416.

9

Pacita F. Reformina & Heirs of Francisco Reformina vs. Honorable Valeriano P. Tomol, Jr., CFI Judge, Br XI, Cebu City, Shell Refining Company (Phils.), Inc. & Michael, Inc., G.R. No. L-59096, October 11, 1985 (139 SCRA 260) Facts: The Reforminas lost a boat and its equipment as a result of a fire. They sued Shell and Michael, Inc. The CFI ruled in their favor and awarded legal interest from the filing of the complaint. The CA modified the decision, but still granted legal interest. The decision became final, and the case was remanded to the CFI for execution. The Reforminas claim that the legal interest should be 12% per annum pursuant to CB Circular No. 416. Shell and Michael, Inc. claim that that the interest should be 6% as stated in Art. 2209 NCC in relation to Art. 2210 and 2211 NCC. The CFI ruled that the interest rate should be at 6%. Issue: Whether the legal interest rate for a judgment involving damages to property is 12%. Held: No. Affirmed. Ratio: Central Bank Circular No. 416 which took effect on July 29, 1974 was issued and promulgated by the Monetary Board pursuant to the authority granted to the Central Bank by P.D. No. 116, which amended Act No. 2655, otherwise known as the Usury Law. The said law states that the Monetary Board is hereby authorized to prescribe the maximum rate or rates of interest for the loan or renewal thereof or the forbearance of any money, goods or credits, and to change such rate or rates whenever warranted by prevailing economic and social conditions: Provided, That such changes shall not be made oftener than once every twelve months. Acting pursuant to this grant of authority, the Monetary Board increased the rate of legal interest from that of six (6%) percent per annum originally allowed under Section 1 of Act No. 2655 to twelve (12%) percent per annum. Act No. 2655 deals with interest on (1) loans; (2) forbearances of any money, goods, or credits; and (3) rate allowed in judgments. The judgments spoken of and referred to are judgments in litigations involving loans or forbearance of any money, goods or credits. Any other kind of monetary judgment which has nothing to do with, nor involving loans or forbearance of any money, goods or credits does not fall within the coverage of the said law for it is not within the ambit of the authority granted to the Central Bank. The Monetary Board may not tread on forbidden grounds. It cannot rewrite other laws. That function is vested solely with the legislative authority. It is axiomatic in legal hermeneutics that statutes should be construed as a whole and not as a series of disconnected articles and phrases. In the absence of a clear contrary intention, words and phrases in statutes should not be

interpreted in isolation from one another. A word or phrase in a statute is always used in association with other words or phrases and its meaning may thus be modified or restricted by the latter. Another formidable argument against the tenability of petitioners' stand are the whereases of PD No. 116 which brought about the grant of authority to the Central Bank. The decision herein sought to be executed is one rendered in an Action for Damages for injury to persons and loss of property and does not involve any loan, much less forbearances of any money, goods or credits. As correctly argued by the private respondents, the law applicable to the said case is Article 2209 NCC. Plana, concurring& dissenting: The Usury Law does not empower the Central Bank to fix the specific rate of interest to be charged for loans. It merely grants the power to prescribe the maximum interest rate, leaving it to the contracting parties to determine within the allowable limit what precisely the interest rate will be. In other words, the provision presupposes that the parties to the loan agreement are free to fix the interest rate, the ceiling prescribed by the Central Bank operating merely to restrict the parties' freedom to stipulate. So viewed, Sec. 1-a cannot include a provision on interest to be allowed in judgments, which is not the subject of contractual stipulations and therefore cannot logically be made subject to interest ceiling, which is all that Sec. 1-a covers. Note that Central Bank Circular 416 itself invokes as the basis for its issuance Sec. 1, rather than Sec. 1-a, of the Usury Law. By purpose and operative effect, Sec. 1 of the Usury Law is different from Sec. 1- a. This section envisages two situations: (a) a loan or forbearance of money, goods of credit, where the parties agreed on the payment of interest but failed to fix the rate thereof; and (b) a litigation that has ended in a final judgment for the payment of money. In either case, the role of Section 1 is to fix the specific rate of interest or legal interest (6%) to be charged. It also impliedly delegates to the Central Bank the power to modify the said interest rate. Thus, the interest rate shall be 6% per annum or "such rate as may be prescribed by the Monetary Board of the Central Bank”. The authority to change the legal interest that has been delegated to the Central Bank under the quoted Section 1 is absolute and unqualified. It is true that Section 1 says that the rate of interest shall be 6% per annum or "such rate as may be prescribed by the Monetary Board of the Central Bank... in accordance with the authority hereby granted." But neither in the said section nor in any other section of the law is there a guideline or limitation imposed on the Central Bank. The determination of what the applicable interest rate shall be, as distinguished from interest rate ceiling, is completely left to the judgment of the Central Bank. In short, there is a total abdication of legislative power, which renders the delegation void.

10

The Overseas Bank of Manila vs. CA & Tony Tapia, in his capacity as atty-in-fact of Enrique Michel de Champourcin, G.R. No. L-49353, June 11, 1981 (105 SCRA 49) Facts: Tapia, in behalf of Enrique de Champourcin, instituted an action against the Overseas Bank of Manila to enforce collection of the proceeds of a time deposit for which TOBM had issued a certificate for P100,000.00, with an interest rate of 4 1/2% per annum. The lower court ruled for Tapia. TOBM appealed. During the pendency of the appeal, TOBM was excluded by the Central Bank under Monetary Board Resolution No. 1263 from inter-bank clearing, and its operations were suspended by a Central Bank resolution. In another resolution, the Central Bank forbade TOBM to do business preparatory to its forcible liquidation. These Resolutions were, however, annulled and set aside by the Supreme Court in its decision in Ramos vs. Central Bank, L29350, promulgated October 4, 1971. To assure maximum protection to its depositors, creditors and the public interest, the rehabilitation, normalization and stabilization thereof was also ordered by the Supreme Court. Nevetheless, the CB resolution suspending TOBM's business operations had actually been implemented starting 2 August 1968, before it was annulled, and that as of this writing TOBM has yet to resume operations in accordance with the aforesaid program of rehabilitation approved by this Honorable Supreme Court. The CA affirmed the lower court decision in toto. Issue: Whether a person who has deposited money to a bank whose operations have been suspended by the Central Bank is entitled to the payment of interest. Held: No. Reversed. Ratio: In the case of Chinese Grocer's Association, et al. vs. American Apothecaries, 65 Phil. 395, the Supreme Court has held that the appellant is not entitled to charge interest on the amounts of his claims. Upon this point a distinction must be made between the interest which the deposits should earn from their existence until the bank ceased to operate, and that which they may earn from the time the bank's operations were stopped until the date of payment of the deposits. As to the first class, we hold that it should be paid because such interest has been earned in the ordinary course of the bank's business and before the latter has been declared in a state of liquidation. Moreover, the bank being authorized by law to make use of the deposits, with the limitation stated, to invest the same in its business and other operations, it may be presumed that it bound itself to pay interest to the depositors as in fact it paid interest prior to the dates of the said claims. As to the interest which may be charged from the date the bank ceased to do business because it was declared in a state of liquidation, we hold that the said interest should not be paid.

It is a matter of common knowledge, which We take judicial notice of, that what enables a bank to pay stipulated interest on money deposited with it is that thru the other aspects of its operation it is able to generate funds to cover the payment of such interest. Unless a bank can lend money, engage in international transactions, acquire foreclosed mortgaged properties or their proceeds and generally engage in other banking and financing activities from which it can derive income, it is inconceivable how it can carry on as a depository obligated to pay stipulated interest. Conventional wisdom dictates this inexorable fair and just conclusion. And it can be said that all who deposit money in banks are aware of such a simple economic proposition. Consequently, it should be deemed read into every contract of deposit with a bank that the obligation to pay interest on the deposit ceases the moment the operation of the bank is completely suspended by the duly constituted authority, the Central Bank. We consider it of trivial consequence that the stoppage of the bank's operation by the Central Bank has been subsequently declared illegal by the Supreme Court, for before the Court's order, the bank had no alternative under the law than to obey the orders of the Central Bank. Whatever be the juridical significance of the subsequent action of the Supreme Court, the stubborn fact remained that the petitioner was totally crippled from then on from earning the income needed to meet its obligations to its depositors. If such a situation cannot, strictly speaking, be legally denominated as "force majeure", as maintained by private respondent, We hold it is a matter of simple equity that it be treated as such. As We have explained earlier, the complete factual suspension of petitioner's operation as a bank disabled it to commit itself to the payment of such interest. Hopefully, petitioner may be able to resume operations and recover its standing as a normal bank. But it is almost vain to expect that within the forseeable future, it would be in a position to pay in full even at least the deposits themselves, not to mention the interest thereon. In justice and equity, having been subjected to what the Supreme Court has found to be an unfortunate excess or abuse by the Central Bank of the exercise of its authority under the law, it would be, to put it tritely, "squeezing blood out of turnip" for Us to grant private respondent's demand. Parenthetically, We may add for the guidance of those who might be concerned, and so that unnecessary litigations may be avoided from further clogging the dockets of the courts, that in the light of the considerations expounded in the above opinion, the same formula that exempts petitioner from the payment of interest to its depositors during the whole period of factual stoppage of its operations by orders of the Central Bank, modified in effect by the decision as well as the approval of a formula of rehabilitation by this court, should be, as a matter of consistency, applicable or followed in respect to all other obligations of petitioner which could not be paid during the period of its actual complete closure.

11

The Overseas Bank of Manila vs. Vicente Cordero, G.R. No. L-33582, March 30, 1982 (113 SCRA 303) Facts: Respondent Cordero made a time deposit of P80,000 with The Overseas Bank of Manila. However, due to its distressed financial condition, petitioner was unable to pay Cordero his said time deposit together with the interest. Cordero filed a case. TOBM raised as a defense the suspension of its operations by order of the Central Bank. The lower court ruled for Cordero on the issues of the payment of the principal and interest, but did not award attorney’s fees. CA affirmed. The principal amount of the deposit was later paid, leaving only the interest and attorney’s fees unpaid. Issue: Whether attorney’s fees can be awarded against a bank which did not pay a depositor due to the suspension of its operations. Held: No. Modified. Ratio: Neither can respondent Cordero recover attorney's fees. The trial court found that herein petitioner's refusal to pay was not due to a wilful and dishonest refusal to comply with its obligation but to restrictions imposed by the Central Bank. Since respondent did not appeal from this decision, he is now barred from contesting the same. Emerito M. Ramos vs. Central Bank of the Philippines, Commercial Bank of Manila, G.R. No. L-29352, July 22, 1985 (137 SCRA 685) Facts: The operations of Overseas Bank of Manila were suspended by the Central Bank. During the suspension of its operations, the Central Bank loaned some funds to the TOBM. The suspension order was later set aside by the Supreme Court, and the rehabilitation of TOBM was ordered. The rehabilitation program did not succeed. And so, the Central Bank called for bidders to recapitalize OBM. It was at this point that the Investment and Underwriting Corporation of the Philippines (IUCP) acquired controlling interest in OBM. IUCP specifically agreed to pay the 6% interest on the aforestated liabilities to the Central Bank. In 1981, OBM reopened business under its new corporate name, Commercial Bank of Manila (COMBANK). On April 13, 1981, COMBANK paid Central Bank partial interests from August 1, 1968 to January 7, 1981 on the P63M advances of the Central Bank to OBM. However, it refused further payment of interest when the Supreme Court rendered its decision in OBM vs. CA and Tony Tapia. To solve the impasse, COMBANK and the Central Bank agreed to abide by any clarificatory ruling the Supreme Court may render on the matter. The Supreme Court ruled that the bank is not liable for interest on the Central Bank loans and advances during the period of

its closure. Central Bank moved to reconsider. Issue: Whether a bank is obligated to pay the Central Bank for loans it gives to the bank during its period of closure. Held: No. Affirmed. Ratio: In the Tapia ruling (105 SCRA 49, June 11, 1981), the Court held that "the obligation to pay interest on the deposit ceases the moment the operation of the bank is completely suspended by the duly constituted authority, the Central Bank," and that "for the guidance of those who might be concerned, and so that unnecessary litigations may be avoided from further clogging the dockets of the courts, that in the light of the considerations expounded in the above opinion, the same formula that exempts petitioner from the payment of interest to its depositors during the whole period of factual stoppage of its operations by orders of the Central Bank, modified in effect by the decision as well as the approval of a formula of rehabilitation by this Court, should be, as a matter of consistency, applicable or followed in respect to all other obligations of petitioner which could not be paid during the period of its actual complete closure." The Tapia ruling is fully applicable to the nonpayment of interest, during the period of the bank's forcible closure, on loans and advances made by respondent Central Bank. Respondent Central Bank itself when it was then managing the Overseas Bank of Manila (now Commercial Bank of Manila) under a holding trust agreement. It should be further noted that the respondent Central Bank when called upon to deal with commercial banks and extend to them emergency loans and advances, deals with them not as an ordinary creditor engaged in business, but as the ultimate monetary authority of government charged with the supervision and preservation of the banking system. The Court's Resolution of October 19, 1982 manifestly redounds to the benefit of another government institution, the GSIS, which has acquired 99.93% of the outstanding capital stock of the COMBANK and to the preservation of the banking system. Aquino,dissenting: Court has no jurisdiction. Melencio-Herrera, dissenting: I agree with the Solicitor General that loans and advances made by the Central Bank to the then Overseas Bank of Manila (OBM) cannot be treated in the same manner as deposits made by ordinary depositors. The Tapia ruling, to my mind, is doctrinal only insofar as it holds that payment of interest on deposits ceases the moment the operation of the bank is completely suspended by the Central Bank, but not when it applies said ruling to interest on loans and advances made by the Central Bank, that point not having been in issue since the Central Bank was not a party therein. As a matter of fact, the paragraph extending its application "to all other obligations of OBM which could not be paid during the period of its

12

complete closure" (p. 62) is prefaced by the term "parenthetically." Moreover, interest payment on the loans and advances made by the Central Bank was the subject of explicit agreement between the parties at a time when the OBM had already been closed, the rehabilitation plan already agreed upon and, in fact, was one of the terms and conditions for the resumption of normal banking operations of OBM (now COMBANK). Significantly, too, as brought out during the hearing, held on October 23, 1984, the interest due has been determined and the moneys therefor held in escrow. Plana, dissenting: Ramos vs. Central Bank was decided by this Court way back on October 4, 1971 on the issue of the validity of the OBM closure. The case did not involve any question as to the liability of OBM for interest on deposits or any other obligation. Surprisingly, however, on February 17, 1982 — more than 10 years after the entry of judgment in Ramos vs. Central Bank — COMBANK filed a motion to intervene in said case as well as a motion praying for a clarificatory ruling on the liability of OBM to pay interest on Central Bank loans and advances. In a Minute Resolution dated October 19, 1982, this Court ruled that OBM is not liable to pay interest on Central Bank loans and advances during the period of its closure. The motion of the Central Bank under consideration seeks a reconsideration of that ruling. There are cogent reasons why OBM (now COMBANK) should be held liable for the payment of interests on CB loans and advances. (a) The loans and advances in question were granted by the Central Bank to OBM before the latter's closure in 1968 to enable it to meet its obligations to its depositors whose money (deposits) it had been able to use in the generation of income. (b) For the period during which OBM stopped banking operations, it collected interests on loans granted by it to its clients. (Actually, the Central Bank closure order was limited only to normal banking operations; it did not prohibit the collection of OBM receivables, including interests due.) If OBM thus collected interests on loans granted by it, why should it not pay interest on loans and advances given to it by the Central Bank to meet its liquidity problems? Is it not enough that OBM has already been exempted from the payment of interests on bank deposits? (c) Money does not come gratuitously to the Central Bank. It has cost. This is now of common knowledge because the JOBO bills and the high interests rates they carry are familiar to all. But even before the advent of JOBO bills, the Central Bank was borrowing money locally and/or from external sources and paying interests on borrowed funds. By all relevant standards, it is only fair and proper that the Central Bank should be allowed to recover its investment and the cost thereof. (d) I do not think that the liability or non-liability of the OBM (COMBANK) for interest payment on CB loans and advances would either prejudice or benefit the GSIS, the government instrumentality which owns 99.93% of the outstanding

capital stock of COMBANK. When the GSIS bought the controlling interest in COMBANK, the vendor (IUCP/Herdis Group) together with the Emerito Ramos Group placed in escrow with the INTERBANK the amount of P47.2 million to answer for the interest liability of COMBANK in case the Supreme Court rules that the latter is liable therefor. On the other hand, however, should the Supreme Court decide that COMBANK is not liable, the amount held in escrow would be returned to the IUCP/Herdis Group and the Emerito Ramos Group. It is therefore clear that neither the GSIS nor COMBANK will be affected, one way or the other, by any ruling of the Supreme Court on the issue at bar. But certainly, the Central Bank and the Philippine Government stand to lose some P47 million in interests should the Supreme Court hold that COMBANK is not liable to pay interest on CB pre-1968 loans and advances from which OBM has unquestionably benefited. Bank of the Philippine Islands, Inc. vs. Sps. Norman and Angelina Yu and Tuanson Builders Corporation represented by Norman Yu, G.R. No. 184122, January 20, 2010 (610 SCRA 412) Facts: Spouses Yu, doing business as Tuanson Trading and Tuanson Builders Corporation, borrowed various sums totaling P75 million from Far East Bank and Trust Company. For collateral, they executed real estate mortgages over several of their properties including certain lands in Legazpi City owned by Tuanson Trading. Unable to pay their loans, they requested a loan restructuring which the bank, now merged with BPI, granted. By this time, the balance of the loan was P33.4 million. Despite the restructuring, the Yus still had difficulty paying the loan. The Yus asked BPI to release some of the mortgaged lands since their total appraised value far exceeded the amount of the remaining debt. When BPI ignored their request, they withheld payment of their amortizations. Thus, BPI extrajudicially foreclosed the mortgaged properties. The Yus countered by filing an annulment case of the foreclosure sale against BPI and the winning bidder, Magnacraft Development Corporation. The Yus and Magnacraft were able to reach a compromise agreement that affirmed Magnacraft’s ownership of three (3) of the ten (10) lots that were auctioned. The court, therefore, dismissed the case against Magnacraft, without prejudice to any case being filed against BPI. The Yus filed a case against BPI for excessive penalty charges, attorney’s fees, and foreclosure expenses that the bank caused to be incorporated in the price of the auctioned properties. In the alternative, the Yus claimed that BPI is in estoppel to claim more than the amount stated in the published notices, therefore, they must turnover the excess bid amounts worth over P6 million. Initially, the RTC, in a partial summary judgment, reduced the penalty charges from 36% to 12% and the attorney’s fees from 25% to 10%. Upon motion for reconsideration of the Yus on the ground that the penalty charges were violative of

13

the Truth in Lending Act (R.A. 3765) as BPI did not disclose the rate of penalties for late amortizations, the court deleted the penalty charges and reduced Attorney’s Fees to 1%. CA affirmed. Issue: Whether a penalty rate contained in the promissory note is sufficient disclosure to charge the borrower a penalty. Whether attorney’s fees can be reduced to 1%. Held: Yes. Yes. Affirmed with modification on the penalty. Ratio: Penalty charge, which is liquidated damages resulting from a breach, falls under item (6) of Section 4 of R.A. 3765 (Truth in Lending Act) or finance charge. A finance charge "represents the amount to be paid by the debtor incident to the extension of credit." The lender may provide for a penalty clause so long as the amount or rate of the charge and the conditions under which it is to be paid are disclosed to the borrower before he enters into the credit agreement. In this case, although BPI failed to state the penalty charges in the disclosure statement, the promissory note that the Yus signed, on the same date as the disclosure statement, contained a penalty clause that said: "I/We jointly and severally, promise to further pay a late payment charge on any overdue amount herein at the rate of 3% per month." The promissory note is an acknowledgment of a debt and commitment to repay it on the date and under the conditions that the parties agreed on. It is a valid contract absent proof of acts which might have vitiated consent. The question is whether or not the reference to the penalty charges in the promissory note constitutes substantial compliance with the disclosure requirement of the Truth in Lending Act. The RTC and CA relied on the ruling in New Sampaguita as authority that the nondisclosure of the penalty charge renders its imposition illegal. But New Sampaguita is not attended by the same circumstances. What New Sampaguita disallowed, because it was not mentioned either in the disclosure statement or in the promissory note, was the unilateral increase in the rates of penalty charges that the creditor imposed on the borrower. Here, however, it is not shown that BPI increased the rate of penalty charge that it collected from the Yus. The ruling that is more in point is that laid down in The Consolidated Bank and Trust Corporation v. Court of Appeals, a case cited in New Sampaguita. The Consolidated Bank ruling declared valid the penalty charges that were stipulated in the promissory notes. What the Court disallowed in that case was the collection of a handling charge that the promissory notes did not contain. The Court has affirmed that financial charges are amply disclosed if stated in the promissory note in the case of Development Bank of the Philippines v. Arcilla, Jr. The Court there said, "Under Circular 158 of the Central Bank, the lender is required to include the information required by R.A. 3765 in the contract covering the credit transaction or any other document to be acknowledged and

signed by the borrower. In addition, the contract or document shall specify additional charges, if any, which will be collected in case certain stipulations in the contract are not met by the debtor." In this case, the promissory notes signed by the Yus contained data, including penalty charges, required by the Truth in Lending Act. They cannot avoid liability based on a rigid interpretation of the Truth in Lending Act that contravenes its goal. Nonetheless, the courts have authority to reduce penalty charges when these are unreasonable and iniquitous. Considering that BPI had already received over P2.7 million in interest and that it seeks to impose the penalty charge of 3% per month or 36% per annum on the total amount due—principal plus interest, with interest not paid when due added to and becoming part of the principal and also bearing interest at the same rate—the Court finds the ruling of the RTC in its original decision reasonable and fair. Thus, the penalty charge of 12% per annum or 1% per month is imposed. As for the award of attorney’s fee, it being part of a party’s liquidated damages, the same may likewise be equitably reduced. The CA correctly affirmed the RTC Order to reduce it from 10% to 1% based on the following reasons: (1) attorney’s fee is not essential to the cost of borrowing, but a mere incident of collection; (2) 1% is just and adequate because BPI had already charged foreclosure expenses; (3) attorney’s fee of 10% of the total amount due is onerous considering the rote effort that goes into extrajudicial foreclosures. Asian Construction and Development Corporation vs. Cathay Pacific Steel Corporation (Capasco), G.R. No. 167942, June 29, 2010 () Facts: On several occasions between June and July of 1997, Asian Construction and Development Corp. purchased from Cathay Pacific Steel Corp. various reinforcing steel bars worth P2,650,916.40 covered by a total of 12 invoices. On November 21, 1997, ACDC made a partial payment of P2,159,211.49, and on March 2, 1998, another partial payment of P250,000, leaving a balance of P214,704.91. Capasco sent two demand letters dated May 12, 1998, and August 10, 1998, respectively, but no payment was made by ACDC. On November 24, 1998, Capasco filed a complaint for a sum of money and damages. The trial court ruled for Capasco and held ACDC liable to pay for the balance of their account with interest and with an additional 2% interest per month and to pay attorney’s fees. The CA affirmed with some modifications on the amount of the balance and the attorney’s fees which was set at 10%. Issue: Whether an interest rate of 24% per annum as penalty stated in the sales invoice is a valid stipulation. Whether a 25% attorney’s fees as penalty in the sales

14

invoice is a valid stipulation. Held: Yes. Yes. Affirmed with modification of the attorney’s fees. Ratio: Article 1306 of the Civil Code provides that the “contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy.” In the present case, the sales invoices expressly stipulated the payment of interest and attorney’s fees in case of overdue accounts and collection suits, to wit: “Interest at 24% per annum is to be charged to all accounts overdue plus 25% additional on unpaid invoice for attorney’s fees aside from court cost, the parties expressly submit themselves to the venue of the courts in Rizal, in case of legal proceeding.” The sales invoices are in the nature of contracts of adhesion. ”The court has repeatedly held that contracts of adhesion are as binding as ordinary contracts. Those who adhere to the contract are in reality free to reject it entirely and if they adhere, they give their consent. It is true that in some occasions the Court struck down such contracts as void when the weaker party is imposed upon in dealing with the dominant party and is reduced to the alternative of accepting the contract or leaving it, completely deprived of the opportunity to bargain on equal footing.” Considering that petitioner is not a small time construction company, having such construction projects as the MRT III and the Mauban Power Plant, “petitioner is presumed to have full knowledge and to have acted with due care or, at the very least, to have been aware of the terms and conditions of the contract. Petitioner was free to contract the services of another supplier if respondent’s terms were not acceptable”. By contracting with respondent for the supply of the reinforcing steel bars and not interposing any objection to the stipulations in the sales invoice, petitioner did not only bind itself to pay the stated selling price, it also bound itself to pay (1) interest of 24% per annum on overdue accounts and (2) 25% of the unpaid invoice for attorney’s fees. Thus, the lower courts did not err in using the invoices as basis for the award of interest. In the present case, the invoices stipulate for 25% of the overdue accounts as attorney’s fees. The overdue account in this case amounts to P241,704.91, 25% of which is P60,426.23. This amount is not excessive or unconscionable, hence, the court sustained the amount of attorney’s fees as stipulated by the parties. Jocelyn M. Toledo vs. Marilou M. Hyden, G.R. No. 172139, December 8, 2010 () Facts: Jocelyn M. Toledo, who was then the VicePresident of the College Assurance Plan (CAP) Phils., Inc., obtained several loans from respondent Marilou M. Hyden

amounting to P290,000 with between 6-7% interest per month. From August 15, 1993 up to December 31, 1997, Jocelyn had been religiously paying Marilou the stipulated monthly interest by issuing checks and depositing sums of money in the bank account of the latter. However, the total principal amount of P290,000.00 remained unpaid. Thus, in April 1998, Marilou visited Jocelyn in her office at CAP in Cebu City and asked Jocelyn and the other employees who were likewise indebted to her to acknowledge their debts. A document entitled "Acknowledgment of Debt" for the amount of P290,000.00 was signed by Jocelyn with two of her subordinates as witnesses. The said amount represents the principal consolidated amount of the aforementioned previous debts due on December 25, 1998. Also on said occasion, Jocelyn issued five checks to Marilou representing renewal payment of her five previous loans. The first check that was about to be due was recalled by Jocelyn and replaced by five (5) checks with staggered amounts. After honoring three (3) of these (5) replacement checks, Jocelyn ordered the stop payment on the remaining checks. She then filed a complaint against Marilou regarding the loan. The lower court ruled in favor of Marilou and ordered the payment of the loaned amount plus interest of 12% per annum or 1% per month. CA affirmed. Issue: Whether 6%-7% interest rate per month can be validly contracted. Held: Yes. Affirmed. Ratio: In view of Central Bank Circular No. 905 s. 1982, which suspended the Usury Law ceiling on interest effective January 1, 1983, parties to a loan agreement have wide latitude to stipulate interest rates. Nevertheless, such stipulated interest rates may be declared as illegal if the same is unconscionable. There is certainly nothing in said circular which grants lenders carte blanche authority to raise interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their assets. In fact, in Medel v. Court of Appeals, we annulled a stipulated 5.5% per month or 66% per annum interest with additional service charge of 2% per annum and penalty charge of 1% per month on a P500,000.00 loan for being excessive, iniquitous, unconscionable and exorbitant. In this case, however, we cannot consider the disputed 6% to 7% monthly interest rate to be iniquitous or unconscionable vis-à-vis the principle laid down in Medel. Noteworthy is the fact that in Medel, the defendant-spouses were never able to pay their indebtedness from the very beginning and when their obligations ballooned into a staggering sum, the creditors filed a collection case against them. In this case, there was no urgency of the need for money on the part of Jocelyn, the debtor, which compelled her to enter into said loan transactions. She used the money from the loans to make advance payments for prospective clients of educational

15

plans offered by her employer. In this way, her sales production would increase, thereby entitling her to 50% rebate on her sales. This is the reason why she did not mind the 6% to 7% monthly interest. Notably too, a business transaction of this nature between Jocelyn and Marilou continued for more than five years. Jocelyn religiously paid the agreed amount of interest until she ordered for stop payment on some of the checks issued to Marilou. The checks were in fact sufficiently funded when she ordered the stop payment and then filed a case questioning the imposition of a 6% to 7% interest rate for being allegedly iniquitous or unconscionable and, hence, contrary to morals. It was clearly shown that before Jocelyn availed of said loans, she knew fully well that the same carried with it an interest rate of 6% to 7% per month, yet she did not complain. In fact, when she availed of said loans, an advance interest of 6% to 7% was already deducted from the loan amount, yet she never uttered a word of protest. After years of benefiting from the proceeds of the loans bearing an interest rate of 6% to 7% per month and paying for the same, Jocelyn cannot now go to court to have the said interest rate annulled on the ground that it is excessive, iniquitous, unconscionable, exorbitant, and absolutely revolting to the conscience of man. "This is so because among the maxims of equity are (1) he who seeks equity must do equity, and (2) he who comes into equity must come with clean hands. The latter is a frequently stated maxim which is also expressed in the principle that he who has done inequity shall not have equity. It signifies that a litigant may be denied relief by a court of equity on the ground that his conduct has been inequitable, unfair and dishonest, or fraudulent, or deceitful as to the controversy in issue." We are convinced that Jocelyn did not come to court for equitable relief with equity or with clean hands. It is patently clear from the above summary of the facts that the conduct of Jocelyn can by no means be characterized as nobly fair, just, and reasonable. This Court likewise notes certain acts of Jocelyn before filing the case with the RTC. In September 1998, she requested Marilou not to deposit her checks as she can cover the checks only the following month. On the next month, Jocelyn again requested for another extension of one month. It turned out that she was only sweet-talking Marilou into believing that she had no money at that time. But as testified by Serapio Romarate, an employee of the Bank of Commerce where Jocelyn is one of their clients, there was an available balance of P276,203.03 in the latter’s account and yet she ordered for the stop payments of the seven checks which can actually be covered by the available funds in said account. She then caught Marilou by surprise when she surreptitiously filed a case for declaration of nullity of the document and for damages.

Banco Filipino Savings and Mortgage Bank vs. Judge

Miguel Navarro, CFI Manila, Br. XXXI & Florante del Valle, G.R. No. L-46591, July 28, 1987 (152 SCRA 346) Facts: On May 20, 1975, respondent Florante del Valle obtained a loan secured by a real estate mortgage from petitioner BANCO FILIPINO in the sum of Forty-one Thousand Three Hundred (P41,300.00) Pesos, payable and to be amortized within fifteen (15) years at twelve (12%) per cent interest annually. Hence, the LOAN still had more than 730 days to run by January 2, 1976, the date when CIRCULAR No. 494 was issued by the Central Bank. Stamped on the promissory note evidencing the loan is an Escalation Clause, reading as follows: “I/We hereby authorize Banco Filipino to correspondingly increase the interest rate stipulated in this contract without advance notice to me/us in the event a law should be enacted increasing the lawful rates of interest that may be charged on this particular kind of loan." The Escalation Clause is based upon Central Bank CIRCULAR No. 494 issued on January 2, 1976, the pertinent portion of which reads: "3. The maximum rate of interest, including commissions, premiums, fees and other charges on loans with maturity of more than seven hundred thirty (730) days, by banking institutions, including thrift banks and rural banks, or by financial intermediaries authorized to engage in quasi- banking functions shall be nineteen per cent (19%) per annum.” CIRCULAR No. 494 was issued pursuant to the authority granted to the Monetary Board by Presidential Decree No. 116 which states “The Monetary Board is hereby authorized to prescribe the maximum rate or rates of interest for the loan or renewal thereof or the forbearance of any money, goods or credits, and to change such rate or rates whenever warranted by prevailing economic and social conditions: Provided, that such changes shall not be made oftener than once every twelve months. On the strength of CIRCULAR No. 494 BANCO FILIPINO gave notice to the BORROWER on June 30, 1976 of the increase of interest rate on the LOAN from 12% to 17% per annum effective on March 1, 1976. Contending that CIRCULAR No. 494 is not the law contemplated in the Escalation Clause of the promissory note, the BORROWER filed suit against BANCO FILIPINO for "Declaratory Relief" with respondent Court, praying that the Escalation Clause be declared null and void and that BANCO FILIPINO be ordered to desist from enforcing the increased rate of interest on the BORROWER's real estate loan. The lower court nullified the Escalation Clause and ordered BANCO FILIPINO to desist from enforcing the increased rate of interest on the BORROWER's loan. It reasoned out that P.D. No. 116 does not expressly grant the Central Bank authority to maximize interest rates with retroactive effect and that BANCO FlLIPINO cannot legally impose a higher rate of interest before the expiration of the 15-year period in which the loan is to be paid other than

16

the 12% per annum in force at the time of the execution of the loan. Issue: Whether an escalation clause that bases the increase in the interest rate on changes in the law can be used to increase the interest rate based on a Central Bank Circular. Held: No. Affirmed. Ratio: Undoubtedly, the escalation clause is valid. What should be resolved is whether BANCO FILIPINO can increase the interest rate on the LOAN from 12% to 17% per annum under the Escalation Clause. It is our considered opinion that it may not. It is clear from the stipulation between the parties that the interest rate may be increased "in the event a law should be enacted increasing the lawful rate of interest that may be charged on this particular kind of loan." The Escalation Clause was dependent on an increase of rate made by "law" alone. CIRCULAR No. 494, although it has the effect of law, is not a law. Although a circular duly issued is not strictly a statute or a law, it has, however, the force and effect of law. An administrative regulation adopted pursuant to law has the force and effect of law. That administrative rules and regulations have the force of law can no longer be questioned. The distinction between a law and an administrative regulation is recognized in the Monetary Board guidelines quoted in the letter to the BORROWER of Ms. Paderes of September 24, 1976 (supra). According to the guidelines, for a loan's interest to be subject to the increases provided in CIRCULAR No. 494, there must be an Escalation Clause allowing the increase "in the event that any law or Central Bank regulation is promulgated increasing the maximum interest rate for loans." The guidelines thus presuppose that a Central Bank regulation is not within the term "any law." The distinction is again recognized by P.D. No. 1684, promulgated on March 17, 1980, adding section 7-a to the Usury Law, providing that parties to an agreement pertaining to a loan could stipulate that the rate of interest agreed upon may be increased in the event that the applicable maximum rate of interest is increased "by law or by the Monetary Board." It is now clear that from March 17, 1980, escalation clauses to be valid should specifically provide: (1) that there can be an increase in interest if increased by law or by the Monetary Board; and (2) in order for such stipulation to be valid, it must include a provision for reduction of the stipulated interest "in the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board." While P.D. No. 1684 is not to be given retroactive effect, the absence of a de- escalation clause in the Escalation Clause in question provides another reason why it should not be given effect because of its one-sidedness in favor of the lender.

The Escalation Clause specifically stipulated that the increase in interest rate was to be "on this particular kind of loan, " meaning one secured by registered real estate mortgage. Paragraph 7 of CIRCULAR No. 494 specifically directs that "loans or renewals continue to be governed by the Usury Law, as amended." So do Circular No. 586 of the Central Bank, which superseded Circular No. 494, and Circular No. 705, which superseded Circular No. 586. The Usury Law, as amended by Acts Nos. 3291, 3998 and 4070, became effective on May 1, 1916. It provided for the maximum yearly interest of 12% for loans secured by a mortgage upon registered real estate (Section 2), and a maximum annual interest of 14% for loans covered by security other than mortgage upon registered real estate (Section 3). Significant is the separate treatment of registered real estate loans and other loans not secured by mortgage upon registered real estate. It appears clear in the Usury Law that the policy is to make interest rates for loans guaranteed by registered real estate lower than those for loans guaranteed by properties other than registered realty. On January 29, 1973, P.D. No. 116 was promulgated amending the Usury Law. The Decree gave authority to the Monetary Board "to prescribe maximum rates of interest for the loan or renewal thereof or the forbearance of any money, goods or credits, and to change such rate or rates whenever warranted by prevailing economic and social conditions. In one section, the Monetary Board could prescribe the maximum rate of interest for loans secured by mortgage upon registered real estate or by any document conveying such real estate or an interest therein and, in another separate section, the Monetary Board was also granted authority to fix the maximum interest rate for loans secured by types of security other than registered real property. Apparent then is that the separate treatment for the two classes of loans was maintained. Yet, CIRCULAR No. 494 makes no distinction as to the types of loans that it is applicable to unlike Circular No. 586 dated January 1, 1978 and Circular No. 705 dated December 1, 1979, which fix the effective rate of interest on loan transactions with maturities of more than 730 days to not exceeding 19% per annum (Circular No. 586) and not exceeding 21% per annum (Circular No. 705) "on both secured and unsecured loans as defined by the Usury Law, as amended." In the absence of any indication in CIRCULAR No. 494 as to which particular type of loan was meant by the Monetary Board, the more equitable construction is to limit CIRCULAR No. 494 to loans guaranteed by securities other than mortgage upon registered realty.

17

Philippine National Bank vs. CA & Ambrosio Padilla, G.R. No. 88880, April 30, 1991 (196 SCRA 535) Facts: In July 1982, the private respondent applied for, and was granted by petitioner PNB, a credit line of 321.8 million, secured by a real estate mortgage, for a term of two (2) years, with 18% interest per annum. Private respondent executed in favor of the PNB a Credit Agreement, two (2) promissory notes in the amount of P900,000.00 each, and a Real Estate Mortgage Contract. The Promissory Notes, in turn, uniformly authorized the PNB to increase the stipulated 18% interest per annum "within the limits allowed by law at any time depending on whatever policy it [PNB] may adopt in the future; Provided, that, the interest rate on this note shall be correspondingly decreased in the event that the applicable maximum interest rate is reduced by law or by the Monetary Board." The Real Estate Mortgage Contract likewise provided that the rate of interest shall be subject during the life of this contract to such an increase within the rate allowed by law, as the Board of Directors of the MORTGAGEE may prescribe for its debtors. Four (4) months advance interest and incidental expenses/charges were deducted from the loan, the net proceeds of which were released to the private respondent by crediting or transferring the amount to his current account with the bank. On June 20, 1984, PNB informed the private respondent that (1) his credit line of P1.8 million "will expire on July 4, 1984,"(2) "if renewal of the line for another year is intended, please submit soonest possible your request," and (3) the "present policy of the Bank requires at least 30% reduction of principal before your line can be renewed." Complying, private respondent on June 25, 1984, paid PNB P540,000 (30% of P1.8 million) and requested that "the balance of P1,260,000.00 be renewed for another period of two (2) years under the same arrangement" and that "the increase of the interest rate of my mortgage loan be from 18% to 21%". On July 4, 1984, private respondent paid PNB P360,000.00. On July 18, 1984, private respondent reiterated in writing his request that "the increase in the rate of interest from 18% be fixed at 21% or 24%. On July 26, 1984, private respondent made an additional payment of P100,000. On August 10, 1984, PNB informed private respondent that "we can not give due course to your request for preferential interest rate in view of the following reasons: Existing Loan Policies of the bank requires 32% for loan of more than one year; our present cost of funds has substantially increased." On August 17, 1984, private respondent further paid PNB P150,000.00. In a letter dated August 24, 1984 to PNB, private respondent announced that he would "continue making further payments, and instead of a 'loan

of more than one year,' I shall pay the said loan before the lapse of one year or before July 4, 1985. I reiterate my request that the increase of my rate of interest from 18% 'be fixed at 21% or 24%.'". On September 12, 1984, private respondent paid PNB P160,000.00. In letters dated September 12, 1984 and September 13, 1984, PNB informed private respondent that "the interest rate on your outstanding line/loan is hereby adjusted from 32% p.a. to 41% p.a. (35% prime rate + 6%) effective September 6, 1984;" and further explained "why we can not grant your request for a lower rate of 21% or 24%." In a letter dated September 24, 1984 to PNB, private respondent registered his protest against the increase of interest rate from 18% to 32% on July 4, 1984 and from 32% to 41% on September 6, 1984. On October 15, 1984, private respondent reiterated his request that the interest rate should not be increased from 18% to 32% and from 32% to 41%. He also attached (as payment) a check for P140,000.00. Like rubbing salt on the private respondent's wound, the petitioner informed private respondent on October 29, 1984, that "the interest rate on your outstanding line/loan is hereby adjusted from 41% p.a. to 48% p.a. (42% prime rate plus 6% spread) effective 25 October 1984." In November 1984, private respondent paid PNB P50,000.00 thus reducing his principal loan obligation to P300,000.00. On December 18, 1984, private respondent filed in the Regional Trial Court of Manila a complaint against PNB to question the unilateral increase in the interest rates. On March 31, 1985, the private respondent paid the P300,000 balance of his obligation to PNB. The trial court rendered judgment on April 14, 1986, dismissing the complaint because the increases of interest were properly made. CA reversed. Issue: Whether a bank may unilaterally change or increase the interest rate stipulated therein at will and as often as it pleased. Held: No. Affirmed Ratio: In the first place, although Section 2, PD. No. 116 of January 29, 1973, authorizes the Monetary Board to prescribe the maximum rate or rates of interest for loans or renewal thereof and to change such rate or rates whenever warranted by prevailing economic and social conditions, it expressly provides that "such changes shall not be made oftener than once every twelve months." In this case, PNB, over the objection of the private respondent, and without authority from the Monetary Board, within a period of only four (4) months, increased the 18% interest rate on the private respondent's loan obligation three (3) times: (a) to

18

32% in July 1984; (b) to 41% in October 1984; and (c) to 48% in November 1984. Those increases were null and void, for if the Monetary Board itself was not authorized to make such changes oftener than once a year, even less so may a bank which is subordinate to the Board. Secondly, as pointed out by the Court of Appeals, while the private respondent- debtor did agree in the Deed of Real Estate Mortgage that the interest rate may be increased during the life of the contract "to such increase within the rate allowed by law, as the Board of Directors of the MORTGAGEE may prescribe" or "within the limits allowed by law", no law was ever passed in July to November 1984 increasing the interest rates on loans or renewals thereof to 32%, 41% and 48% (per annum), and no documents were executed and delivered by the debtor to effectuate the increases. The PNB relied on its own Board Resolution No. 681 (Exh. 10), PNB Circular No. 40-79-84 (Exh. 13), and PNB Circular No. 40-129-84 (Exh. 15), but those resolution and circulars are neither laws nor resolutions of the Monetary Board. CB Circular No. 905, Series of 1982 (Exh. 11) removed the Usury Law ceiling on interest rates, but it did not authorize the PNB, or any bank for that matter, to unilaterally and successively increase the agreed interest rates from 18% to 48% within a span of four (4) months, in violation of PD. 116 which limits such changes to "once every twelve months." Besides violating PD. 116, the unilateral action of the PNB in increasing the interest rate on the private respondent's loan, violated the mutuality of contracts ordained in Article 1308 of the Civil Code. In order that obligations arising from contracts may have the force of law between the parties, there must be mutuality between the parties based on their essential equality. A contract containing a condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one of the contracting parties, is void (Garcia vs. Rita Legarda, Inc., 21 SCRA 555). Hence, even assuming that the P1.8 million loan agreement between the PNB and the private respondent gave the PNB a license (although in fact there was none) to increase the interest rate at will during the term of the loan, that license would have been null and void for being violative of the principle of mutuality essential in contracts. It would have invested the loan agreement with the character of a contract of adhesion, where the parties do not bargain on equal footing, the weaker party's (the debtor) participation being reduced to the alternative "to take it or leave it" (Qua vs. Law Union & Rock Insurance Co., 95 Phil. 85). Such a contract is a veritable trap for the weaker party whom the courts of justice must protect against abuse and imposition. PNB'S successive increases of the interest rate on the private respondent's loan, over the latter's protest, were arbitrary as they violated an express provision of the Credit Agreement (Exh. 1) Section 9.01 that its terms "may be amended only by an instrument in writing signed by the party to be bound as burdened by such amendment." The increases imposed by PNB also contravene Art. 1956 of the

Civil Code which provides that "no interest shall be due unless it has been expressly stipulated in writing." The debtor herein never agreed in writing to pay the interest increases fixed by the PNB beyond 24% per annum, hence, he is not bound to pay a higher rate than that. Development Bank of the Philippines & Privatization and Management Office (formerly Asset Privatization Trust) vs. CA, Philippine United Foundry & Machinery Shop & Philippine Iron Manufacturing Co., Inc., G.R. No. 138703, June 30, 2006 (494 SCRA 25) Facts: Sometime in March 1968, the Development Bank of the Philippines (DBP) granted to respondents Philippine United Foundry and Machineries Corporation and Philippine Iron Manufacturing Company, Inc. an industrial loan in the amount of P2,500,000 consisting of P500,000 in cash and P2,000,000 in DBP Progress Bonds. The loan was evidenced by a promissory note dated June 26, 1968 and secured by a mortgage executed by respondents over their present and future properties such as buildings, permanent improvements, various machineries and equipment for manufacture. Subsequently, DBP granted to respondents another loan in the form of a five-year revolving guarantee amounting to P1,700,000 which was reflected in the amended mortgage contract. According to respondents, the loan guarantee was extended to them when they encountered difficulty in negotiating the DBP Progress Bonds. Respondents were only able to sell the bonds in 1972 or about five years from its issuance for an amount that was 25% less than its face value. On September 10, 1975, the outstanding accounts of respondents with DBP were restructured in view of their failure to pay. Thus, the outstanding principal balance of the loans and advances amounting to P4,655,992.35 were consolidated into a single account. The restructured loan was evidenced by a new promissory note dated November 12, 1975 payable within seven years, with partial payments on the principal to be made beginning on the third year plus a 12% interest per annum payable every month. Notwithstanding the restructuring, respondents were still unable to comply with the terms and conditions of the new promissory notes. As a result, respondents requested DBP to refinance the matured obligation. The request was granted by DBP, pursuant to which three foreign currency denominated loans sourced from DBP’s own foreign borrowings were extended to respondents on various dates between 1980 and 1981. Sometime in October 1985, DBP initiated foreclosure proceedings upon its computation that respondents’ loans were in arrears by P62,954,473.68. According to DBP, this figure already took into account the intermittent payments made by respondents between 1968 and 1981 in the aggregate amount of P5,150,827.71. However, the foreclosure proceedings were suspended on twelve separate occasions from October 1985 to December 1986 upon the representations of respondents that a financial rehabilitation fund arising

19

from a contract with the military was forthcoming. On December 23, 1986, before DBP could proceed with the foreclosure proceedings, respondents instituted the present suit for injunction. Respondents’ cause of action arose from their claim that DBP was collecting from them an unconscionable if not unlawful or usurious obligation of P62,954,473.68 as of September 30, 1985, out of a mere P6,200,000 loan. Primarily, respondents contended that the amount claimed by DBP is erroneous since they have remitted to DBP approximately P5,300,000 to repay their original debt. Additionally, respondents assert that since the loans were procured for the Self-Reliant Defense Posture Program of the Armed Forces of the Philippines (AFP), the latter’s breach of its commitment to purchase military armaments and equipment from respondents amounts to a failure of consideration that would justify the annulment of the mortgage on respondents? properties. The RTC issued a TRO and Writ of Preliminary Injunction. It then ruled against DBP. CA affirmed. Issue: Whether a foreign currency denominated loan shall be paid at the exchange rate prevailing at the time of the payment. Held: Yes. Modified. Ratio: As correctly pointed out by PMO, the original loans alluded to by respondents had been refinanced and restructured in order to extend their maturity dates. Refinancing is an exchange of an old debt for a new debt, as by negotiating a different interest rate or term or by repaying the existing loan with money acquired from a new loan. On the other hand, restructuring, as applied to a debt, implies not only a postponement of the maturity but also a modification of the essential terms of the debt (e.g., conversion of debt into bonds or into equity, or a change in or amendment of collateral security) in order to make the account of the debtor current. The reason respondents seek to be excused from fulfilling their obligation under the second batch of promissory notes is that first, they allegedly had "no choice" but to sign the documents in order to have the loan restructured and thus avert the foreclosure of their properties, and second, they never received any proceeds from the same. This reasoning cannot be sustained. Respondents’ allegation that they had no "choice" but to sign is tantamount to saying that DBP exerted undue influence upon them. The Court is mindful that the law grants an aggrieved party the right to obtain the annulment of a contract on account of factors such as mistake, violence, intimidation, undue influence and fraud which vitiate consent. However, the fact that the representatives were "forced" to sign the promissory notes and mortgage contracts in order to have respondents’ original loans restructured and to prevent the foreclosure of their properties does not amount to vitiated consent. The financial condition of respondents may have motivated

them to contract with DBP, but undue influence cannot be attributed to DBP simply because the latter had lent money. The concept of undue influence is defined as follows: There is undue influence when a person takes improper advantage of his power over the will of another, depriving the latter of a reasonable freedom of choice. The following circumstances shall be considered: the confidential, family, spiritual and other relations between the parties or the fact that the person alleged to have been unduly influenced was suffering from mental weakness, or was ignorant or in financial distress. While respondents were purportedly financially distressed, there is no clear showing that those acting on their behalf had been deprived of their free agency when they executed the promissory notes representing respondents’ refinanced obligations to DBP. For undue influence to be present, the influence exerted must have so overpowered or subjugated the mind of a contracting party as to destroy the latter’s free agency, making such party express the will of another rather than its own. The alleged lingering financial woes of a debtor per se cannot be equated with the presence of undue influence. Corollarily, the threat to foreclose the mortgage would not in itself vitiate consent as it is a threat to enforce a just or legal claim through competent authority. It bears emphasis that the foreclosure of mortgaged properties in case of default in payment of a debtor is a legal remedy given by law to a creditor. In the event of default by the mortgage debtor in the performance of the principal obligation, the mortgagee undeniably has the right to cause the sale at public auction of the mortgaged property for payment of the proceeds to the mortgagee. It is likewise of no moment that respondents never physically received the proceeds of the foreign currency loans. When the loan was refinanced and restructured, the proceeds were understandably not actually given by DBP to respondents since the transaction was but a renewal of the first or original loan and the supposed proceeds were applied as payment for the latter. It also bears emphasis that the second set of promissory notes executed by respondents must govern the contractual relation of the parties for they unequivocally express the terms and conditions of the parties’ loan agreement, which are binding and conclusive between them. Parties are free to enter into stipulations, clauses, terms and conditions they may deem convenient; that is, as long as these are not contrary to law, morals, good customs, public order or public policy. As a rule, a court in such a case has no alternative but to enforce the contractual stipulations in the manner they have been agreed upon and written. Courts, whether trial or appellate, generally have no power to relieve parties from obligations voluntarily assumed simply because their contract turned out to be disastrous or unwise investments. Thus, respondents cannot be absolved from their loan obligations on the basis of the failure of the AFP to fulfill its commitment under the manufacturing agreement entered by them allegedly upon the prompting of certain

20

AFP and DBP officials. While it is true that the DBP representatives appear to have been aware that the proceeds from the sale to the AFP were supposed to be applied to the loan, the records are bereft of any proof that would show that DBP was a party to the contract itself or that DBP would condone respondents’ credit if the contract did not materialize. Even assuming that the AFP defaulted in its obligations under the manufacturing agreement, respondents’ cause of action lies with the AFP, and not with DBP or PMO. The loan contract of respondents is separate and distinct from their manufacturing agreement with the AFP. Again, as a rule, courts cannot intervene to save parties from disadvantageous provisions of their contracts if they consented to the same freely and voluntarily. Thus, respondents cannot now protest against the fact that the loans were denominated in foreign currency and were to be paid in its peso equivalent after they had already given their consent to such terms. There is no legal impediment to having obligations or transactions paid in a foreign currency as long as the parties agree to such an arrangement. In fact, obligations in foreign currency may be discharged in Philippine currency based on the prevailing rate at the time of payment. Emma R. Geniza, Aurelio Geniza, Lorenzo Rivera, Catalina Carreon Rivera & Zacarias Rivera vs. Henry Sy & Asia Mercantile Corporation, G.R. No. L-17165, July 31, 1962 (5 SCRA 754) Facts: On July 8, 1959, Catalina Carreon, with the consent of her husband Zacarias Rivera, mortgaged to the defendant Asia Mercantile Corporation Lot No. 551 of the Piedad estate subdivision for P50,000.00, payable within a period of thirty days with interest at the rate of 12% per annum. Paragraph 4, of the contract provides that upon failure of the mortgagor to pay the indebtedness and the interest when due, the mortgage shall become due and demandable, and without necessity of demand the mortgagee may immediately foreclose the mortgage, judicially or extrajudicially, and for this purpose the mortgagor appoints the mortgagee as his attorney-in-fact to sell the properties and to sign all documents and perform any act requisite and necessary to accomplish said purpose. It was further expressly agreed that in case of foreclosure the mortgagor binds himself to pay the mortgagee 30% of the sum owing and unpaid as attorney's fees and liquidated damages, exclusive of costs and expenses of the sale. On the same date another mortgage was executed by plaintiffs Emma R. Geniza, Aurelio Geniza and Lorenzo Rivera over two parcels of registered land for the sum of P50,000.00, and with the same conditions as the mortgage executed by the spouses Catalina Carreon and Zacarias Rivera. The mortgagors in both mortgage contracts defaulted in the payment of their respective obligations. The mortgage executed by Catalina Carreon Rivera and Zacarias Rivera was foreclosed extra-judicially and the proceeds of the sale of the land amounting to P68,567.57

was disposed of by the mortgagee. Plaintiffs brought this action to obtain a judicial declaration that the stipulation in the deeds of mortgage fixing the amount of 30% as attorney's fees and liquidated damages is excessive, unconscionable and iniquitous and that the same should be reduced to P200.00 (or 1%). The complainants also asked for P5,000.00 as attorney's fees for bringing this action. The defendants set up the defense that the complaint states no cause of action; that the mortgage executed by Emma R. Geniza and Aurelio Geniza has not yet been foreclosed; that the mortgagors are estopped from alleging that the stipulation regarding liquidated damages and attorney's fees is excessive and unreasonable. CFI dismissed the action of plaintiffs Emma Geniza and Aurelio Geniza as premature and ordered the defendant Asia Mercantile Corporation to return to plaintiff Catalina C. Rivera the sum of P13,567.57 which represents the excess of the total obligations of the mortgagor. It is against the above judgment that the plaintiffs have prosecuted the appeal to this Court, claiming that the lower court erred in not reducing the liquidated damages and the attorney's fees to not more than P500.00 and in not declaring the stipulation exacting attorney's fees and liquidated damages as a usurious stipulation, by reason of which plaintiffs (appellants herein) should be entitled to attorney's fees amounting to P5,000.00. Issue: Whether the reduction of a 30% stipulated atty’s fees and litigation damages to 5% by a lower court judge is justified. Held: Yes. Affirmed. Ratio: In reducing the 30 per cent attorney's fees and liquidated damages from 30 per cent to 5 per cent, the judge below appears to be fully justified. As the loan was for a period of thirty days only, damages amounting to 30 per cent of the loan of P50,000.00 would appear to be iniquitous and subject to reduction in accordance with the provisions of Articles 1227 and 1229 of the Civil Code of the Philippines. We do not agree with counsel for plaintiffs-appellants that the contract was a usurious contract there being no allegation of fact that the mortgagee's intention was to exact a usurious interest, nor evidence to that effect. Neither is there any allegation or claim that the mortgage is contra bonos mores, so that we may assume that he demanded the insertion of the iniquitous clause or 30% damages to cover a usurious deal. Under these circumstances we cannot sustain the claim of the plaintiffs-appellants that the agreement was a usurious one; so that we hold that the trial court was fully justified in considering the provision only as an iniquitous clause subject to reduction. We also find the reduced liquidated damages and attorney's fees to be fair and we find no reason for disturbing the discretion of the court below in this respect.

21

Dominador Nicolas & Olimpia Matias vs. Vicenta Matias, Amado Cornejo, Jr., Jose Policarpio, & Matilde Manuel, G.R. No. L-8093, October 29, 1955 (97 Phil 795)

Issue: Whether a stipulation that makes the loan payable after liberation will cause the application of the currency at that time. (Peso for Peso) Held: Yes. Reversed.

Facts: By an instrument dated June 29, 1944, Vicenta Matias Vda. de Cornejo, and her son, Amado Cornejo, Jr., mortgaged to the spouses Dominador Nicolas and Olimpia Matias, four (4) parcels of land, situated in San Roque, municipality of Gapan, Province of Nueva Ecija, to guarantee the payment of the sum of P30,000 — then lent by the mortgagees to the mortgagors and received by the latter, in Japanese military notes — one (1) year after the expiration of five (5) years from said date, with interest thereon, at the rate of six per cent (6%) per annum. On July 15, 1944, said mortgagors offered to pay the debt, with interest for five (5) years, but the mortgagees rejected the offer. Whereupon, in August, 1944, the mortgagors deposited judicially the sum of P39,000 — representing the principal (P30,000), plus interest for five (5) years, at the stipulated rate — and instituted Civil Case No. 156 of the Court of First Instance of Nueva Ecija for the purpose of compelling the mortgagees to accept said amount and to discharge the mortgage. Although holding that the mortgagees were not justified in rejecting the tender of payment made by the mortgagors, said court rendered judgment, on August 12, 1946, declaring the consignation invalid for failure of the mortgagors to give previous notice thereof, and sentencing the mortgagors to pay the mortgagees the sum of P2,000 — as the equivalent in Philippine currency, pursuant to the Ballantyne schedule, of P30,000 in Japanese military notes — with interest, at the legal rate, from June 29, 1944. The CA held the consignation valid and the obligation guaranteed by the mortgage fully discharged. The mortgagees, however, brought the case, for review by writ of certiorari, to this Court, which held that the mortgagors could not, without the mortgagees' consent, accelerate the date of maturity of the obligation in question, which is payable after the fifth year from June 29, 1944; that the mortgagees cannot be compelled to accept payment prior to the expiration of said fifth year; and that the judicial consignation made by the mortgagors is, consequently, invalid, except as regards the amount corresponding to the interest for one (1) year from June 29, 1944. Soon thereafter, or on August 22, 1951, the mortgagees instituted the present action for foreclosure of said mortgage. The only issue raised in the lower court was whether the sum of P30,000, lent by the mortgagees in Japanese war notes, should be paid by the mortgagors in Philippine currency, peso for peso, or in accordance with the Ballantyne schedule. The lower court chose the latter alternative and, accordingly, rendered judgment "ordering defendants to pay plaintiffs the amount of P2,000, Philippine currency, with interest at six per cent (6%) a year, from June 29, 1945, up to the date when it is actually paid."

Ratio: In Cruz vs. Del Rosario (G. R. No. L-4859) decided on July 24, 1951, it was held that if according to the stipulation of the parties, the money to be paid by the debtor to the creditor, or by the vendor with pacto to the creditor to redeem the property mortgaged, or sold, shall be due and payable after liberation as agreed upon by the parties in the present case, it shall be paid in legal tender or Philippine currency at par value or at the rate of one Philippine peso for each peso in Japanese military notes; but if it shall be due and payable before liberation it shall be paid after the liberation in Philippine currency in accordance with the Ballentyne schedule. This ruling was reiterated in Arevalo vs. Barreto (89 Phil. 633) decided on July 31, 1951. To the same effect was the conclusion reached in the case of Wilson vs. Berkenkotter (49 Off. Gaz., p. 1401). The foregoing view has been consistently applied by this Court in a number of other cases, among which the following may be mentioned: Ilusorio vs. Busuego, 84 Phil., 630; Roño vs. Gomez, 46 Off. Gaz., Supp. No. 11, 339; Gomez vs. Tabia, 47 Off. Gaz., 641, Ponce de Leon vs. Syjuco, 90 Phil., 311; Garcia vs. De los Santos, 49 Off. Gaz., 4830. What is more, the strong dissents written in some of the cases cited indicated that adherence to said view was effected upon thorough consideration of the different aspects thereof, that said doctrine is now in the nature of stare decisis and that the issue is now close as regards this Court. It is thus settled that the contracting parties are free to stipulate on the currency in which their respective obligations shall be settled, and that whenever, pursuant to the terms of an agreement, an obligation assumed during the Japanese occupation is not payable until after liberation of the Philippines, the parties to the agreement are deemed to have intended that the amount stated in the contract be paid in such currency as may be legal tender at the time when the obligation becomes due. This is, precisely, the situation obtaining in the case at bar. The deed of mortgage in question provides that the obligation of the mortgagees shall be paid one year after the expiration of five (5) years from June 29, 1944, which is the date of said instrument. In other words, the obligation is not payable until June 29, 1949. Thus, the obligation became due after liberation. The obligation involved in the present case must be satisfied, peso for peso, in Philippine currency. Padilla&Paras,dissenting.

22

In the matter of the intestate estate of Eugenia Peregrina, deceased. Ang Lam vs. Hilario Peregrina, G.R. No. L-4871, January 26, 1953 (92 Phil 506) Facts: On December 26, 1944, Eugenia Peregrina borrowed P100,000, Philippine currency prevailing on that date, from Ang Lam, promising to pay it within a period of one year therefrom. Peregrina died on April 1, 1945, and thereupon Ang Lam presented a claim against her estate for the full amount of the indebtedness. Judgment having been rendered thereon for P1,000, the equivalent thereof according to the Ballantyne Conversion Table, Ang Lam has prosecuted this appeal, contending that as the currency in which the indebtedness was to be paid was not agreed upon or stipulated in the contract of loan, this should be in the legal tender on December 25, 1945, or one year from the date of the loan, because both parties had elected to subject their rights to a contingency, i.e., the change in the intrinsic value and purchasing power of the currency. Issue: Whether a stipulation that makes the loan payable within the 1-year period when the liberation occurred will cause the application of the currency at the time prior to the liberation. (Ballantyne scale) Held: Yes. Affirmed. Ratio: The loan was payable within one year from December 26, 1944. It could be paid the following day, or any day before liberation, in Japanese military notes, had the debtor chosen to do so. It is incorrect to assume that the parties intended to subject their rights and obligations under the contract to a contingency, a change in the currency, without evidence of said intent. While perhaps they could be presumed to be bound by the fluctuations in the value of the currency they contracted in, it may not be presumed that they intended to gamble on a change therein, in the absence of an agreement, express or implied, to that effect. If it is unfair and unjust that the loan be decreased or completely wiped out because of a change in the currency; it is also unfair and unjust that the loan be paid in the same amount in which it was contracted and at the restored currency, because then the lender would be unduly enriched at the expense of the debtor. The fair and just rule to apply is, therefore, for the debtor to pay the actual value or worth of the loan at the time it was contracted in the currency in existence at the time of payment.

First Metro Investment Corp. vs. Este del Sol Mountain Reserve, Inc., Valentin S. Daez, Jr., Manuel Q. Salientes, Ma. Rocio A. De Vega, Alexander G. Asuncion, Alberto M. Ladores, Vicente M. De Vera, Jr., and Felipe B. Sese, G.R. No. 141811, November 15, 2001 (369 SCRA 99) Facts: On January 31, 1978, petitioner FMIC granted respondent Este del Sol a loan of Seven Million Three Hundred Eighty-Five Thousand Five Hundred Pesos (P7,385,500.00) to finance the construction and development of the Este del Sol Mountain Reserve, a sports/resort complex project located at Barrio Puray, Montalban, Rizal. Under the terms of the Loan Agreement, the proceeds of the loan were to be released on staggered basis. Interest on the loan was pegged at sixteen (16%) percent per annum based on the diminishing balance. The loan was payable in thirty-six (36) equal and consecutive monthly amortizations to commence at the beginning of the thirteenth month from the date of the first release in accordance with the Schedule of Amortization. In case of default, an acceleration clause was, among others, provided and the amount due was made subject to a twenty (20%) percent one-time penalty on the amount due and such amount shall bear interest at the highest rate permitted by law from the date of default until full payment thereof plus liquidated damages at the rate of two (2%) percent per month compounded quarterly on the unpaid balance and accrued interests together with all the penalties, fees, expenses or charges thereon until the unpaid balance is fully paid, plus attorney’s fees equivalent to twenty-five (25%) percent of the sum sought to be recovered, which in no case shall be less than Twenty Thousand Pesos ( P20,000.00) if the services of a lawyer were hired. Este del Sol executed several documents as security, including a Real Estate Mortgage and Suretyship Agreement. They also executed an Underwriting Agreement whereby petitioner FMIC shall underwrite on a best-efforts basis the public offering of One Hundred Twenty Thousand (120,000) common shares of respondent Este del Sol’s capital stock for a one-time underwriting fee of Two Hundred Thousand Pesos (P200,000.00). Since respondent Este del Sol failed to meet the schedule of repayment in accordance with a revised Schedule of Amortization, it appeared to have incurred a total obligation of P12,679,630.98. Accordingly, petitioner FMIC caused the extrajudicial foreclosure of the real estate mortgage on June 23, 1980. At the public auction, petitioner FMIC was the highest bidder of the mortgaged properties for Nine Million Pesos (P9,000,000.00). Failing to secure from the individual respondents, as sureties, the payment of the alleged deficiency balance, a collection case was filed for the payment of P6,863,297.73 plus interest thereon at twenty-one (21%) percent per annum from June 24, 1980 until fully paid, and twenty-five (25%) percent thereof as and for attorney’s fees and costs. The lower court ruled for the creditor FMIC. CA reversed. The appellate court found and declared that the

23

fees provided for in the Underwriting and Consultancy Agreements were mere subterfuges to camouflage the excessively usurious interest charged by the petitioner FMIC on the loan of respondent Este del Sol; and that the stipulated penalties, liquidated damages and attorney’s fees were “excessive, iniquitous, unconscionable and revolting to the conscience,” and declared that in lieu thereof, the stipulated one time twenty (20%) percent penalty on the amount due and ten (10%) percent of the amount due as attorney’s fees would be reasonable and suffice to compensate petitioner FMIC for those items. Thus, the appellate court dismissed the complaint as against the individual respondents sureties and ordered petitioner FMIC to pay or reimburse respondent Este del Sol the amount of P971,000 representing the difference between what is due to the petitioner and what is due to respondent Este del Sol, based on the following computation. Issue: Whether a contract that has usurious interest rate shall be deemed as having no interest at all. Held: Yes. Affirmed. Ratio: First, there is no merit to petitioner FMIC’s contention that Central Bank Circular No. 905 which took effect on January 1, 1983 and removed the ceiling on interest rates for secured and unsecured loans, regardless of maturity, should be applied retroactively to a contract executed on January 31, 1978, as in the case at bar, that is, while the Usury Law was in full force and effect. It is an elementary rule of contracts that the laws, in force at the time the contract was made and entered into, govern it. More significantly, Central Bank Circular No. 905 did not repeal nor in any way amend the Usury Law but simply suspended the latter’s effectivity. The illegality of usury is wholly the creature of legislation. A Central Bank Circular cannot repeal a law. Only a law can repeal another law. Thus, retroactive application of a Central Bank Circular cannot, and should not, be presumed. Second, when a contract between two (2) parties is evidenced by a written instrument, such document is ordinarily the best evidence of the terms of the contract. Courts only need to rely on the face of written contracts to determine the intention of the parties. However, this rule is not without exception. The form of the contract is not conclusive for the law will not permit a usurious loan to hide itself behind a legal form. Parol evidence is admissible to show that a written document though legal in form was in fact a device to cover usury. If from a construction of the whole transaction it becomes apparent that there exists a corrupt intention to violate the Usury Law, the courts should and will permit no scheme, however ingenious, to becloud the crime of usury. In the instant case, several facts and circumstances taken altogether show that the Underwriting and Consultancy Agreements were simply cloaks or devices to cover an illegal scheme employed by petitioner FMIC to conceal and collect excessively usurious interest, and these

are: a) The Underwriting and Consultancy Agreements are both dated January 31, 1978 which is the same date of the Loan Agreement. Furthermore, under the Underwriting Agreement payment of the supervision and consultancy fees was set for a period of four (4) years to coincide ultimately with the term of the Loan Agreement. This fact means that all the said agreements which were executed simultaneously were set to mature or shall remain effective during the same period of time. b) The Loan Agreement dated January 31, 1978 stipulated for the execution and delivery of an underwriting agreement and specifically mentioned that such underwriting agreement is a condition precedent for petitioner FMIC to extend the loan to respondent Este del Sol, indicating and as admitted by petitioner FMIC’s employees, that such Underwriting Agreement is “part and parcel of the Loan Agreement.” c) Respondent Este del Sol was billed by petitioner on February 28, 1978 One Million Three Hundred Thirty Thousand Pesos (P1,330,000.00) as consultancy fee despite the clear provision in the Consultancy Agreement that the said agreement is for Three Hundred Thirty-Two Thousand Five Hundred Pesos (P332,500.00) per annum for four (4) years and that only the first year consultancy fee shall be due upon signing of the said consultancy agreement. d) The Underwriting, Supervision and Consultancy fees in the amounts of Two Hundred Thousand Pesos (P200,000.00), Two Hundred Thousand Pesos (P200,000.00) and One Million Three Hundred Thirty Thousand Pesos (P1,330,000.00), respectively, were billed by petitioner to respondent Este del Sol on February 22, 1978, that is, on the same occasion of the first partial release of the loan in the amount of Two Million Three Hundred Eighty-Two Thousand Five Hundred Pesos (P2,382,500.00). It is from this first partial release of the loan that the said corresponding bills for Underwriting, Supervision and Consultancy fees were deducted and apparently paid, thus, reverting back to petitioner FMIC the total amount of One Million Seven Hundred Thirty Thousand Pesos (P1,730,000.00) as part of the amount loaned to respondent Este del Sol. e) Petitioner FMIC was in fact unable to organize an underwriting/selling syndicate to sell any share of stock of respondent Este del Sol and much less to supervise such a syndicate, thus failing to comply with its obligation under the Underwriting Agreement. Besides, there was really no need for an Underwriting Agreement since respondent Este del Sol had its own licensed marketing arm to sell its shares and all its shares have been sold through its marketing arm. f) Petitioner FMIC failed to comply with its obligation under the Consultancy Agreement, aside from the fact that there was no need for a Consultancy Agreement, since respondent Este del Sol’s officers appeared to be more competent to be consultants in the development of the projected sports/resort complex.

24

All the foregoing established facts and circumstances clearly belie the contention of petitioner FMIC that the Loan, Underwriting and Consultancy Agreements are separate and independent transactions. The Underwriting and Consultancy Agreements which were executed and delivered contemporaneously with the Loan Agreement on January 31, 1978 were exacted by petitioner FMIC as essential conditions for the grant of the loan. An apparently lawful loan is usurious when it is intended that additional compensation for the loan be disguised by an ostensibly unrelated contract providing for payment by the borrower for the lender’s services which are of little value or which are not in fact to be rendered, such as in the instant case. In this connection, Article 1957 of the New Civil Code clearly provides that Contracts and stipulations, under any cloak or device whatever, intended to circumvent the laws against usury shall be void. The borrower may recover in accordance with the laws on usury. In usurious loans, the entire obligation does not become void because of an agreement for usurious interest; the unpaid principal debt still stands and remains valid but the stipulation as to the usurious interest is void, consequently, the debt is to be considered without stipulation as to the interest. Thus, the nullity of the stipulation on the usurious interest does not affect the lender’s right to receive back the principal amount of the loan. With respect to the debtor, the amount paid as interest under a usurious agreement is recoverable by him, since the payment is deemed to have been made under restraint, rather than voluntarily. Wilfredo Verdejo vs CA, Judge Sofronio G. Sayo, RTC Br III, Pasay City & Herminia Patimo, et al., G.R. No. 77735, January 29, 1988 (157 SCRA 743) Facts: On 20 December 1984, the herein petitioner filed a complaint against the private respondent Herminia Patinio and one John Doe before the Regional Trial Court of Pasay City, docketed therein as Civil Case No. 2546-P, for collection of a sum of money amounting to P60,500.00, which said Herminia Patinio had allegedly borrowed from him but failed to pay when it became due, notwithstanding demands. Answering, Herminia Patinio admitted having obtained loans from the petitioner but claimed that the amount borrowed by her was very much less than the amount demanded in the complaint, which amount she had already paid or settled, and that the petitioner had exacted or charged interest on the loan ranging from 10% to 12% per month, which is exorbitant and in gross violation of the Usury Law. Wherefore she prayed that she be reimbursed the usurious interests charged and paid. She also asked for damages, attorney's fees and costs of suit. The lower court dismissed the suit, but granted the counterclaim ordering the refund of P13,980 and the payment of attorney’s fees. A notice of appeal was filed through mail. A motion for execution was filed claiming

that there was no valid appeal. The court denied the appeal and ordered the execution. A petition for certiorari before the CA was filed, but it was dismissed. Issue: Whether only the usurious portion of the interest shall be reimbursed and not the legal or lawful portion of the interest. Held: Yes. Reversed. Ratio: The case involves an alleged violation of the Usury Law, where the petitioner was found by the trial court to have charged and collected usurious interests from the private respondent on loans which were first obtained on 15 February 1982, later renewed, and finally culminated with the execution by private respondent of the Deed of Sale with Right of Repurchase on 17 November 1983. This Court has ruled in one case that with the promulgation of Central Bank Circular No. 905, series of 1982, usury has become "legally inexistent" as the lender and the borrower can agree on any interest that may be charged on the loan. This Circular was also given retroactive effect. But, whether or not this Circular should also be given retroactive effect and applied in this case is yet to be determined by the appellate court at the proper time. Moreover, it appears that the computation of the amount considered as usurious interest is incorrect. The trial court merely added the amounts paid by the private respondent to the petitioner and, thereafter, deducted therefrom the amounts given as loan to the private respondent and considered the excess amount usurious, without apparently considering the lawful interest that may be collected on said loans. Only usurious interests may be reimbursed. In the instant case, the notice of appeal was sent by special delivery, instead of registered mail. Considering that said notice of appeal was sent within the period for perfection of appeals by the petitioner who, not being a lawyer, is not well versed in the finer points of the law, and, hence, committed an honest mistake; and that the petitioner appears to have a good and valid cause of action, we find that there was substantial compliance with the rules.

25

Restituta M. Imperial vs. Alex A. Jaucian, G.R. No. 149004, April 14, 2004 (427 SCRA 517) Facts: Imperial obtained from Jaucian six (6) separate loans worth P320,000 for which the former executed in favor of the latter six (6) separate promissory notes and issued several checks as guarantee for payment. When the said loans became overdue and unpaid, especially when the defendant’s checks were dishonored, plaintiff made repeated oral and written demands for payment. The face value of each promissory notes is bigger than the amount released to defendant because said face value already included the interest from date of note to date of maturity of 16% per month. The arrangement between plaintiff and defendant regarding these guarantee checks was that each time a check matures the defendant would exchange it with cash. Although, admittedly, defendant made several payments, the same were not enough and she always defaulted whenever her loans matured. As of August 16, 1991, the total unpaid amount, including accrued interest, penalties and attorney’s fees, was P2,807,784.20. A case was filed with the RTC. The lower court ruled that the defendant should pay the debt, but also ruled that the amount of interest was unconscionable, iniquitous, and in violation of Act No. 2655. In so doing, the court pronounced Section I, Central Bank Circular No. 905, series of 1982 to be of no force and legal effect, it having been promulgated by the Monetary Board of the Central Bank of the Philippines with grave abuse of discretion amounting to excess of jurisdiction. The lower court reduced the interest rate to 28% per annum. CA affirmed. Issue: Whether the court can reduce usurious interest rate to a lower interest rate of its discretion. Held: Yes. Affirmed. Ratio: The trial court, as affirmed by the CA, reduced the interest rate from 16 percent to 1.167 percent per month or 14 percent per annum; and the stipulated penalty charge, from 5 percent to 1.167 percent per month or 14 percent per annum. Petitioner alleges that absent any written stipulation between the parties, the lower courts should have imposed the rate of 12 percent per annum only. The records show that there was a written agreement between the parties for the payment of interest on the subject loans at the rate of 16 percent per month. As decreed by the lower courts, this rate must be equitably reduced for being iniquitous, unconscionable and exorbitant. “While the Usury Law ceiling on interest rates was lifted by C.B. Circular No. 905, nothing in the said circular grants lenders carte blanche authority to raise interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their assets.” In Medel v. CA, the Court found the stipulated

interest rate of 5.5 percent per month, or 66 percent per annum, unconscionable. In the present case, the rate is even more iniquitous and unconscionable, as it amounts to 192 percent per annum. When the agreed rate is iniquitous or unconscionable, it is considered “contrary to morals, if not against the law. Such stipulation is void.” Since the stipulation on the interest rate is void, it is as if there were no express contract thereon. Hence, courts may reduce the interest rate as reason and equity demand. We find no justification to reverse or modify the rate imposed by the two lower courts. As for the issue of penalties and attorney’s fees, in exercising the power to determine what is iniquitous and unconscionable, courts must consider the circumstances of each case. What may be iniquitous and unconscionable in one may be totally just and equitable in another. In the present case, iniquitous and unconscionable was the parties’ stipulated penalty charge of 5 percent per month or 60 percent per annum, in addition to regular interests and attorney’s fees. Also, there was partial performance by petitioner when she remitted P116,540 as partial payment of her principal obligation of P320,000. Under the circumstances, the trial court was justified in reducing the stipulated penalty charge to the more equitable rate of 14 percent per annum. The Promissory Note carried a stipulation for attorney’s fees of 25 percent of the principal amount and accrued interests. Strictly speaking, this covenant on attorney’s fees is different from that mentioned in and regulated by the Rules of Court. “Rather, the attorney’s fees here are in the nature of liquidated damages and the stipulation therefor is aptly called a penal clause.” So long as the stipulation does not contravene the law, morals, public order or public policy, it is binding upon the obligor. It is the litigant, not the counsel, who is the judgment creditor entitled to enforce the judgment by execution. Nevertheless, it appears that petitioner’s failure to comply fully with her obligation was not motivated by ill will or malice. The twenty-nine partial payments she made were a manifestation of her good faith. Again, Article 1229 of the Civil Code specifically empowers the judge to reduce the civil penalty equitably, when the principal obligation has been partly or irregularly complied with. Upon this premise, we hold that the RTC’s reduction of attorney’s fees -- from 25 percent to 10 percent of the total amount due and payable -- is reasonable. Petitioner contends that the case against her should have been dismissed, because her husband was not included in the proceedings before the RTC. We are not persuaded. The husband’s non-joinder does not warrant dismissal, as it is merely a formal requirement that may be cured by amendment. Since petitioner alleges that her husband has already passed away, such an amendment has thus become moot.

26

Ileana DR. Macalinao vs. Bank of the Philippine Islands, G.R. No. 175490, September 17, 2009 Facts: Macalinao was an approved cardholder of BPI Mastercard. She made some purchases through the use of the said credit card and defaulted in paying for said purchases. She subsequently received a letter dated January 5, 2004 from BPI, demanding payment of the amount of PhP 141,518.34. Under the Terms and Conditions Governing the Issuance and Use of the BPI Credit and BPI Mastercard, the charges or balance thereof remaining unpaid after the payment due date indicated on the monthly Statement of Accounts shall bear interest at the rate of 3% per month and an additional penalty fee equivalent to another 3% of the amount due for every month or a fraction of a month’s delay. For failure of Macalinao to settle her obligations, BPI filed with the MeTC of Makati City a complaint for a sum of money against her and her husband, Danilo SJ. Macalinao. In said complaint, BPI prayed for the payment of the amount of PhP 154,608.78 plus 3.25% finance charges and late payment charges equivalent to 6% of the amount due from February 29, 2004 and an amount equivalent to 25% of the total amount due as attorney’s fees, and of the cost of suit. The Macalinao failed to file an Answer. In its decision, the MeTC ruled for BPI and ordered the Macalinaos to pay the amount of P141,518.34 plus interest and penalty charges of 2% per month. Macalinao appealed to the RTC, but the RTC affirmed the decision in toto. The Macalinaos filed a petition for review with the CA, but the CA affirmed with modifications the RTC Decision by ordering the payment of the principal amount of P126, 706.70 plus interest and penalty charges of 3% per month from date of demand unti fully paid. The Motion for Reconsideration was denied, hence this case that was filed by Macalinao. Issue: Whether the charging of 3% interest and penalty charges by a credit card company is usurious. Whether the court can reduce a usurious interest rate and penalty charge to whatever rate is reasonable and equitable.

Indeed, in the Terms and Conditions Governing the Issuance and Use of the BPI Credit Card, there was a stipulation on the 3% interest rate. Nevertheless, it should be noted that this is not the first time that this Court has considered the interest rate of 36% per annum as excessive and unconscionable as held in Chua vs. Timan. Since the stipulation on the interest rate is void, it is as if there was no express contract thereon. Hence, courts may reduce the interest rate as reason and equity demand. The same is true with respect to the penalty charge. Notably, under the Terms and Conditions Governing the Issuance and Use of the BPI Credit Card, it was also stated therein that respondent BPI shall impose an additional penalty charge of 3% per month. Pertinently, Article 1229 of the Civil Code states that the judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor. Even if there has been no performance, the penalty may also be reduced by the courts if it is iniquitous or unconscionable. In exercising this power to determine what is iniquitous and unconscionable, courts must consider the circumstances of each case since what may be iniquitous and unconscionable in one may be totally just and equitable in another. Thus, under the circumstances, the Court finds it equitable to reduce the interest rate pegged by the CA at 1.5% monthly to 1% monthly and penalty charge fixed by the CA at 1.5% monthly to 1% monthly or a total of 2% per month or 24% per annum in line with the prevailing jurisprudence and in accordance with Art. 1229 of the Civil Code. Significantly, the CA correctly used the beginning balance of PhP 94,843.70 as basis for the re-computation of the interest considering that this was the first amount which appeared on the Statement of Account of petitioner Macalinao. There is no other amount on which the recomputation could be based, as can be gathered from the evidence on record. The principal amount to be paid should be P112, 309,52.

Held: Yes. Yes. Modified. Ratio: The Interest Rate and Penalty Charge of 3% Per Month or 36% Per Annum Should Be Reduced to 2% Per Month or 24% Per Annum. In its Complaint, respondent BPI originally imposed the interest and penalty charges at the rate of 9.25% per month or 111% per annum. This was declared as unconscionable by the lower courts for being clearly excessive, and was thus reduced to 2% per month or 24% per annum. On appeal, the CA modified the rate of interest and penalty charge and increased them to 3% per month or 36% per annum based on the Terms and Conditions Governing the Issuance and Use of the BPI Credit Card, which governs the transaction between petitioner Macalinao and respondent BPI.

27

Antonio F. Aquino, special administrator of the testate estate of the deceased Mariano Aquino vs. Tomas Deala, G.R. No. 43304, October 21, 1936 (63 Phil 582) Facts: The defendant approached Mariano Aquino, the plaintiff's father, to solicit a P4,000 loan secured by the real property on which a house of strong materials was built. Mariano Aquino acceded on condition that the transaction be evidenced by a deed of sale with a 4 year right of repurchase, obligation to build a house, and obligation to lease the property from Mariano Aquino for the sum of P40 per month. The instrument was later novated, the only alteration being the price and the rent – P4,500 and P45, respectively. It was novated again to change the price and rent to P5,200 and P52, respectively. Then again to P6,600 and P49.50 and extending the period or repurchase to April 20, 1933. The defendant was able to get permission from the Department of Engineering and Public Works to build a 2-storey house, and he completed the building of the house in 2 years. Mariano Aquino, sometime in 1933, had the consolidation of the property registered with the registry of deeds, and a transfer certificate of title was issued to him. He died sometime later. His son, as special administrator, instituted the ejectment proceeding. The municipal court ordered the defendant to vacate the property. The CFI affirmed. Issue: Whether a contract of deposit which has a stipulation for the payment of interest is actually a loan. Held: Yes. Reversed. Case dismissed Ratio: The subsequent conduct of the parties and other circumstances of the case warrant the conclusion that the true intention of the parties was the granting of a loan in a certain amount to the defendant, with interest at 12 per cent per annum which, in view of the defendant's precarious situation, was later reduced to 9 per cent so that he could build another house on the vacant part of the lot in question, the loan being secured by said lot, the house already built thereon at the time of the execution of the contract and that which the defendant intended to build with the money received from Mariano Aquino. If the words "sale with right of repurchase", "price", "repurchase", "right of redemption", "lease", "rent", "purchaser", "vendor", and other similar words used according to custom in the deed Exhibit 1, the other stipulations contained therein and the other circumstances of the case are incompatible with the idea that it was the intention of the assignor to transfer the ownership of the property in question to the purchaser at a certain price, the vendor reserving for himself only the right to repurchase it within a certain period. Let us begin with the stipulations of the original

contract Exhibit 1. Those contained in paragraphs 5, 6, 10 and 11 thereof are, in our opinion, incompatible with the theory that the contract was one of purchase and sale as claimed by the plaintiff. We should not lose sight of the fact that between an absolute sale and a sale with right of repurchase, no difference exists except that in the latter the ownership of the purchaser is subject to the resolutory condition that the vendor exercises his right of repurchase with the time agreed upon. Under paragraph 5, the so-called vendor found himself to construct a two-story house of strong materials within six months on the vacant part of the lot referred to in the contract. It is not explained why the vendor should have to assume said obligation and spend the money received from the purchaser in compliance therewith when such obligation is an act of ownership and the performance thereof devolved upon the purchaser-owner, not upon the vendor-lessees. It is stated in their contract that the security offered is insufficient and, therefore, the creditor required the debtor to amplify it by constructing another additional house on the lot given as security. Had it been the intention of the parties to make this new house a part of the subject matter of the said sale, a stipulation regarding payment of additional rent would have been inserted in the contract inasmuch as a rental of P40 a month was fixed for the use and occupation of the house already existing on the property which is the subject matter of the contract. It is true that under paragraph 10 this sum of P40 was for the rent not only of the house already existing but also of that which the defendant undertook to construct, but this part of the contract is clearly fictitious, because if the rent of P40 covered the two houses, it is not explained why the lessee should agree to pay rent for the occupation of an inexistent house which he himself was to construct with his own money and how the lessor should accept rent of only P40 for two houses of strong materials, one of which consists of two stories. Paragraph 6 and paragraph 10, subparagraph (d) imposed upon the vendor the obligation to insure against fire the buildings constructed on the property which is the subject matter of the contract, for not less than P3,000, the payment of the premiums thereof being to the account of said vendor who was obliged to indorse the policy immediately to the purchaser and to pay, also for his own account and responsibility, the land tax and any other taxes imposed or that might thereafter be imposed upon the property. When a property is insured, the indemnity, in case of loss, is paid to the owner because the insurable interest is his. This being so, the correlative obligation to pay for the insurance premiums should devolve upon the owner and not upon the lessee or vendor with right of repurchase who, with the exception of his right of redemption, should have considered all other juridical relations with the property sold extinguished after the contract. The same is true with respect to the payment of the land tax. This lien should have been shouldered by the owner and not by the lessee. Under paragraph 10, subparagraph (e), the

28

expenses for the conservation of the property should likewise be for the account of the defendant. However, these expenses are ordinarily for the account of the lessor (article 1554, Civil Code). It appears that Mariano Aquino desired to obtain a net income of 12 per cent per annum from his investment and for this reason he caused the defendant to assume the obligation to pay not only the land tax and insurance of the property but also the expenses for its conservation. If Mariano Aquino had assumed these obligations which strictly belong to the owner of the property, instead of imposing them upon the defendant, he would not have been able to realize said net income of 12 per cent per annum on his capital, because he would have had to deduct therefrom the sum represented by the insurance, the land tax and the expenses for the conservation of the property. On the other hand, had he assumed such obligations and compensated these liens by charging interest in excess of 12 per cent he would have openly violated the Usury Law. When the alleged sale price was increased to P4,500 in the first novation of the contract on December 26, 1926, the rent of the property was increased to P45, in spite of the fact that said property had suffered no change, in order to maintain the rate of interest at 12 per cent. When the contract was novated for the second time on May 31, 1927, by increasing the so-called selling price to P5,200, the rent was likewise increased to P52 in order to continue maintaining the rate of interest at 12 per cent. It was only when said contract was novated for the last time on April 20, 1931, and the so-called selling price was increased to P6,600 that the rent was reduced to P49.50 a month because Mariano Aquino had acceded to reduce the rate of interest to 9 per cent. The new house on the lot in question had just been finished about June 23, 1928, and it is strange that the fluctuations of the amount of the rent had nothing to do with the construction of said new house but with the successive increases of the so-called selling price, or the amount of the loan. In other words, the rent went up or down not because of the improvement or amplification of the leased property but because of the increase of the amount of the loan and the rate of the interest agreed upon by the parties. The term of the right of redemption, under the original deed, was supposed to expire and it expired on September 25, 1930. However, the so-called purchaser, far from having the consolidation of his ownership registered in the registry of deeds, executed Exhibit 5, on April 20, 1931, "extending" the already expired original term of four years stipulated in Exhibit 1 to April 20, 1933. This shows that, notwithstanding the form of the contract, Mariano Aquino always considered the transaction as a simple loan. The affirmation made in paragraph 3 of the deed Exhibit 5 that "as the term of the contract had expired on September 25, 1930, the same remaining in status quo, etc." excludes every idea that the parties intended to enter into a contract of sale. In fact, once the period for the right have been exercised, it could not be said, if the contract were on of sale with pacto de retro, that "the contract has

remained in status quo", because failure to exercise the right of redemption, in such contract, automatically produces the effect of consolidating the ownership of the purchaser without the necessity of any other act on his part, the fact on which his ownership was temporarily conditioned not having been realized. In Padilla vs. Linsangan (19 Phil., 65), we stated that "the court will not construe an instrument to be one of a sale con pacto de retro, with the stringent and onerous effects that follow, unless the terms of the instrument and all the circumstances positively require it. Whenever, under the terms of the writing, any other construction can fairly and reasonably be made, such construction will be adopted. Sales with a right to repurchase, as defined by the Civil Code, are not favored, and the contract will be construed as a mere loan unless the court can see that, if enforced according to its terms, it is not an unconscionable one." It may be contended that "the contracting parties may establish any agreements, terms and conditions that may deem advisable, provided they are not contrary to law, morals, or public order." (Art. 1255, Civil Code.) However, we do not declare herein the nullity of the agreements contained in Exhibit 1 and in its various novations. None of said agreements is contrary to law, morals, or public order, and all of them should therefore be maintained out of respect to the will of the contracting parties. The validity of these agreements, however, is one thing, while the juridical qualification of the contract resulting therefrom is very distinctly another. Such agreements, in our opinion, change the status of the sale with pacto de retro and give rise to juridical relations of a different nature. Similar thereto is a contract of commodatum wherein payment of compensation by the person acquiring the use of the thing is stipulated. This stipulation is valid but the commodatum, although so termed, ceases to exist and it converted into another contract with different effects (art. 1741). The same thing happens with the contract of depositum. Although it would seem that article 1760 of the Civil Code indirectly authorizes the constitution of an onerous deposit, when there is an express stipulation to that effect, this court has repeatedly held that the deposit should be considered a loan when it contains a stipulation for payment of interest. (Garcia Gavieres vs. Pardo de Tavera, 1 Phil., 71; Barretto vs. Reyes, 10 Phil., 489; In re Guardianship of the minors Tamboco, 36 Phil., 939, 941.) In order not to multiply the examples, we shall cite the cases of use and habitation wherein the usuary who consumes all the fruits of the thing subject to use, and the person having the right of habitation who occupies the whole house, are considered usufructuaries (art. 527). AngelJavellana vs. Jose Lim, et al., G.R. No. 4015,August 24,1908(11Phil141) Facts: The defendants received from the plaintiff the sum

29

of P2,686.58 as a deposit without interest sometime in 1897 which was to be returned, jointly and severally, in 1898. When the obligation became due, the defendants begged the plaintiff for an extension of time for the payment thereof, binding themselves to pay interest at the rate of 15 per cent on the amount of their indebtedness, to which the plaintiff acceded. On May 15, 1902, the debtors paid interest of P1,000 and then made no other payments. The plaintiff filed a case. CFI found the defendants liable jointly and severally.

maintained in COMTRUST, Quezon City Branch, a dollar savings account and a peso current account.

Issue: Whether a contract denominated as a deposit but which did not require the return of exactly the same coins and which eventually provided for the payment of interest is actually a loan. Held: Yes. Affirmed. Ratio: They did not engage to return the same coins received and of which the amount deposited consisted, and they could have accomplished the return agreed upon by the delivery of a sum equal to the one received by them. For this reason it must be understood that the debtors were lawfully authorized to make use of the amount deposited, which they have done, as subsequently shown when asking for an extension of the time for the return thereof, inasmuch as, acknowledging that they have subjected the lender, their creditor, to losses and damages for not complying with what had been stipulated, and being conscious that they had used, for their own profit and gain, the money that they received apparently as a deposit, they engaged to pay interest to the creditor from the date named until the time when the refund should be made. Such conduct on the part of the debtors is unquestionable evidence that the transaction entered into between the interested parties was not a deposit, but a real contract of loan. It may be inferred that there was no renewal of the contract of deposit converted into a loan, because, as has already been stated, the defendants received said amount by virtue of a real loan contract under the name of a deposit, since the so-called bails were forthwith authorized to dispose of the amount deposited. This they have done, as has been clearly shown. The original joint obligation contracted by the defendant debtors still exists, and it has not been shown or proven in the proceedings that the creditor had released Jose Lim from complying with his obligation in order that he should not be sued for or sentenced to pay the amount of capital and interest together with his co-debtor. Bank of the Philippine Islands vs. IAC & Rizaldy T. Zshornack, G.R. No. L-66826, August 19, 1988 (164 SCRA 630) Facts: Rizaldy Zshornack and his wife, Shirley Gorospe,

30

On October 27, 1975, an application for a dollar draft was accomplished by Virgilio V. Garcia, Assistant Branch Manager of COMTRUST Quezon City, payable to a certain Leovigilda D. Dizon in the amount of $1,000.00. In the application, Garcia indicated that the amount was to be charged to Dollar Savings Acct. No. 25-4109, the savings account of the Zshornacks; the charges for commission, documentary stamp tax and others totalling P17.46 were to be charged to Current Acct. No. 210-46529, again, the current account of the Zshornacks. There was no indication of the name of the purchaser of the dollar draft. On the same date, October 27, 1975, COMTRUST, under the signature of Virgilio V. Garcia, issued a check payable to the order of Leovigilda D. Dizon in the sum of US$1,000 drawn on the Chase Manhattan Bank, New York, with an indication that it was to be charged to Dollar Savings Acct. No. 25-4109. When Zshornack noticed the withdrawal of US$1,000.00 from his account, he demanded an explanation from the bank. In answer, COMTRUST claimed that the peso value of the withdrawal was given to Atty. Ernesto Zshornack, Jr., brother of Rizaldy, on October 27,1975 when he (Ernesto) encashed with COMTRUST a cashier's check for P8,450.00 issued by the Manila Banking Corporation payable to Ernesto. In its desperate attempt to justify its act of withdrawing from its depositor's savings account, the bank has adopted inconsistent theories. First, it still maintains that the peso value of the amount withdrawn was given to Atty. Ernesto Zshornack, Jr. when the latter encashed the Manilabank Cashier's Check. At the same time, the bank claims that the withdrawal was made pursuant to an agreement where Zshornack allegedly authorized the bank to withdraw from his dollar savings account such amount which, when converted to pesos, would be needed to fund his peso current account. Zshornack also entrusted to COMTRUST, thru Garcia, US$3,000.00 cash (popularly known as greenbacks) for safekeeping. Despite demand, the bank refused to return the money. COMTRUST averred that the US$3,000 was credited to Zshornack's peso current account at prevailing conversion rates. BPI later absorbed COMTRUST. Zshornack filed a case against BPI. The trial court ruled for Zshornack.

a personality distinct and separate from Rizaldy Zshornack. Payment made to Ernesto cannot be considered payment to Rizaldy. As to the second explanation, even if we assume that there was such an agreement, the evidence do not show that the withdrawal was made pursuant to it. Instead, the record reveals that the amount withdrawn was used to finance a dollar draft in favor of Leovigilda D. Dizon, and not to fund the current account of the Zshornacks. There is no proof whatsoever that peso Current Account No. 210-465-29 was ever

Issue: Whether money that is given to the bank for safekeeping is a deposit. Ratio: Yes. Modified. Ratio: The explanations of the bank are unavailing. With regard to the first explanation, petitioner bank has not shown how the transaction involving the cashier's check is related to the transaction involving the dollar draft in favor of Dizon financed by the withdrawal from Rizaldy's dollar account. The two transactions appear entirely independent of each other. Moreover, Ernesto Zshornack, Jr., possesses

31

credited with the peso equivalent of the US$1,000.00 withdrawn on October 27, 1975 from Dollar Savings Account No. 25-4109. The arrangement between the bank and Zshoranck is that contract defined under Article 1962, New Civil Code -- A deposit is constituted from the moment a person receives a thing belonging to another, with the obligation of safely keeping it and of returning the same. If the safekeeping of the thing delivered is not the principal purpose of the contract, there is no deposit but some other contract. Note that the object of the contract between Zshornack and COMTRUST was foreign exchange. Hence, the transaction was covered by Central Bank Circular No. 20, Restrictions on Gold and Foreign Exchange Transactions, promulgated on December 9, 1949, which was in force at the time the parties entered into the transaction involved in this case. The circular requires all persons to sell to the Central Bank all foreign exchange received within one business day following such receipt. This was modified by CB Circular No. 281 which limited the restriction to Philippine residents. The document and the subsequent acts of the parties show that they intended the bank to safekeep the foreign exchange, and return it later to Zshornack, who alleged in his complaint that he is a Philippine resident. The parties did not intend to sell the US dollars to the Central Bank within one business day from receipt. Otherwise, the contract of depositum would never have been entered into at all. Since the mere safekeeping of the greenbacks, without selling them to the Central Bank within one business day from receipt, is a transaction which is not authorized by CB Circular No. 20, it must be considered as one which falls under the general class of prohibited transactions. Hence, pursuant to Article 5 of the Civil Code, it is void, having been executed against the provisions of a mandatory/prohibitory law. More importantly, it affords neither of the parties a cause of action against the other. We thus rule that Zshornack cannot recover under the second cause of action.

in connection with some that she took over from Guillermo Baron, amounted to 1,012 cavans and 24 kilos. During approximately the same period Guillermo Baron placed other 1,865 cavans and 43 kilos of palay in the mill. No compensation has ever been received by Silvestra Baron upon account of the palay thus placed with the defendant. As against the palay delivered by Guillermo Baron, he has received from the defendant advancements amounting to P2,800; but apart from this he has not been compensated. Both the plaintiffs claim that the palay which was delivered by them to the defendant was sold to the defendant; while the defendant, on the other hand, claims that the palay was deposited

Silvestra Baron vs. Pablo David; Guillermo Baron vs. Pablo David, G.R. Nos. 26948 & 26949, October 8, 1927 (51 Phil 1) Facts: Prior to January 17,1921, the defendant Pablo David had been engaged in running a rice mill in the municipality of Magalang, in the Province of Pampanga, a mill which was well patronized by the rice growers of the vicinity and almost constantly running. On the date stated, a fire occurred that destroyed the mill and its contents, and it was some time before the mill could be rebuilt and put in operation again. Silvestra Baron, the plaintiff in the first action, is an aunt of the defendant; while Guillermo Baron, the plaintiff in the other action, is his uncle. In the months of March, April, and May, 1920, Silvestra Baron placed a quantity of palay in the defendant's mill; and this,

32

subject to future withdrawal by the depositors or subject to some future sale which was never effected. He therefore supposes himself to be relieved from all responsibility by virtue of the fire of January 17, 1921, already mentioned. The plaintiffs further say that their palay was delivered to the defendant at his special request, coupled with a promise on his part to pay for the same at the highest price per cavan at which palay would sell during the year 1920; and they say that in August of that year the defendant promised to pay them severally the price of P8.40 per cavan, which was about the top of the market for the season, provided they would wait for payment until December. A case was filed against the defendant. The court ruled that the alleged promise to pay at the highest price was not made, but gave judgment in favor of the plaintiffs for the recovery of the sums of P5,238.51 and P5,734.60. Both parties appealed.

we wholly reject the defendant's pretense that the palay delivered by the plaintiffs or any part of it was actually consumed in the fire of January, 1921. Nor is the liability of the defendant in any wise affected by the circumstance that, by a custom prevailing among rice millers in this country, persons placing palay with them without special agreement as to price are at liberty to withdraw it later, proper allowance being made for storage and shrinkage, a thing that is sometimes done, though rarely.

Issue: Whether the deposit of things with the object of allowing the depositary to use them is actually a loan. Held: Yes. Affirmed with modifications. Ratio: It should be stated that the palay in question was placed by the plaintiffs in the defendant's mill with the understanding that the defendant was at liberty to convert it into rice and dispose of it at his pleasure. The mill was actively running during the entire season, and as palay was daily coming in from many customers and as rice was being constantly shipped by the defendant to Manila, or other rice markets, it was impossible to keep the plaintiffs' palay segregated. In fact the defendant admits that the plaintiffs' palay was mixed with that of others. In view of the nature of the defendant's activities and the way in which the palay was handled in the defendant's mill, it is quite certain that all of the plaintiffs' palay, which was put in before June 1,1920, had been milled and disposed of long prior to the fire of January 17, 1921. Furthermore, the proof shows that when the fire occurred there could not have been more than about 360 cavans of palay in the mill, none of which by any reasonable probability could have been any part of the palay delivered by the plaintiffs. Considering the fact that the defendant had thus milled and doubtless sold the plaintiffs' palay prior to the date of the fire, it results that he is bound to account for its value, and his liability was not extinguished by the occurrence of the fire. Even supposing that the palay may have been delivered in the character of deposit, subject to future sale or withdrawal at plaintiffs' election, nevertheless if it was understood that the defendant might mill the palay and he has in fact appropriated it to his own use, he is of course bound to account for its value. Under article 1768 of the Civil Code, when the depositary has permission to make use of the thing deposited, the contract loses the character of mere deposit and becomes a loan or a commodatum; and of course by appropriating the thing, the bailee becomes responsible for its value. In this connection

33

In view of what has been said it becomes necessary to discover the price which the defendant should be required to pay for the plaintiffs' palay. Upon this point the trial judge fixed upon P6.15 per cavan; and although we are not exactly in agreement with him as to the propriety of the method by which he arrived at this figure, we are nevertheless of the opinion that, all things considered, the result is approximately correct. The plaintiffs made demand upon the defendant for settlement in the early part of August; and, so far as we are able to judge from the proof, the price of P6.15 per cavan, fixed by the trial court, is about the price at which the defendant should be required to settle as of that date. It was the date of the demand of the plaintiffs for settlement that determined the price to be paid by the defendant, and this is true whether the palay was delivered in the character of sale with price undetermined or in the character of deposit subject to use by the defendant. It results that the plaintiffs are respectively entitled to recover the value of the palay which they had placed with the defendant during the period referred to, with interest from the date of the filing of their several complaints. As already stated, the trial court found that at the time of the fire there were about 360 cavans of palay in the mill and that this palay was destroyed. His Honor assumed that this was part of the palay delivered by the plaintiffs, and he held that the defendant should be credited with said amount. His Honor therefore deducted from the claims of the plaintiffs their respective proportionate shares of this amount of palay. We are unable to see the propriety of this feature of the decision. There were many customers of the defendant's rice mill who had placed their palay with the defendant under the same conditions as the plaintiffs, and nothing can be more certain than that the palay which was burned did not belong to the plaintiffs. That palay without a doubt had long been sold and marketed. The defendant is, however, entitled to an award for his cross-complaint arising from the wrongful attachment of his mill by plaintiff Guillermo Baron. The ground used by the plaintiff was clearly unjustified, and it caused the defendant damages resulting from the closure of his mill for several months and the loss of good will of his customers.

that he would pay them for the palay the highest market price for the season, and to the making of the second contract about the first of August, in which they had a settlement, and that the defendant then agreed to pay them P8.40 per cavan, such payment to be made on December first. The defendant denied the making of either one of those contracts, and offered no other evidence on that question. That is to say, we have the evidence of both Silvestra Baron and Guillermo Baron to the making of those contracts, which is denied by the defendant only. Plaintiffs' evidence is also corroborated by the usual and customary manner in which the growers sell their palay. That is to say, it is their custom to sell the palay at or

John, dissenting and concurring: The amount of palay is not in dispute, and the defendant admits that it was delivered to his mill, but he claims that he kept it on deposit and as bailee without hire for the plaintiffs and at their own risk, and that the mill was burned down, and that at the time of the fire, plaintiffs' palay was in the mill. The lower court found as a fact that there was no merit in that defense, and that there was but little, if any, palay in the mill at the time of the fire and that in truth and in fact that defense was based upon perjured testimony. Both plaintiffs testified to the making of the respective contracts as alleged in their complaint; to wit, that they delivered the palay to the defendant with the express understanding and agreement

34

about the time it is delivered at the mill and as soon as it is made ready for market in the form of rice. Yet, strange as it may seem, both the lower court and this court have found as a fact that upon the question of the alleged contracts, the evidence for the defendant is true and entitled to more weight than the evidence of both plaintiffs which is false. In the very nature of things, if defendant's evidence upon that point is true, it stands to reason that, following the custom of growers, the plaintiffs would have sold their palay during the period of high prices, and would not have waited until it dropped from P8.50 per cavan to P6.15 per cavan about the first of August. Upon that question, both the weight and the credibility of the evidence is with the plaintiffs, and they should have judgment for the full amount of their palay on the basis of P8.40 per cavan. For such reason, I vigorously dissent from the majority opinion. I frankly concede that the attachment was wrongful, and that it should never have been levied. The majority opinion also allowed the defendant P1,400 "for injury to the goodwill of his business." The very fact that after a delay of about four years, both of the plaintiffs were compelled to bring their respective actions against the defendant to recover from him on a just and meritorious claim, as found by this court and the lower court, and the further fact that after such long delay, the defendant has sought to defeat the actions by a sham and manufactured defense, as found by this and the lower court, would arouse the suspicion of any customers the defendant ever had, and shake their confidence in his business honor and integrity, and destroy any goodwill which he ever did have. Under such conditions, it would be strange that the defendant would have any customers left. He is not entitled to any compensation for the loss of goodwill, and P5,000 should be the very limit of the amount of his damages for the wrongful attachment, and upon that point I vigorously dissent. In all other respects, I agree with the majority opinion.

payment, and the costs. The plaintiff asked that the interest run from November 21, 1905, because on that date, his counsel demanded of the defendants, Bonnevie and Arandez, their partnership having been dissolved, that they settle the accounts in this matter. The lower court ruled in favor of the plaintiff. Issue: Whether a deposit which is converted to another contract loses its nature as a deposit.

Vicente Delgado vs. Pedro Bonnevie & Francisco Arandez, G.R. No. 7097, October 23, 1912 (23 Phil 308) Facts: Pedro Bonnevie and Francisco Arandez formed a regular general partnership for engaging in the business of threshing paddy. Vicente Delgado undertook to deliver to them paddy for this purpose to be cleaned and returned to him as rice, with the agreement of paying them 10 centimos for each cavan and to have returned in rice onehalf the amount received as paddy. Receipts were given out to evidence the transaction. On February 6, 1909, Vicente Delgado appeared in the Court of First Instance of Ambos Camarines with said receipts, demanding return of the said 2,003 and a half cavanes of paddy, or in the absence thereof, of the price of said article at the rate of 3 persons the cavan or 6,009 pesos and 50 centimos, with interest thereon at 6 per cent a year reckoning from November 21, 1905, until complete

35

Held: No. Affirmed. Ratio: It is true that, according to article 950 of the Code of Commerce, actions arising from bills of exchange, drafts, notes, checks, securities, dividends, coupons, and the amounts of the amortization of obligations issued in accordance with said code, shall extinguish three years after they have fallen due; but it is also true that as the receipts in question are not documents of any of the kinds enumerated in said article, the actions arising therefrom do not extinguish three years from their date (that, after all, they do not fall due). It is true that paragraph 2 of article 950 also mentions, besides those already stated, "other instruments of draft or exchange;" but it is also true that the receipts in this case are not documents of draft or exchange, they are not drafts payable to order, but they are, as the appellants acknowledge, simple promises to pay, or rather mere documents evidencing the receipt of some cavanes of paddy for the purpose already stated, which is nothing more than purely for industrial, and not for mercantile exchange. The contract whereby one person receives from another a quantity of unhulled rice to return it hulled, for a fixed compensation or remuneration, is an industrial, not a commercial act; it is, as the appellants say, a hire of services without mercantile character, for there is nothing mercantile about it, just as there is nothing mercantile about the operation of washing clothes. Neither are articles 309 of the Code of Commerce and 1955 and 1962 of the Civil Code applicable. It is acknowledged that the obligation of the appellants arose primarily out of the contract of deposit, but this deposit was later converted into a contract of hire of services, and this is true. But it is also true that, after the object of the hire of services had been fulfilled, the rice in every way remained as a deposit in the possession of the appellants for them to return to the depositor at any time they might be required to do so, and nothing has relieved them of this obligation; neither the dissolution of the partnership that united them, nor the revolutionary movement of a political character that seems to have occurred in 1898, nor the fact that they may at some time have lost possession of the rice. Under title of deposit or hire of services, the possession of the appellants can in no way amount to prescription, for the thing received on deposit or for hire of services could not prescribe, since for every prescription of ownership the possession must be in the capacity of an owner, public, peaceful, and uninterrupted (Civil Code, 1941); and the appellants could not possess the rice in the capacity of owners, taking for granted that the depositor or lessor never could have believed that he had transferred to them ownership of the thing deposited or leased, but merely the care of the thing on deposit and the use or profit thereof; which is expressed in legal terms by saying that the possession of the depositary or of the lessee is not adverse to that of the depositor or lessor, who continues to be the owner of the thing which is merely held in trust by the depositary or lessee.

In strict law, the deposit, when it is of fungible goods received by weight, number, or measurement, becomes a mutual loan, by reason of the authorization which the depositary may have from the depositor to make use of the goods deposited. (Civil Code, 1768, and Code of Commerce, 309.) But in the present case neither was there authorization of the depositor nor did the depositaries intend to make use of the rice for their own consumption or profit; they were merely released from the obligation of

36

returning the same thing and contracted in lieu thereof the obligation of delivering something similar to the half of it, being bound by no fixed terms, the opposite of what happens in a mutual loan, to make the delivery or return when and how it might please the depositor. Nicolas Lizares vs. Rosendo Hernaez & Enrica Alunan Viuda de Lizares, G.R. No. 14977, March 30, 1920 (40 Phil 981)

These antagonistic views presently culminated in the litigation now before us. A case was filed by the lessee to rescind the contract and to recover a sum of money as damages by reason of the failure of the defendant to comply with certain obligations incumbent upon him under the contract. The trial court rescinded the contract, found the lessor liable for damages, and found the lessee indebted for rent. The

Facts: The plaintiff, Nicolas Lizares, and the defendant, Rosendo Hernaez, entered into a contract, whereby the former became the lessee of the two haciendas Panaogao and Matagoy No. 2. Among the improvements existing upon the hacienda Panaogao, and which the plaintiff was entitled to use, was a large iron-roofed camarin, containing furnaces, boilers, mills, engines, and other apparatus for the manufacture of sugar. At about 7 p. m., on March 16, 1918, a fire of unknown origin occurred at this sugar mill, which destroyed the camarin and greatly damaged the sugarmilling apparatus. Upon the actual occasion of the fire in question the plaintiff was absent on business in the city of Iloilo, having left Amando Ereñeta in charge of the hacienda. The latter had left the camarin at about 5 pm on the date referred to; and when the fire occurred, he was at the corral where the carabaos were kept, a short distance away from the camarin. Instead of hastening to the fire at once, after the alarm was given, he remained a little while in the corral in order to get the animals into a place of safety. Felipe Beldua, apparently next in authority to Amando Ereñeta, and who was engaged in the sugar-boiling department, had left the camarin at about 4 pm in order to get something to eat. As he was returning to the camarin, and while yet a short distance away, he discerned the flames rising from a pile of bagasse at the north side of the camarin. He was the first person to see the fire and at once gave alarm. It should be noted that the fire did not originate in that part of the bagasse which was lying in closest proximity to the stoking-stands but a little distance away where it was unnoticed by the stokers. When Felipe Beldua left the camarin, two of his assistants remained on duty, and the evidence shows that other employees, such as the stokers, machine-cleaners, and sugar boilers, were busy at work. The stoker Lucas Bendado was on duty at the cabcacan immediately in front of the opening of the furnaces at the time the fire occurred. Amando Ereneta, who was first in charge of the camarin at the time, was employed by the plaintiff to look after the animals, and his duties were not such as to require him to be continually inside the camarin. Soon after the fire the plaintiff informed the defendant of the calamity and made demand upon him for the reconstruction of the camarin. The defendant refused to recognize the existence of any obligation on his part to reconstruct the camarin, insisting that the plaintiff, being the lessee, and not himself, as lessor, was responsible for the fire and answerable for the damage occasioned thereby.

37

trial court found that the fire which destroyed the camarin was of unknown and accidental origin and that no fault or negligence was attributable to the plaintiff in regard either to the conditions antecedent to the fire or the manner in which the flames were resisted. He was, therefore, of the opinion that the loss caused by the fire was due to casus fortuitus, for the consequences of which no one was responsible. Issue: Whether a loss of a thing under lease which could not have been prevented should be borne by the lessee. Whether the loss of a thing deposited which could not have been prevented should be borne by depositary.

thing is lost while in the possession of the debtor it shall be presumed that the loss occurred by his fault and not by fortuitous event in the absence of proof to the contrary. But where it is found, and the fact is indisputable, this is equivalent to a finding that the fire was not attributable to the fault of the defendant and negatives every idea of negligence on its part with reference to the origin of the fire. This was casus fortuitus such as to exempt the defendant from liability. Article 1183

Held: No. No. Affirmed, but award for damages reversed. Ratio: It must be admitted that when a loss of the leased property occurs, there is a presumption against the lessee, which makes him responsible, in the absence of proof that the loss happened without his fault. But the question whether there has been fault on his part must be determined in relation with other provisions of the Civil Code as well as in the light of the general principles of jurisprudence. Under article 1561 of the Civil Code the lessee of lands is not responsible for a loss resulting from inevitable cause; and in article 1106 the general rule is declared that, in the absence of express provision to the contrary, no one is liable for events which cannot be foreseen or which, if foreseen, are inevitable. As applied to the case before us we are of the opinion that when the trial court found that reasonable precautions had been taken by the lessee to prevent fires, but that nevertheless fire did occur, of inscrutable origin, which destroyed, the camarin in spite of all that could be done to prevent it, this is equivalent to a finding that the lessee was without fault and that the loss was in fact due to an inevitable cause. In other words the presumpting against the lessee is overcome by proving that the usual and proper care was used to protect the leased property from fire. Upon principle the responsibility of the lessee for the property leased is substantially the same as that of a person who has possession of movable property belonging to another, as in the case of bailment. It is a well known fact in legal history that the doctrines of English law applicable to the bailment of chattels are in great part identical with those developed by the civil law of Rome, of which indeed the English doctrines may be considered mere emanations. In bailment ordinary care and diligence are required of the bailee and he is not liable for the inevitable loss or destruction of the chattel, not attributable to his fault. If while the bailment continues, the chattel is destroyed, or stolen, or perishes, without negligence on the bailee's part, the loss, as in other hirings, falls upon the owner, in accordance with the maxim res perit domino. Upon this point the civil and common law are agreed; and we find nothing to the contrary in the Spanish Civil Code. Article 1183 declares that when a

38

must be construed in relation with the next preceding article (1182), which says that the obligation to deliver a thing is extinguished when the thing is destroyed without the fault of the debtor. We now pass to the consideration of a special clause found in the contract of lease (paragraph 4, [b] ), declaring that the lessee shall be obliged, upon his own account and risk, to make all repairs upon the improvements existing on the haciendas which were the subject of the lease, and to bear the expense of the same without right to reimbursement. The obligation fixed upon the lessee by the special provision of the contract is also limited to repairs (composiciones). From an examination of the two provisions it is evident that the two different Spanish words used in the sense of repairs (reparaciones, composiciones) are exactly equivalent; and it is seen that the obligation imposed by the code on the lessor is transferred by the contract to the lessee. In both cases, however, the obligation is limited to the making of repairs, which is a very different thing from reconstruction in case of total loss. The Spanish terms "reparaciones" and "composiciones," like the English word "repairs" in its ordinary acceptation, must be understood to apply to the restoration of things after injury or partial destruction, without complete loss of identity in the thing repaired. (34 Cyc., 1336, 1337.) In subsection (d) of paragraph 4 of the contract it is declared to be the duty of the lessee to maintain the improvements on the haciendas in good condition and to deliver them in the same state to the lessor upon the termination of the lease. This is merely a statement of the obligation imposed by law generally upon all lessees; and the duty thus defined is to be understood as subject to the limitations and exceptions recognized by law. There is nothing in this provision which deprives the lessee of the defense arising from the destruction of the property without his fault. It results in our opinion that there was no positive duty on the part of either the lessor or lessee to reconstruct the camarin after it had been totally destroyed by fire; neither can therefore be held liable to the other for any damages which may supposedly have resulted from the failure to reconstruct. The judgment of the trial court must therefore be modified by eliminating the item of P1,736.01, which was awarded to the plaintiff as damages for the failure of the defendant to promptly reconstruct the camarin.

contained thousands of cavanes of palay, the exact number being disputed, and 568 cavanes outside. 1,052 cavanes of palay stored in the warehouse were saved, and that the 568 cavanes of palay outside of the warehouse were all saved. Of the 1,052 cavanes saved from the warehouse, 170 were distributed by way of remuneration among those who helped to save them. The remaining 882 cavanes of palay were hulled and sold, yielding the net sum of P2,238.98.

La Sociedad Dalisay vs. Januario de los Reyes, G.R. No. 32465, December 20, 1930 (55 Phil 452) Facts: The entity known as "Dalisay" is an industrial partnership legally existing, located in the municipality of Santa Rosa, Laguna, P. I. Prior to May 20, 1923, said partnership received in its warehouse located at the place mentioned, certain lots of palay belonging to several persons. Early on the morning of that day, May 20, 1923, a fire broke out in said warehouse which at that time

39

On October 3, 1924, Ramon Bartolazo brought an action against the "Sociedad Dalisay" for the return of 1,158 cavanes of palay and 27 cavanes of rice or the value thereof, amounting to P6,073.50, plus P1,500 as damages, and the costs. The “Dalisay” denied the charge. On February 18, 1926, the "Dalisay" brought an action against Januario de los Reyes in the same court for the return of the goods or, in default thereof, for the payment of their cash value. In this latter case, Domingo Zavalla filed a third- party claim against the plaintiff entity and the defendant Januario de los Reyes, praying that the "Dalisay" be ordered to deliver to him the palay belonging to him according to the books of said entity, or, in lieu thereof, its value at P5 per cavan, with legal interest and that Januario de los Reyes be ordered to render an account of the palay sold, and to deliver to him the balance according to the account to be rendered. The trial court failed to find that the fire was intentional, or was caused by the negligence of the officials of the plaintiff company, and from these findings no appeal proper in form has been taken, for which reason, they must be accepted as indisputable. Nonetheless, the “Dalisay” was ordered to deliver to the depositors their proportionate share of the palay which was stored in the warehouse at the time of the fire.

affirmed without express pronouncement of costs. So ordered. AnicetaPalaciovs.DionisioSudario,G.R.No.2980,January 2,1907(7Phil275) Facts: The plaintiff made an arrangement for the pasturing of eighty-one head of cattle, in return for which she was to give one-half of the calves that might be born and was to

Issue: Whether a depositary is liable for the loss of the deposit due to fire which broke out without any fault or negligence on its part. Held: No. Modified. Ratio: It is contended that the appellant has not alleged that the palay burned was destroyed without negligence on its part. The fact is, the appellant in its special defense alleged that the palay was burned. There was no need to make such an allegation for the presumption is that every person is deemed innocent of crime or wrong, and that he takes ordinary care of his own concerns. As to the trial court not having found the fire in question to be intentional, or the result of negligence on the appellant's part, the evidence supports the said court's finding, in that it does not show sufficiently that the fire was intentional or was due to negligence on the part of the "Dalisay" partnership, or of the manager Perlas. Wherefore, the judgment appealed from is modified absolving the appellant company from distributing or returning to the appellees any quantity of palay, or the value thereof, except that saved from the fire, amounting to P2,238.98, which sum is to be distributed by said company among the depositors mentioned in the dispositive part of the judgment, in proportion to the amount of palay which each of them had in the warehouse at the time of the fire; and this distribution shall be made as soon as Januario de los Reyes delivers to said appellant partnership, without any deduction, the aforesaid sum of P2,238.98, comprising the net proceeds of the palay saved. In all other respects the judgment appealed from is

40

pay the defendant one-half peso for each calf branded. On demand for the whole, forty- eight head of cattle were afterwards returned to her and this action is brought to recover the remaining thirty-three. It is claimed as a defense that the thirty-three cows either died of disease or were drowned in a flood. As to this point, on which the trial court has made no specific finding, the proof is conflicting in many particulars and indicates that at least some of these cattle were living at the time of the surrender of the forty-eight head. The defendant's witnesses swore that of the cows that perished, six die from overfeeding, and they failed to make clear the happening of any flood sufficient to destroy the others. The lower court ruled for the plaintiff.

and turned over to the Government. The plaintiff filed this case to recover the confiscated money from the estate of Fr. de la Peña. The lower court ruled for the plaintiff. Issue: Whether the depositary is liable for unforeseeable and inevitable events that lead to the loss of the thing deposited.

Issue: Whether the depositary has the burden of explaining the loss of the thing deposited. Held: Yes. Affirmed. Ratio: If we consider the contract as one of deposit, then under article 1183 of the Civil Code, the burden of explanation of the loss rested upon the depositary and under article 1769 the fault is presumed to be his. The defendant has not succeeded in showing that the loss occurred either without fault on his part or by reason of caso fortuito. If, however, the contract be not one strictly of deposit but one according to local custom for the pasturing of cattle, the obligations of the parties remain the same. The Roman Catholic Bishop of Jaro vs. Gregorio de la Peña, administrator of the estate of Fr. Agustin de la Peña, G.R. No. 6913, November 21, 1913 (26 Phil 144) Facts: The plaintiff is the trustee of a charitable bequest made for the construction of a leper hospital, and Father Agustin de la Peña was the duly authorized representative of the plaintiff to receive the legacy. The defendant is the administrator of the estate of Father De la Peña. In the year 1898, the books of Father de la Peña, as trustee, showed that he had on hand as such trustee the sum of P6,641, collected by him for the charitable purposes aforesaid. In the same year, he deposited in his personal account P19,000 in the Hongkong and Shanghai Bank at Iloilo. Shortly thereafter and during the war of the revolution, Father dela Peña was arrested by the military authorities as a political prisoner, and while thus detained made an order on said bank in favor of the United States Army officer under whose charge he then was so for the sum thus deposited in said bank. The arrest of Father de la Peña and the confiscation of the funds in the bank were the result of the claim of the military authorities that he was an insurgent and that the funds thus deposited had been collected by him for revolutionary purposes. The money was taken from the bank by the military authorities by virtue of such order, was confiscated

41

Held: No. Reversed. Ratio: The branch of the law know in England and America as the law of the trusts had no exact counterpart in the Roman law and is more has none under the Spanish law, In this jurisdiction, therefore, Father dela Peña's liability is determined by those portions of the Civil Code which relate to obligations (Book 4, Title 1.) Although the Civil Code states that a "person obliged to give something is also bound to preserve it with the diligence pertaining to a good father of a family" (art. 1094), it also provides, following the principle of the Roman law, major casus est, cui humana infirmitas resistere non potest, that "no one shall be liable for events which could not be foreseen, or which having been foreseen were inevitable, with the exceptions of the cases expressly mentioned in the law of those in which the obligation so declares." (Art. 1105). By placing the money in the bank and mixing it with his personal funds, De la Peña did not thereby assume an obligation different from that under which he would have lain if such deposit had not been made, nor did he thereby make himself liable to repay the money at all hazards. If the money had been forcibly taken from his pocket or from his house by the military forces of one of the combatants during a state of war, it is clear that under the provisions of the Civil Code he would have been exempt from responsibility. The fact that he placed the trust fund in the bank in his personal account does not add to his responsibility. Such deposit did not make him a debtor who must respond at all the hazards. We do not enter into a discussion for the purpose of determining whether he acted more or less negligently by depositing the money in the bank than he would if had left it in his home: or whether he was more or less negligent by depositing the money in his personal account than he would have been if had deposited it in a separate account as trustee. We regard such discussion as substantially fruitless, inasmuch as the precise question is not one of the negligence. There was no law prohibiting him from depositing it as he did and there was no law which changed his responsibility by reason of the deposit. While it may be true that one who is under obligation to do or give a things is duty-bound, when he sees events approaching the results of which will be dangerous to his trust, to take all reasonable means and measures to escape or, if unavoidable, to temper the effects of those events, we do not feel constrained to hold that, in choosing between two means equally legal, he is culpably negligent in selecting one whereas he would not have been if he had selected the other.

showed that in 1898 he had in his possession as trustee or agent the sum of P6,641 belonging to the plaintiff as the head of the church. This money was then clothed with all the immunities and protection with which the law seeks to invest trust funds. But when De la Peña mixed this trust fund with his own and deposited the whole in the bank to his personal account or credit, he, by this act, stamped on the said funds his own private marks and unclothed it of all the protection it had. If this money had been deposited in the name of De la Peña as trustee of agent of

Trent, dissenting: Technically speaking, whether Father De la Peña was a trustee or an agent of the plaintiff his books showed that in 1898 he had in his possessions as trustee or agent or a trustee or an agent of the plaintiff his books

42

the plaintiff, I think that it may be presumed that the military authorities would not have confiscated it for the reason that they were looking for insurgent funds only. Again, the plaintiff had no reason to suppose that De la Peña would attempt to strip the fund of its identity, not had he said or done anything which tended to relieve De la Peña from the legal responsibility which pertains to the care and custody of trust funds. The Supreme Court of the United States in United States vs. Thomas (82 U.S., 337), at page 343, said: "Trustees are only bound to exercise the same care and solicitude with regard to their own. Equity will not exact more of them. They are not liable for a loss by theft without their fault. But this exemption ceases when they mix the trust money with their own, whereby it loses its identity, and they become mere debtors." If De la Peña, after depositing the trust fund in his personal account, had used this money for speculative purposes, such as the buying and selling of sugar or other products of the country, thereby becoming a debtor, there would have been no doubt as to the liability of his estate. Whether he used this money for that purpose the record is silent, but it will be noted that a considerable length of time intervened from the time of the deposit until the funds were confiscated by the military authorities. In fact, the record shows that De la Peña deposited on June 27, 1898, P5,259, on June 28 of that year P3,280, and on August 5 of the same year P6,000. The record also shows that these funds were withdrawn and again deposited all together on the 29th of May, 1900, this last deposit amounting to P18,970. These facts strongly indicate that De la Peña had as a matter of fact been using the money in violation of the trust imposed in him.

Company, a domestic banking corporation. For this purpose, both signed a contract of lease which contains the condition that the bank is not a depositary of the contents of the safe and it has neither the possession nor control of the same and that the bank has no interest whatsoever in said contents, except herein expressly provided, and it assumes absolutely no liability in connection therewith. After the execution of the contract, two (2) renter's keys were given to the renters — one to Aguirre (for the petitioner) and the other to the Pugaos. A guard key remained in the possession of the respondent Bank. The safety deposit box has two (2) keyholes, one for the guard key and the other for the renter's key, and can be opened only with the

CA Agro-Industrial Development Corporation vs. CA & Security Bank and Trust Company, G.R. No. 90027, March 3, 1993 (219 SCRA 426) Facts: On 3 July 1979, petitioner (through its President, Sergio Aguirre) and the spouses Ramon and Paula Pugao entered into an agreement whereby the former purchased from the latter two (2) parcels of land for a consideration of P350,625.00. Of this amount, P75,725.00 was paid as downpayment while the balance was covered by three (3) postdated checks. Among the terms and conditions of the agreement embodied in a Memorandum of True and Actual Agreement of Sale of Land were that the titles to the lots shall be transferred to the petitioner upon full payment of the purchase price and that the owner's copies of the certificates of titles thereto, Transfer Certificates of Title (TCT) Nos. 284655 and 292434, shall be deposited in a safety deposit box of any bank. The same could be withdrawn only upon the joint signatures of a representative of the petitioner and the Pugaos upon full payment of the purchase price. Petitioner, through Sergio Aguirre, and the Pugaos then rented Safety Deposit Box No. 1448 of private respondent Security Bank and Trust

43

use of both keys. Petitioner claims that the certificates of title were placed inside the said box. Thereafter, a certain Mrs. Margarita Ramos offered to buy from the petitioner the two (2) lots at a price of P225.00 per square meter which, as petitioner alleged in its complaint, translates to a profit of P100.00 per square meter or a total of P280,500.00 for the entire property. Mrs. Ramos demanded the execution of a deed of sale which necessarily entailed the production of the certificates of title. In view thereof, Aguirre, accompanied by the Pugaos, then proceeded to the respondent Bank on 4 October 1979 to open the safety deposit box and get the certificates of title. However, when opened in the presence of the Bank's representative, the box yielded no such certificates. Because of the delay in the reconstitution of the title, Mrs. Ramos withdrew her earlier offer to purchase the lots; as a consequence thereof, the petitioner allegedly failed to realize the expected profit of P280,500.00. A complaint for damages was filed.

that under the latter, the prevailing rule is that the relation between a bank renting out safe- deposit boxes and its customer with respect to the contents of the box is that of a bailor and bailee, the bailment being for hire and mutual benefit. There is, however, some support for the view that the relationship in question might be more properly characterized as that of landlord and tenant, or lessor and lessee. It has also been suggested that it should be characterized as that of licensor and licensee. The relation between a bank, safe-deposit company, or storage company, and the renter of a safe-deposit box therein, is often described as contractual, express or implied, oral or

It was dismissed by the trial court. CA affirmed. Issue: Whether the rental of a safety deposit box is a contract of deposit. Held: Yes. Affirmed. Ratio: We agree with the petitioner's contention that the contract for the rent of the safety deposit box is not an ordinary contract of lease as defined in Article 1643 of the Civil Code. However, We do not fully subscribe to its view that the same is a contract of deposit that is to be strictly governed by the provisions in the Civil Code on deposit. The contract in the case at bar is a special kind of deposit. It cannot be characterized as an ordinary contract of lease under Article 1643 because the full and absolute possession and control of the safety deposit box was not given to the renters — the petitioner and the Pugaos. The guard key of the box remained with the respondent Bank; without this key, neither of the renters could open the box. On the other hand, the respondent Bank could not likewise open the box without the renter's key. In this case, the said key had a duplicate which was made so that both renters could have access to the box. Neither could Article 1975, also relied upon by the respondent Court, be invoked as an argument against the deposit theory. Obviously, the first paragraph of such provision cannot apply to a depositary of certificates, bonds, securities or instruments which earn interest if such documents are kept in a rented safety deposit box. It is clear that the depositary cannot open the box without the renter being present. We observe, however, that the deposit theory itself does not altogether find unanimous support even in American jurisprudence. We agree with the petitioner

44

written, in whole or in part. But there is apparently no jurisdiction in which any rule other than that applicable to bailments governs questions of the liability and rights of the parties in respect of loss of the contents of safedeposit boxes. In the context of our laws which authorize banking institutions to rent out safety deposit boxes, it is clear that in this jurisdiction, the prevailing rule in the United States has been adopted. Section 72 of the General Banking Act pertinently provides that banks may receive in custody funds, documents, and valuable objects, and rent safety deposit boxes for the safeguarding of such effects. The banks shall perform the services permitted under subsections (a), (b) and (c) of this section as depositories or as agents. Note that the primary function is still found within the parameters of a contract of deposit, i.e., the receiving in custody of funds, documents and other valuable objects for safekeeping. The renting out of the safety deposit boxes is not independent from, but related to or in conjunction with, this principal function. A contract of deposit may be entered into orally or in writing and, pursuant to Article 1306 of the Civil Code, the parties thereto may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order or public policy. The depositary's responsibility for the safekeeping of the objects deposited in the case at bar is governed by Title I, Book IV of the Civil Code. Accordingly, the depositary would be liable if, in performing its obligation, it is found guilty of fraud, negligence, delay or contravention of the tenor of the agreement. In the absence of any stipulation prescribing the degree of diligence required, that of a good father of a family is to be observed. Hence, any stipulation exempting the depositary from any liability arising from the loss of the thing deposited on account of fraud, negligence or delay would be void for being contrary to law and public policy. In the instant case, petitioner maintains that conditions 13 and 14 of the questioned contract of lease of the safety deposit box are void as they are contrary to law and public policy. We find Ourselves in agreement with this proposition for indeed, said provisions are inconsistent with the respondent Bank's responsibility as a depositary under Section 72(a) of the General Banking Act. Both exempt the latter from any liability except as contemplated in condition 8 thereof which limits its duty to exercise reasonable diligence only with respect to who shall be admitted to any rented safe. Furthermore, condition 13 stands on a wrong premise and is contrary to the actual practice of the Bank. It is not correct to assert that the Bank has neither the possession nor control of the contents of the box since in fact, the safety deposit box itself is located in its premises and is under its absolute control; moreover, the respondent Bank keeps the guard key to the said box. As stated earlier, renters cannot open their respective boxes unless the Bank cooperates by presenting and using this guard key. Clearly then, to the

extent above stated, the foregoing conditions in the contract in question are void and ineffective. The petition is, nonetheless, dismissed on grounds quite different from those relied upon by the Court of Appeals. In the instant case, the respondent Bank's exoneration cannot, contrary to the holding of the Court of Appeals, be based on or proceed from a characterization of the impugned contract as a contract of lease, but rather on the fact that no competent proof was presented to show that respondent Bank was aware of the agreement between the petitioner and the Pugaos to the effect that the certificates of title were withdrawable from the safety deposit box only upon both parties' joint signatures, and that no evidence was submitted to reveal that the loss of the

45

certificates of title was due to the fraud or negligence of the respondent Bank. This in turn flows from this Court's determination that the contract involved was one of deposit. Since both the petitioner and the Pugaos agreed that each should have one (1) renter's key, it was obvious that either of them could ask the Bank for access to the safety deposit box and, with the use of such key and the Bank's own guard key, could open the said box, without the other renter being present.

landlord, clerk or servant employed by him. For purpose of safekeeping the valuables of guests, the hotel had a very large vault which was in plain sight at the counter. The coat room was only intended for the reception of ordinary valises, coats, umbrellas, and not for valuables or jewelry. Evidence showing that hotel employee William Drum had stolen the jewelries was objected to and excluded during the trial.

Elcoxvs.Hill,98US218(1878) Facts: Elcox and Larter were manufacturing jewelers, doing business at Newark, New Jersey. Larter left home for a tour through several Western cities, with some $6,300 worth of jewelry which was contained in 2 bags or satchels – one a large leather bag containing $5,300 worth of solid gold jewelry and the other a small satchel containing $1,000 worth of jewelry. The smaller bag was not locked and had no key. On arriving at the hotel, Larter asked for a room, but one could not be assigned to him for some 3-4 hours. During the time he was waiting, he placed his bags in the coat room and received a check therefore. Between 12-2, a room was assigned to him, and his baggage was taken from the coat room and carried up to the room. When coming down for dinner, Larter gave the key to his room to the bellboy and directed him to go up and bring down his bags to the coat room again. He then received a coat room check after dinner. He saw the bags in the coat room 2 or 3 times after that before he went to bed around 10pm. The boy in charge of the coat room, William Drum, voluntarily told him that his bags were perfectly safe. The next day, Larter asked for his bags, but only the small one could be found. The jewelry inside had been stolen. Larter did not inform the hotel of the contents of the bags, and he did not ask to have the bags placed in the safe. At the top of the page of the register where he wrote his name on entering the hotel were printed the words: “Money, jewels, and valuable property must be placed in the safe in the office, otherwise the proprietor will not be responsible for any loss.” On the door of his room and every other room were a printed notice saying that “All guests of the house are cautioned against leaving money, jewels, or valuables of any description in their rooms, as the proprietor will not be responsible for them if stolen. Money or valuables, properly labelled, must be deposited in the safe at the office.” Furthermore, the statute of the State of Illinois entitled “An Act for the protection of innkeepers” provides that hotels shall keep notices posted at conspicuous places in the hotel that guests and customers must leave their money, jewelry, and other valuables with the landlord, agent or clerk for safekeeping and that hotels that comply with these requirements shall not be liable for the loss of such money, jewelry or valuables, unless such loss shall occur by the hand or through the negligence of the

46

Issue: Whether a hotel is liable for the loss of valuables which were not made known to it and which were not properly deposited to it as stated in the notices posted in conspicuous places. Held: No. Judgment affirmed. Ratio: There can be but little doubt that the goods of the plaintiffs were stolen from them while one of them was at the hotel of the defendant, in the city of Chicago. They insist thereupon that their loss shall be made good; but it does not follow, because they met with a loss, that they can recover the amount from him. The defendant contends that he is exempt from liability for money, jewels, and the like, unless his guest who lost them complied with the statute of Illinois on that subject. Where a safe for the keeping of such articles is provided by the hotelkeeper, and the notice given as required by the statute, a loser failing to take the benefit of the protection thus furnished him must bear his own loss. To this rule the statute makes one exception. If the loss occurs 'by the hand or through the negligence of the landlord, or by a clerk or servant employed by him in such hotel or inn,' the liability remains. It is settled by the authorities that where the loss is occasioned by the personal negligence of the guest himself, the liability of the innkeeper does not exist. The court refused to receive evidence that William Drum had admitted that he had stolen the jewelry in question. If he was guilty of the offence, the fact should have been established by due proof. If he were on trial himself, his admission would be competent, but upon no principle could he admit away the rights of another person.

valuables, but saw no such notice. Mr. Ippolito also testified he did not see any notice of the availability of safety deposit boxes posted in the room; however, he admitted that if such notice was posted, he may have overlooked it. Despite not seeing a notice in the room, Mr. Ippolito testified he was aware that Innkeeper provided safety deposit boxes, but he chose not to request a box from the Innkeeper because he felt that the less anybody knew what he had, the better.

Ippolito vs. Hospitality Management, South Carolina C.A., No.3586,2003 Facts: While traveling from Florida to Connecticut, Mr. and Mrs. Ipppolito stopped in Walterboro, South Carolina and paid for a room at a Holiday Inn. At the hotel, Mr. Ippolito signed a registration card on which was written, “The management is not responsible for any valuables not secured in safety deposit boxes provided at the front office.” In addition to the language on the registration card, notice that the hotel had safety deposit boxes available for guests’ valuables was also printed on the pouch that enclosed the key-card to the Ippolitos’ room. After bringing their luggage to the room, the Ippolitos walked to a nearby restaurant, and they returned approximately forty minutes later. Upon their return, they noticed that pieces of their luggage, which contained jewelry valued at over $500,000 and approximately $8,000 in cash, were missing. The Ippolitos sued the hotel. At trial, Mrs. Ippolito testified that, prior to the disappearance of their belongings, she looked around the hotel room for notice of the availability of hotel safety deposit boxes for her

47

The hotel provided the testimony of its employees and a security expert on its security procedures and its dedication to adhering to those procedures, particularly for providing guests with notice of the availability of safety deposit boxes. On crossexamination of the security expert, he was asked about past security problems at Innkeeper’s hotel in which Innkeeper’s employees spied on guests through peepholes. The expert replied that he was not aware of those prior incidents. The jury awarded the Ippolitos $350,000 in actual damages. However, the jury found that the Ippolitos were forty percent comparatively negligent, and reduced the award to $210,000.

646) Facts: On March 31, 1959, the Court of First Instance of Manila, in its Civil Case No. 36525, rendered a decision ordering the City of Baguio to pay the National Power Corporation various sums of money totalling P240,000.00 representing the unpaid electric charges, and rentals for the lease of two electric generators, etc. The aforesaid decision having become final, the court of Manila granted on June 4, 1959, the National

Issue: Whether the hotel is liable for losses when the guests were unable to see posted notices that valuables must be deposited. Held: Yes. Affirmed. Ratio: The Ippolitos testified that neither of them saw any conspicuously posted notice in their room indicating that the hotel had safety deposit boxes available in which they could store their valuables. Although testimony from Officer Sadler, as well as several of Innkeeper’s current and former employees, contradicts this evidence, the existence of conflicting evidence precludes us from finding as a matter of law that Innkeeper complied with the statute. The jury implicitly found that Innkeeper failed to comply with the statute’s notice requirements. Thus, Innkeeper cannot avail itself of the statute’s protection from liability, regardless of whether its actions contributed to the Ippolitos’ loss. Because we find the Innkeeper offered evidence concerning the quality of its security, we cannot say as a matter of law that the trial court erred in admitting evidence contradicting this testimony. We find no evidence in the record indicating that Innkeeper suffered any prejudice from the Ippolitos’ two questions concerning Booth’s knowledge of the peephole incidents or his negative responses. Concurring Opinion: In arguing its post trial motions, Innkeeper urged the court to consider Mr. Ippolito’s actual knowledge of the availability of safety deposit boxes. However, to fall within the protections of the Innkeeper’s Statute, the notice innkeepers post must inform guests that they are required to place their jewels and money in the innkeeper’s safe. Here, Mr. Ippolito only admitted to knowing that Innkeeper had a safe available; he did not admit to knowing he was required to place his money and jewelry in that safe. National Power Corporation vs. Judge Jesus de Veyra, CFI Baguio City & City of Baguio, G.R. No. L-15763, December 22, 1961 (3 SCRA

48

Power Corporation's motion for execution. A writ was issued, addressed to the Sheriff of Baguio City to levy execution on the property of above respondent Baguio City to satisfy the judgment. Such Sheriff, in compliance with the writ, garnished on June 8, 1959, the amount of P239,589.80 out of the cash deposits of Baguio City in the possession of the Baguio Branch of the Philippine National Bank. Whereupon on June 12, 1959, Baguio City filed against herein petitioner National Power Corporation, the Philippine National Bank and the said Sheriff, in the Court of First Instance of Baguio City, a complaint (Civil Case No. 866) praying that all the acts of said defendants relative to the garnishment of the cash deposits with the defendant Philippine National Bank, be declared illegal, that said defendants be permanently restrained from performing acts in furtherance of the said garnishment, and that they be ordered to pay damages. On the same date, June 12, 1959, above respondent court of Baguio City issued a preliminary mandatory injunction ordering above petitioner corporation, the Philippine National Bank, the Sheriff and others acting in their behalf to restore and maintain the status quo of respondent corporation's bank deposits. Petition for certiorari was filed.

presented before it. The reason advanced by the respondent court of Baguio City that it should grant relief when "there is apparently an illegal service of the writ" (the property garnished being allegedly exempt from execution) may not be upheld, there being a better procedure to follow, i.e., a resort to the Manila court, wherein the remedy may be obtained, it being the court under whose authority the illegal levy had been made.

Issue: Whether property which has been levied upon in a garnishment proceedings by one court, may be subject to the jurisdiction of another court in an independent suit impugning the legality of said garnishment. Held: No. Petition Granted. Ratio: The garnishment of property to satisfy a writ of execution "operates as an attachment and fastens upon the property a lien by which the property is brought under the jurisdiction of the court issuing the writ." It is brought into custodia legis, under the sole control of such court. Property is in the custody of the court when it has been seized by an officer either under a writ of attachment on mesne process or under a writ of execution. A court which has control of such property, exercises exclusive jurisdiction over same. No court, except one having a supervisory control or superior jurisdiction in the premises, has a right to interfere with and change that possession. We have followed and applied this principle of procedure. Thereby conflict of power is avoided between different courts of coordinate jurisdiction. We have invariably held that no court has authority to interfere by injunction with the judgments or decrees of a court of concurrent or coordinate jurisdiction having equal power to grant the relief sought by injunction. The property involved in Civil Case No. 866, is property in custodia legis of the Court of First Instance of Manila, it having been garnished to satisfy a writ of execution duly issued by the said court. Respondent Baguio court should not have interfered with the Manila court's jurisdiction by issuing the writ of preliminary injunction and assuming cognizance of the complaint

49

Needless to say, an effective ordering of legal relationships in civil society is possible only when each court is granted exclusive jurisdiction over the property brought to it. To allow coordinate courts to interfere with each other's judgments or decrees by injunctions, would obviously lead to confusion and might seriously hinder the proper administration of justice.

Ratio: We think the court below erred in proceeding with the case against the guarantor while the proceedings were suspended as to the principal. The guaranty in the present case was for a future debt of unknown amount and even regarding the guaranty as an

Romulo Machetti vs. Hospicio de San Jose & Fidelity & Surety Company of the Philippine Islands, G.R. No. L-16666, April 10, 1922 (43 Phil 297) Facts: Romulo Machetti, by a written agreement, undertook to construct a building on Calle Rosario in the city of Manila for the Hospicio de San Jose, the contract price being P64,000. One of the 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 P12,800 and the following endorsement in the English language appears upon the contract: "For value received we hereby guarantee compliance with the terms and conditions as outlined in the above contract.” Machetti constructed the building under the supervision of architects representing the Hospicio de San Jose and, as the work progressed, payments were made to him from time to time upon the recommendation of the architects, until the entire contract price, with the exception of the sum of P4,978.08, was paid. Subsequently it was found that the work had not been carried out in accordance with the specifications which formed part of the contract and that the workmanship was not of the standard required, and the Hospicio de San Jose therefore refused to pay the balance of the contract price. Machetti thereupon brought this action. Hospicio de San Jose answered the complaint and presented a counterclaim for damages for the partial noncompliance with the terms of the agreement above mentioned, in the total sum of P71,350. After issue was thus joined, Machetti, on petition of his creditors, was declared insolvent, and an order was entered suspending the proceeding in the present case in accordance with section 60 of the Insolvency Law, Act No. 1956. The Hospicio de San Jose on January 29, 1919, filed a motion asking that the Fidelity and Surety Company be made cross-defendant to the exclusion of Machetti and that the proceedings be continued as to said company, but still remain suspended as to Machetti. This motion was granted, and Hospicio filed a complaint against the Fidelity and Surety Company asking for a judgment for P12,800 against the company upon its guaranty. After trial, the Court of First Instance rendered judgment against the Fidelity and Surety Company. Issue: Whether a guarantor can be held liable for an obligation of a debtor who is under insolvency proceedings Held: No. Reversed.

50

ordinary fianza under the Civil Code, the surety cannot be held responsible until the debt is liquidated. But in this instance the guarantor's case is even stronger than that of an ordinary surety. The contract of guaranty is written in the English language and the terms employed must of course be given the signification which ordinarily attaches to them in that language. In English the term "guarantor" implies an undertaking of guaranty, as distinguished from suretyship. It is very true that notwithstanding the use of the words "guarantee" or "guaranty" circumstances may be shown which convert the contract into one of suretyship but such circumstances do not exist in the present case: on the contrary it appears affirmatively that the contract is the guarantor's separate undertaking in which the principal does not join, that it rests on a separate consideration moving from the principal and that although it is written in continuation of the contract for the construction of the building, it is a collateral undertaking separate and distinct from the latter. All of these circumstances are distinguishing features of contracts of guaranty. Now, while a surety undertakes to pay if the principal does not pay, the guarantor only binds himself to pay if the principal cannot pay. The one is the insurer of the debt, the other an insurer of the solvency of the debtor. This latter liability is what the Fidelity and Surety Company assumed in the present case. The undertaking is perhaps not exactly that of a fianza under the Civil Code, but it is a perfectly valid contract and must be given the legal effect it ordinarily carries. The Fidelity and Surety Company having bound itself to pay only in the event its principal, Machetti, cannot pay it follows that it cannot be compelled to pay until it is shown that Machetti is unable to pay. Such inability may be proven by the return of a writ of execution unsatisfied or by other means , but is not sufficiently established by the mere fact that he has been declared insolvent in insolvency proceedings under our statutes, in which the extent of the insolvent's inability to pay is not determined until the final liquidation of his estate.

of compromise, and the balance in three several payments of P20,000 at the end of one year, two years, and three years respectively. To this contract the appellant Enrique Echaus affixed his name as guarantor. The first payment of P40,000 was made on July 11, 1924, the date when the contract of compromise was executed; and of this amount the plaintiff Fabiola Severino received the sum of P10,000. Of the remaining P60,000, all as yet unpaid, Fabiola Severino is entitled to the sum of P20,000.

Fabiola Severino, accompanied by her husband Ricardo Vergara vs. Guillermo Severino, et al., G.R. No. 34642, September 24, 1931 (56 Phil 185) Facts: The plaintiff Fabiola Severino is the recognized natural daughter of Melecio Severino, deceased, former resident of Occidental Negros. Upon the death of Melecio Severino a number of years ago, he left considerable property and litigation ensued between his widow, Felicitas Villanueva, and Fabiola Severino, on the one part, and other heirs of the deceased on the other part. In order to make an end of this litigation a compromise was effected by which Guillermo Severino, a son of Melecio Severino, took over the property pertaining to the estate of his father at the same time agreeing to pay P100,000 to Felicitas Villanueva and Fabiola Severino. This sum of money was made payable, first, P40,000 in cash upon the execution of the document

51

It appears that at the time the compromise agreement was executed Fabiola Severino had not yet been judicially recognized as the natural daughter of Melecio Severino, and it was stipulated that the last P20,000 corresponding to Fabiola and the last P5,000 corresponding to Felicitas Villanueva should be retained on deposit until the definite status of Fabiola Severino as natural daughter of Melecio Severino should be established. The judicial decree to this effect was entered in the Court of First Instance of Occidental Negros on June 16, 1925. This action was instituted in the Court of First Instance of the Province of Iloilo by Fabiola Severino, with whom is joined her husband Ricardo Vergara, for the purpose of recovering the sum of P20,000 from Guillermo Severino and Enrique Echaus, the latter in the character of guarantor for the former. The proof shows that the money claimed in this action has never been paid and is still owing to the plaintiff; and the only defense worth noting in this decision is the assertion on the part of Enrique Echaus that he received nothing for affixing his signature as guarantor to the contract which is the subject of suit and that in effect the contract was lacking in consideration as to him. Upon hearing the cause, the trial court gave judgment in favor of the plaintiff's to recover the sum of P20,000 with lawful interest, but it was declared that execution of this judgment should issue first against the property of Guillermo Severino, and if no property should be found belonging to said defendant sufficient to satisfy the judgment in whole or in part, execution for the remainder should be issued against the property of Enrique Echaus as guarantor. Guillermo did not appeal. Echaus appealed.

vs. Esteban Piczon & Sosing-Lobos & Co., Inc., G.R. No. L29139, November 15, 1974 (61 SCRA 67) Facts: Esteban Piczon, as President, of Sosing-Lobos & Co, Inc., as controlling stockholder, and as guarantor for the same, took out a loan for P12,500 to be used as surety cash deposit for registration with the SEC of the incorporation papers relative to the Sosing-Lobos and Co., Inc. The amount was to be returned as soon as the

Issue: Whether a separate consideration from the principal contract is necessary for the existence of a guarantee Held: No. Affirmed. Ratio: A guarantor or surety is bound by the same consideration that makes the contract effective between the principal parties thereto. The compromise and dismissal of a lawsuit is recognized in law as a valuable consideration; and the dismissal of the action which Felicitas Villanueva and Fabiola Severino had instituted against Guillermo Severino was an adequate consideration to support the promise on the part of Guillermo Severino to pay the sums of money stipulated in the contract which is the subject of this action. The promise of the appellant Echaus as guarantor is therefore binding. It is never necessary that a guarantor or surety should receive any part of the benefit, if such there be, accruing to his principal. But the true consideration of this contract was the detriment suffered by the plaintiffs in the former action in dismissing that proceeding, and it is immaterial that no benefit may have accrued either to the principal or his guarantor. Consuelo P. Piczon, Ruber O. Piczon & Aida P. Alcantara

52

incorporation papers are duly registered and the Certificate of Incorporation is issued. The amount was not returned. A case was filed. Sosing-Lobos & Co, Inc. and Esteban Piczon, as guarantor, were found liable.

Issue: Whether a subsidiary contract of guarantee must be phrased in a certain formal manner. Whether acceptance is necessary for the perfection of a contract of guarantee.

Issue: Whether a person who is expressly designated as a “guarantor” can be held as a surety.

Held: No. No. Affirmed.

Held: No. Affirmed with modifications. Ratio: Under the terms of the contract, Esteban Piczon expressly bound himself only as a guarantor, and there are no circumstances in the record from which it can be deduced that his liability could be that of a surety. A guaranty must be express, and it would be violative of the law to consider a party to be bound as a surety when the very word in the agreement is “guarantor”. Piczon bound himself as an insurer. Macondray & Company, Inc. vs Perfecto Piñon, et al., G.R. No. L-13817, August 31, 1961 (2 SCRA 1110) Facts: Upon representation and undertaking made by Ruperto K. Kangleon, then a member of the Senate, in a letter addressed to the plaintiff dated 30 January 1954, that he would guarantee payment of his co-defendants' obligation, should they fail to pay on the due date, the plaintiff sold on credit and delivered to the defendants Perfecto Piñon and Conrado Piring, known in the theater and entertainment business as "Tugak" and "Pugak," respectively, and transacting business under a common name known as "All Stars Productions," 127 rolls of cinematographic films, F. G. release positive type. The guarantee is phrased as follows: “for which by their guaranty I pledge payment”. The principal debtors failed to pay the amount owed by them on the due date. Upon extensive investigations made by the plaintiff as to whether the principal debtors have any property, real or personal, which may be levied upon for the satisfaction of their obligation, it has found that they have none. Kangleon could not point to the plaintiff any property of the principal debtors leviable for execution sufficient to satisfy the obligation. The creditors filed a case to hold the debtor and Kangleon jointly and severally liable. Kangleon answered the plaintiff's complaint setting up the defense that the letter he had written to the plaintiff was only to introduce his co-defendants. Assuming that there was an intent on his part to guarantee payment of his co-defendant's obligation, the said letter was but an offer to act as guarantor of his co-defendants which was not accepted. The court ruled against the debtors and the guarantor. The guarantor appealed. During the time this appeal was pending in this Court the appellant died. His heirs or their legal representative were directed to appear in substitution for the deceased appellant.

53

Ratio: The appellant contends that although in the stipulation of facts entered into by and between him and the appellee, he had admitted the liability of his codefendants, who were declared in default, under the principle of res inter alios acta, that an admission by a third person can not bind another, his admission cannot bind the defendants in default, and no judgment against them may be rendered on the basis of the stipulation of facts referred to. Since the appellee had not established a case against the defendants in default, the principal debtors, it cannot directly hold liable the appellant, the guarantor, whose obligation is only subsidiary to that of the former. The appellant proceeds from the wrong premise that the case was submitted to the Court solely on the stipulation of facts entered into by and between him and the appellee. The records show that when the case was called for trial on 30 August 1956, after the appellant's codefendants had been declared in default, the appellee presented its evidence, testimonial and documentary, against them, and thereby established their primary liability. The appellant claims that the letter is merely a letter of introduction and does not constitute an offer of guaranty. A cursory reading of the letter belies his assertion. While in his opening sentence he says that "This will introduce to you the bearers, Messrs. Conrado Piring and Perfecto Piñon," who "wish to place an order for" cinematographic films, yet in the later part he says that "for which by their guaranty I pledge payment." This can only mean that he undertakes to guarantee payment of the principal debtors' obligation should they fail to pay. The appellant is a responsible man and may be presumed to mean what he says. At that time, he was occupying the exalted position of member of the Senate and his plighted word given to another would immediately be accepted. It is not, therefore, odd that upon receipt of the appellant's letter, the appellee readily sold on credit to the principal debtors, the defendants in default, the cinematographic films in question. That the appellant really meant to guarantee payment of the principal debtors' obligation should they default, is patent in his answer to the appellee's letter dated 27 May 1954, reminding him that on 30 January he requested it "to give Messrs. Conrado Piring and Perfecto Piñon, of "All Stars Productions', certain rolls of negative and positive films, the cost of which was payable in three months time and payment of which you guaranteed; that the ''films were delivered and billed at P6,985.00 on Feb. 9th, last;" and that "the amount has not been paid (and) we have difficulty locating the above gentlemen as they cannot be found in their offices," and requesting the appellant to send a check for the amount. In his answer to the foregoing letter, dated 31 May 1954, he acknowledged receipt of the appellee's letter of the 27th of the same month and informed it that the principal debtors were "being contacted to invite their attention to your letter." Had the appellant meant otherwise, he would have immediately

denied that he ever guaranteed payment of the principal debtors' obligation. This he did not do. The appellant's very letter constitutes his undertaking of guaranty. "Contracts shall be obligatory in whatever form they may have been entered into, provided all the essential requisites for their validity are present." A contract of guaranty is not a formal contract and shall be valid in whatever form it may be, provided that it complies with the statute of frauds. The appellant insists that he should have been notified by the appellee of the acceptance of his offer of guaranty. In the first place, his letter already constitutes his

54

undertaking of guaranty. In the second place, the contract entered into by and between the appellee and the defendants in default is the principal contract and the contract entered into by and between the appellant and the appellee is subsidiary to the principal contract. Since the principal contract had already been perfected, the subsidiary contract of guaranty became binding upon effectivity of the principal contract. Hence no notice of acceptance by the appellee to the appellant is necessary for its validity. Pacific Tobacco Corp. vs. Ricardo D. Lorenzana & Visayan Surety & Insurance Corp. Visayan Surety & Insurance Corp, cross claimant & 3 rd party, vs. Ricardo

that plaintiff Philippine Tobacco Corporation was barred from presenting this action against the surety due to laches, waiver of claim and estoppel. Ricardo D. Lorenzana denied the allegation of the complaint that he refused or failed to pay the plaintiff. He set up the defense that the agreement was partially modified when plaintiffs agreed and allowed him to sell the tobacco products not only in the City of Manila and Rizal province but throughout the island of Luzon. By virtue of such modifications, he sold plaintiff's products in places as far as the northern provinces on credit basis. On August 2, 1952, when defendant arrived from his trip from the Ilocos regions, plaintiff terminated his services on the ground that the corporation was losing

D. Lorenzana, cross defendant, Calixto D. Lorenzana, Jose M. Lorenzana & Benigno C. Gutierrez, 3rd party defendants, G.R. No. L-8086, October 31, 1957 (102 Phil 234)

Facts: Pacific Tobacco Corporation is engaged in the business of manufacturing and distributing cigarettes, cigars and other tobacco products. On January 16, 1952, Ricardo D. Lorenzana and said corporation entered into a distributorship agreement. The agreement stipulated that to guarantee the faithful performance on his part of the terms and conditions of this contract, the distributor shall post a surety bond in favor of the company in the amount of P8,000 signed by him and a reputable surety company acceptable to the company – P3,000 to answer for the faithful settlement of the distributor’s account and P5,000 for the return of a company truck. In accordance thereto, Lorenzana put up a bond in the amount of P3,000 with Visayan Surety & Insurance Corp as surety. On various occasions in 1952, the Philippine Tobacco Corporation delivered to Lorenzana for distribution cigarettes, cigars and other tobacco products amounting to P15,645.64, but out of this amount the latter paid and was only credited with P13,559.33, leaving a balance of P2,086.31. Upon demand by the corporation, Lorenzana proposed to settle his pending obligation by giving P100 a month, which amount was later reduced to P25, to which arrangement the company apparently agreed and Lorenzana actually made installments amounting to P250. As he failed to make any further payment, the Philippine Tobacco Corporation filed a complaint with the Court of First Instance of Manila on October 30, 1953, against Ricardo D. Lorenzana and the Visayan Surety & Insurance Corporation for the recovery of the sum of P2,086.31, with legal interest. Defendant Visayan Surety & Insurance Corporation answered this complaint, which it later modified with leave of Court by filing an amended answer with cross-claim against Ricardo D. Lorenzana and third party complaint against Calixto D. Lorenzana, Jose Lorenzana and Benigno C. Gutierrez, denying the material allegations of the complaint and setting the affirmative defense that the bond could not be held liable for damages and attorney's fees,

55

without giving him an advance notice of 30 days in accordance with the agreement. Since the plaintiff took the delivery truck which he was using in the distribution of plaintiff's products, he was prevented from going back to the provinces to collect from his customers their accounts. He made several payments in small amounts to settle his remaining obligation which were accepted, but in November, 1953, plaintiff refused to receive the same. At the hearing, defendant Lorenzana failed to appear. The court ruled that although on one occasion plaintiff shipped cigarettes to defendant Lorenzana addressed at San Fernando, La Union, this fact alone would not release the surety from liability, for there was nothing in the contract that expressly prohibited defendant Lorenzana from selling cigarettes outside Manila and Rizal. The lower Court opined that what was guaranteed by the Visayan Surety & Insurance Corporation was the faithful delivery by defendant Lorenzana of the price of the cigarettes to plaintiff within the time fixed in the contract and as the sending of some cigarettes to San Fernando, La Union, caused the surety no injury, said deviation will not relieve the surety from its liability under the bond. The court thus ordered defendants Ricardo D. Lorenzana and the Visayan Surety & Insurance Corporation to pay, jointly and severally, to the plaintiff Pacific Tobacco Corporation the sum of P2,086.31, with legal interest from the date of the filing of the complaint, plus P500 as attorney's fees and costs. 3 rd

La Union, was actually sold and distributed therein, this may not be considered as a deviation from the terms of the agreement, for such widening of the territory to be covered by the agent or distributor was not prohibited by the agreement itself, nor does the record show that such expansion of the territory was due to instructions from the plaintiff. While it is true that the contract states that the distributor is willing to sell and distribute the products of the company in Manila and Rizal, this specification serves more as a manifestation that Lorenzana entered into the agreement

party defendants were ordered to indemnify the Visayan Surety & Insurance Corporation for the amount which the latter would actually pay plaintiff in case defendant Ricardo D. Lorenzana should fail to make the payment himself.

Issue: Whether the delivery by the company of its products to defendant Lorenzana in a place other than that mentioned in the agreement constitutes an alteration of said agreement that would release the surety from its liability under the bond. Held: No. Affirmed. Ratio: It appears on record that cigarettes valued at P1,870 were transported to Ricardo Lorenzana, c/o Mrs. Justo de Leon at San Fernando, Pampanga. Defendant surety tried to capitalize on this single act but it failed to present evidence that these goods were actually sold and distributed in said place. It would have been possible for the distributor to take a sojourn in that place and the company, knowing where he could be reached, sent the merchandise to him. Defendant Lorenzana also alleged in his answer that plaintiff allowed him to sell the latter's products even as far as the northern provinces but this defendant was not able to substantiate such claim due to his failure to appear and testify to this effect at the trial, despite the fact that he was duly represented by counsel. But even granting arguendo that the merchandise thus delivered and presumably received at San Fernando,

56

with the understanding that his sphere of activity would be for these places. But certainly nowhere in the same agreement appears a restriction against his acceptance of additional territories, if he so desired. Appellant surety argues that the bond guarantees only the payment of cigarettes, cigars or other tobacco products that were delivered to and distributed by Lorenzana in Manila and Rizal and at no other place. To adopt this line of reasoning would be to harness a pliant argument to suit appellant's purpose. The agreement required the distributor to post a bond for P8,000, "P3,000 of which bond shall answer for the faithful settlement of the account of the distributor with the Company". The bond put up by Lorenzana in the amount of P3,000, undertaken by the Visayan Surety & Insurance Corporation, therefore, was only to secure the prompt and faithful payment of the accounts of the distributor to the company. The mention of Manila and Rizal in said agreement was designed more as a declaration or identification of the places wherein the distributor was expressly authorized and assigned to sell the cigar, cigarettes and tobacco products of the plaintiff, which is no obstacle to the distributor's acceptance or taking motu propio of additional territories in order to better fulfill his obligation to sell monthly for the Company not less than P20,000 worth of cigarettes and other tobacco products and could by no means alter his liability to turn over to the company payments therefor, and that is precisely his obligation secured by the bond. Appellant, maintaining that the alleged modification of the agreement released the surety from its liability, invokes the rule of strictissimi juris under which, it is claimed, surety bonds must be strictly construed and cannot be extended beyond their terms. Although We might acknowledge that a surety is a favorite of the law and his contract strictissimi juris, this rule has no bearing on the case at bar. Anyway, it commonly refers to an accommodation surety and should not be extended to favor a compensated surety, as is appellant in the instant case. The rationale of this doctrine is reasonable; an accommodation surety acts without motive of pecuniary gain and, hence, should be protected against unjust pecuniary impoverishment by imposing on the principal duties akin to those of a fiduciary. This cannot be said of a compensated corporate surety which is a business association organized for the purpose of assuming classified risks in large numbers, for profit and on an impersonal basis, through the medium of standardized written contractual forms drawn by its own representatives with the primary aim of protecting its own interests. The law does not have the same solicitude for corporations engaged in giving indemnity bonds for profit as it does for individual surety who voluntarily undertakes to answer for the obligations of another. Although calling themselves sureties, such corporations are in fact insurers, and in determining their rights and liabilities the rules peculiar to suretyship do not apply. A material alteration of a contract is such a change

in the terms of the agreement as either imposes some new obligation on the party promising or takes away some obligation already imposed. A change in the form of the contract which does not affect one or the other of these results is immaterial, and will not discharge the surety. It cannot be denied that the obligation of the principal remained the same — to settle his accounts to the company at the specified time. The addition or diminution of the territories covered by his previous assignment will not alter or affect that duty to make payments on time. Apart from the fact that the alteration in the instant case, if there was any, is not material

57

as to relieve the surety from its liability under the bond, there is not even an iota of proof that such deviation caused the surety any loss or injury or that such delivery caused the distributor's failure to pay his accounts. Southern Motors, Inc. vs. Eliseo Barbosa, G.R. No. L9306, May 25, 1956 (99 Phil 263)

and others and was able to get a writ of preliminary attachment. For the dissolution of the attachments, the defendants put up a bond issued by Imperial Insurance, Inc., as surety. Rosa won the case. The decision became final. A writ of execution was issued which remained unsatisfied. Rosa filed a motion for recovery on the surety bonds. This motion was granted. In the meantime, the surety moved for reconsideration of the order granting

Facts: Mr. Alfredo Brillantes owed P2,889.53 to Southern Motors, Inc. To secure this obligation, Eliseo Barbosa acted as guarantor or surety by mortgaging his land. Mr. Brillantes failed to pay his obligations. Southern Motors sought to foreclose the mortgage executed by Barbosa. Southern Motors moved for summary judgment, but this was denied by the lower court judge. The case was transferred to another judge which ruled against Barbosa by ordering him to pay the debt or face foreclosure. Issue: Whether a mortgagor who secures a loan has the right to excussion. Held: No. Affirmed. Ratio: The right of guarantors, under Article 2058 of the Civil Code of the Philippines, to demand exhaustion of the property of the principal debtor, exists only when a pledge or a mortgage has not been given as special security for the payment of the principal obligation. Guarantees, without any such pledge or mortgage, are governed by Title XV of said Code, whereas pledges and mortgages fall under Title XVI of the same Code. Art. 2087 CC states that it is also of the essence of these contracts that when the principal obligation becomes due, the things in which the pledge or mortgage consists may be alienated for the payment to the creditor. Art. 2126 CC further states that the mortgage directly and immediately subjects the property upon which it is imposed, whoever the possessor may be, to the fulfillment of the obligation for whose security it was constituted. It has been held already stated in Saavedra vs. Price, 68 Phil., 688 that a mortgagor is not entitled to the exhaustion of the property of the principal debtor. Although an ordinary personal guarantor — not a mortgagor or pledgor — may demand the aforementioned exhaustion, the creditor may, prior thereto, secure a judgment against said guarantor, who shall be entitled, however, to a deferment of the execution of said judgment against him until after the properties of the principal debtor shall have been exhausted to satisfy the obligation involved in the case. The Imperial Insurance, Inc. vs. Hon. Walfrido de los Angeles, Judge of CFI Rizal, QC Br IV, Rosa V. Reyes, Pedro V. Reyes & Consolacion V. Reyes, G.R. No. L28030, January 18, 1982 (111 SCRA 24) Facts: Rosa V. Reyes filed a case against Felicisimo V. Reyes

58

plaintiffs' motion to recover on the counterbond, and upon denial thereof, filed a petition for certiorari with the Court of Appeals. The petition was dismissed. Issue: Whether a bonding company issuing a counterbond to lift an attachment is a guarantor. Whether the wording of a guarantee can turn it into a surety.

the same. Jose M. Arroyo, guardian of Tito Jocsing, an imbecile vs. Florentino Hilario Jungsay, et al., G.R. No. 10168, July 22, 1916 (34 Phil 589)

Held: Yes. Yes. Affirmed. Ratio: Counterbonds to lift an attachment may be charged only after notice and summary hearing in the same action. The records show that the notice and hearing requirement was substantially complied with in the instant case. The petitioner asserts that the Court of Appeals gravely erred in holding that the plaintiff who obtained judgment against the defendant may legally choose "to go directly" after the surety in a counterbond without prior exhaustion of the defendant's properties. This contention is likewise not meritorious. Although the counterbond contemplated in the aforequoted Sec. 17, Rule 57, of the Rules of Court is an ordinary guaranty where the sureties assume a subsidiary liability, the rule cannot apply to a counterbond where the surety bound itself "jointly and severally" (in solidum) with the defendant as in the present case. The counterbond executed by the deceased defendant Felicisimo V. Reyes, as principal, and the petitioner, The Imperial Insurance, Inc., as solidary guarantor to lift the attachment in Civil Case No. Q-5213 is in the following terms:” hereby JOINTLY AND SEVERALLY, bind ourselves”. Clearly, the petitioner, the Imperial Insurance, Inc., had bound itself solidarily with the principal. To recover against the petitioner surety on its counterbonds it is not necessary to file a separate action. Recovery and execution may be had in the same Civil Case. The counterbonds merely stand in place of the properties so released. They are mere replacements of the properties formerly attached, and just as the latter may be levied upon after final judgment in the case in order to realize the amount adjudged so is the liability of the counter sureties ascertainable after the judgment has become final. Under the law and under their own terms, the counterbonds are only conditioned upon the rendition of the judgment. As held by this Court in the aforecited case of Luzon Steel Corporation vs. Sia:" where under the rule and the bond the undertaking is to pay the judgment, the liability of the surety or sureties attaches upon the rendition of the judgment, and the issue of an execution and its return nulla bona is not, and should not be a condition to the right to resort to the bond." Thus, it matters not whether the Provincial Sheriff of Bulacan, in making the return of the writ of execution served or did not serve a copy thereof with notice of attachment on the administratrix of the intestate estate of Felicisimo V. Reyes and filed a copy of said writ with the Office of the Clerk of Court with notice in accordance with Sec. 7 (f), Rule 57 of the Revised Rules of Court. The petitioner surety as solidary obligor is liable just

59

Facts: Jungsay is a guardian of Tito Jocsing, an imbecile, who absconded with the funds of his ward. His guardianship was secured by a bond. The new guardian, Jose Arroyo, filed a case against Jungsay and the bondsmen. The court ruled in favor of Arroyo and awarded P6,000. The bondsmen appealed claiming that they should be credited with P4,400 or the alleged value of certain properties belonging to the absconding guardian all of which are in the exclusive possession of 3rd parties under claim of ownership.

Issue: Whether a surety is entitled to the right of excussion when he points out properties of the debtor which are insufficient, not salable, and encumbered.

Held: No. Remanded. Ratio: There is merit in appellant's contention that there exists a controversy in the complaint and answer as to whether or not appellee had actually paid appellant's obligation to the Philippine National Bank, a matter which should be decided in the affirmative before appellee, as surety, can claim reimbursement from appellant, the principal debtor. The affidavit of plaintiff's comptroller Pedro R Mendiola, supporting the motion for summary judgment, simply relates to the amount of the loan in question

Held: No. Affirmed. Ratio: The surety who desires to avail himself of the right of excussion must demand it in limine, 'on the institution of proceedings against him.' He must, moreover, point out to the creditor property of the principal debtor, not incumbered, subject to seizure; and must furnish a sufficient sum to have the excussion carried into effect. A plea which does not meet these requirements must be disregarded. The property pointed out by the sureties is not sufficient to pay the indebtedness; it is not salable; it is so incumbered that third parties have, as we have indicated, full possession under claim of ownership without leaving to the absconding guardian a fractional or reversionary interest without determining first whether the claim of one or more of the occupants is well founded. In all these respects the sureties have failed to meet the requirements of article 1832 of the Civil Code. General Indemnity Co., Inc. vs. Estanislao Alvarez, G.R. No. L-9434, March 29, 1957 (100 Phil 1059) Facts: Estanislao Alvarez took out a loan from the Philippine National Bank which was guaranteed by an indemnity bond issued by General Indemnity Co., Inc., for which Alvarez, as counter-guaranty, executed a mortgage on his share in a parcel of land. Alvarez failed to pay, and PNB deducted the amount of his loan from the deposit account of General Indemnity Co, Inc. General Indemnity filed this case to recover its payment of Alvarez’s debt. Alvarez denied having knowledge of any payment made by the plaintiff. The court, in a summary judgment, ruled in favor of the plaintiff. Issue: Whether the guarantor may file a collection action against the principal debtor even before the guarantor has paid the debt.

60

and appellant's failure to pay the same to appellee inspite of repeated demands, but does not touch on the alleged payment made by appellee to the bank. The plaintiff likewise contends that it is immaterial to its cause of action against appellant whether or not it had actually paid the Philippine National Bank, citing Art. 2071 of the New Civil Code to the effect that a guarantor may proceed against the principal debtor, even before having paid, when the debt has become demandable. The last paragraph of this same article, however, provides that in such instance, the only action the guarantor can file against the debtor is to obtain release from the guaranty, or to demand a security that shall protect him from any proceeding by the creditor and from the danger of insolvency of the debtor." An action by the guarantor against the principal debtor for payment, before the former has paid the creditor, is premature. The judgment appealed from is hereby set aside and the lower court is ordered to set anew this case for trial on the sole issue of whether or not appellee General Indemnity Co, Inc., had already paid the loan in question to the Philippine National Bank.

Exchange in favor of the former, drawn on and accepted by UTEFS. Pursuant to the above commercial transaction, UTEFS executed and delivered to Metrobank a Trust Receipt whereby the former acknowledged receipt in trust from the latter of the aforementioned goods from Planters Products which amounted to P815,600.00. Being the entrustee, the former agreed to deliver to Metrobank the entrusted goods in the event of non-sale or, if sold, the proceeds of the sale thereof, on or before September 2, 1979.

Jacinto Uy Diño & Norberto Uy vs CA & Metropolitan Bank & Trust Co., G.R. No. 89775, November 26, 1992 (216 SCRA 9) Facts: In 1977, Uy Tiam Enterprises and Freight Services (UTEFS), thru its representative Uy Tiam, applied for and obtained credit accommodations, from Metrobank in the sum of P700,000. To secure the aforementioned credit accommodations, Norberto Uy and Jacinto Uy Diño executed separate Continuing Suretyships. Under the aforesaid agreements, Norberto Uy agreed to pay Metrobank any indebtedness of UTEFS up to the aggregate sum of P300,000.00 while Jacinto Uy Diño agreed to be bound up to the aggregate sum of P800,000.00. Having paid the obligation under the above letter of credit in 1977, UTEFS, through Uy Tiam, obtained another credit accommodation from Metrobank in 1978, which credit accommodation was fully settled before an irrevocable letter of credit was applied for and obtained by the abovementioned business entity in 1979. The Irrevocable Letter of Credit No. SN-Loc-309, dated March 30, 1979, in the sum of P815,600.00, covered UTEFS' purchase of '8,000 Bags Planters Urea and 4,000 Bags Planters 21-0-0.' It was applied for and obtained by UTEFS without the participation of Norberto Uy and Jacinto Uy Diño as they did not sign the document denominated as 'Commercial Letter of Credit and Application.' Also, they were not asked to execute any suretyship to guarantee its payment. Neither did Metrobank nor UTEFS inform them that the 1979 Letter of Credit has been opened and that the Continuing Suretyships separately executed in February, 1977 shall guarantee its payment. The 1979 letter of credit was negotiated. Metrobank paid Planters Products the amount of P815,600.00 which payment was covered by a Bill of

61

However, UTEFS did not acquiesce to the obligatory stipulations in the trust receipt. As a consequence, METROBANK sent letters to the said principal obligor and its sureties, Norberto Uy and Jacinto Uy Diño, demanding payment of the amount due. Informed of the amount due, UTEFS made partial payments to the Bank which were accepted by the latter. Answering one of the demand letters, Diño, thru counsel, denied his liability for the amount demanded and requested Metrobank to send him copies of documents showing the source of his liability. In its reply, the bank informed him that the source of his liability is the Continuing Suretyship which he executed on February 25, 1977. As a rejoinder, Diño maintained that he cannot be held liable for the 1979 credit accommodation because it is a new obligation contracted without his participation. Besides, the 1977 credit accommodation which he guaranteed has been fully paid. Having sent the last demand letter to UTEFS, Diño and Uy and finding resort to extrajudicial remedies to be futile, Metrobank filed a complaint for collection of a sum of money (P613,339.32, as of January 31, 1982, inclusive of interest, commission penalty and bank charges) with a prayer for the issuance of a writ of preliminary attachment, against Uy Tiam, representative of UTEFS and impleaded Diño and Uy as parties- defendants. The case against Uy Tiam was later dismissed because he could not be found. After trial, the court ruled that the sureties were not liable. CA reversed.

reserved. Hence, where the contract of guaranty states that the same is to secure advances to be made "from time to time" the guaranty will be construed to be a continuing one. In other jurisdictions, it has been held that the use of particular words and expressions such as payment of "any debt," "any indebtedness," "any deficiency," or "any sum," or the guaranty of "any transaction" or money to be furnished the principal debtor

Issue: Whether a surety under a continuing suretyship agreement is liable for subsequent obligations which were entered into without his knowledge. Held: Yes. Affirmed. Ratio: Under the Civil Code, a guaranty may be given to secure even future debts, the amount of which may not be known at the time the guaranty is executed. This is the basis for contracts denominated as a continuing guaranty or suretyship. A continuing guaranty is one which is not limited to a single transaction, but which contemplates a future course of dealing, covering a series of transactions, generally for an indefinite time or until revoked. It is prospective in its operation and is generally intended to provide security with respect to future transactions within certain limits, and contemplates a succession of liabilities, for which, as they accrue, the guarantor becomes liable. Otherwise stated, a continuing guaranty is one which covers all transactions, including those arising in the future, which are within the description or contemplation of the contract of guaranty, until the expiration or termination thereof. A guaranty shall be construed as continuing when by the terms thereof it is evident that the object is to give a standing credit to the principal debtor to be used from time to time either indefinitely or until a certain period, especially if the right to recall the guaranty is expressly

62

"at any time," or "on such time" that the principal debtor may require, have been construed to indicate a continuing guaranty. The stipulations unequivocally reveal that the suretyship agreements in the case at bar are continuing in nature. Petitioners do not deny this; in fact, they candidly admitted it. Neither have they denied the fact that they had not revoked the suretyship agreements. Petitioners maintain, however, that their Continuing Suretyship Agreements cannot be made applicable to the 1979 obligation because the latter was not yet in existence when the agreements were executed in 1977; under Article 2052 of the Civil Code, a guaranty "cannot exist without a valid obligation." We cannot agree. First of all, the succeeding article provides that "[a] guaranty may also be given as security for future debts, the amount of which is not yet known." Secondly. Article 2052 speaks about a valid obligations, as distinguished from a void obligation, and not an existing or current obligation. This distinction is made clearer in the second paragraph of Article 2052 which reads: "Nevertheless, a guaranty may be constituted to guarantee the performance of a voidable or an unenforceable contract. It may also guarantee a natural obligation." The limit of the petitioners' respective liabilities must be determined from the suretyship agreement each had signed. It is undoubtedly true that the law looks upon the contract of suretyship with a jealous eye, and the rule is settled that the obligation of the surety cannot be extended by implication beyond its specified limits. To the extent, and in the manner, and under the circumstances pointed out in his obligation, he is bound, and no farther. Indeed, the Continuing Suretyship Agreements signed by petitioner Diño — and petitioner Uy fix the aggregate amount of their liability, at any given time, at P800,000.00 and P300,000.00, respectively. The law is clear that a guarantor may bind himself for less, but not for more than the principal debtor, both as regards the amount and the onerous nature of the conditions. In the case at bar, both agreements provide for liability for interest and expenses. Thus, by express mandate of the Continuing Suretyship Agreements which they had signed, petitioners separately bound themselves to pay interests, expenses, attorney's fees and costs. The last two items are pegged at not less than ten percent (10%) of the amount due.

By an order dated July 11, 1955, the court required Haragan to file a bond of P4,000 "to answer for his return to the Philippines and the prosecution of this case against him, with the understanding that upon his failure to return, said bond will answer pro tanto for any judgment that may be rendered against him". Thereupon, or on July 12, 1955, Haragan submitted a bond, subscribed by him and the Associated Insurance & Surety Co., as principal and surety. Haragan was allowed by the court to leave the country. Haragan was unable to return to the Philippines because the Philippine Consulate in Hongkong had advised Haragan of a communication from our Department

Allen McConn vs. Paul Haragan, et al., Associated Insurance & Surety Co., Inc., G.R. No. L-16550, January 31, 1962 (4 SCRA 251) Facts: Pending hearing of Civil Case No. 24790 of the Court of First Instance of Manila, entitled "Morris McConn vs. Paul Haragan", which was scheduled to take place on September 16, 1955 — the Bureau of Immigration advised said court that defendant Paul Haragan had applied for an immigration clearance and a re-entry permit to enable him to leave the Philippines for 15 days only and requested information whether the court had any objection thereto.

63

of Foreign Affairs banning him from returning to the Philippines. In due course, thereafter, or on February 19, 1959, the court rendered judgment, which, inter alia, sentenced Haragan to pay to plaintiff the sum of P5,500, with 6% interest thereon from December 8, 1954, until full payment, plus P1,000 as attorney's fees and costs. After this judgment had become final and executory, plaintiff moved for the execution of the aforementioned bond to satisfy said judgment against Haragan. The surety company objected thereto upon several grounds and, after due hearing, the lower court issued an order dated October 13, 1959, releasing said company from liability under the bond aforementioned and denying plaintiff's motion.

Facts: Jesus R. Roa became indebted to the Philippine Theatrical Enterprises, Inc., in the sum of P28,400 payable in 71 equal monthly installments at the rate of P400 a month. On that same date the Philippine Theatrical Enterprises, Inc., assigned all its rights and interest in that contract to the Radio Corporation of the Philippines. The loan carried an acceleration clause which states that in case the vendee-mortgagor fails to make any of

Issue: Whether a surety is liable for an obligation that has become impossible without its fault and due to government decree. Held: No. Affirmed. Ratio: A careful reading of the surety bond, Exhibit F, indicates that the surety's principal commitment is 'to guarantee that he (Haragan) will return to the Philippines on or before September 16, 1955'. In the last paragraph of said surety bond, Exhibit F, it appears that said bond was executed in favor of the Republic of the Philippines or its duly authorized representatives to guarantee 'that the herein principal (Haragan) will return to the Philippines on or before September 16, 1955 and that should he fail to do so, said bond will answer pro tanto for any judgment that may be rendered against him.' As the terms of the bond so state, it appears clearly that the bond will only answer for the judgment which may be rendered against defendant, should he (defendant Haragan) fail to return to the Philippines. In other words, if defendant Haragan should return to the Philippines on or before September 16, 1955, said bond will not answer for the judgment. It is now the contention of the Associated Insurance that since it was the Republic of Philippines (obligee under the bond) who rendered the return of defendant Haragan to the Philippines impossible, said surety company is thereby released from its obligation, and cites in support thereof Articles 1266 and 2076 of the New Civil Code. Upon a consideration of this contention, the Court finds it tenable and well grounded, for as the surety company has so well stated 'where the principal obligation (of returning to the Philippines) has been extinguished by the action of the obligee, Philippine Government, in preventing such return, the accessory obligation of the surety is likewise extinguished and the bond released of its liability.' The debtor in obligation to do shall also be released when the prestation becomes legally or physically impossible without the fault of the obligor. Radio Corporation of the Philippines vs. Jesus R. Roa, et al., G.R. No. 42829, September 30, 1935 (62 Phil 211)

64

the payments as hereinbefore provided, the whole amount remaining unpaid under this mortgage shall immediately become due and payable and this mortgage on the property herein mentioned as well as the Luzon Surety Bond may be foreclosed by the vendor- mortgagee. Roa sought an extension in the payment of the loan from February to April which Radio Corp approved. When Roa failed to pay, a case was filed. The court ruled in favor of Radio Corp and held Roa and his sureties jointly and severally liable.

proved prejudicial to the surety or not. The rule stated is quite independent of the event, and the fact that the principal is insolvent or that the extension granted promised to be beneficial to the surety would give no right to the creditor to change the terms of the contract without the knowledge or consent of the surety. Nor does it matter for how short a period the time of payment may be extended. The principle is the same whether the time is long or short. The creditor must be in such a situation that when the surety comes to be substituted in his place by paying the debt, he

Issue: Whether an extension granted without the consent of the guarantors extinguishes the guarantors’ liability not only as to the installments due at that time, but also as to the whole amount of their obligation. Held: Yes. Reversed. Ratio: Art. 1851 states that an extension granted to the debtor by the creditors, without the consent of the guarantor, extinguishes the latter's liability. This court has held that mere delay in suing for the collection of the debt does not release the sureties. The stipulation in the contract under consideration, copied above, is to the effect that upon failure to pay any installment when due the other installments ipso facto become due and payable. In view of the fact that under the express provision of the contract, quoted above, the whole unpaid balance automatically becomes due and payable upon failure to pay one installment, the act of the plaintiff in extending the payment of the installment corresponding to February, 1932, to April, 1932, without the consent of the guarantors, constituted in fact an extension of the payment of the whole amount of the indebtedness, as by that extension the plaintiff could not have filed an action for the collection of the whole amount until after April, 1932. Therefore appellants' contention that after default of the payment of one installment the act of the herein creditor in extending the time of payment discharges them as guarantors in conformity with articles 1851 and 1852 of the Civil Code is correct. It is a familiar rule that if a creditor, by positive contract with the principal debtor, and without the consent of the surety, extends the time of payment, he thereby discharges the surety. The time of payment may be quite as important a consideration of the surety as the amount he has promised conditionally to pay. Again, a surety has the right, on payment of the debt, to be subrogated to all the rights of the creditor, and to proceed at once to collect it from the principal; but if the creditor has tied his own hands from proceeding promptly, by extending the time of collection, the hands of the surety will equally be bound; and before they are loosed, by the expiration of the extended credit, the principal debtor may have become insolvent and the right of subrogation rendered worthless. It should be observed, however, that it is really unimportant whether the extension given has actually

65

may have an immediate right of action against the principal. The suspension of the right to sue for a month, or even a day, is as effectual to release the surety as a year or two years. Plaintiff's contention that the enforcement of the accelerating clause is potestative on the part of the obligee, and not self-executing, is clearly untenable from a simple reading of the clause copied above. What is potestative on the part of the obligee is the foreclosure of the mortgage and not the accelerating clause. Plaintiff-appellee contends that there was no consideration for the extension granted the principal debtor. Article 1277 of the Civil Code provides that "even though the consideration should not be expressed in the contract, it shall be presumed that a consideration exists and that it is licit, unless the debtor proves the contrary." It was incumbent upon the plaintiff to prove that there was no valid consideration for the extension granted.

and in his personal and individual capacity; Mr. Liu signed both as President of PACOCO and in his individual and personal capacity. Under both indemnity agreements, the indemnitors bound themselves jointly and severally to R & B Surety to pay an annual premium of P5,103.05 and for the faithful compliance of the terms and conditions set forth in said surety bond for a period beginning until the same is cancelled and/or discharged.

Joseph Cochingyan, Jr. & Jose K. Villanueva vs. R&B Surety & Insurance Co., Inc., G.R. No. L-47369, June 30, 1987 (151 SCRA 339) Facts: In November 1963, Pacific Agricultural Suppliers, Inc. (PAGRICO) applied for and was granted an increase in its line of credit from P400,000.00 to P800,000.00 with the Philippine National Bank (PNB). To secure PNB's approval, PAGRICO had to give a good and sufficient bond in the amount of P400,000.00, representing the increment in its line of credit, to secure its faithful compliance with the terms and conditions under which its line of credit was increased. In compliance with this requirement, PAGRICO submitted Surety Bond No. 4765, issued by the respondent R & B Surety and Insurance Co., Inc. in the specified amount in favor of the PNB. Under the terms of the Surety Bond, PAGRICO and R & B Surety bound themselvesjointlyandseverally to comply with the "terms and conditions of the advance line of credit established by the PNB. PNB had the right under the Surety Bond to proceed directly against R & B Surety without the necessity of first exhausting the assets of the principal obligor, PAGRICO. The Surety Bond also provided that R & B Surety's liability was not to be limited to the principal sum of P400,000.00, but would also include "accrued interest" on the said amount "plus all expenses, charges or other legal costs incident to collection of the obligation under the Surety Bond. In consideration of R & B Surety's issuance of the Surety Bond, two identical indemnity agreements were entered into with R & B Surety: (a) one agreement dated 23 December 1963 was executed by the Catholic Church Mart (CCM) and by petitioner Joseph Cochingyan, Jr.; the latter signed not only as President of CCM but also in his personal and individual capacity; and (b) another agreement dated 24 December 1963 was executed by PAGRICO, Pacific Copra Export Inc. (PACOCO), Jose K. Villanueva and Liu Tua Beh; Mr. Villanueva signed both as Manager of PAGRICO

66

When PAGRICO failed to comply with its Principal Obligation to the PNB, the PNB demanded payment from R & B Surety of the sum of P400,000.00, the full amount of the Principal Obligation. R & B Surety made a series of payments to PNB by virtue of that demand totalling P70,000.00 evidenced by detailed vouchers and receipts. R & B Surety in turn sent formal demand letters to petitioners Joseph Cohingyan, Jr. and Jose K. Villanueva for reimbursement of the payments made by it to the PNB and for a discharge of its liability to the PNB under the Surety Bond. When petitioners failed to heed its demand, R & B Surety brought suit against Joseph Cochingyan, Jr., Jose K. Villanueva and Liu Tua Beh in the Court of First Instance of Manila. The defendants raised the defense that the indemnity agreement did not express the true intent of the parties, that they signed the indemnity agreement for the sake of complying with the formalities only, that they were assured to remain as strangers to the transaction, that R & B Surety was estopped from enforcing its claim against them, that the Principal Obligation of PAGRICO to the PNB secured by the Surety Bond had already been assumed by CCM by virtue of a Trust Agreement entered into with the PNB, where CCM represented by Joseph Cochingyan, Jr. undertook to pay the Principal Obligation of PAGRICO to the PNB, that his obligation under the Indemnity Agreement was thereby extinguished by novation arising from the change of debtor under the Principal Obligation, and that the case was premature since PNB has not yet proceeded against R & B Surety. The court ruled in favor of R & B Surety.

purpose is achieved — an obligation is extinguished and a new one is created in lieu thereof. If objective novation is to take place, it is imperative that the new obligation expressly declare that the old obligation is thereby extinguished, or that the new obligation be on every point incompatible with the old one. Novation is never presumed: it must be established either by the discharge of the old debt by the express terms of the

Issue: Whether a surety agreement is extinguished when another person is included to assume the debt. Whether a mere delay in proceeding against the principal will extinguish the surety. Whether the indemnity parties are liable to pay the full amount even though the surety has only made partial payments. Held: No. No. Yes. Affirmed. Ratio: We are unable to sustain petitioners' claim that the Surety Bond and their respective obligations under the Indemnity Agreements were extinguished by novation brought about by the subsequent execution of the Trust Agreement. Novation is the extinguishment of an obligation by the substitution or change of the obligation by a subsequent one which terminates it, either by changing its object or principal conditions, or by substituting a new debtor in place of the old one, or by subrogating a third person to the rights of the creditor. Novation through a change of the object or principal conditions of an existing obligation is referred to as objective (or real) novation. Novation by the change of either the person of the debtor or of the creditor is described as subjective (or personal) novation. Novation may also be both objective and subjective (mixed) at the same time. In both objective and subjective novation, a dual

67

new agreement, or by the acts of the parties whose intention to dissolve the old obligation as a consideration of the emergence of the new one must be clearly discernible. Again, if subjective novation by a change in the person of the debtor is to occur, it is not enough that the juridical relation between the parties to the original contract is extended to a third person. It is essential that the old debtor be released from the obligation, and the third person or new debtor take his place in the new relation. If the old debtor is not released. no novation occurs and the third person who has assumed the obligation of the debtor becomes merely a co-debtor or surety or a co-surety. Applying the above principles to the instant case, it is at once evident that the Trust Agreement does not expressly terminate the obligation of R & B Surety under the Surety Bond. On the contrary, the Trust Agreement expressly provides for the continuing subsistence of that obligation by stipulating that "[the Trust Agreement] shall not in any manner release" R & B Surety from its obligation under the Surety Bond. Neither can the petitioners anchor their defense on implied novation. Absent an unequivocal declaration of extinguishment of a pre-existing obligation, a showing of complete incompatibility between the old and the new obligation (and nothing else) would sustain a finding of novation by implication. But where, as in this case, the parties to the new obligation expressly recognize the continuing existence and validity of the old one, where, in other words, the parties expressly negated the lapsing of the old obligation, there can be no novation. The issue of implied novation is not reached at all. What the trust agreement did was, at most, merely to bring in another person or persons — the Trustor[s] — to assume the same obligation that R & B Surety was bound to perform under the Surety Bond. It is not unusual in business for a stranger to a contract to assume obligations thereunder; a contract of suretyship or guarantee is the classical example. The precise legal effect is the increase of the number of persons liable to the obligee, and not the extinguishment of the liability of the first debtor. The Indemnity Agreement speaks of the several indemnitors applying jointly and severally to the R & B Surety to become surety upon a surety bond demanded by and in favor of PNB in the sum of P400.000 for the faithful compliance of the terms and conditions set forth in said surety bond. This part of the Agreement suggests that the indemnitors (including the petitioners) would become co-sureties on the Security Bond in favor of PNB. The record, however, is bereft of any indication that the petitioners- indemnitors ever in fact became co-sureties of R & B Surety vis-a-vis the PNB. The petitioners, so far as the record goes, remained simply indemnitors bound to R & B Surety but not to PNB, such that PNB could not have directly demanded payment of the Principal Obligation from the petitioners. PNB's undertaking under the Trust Agreement "to hold in abeyance any action to enforce its claims" against R

& B Surety did not extend the maturity of R & B Surety's obligation under the Surety Bond. The Principal Obligation had in fact already matured, along with that of R & B Surety, by the time the Trust Agreement was entered into. Petitioners' obligations under the Indemnity Agreements had, in turn, already similarly matured, for those obligations were to mature "as soon as [R & B Surety] became liable to make payment of any sum under the terms of the [Surety Bond] — whether the said sum or sums or part thereof have been actually paid or not." Thus, the situation was that precisely envisaged in Article 2079 which states that the mere failure on the part of the creditor to demand payment after the debt has become due does not of itself constitute

68

any extension of time referred to herein. The theory behind Article 2079 is that an extension of time given to the principal debtor by the creditor without the surety's consent would deprive the surety of his right to pay the creditor and to be immediately subrogated to the creditor's remedies against the principal debtor upon the original maturity date. The surety is said to be entitled to protect himself against the contingency of the principal debtor or the indemnitors becoming insolvent during the extended period. The underlying rationale is not present in the instant case. Mere delay or negligence in proceeding against the principal will not discharge a surety unless there is between the creditor and the principal debtor a valid and binding agreement therefor, one which tends to prejudice [the surety] or to deprive it of the power of obtaining indemnity by presenting a legal objection for the time, to the prosecution of an action on the original security. In the instant case, there was nothing to prevent the petitioners from tendering payment, if they were so minded, to PNB of the matured obligation on behalf of R & B Surety and thereupon becoming subrogated to such remedies as R & B Surety may have against PAGRICO. The petitioners lose sight of the fact that the Indemnity Agreements are contracts of indemnification not only against actual loss but against liability as well. While in a contract of indemnity against loss an indemnitor will not be liable until the person to be indemnified makes payment or sustains loss, in a contract of indemnity against liability, as in this case, the indemnitor's liability arises as soon as the liability of the person to be indemnified has arisen without regard to whether or not he has suffered actual loss. Accordingly, R & B Surety was entitled to proceed against petitioners not only for the partial payments already made but for the full amount owed by PAGRICO to the PNB.

Issue: Whether a surety company is in the nature of an insurance company that is exempt from local government fees and permits. Held: Yes. Reversed partially.

Luzon Surety Co., Inc. vs. The City of Bacolod, Romeo Guanzon, in his capacity as Mayor, and Porfirio T. de Leon, in his capacity as Treasurer, G.R. No. L-23618, August 31, 1970 (34 SCRA 509) Facts: On July 1, 1962, the city council of the City of Bacolod approved Ordinance 158, series of 1962 which required Luzon Surety Co., Inc. to pay a fixed annual license fee of P300 and to apply for and obtain from the City Mayor a permit. Luzon Surety paid the fees under protest, and it then filed with the CFI of Negros Occidental an action assailing the legality and constitutionality of the ordinance. The law allegedly violated is RA 2264 which prohibits cities from taxing insurance companies. The officers of the City of Bacolod countered that the Act 326 or the Charter of the City of Bacolod grants the city council the power to enact ordinances intended to regulate and fix the amounts of permit and license fees. The court adjudged Luzon Surety as a surety company and not an insurance company and, therefore, as not entitled to claim exemption from the effects of the controverted ordinance.

69

Ratio: Under the Insurance Act, insurance company shall include all corporations, associations, partnerships, or individuals engaged as principals in the insurance business, excepting fraternal and benevolent orders and societies. Corporations formed or organized to save any person or persons from loss, damage, or liability arising from any unknown or future or contingent event, or to indemnify or to compensate any person or persons or other corporation for any such loss, damage, or liability or to guarantee the contractual obligations or debts of others, shall be known as Insurance Corporations. According to American Jurisprudence (The Cyclopedia of Insurance Law), a class of contracts written by guaranty or surety companies, and generally designated as guaranty, insurance, comprises principally contract, credit, fidelity, title, bond, and security guaranty generally. Contracts of this kind are now almost universally regarded as those of insurance where the underwriter engages in the business for profit, especially since the terms of the contracts usually closely resemble the essential elements of an insurance contract. In American Surety Co. of New York vs. Folk Insurance Commissioner (135 SW 778), the Supreme Court of Tennessee ruled that American Surety Company was authorized to conduct the business of guaranteeing the fidelity of persons holding places of public and private trust, the performance of contracts other than insurance policies, and executing or guaranteeing bonds and undertaking required or permitted in all actions or proceedings or by law allowed. These contracts are contracts of insurance and the making of them is insurance business. Luzon Surety, which is the holder of a Certificate of Authority as a fire, marine, earthquake, typhoon, tidal wave, riot, flood, civil commotion, war, civil war, revolutions, rebellions, military or usurped power, use & occupancy, storm, bombardment, invasion, insurrection, motor car, burglary, accident, and fidelity insurance company, and which is authorized to become a surety upon official recognizances, stipulations, bonds and undertakings, is engaged in the insurance business and is an insurance company. As to the P20 annual permit fee, the company was correctly adjudged liable. The authority of the City of Bacolod to require persons and entities engaged in or conducting any business within its jurisdictional territory to obtain permits and pay the corresponding permit fees is specifically granted by Commonwealth Act 326.

Bermundo as sureties, executed a Continuing Suretyship Agreement in favor of Atok Finance as creditor. Under this Agreement, Sanyu Trading and the individual private respondents who were officers and stockholders of Sanyu Chemical jointly and severally unconditionally guarantee to ATOK FINANCE CORPORATION the full, faithful and prompt payment and discharge of any and all indebtedness of Sanyu Chemical to the Creditor. The word 'indebtedness' is used herein in its most comprehensive sense and includes any and all advances, debts, obligations and liabilities of Principal or any one or more of them, heretofore, now or hereafter made, incurred or created, whether voluntary or involuntary and however

Atok Finance Corporation vs. CA, Sanyu Chemical Corporation, Danilo E. Arrieta, Nenita B. Arrieta, Pablito Bermundo & Leopoldo Halili, G.R. No. 80078, May 18, 1993 (222 SCRA 232) Facts: Sanyu Chemical Corporation, as principal, and Sanyu Trading Corporation along with individual private stockholders of Sanyu Chemical, namely, spouses Danilo E. Arrieta and Nenita B. Arrieta, Leopoldo G. Halili and Pablito

70

arising, whether direct or acquired by the Creditor by assignment or succession, whether due or not due, absolute or contingent, liquidated or unliquidated, determined or undetermined and whether the Principal may be liable individually or jointly with others, or whether recovery upon such indebtedness may be or hereafter become barred by any statute of limitations, or whether such indebtedness may be or otherwise become unenforceable. On 27 November 1981, Sanyu Chemical assigned its trade receivables outstanding as of 27 November 1981 with a total face value of P125,871.00, to Atok Finance in consideration of receipt from Atok Finance of the amount of P105,000.00. The assigned receivables carried a standard term of thirty (30) days; it appeared, however, that the standard commercial practice was to grant an extension of up to one hundred twenty (120) days without penalties. Later, additional trade receivables were assigned by Sanyu Chemical to Atok Finance with a total face value of P100,378.45. On 13 January 1984, Atok Finance commenced action against Sanyu Chemical, the Arrieta spouses, Pablito Bermundo and Leopoldo Halili before the Regional Trial Court of Manila to collect the sum of P120,240.00 plus penalty charges amounting to P0.03 for every peso due and payable for each month starting from 1 September 1983. Atok Finance alleged that Sanyu Chemical had failed to collect and remit the amounts due under the trade receivables. Sanyu Chemical and the individual private respondents sought dismissal of Atok's claim upon the ground that such claim had prescribed under Article 1629 of the Civil Code and for lack of cause of action. The private respondents contended that the Continuing Suretyship Agreement, being an accessory contract, was null and void since, at the time of its execution, Sanyu Chemical had no pre-existing obligation due to Atok Finance. The court ruled for Atok Finance. The appeal was dismissed at first due to the failure to file the appellant’s brief. The dismissal was set aside through a petition for relief, and the decision of the lower court was reversed.

guarantee the performance of a voidable or an unenforceable contract. It may also guarantee a natural obligation. Moreover, Article 2053 of the Civil Code states that a guaranty may also be given as security for future debts, the amount of which is not yet known; there can be no claim against the guarantor until the debt is liquidated. A conditional obligation may also be secured. The

Issue: Whether a suretyship is valid and binding even before the principal obligation is born. Held: Yes. Reversed. Ratio: It is true that a guaranty or a suretyship agreement is an accessory contract in the sense that it is entered into for the purpose of securing the performance of another obligation which is denominated as the principal obligation. It is also true that Article 2052 of the Civil Code states that "a guarantee cannot exist without a valid obligation." This legal proposition is not, however, like most legal principles, to be read in an absolute and literal manner and carried to the limit of its logic. This is clear from Article 2052 of the Civil Code itself which states that a guaranty cannot exist without a valid obligation. Nevertheless, a guaranty may be constituted to

71

Court of Appeals apparently overlooked our caselaw interpreting Articles 2052 and 2053 of the Civil Code. In National Rice and Corn Corporation (NARIC) v. Jose A. Fojas and Alto Surety Co., Inc., the court ruled that Article 1825 of the Civil Code of 1889, in force in 1948, expressly recognized that 'a guaranty may also be given as security for future debts the amount of which is not yet known.' In Rizal Commercial Banking Corporation v. Arro, it can be clearly seen that the surety agreement was executed to guarantee future debts which Daicor may incur with petitioner, as is legally allowable under the Civil Code. It is clear to us that the Rizal Commercial Banking Corporation and the NARIC cases rejected the distinction which the Court of Appeals in the case at bar sought to make with respect to Article 2053, that is, that the "future debts" referred to in that Article relate to "debts already existing at the time of the constitution of the agreement but the amount [of which] is unknown," and not to debts not yet incurred and existing at that time. Of course, a surety is not bound under any particular principal obligation until that principal obligation is born. But there is no theoretical or doctrinal difficulty inherent in saying that the suretyship agreement itself is valid and binding even before the principal obligation intended to be secured thereby is born, any more than there would be in saying that obligations which are subject to a condition precedent are valid and binding before the occurrence of the condition precedent. Comprehensive or continuing surety agreements are in fact quite commonplace in present day financial and commercial practice. A bank or a financing company which anticipates entering into a series of credit transactions with a particular company, commonly requires the projected principal debtor to execute a continuing surety agreement along with its sureties. By executing such an agreement, the principal places itself in a position to enter into the projected series of transactions with its creditor; with such suretyship agreement, there would be no need to execute a separate surety contract or bond for each financing or credit accommodation extended to the principal debtor. The contention of Sanyu Chemical was that Atok Finance had no cause of action under the Deed of Assignment for the reason that Sanyu Chemical's warranty of the debtors' solvency had ceased. It may be stressed as a preliminary matter that the Deed of Assignment was valid and binding upon Sanyu Chemical. Assignment of receivables is a commonplace commercial transaction today. It is an activity or operation that permits the assignee to monetize or realize the value of the receivables before the maturity thereof. In other words, Sanyu Chemical received from Atok Finance the value of its trade receivables it had assigned; Sanyu Chemical obviously benefitted from the assignment. The payments due in the first instance from the trade debtors of Sanyu Chemical would represent the return of the investment which Atok Finance had made when it paid Sanyu Chemical the transfer value of such receivables.

Article 1629 of the Civil Code invoked by private respondents and accepted by the Court of Appeals is not, in the case at bar, material. The liability of Sanyu Chemical to Atok Finance rests not on the breach of the warranty of solvency; the liability of Sanyu Chemical was not ex lege (ex Article 1629) but rather excontractu. Under the Deed of Assignment, the effect of non-payment by the original trade debtors was a breach of warranty of solvency by Sanyu Chemical, resulting in turn in the assumption of solidary liability by the assignor under the receivables assigned. In other words, the assignor Sanyu Chemical becomes a solidary debtor under the terms of the receivables covered

72

and transferred by virtue of the Deed of Assignment. And because assignor Sanyu Chemical became, under the terms of the Deed of Assignment, solidary obligor under each of the assigned receivables, the other private respondents (the Arrieta spouses, Pablito Bermundo and Leopoldo Halili), became solidarily liable for that obligation of Sanyu Chemical, by virtue of the operation of the Continuing Suretyship Agreement. Put a little differently, the obligations of individual private respondent officers and stockholders of Sanyu Chemical under the Continuing Suretyship Agreement, were activated by the resulting obligations of Sanyu Chemical as solidary obligor under each of the assigned receivables by virtue of the operation of the Deed of Assignment. That solidary liability of Sanyu Chemical is not subject to the limiting period set out in Article 1629 of the Civil Code.

respondent, even if he did not sign the promisory note, is liable by virtue of the surety agreement. The only condition that would make him liable thereunder is that the Borrower "is or may become liable as maker, endorser, acceptor or otherwise". There is no doubt that Daicor is liable on the promissory note evidencing the indebtedness. The surety agreement which was earlier signed by Enrique Go, Sr. and private respondent, is an accessory obligation, it being dependent upon a principal one which, in this case is the loan obtained by Daicor as evidenced by a promissory note. What

Rizal Commercial Banking Corporation vs. Hon. Jose P. Arro, Judge of the CFI of Davao & Residoro Chua, G.R. No. L-49401, July 30, 1982 (115 SCRA 777) Facts: Residoro Chua and Enrique Go, Sr. jointly executed a comprehensive surety agreement to guaranty any existing or future obligation of Davao Agricultural Industries Corporation (DAICOR) with petitioner bank. Thereafter, a promissory note in the amount of P100,000.00 was issued in favor of petitioner bank which was signed solely by Enrique Go, Sr. in his personal capacity and in behalf of DAICOR. When despite repeated demands the note was not fully paid, petitioner bank filed a complaint against Daicor, respondent Chua and Enrique Go, Sr. The trial court, sustaining the private respondent, dismissed the complaint on the ground that it states no cause of action as against him since he did not sign the subject promissory note, which is a necessary corollary to the comprehensive surety agreement as evidence of indebtedness, and without which the said agreement served no purpose. Issue: Whether a surety who guarantees any existing or future obligation can be held liable for a promissory note subsequently executed without his signature. Held: Yes. Reversed. Ratio: The agreement was executed obviously to induce petitioner to grant any application for a loan Daicor may desire to obtain from petitioner bank. The guaranty is a continuing one which shall remain in full force and effect until the bank is notified of its termination. At the time the loan of P100,000.00 was obtained from petitioner by Daicor, for the purpose of having an additional capital for buying and selling coco-shell charcoal and importation of activated carbon, the comprehensive surety agreement was admittedly in full force and effect. The loan was, therefore, covered by the said agreement, and private

73

obviously induced petitioner bank to grant the loan was the surety agreement whereby Go and Chua bound themselves solidarily to guaranty the punctual payment of the loan at maturity. By terms that are unequivocal, it can be clearly seen that the surety agreement was executed to guarantee future debts which Daicor may incur with petitioner, as is legally allowable under the Civil Code. Thus, Article 2053 states that a guaranty may also be given as security for future debts, the amount of which is not yet known; there can be no claim against the guarantor until the debt is liquidated. A conditional obligation may also be secured.

Upon appeal, the IAC modified the decision by holding Roberto Regal liable only to the extent of the monthly credit limit granted to Celia Regala, i.e., at P2,000.00 a month and only for the advances made during the one year period of the card's effectivity. Issue: Whether a guarantor’s undertaking which makes him liable jointly and severally can be construed as being a contract of surety.

Pacific Banking Corporation vs. Hon. Intermediate Appellate Court & Roberto Regala, Jr., G.R. No. 72275, November 13, 1991 (203 SCRA 496) Facts: On October 24, 1975, defendant Celia Syjuco Regala applied for and obtained from the Pacific Banking Corp. the issuance and use of Pacificard credit card. On the same date, the defendant-appellant Robert Regala, Jr., spouse of defendant Celia Regala, executed a 'Guarantor's Undertaking' in favor of the bank whereby the latter agreed 'jointly and severally of Celia Aurora Syjuco Regala, to pay the Pacific Banking Corporation upon demand, any and all indebtedness, obligations, charges or liabilities due and incurred by said Celia Aurora Syjuco Regala with the use of the Pacificard, or renewals thereof, issued in her favor by the Pacific Banking Corporation'. It was also agreed that any changes of or novation in the terms and conditions in connection with the issuance or use of the Pacificard, or any extension of time to pay such obligations, charges or liabilities shall not in any manner release Robert Regala from responsibility hereunder, it being understood that he fully agrees to such charges, novation or extension, and that this understanding is a continuing one and shall subsist and bind him until the liabilities of the said Celia Syjuco Regala have been fully satisfied or paid. Celia Regala, as such Pacificard holder, had purchased goods and/or services on credit under her Pacificard, for which the plaintiff advanced the cost amounting to P92,803.98. In view of defendant Celia Regala's failure to settle her account for the purchases made thru the use of the Pacificard, a written demand was sent to the latter and also to the defendant Roberto Regala, Jr. under his 'Guarantor's Undertaking. A complaint was subsequently filed in Court for the repeated failure to settle their obligation. Celia Regala was declared in default for her failure to file her answer within the reglementary period. Roberto Regala, Jr., on the other hand, filed his Answer with Counterclaim admitting his execution of the 'Guarantor's Understanding, but with the understanding that his liability would be limited to P2,000.00 per month.' After all evidence were presented, a fire struck the City Hall of Manila, including the court. The records of the case were reconstituted upon petition. The court ruled for the bank, holding the spouses solidarily liable for the liability.

74

Held: Yes. Reversed. Ratio: The undertaking signed by Roberto Regala, Jr. although denominated "Guarantor's Undertaking," was in substance a contract of surety. As distinguished from a contract of guaranty where the guarantor binds himself to the creditor to fulfill the obligation of the principal debtor only in case the latter should fail to do so, in a contract of suretyship, the surety binds himself solidarily with the principal debtor. We need not look elsewhere to determine the nature and extent of private respondent Roberto Regala, Jr.'s undertaking. As a surety he bound himself jointly and severally with the debtor Celia Regala "to pay the Pacific Banking Corporation upon demand, any and all indebtedness, obligations, charges or liabilities due and incurred by said Celia Syjuco Regala with the use of Pacificard or renewals thereof issued in (her) favor by Pacific Banking Corporation." It is true that under Article 2054 of the Civil Code, "(A) guarantor may bind himself for less, but not for more than the principal debtor, both as regards the amount and the onerous nature of the conditions. It is likewise not disputed by the parties that the credit limit granted to Celia Regala was P2,000.00 per month and that Celia Regala succeeded in using the card beyond the original period of its effectivity, October 29, 1979. We do not agree however, that Roberto Jr.'s liability should be limited to that extent. Private respondent Roberto Regala, Jr., as surety of his wife, expressly bound himself up to the extent of the debtor's (Celia) indebtedness likewise expressly waiving any "discharge in case of any change or novation of the terms and conditions in connection with the issuance of the Pacificard credit card." Roberto, in fact, made his commitment as a surety a continuing one, binding upon himself until all the liabilities of Celia Regala have been fully paid. All these were clear under the "Guarantor's Undertaking' Roberto signed. Private respondent Roberto Regala, Jr. had been made aware by the terms of the undertaking of future changes in the terms and conditions governing the issuance of the credit card to his wife and that notwithstanding, he voluntarily agreed to be bound as a surety. As in guaranty, a surety may secure additional and future debts of the principal debtor the amount of which is not yet known. A guarantor or surety does not incur liability unless the principal debtor is held liable. It is in this sense that a surety, although solidarily liable with the principal debtor, is different from the debtor. It does not mean, however, that the surety cannot be held liable to the same extent as the principal debtor. The nature and extent of the liabilities of a guarantor or a surety is determined by the clauses in the contract of suretyship.

Facts: Dr. Marylou J. Perlas, called up the Vizconde, a longtime friend and former high school classmate, asking her to sell Perlas' 8-carat diamond ring. Shortly afterwards, Perlas delivered the ring to Vizconde to be sold on commission for P85,000.00. Vizconde signed a receipt for the ring. About a week and a half later, Vizconde returned the ring to Perlas, who had asked for it because she needed to show it to a cousin. However, Vizconde afterwards

Corazon J. Vizconde vs. Intermediate Appellate Court & People of the Philippines, G.R. No. 74231, April 10, 1987 (149 SCRA 226)

75

called on Perlas at the latter's home, with another lady, Pilar A. Pagulayan, who claimed to have a "sure buyer" for the ring. Perlas was initially hesitant to do so, but she eventually parted with the ring so that it could be examined privately by Pagulayan's buyer when the latter gave her a postdated check for the price (P85,000.00) and, together with Vizconde, signed a receipt prepared by Perlas. The receipt made Pagulayan principally liable while Vizconde jointly and severally guaranteed the obligation. After Pagulayan's postdated check matured, Perlas deposited it to her account at Manila Bank. It was dishonored for the reason, "No arrangement," stated in the debit advice. Perlas then called up Vizconde to inform her about the dishonor of the check. The latter suggested that Perlas redeposit the check while she (Vizconde) followed up the sale of the ring. Perlas re-deposited the check, but again it was dishonored because drawn against insufficient funds. So Perlas took the matter to counsel, who sent separate letters of demand to Vizconde and Pagulayan for return of the ring or payment of P85,000.00. After nine days, Vizconde and Pagulayan called on Perlas. Pagulayan paid Perlas P5,000.00 against the value of the ring. She also gave into Perlas' keeping three certificates of title to real estate to guarantee delivery of the balance of such value. A receipt for the money and the titles was typed and signed by Perlas, which she also made the two sign. Vizconde and Pagulayan having allegedly reneged on a promise to complete payment for the ring on the very next day, Perlas filed with the Quezon City Fiscal's office a complaint against them for estafa. This notwithstanding, Pagulayan still paid Perlas various sums totalling P25,000.00 which together with the P5,000.00 earlier paid, left a balance of P55,000.00 still owing. After trial, both accused were convicted and each sentenced to serve an indeterminate prison term of from eight (8) years, four (4) months and one (1) day to ten (10) years and two (2) months of prision mayor, with the accessory penalties provided by law, and jointly and severally to indemnify the offended party in the sum of P55,000.00 for the unaccounted balance of the value of the ring with legal interest from April 22, 1975, the further sum of P30,000.00 as and for moral damages and the sum of P10,000.00 for attorney's fees. Both accused appealed to the Court of Appeals, but as Pilar A. Pagulayan had evaded promulgation of sentence in the Trial Court and had appealed only through counsel, the Appellate Court vacated her appeal as ineffectual. On Vizconde's part, the Court of Appeals affirmed the judgment of the Trial Court in all respects except the penalty of imprisonment, which it increased to a term of from ten (10) years and one (1) day of prision mayor to twelve (12) years ten (10) months and twentyone (21) days of reclusion temporal. A motion for reconsideration was denied. Vizconde thereafter filed the present petition for review on certiorari. Required to comment on the petition, the Solicitor General, despite having argued for affirmance of Vizconde's

conviction in the Court of Appeals, now recommends that she be acquitted, but nonetheless held civilly liable. Issue: Whether a surety can be held liable for estafa. Held: No. Reversed.

76

Ratio: Nothing in the language of the receipt, or in the proven circumstances attending its execution can logically be considered as evidencing the creation of an agency between Perlas, as principal, and Vizconde, as agent, for the sale of the former's ring. True, reference to what may be taken for an agency agreement appears in the clause ". . . which I agree to sell . . . on commission basis" in the main text of that document. But it is clear that if any agency was established, it was one between Perlas and Pagulayan only, this being the only logical conclusion from the use of the singular "I" in said clause, in conjunction with the fact that the part of the receipt in which the clause appears bears only the signature of Pagulayan. To warrant anything more than a mere conjecture that the receipt also constituted Vizconde the agent of Perlas for the same purpose of selling the ring, the cited clause should at least have used the plural "we," or the text of the receipt containing that clause should also have carried Vizconde's signature. As the Solicitor General correctly puts it, the joint and several undertaking assumed by Vizconde in a separate writing below the main body of the receipt merely guaranteed the civil obligation of Pagulayan to pay Perlas the value of the ring in the event of her (Pagulayan's) failure to return said article. It cannot, in any sense, be construed as assuming any criminal responsibility consequent upon the failure of Pagulayan to return the ring or deliver its value. It is fundamental that criminal responsibility is personal and that in the absence of conspiracy, one cannot be held criminally liable for the act or default of another. Thus, the theory that by standing as surety for Pagulayan, Vizconde assumed an obligation more than merely civil in character, and staked her very liberty on Pagulayan's fidelity to her trust is utterly unacceptable; it strikes at the very essence of guaranty (or suretyship) as creating purely civil obligations on the part of the guarantor or surety. To render Vizconde criminally liable for the misappropriation of the ring, more than her mere guarantee is necessary. At the least, she must be shown to have acted in concert and conspiracy with Pagulayan, either in obtaining possession of the ring, or in undertaking to return the same or delivery its value, or in the misappropriation or conversion of the same. Now, the information charges conspiracy between Vizconde and Pagulayan, but no adequate proof thereof has been presented. It is of course true that direct proof of conspiracy is not essential to convict an alleged conspirator, and that conspiracy may be established by evidence of acts done in pursuance of a common unlawful purpose. Here, however, the circumstances from which a reasonable inference of conspiracy might arise, such as the fact that Vizconde and the complainant were friends of long standing and former classmates, that it was Vizconde who introduced Pagulayan to Perlas, that Vizconde was present on the two occasions when the ring was entrusted to Pagulayan and when part payment of P5,000.00 was made, and that she signed the receipts on those occasions are, at best, inconclusive. They are not inconsistent with what

Vizconde has asserted to be an innocent desire to help her friend dispose of the ring; nor do they exclude every reasonable hypothesis other than complicity in a premeditated swindle. The conflict in the recitals of the two receipts insofar as concerns Vizconde's part in the transaction involving Perlas' ring is obvious and cannot be ignored. Neither, as the Court sees it, should these writings be read together in an attempt to reconcile what they contain, since the later receipt was made under circumstances which leave no little doubt of its truth and integrity. What is clear from the first receipt is that the ring was entrusted

77

to Pilar A. Pagulayan to be sold on commission; there is no mention therein that it was simultaneously delivered to and received by Vizconde for the same purpose or, therefore, that Vizconde was constituted, or agreed to act as, agent jointly with Pagulayan for the sale of the ring. What Vizconde solely undertook was to guarantee the obligation of Pagulayan to return the ring or deliver its value; and that guarantee created only a civil obligation, without more, upon default of the principal. The second receipt, on the other hand, would make out Vizconde an agent for the sale of the ring. The undisputed fact that the first receipt was executed simultaneously with the delivery of the ring to Pagulayan compellingly argues for accepting it as a more trustworthy memorial of the real agreement and transaction of the parties than the second receipt which was executed at a later date and after the supervention of events rendering it expedient or desirable to vary the terms of that agreement or transaction. Upon the evidence, appellant Corazon J. Vizconde was a mere guarantor, a solidary one to be sure, of the obligation assumed by Pilar A. Pagulayan to complainant Marylou J. Perlas for the return of the latter's ring or the delivery of its value. Whatever liability was incurred by Pagulayan for defaulting on such obligation — and this is not inquired into — that of Vizconde consequent upon such default was merely civil, not criminal. It was, therefore, error to convict her of estafa.

cause to be paid or become liable to pay, on account of or arising from the execution of the above mentioned Bond." On June 25, 1954, the surety advised the Secretary of Education that it was withdrawing and cancelling its bond. Copies of the letter were sent to the Bureau of Private Schools and to the Central Luzon Educational Foundation, Inc. It appears that on the date of execution of the bond, the Foundation was indebted to two of its teachers for salaries, to wit: to Remedios Laoag, in the sum of P685.64, and to H.B. Arandia, in the sum of P820.00, or a total of P1,505.64. Demand for the above

General Insurance and Surety Corporation vs. Republic of the Philippines & Central Luzon Educational Foundation, G.R. No. L-13873, January 31, 1963 (7 SCRA 4) Facts: Department of Education required the Central Luzon Educational Foundation, Inc., operating the Sison & Aruego Colleges, of Urdaneta, Pangasinan, Philippines an institution of learning to file a bond to guarantee the adequate and efficient administration of said school or college and the observance of all regulations prescribed by the Secretary of Education and compliance with all obligations, including the payment of the salaries of all its teachers and employees, past, present, and future, and the payment of all other obligations incurred by, or in behalf of said school. Thus, Central Luzon Educational Foundation, Inc. and the General Insurance and Surety Corporation posted in favor of the Department of Education a bond which holds them jointly and severally liable. On the same day, May 15, 1954, the Central Luzon Educational Foundation, Inc., Teofilo Sison and Jose M. Aruego executed an indemnity agreement binding themselves jointly and severally to indemnify the surety of "any damages, prejudices, loss, costs, payments, advances and expenses of whatever kind and nature, including attorney's fees and legal costs, which the COMPANY may, at any time sustain or incur, as well as to reimburse to said COMPANY all sums and amounts of money which the COMPANY or its representatives shall or may pay or

78

amount having been refused, the Solicitor General, in behalf of the Republic of the Philippines, filed a complaint for the forfeiture of the bond, in the Court of First Instance of Manila on July 11, 1956. The CFI rendered judgment holding the principal and the surety jointly and severally liable to the Government in the sum of P10,000.00 with legal interest from the date of filing of the complaint, until the sum is fully paid and ordering the principal to reimburse the surety whatever amount it may be compelled to pay to the Government by reason of the judgment, with costs against both principal and the surety. The CA affirmed with modifications.

Benjamin K. Gorospe, Presiding Judge, CFI of Misamis Oriental, Br. 1, G.R. No. L-45848, November 9, 1977 (80 SCRA 262) Facts: See Hong, the proprietor of Ororama Supermart in Cagayan de Oro City, sued the spouses Ernesto Ong and Conching Ong in the CFI of Misamis Oriental for the collection of the sum of P58,400 plus litigation expenses and attorney’s fees. See Hong asked for a

Issue: Whether the whole bond can be executed upon even though the actual liability is a smaller amount. Held: Yes. Affirmed. Ratio: It must be remembered that, by the terms of the bond, the surety guaranteed to the Government "compliance (by the Foundation) with all obligations, including the payment of the salaries of its teachers and employees, past, present and future, and the payment of all other obligations incurred by, or in behalf of said school." Now, it is not disputed that even before the execution of the bond, the Foundation was already indebted to two of its teachers for past salaries. From the moment, therefore, the bond was executed, the right of the Government to proceed against the bond accrued because since then, there has been violation of the terms of the bond regarding payment of past salaries of teachers at the Sison and Aruego Colleges. The fact that the action was filed only on July 11, 1956 does not militate against this position because actions based on written contracts prescribe in ten years. There is no provision that the bond will be cancelled unless the surety is notified of any claim and so no condition precedent has to be complied with by the Government before it can bring an action. Indeed, the provision of the bond in the NARIC and Santos cases that it would be cancelled ten days after its expiration unless notice of claim was given was inserted precisely because, without such a provision, the surety's liability for obligations arising while the bond was in force would subsist even after its expiration. There is nothing against public policy in forfeiting the bond for the full amount. The bond is penal in nature. Article 1226 of the Code states that in obligation with a penal clause, the penalty shall substitute the indemnity for damages and the payment of interests in case of noncompliance, if there is no stipulation to the contrary, and the party to whom payment is to be made is entitled to recover the sum stipulated without need of proving damages because one of the primary purposes of a penalty clause is to avoid such necessity. Towers Assurance Corporation vs. Ororama Supermart, its owner-proprietor, See Hong & Judge

79

writ of preliminary attachment which was granted. The deputy sheriff attached the properties of the Ong spouses in Valencia, Bukidnon and in Cagayan de Oro City. To lift the attachment, the Ong spouses filed a counterbond in the amount of P58,400 with Towers Assurance Corporation as surety. In that undertaking, the Ong spouses and Towers Assurance Corporation bound themselves to pay solidarily to See Hong the sum of P58,400. The lower court ruled for See Hong and ordered not only the Ong spouses but also their surety, Towers Assurance Corporation to pay solidarily to See Hong the sum of P58,400. A writ of execution was issued. Towers Assurance Corporation filed a petition for certiorari where it assailed the decision and the writ of execution.

of Agreement was executed by and between Slobec Realty and Development, Inc., represented by its President Santiago Rivera and the Castillo family. In this agreement, Santiago Rivera obliged himself to pay the Castillo family the sum of P70,000.00 immediately after the execution of the agreement and to pay the additional amount of P400,000.00 after the property has been converted into a subdivision. Rivera,

Issue: Whether the surety in an attachment counterbond is entitled to be heard before it can be held liable. Held: Yes. Reversed. Ratio: Under Section 17, Rule 47, in order that the judgment creditor might recover from the surety on the counterbond, it is necessary (1) that execution be first issued against the principal debtor and that such execution was returned unsatisfied in whole or in part; (2) that the creditor made a demand upon the surety for the satisfaction of the judgment; and (3) that the surety be given notice and a summary hearing in the same action as to his liability for the judgment under his counterbond. The first requisite mentioned above is not applicable to this case because Towers Assurance Corporation assumed a solidary liability for the satisfaction of the judgment. A surety is not entitled to the exhaustion of the properties of the principal debtor. But certainly, the surety is entitled to be heard before an execution can be issued against him since he is not a party in the case involving his principal. Notice and hearing constitute the essence of procedural due process. Buenaflor C. Umali, Mauricia M. Vda. De Castillo, Victoria M. Castillo, Bertilla C. Rada, Marietta C. Abañez, Leovina C. Jalbuena & Santiago M. Rivera vs. CA, Bormaheco Inc., & Philippine Machinery Parts Manufacturing Co., Inc., G.R. No. 89561, September 13, 1990 (189 SCRA 529) Facts: Santiago Rivera is the nephew of Mauricia Meer Vda. de Castillo. The Castillo family are the owners of a parcel of land located in Lucena City which was given as security for a loan from the Development Banks of the Philippines. For their failure to pay the amortization, foreclosure of the said property was about to be initiated. This problem was made known to Santiago Rivera, who proposed to them the conversion into subdivision of the four (4) parcels of land adjacent to the mortgaged property to raise the necessary fund. The idea was accepted by the Castillo family and to carry out the project, a Memorandum

80

armed with the agreement, approached Mr. Modesto Cervantes, President of defendant Bormaheco, and proposed to purchase from Bormaheco two (2) tractors Model D-7 and D-8. Subsequently, a Sales Agreement was executed on December 28, 1970. On January 23, 1971, Bormaheco, Inc. and Slobec Realty and Development, Inc., represented by its President, Santiago Rivera, executed a Sales Agreement over one unit of Caterpillar Tractor D-7. As shown by the contract, the price was P230,000.00 of which P50,000.00 was to constitute a down payment, and the balance of P180,000.00 payable in eighteen monthly installments. On the same date, Slobec, through Rivera, executed in favor of Bormaheco a Chattel Mortgage over the said equipment as security for the payment of the aforesaid balance of P180,000.00. As further security of the aforementioned unpaid balance, Slobec obtained from Insurance Corporation of the Phil. a Surety Bond, with ICP (Insurance Corporation of the Phil.) as surety and Slobec as principal, in favor of Bormaheco. The aforesaid surety bond was in turn secured by an Agreement of Counter- Guaranty with Real Estate Mortgage executed by Rivera as president of Slobec and Mauricia Meer Vda. de Castillo, Buenaflor Castillo Umali, Bertilla Castillo Rada, Victoria Castillo, Marietta Castillo and Leovina Castillo Jalbuena, as mortgagors and Insurance Corporation of the Philippines (ICP) as mortgagee. In this agreement, ICP guaranteed the obligation of Slobec with Bormaheco in the amount of P180,000.00. In giving the bond, ICP required that the Castillos mortgage to them the properties in question, namely, four parcels of land covered by TCTs in the name of the aforementioned mortgagors, namely TCT Nos. 13114, 13115, 13116 and 13117 all of the Register of Deeds for Lucena City. For violation of the terms and conditions of the Counter-Guaranty, the properties of the Castillos were foreclosed by ICP. As the highest bidder with a bid of P285,212.00, a Certificate of Sale was issued by the Provincial Sheriff of Lucena City and Transfer Certificates of Title over the subject parcels of land were issued by the Register of Deeds of Lucena City in favor of ICP. The mortgagors had one (1 ) year from the date of the registration of the certificate of sale, that is, until October 1,1974, to redeem the property, but they failed to do so. Consequently, ICP consolidated its ownership over the subject parcels of land through the requisite affidavit of consolidation of ownership dated October 29, 1974. Pursuant thereto, a Deed of Sale of Real Estate covering the subject properties was issued in favor of ICP. On April 10, 1975, Insurance Corporation of the Phil. (ICP) sold to Phil. Machinery Parts Manufacturing Co. (PM Parts) the four (4) parcels of land and by virtue of said conveyance, PM Parts transferred unto itself the titles over the lots in dispute so that said parcels of land are now covered by TCT Nos. T-24846, T-24847, T-24848 and T24849. Thereafter, PM Parts, through its President, Mr. Modesto Cervantes, sent a letter dated August 9,1976 addressed to plaintiff Mrs. Mauricia Meer Castillo requesting her and her children to vacate the subject

property, who (Mrs. Castillo) in turn sent her reply expressing her refusal to comply with his demands. On September 29, 1976, the heirs of the late Felipe Castillo, particularly plaintiff Buenaflor M. Castillo Umali as the appointed administratrix of the properties in question filed an action for annulment of title before the then Court of First Instance of Quezon and docketed thereat as Civil Case No. 8085. Thereafter, they filed an Amended Complaint on January 10,1980. On July 20, 1983, plaintiffs filed their Second Amended Complaint, impleading Santiago M. Rivera as a party plaintiff. They contended that all

81

the aforementioned transactions starting with the Agreement of Counter-Guaranty with Real Estate Mortgage, Certificate of Sale and the Deeds of Authority to Sell, Sale and the Affidavit of Consolidation of Ownership as well as the Deed of Sale are void for being entered into in fraud and without the consent and approval of the Court of First Instance of Quezon, (Branch IX) before whom the administration proceedings has been pending. The court declared the counter-guaranty, sales agreement, chattel mortgage, Certificate of Sale void for being fictitious, spurious, and without consideration. CA reversed.

the agent of ICP is, therefore, binding on Rivera. He is now estopped from questioning the validity of the suretyship contract. The surety bond was dated October 24, 1970. However, an annotation on the upper part thereof states: "NOTE: EFFECTIVITY DATE OF THIS BOND SHALL BE ON JANUARY 22, 1971." On the other hand, the Sales Agreement dated January 23, 1971 provides that the balance of P180,000.00 shall be payable in eighteen (18) monthly

Issue: Whether a surety who was not given a timely notice can be relieved of its liability. Whether a surety can be liable for a shorter period of time than the principal. Held: Yes. Yes. Affirmed with modifications. Ratio: There is absolute simulation, which renders the contract null and void, when the parties do not intend to be bound at all by the same. The basic characteristic of this type of simulation of contract is the fact that the apparent contract is not really desired or intended to either produce legal effects or in any way alter the juridical situation of the parties. The subsequent act of Rivera in receiving and making use of the tractor subject matter of the Sales Agreement and Chattel Mortgage, and the simultaneous issuance of a surety bond in favor of Bormaheco, concomitant with the execution of the Agreement of Counter-Guaranty with Chattel/Real Estate Mortgage, conduce to the conclusion that petitioners had every intention to be bound by these contracts. The occurrence of these series of transactions between petitioners and private respondents is a strong indication that the parties actually intended, or at least expected, to exact fulfillment of their respective obligations from one another. Neither will an allegation of fraud prosper in this case where petitioners failed to show that they were induced to enter into a contract through the insidious words and machinations of private respondents without which the former would not have executed such contract. To set aside a document solemnly executed and voluntarily delivered, the proof of fraud must be clear and convincing. We are not persuaded that such quantum of proof exists in the case at bar. The fact that it was Bormaheco which paid the premium for the surety bond issued by ICP does not per se affect the validity of the bond. Petitioners themselves admit in their present petition that Rivera executed a Deed of Sale with Right of Repurchase of his car in favor of Bormaheco and agreed that a part of the proceeds thereof shall be used to pay the premium for the bond. In effect, Bormaheco accepted the payment of the premium as an agent of ICP. The execution of the deed of sale with a right of repurchase in favor of Bormaheco under such circumstances sufficiently establishes the fact that Rivera recognized Bormaheco as an agent of ICP. Such payment to

82

installments. The Promissory Note executed by Slobec on even date in favor of Bormaheco further provides that the obligation shall be payable on or before February 23, 1971 up to July 23, 1972, and that non-payment of any of the installments when due shall make the entire obligation immediately due and demandable. It is basic that liability on a bond is contractual in nature and is ordinarily restricted to the obligation expressly assumed therein. We have repeatedly held that the extent of a surety's liability is determined only by the clause of the contract' of suretyship as well as the conditions stated in the bond. It cannot be extended by implication beyond the terms the contract. Fundamental likewise is the rule that, except where required by the provisions of the contract, a demand or notice of default is not required to fix the surety's liability. Hence, where the contract of suretyship stipulates that notice of the principal's default be given to the surety, generally the failure to comply with the condition will prevent recovery from the surety. There are certain instances, however, when failure to comply with the condition will not extinguish the surety's liability, such as a failure to give notice of slight defaults, which are waived by the obligee; or on mere suspicion of possible default; or where, if a default exists, there is excuse or provision in the suretyship contract exempting the surety or liability therefor, or where the surety already has knowledge or is chargeable with knowledge of the default. In the case at bar, the suretyship contract expressly provides that ICP shall not be liable for any claim not filed in writing within thirty (30) days from the expiration of the bond. In its decision dated May 25, 1987, the court a quo categorically stated that "(n)o evidence was presented to show that Bormaheco demanded payment from ICP nor was there any action taken by Bormaheco on the bond posted by ICP to guarantee the payment of plaintiffs obligation. There is nothing in the records of the proceedings to show that ICP indemnified Bormaheco for the failure of the plaintiffs to pay their obligation." The failure, therefore, of Bormaheco to notify ICP in writing about Slobec's supposed default released ICP from liability under its surety bond. Consequently, ICP could not validly foreclose that real estate mortgage executed by petitioners in its favor since it never incurred any liability under the surety bond. It cannot claim exemption from the required written notice since its case does not fall under any of the exceptions herein before enumerated. The liability of a surety is measured by the terms of his contract, and, while he is liable to the full extent thereof, such liability is strictly limited to that assumed by its terms. While ordinarily the termination of a surety's liability is governed by the provisions of the contract of suretyship, where the obligation of a surety is, under the terms of the bond, to terminate at a specified time, his obligation cannot be enlarged by an unauthorized extension thereof. This is an exception to the general rule that the obligation of the surety continues for the same

period as that of the principal debtor. It is possible that the period of suretyship may be shorter than that of the principal obligation, as where the principal debtor is required to make payment by installments. In the case at bar, the surety bond issued by ICP was to expire on January 22, 1972, twelve (12) months from its effectivity date whereas Slobec's installment payment was to end on July 23, 1972. Therefore, while ICP guaranteed the payment by Slobec of the balance of P180,000 00, such guaranty was valid only for and within twelve (12) months from the date of effectivity of the surety bond, or until January 22, 1972. Thereafter, from January 23, 1972 up to July 23, 1972, the liability of Slobec became an unsecured obligation. The

83

default of Slobec during this period cannot be a valid basis for the exercise of the right to foreclose by ICP since its surety contract had already been terminated. Besides, the liability of ICP was extinguished when Bormaheco failed to file a written claim against it within thirty (30) days from the expiration of the surety bond. Consequently, the foreclosure of the mortgage, after the expiration of the surety bond under which ICP as surety has not incurred any liability, should be declared null and void. Lastly, it has been held that where the guarantor holds property of the principal as collateral surety for his personal indemnity, to which he may resort only after payment by himself, until he has paid something as such guarantor neither he nor the creditor can resort to such collaterals. The Agreement of Counter-Guaranty with Chattel/Real Estate Mortgage states that it is being issued for and in consideration of the obligations assumed by the Mortgagee-Surety Company under the terms and conditions of ICP Bond No. 14010 in behalf of Slobec Realty Development Corporation and in favor of Bormaheco, Inc. There is no doubt that said Agreement of Counter-Guaranty is issued for the personal indemnity of ICP. Considering that the fact of payment by ICP has never been established, it follows, pursuant to the doctrine above adverted to, that ICP cannot foreclose on the subject properties.

respondent Phoenix from liability under its surety bond. Issue: Whether the increase in the indebtedness of the principal without the knowledge of the surety is such a material alteration that will completely discharge the surety from all liability. Held: Yes. Affirmed.

Philippine National Bank vs CA & the Philippine Phoenix Surety & Insurance, Inc., G.R. No. L-30937, January 21, 1987 (147 SCRA 273) Facts: Marino P. Rubin obtained from the Binalbagan Branch of petitioner Philippine National Bank a 1954-1955 sugar crop loan in the amount of P40,200.00, secured by a chattel mortgage executed by Rubin as debtor-mortgagor and Jose A. Campos as mortgagor. As additional security, private respondent Philippine Phoenix Surety and Insurance, Inc. issued Surety Bond No. 88 for P10,000.00 in favor of petitioner Bank. Liability under said bond was to expire one (1) year from the date thereof, unless within ten (10) days from its expiration, the surety is notified of any existing obligations thereunder. Three months later, petitioner Bank increased the loan from P40,200.00 to P56,800.00, without the knowledge and consent of private respondent Phoenix. When Rubin failed to liquidate said loan, petitioner Bank demanded of private respondent Phoenix that it make good its undertaking as surety for Rubin up to the stated amount of P10,000.00. Private respondent Phoenix denied liability, resulting in petitioner instituting a collection case against Rubin, his guarantors and sureties, including private respondent Phoenix. The trial court ruled in favor of petitioner Bank, ordering, among others, private respondent Phoenix to pay petitioner the sum of P10,000 upon failure of the principal debtor Rubin and his guarantors to pay the judgment amount. On appeal, the Court of Appeals modified the trial court's decision by exonerating private

84

Ratio: The discharge of private respondent Phoenix from liability under Surety Bond No. 88 is correct. Contrary to petitioner's thinking, the contract in question is not a continuing chattel mortgage for which consent and knowledge of the surety is unnecessary for an increase in the amount of the principal obligation. The contract of chattel mortgage itself fixed the credits, loans, overdrafts, etc. and other valuable consideration received thereunder at Forty Thousand Two Hundred Pesos [P40,200.00]. The undertaking under said contract was "for the purpose of securing their payment including the interest thereon, the cost of collection and other obligations owing by the Debtor-Mortgagor to the mortgagee, whether direct or indirect, principal or secondary as appears in the accounts, books and records of the mortgagee. Applying the principle of ejusdem generis, the term "other obligations" must be limited to such as are of the same nature as interest and costs of collection. The term cannot be enlarged to include future additional advances to debtor-mortgagor, much less be interpreted as a previous authorization from the surety to increase the principal amount fixed in the contract. The increase in the indebtedness from P40,200.00 to P56,800.00 is material and prejudicial to private respondent Phoenix. While the liability of private respondent under the bond is limited to P10,000.00, the increase in the amount of the debt proportionally decreased the probability of the principal debtor being able to liquidate the debt; thus, increasing the risk undertaken by the surety to answer for the failure of the debtor to pay. "A material alteration of the principal contract, effected by the creditor and principal debtor without the knowledge and consent of the surety, completely discharges the surety from all liability in the contract of suretyship."

but the latter has refused and refuses to make payment; and PNB also made demand on Plaridel Surety & Insurance for said payment, but the latter refused and refuses to make payment. A complaint was filed by PNB against Macapanga Producers Inc. and Plaridel Surety and Insurance Co. Plaridel Surety & Insurance moved to dismiss the complaint for failure to state cause of action, alleging that it is a guarantor and as such is responsible only if Macapanga Producers has no property or assets to pay its obligation as lessee. Plaintiff opposed the motion calling attention to the provision of the performance bond in

Philippine National Bank vs. Macapanga Producers Inc., Plaridel Surety & Insurance Co., G.R. No. L-8349, May 23, 1956 (99 Phil 180) Facts: On December 26, 1952, Luzon Sugar Company leased a sugar mill located at Calumpit, Bulacan to Macapanga Producers beginning with the crop year 195253 at a minimum annual royalty of P50,000, which shall be a lien on the sugar produced by the lessee and shall be paid before sale or removal of sugar from warehouse. Macapanga Producers, as principal, and Plaridel Surety & Insurance, as surety, executed and delivered to PNB a performance bond in the amount of P50,000 for the full and faithful compliance by Macapanga Producers of all terms and conditions of the lease. On December 21, 1953, Luzon Sugar assigned to PNB the payment due from Macapanga Producers in the sum of P50,000, representing royalty for the lease of the sugar mill for the crop year 1952-53. PNB notified Macapanga Producers and Plaridel Surety & Insurance of said assignment. PNB had demanded from Macapanga Producers payment of said royalty of P50,000,

85

which Macapanga Producers and Plaridel Surety & Insurance, the former as principal and the latter as surety, agreed to be held and firmly bound unto Luzon Sugar in the penal sum of P50,000, "for the payment of which, well and truly be made, we bind ourselves, our heirs, executors, administrators, successors, and assigns, jointly and severally." Plaintiff contended that, as Plaridel Surety & Insurance bound itself solidarily with Macapanga Producers, it became a surety in accordance with Article 2047, par. 2 of the Civil Code. The trial court dismissed the complaint against Plaridel Surety & Insurance and subsequently denied a motion to reconsider the order of dismissal.

Company. As early as 1933, Laureano Marquez had agreed to pay Fortunato Resurreccion's indebtedness of P5,000 to the Luzon Surety Company by way of satisfaction of his own indebtedness to Fortunato Resurreccion in the same amount. Laureano Marquez signed a document where he bound himself as follows: "In the event an action is presented by the Luzon Surety Company against Fortunato Resurreccion for the recovery of the said indebtedness and the interests thereon, I, Laureano Marquez, obligate myself to

Issue: Whether assignment of a payment without the knowledge or consent of the surety is a material alteration that could extinguish the surety. Held: No. Reversed. Ratio: An assignment without knowledge or consent of the surety is not a material alteration of the contract, sufficient to discharge the surety (Stearns Law of Suretyship, Elder, fifth edition, p. 113.) There is, besides, no allegation in the complaint, or provision in the deed of assignment, or any change therein that makes the obligation of Plaridel Surety & Insurance more onerous than that stated in the performance bond. Such assignment did not, therefore, release the Plaridel Surety & Insurance from its obligation under the surety bond. It is lastly contended that as plaintiff or the lessor had a lien in the sugar produced, and failed to proceed against it or enforce such lien, Plaridel Surety & Insurance was released thereby. There is no allegation to this effect in the complaint, that lessor or plaintiff ever had possession or control of the sugar, or ever waived or released the lien thereon. Appellee cannot raise the issue in a motion to dismiss. Norberto L. Dilag, as administrator of the intestate estate of Laureano Marquez, vs. The Legal Heirs of Fortunato Resurreccion, et al., G.R. No. 48941, May 6, 1946 (76 Phil 650) Facts: Before the year 1936, Laureano Marquez was indebted to Fortunato Resurreccion in the sum of P5,000 as the balance of the purchase price of a parcel of land which the former had bought and received from the latter. Fortunato Resurreccion, in turn, was indebted to the Luzon Surety Company in the same amount, which was secured by a mortgage on three parcels of land, one of which was that bought by Laureano Marquez from him. The formal deed of sale from Resurreccion to Marquez was to have been executed after Marquez shall have fully paid the purchase price and after Resurreccion shall have secured the cancellation of the mortgage by the Luzon Surety

86

indemnify Fortunato Ressurreccion for all the damages he may suffer in case the parcels of land mortgaged to the Luzon Surety Company are sold at public auction, including the fees of the attorneys of Fortunato Ressurrecion as well as in the action that Fortunato Resurreccion in the suit brought by the Luzon Surety Company as well as in the action that Fortunato Resurreccion may bring against me in relation to this agreement." Laureano Marquez failed to pay the indebteness of Fortunato Resurreccion to the Luzon Surety Company, and the latter foreclosed judicially the mortgaged executed in its favor by Fortunato Resurreccion. On April 25, 1936, pending the foreclosure sale of the Company, Laureano Marquez executed and delivered to Fortunato Resurreccion another document. Since Laureano Marquez again did not fulfill his promise, the mortgaged properties were sold at public auction and were totally lost by Fortunato Resurreccion. Resurreccion commenced the present action against Laureano Marquez to recover the value of the lost properties amounting to P16,500, with legal interest thereon from the date of the filing of the complaint, plus P2,000 as indemnity for the rents of the lands sold and P1,000 as attorney's fees, and to foreclose the mortgage embodied in said instrument. The CFI ruled for the plaintiff. The CA affirmed.

the only party to that contract and the only one entitled to sue thereon. The obligee is as much a party to the contract as the obligor, for there can be no obligor without an obligee; and as a matter of course it is the obligee who has the right to sue on and enforce the obligation. The petitioner assails the judgment against him insofar as it authorizes the sale at public auction of five parcels of land which were not specifically described in the mortgage deed. Those five parcels are said to have been acquired by Laureano Marquez

Issue: Whether a property that is subsequently acquired can be the subject of a mortgage. Held: No. Affirmed with modifications. Ratio: The petitioner contends that Fortunato Resurreccion cannot be granted damages caused by the loss of two of the three parcels of land mortgaged to the Luzon Surety Company because they did not belong to Fortunato Resurreccion but to Emiliana Resurreccion and the children of Vicente Platon. He contends that it was only the said owners of those lands who could have brought the present action. This contention runs counter to the provision of section 3 of Rule 3 of the Rules of Court, which says that a party with whom or in whose name a contract has been made for the benefit of another may sue or be sued without joining the party for whose benefit the action is presented or defended. We do not think that the word "contract" used in section 3 of Rule 3 refers exclusively to a bilateral contract. It obviously refers to any contract — bilateral or unilateral — enforcible in court. The rule in question refers to a suit by or against "a party with whom or in whose name a contract has been made for the benefit of another. Article 1254 of the Civil Code says that a contract exists from the moment one or more persons consent to be bound with respect to another or others to deliver something or to render some service. A deed of sale or mortgage is usually a unilateral contract in the sense that only the vendor or mortgagor signs it. Likewise a promissor note is a unilateral contract in the sense that only the promissor or maker signs it. But these do not mean that the signer is

87

subsequent to the execution of the document. In the fifth clause of said document Laureano Marquez stipulated that inasmuch as the five parcels of land described in the fourth clause were not sufficient to cover all his obligations in favor of Fortunato Resurreccion, he also constituted a mortgage in favor of the latter and his assignees on any other property he then might have and on those he might acquire in the future. Did such a stipulation constitute a valid mortgage on the five other parcels of land which Laureano Marquez subsequently acquired? We do not think so. In the first place, Laureano Marquez could not legally mortgage any property he did not yet own. In the second place, in order that a mortgage may be validly constituted, the instrument by which it is created must be recorded in the registry of deeds and insofar as the additional five parcels of land are concerned, the registration of the document did not affect and could not have affected them because they were not specifically described therein. The contention of the respondents that after the institution of the present action notice of lis pendens was filed in the registry of deeds affecting the said five additional parcels of land, merely serves to emphasize the fact that there was no mortgage thereon; otherwise there would have been no necessity for any notice of lis pendens.

favor of Atlantic to secure payment of the unpaid balance of the sale price of the lumber concession amounting to the sum of $450,000.00. Both deeds contained the following provision extending the mortgage lien to properties to be subsequently acquired — referred to hereafter as "after acquired properties" — by the mortgagor: "All property of every nature and description taken in exchange or replacement, and all buildings, machinery, fixtures, tools, equipment and other property which the Mortgagor may hereafter acquire, construct, install, attach, or use in, to, upon, or in connection with the

People’s Bank & Trust Co. & Atlantic, Gulf & Pacific Co. of Manila vs. Dahican Lumber Company, Dahican American Lumber Corporation, & Connell Bros. Co. (Phil), G.R. No. L-17500, May 16, 1967 (20 SCRA 84) Facts: On September 8, 1948, Atlantic Gulf & Pacific Company of Manila, a West Virginia corporation licensed to do business in the Philippines, sold and assigned all its right in the Dahican lumber concession to Dahican Lumber Company (Dalco) for the total sum of $500,000.00 of which only the amount of $50,000.00 was paid. Thereafter, to develop the concession, DALCO obtained various loans from the People's Bank & Trust Company (Bank) amounting, as of July 13, 1950, to P200,000.00. In addition, DALCO obtained, through the Bank, a loan of $250,000.00 from the Export-Import Bank of Washington D.C., evidenced by five promissory notes of $50,000.00 each, maturing on different dates, executed by both DALCO and the Dahican American Lumber Corporation (Damco), a foreign corporation and a stockholder of DALCO, all payable to the BANK or its order. As security for the payment of the abovementioned loans, DALCO executed in favor of the Bank— the latter acting for itself and as trustee for the Export, Import Bank of Washington D. C. — a deed of mortgage covering five parcels of land situated in the province of Camarines Norte, together with all the buildings and other improvements existing thereon and all the personal properties of the mortgagor located in its place of business in the municipalities of Mambulao and Capalonga, Camarines Norte. On the same date, DALCO executed a second mortgage on the same properties in

88

premises, shall immediately be and become subject to the lien of this mortgage in the same manner and to the same extent as if now included therein, and the Mortgagor shall from time to time during the existence of this mortgage furnish the Mortgagee with an accurate inventory of such substituted and subsequently acquired property." Both mortgages were registered in the Office of the Register of Deeds of Camarines Norte. In addition thereto DALCO and DAMCO pledged to the BANK 7,296 shares of stock of DALCO and 9,286 shares of DAMCO to secure the same obligations. 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 assigned to the former its credit and the first mortgage securing it. Subsequently, the BANK gave DALCO and DAMCO up to April 1, 1953 to pay the overdue promissory note. After July 13, 1950 — the date of execution of the mortgages mentioned above — DALCO purchased various machineries, equipment, spare parts and supplies in addition to, or in replacement of some of those already owned and used by it on the date aforesaid. Pursuant to the provision of the mortgage deeds quoted heretofore regarding "after acquired properties", the BANK requested DALCO to submit complete lists of said properties but the latter failed to do so. In connection with these purchases, there appeared in the books of DALCO as due to Connell Bros. Company (Philippines) — a domestic corporation who was acting as the general purchasing agent of DALCO — the sum of P452,860.55 and to DAMCO, the sum of P2,151,678.34. On December 16, 1952, the Board of Directors of DALCO in a special meeting called for the purpose, passed a resolution agreeing to rescind the alleged sales of equipment, spare parts and supplies by CONNELL and DAMCO to it. Thereafter, the corresponding agreements of rescission of sale were executed between DALCO and DAMCO, on the one hand, and between DALCO and CONNELL, on the other. On January 23, 1953, the BANK, in its own behalf and that of ATLANTIC, demanded that said agreements be cancelled but CONNELL and DAMCO refused to do so. As a result, on February 12, 1953, ATLANTIC and the BANK, commenced foreclosure proceedings in the Court of First Instance of Camarines Norte against DALCO and DAMCO. On the same date they filed an ex-parte application for the appointment of a Receiver and/or for the issuance of a writ of preliminary injunction to restrain DALCO from removing its properties. The court granted both remedies and appointed George U. Evans as Receiver. Upon defendants' motion, however, the court, in its order of February 21, 1953, discharged the Receiver. CONNELL filed a motion for intervention alleging that it was the owner and possessor of some of the equipments, spare parts and supplies which DALCO had acquired subsequent to the execution of the mortgages sought to be foreclosed and which plaintiffs claimed were

covered by their lien. In its order of March 18, 1953 the Court granted the motion, as well as plaintiffs' motion to set aside the order discharging the Receiver. Consequently, Evans was reinstated. Upon motion of all the parties, the Court ordered the sale of all the machineries, equipment and supplies of DALCO, and the same were subsequently sold for a total consideration of P175,000.00 which was deposited in court pending final determination of the action. By a similar agreement one half (P87,500.00) of this amount was considered as representing the proceeds obtained from the sale of the "undebated

89

properties" (those not claimed by DAMCO and CONNELL), and the other half as representing those obtained from the sale of the "after acquired properties". The court ruled against DALCO and ordered a proportionate sharing among the creditors of the proceeds of the sale of DALCO’s properties. All parties appealed. Issue: Whether mortgage of after-acquired properties is valid. Whether financiers have a superior lien over mortgagors.

disputed in the case at bar that the "after acquired properties" were purchased by DALCO in connection with, and for use in the development of its lumber concession and that they were purchased in addition to, or in replacement of those already existing in the premises on July 13, 1950. In law, therefore, they must be deemed to have been immobilized, with the result that the real estate mortgages involved herein — which were registered as such

Held: Yes. No. Modified. Ratio: Under the fourth paragraph of both deeds of mortgage, it is crystal clear that all property of every nature and description taken in exchange or replacement, as well as all buildings, machineries, fixtures, tools, equipments, and other property that the mortgagor may acquire, construct, install, attach, or use in, to, upon, or in connection with the premises — that is, its lumber concession — "shall immediately be and become subject to the lien" of both mortgages in the same manner and to the same extent as if already included therein at the time of their execution. As the language thus used leaves no room for doubt as to the intention of the parties, We see no useful purpose in discussing the matter extensively. Suffice it to say that the stipulation referred to is common, and We might say logical, in all cases where the properties given as collateral are perishable or subject to inevitable wear and tear or were intended to be sold, or to be used — thus becoming subject to the inevitable wear and tear — but with the understanding — express or implied — that they shall be replaced with others to be thereafter acquired by the mortgagor. Such stipulation is neither unlawful nor immoral, its obvious purpose being to maintain, to the extent allowed by circumstances, the original value of the properties given as security. Indeed, if such properties were of the nature already referred to, it would be poor judgment on the part of the creditor who does not see to it that a similar provision is included in the contract. Conceding, on the other hand, that it is the law in this jurisdiction that, to affect third persons, a chattel mortgage must be registered and must describe the mortgaged chattels or personal properties sufficiently to enable the parties and any other person to identify them, We say that such law does not apply to this case. Article 415 does not define real property but enumerates what are considered as such, among them being machinery, receptacles, instruments or replacements intended by the owner of the tenement for an industry or works which may be carried on in a building or on a piece of land, and shall tend directly to meet the needs of the said industry or works. On the strength of the above-quoted legal provisions, the lower court held that inasmuch as "the chattels were placed in the real properties mortgaged to plaintiffs, they came within the operation of Art. 415, paragraph 5 and Art. 2127 of the new Civil Code. It is not

90

— did not have to be registered a second time as chattel mortgages in order to bind the "after acquired properties" and affect third parties. Now to the question of whether or not DAMCO and CONNELL have rights over the "after acquired properties" superior to the mortgage lien constituted thereon in favor of plaintiffs. It is defendants' contention that in relation to said properties they are "unpaid sellers"; that as such they had not only a superior lien on the "after acquired properties" but also the right to rescind the sales thereof to DALCO. This contention — it is obvious — would have validity only if it were true that DAMCO and CONNELL were the suppliers or vendors of the "after acquired properties". According to the record, plaintiffs did not know their exact identity and description prior to the filing of the case at bar because DALCO, in violation of its obligation under the mortgages, had failed and refused therefore to submit a complete list thereof. The report of the auditors and its annexes show that neither DAMCO nor CONNELL had supplied any of the goods of which they respectively claimed to be the unpaid seller; that all items were supplied by different parties, neither of whom appeared to be DAMCO or CONNELL; that, in fact, CONNELL collected a 5 per cent service charge on the net value of all items it claims to have sold to DALCO and which, in truth, it had purchased for DALCO as the latter's general agent; that CONNELL had to issue its own invoices in addition to those of the real suppliers in order to collect and justify such service charge. Taking into account the above circumstances together with the fact that DAMCO was a stockholder and CONNELL was not only a stockholder but the general agent of DALCO, their claim to be the suppliers of the "after acquired properties" would seem to be preposterous. The most that can be claimed on the basis of the evidence is that DAMCO and CONNELL probably financed some of the purchases. But if DALCO still owes them any amount in this connection, it is clear that, as financiers, they can not claim any right over the "after acquired properties" superior to the lien constituted thereon by virtue of the deeds of mortgage under foreclosure. Indeed, the execution of the rescission of sales mentioned heretofore appears to be but a desperate attempt to better or improve DAMCO and CONNELL's position by enabling them to assume the role of "unpaid suppliers" and thus claim a vendor's lien over the "after acquired properties". The attempt, of course, is utterly ineffectual, not only because they are not the "unpaid sellers" they claim to be but also because there is abundant evidence in the record showing that both DAMCO and CONNELL had known and admitted from the beginning that the "after acquired properties" of DALCO were meant to be included in the first and second mortgages under foreclosure. As regard the proceeds obtained from the sale of the "after acquired properties" and the "undebated properties", it is clear, in view of our opinion sustaining the validity of the mortgages in relation thereto, that said proceeds should be awarded exclusively to the plaintiffs in

payment of the money obligations secured by the mortgages under foreclosure. Luzon Lumber & Hardware Company, Inc. vs. Manuel Quiambao, Virginia Santiago, & Rehabilitation Finance Corporation, G.R. No. L-5638, March 30, 1954 (94 Phil 663)

91

Facts: Manuel Quiambao and his wife Virginia Santiago, owners of three lots in the province of Tarlac covered by Certificates of Title Nos. 22607, 4217 and 4218, mortgaged the said lots on July 20, 1948, in favor of the Rehabilitation Finance Corporation (RFC) to secure the payment of a loan in the amount of P37,000 which sum was to be spent for the construction of two buildings, one for a hotel and the other for residence. The mortgage was registered on September 13th of the same year. The two buildings were subsequently constructed on the lot covered by Certificate of Title No. 22607. Upon violation of the terms of the mortgage, the RFC foreclosed the same and, in the auction sale, said RFC, as highest bidder, was awarded the mortgaged properties for the total sum of P31,000 followed by the issuance of the corresponding Transfer Certificates of Title. The hotel and residence buildings were valued at P18,000 and P4,000, respectively. In the edification of the two buildings, the spouses bought on credit construction materials valued at about P7,000 from the plaintiff Luzon Lumber & Hardware Co. Said building materials were furnished by the lumber company between October 1948 and March 1949. Only P3,500 of this amount was paid, leaving an unpaid balance of P3,456.50. To recover this balance including interests and attorney's fees the lumber company filed this suit against the spouses, the complaint being later amended so as to include the RFC as party defendant. According to the RFC said amendment was made about a week after the auction sale of the foreclosed properties. After hearing, the Court of First Instance of Tarlac rendered judgment ordering the defendant spouses Manuel and Virginia to pay to the plaintiff lumber company the sum of P3,456.49 with legal interests and in default of such payment by them, the RFC was ordered to pay to plaintiff out of the proceeds of the sale of the hotel and the house, the said sum of P3,456.49 together with the corresponding legal interests thereon. The RFC is appealing from that decision.

mentioned in paragraphs 3 and 5. Refectionary credit is primarily an indebtedness incurred in the repair or reconstruction of something and does not ordinarily include an entirely new work, but that Spanish jurisprudence appears to have sanctioned in certain cases this broader view to include a new work or construction. The word "refaccionario" from which come the English translation of "refectionary" is derived from the Latin verb "refacio", "refacere",

Issue: Whether a registered mortgage is preferred over a refectionary credit on construction materials. Held: Yes. Reversed. Ratio: Art. 2242 (claims, mortgages & liens that constitute encumbrance over specific immovable property) and 2253 (effectivity of law & non-impairment of vested rights clause) of the New Civil Code may not be applied in the instant case for the reason that the credit of the plaintiff is not a new right or one declared for the first time, a condition required by Article 2253 of the new Civil Code for its enforcement and application, because said right was already provided for by article 1923 of the old Civil Code particularly paragraphs 3 and 5. The question now to be decided is whether the furnishing of lumber and building materials by the plaintiff for the construction of the two buildings of the spouses falls under refection credit

92

meaning "rehacer" which implies the idea of reconstruction or repair for reason of destruction or deterioration. As already said, that was the original idea of the word "refectionary". The liberal interpretation of the refectionary credit to include new construction is upheld in the ENCICLOPEDIA JURIDICA ESPAÑOLA. And this view is shared by our Code Commission which prepared the new Civil Code. In its Report on the proposed Civil Code of the Philippines (now our new Civil Code) which went into effect in 1950, referring to article 2242 of the new Code, it said that the new encumbrances in said article are Nos. 2, 3, 6, 7 and 9, meaning to say that paragraph 4 referring to claims of furnishers of materials used in the construction, reconstruction or repair of building which as invoked by the plaintiff and applied by the trial court is not a new provision, clearly implying that it was already provided for in article 1923, paragraphs 3 and 5 under refectionary credits. This liberal view and interpretation of refectionary credit is in consonance with principles of justice and fairness, for there seems to be no valid reason why one furnishing material for purposes of repair or reconstruction should be given preference while another furnishing material on new construction is not given the same consideration. With respect to the holding of the trial court that in point of time the credit of the plaintiff enjoys priority over that of the RFC for the reason that according to said court the lien of the plaintiff vested when the materials were furnished while the mortgage credit of the RFC vested only when the buildings were constructed, we must not forget that according to the facts of the case the loan of P37,000 was given to the spouses to construct the two buildings, and that under the terms of the deed of mortgage, not only the lots but also all the improvements now existing or which may hereafter be constructed on the mortgaged property are included. In other words, the mortgage in favor of the defendant RFC not only enjoyed the presumption provided by law that a mortgage includes all improvements on the land mortgaged when the obligation falls due, but there was an express stipulation to include all buildings and improvements thereafter to be constructed on the mortgaged premises. This lien on all improvements vested on the day and hour the mortgage was registered - about one month before plaintiff began furnishing materials for construction. One of the purposes of the creation of the RFC was to finance the construction and reconstruction of buildings for purposes of rehabilitation. We may even take judicial notice of the fact that the security of the loans from the RFC is based mainly on the buildings and constructions themselves, and that to assure that the loans are spent for the said construction, the money is sometimes given on the installment basis, that is, so much money is released by the RFC as the construction progresses. This is to show the intimate relation between an RFC loan and the construction financed by it, for purposes of security. In the discussion of this case among the members of this Tribunal, there was a suggestion, even a contention that the credit of the plaintiff herein might be made to fall

under article 1922 of the old Civil Code (preferred encumbrances over personal property). But we believe that the two buildings in question constructed partly with building materials furnished by the plaintiff may not be considered as personal property under article 1922. Once said building materials were used in the construction and had become part of the building, they lost their classification as personal property and become real property. It is true that in the case of Unson vs. Orquije, et al., 50 Phil., 160, this Tribunal applied the provision of article 1922, paragraph 1, referring to the purchase

93

price of personal property in the possession of the debtor (machinery and grinder sold to the Capiz Central and installed in its building), the reason being that said machinery and grinder did not lose their form and substance and they preserved their identity. Besides, they could easily be removed from the building of the Central. May the same thing be said in the present case as regards the building materials which went into the construction of the hotel and the house? The answer can be given only in the negative. Said materials had already become part of the two buildings either as posts, frames, floor, partition, roof, etc. They have lost their form and identity and had become part of the buildings which are real property. There is another circumstance in this case which greatly weakens plaintiff's claim. While as already stated, appellant RFC's mortgage which included the two buildings in question was recorded in September 1948, thus serving as notice to third parties including the plaintiff, the latter began furnishing building materials for the construction of the two buildings only in October 1948, that is the month following, and what is more, the evidence fails to show that it was ever recorded in the Registry of Deeds, so that said refection credit comes not under paragraph 3 of article 1923 of the old Civil Code, as does the RFC mortgage, but under paragraph 5 of the same article under unregistered and unrecorded refection credits.

payment of which was secured by another real estate mortgage executed by spouses Marcial See and Lilian Tan in favor of said bank over the same realty. In December 1980, the three (3) loans with an aggregate amount of P1,000,000.00 were re-structured and consolidated into one (1) loan and Ajax Marketing and Development Corporation, represented by Antonio Tan as Board Chairman/President and in his personal capacity as solidary co-obligor, and Elisa Tan as VicePresident/Treasurer and in her personal capacity as solidary co-obligor, executed a Promissory Note.

Ajax Marketing & Development Corporation, Antonio Tan, Elisa Tan Yee, & Sps. Marcial See & Lilian Tan vs. CA, Metropolitan Bank & Trust Company, & the Sheriff of Manila, G.R. No. L-118585, September 14, 1995 (248 SCRA 222) Facts: Ylang-Ylang Merchandising Company, a partnership between Angelita Rodriguez and Antonio Tan, obtained a loan in the amount of P250,000.00 from the Metropolitan Bank and Trust Company, and to secure payment of the same, spouses Marcial See and Lilian Tan constituted a real estate mortgage in favor of said bank over their property in the District of Paco, Manila. The mortgage was annotated at the back of the title. Subsequently, after the partnership had changed its name to Ajax Marketing Company albeit without changing its composition, it obtained a loan in the sum of P150,000.00 from Metropolitan Bank and Trust Company. Again to secure the loan, spouses Marcial See and Lilian Tan executed in favor of said bank a second real estate mortgage over the same property. On February 19, 1979, the partnership (Ajax Marketing Company) was converted into a corporation denominated as Ajax Marketing and Development Corporation, with the original partners (Angelita Rodriguez and Antonio Tan) as incorporators and three (3) additional incorporators, namely, Elisa Tan, the wife of Antonio Tan, and Jose San Diego and Tessie San Diego. Ajax Marketing and Development Corporation obtained from Metropolitan Bank and Trust Company a loan of P600,000.00, the

94

Due to non-payment, the bank extrajudicially foreclosed the mortgaged property. A case was filed with the trial court whereby the debtors contended that a novation occurred when their three (3) loans which are all secured by the same real estate property were consolidated into a single loan of P1 million under a Promissory Note, thereby extinguishing their monetary obligations and releasing the mortgaged property from liability. The trial court upheld the foreclosure. The CA affirmed.

including their renewals or extensions with the principals fixed at P600,000.00, P150,000.00, and P250,000.00. The promissory note merely restructured and renewed the three previous loans to expediently make the loans current. There was no change in the object of the prior obligations. The consolidation of the three loans, contrary to petitioners' contention, did not release the mortgaged real estate property from any liability because the mortgage annotations all remained uncancelled, thus indicating the continuing subsistence of the real estate-mortgages.

Issue: Whether a real estate mortgage can cover future debts. Held: Yes. Affirmed. Ratio: Basic principles on novation need to be stressed at the outset. Novation is the extinguishment of an obligation by the substitution or change of the obligation by a subsequent one which extinguishes or modifies the first, either by changing the object or principal conditions, or, by substituting another in place of the debtor, or by subrogating a third person in the rights of the creditor. Novation, unlike other modes of extinction of obligations, is a juridical act with a dual function, namely, it extinguishes an obligation and creates a new one in lieu of the old. It can be objective, subjective, or mixed. Objective novation occurs when there is a change of the object or principal conditions of an existing obligation while subjective novation occurs when there is a change of either the person of the debtor, or of the creditor in an existing obligation. When the change of the object or principal conditions of an obligation occurs at the same time with the change of either in the person of the debtor or creditor a mixed novation occurs. The well settled rule is that novation is never presumed. Novation will not be allowed unless it is clearly shown by express agreement, or by acts of equal import. Thus, to effect an objective novation it is imperative that the new obligation expressly declare that the old obligation is thereby extinguished, or that the new obligation be on every point incompatible with the new one. In the same vein, to effect a subjective novation by a change in the person of the debtor it is necessary that the old debtor be released expressly from the obligation, and the third person or new debtor assumes his place in the relation. There is no novation without such release as the third person who has assumed the debtor's obligation becomes merely a codebtor or surety. The attendant facts herein do not make a case of novation. There is nothing in the records to show the unequivocal intent of the parties to novate the three loan agreements through the execution of a promissory note. The provisions of the promissory note yield no indication of the extinguishment of, or an incompatibility with, the three loan agreements secured by the real estate mortgages. The provisions of the real estate mortgage show that petitioners agreed to apply the real estate property to secure obligations that they may thereafter obtain

95

Neither can it be validly contended that there was a change or substitution in the persons of either the creditor (Metrobank) or more specifically the debtors (petitioners) upon the consolidation of the loans. The bare fact of petitioner's conversion from a partnership to a corporation, without sufficient evidence, either testimonial or documentary, that they were expressly released from their obligations, did not make petitioner AJAX, with its new corporate personality, a third person or new debtor within the context of a subjective novation. If at all, petitioner AJAX only became a co-debtor or surety. Without express release of the debtor from the obligation, any third party who may thereafter assume the obligation shall be considered merely as co-debtor or surety. Novation arising from a purported change in the person of the debtor must be clear and express because, to repeat, it is never presumed. Clearly then, from the aforediscussed points, neither objective nor subjective novation occurred here. An action to foreclose a mortgage is usually limited to the amount mentioned in the mortgage, but where on the four corners of the mortgage contracts, as in this case, the intent of the contracting parties is manifest that the mortgaged property shall also answer for future loans or advancements then the same is not improper as it is valid and binding between the parties.

supporting a contract, even if such cause is not stated therein. This presumption appellants cannot overcome by a simple assertion of lack of consideration. Especially may not the presumption be so lightly set aside when the contract itself states that consideration was given, and the same has been reduced into a public instrument with all due formalities and solemnities as in this case.

Paz Samanilla vs. Cenen A. Cajucom, et al., G.R. No. L13683, March 28, 1960 (107 Phil 432) Facts: The Cajucoms had executed in Samanilla’s favor, on December 20, 1955, a real estate mortgage over their rights and participation on the parcel of land covered by Original Certificate of Title No. O-966 to secure a loan of P10,000. Sometime in February, 1956, the Cajucoms borrowed the title from her on the excuse that they needed it to segregate from the land the portion claimed by other persons. Thereafter, Samanilla asked for the return of the title so that she could register her mortgage, but the Cajucoms refused. Samanilla filed a petition against the Cajucoms. They opposed the petition, claiming that the mortgage in question was void ab initio for want of consideration, and that the issues should be litigated in an ordinary civil action. The court found the petition well-taken and ordered the Cajucoms to surrender their title either to the Register of Deeds or to the Court. From this order, the Cajucoms appealed. Issue: Whether a mortgage which has not been registered is valid. Held: Yes. Affirmed. Ratio: The appeal has no merit. Appellants' sole objection to the registration of the deed of mortgage is that the same was executed without any consideration. But there is a legal presumption of sufficient cause or consideration

96

Appellants assert that they cannot be compelled to surrender their title for registration of the mortgage in question until they are given an opportunity to show its invalidity in an ordinary civil action, because registration is an essential element of a real estate mortgage and the surrender of their title would complete this requirement of registration. The argument is fallacious, for a mortgage, whether registered or not, is binding between the parties, registration being necessary only to make the same valid against third persons (Art. 2125, New Civil Code). In other words, registration only operates as a notice of the mortgage to others, but neither adds to its validity nor convert an invalid mortgage into a valid one between the parties. Appellants still have the right to show that the mortgage in question is invalid for lack of consideration in an ordinary action and there ask for the avoidance of the deed and the cancellation of its registration. But until such action is filed and decided, it would be too dangerous to the rights of the mortgagee to deny registration of her mortgage, because her rights can so easily be defeated by a transfer or conveyance of the mortgaged property to an innocent third person. If the purpose of registration is merely to give notice, the questions regarding the effect or invalidity of instruments are expected to be decided after, not before, registration. It must follow as a necessary consequence that registration must first be allowed and validity or effect litigated afterwards.

deeds, in lieu thereof, to register the certified complete copy of said document which he then and there presented with a view to the annotation of the mortgage in his favor on the certificates of title to be issued in the name of Feliciano Basa, Jr. The register of deeds refused to accede to said request of Attorney Gonzalez on the ground that Attorneys Javier & Javier, representing Feliciano Basa Jr., refused to grant him authority to annotate said mortgage on the certificates of title to be issued in the name of Basa, and that since a mortgage is presumed to be a voluntary transaction

Antonio Gonzalez vs. Feliciano Basa, Jr. & Pilar Lopez de Basa, G.R. No. 48695, September 30, 1942 (73 Phil 704) Facts: In the matter of the estate of the deceased Amalia Arcega y Alfonso Vda. de Basa, Pilar Lopez de Basa, as administratrix; Feliciano Basa, Jr., as sole and universal heir, and Antonio Gonzalez, as creditor and attorney of the estate, presented to the court a project of partition jointly signed by them and asked that it be approved. The said document consists of several clauses. Clause 2 contains an inventory of the properties left by the deceased, and clause 3 contains a list of all the obligations of the estate. The adjudication is contained in clause 4. Said project of partition was approved by the court. Thereafter Feliciano Basa, Jr., thru his present attorney Mr. Benedicto M. Javier, procured from the clerk of court a certified copy of said project of partition in a modified or mutilated form in that page 22 thereof was omitted at the express request of Attorney Javier. That certified copy, together with the owner's duplicates of the certificates of title covering the real properties adjudicated to Feliciano Basa, Jr., was presented to the register of deeds of Manila for registration with a view to the issuance of the corresponding transfer certificates of title in the name of Feliciano Basa, Jr., free from the mortgage lien in favor of Antonio Gonzalez. The latter, upon learning thereof, objected to the registration of the project of partition as thus mutilated and requested the register of

97

between the parties he had no authority to make such annotation without the consent of both parties. The matter was brought to the CFI which ruled to instruct the register of deeds of Manila to register a certain project of partition in its entirety and not in a mutilated form as requested by the appellants. Issue: Whether the mortgagee is entitled to register the mortgage as a matter of right.

register of deeds authorized to comply with such request? No reasonable person would so contend; and yet that is what the register of deeds of Manila proposes to do in the present case. Agricultural Credit Cooperative Association of Hinigaran vs. Estanislao Yulo Yusay, et al., G.R. No. L-13313, April 28, 1960 (107 Phil 791)

Held: Yes. Affirmed. Ratio: In deciding to comply with the request of the appellants for the registration of the project of partition as mutilated, over the objection of the appellee, who tendered a complete, certified true copy of the same document, the register of deeds of Manila impliedly conceded to them the right to repudiate and annul an obligation evidenced by said document against the will of the obligee and without judicial intervention. That is obviously wrong. It is precisely his duty to see to it that a document presented for registration is regular and in due form. The mutilated certified copy was irregular on its face and should have been rejected by him. In fact his authority in the premises goes no farther than this. He has no authority to inquire into the intrinsic validity of a document based upon proofs aliunde. If he had no authority to inquire into the truth of appellants' allegation as to lack of consideration for the mortgage in question, much less was he authorized to assume the truth of such allegation without any investigation. The project of partition in question, having been signed by the parties and approved by the court, is presumed to be valid and is acceptable for registration in its entirety. Neither of the parties may alter it without the consent of the other and the approval of the court. The reasoning of the register of deeds that, inasmuch as a mortgage is a voluntary transaction, he had no authority to register it without the consent of both parties, is fallacious. He confuses the execution of a mortgage with its registration. It is the execution of the mortgage that is voluntary. Once a mortgage has been signed in due form, the mortgagee is entitled to its registration as a matter of right. By executing the mortgage the mortgagor is understood to have given his consent to its registration, and he cannot be permitted to revoke it unilaterally. The validity and fulfillment of contracts cannot be left to the will of one of the contracting parties (article 1256 of the Civil Code). In the last analysis, the case is as if Feliciano Basa, Jr., had presented to the register of deeds a certified complete copy of the project of partition with the request that the register of deeds take into consideration only the rights, and ignore the obligations, evidenced by said document. It is the same as if a buyer of real property who mortgaged the property bought to secure the payment of the purchase price, had presented the combined deed of sale and mortgage to the register of deeds with the request to transfer the title to him without annotating the mortgage thereon. Is the

98

Facts: Rafaela Yulo executed in favor of the cooperative a mortgage for P33,626.29, due from her, her mother, sisters, brothers, and others, which amount she assumed to pay to the cooperative. A motion was presented to the court by the cooperative demanding the surrender of the owner's duplicate certificate of title that it may annotate said mortgage at the back of the certificate. Estanislao Yusay, a part owner of the lot, opposed the petition on the ground that he is owner of a part of the property in question; that the granting of the motion would operate to his prejudice, as he has not participated in the mortgage cited in the motion; that Rafaela Yulo is dead; that the motion is not verified and movant's rights have lapsed by prescription. Finally it is argued that his opposition raises a controversial matter which the court has no jurisdiction to pass upon. The existence of the mortgage is not disrupted, and neither is the fact that the mortgagor Rafaela Yulo is part owner of the lot. The oppositors do not dispute that she is such a part owner, and their main objection to the petition is that as part owners of the property, the annotation of the mortgage on the common title will affect their rights. The matter was brought to the CFI, and it ordered the Register of Deeds to register the mortgage.

registration court, is to order its registration and annotation on the certificate of title covering the land mortgaged. By said order the court did not pass upon the effect or validity of the mortgage - these can only be determined in an ordinary case before the courts, not before a court acting merely as a registration court, which did not have the jurisdiction to pass upon the alleged effect or invalidity.

Issue: Whether the validity or effectivity of a mortgage may be determined during its registration Held: No. Affirmed. Ratio: In his Brief before this Court, counsel for appellants argue that the mortgage sought to be registered was not recorded before the closing of the intestate proceedings of the deceased mortgagor, but was so recorded only four months after the termination of said proceedings, so that the claim of movant has been reduced to the character of a mere money claim, not a mortgage, hence the mortgage may not be registered. In the first place, the proceeding to register the mortgage does not purport to determine the supposed invalidity of the mortgage or its effect. Registration is a mere ministerial act by which a deed, contract or instrument is sought to be inscribed in the records of the Office of the Register of Deeds and annotated at the back of the certificate of title covering the land subject of the deed The registration of a lease or mortgage, or the entry of a memorial of a lease or mortgage on the register, is not a declaration by the state that such an instrument is a valid and subsisting interest in land; it is merely a declaration that the record of the title appears to be burdened with the lease or mortgage described, according to the priority set forth in the certificate. The mere fact that a lease or mortgage was registered does not stop any party to it from setting up that it now has no force or effect. The court below, in ordering the registration and annotation of the mortgage, did not pass on its invalidity or effect. As the mortgage is admittedly an act of the registered owner, all that the judge below did and could do, as a

99

Winifreda Ursal vs. CA, the Rural Bank of Larena (Siquijor), Inc., & Sps. Jesus Moneset & Cristita Moneset, G.R. No. 142411, October 14, 2005 (473 SCRA 52)

of title in ascertaining the status of mortgaged properties; as their business is impressed with public interest, they are expected to exercise more care and prudence in their dealings than private individuals. Indeed, the rule that persons dealing with registered lands can rely solely on the certificate of title does not apply to banks.

Facts: Jesus and Cristita Moneset (Monesets) are the registered owners of a 333-square meter land together with a house thereon situated at Sitio Laguna, Basak, Cebu City. On January 9, 1985, they executed a "Contract to Sell Lot & House" in favor of petitioner Winifreda Ursal. Ursal paid the down payment and took possession of the property. She immediately built a concrete perimeter fence and an artesian well, and planted fruit bearing trees and flowering plants thereon which all amounted to P50,000.00. After paying six monthly installments, petitioner stopped paying due to the Monesets' failure to deliver to her the transfer certificate of title of the property as per their agreement; and because of the failure of the Monesets to turn over said title, petitioner failed to have the contract of sale annotated thereon. Unknown to Ursal, the Monesets executed on November 5, 1985 an absolute deed of sale in favor of Dr. Rafael Canora, Jr. over the said property for P14,000.00. On September 15, 1986, the Monesets executed another sale, this time with pacto de retro with Restituto Bundalo. On the same day, Bundalo, as attorney-in-fact of the Monesets, executed a real estate mortgage over said property with Rural Bank of Larena located in Siquijor for the amount of P100,000.00. The special power of attorney made by the Monesets in favor of Bundalo as well as the real estate mortgage was then annotated on the title on September 16, 1986. For the failure of the Monesets to pay the loan, the Bank served a notice of extrajudicial foreclosure dated January 27, 1988 on Bundalo. Ursal filed an action for declaration of noneffectivity of mortgage and damages against the Monesets, Bundalo and the Bank. She claimed that the defendants committed fraud and/or bad faith in mortgaging the property she earlier bought from the Monesets with a bank located in another island, Siquijor; and the Bank acted in bad faith since it granted the real estate mortgage in spite of its knowledge that the property was in the possession of petitioner. The trial court ruled that Ursal was more credible than the Monesets and that the Monesets are liable for damages, fraud, and breach of contract. As to the real estate mortgage, the trial court held that the same was valid and that the bank was under no obligation to look beyond the title. CA affirmed. Issue: Whether the bank, as mortgagee, can rely solely on the certificate of title and had no obligation to look beyond the title. Held: No. Affirmed with modifications. Ratio: We agree. Banks cannot merely rely on certificates

100

Respondent is not an ordinary mortgagee; it is a mortgagee-bank. As such, unlike private individuals, it is expected to exercise greater care and prudence in its dealings, including those involving registered lands. A banking institution is expected to exercise due diligence before entering into a mortgage contract. The ascertainment of the status or condition of a property offered to it as security for a loan must be a standard and indispensable part of its operations. Our agreement with petitioner on this point of law, notwithstanding, we are constrained to refrain from granting the prayers of her petition. The reason is that, the contract between petitioner and the Monesets being one of "Contract to Sell Lot and House," petitioner, under the circumstances, never acquired ownership over the property and her rights were limited to demand for specific performance from the Monesets, which at this juncture however is no longer feasible as the property had already been sold to other persons. A contract to sell is a bilateral contract whereby the prospective seller, while expressly reserving the ownership of the subject property despite delivery thereof to the prospective buyer, binds himself to sell the said property exclusively to the prospective buyer upon fulfillment of the condition agreed upon, that is, full payment of the purchase price. In such contract, the prospective seller expressly reserves the transfer of title to the prospective buyer, until the happening of an event, which in this case is the full payment of the purchase price. What the seller agrees or obligates himself to do is to fulfill his promise to sell the subject property when the entire amount of the purchase price is delivered to him. Stated differently, the full payment of the purchase price partakes of a suspensive condition, the non-fulfillment of which prevents the obligation to sell from arising and thus, ownership is retained by the prospective seller without further remedies by the prospective buyer. It is different from contracts of sale, since ownership in contracts to sell is reserved by the vendor and is not to pass to the vendee until full payment of the purchase price, while in contracts of sale, title to the property passess to the vendee upon the delivery of the thing sold. In contracts of sale the vendor loses ownership over the property and cannot recover it unless and until the contract is resolved or rescinded, while in contracts to sell, title is retained by the vendor until full payment of the price. In contracts to sell, full payment is a positive suspensive condition while in contracts of sale, non-payment is a negative resolutory condition. Since the contract in this case is a contract to sell, the ownership of the property remained with the Monesets even after petitioner has paid the down payment and took possession of the property. In Flancia vs. CA, where the vendee in the contract to sell also took possession of the property, this Court held that the subsequent mortgage constituted by the owner over said property in favor of another person was valid since the vendee retained absolute ownership over the property. At most, the

vendee in the contract to sell was entitled only to damages. Petitioner attributes her decision to stop paying installments to the failure of the Monesets to comply with their agreement to deliver the transfer certificate of title after the down payment of P50,000.00. On this point, the trial court was correct in holding that for such failure, the Monesets are liable to pay damages pursuant to Art. 1169 of the Civil Code on reciprocal obligations. The vendors' breach of the contract, notwithstanding, ownership still remained with the Monesets and petitioner cannot justify her failure to complete the payment.

101

In Pangilinan vs CA, the vendees contended that their failure to pay the balance of the total contract price was because the vendor reneged on its obligation to improve the subdivision and its facilities. In said case, the Court held that the vendees were barred by laches from asking for specific performance eight years from the date of last installment. The legal adage finds application in the case at bar. Tempus enim modus tollendi obligations et actiones, quia tempus currit contra desides et sui juris contemptoresFor time is a means of dissipating obligations and actions, because time runs against the slothful and careless of their own rights. In this case, petitioner instituted an action for "Declaration of Non-Effectivity of Mortgage with Damages" four years from the date of her last installment and only as a reaction to the foreclosure proceedings instituted by respondent Bank. After the Monesets failed to deliver the TCT, petitioner merely stopped paying installments and did not institute an action for specific performance, neither did she consign payment of the remaining balance as proof of her willingness and readiness to comply with her part of the obligation. As held in San Lorenzo Development Corp vs. CA, the perfected contract to sell imposed on the vendee the obligation to pay the balance of the purchase price. There being an obligation to pay the price, the vendee should have made the proper tender of payment and consignation of the price in court as required by law. Consignation of the amounts due in court is essential in order to extinguish the vendee's obligation to pay the balance of the purchase price. Since there is no indication in the records that petitioner even attempted to make the proper consignation of the amounts due, the obligation on the part of the Monesets to transfer ownership never acquired obligatory force. In other words, petitioner did not acquire ownership over the subject property as she did not pay in full the equal price of the contract to sell. Further, the Monesets' breach did not entitle petitioner to any preferential treatment over the property especially when such property has been sold to other persons. Petitioner's rights were limited to asking for specific performance and damages from the Monesets. Specific performance, however, is no longer feasible at this point as explained above. This being the case, it follows that petitioner never had any cause of action against respondent Bank. Having no cause of action against the bank and not being an owner of the subject property, petitioner is not entitled to redeem the subject property. Indeed, it is the Monesets who first breached their obligation towards petitioner and are guilty of fraud against her. It cannot be denied however that petitioner is also not without fault. She sat on her rights and never consigned the full amount of the property. She therefore cannot ask to be declared the owner of the property, this late, especially since the same has already passed hands several times, neither can she question the mortgage constituted on the property years after title has already passed to another

person by virtue of a deed of absolute sale. Teotimo Rivera vs. Timoteo Peña, Rehabilitation Finance Corporation & Register of Deeds Tarlac, G.R. No. L-11781, March 24, 1961 (1 SCRA 747) Facts: Timoteo Peña was the registered owner of 2 lots of the barrios of Pacalcal and Anupul, respectively, municipality of Bamban, province of Tarlac, and covered by TCTs. Timoteo Peña executed in favor of petitioner Rivera a contract of lease over said two (2)

102

parcels of land, for the period from September 14, 1956 to September 15,1960, as evidenced by a public document in the Pampango dialect. This contract was merely a renewal of a previous contract of lease over the same parcels of land, between the same parties. The owner's duplicates of the aforementioned transfer certificates of title are in the possession of the Rehabilitation Finance Corporation, to whom said lands were mortgaged by Timoteo Peña on October 26, 1955, to guarantee the payment of a P25,000.00 loan, which mortgage is duly annotated on the aforementioned transfer certificates of title; and that, in order to protect his rights over the parcels of land aforementioned, petitioner Rivera desires to have said rights registered in the office of the register of deeds of Tarlac and annotated in the certificates of title above referred to, for which reason he prayed that the Rehabilitation Finance Corporation be ordered to surrender to said register of deeds the owner's duplicates of the aforementioned transfer certificates of title and that said register of deeds be directed to register the original of the contract of lease, and to make the corresponding annotations in said transfer certificates of title, upon presentation of said original of the contract of lease and payment of the corresponding fees. The Rehabilitation Finance Corporation objected to said petition upon the ground that, pursuant to the deed of mortgage executed in its favor by Timoteo Peña, the lands above referred to shall not be encumbered in any manner without the written consent of the mortgagee; that the consent of the corporation to the contract of lease had never been sought. The corporation had granted the loan guaranteed by said mortgage for the development of the property in question, to be undertaken by the mortgagor; and, as a matter of policy, the corporation does not allow, therefore, the leasing of mortgaged property. The lower court denied the petition because the deed of lease sought to be registered is in the Pampango dialect and that it does not bear the correct number of the title covering the leased property.

in favor of said corporation, it is clear that appellant has no valid adverse claim which may be ordered registered and that, accordingly, the lower court has not erred in denying his petition, regardless of the language or dialect in which the deed of lease in question is written and of the inaccuracy of the number therein given of one of the transfer certificates of title involved in this incident.

Issue: Whether a subsequent encumbrance may be registered when a previous encumbrance disallows it. Held: No. Affirmed. Ratio: One of the conditions of the contract executed by Timoteo Peña in favor of the Rehabilitation Finance Corporation is that the property thus mortgaged thereto shall not be encumbered in any manner whatsoever without the written consent of the mortgagee. Such consent has never been sought. Had it been requested, the consent would have been denied or refused, as a matter of policy, by the mortgagee, the loan guaranteed by said mortgage having been granted for the development of the mortgaged property, which should, therefore, be cultivated by the mortgagor himself. Inasmuch as appellant's rights were derived from Timoteo Peña and is bound, therefore, by his commitments

103

Philippine National Bank vs. CA & Chu Kim Kit represented by Chu Tong U, G.R. No. 43972, July 24, 1990 (187 SCRA 735) Facts: Chu Kim Kit, a Chinese national and son of defendant Boyano, is the absolute owner of a commercial lot and building on Rizal Avenue, Tacloban City, registered in his name. Chu Kim Kit went to mainland China, and he was prevented from returning to the Philippines when the Communists took over mainland China. Through letters, he requested Chu Tong U to take care of his aforementioned property. Although Boyano was aware that her son was still alive, she executed an affidavit on May 21, 1963, alleging that he had died and adjudicating to herself, as his sole heir, the above-described property. By means of said affidavit of adjudication, she was able to obtain a Transfer Certificate of Title over the land in her name. She thereafter mortgaged the property to the Philippine National Bank, Tacloban Branch, to secure a loan of P25,000. She was also about to dispose of the property. Chu Kim Kit, represented by his uncle, Chu Tong U, filed a case against Felisa Boyano for cancellation of the latter's Certificate of Title. Boyano admitted that Chu Kim Kit was still alive but she alleged that she signed the affidavit of adjudication without having read its contents, the same being written in English which she does not understand. The trial court ruled that the TCT of Boyano were

that would have aroused suspicion as to its authenticity. "The certificate of title was in the name of the mortgagor when the land was mortgaged to the PNB. Such being the case, petitioner PNB had the right to rely on what appeared on the certificate of title, and in the absence of anything to excite suspicion, it was under no obligation to look beyond the certificate and investigate the title of the mortgagor appearing on the face of the certificate."

null and void. CA affirmed. Issue: Whether a mortgagee may rely on the correctness of the certificate of title. Held: Yes. Reversed. Ratio: The records show that Chu Kim Kit entrusted his Transfer Certificate of Title No. T-1412 to his mother, Felisa Boyano, before he left for mainland China and allowed his mother to administer the property, and to enjoy its fruits in his absence. Those acts of his enabled Felisa Boyano to cause the cancellation of TCT No. T-1412 and to obtain TCT No. T-1439 in her name. That Felisa Boyano was administering his property may also have created the impression in the mind of third persons that she was the owner of the property and could dispose of it. It is plain to see that by his own acts of confidence in Felisa Boyano, the private respondent was partly to blame for the commission of the fraud against himself by his mother. As between him and the petitioner which was totally innocent and free from negligence or wrongdoing in the transaction, the latter is entitled to the protection of the law. There is no question that the petitioner PNB is a mortgagee in good faith and for value. At the time the mortgage was constituted on the property on October 30, 1963, it was covered by TCT No. T-1439 in the name of Felisa Boyano. The title carried no annotation, defect or flaw

104

Where there was nothing in the certificate of title to indicate any cloud or vice in the ownership of the property, or any encumbrance thereon, the purchaser is not required to explore farther than what the Torrens Title upon its face indicates in quest for any hidden defect or inchoate right that may subsequently defeat his right thereto. If the rule were otherwise, the efficacy and conclusiveness of the certificate of title which the Torrens System seeks to insure would entirely be futile and nugatory. Where innocent third persons relying on the correctness of the certificate of title issued, acquire rights over the property, the court cannot disregard such rights and order the total cancellation of the certificate for that would impair public confidence in the certificate of title; otherwise everyone dealing with property registered under the torrens system would have to inquire in every instance as to whether the title had been regularly or irregularly issued by the court. Indeed, this is contrary to the evident purpose of the law. Every person dealing with registered land may safely rely on the correctness of the certificate of title issued therefor and the law will in no way oblige him to go behind the certificate to determine the condition of the property. Stated differently, an innocent purchaser for value relying on a torrens title issued is protected. A mortgagee has the right to rely on what appears in the certificate of title and, in the absence of anything to excite suspicion, he is under no obligation to look beyond the certificate and investigate the title of the mortgagor appearing on the face of said certificate. The right or lien of an innocent mortgagee for value upon the land mortgaged must be respected and protected, even if the mortgagor obtained his title through fraud. The remedy of the persons prejudiced is to bring an action for damages against those who caused the fraud, and if the latter are insolvent, an action against the Treasurer of the Philippines may be filed for recovery of damages against the Assurance Fund.

P25,500.00 which was accepted by respondent spouses. The parties further agreed that payment was to be made within six months thereafter for it to be considered as cash payment. On July 20, 1981, a deed of absolute sale was executed. Said document contained a waiver of the seller's warranty againsteviction. Thereafter, the spouses Mangubat applied for an industrial tree planting loan with DBP. The latter required the former to submit a certification from the Bureau of Forest Development that the land is alienable and disposable. However, on October 29, 1981, said office issued a certificate attesting to the fact that the said property was classified as timberland, hence not subject to disposition. The loan application of respondent spouses

Development Bank of the Philippines vs. CA, Celebrada Mangubat & Abner Mangubat, G.R. No. 110053, October 16, 1995 (249 SCRA 331) Facts: A land, covered by a tax declaration, was originally owned by one Presentacion Cordovez, who, on February 9, 1937, donated it to Luciano Sarmiento. On June 8, 1964 Luciano Sarmiento sold the land to Pacifico Chica. On April 27, 1965, Pacifico Chica mortgaged the land to DBP to secure a loan of P6,000.00. However, he defaulted in the payment of the loan, hence DBP caused the extrajudicial foreclosure of the mortgage. In the auction sale held on September 9, 1970, DBP acquired the property as the highest bidder and was issued a certificate of sale on September 17, 1970 by the sheriff. On October 14, 1980, spouses Celebrada and Abner Mangubat offered to buy the property for P18,599.99. DBP made a counter-offer of

105

was, nevertheless, eventually approved by DBP in the sum of P140,000.00, despite the aforesaid certification of the bureau, on the understanding of the parties that DBP would work for the release of the land by the former Ministry of Natural Resources. To secure payment of the loan, respondent spouses executed a real estate mortgage over the land on March 17, 1982, which document was registered in the Registry of` Deeds pursuant to Act No. 3344. The loan was then released to the spouses Mangubat on a staggered basis. After a substantial sum of P118,540.00 had been received by private respondent, they asked for the release of the remaining amount of the loan. It does not appear that their request was acted upon by DBP, ostensibly because the release of the land from the then Ministry of Natural Resources had not been obtained. The spouses Mangubat then filed a complaint against DBP seeking the annulment of the subject deed of absolute sale on the ground that the object thereof was verified to be timberland and, therefore, is in law an inalienable part of the public domain. They also alleged that DBP acted fraudulently and in bad faith by misrepresenting itself as the absolute owner of the land and in incorporating the waiver of warranty against eviction in the deed of sale. In its answer, DBP contended that it was actually the absolute owner of the land, having purchased it for value at an auction sale pursuant to an extrajudicial foreclosure of mortgage; that there was neither malice nor fraud in the sale of the land under the terms mutually agreed upon by the parties; that assuming arguendo that there was a flaw in its title, DBP cannot be held liable for anything inasmuch as respondent spouses had full knowledge of the extent and nature of DBP's rights, title and interest over the land. The trial court rendered judgment annulling the subject deed of absolute sale and ordering DBP to return the P25,500.00 purchase price, plus interest; to reimburse to respondent spouses the taxes paid by them, the cost of the relocation survey, incidental expenses and other damages in the amount of P50,000.00; and to further pay them attorney's fees and litigation expenses in the amount of P10,000.00, and the costs of suit. Upon appeal, the CA rendered judgment modifying the disposition of the lower court by deleting the award for damages, attorney's fees, litigation expenses and the costs, but affirming the same in all its other aspects.

of the same kind and quality. The fact that the annulment of the sale will also result in the invalidity of the mortgage does not have an effect on the validity and efficacy of the principal obligation, for even an obligation that is unsupported by any security of the debtor may also be enforced by means of an ordinary action. Where a mortgage is not valid, as where it is executed by one who is not the owner of the property, or the consideration of the contract is simulated or false, the principal obligation which it guarantees is not thereby rendered

Issue: Whether a loan contract which is secured by a void mortgage is still valid. Held: Yes. Affirmed with Modifications. Ratio: In its legal context, the contract of loan executed between the parties is entirely different and discrete from the deed of sale they entered into. The annulment of the sale will not have an effect on the existence and demandability of the loan. One who has received money as a loan is bound to pay to the creditor an equal amount

106

null and void. That obligation matures and becomes demandable in accordance with the stipulations pertaining to it. Under the foregoing circumstances, what is lost is only the right to foreclose the mortgage as a special remedy for satisfying or settling the indebtedness which is the principal obligation. In case of nullity, the mortgage deed remains as evidence or proof of a personal obligation of the debtor, and the amount due to the creditor may be enforced in an ordinary personal action. Considering that neither party questioned the legality and correctness of the judgment of the court a quo, as affirmed by respondent court, ordering the annulment of the deed of absolute sale, such decreed nullification of the document has already achieved finality. We only need, therefore, to dwell on the effects of that declaration of nullity. With respect to the right of a party to recover the amount given as consideration, this has been passed upon in the case of Leather Manufacturers National Bank vs. Merchants National Bank where it was held that: "What money is paid upon the representation of the receiver that he has either a certain title in property transferred in consideration of the payment or a certain authority to receive the money paid, when in fact he has no such title or authority, then, although there be no fraud or intentional misrepresentation on his part, yet there is no consideration for the payment, the money remains, in equity and good conscience, the property of the payer and may be recovered back by him." Therefore, the purchaser is entitled to recover the money paid by him where the contract is set aside by reason of the mutual material mistake of the parties as to the identity or quantity of the land sold. And where a purchaser recovers the purchase money from a vendor who fails or refuses to deliver the title" he is entitled as a general rule to interest on the money paid from the time of Payment. A contract which the law denounces as void is necessarily no contract whatever, and the acts of the parties in an effort to create one can in no wise bring about a change of their legal status. The parties and the subject matter of the contract remain in all particulars just as they did before any act was performed in relation thereto.

writ of possession. Such writ was issued. The spouses Carpo then filed a complaint for the annulment of real estate mortgage and the consequent foreclosure proceedings. They consigned the amount of P257, 197.26 with the court. A TRO was issued. The RTC suspended the enforcement of the writ of possession pending the final disposition of the complaint. Chua and Ng questioned this suspension order before the CA. During the pendency of the case before the CA, the court handling the complaint for annulment dismissed the case on the ground

Spouses David B. Carpo & Rechilda S. Carpo vs. Eleanor Chua & Elma Dy Ng, G.R. Nos. 150773 & 153599, September 30, 2005 (471 SCRA 471) Facts: The spouses Carpo borrowed from Chua and Ng the amount of P175,000 payable within 6 months with an interest of 6% per month. To secure the loan, they mortgaged their residential house and lot in Camarines Sur. They failed to pay the loan. Consequently, the property was extrajudicially foreclosed and sold at an auction sale to Chua and Ng. Upon failure to exercise their right of redemption, a certificate of sale was issued and TCTs were issued in the name of the winning bidders. Despite such developments, the spouses Carpo continued to occupy the house and lot prompting Chua and Ng to file a petition for

107

that it was filed out of time and was barred by laches. A petition was filed assailing the dismissal of the complaint. The CA eventually reversed the suspension order on the ground that it was the ministerial duty of the lower court to issue the writ of possession when title over the mortgaged property had been consolidated in the mortgagee.

and the offending interest rate merely corrected. Hence, it is clear and settled that the principal loan obligation still stands and remains valid. By the same token, since the mortgage contract derives its vitality from the validity of the principal obligation, the invalid stipulation on interest rate is similarly insufficient to render void the ancillary mortgage contract.

Issue: Whether a mortgage can be nullified on the ground that the interest of the loan which is secured by the mortgage is usurious. Held: No. Affirmed. Ratio: There is no need to unsettle the principle affirmed in Medel and like cases. From that perspective, it is apparent that the stipulated interest in the subject loan is excessive, iniquitous, unconscionable and exorbitant. Pursuant to the freedom of contract principle embodied in Article 1306 of the Civil Code, contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy. In the ordinary course, the codal provision may be invoked to annul the excessive stipulated interest. In the case at bar, the stipulated interest rate is 6% per month, or 72% per annum. By the standards set in the above-cited cases, this stipulation is similarly invalid. However, the RTC refused to apply the principle cited and employed in Medel on the ground that Medel did not pertain to the annulment of a real estate mortgage, as it was a case for annulment of the loan contract itself. The question thus sensibly arises whether the invalidity of the stipulation on interest carries with it the invalidity of the principal obligation. The question is crucial to the present petition even if the subject thereof is not the annulment of the loan contract but that of the mortgage contract. The consideration of the mortgage contract is the same as that of the principal contract from which it receives life, and without which it cannot exist as an independent contract. Being a mere accessory contract, the validity of the mortgage contract would depend on the validity of the loan secured by it. Notably in Medel, the Court did not invalidate the entire loan obligation despite the inequitability of the stipulated interest, but instead reduced the rate of interest to the more reasonable rate of 12% per annum. The same remedial approach to the wrongful interest rates involved was employed or affirmed by the Court in Solangon, Imperial, Ruiz, Cuaton, and Arrofo. The Court’s ultimate affirmation in the cases cited of the validity of the principal loan obligation side by side with the invalidation of the interest rates thereupon is congruent with the rule that a usurious loan transaction is not a complete nullity but defective only with respect to the agreed interest. The Court’s wholehearted affirmation of the rule that the principal obligation subsists despite the nullity of the stipulated interest is evinced by its subsequent rulings, cited above, in all of which the main obligation was upheld

108

The petition for certiorari and mandamus questioning the suspension order was proper since the said order was interlocutory in nature and since the case involved the performance of a ministerial duty. Gonzalo Tuason vs. Dolores Orozco, G.R. No. 2344, February10,1906(5Phil596) Facts: On November 19, 1888, Juan de Vargas y Amaya, the defendant's husband, executed a power of attorney to Enrique Grupe, authorizing him to dispose of all his property, and particularly of a certain house and lot known as No. 24 Calle Nueva, Malate, in the city of Manila, for the price at which it was actually sold. He was also authorized to mortgage the house for the purpose of securing the payment of any amount advanced to his wife, Dolores Orozco de Rivero. On the 21st of January, 1890, Enrique Grupe and Dolores Orozco de Rivero obtained a loan from the plaintiff secured by a mortgage on the property referred to in the power of attorney. In the caption of the instrument evidencing the debt it is stated the Grupe and Dolores Orozco appeared as the parties of the first part and Gonzalo Tuason, the plaintiff, as the party of the second part; that Grupe acted for himself and also in behalf of Juan Vargas by virtue of the power granted him by latter, and that Dolores Orozco appeared merely for the purpose of complying with the requirements contained in the power of attorney. This instrument was duly recorded in the Registry of Property, and it appears therefrom that Enrique Grupe, as attorney in fact for Vargas, received from the plaintiff a loan of 2,200 pesos and delivered the same to the defendant. To secure its payment, he mortgaged the property of his principal with defendant's consent as required in the power of attorney. The loan was not paid. The creditor filed suit and won in the lower court.

1727 of the Civil Code.) The fact that the agent has also bound himself to pay the debt does not relieve from liability the principal for whose benefit the debt was incurred. The individual liability of the agent constitutes in the present case a further security in favor of the creditor and does not affect or preclude the liability of the principal. In the present case the latter's liability was further guaranteed by a mortgage upon his property. The law does not provide that the agent can not bind himself personally to the fulfillment of an obligation incurred by him in the name and on behalf of his principal. On the contrary, it

Issue: Whether validity of the mortgage can be affected by the circumstances on how the money from the loan was received by the mortgagor. Held: No. Affirmed. Ratio: The fact that the defendant received the money from her husband's agent and not from the creditor does not affect the validity of the mortgage in view of the conditions contained in the power of attorney under which the mortgage was created. Nowhere does it appear in this power that the money was to be delivered to her by the creditor himself and not through the agent or any other person. The important thing was that she should have received the money. This we think is fully established by the record. A debt thus incurred by the agent is binding directly upon the principal, provided the former acted, as in the present case, within the scope of his authority. (Art.

109

provides that such act on the part of an agent would be valid. (Art. 1725 of the Civil Code.) The appellant's final contention is that in order to render judgment against the mortgaged property it would be necessary that the minor children of Juan de Vargas be made parties defendant in this action, they having an interest in the property. Under article 154 of the Civil Code, which was in force at the time of the death of Vargas, the defendant had the parental authority over her children and consequently the legal representation of their persons and property. (Arts. 155 and 159 of the Civil Code.) It can not be said, therefore, that they were not properly represented at the trial. Furthermore this action was brought against the defendant in her capacity as administratrix of the estate of the deceased Vargas. She did not deny in her answer that she was such administratrix. Vargas having incurred this debt during his marriage, the same should not be paid out of property belonging to the defendant exclusively but from that pertaining to the conjugal partnership. This fact should be borne in mind in case the proceeds of the mortgaged property be not sufficient to pay the debt and interest thereon. The judgment of the court below should be modified in so far as it holds the defendant personally liable for the payment of the debt.

assignee of the said "Assignment of Real Estate Mortgage" executed by Presentacion Quimbo in his favor, and with the consent of Mauricia Albaytar, the sister of the deceased Josefa Albaytar Arizapa, after the demise of the spouses Julio Arizapa and Josefa Albaytar. Evelyn Banua and her husband filed a case against Lagrosa. Lagrosa, in turn, filed a case against Cesar Orolfo. The case filed by Evelyn Banua was ruled in her favor. The case filed by Lagrosa was ruled in his favor. The case was consolidated in the CA,

Ruben Lagrosa vs. CA, Spouses Romulo & Evelyn A. Banua, & Cesar Orolfo, G.R. Nos. 115981-82, August 12, 1999 (312 SCRA 298) Facts: Involved in this case is the possession of sixtyfive (65) square meters of residential lot located in Paco, Manila, originally owned by the City of Manila which, in due course, following its land and housing program for the under-privileged, awarded it to one Julio Arizapa who constructed a house and upholstery shop thereon. The award was in the nature of a "Contract to Sell" payable monthly for a period of twenty (20) years. Before Julio Arizapa could pay for the lot, he died, leaving behind his wife and children. His wife died the following year. The surviving children, including Evelyn Arizapa Banua, executed a Deed of Extrajudicial Partition adjudicating unto themselves the lot and a Renunciation in favor of Evelyn. Cesar Orolfo is the caretaker of the same subject property as authorized and appointed by Evelyn Banua, in whose name TCT No. 197603 covering the said property is registered. The title of Evelyn Banua to the subject property is evidenced by a Deed of Sale executed by the City of Manila in her favor and by a TCT. Ruben Lagrosa claims to be the lawful possessor of the subject property by virtue of the "Deed of Assignment of Real Estate Mortgage" executed in his favor by Presentacion Quimbo on the basis of a "Contract of Real Estate Mortgage" executed by Julio Arizapa in favor of the latter. Lagrosa posits that he cannot be evicted from the subject property because he had prior possession as

110

and the court affirmed the ruling in favor of Evelyn Banua and reversed the ruling in favor of Cesar Orolfo.

estate unless and until he purchases the same at public auction and the property is not redeemed within the period provided for by the Rules of Court.

Issue: Whether a mortgage executed by a person who is not the owner of the property is valid. Held: No. Affirmed. Ratio: The Deed of Real Estate Mortgage" executed by Julio Arizapa is null and void, the property mortgaged by Julio Arizapa being owned by the City of Manila under Transfer Certificate of Title No. 91120. For a person to validly constitute a valid mortgage on real estate, he must be the absolute owner thereof as required by Article 2085 of the Civil Code of the Philippines. Since the mortgage to Presentacion Quimbo of the lot is null and void, the assignment by Presentacon Quimbo of her rights as mortgage to Lagrosa is likewise void. Even if the mortgage is valid as insisted by herein petitioner, it is well-settled that a mere mortgagee has no right to eject the occupants of the property mortgaged. This is so, because a mortgage passes no title to the mortgagee. Indeed, by mortgaging a piece of property, a debtor merely subjects it to a lien but ownership thereof is not parted with. Thus, a mortgage is regarded as nothing more than a mere lien, encumbrance, or security for a debt, and passes no title or estate to the mortgagee and gives him no right or claim to the possession of the property. Petitioner Lagrosa now contends that what was mortgaged by Julio Arizapa in favor of Presentacion Quimbo was "his right as an awardee over the homelot in question, and not the homelot itself." Petitioner would have this Court uphold the validity and legality of the mortgage over the "right as an awardee" rather than the homelot itself. The agreement between the City of Manila and Julio Arizapa was in the nature of a "contract to sell," the price for the lot being payable on installment for a period of twenty (20) years which could yet prevent, such as by the nonfulfillment of the condition, the obligation to convey title from acquiring any obligatory force. Hence, there is no "right" as awardee to speak of, and there is no alienable interest in the property to deal with. As to Lagrosa's prior possession of the subject property, their stay in the property as correctly found by the respondent Court of Appeals was by mere tolerance or permission. It is well-settled that "a person who occupies the land of another at the latter's tolerance or permission, without any contract between them is necessarily bound by an implied promise that he will vacate upon demand, failing which, a summary action for ejectment is the proper remedy against him. By Lagrosa's own admission, he is merely an assignee of the rights of the mortgage of the lot and that, consequently, the respondent Court of Appeals correctly ruled that the only right of action of Lagrosa as such assignee of the mortgagee, where the mortgagor is already dead, is that provided for in Section 7 of Rule 86 and Section 5 of Rule 87 of the Rules of Court. Thus, the mortgagee does not acquire title to the mortgaged real

111

Luis Castro, Jr., Marissa Castro, Ramon Castro, Mary Ann Castro, Catherine Castro & Antonio Castro vs. CA & Union Bank of the Philippines, G.R. No. 97401, December 6, 1995 (250 SCRA 661) Facts: On 15 August 1974, Cabanatuan City Colleges obtained a loan from the Bancom Development Corporation. In order to secure the indebtedness, the college mortgaged to Bancom two parcels of land covered by TCT No. T-45816 and No. T-45817 located in Cabanatuan City. The parcels were both within the school site. While the mortgage was subsisting, the college board of directors agreed to lease to petitioners a 1,000-squaremeter portion of the encumbered property on which the latter, eventually, built a residential house. Bancom, the mortgagee, was duly advised of the matter. The school defaulted in the due payment of the loan. In time, Bancom extrajudicially foreclosed on the mortgage, and the mortgaged property was sold at public auction on 22 August 1979 with Bancom coming out to be the only bidder. A certificate of sale was accordingly executed by the provincial sheriff in favor of Bancom. Subsequently, the latter assigned its credit to herein private respondent Union Bank of the Philippines. On 10 October 1984, following the expiration of the redemption period without the college having exercised its right of redemption, private respondent consolidated title to the property. On 08 May 1985, private respondent filed with the Regional Trial Court of Nueva Ecija, Branch XXVIII in Cabanatuan City, an ex-parte motion for the issuance of a writ of possession not only over the land and school buildings but also the residential house constructed by petitioners. On 10 May 1985, the lower court granted the motion and direct issuance of the corresponding writ. The ex- officio provincial sheriff, in implementing the writ, thereby also sought the vacation of the premises by petitioners. When the latter refused, private respondent filed an ex-parte motion for a special order directing the physical ouster of the occupants. On 23 May 1986, petitioners formally entered their appearance in the proceedings to oppose the ex-parte motion. Petitioners averred that, being the owners of the residential house which they themselves had built on the foreclosed property with the prior knowledge of the mortgagee, they could not be ousted simply on the basis of a petition for a writ of possession under Act No. 3135. The court, nevertheless, issued an order granting private respondent's motion, and it directed Atty. Luis T. Castro representation of petitioners, to deliver "all the keys to all the room premises" found on the property foreclosed and authorized, in the event petitioners would refuse to surrender the keys, private respondent "to the premises in question and do what is best for the preservation properties belonging to the Cabanatuan City Colleges." Upon appeal, the CA affirmed.

be included in the foreclosure proceedings. Held: No. Reversed. Ratio: Art. 2127 NCC provides that the mortgage extends to the natural accessions, to the improvements, growing fruits, and the rents or income not yet received when the obligation becomes due, and to the amount of the indemnity granted or owing to the

Issue: Whether a house subsequently built by a lessee on mortgaged land with the knowledge of the mortgagee can

112

proprietor from the insurers of the property mortgaged, or in virtue of expropriation for public use, with the declarations, amplifications and limitations established by law, whether the estate remains in the possession of the mortgagor, or passes into the hands of a third person. This article extends the effects of the real estate mortgage to accessions and accessories found on the hypothecated property when the secured obligation becomes due. The law is predicated on an assumption that the ownership of such accessions and accessories also belongs to the mortgagor as the owner of the principal. The provision has thus been seen by the Court, in a long line of cases beginning in 1909 with Bischoff vs. Pomar, to mean that all improvements subsequently introduced or owned by the mortgagor on the encumbered property are deemed to form part of the mortgage. That the improvements are to be considered so incorporated only if so owned by the mortgagor is a rule that can hardly be debated since a contract of security, whether real or personal, needs as an indispensable element thereof the ownership by the pledgor or mortgagor of the property pledged or mortgaged. The rationale should be clear enough — in the event of default on the secured obligation, the foreclosure sale of the property would naturally be the next step that can expectedly follow. A sale would result in the transmission of title to the buyer which is feasible only if the seller can be in a position to convey ownership of the thing sold (Article 1458, Civil Code). It is to say, in the instant case, that a foreclosure would be ineffective unless the mortgagor has title to the property to be foreclosed. It may not be amiss to state, in passing, that in respect of the lease on the foreclosed property, the buyer at the foreclosure sale merely succeeds to the rights and obligations of the pledgor-mortgagor subject, however, to the provisions of Article 1676 of the Civil Code, on its possible termination.

bought the land. When L & R Corp attempted to have their Certificate of Sale recorded, it discovered the prior sale of the land to PWHAS for the first time. L & R Corp. wrote a letter to the Register of Deeds requesting the cancellation of the annotation of the sale on the ground that the contract of mortgage prohibited such sale. 7 months after the foreclosure sale, PWHAS, for the account of the spouses Litonjua, tendered payment of

Sps. Reynaldo K. Litonjua & Erlinda P. Litonjua & Phil. White House Auto Supply, Inc. vs. L & R Corporation, Vicente M. Coloyan in his capacity as Acting Registrar of the Register of Deeds of Quezon City thru Deputy Sheriff Roberto R. Garcia, G.R. No. 130722, December 9, 1999 (320 SCRA 405) Facts: The spouses Litonjua obtained loans from the L & R Corp. in the aggregate sum of P400,000. The loans were secured by a mortgage constituted by the spouses upon their 2 parcels of land and the improvements thereon located in Cubao, Quezon City. The mortgage provided that the mortgagor cannot sell the mortgaged property without getting the consent of the mortgagee and that the mortgagee shall have the right of first refusal. The spouses Litonjua then sold the property to Phil. White House Auto Supply, Inc. The sale was annotated at the back of the certificate of title. The spouses Litonjua defaulted on their loan, so L & R Corp. started extrajudicial foreclosure of the property. During the public auction, L & R Corp., as the sole bidder,

113

the full redemption price to L & R Corp in the form of a Chinabank manager’s check. L & R Corp refused to accept the payment. Hence, PWHAS was compelled to redeem the mortgaged properties through the ex-officio sheriff who, in turn, issued a Certificate of Redemption. Due to the refusal of L & R Corp to return their owner’s duplicate certificate of title, the spouses Litonjua asked the Register of Deeds to annotate their Certificate of Redemption as an adverse claim on the titles. The Register of Deeds refused to do so, hence the spouses Litonjua filed a petition against L & R Corp for the surrender of the title. While the case was pending, L & R Corp. executed an Affidavit of Consolidation of Ownership. The Register of Deeds then issued it a TCT, free of any lien and encumbrance. L & R Corp then informed all tenants of the property to pay the rentals to it. Upon learning of this, the spouses Litonjua filed an adverse claim and a notice of lis pendens with the Register of Deeds. In the process, they learned that the prior sale of the properties to PWHAS was not annotated on the titles. A complaint for quieting of title, annulment of title & damages was filed. The lower court dismissed the complaint. CA reversed at first, but set aside its decision in an amended decision.

notifying the purchaser or including him as a defendant. At the same time, the purchaser of the mortgaged property was deemed not to have lost his equitable right of redemption. In Bonnevie v. Court of Appeals, where a similar provision appeared in the subject contract of mortgage, the petitioners therein, to whom the mortgaged property were sold without the written consent of the mortgagee, were held as without the right to

Issue: Whether a mortgage contract may provide that the mortgagor cannot sell the mortgaged property without first obtaining the consent of the mortgagee. Whether a mortgage contract may provide for a right of first refusal in favor of the mortgagee. Held: No. Yes. Affirmed with modifications. Ratio: In the case of Philippine Industrial Co. v. El Hogar Filipino and Vallejo, a stipulation prohibiting the mortgagor from entering into second or subsequent mortgages was held valid. This is clearly not the same as that contained in paragraph 8 of the subject Deed of Real Estate Mortgage which also forbids any subsequent sale without the written consent of the mortgagee. Yet, in Arancillo v. Rehabilitation Finance Corporation, the case of Philippine Industrial Co., supra, was erroneously cited to have held a mortgage contract against the encumbrance, sale or disposal of the property mortgaged without the consent of the mortgagee is valid. No similar prohibition forbidding the owner of mortgaged property from (subsequently) mortgaging the immovable mortgaged is found in our laws, making the ruling in Philippine Industrial Co., supra, perfectly valid. On the other hand, to extend such a ruling to include subsequent sales or alienation runs counter not only to Philippine Industrial Co., itself, but also to Article 2130 of the New Civil Code. Meanwhile in De la Paz v. Macondray &; Co., Inc., it was held that while an agreement of such nature does not nullify the subsequent sale made by the mortgagor, the mortgagee is authorized to bring the foreclosure suit against the mortgagor without the necessity of either

114

redeem the said property. No consent having been secured from the mortgagee to the sale with assumption of mortgage by petitioners therein, the latter were not validly substituted as debtors. It was further held that since their rights were never recorded, the mortgagee was charged with the obligation to recognize the right of redemption only of the original mortgagors-vendors. Without discussing the validity of the stipulation in question, the same was, in effect, upheld. On the other hand, in Tambunting v. RehabilitationFinanceCorporation, the validity of a similar provision was specifically raised and discussed and found as invalid. It was there ratiocinated that the provision can only be construed as directed against subsequent mortgages or encumbrance, not to an alienation of the immovable itself. For while covenants prohibiting the owner from constituting a later mortgage over property registered under the Torrens Act have been held to be legally permissible (Phil. Industrial Co. v. El Hogar Filipino, et al., 45 Phil. 336, 341-342; Bank of the Philippines v. Ty Camco Sobrino, 57 Phil. 801), stipulations "forbidding the owner from alienating the immovable mortgaged" are expressly declared void by law (Art. 2130, Civil Code). Earlier, in PNB v. Mallorca, it was reiterated that a real mortgage is merely an encumbrance; it does not extinguish the title of the debtor, whose right to dispose – a principal attribute of ownership – is not thereby lost. Thus, a mortgagor had every right to sell his mortgaged property, which right the mortgagee cannot oppose. Insofar as the validity of the questioned stipulation prohibiting the mortgagor from selling his mortgaged property without the consent of the mortgagee is concerned, therefore, the ruling in the Tambunting case is still the controlling law. Indeed, we are fully in accord with the pronouncement therein that such a stipulation violates Article 2130 of the New Civil Code. Both the lower court and the Court of Appeals in its Amended Decision rationalize that since paragraph 8 of the subject Deed of Real Estate Mortgage contains no absolute prohibition against the sale of the property mortgaged but only requires the mortgagor to obtain the prior written consent of the mortgagee before any such sale, Article 2130 is not violated thereby. This observation takes a narrow and technical view of the stipulation in question without taking into consideration the end result of requiring such prior written consent. True, the provision does not absolutely prohibit the mortgagor from selling his mortgaged property; but what it does not outrightly prohibit, it nevertheless achieves. For all intents and purposes, the stipulation practically gives the mortgagee the sole prerogative to prevent any sale of the mortgaged property to a third party. The mortgagee can simply withhold its consent and thereby, prevent the mortgagor from selling the property. This creates an unconscionable advantage for the mortgagee and amounts to a virtual prohibition on the owner to sell his mortgaged property. In other words, stipulations like those covered by paragraph 8 of the subject Deed of Real Estate Mortgage

circumvent the law, specifically, Article 2130 of the New Civil Code. Being contrary to law, paragraph 8 of the subject Deed of Real Estate Mortgage is not binding upon the parties. Accordingly, the sale made by the spouses Litonjua to PWHAS, notwithstanding the lack of prior written consent of L & R Corporation, is valid. While petitioners question the validity of paragraph 8 of their mortgage contract, they appear to be silent insofar as paragraph 9 thereof is concerned. Said paragraph 9 grants upon L & R Corporation the right of first refusal over the mortgaged property in the event the mortgagor decides to sell the same. We see nothing wrong in this provision.

115

The right of first refusal has long been recognized as valid in our jurisdiction. The consideration for the loanmortgage includes the consideration for the right of first refusal. L & R Corporation is, in effect, stating that it consents to lend out money to the spouses Litonjua provided that in case they decide to sell the property mortgaged to it, then L & R Corporation shall be given the right to match the offered purchase price and to buy the property at that price. Thus, while the spouses Litonjua had every right to sell their mortgaged property to PWHAS without securing the prior written consent of L & R Corporation, they had the obligation under paragraph 9, which is a perfectly valid provision, to notify the latter of their intention to sell the property and give it priority over other buyers. It is only upon failure of L & R Corporation to exercise its right of first refusal could the spouses Litonjua validly sell the subject properties to others, under the same terms and conditions offered to L & R Corporation. What then is the status of the sale made to PWHAS in violation of L & R Corporation's contractual right of first refusal? The Contract of Sale was not voidable but rescissible. Under Article 1380 to 1381(3) of the Civil Code, a contract otherwise valid may nonetheless be subsequently rescinded by reason of injury to third persons, like creditors. The status of creditors could be validly accorded by the Bonnevies for they had substantial interest that were prejudiced by the sale of the subject property to the Contract of Lease. In the case at bar, PWHAS cannot claim ignorance of the right of first refusal granted to L & R Corporation over the subject properties since the Deed of Real Estate Mortgage containing such a provision was duly registered with the Register of Deeds. As such, PWHAS is presumed to have been notified thereof by registration, which equates to notice to the whole world. We note that L & R Corporation had always expressed its willingness to buy the mortgaged properties on equal terms as PWHAS. Indeed, in its Answer to the Complaint filed, L & R Corporation expressed that it was ready, willing and able to purchase the subject properties at the same purchase price of P430,000.00, and was agreeable to pay the difference between such purchase price and the redemption price of P249,918.77, computed as of August 13, 1981, the expiration of the one-year period to redeem. That it did not duly exercise its right of first refusal at the opportune time cannot be taken against it, precisely because it was not notified by the spouses Litonjua of their intention to sell the subject property and thereby, to give it priority over other buyers. All things considered, what then are the relative rights and obligations of the parties? To recapitulate:, the sale between the spouses Litonjua and PWHAS is valid, notwithstanding the absence of L & R Corporation's prior written consent thereto. Inasmuch as the sale to PWHAS was valid, its offer to redeem and its tender of the redemption price, as successor-in-interest of the spouses Litonjua, within the one-year period should have been accepted as valid by the L & R Corporation. However, while the sale is, indeed, valid, the same is rescissible because it

ignored L & R Corporation's right of first refusal. Vitug, concurring & dissenting: What I find quite difficult to accept, with all due respect, is the pre-emptive and peremptory pronouncement in the ponencia that the sale between the Litonjuas and PWHAS is rescissible because it ignored the "right of first refusal" of L & R Corporation. I must stress that a right of first refusal is not a perfected contract. Neither does it qualify as an option under the second paragraph of Article 1479, which

116

itself must be supported by a consideration separate and distinct from the price itself, nor an offer which Article 1319 of the Code requires to be definitive and certain both as to object and cause of the contemplated agreement. Even while the object in a "right of first refusal" might be determinate, the exercise of the right, nevertheless, would still be dependent not only on the grantor's eventual intention to enter into a binding juridical relation but also on terms, including the price, that obviously are yet to be fixed. It would be absurd to suggest that a right of first refusal can be the proper subject of an action for specific performance but, of course, neither would it be correct to say that a breach of such right would be totally inconsequential. A grantor who unjustly discards his own affirmation violates the basic dogma in human relations so well expressed as in Article 19 of the Civil Code to the effect that every person is expected to act with justice, give another his due and observe honesty and good faith. When ignored, the legal feasibility of an action for damages is a matter now long settled. Most importantly, a rescissory action in consonance with Article 1380, in relation to Article 1381, paragraph (3), of the New Civil Code so invoked (by citing Guzman, Bocaling & Co. vs. Bonnevie) as the authority for the rescission of the sale between the Litonjua spouses and PWHAS is here off the mark unfortunately. An action for rescission under said provisions of the Code is merely subsidiary and relates to the specific instance when a debtor, in an attempt to defraud his creditor, enters into a contract with another that deprives the creditor to recover his just claim and leaves him with no other legal means, than by rescission, to obtain reparation. Hence, the rescission is only to the extent necessary to cover the damages caused pursuant to Article 1384 of the Civil Code. Verily, the case and factual settings in the instant controversy (for "Quieting of Title, Annulment of Title and Damages with Preliminary Injunction") initiated by the Litonjua spouses and PWHAS against herein respondents is neither the occasion nor the proper forum for such an issue to be considered.

not sign the deed, this time signed her name below the annotation. It appears that after the execution of this instrument, Lanuza and his wife mortgaged the same house in favor of Martin de Leon to secure the payment of P2,720 within one year. This mortgage was executed on October 4, 1961 and recorded in the Office of the Register of Deeds of Manila on November 8, 1961 under the provisions of Act No. 3344.

In Re: Petition for Consolidation of Title in the Vendees of a House and the Rights to a Lot. Maria Bautista Vda. de Reyes, et al., Rodolfo Lanuza vs. Martin de Leon, G.R. No. L-22331, June 6, 1967 (20 SCRA 369) Facts: Rodolfo Lanuza and his wife Belen were the owners of a two-story house built on a lot of the Maria Guizon Subdivision in Tondo, Manila, which the spouses leased from the Consolidated Asiatic Co. On January 12, 1961, Lanuza executed a document entitled "Deed of Sale with Right to Repurchase" whereby he conveyed to Maria Bautista Vda. de Reyes and Aurelia R. Navarro the house, together with the leasehold rights to the lot, a television set and a refrigerator in consideration of the sum of P3,000. When the original period of redemption expired, the parties extended it to July 12, 1961 by an annotation to this effect on the left margin of the instrument. Lanuza's wife, who did

117

As the Lanuzas failed to pay their obligation, De Leon filed a petition for the extrajudicial foreclosure of the mortgage. On the other hand, Reyes and Navarro followed suit by filing in the Court of First Instance of Manila a petition for the consolidation of ownership of the house on the ground that the period of redemption expired on July 12, 1961 without the vendees exercising their right of repurchase. The petition for consolidation of ownership was filed on October 19. On October 23, the house was sold to De Leon as the only bidder at the sheriff's sale. De Leon immediately took possession of the house, secured a discharge of the mortgage on the house in favor of a rural bank by paying P2,000 and, on October 29, intervened in court and asked for the dismissal of the petition filed by Reyes and Navarro on the ground that the unrecorded pacto de retro sale could not affect his rights as a third party. The court ruled for Reyes and Navarro.

Sale with Right to Repurchase" and the claim that it is in reality an equitable mortgage. Circumstances are clearly present that indicate the existence of the equitable mortgage. The price is grossly inadequate. There was no transmission of ownership to the vendees. There was a delay in the filing of a petition for consolidation. Under these circumstances we cannot but conclude that the deed in question is in reality a mortgage. This conclusion is of farreaching consequences because it means not only that this action for consolidation of ownership is improper as

Issue: Whether an unrecorded prior sale of a property is preferred over a recorded subsequent mortgage. Whether a recorded subsequent mortgage is preferred over a prior equitable mortgage. Held: Yes. Yes. Reversed. Ratio: We are in accord with the trial court's ruling that a conveyance of real property of the conjugal partnership made by the husband without the consent of his wife is merely voidable. This is clear from article 173 of the Civil Code which gives the wife ten years within which to bring an action for annulment. As such it can be ratified as Lanuza's wife in effect did in this case when she gave her conformity to the extension of the period of redemption by signing the annotation on the margin of the deed. We may add that actions for the annulment of voidable contracts can be brought only by those who are bound under it, either principally or subsidiarily (Art. 1397), so that if there was anyone who could have questioned the sale on this ground it was Lanuza's wife alone. We also agree with the lower court that between an unrecorded sale of a prior date and a recorded mortgage of a later date the former is preferred to the latter for the reason that if the original owner had parted with his ownership of the thing sold then he no longer had the ownership and free disposal of that thing so as to be able to mortgage it again. Registration of the mortgage under Act No. 3344 would, in such case, be of no moment since it is understood to be without prejudice to the better right of third parties. Nor would it avail the mortgagee any to assert that he is in actual possession of the property for the execution of the conveyance in a public instrument earlier was equivalent to the delivery of the thing sold to the vendee. But there is one aspect of this case which leads us to a different conclusion. It is a point which neither the parties nor the trial court appear to have sufficiently considered. We refer to the nature of the so-called "Deed of

118

De Leon claims, but, what is more, that between the unrecorded deed of Reyes and Navarro which we hold to be an equitable mortgage, and the registered mortgage of De Leon, the latter must be preferred. Preference of mortgage credits is determined by the priority of registration of the mortgages, following the maxim "Prior tempore potior jure" (Hewhoisfirstintimeispreferredinright."). Under Article 2125 of the Civil Code the equitable mortgage, while valid between Reyes and Navarro, on the one hand, and the Lanuzas, on the other, as the immediate parties thereto, cannot prevail over the registered mortgage of De Leon.

Ramirez, Frederic P. Ramirez, & the Intestate Estate of Francisco Ramirez, Jr. vs. CA, Hon. Juan A. Bigornia, Jr., in his capacity as Presiding Judge of the RTC of Iligan, Isabela, Br. 18 & Sps. Loreto Claravall & Victoria H. Claravall, G.R. No. 133841, August 15, 2003 (409 SCRA 133)

Maria T. Guanzon vs. Hon. Manuel Argel, Presiding Judge of CFI of Antique, Juan, Ernesto, Estrella, Bartolome, Honorato, all surnamed Dumaraog, G.R. No. L-27706, June 16, 1970 (33 SCRA 474) Facts: Ines Flores executed a document entitled pacto de retro over a parcel of rice land situated in Inabasan, San Jose, Antique in favor of Maria Guanzon. When Ines Flores was unable to pay, Maria Guanzon consolidated her title over the property. The children of Ines Flores, the Dumaraogs, filed an action for the redemption of the land claiming that the purported pacto de retro sale was actually an equitable mortgage. After trial, the court declared the document involved to be one of equitable mortgage and ordered Guanzon to execute an instrument of reconveyance in favor of the Dumaraogs upon the payment of P1,500. Guanzon then filed this petition. Issue: Whether an equitable mortgagee’s title over the mortgaged property will be consolidated if the debtor fails to pay the loan. Held: No. Affirmed. Ratio: If the Dumaraogs fail to pay the P1,500 within the specified 20 days, Guanzon would be entitled to have execution issue to collect the said amount from the properties of the Dumaraogs whereupon the deed of reconveyance would be executed by Guanzon. In no way can the judgment be construed to mean that should the Dumaraogs fail to pay the money within the specified period then the property would be conveyed by the sheriff to Guanzon. Any interpretation in that sense would contradict the declaration made in the same judgment that the contract between the parties was in fact a mortgage and not a pacto de retro sale. The only right of a mortgagee in case of non-payment of a debt secured by mortgage would be to foreclose the mortgage and have the encumbered property sold to satisfy the outstanding indebtedness. The mortgagor’s default does not operate to vest in the mortgagee the ownership of the encumbered property, for any such effect is against public policy. Carolina P. Ramirez, Ferdinand P. Ramirez, Francis P.

119

Facts: On Dec. 29, 1965, spouses Loreto Claravall and Victoria Claravall executed a deed of sale in favor of the spouses Francisco Ramirez, Jr. and Carolina Ramirez covering a parcel of land, including improvements thereon, situated in Ilagan, Isabela. On even date, another instrument was executed granting the spouses Claravall an option to repurchase the property within a period of two years from December 29, 1965 but not earlier nor later than the month of December, 1967. At the expiration of the two-year period, the Claravalls failed to redeem the property, prompting them to file a complaint against the spouses Francisco Ramirez, Jr. and Carolina Ramirez to compel the latter to sell the property back to them. After trial, judgment was rendered in favor of the spouses Ramirez which was, on appeal, affirmed by the Court of Appeals. On review, however, this Court, finding that the Deed of Absolute Sale with option to repurchase executed by private respondents in favor of the spouses Ramirez was one of equitable mortgage, reversed the decision of the appellate court by Decision of October 15, 1990. The decision of this Court having become final and executory, possession of the property was turned over to private respondents after they settled their obligation to the spouses Ramirez. Following the death of Francisco Ramirez, Jr., the spouses Claravall filed a complaint for accounting and damages against the intestate estate of Francisco Ramirez, his widow and children. A motion to dismiss was filed alleging, among other things, that the Ramirezes, as registered owners of the lot prior to its redemption, were entitled to collect rentals for the lot. The resolution of the motion to dismiss was deferred. The Ramirezes filed a petition for certiorari which was denied.

void. Before perfect title over a mortgaged property may thus be secured by the mortgagee, he must, in case of nonpayment of the debt, foreclose the mortgage first and thereafter purchase the mortgaged property at the foreclosure sale. In fine, the ownership of the property was not vested to the spouses Ramirez upon private respondents’ failure to pay their indebtedness, the registration of the property in the former’s names notwithstanding, absent any showing that they foreclosed the mortgage and purchased the property at a foreclosure sale.

Issue: Whether the mortgagees of an equitable mortgage who have been registered as the owners of the mortgaged property can collect rent and other fruits from the said property. Held: No. Affirmed. Ratio: The flaw in petitioners’ argument stems from their submission that the spouses Ramirez, as “vendees,” were the owners of the property after it was registered in their names following the execution of the deed of sale in their favor. The declaration, however, by this Court in the first case that the deed of sale with option to repurchase entered into by the spouses Ramirez and private respondents was an equitable mortgage necessarily takes the deed out of the ambit of the law on sales and puts into operation the law on mortgage. It is a well-established doctrine that the mortgagor’s default does not operate to vest the mortgagee the ownership of the encumbered property and the act of the mortgagee in registering the mortgaged property in his own name upon the mortgagor’s failure to redeem the property amounts to pactum commissorium, a forfeiture clause declared by this Court as contrary to good morals and public policy and, therefore,

120

Lucia Perez, et al. vs. Domingo Cortes, et al., G.R. No. 3821, February 16, 1910 (15 Phil 211) Facts: Liberato Perez, by virtue of the possession he enjoyed as owner for more than sixty years, without counting that of his ancestors, lawfully acquired by means of extraordinary prescription, under the provisions of article 1959 of the Civil Code, the ownership of about 30 hectares of land. His two daughters, Lucia and Eduvigis Perez, inherited such land from him. The daughters transferred ½ of the land to Dominga Bolado who, in turn, transferred the said half to her daughter, Inocenta Perez. In 1903, Domingo Cortes and his wife Dominga Ubaldo, usurped and unlawfully retained the land last described, and still retain it without possessing any right thereto. The Perezes filed suit. Impugning the right of the plaintiffs, the defendants alleged that they were and still are the owners of the part or portion of land claimed, for the reason that Pedro Olang had acquired it in 1895 from its lawful owner and possessor, Vicente Perez, and that Dominga Ubaldo inherited it upon the death of her husband. The court ruled for the Perezes.

the contract entered into by Vicente Perez was one of mortgage or one of sale, on the hypothesis that he could dispose of the property, while it is not possible to decide the question by the language of the document, in justice it must be assumed that the debtor assumed a lesser obligation and that in accord with the creditor he bound himself to execute a mortgage which

Issue: Whether a person who is not the owner of a property can mortgage the property. Whether the parties are presumed to have entered a contract of mortgage when the terms of the contract are doubtful. Whether mortgagee can automatically appropriate and dispose of the property mortgaged upon default. Held: No. Yes. No. Affirmed Ratio: It may be true that Vicente Perez owed Pedro Olang 100 pesos in the year 1895, but it can not be admitted that he gave the said land as security; it did not belong to him, nor could he in any manner dispose of it without the knowledge or consent of its lawful owner, and, seeing that he died before his mother, he could not have succeeded her in the enjoyment of the said portion of land. Dominga Ubaldo rests her claim on a document where Vicente Perez declared to have mortgaged to Pedro Olang for the sum of 100 pesos a parcel of land owned by him situated in the barrio of Looc, with a description of its boundaries, on the condition that he would continue to work it and obtain the benefits therefrom, but if it were not redeemed within a period of three years, the land would then become the property of the creditor. The document is a private one, and could not therefore be entered in the register. The contract entered into by means of the said document is one of loan with mortgage; not one of sale under pacto de retro, because beyond the word rescate (redemption), said document does not contain any word to show that the agreement was a sale a retro. However, even if there were a doubt as to whether

121

involves a greater reciprocity of interests than a contract of sale under pacto de retro, in spite of the fact that both the latter and that of mortgage involve a valuable consideration in accordance with the provisions of article 1289 of the Civil Code. Further, when the obligation became due, the creditor would be entitled to have the mortgaged property sold to satisfy the debt, but not to appropriate or dispose of it.

Ratio: Is this stipulation violative of the provisions of article 1859 of the Civil Code? Two things are prohibited by this article, to wit, (a) the appropriation by the creditor of the properties pledged or mortgaged; and (b) the disposition thereof by the same creditor. The stipulation above set forth does not authorize either one or the other. Of course it is clear that it does not authorize the creditor to dispose of the properties mortgaged.

Juan Dalay vs. Bernardo Aquiatin & Proceso Maximo, G.R. No. 20132, September 22, 1923 (47 Phil 951) Facts: Ciriaco Villarin, being the owner of six parcels of land, executed a document in favor of Eugenio Gomez, acknowledging a debt, one of whose clauses is as follows: “if I cannot pay the aforesaid amount, when the date agreed upon comes, the same shall be paid with the lands given as security, the lot and house and lands described in the aforesaid seven documents.” As the period so stipulated elapsed without Ciriaco Villarin having paid the debt, Eugenio Gomez, believing himself entitled to do so, executed a document in favor of Juan Dalay transferring the properties used as security in consideration of the amount of P2,300. By virtue of this conveyance, Juan Dalay, on the same date it was executed, entered upon the possession of these lands and is now still in possession thereof. On October 10, 1917, Ciriaco Villarin, in an affidavit, acknowledged that the title to, and possession of, the aforesaid lands had been transferred in a real and absolute sale to Eugenio Gomez. Fifteen days later, that is, on October 25, 1917, Ciriaco Villarin contracted a debt in favor of Bernardino Aquiatin. Villarin was unable to pay, so Aquiatin filed suit. He won and the judgment became final. Execution was issued and levied upon the six parcels aforementioned. Juan Dalay brought this action against Bernardino Aquiatin and the deputy sheriff, Proceso Maximo, to have himself declared owner of said lands, to forever prohibit the defendants, their agents and other persons acting in their behalf, from performing any act tending to carry out the attachment and execution sale of said realties, and to recover the costs. After trial, the court found that the plaintiff had no cause of action for the reason that he was not, nor could he have been, the owner of the properties given to him as security of the debt, and dismissed the complaint, ordering the execution to be carried out upon the lands in question, and sentencing the plaintiff to pay the costs. Issue: Whether a provision which provides that if a loan is not paid upon a date agreed, the loan shall be paid with the lands given as security is valid. Held: Yes. Reversed.

122

Neither do we find that it authorizes him to appropriate the same. What it says is merely a promise to pay the debt with such properties, if at its maturity it is not satisfied. It is merely a promise made by the debtor to assign the property given as security in payment of the debt, which promise is accepted by the creditor. There is no doubt that a debtor may make an assignment of his properties in payment of a debt. (Art. 1175, Civil Code.) And the assignment is not made unlawful by the fact that said properties are mortgaged, because the title thereto remains in the debtor; nor is a promise to make such an assignment in violation of the law. We are, therefore, of the opinion that this case does not come under the provisions of article 1859 of the Civil Code, and therefore said article is not applicable to the stipulation in question. Upon the expiration of the period for the payment of the debt without the same having been paid, Eugenio Gomez did not wait nor require Ciriaco Villarin to make a formal assignment of the mortgaged property in payment of the debt, and transferred the same to Juan Dalay in the document Exhibit C. And in doing so, Eugenio Gomez did not dispose of property merely mortgaged, but of property promised to be assigned in payment of the debt which had not been paid at the expiration of the period fixed for its payment. Gomez had not, by virtue alone of the promise of assignment of said property, any real right thereon, but he did have a personal action against Villarin to compel him to execute the proper deed of assignment. For this reason the conveyance made by Gomez in favor of Dalay was defective, it having been made in advance of the actual assignment of said property in his favor. This transfer, however, is not void per se inasmuch as Villarin consented to the said property passing to Gomez in payment of the debt after the expiration of the period for payment, if the debt was not paid. There is no question as to the concurrence of the other elements of this contract made in favor of Dalay, the defect consisting in Villarin not having previously executed the deed of assignment he had promised. This defect, which would have been a ground for annulling this transfer made by Gomez in favor of Dalay, had Villarin brought the proper action, was cured by the act of said Villarin in executing the document wherein he acknowledged that the title to, and possession of, said lands were transferred to Gomez as in a real and absolute sale. This confirmation, valid and effective under the provisions of article 1311 of the Civil Code, gave full effect to the transfer of these properties made by Gomez in favor of Dalay. The allegation of the defendant Aquiatin that this sale in favor of Dalay is simulated and fraudulent cannot be held proven. It does not appear that when he executed the document, Ciriaco Villarin was indebted to anybody with the exception of Gomez, nor that he owed anything to anybody when he executed the affidavit which cured the defect of the transfer in favor of Dalay.

undersigned should be declared invalid, as being contrary to the spirit, if not the letter, of article 1859 of the Civil Code, as well as directly contrary to the general principles of jurisprudence applicable to the relation of mortgagor and mortgagee. If a stipulation of this kind is valid, every mortgage in which such stipulation is inserted will become self-executing, and the debtor, upon making default in the payment of the debt, will be bound to transfer the property in satisfaction of the mortgage, with the result that the right of redemption is lost from the mere fact that the debtor is unable to pay at the date stipulated.

Street, dissenting: Said stipulation in the opinion of the

123

There is a maxim long recognized by the equity courts of England and America to the effect that "Once a mortgage, always a mortgage." This means that if an instrument is in its origin a mortgage, it will be treated as such by the courts until it is satisfied or foreclosed by some legal process; and the courts will not recognize a stipulation inserted in the instrument creating the mortgage which is intended to vest the property in the creditor upon failure of the debtor to pay the mortgage debt. Nor will they recognize any waiver of the equity of redemption inserted in the contract. This doctrine is based upon a recognition of the inequality of the position of the debtor and creditor respectively. It recognizes the fact that the creditor necessarily has a power over his debtor which may be exercised inequitably, and that the debtor is liable to yield to the exertions of such power. The doctrine embodied in the maxim referred to protects the debtor absolutely from the consequences of his inferiority and of his own act done through infirmity of will. Opposed as I am to the doctrine stated by the court with reference to the legality of the stipulation above referred to, I also differ from the court with respect to the effect of the affidavit. The admission in the said affidavit on the part of Villarin was merely a recognition of the validity of the stipulation in question and such an admission could not impress validity upon a stipulation of the character referred to. It is not to be denied that a mortgagor of property may transfer the mortgaged property to the creditor in satisfaction of the mortgage debt after the mortgage has fallen due. But such a transfer implies the independent exercise of the power vested in the mortgagor, as owner, and the affidavit in question is nothing more than the recognition of a situation which was supposed by the debtor to be an accomplished fact, namely, that the property in question had passed to the creditor upon the debtor's failure to pay the debt when due. No legal efficacy can be conceded to such an admission.

maturity, a petition for extrajudicial foreclosure of mortgage was filed. The Cruzes instituted an action against the Tambuntings for annulment of mortgage and damages with prayer for a writ of preliminary injunction. A TRO was issued by the court. When the TRO lapsed, the mortgage properties were sold at a public auction to Aurora Tambunting and Antonio Tambunting for P9,400.00. Thereafter, mortgagee-vendee Antonio Tambunting sold and transferred his 1/2 share in the property to his wife Aurora Tambunting. On 31 January 1969, Aurora Tambunting executed an Affidavit of Consolidation of Title, for the issuance of a new title in her name. A TCT was issued in her name.

Aurora Tambunting, Antonio Tambunting, Jose P. Tambunting & the Acting Provincial Sheriff for the Province of Rizal vs. CA, Damaso R. Cruz & Monica Andres, G.R. No. L-48278, November 8, 1988 (167 SCRA 16) Facts: Spouses Damaso R. Cruz and Monica Andres obtained a loan from spouses Antonio and Aurora Tambunting in the amount of P3,600.00. The Tambuntings are engaged in the lending-pawnshop business using the name and style "Agencia de Tambunting", with Jose P. Tambunting as Manager. The loan was evidenced by a promissory note executed by the Cruzes, payable within four (4) months from 16 December 1959, with interest at 12% per annum. As security for payment of the loan, a Deed of Real Estate Mortgage was executed by the Cruzes in favor of the Tambuntings over a parcel of land belonging to the Cruzes. Due to debtors' failure to pay the loan obligation at

124

The court eventually upheld the loan and the mortgage, but voided the foreclosure sale. CA affirmed. Issue: Whether a deviation from the publication requirement will make the foreclosure sale voidable. Whether the mortgagor is entitled to an accounting of the fruits of the mortgaged property which was improperly foreclosed. Held: Yes. Yes. Affirmed.

As for the petition for accounting of fruits and rentals, the Cruzes were entitled to such accounting and the Court of Appeals was the proper forum for such petition. The petition for accounting did not really seek a modification of the judgments of the trial court and the Court of Appeals. The remedy sought (accounting and offsetting of accounts) was a direct clear-cut consequence of an equally clear-cut decision which, in effect, held that the Cruzes were never divested of their ownership over the property in

Ratio: Sec. 3 of Act No. 3135 provides that Notice shall be given by posting notices of the sale for not less than twenty (20) days in at least three public places of the municipality or City where the property is situated, and if such property is worth more than four hundred pesos, such notice shall also be published once a week for at least three consecutive weeks in a newspaper of general circulation in the municipality or city. The rule is that statutory provisions governing publication of notice of mortgage foreclosure sales must be strictly complied with, and that even slight deviations therefrom will invalidate the notice and render the sale at least voidable. Where required by the statute or by the terms of the foreclosure decree, public notice of the place and time of the mortgage foreclosure sale must be given, a statute requiring it being held applicable to subsequent sales as well as to the first advertised sale of the property. It has been held that failure to advertise a mortgage foreclosure sale in compliance with statutory requirements constitutes a jurisdictional defect invalidating the sale and that a substantial error or omission in a notice of sale will render the notice insufficient and vitiate the sale. One issue of a newspaper of general circulation is not substantial compliance with the required publication of once (1) a week for at least three (3) consecutive weeks. Petitioners claim the publisher's affidavit of publication is merely a customary proof, hence, it should not be considered as the sole evidence of publication. This may be so in the presence of equally convincing evidence. In the case at bar, however, there is no such other proof of publication. To show compliance, the published notices and certificate of posting by the sheriff of the notice of sale of 26 January 1968 should have been presented. They do not appear in the record. Neither can the sale be considered as an adjournment of an earlier sale under Sec. 24 of Rule 39 of the Rules of Court. As correctly posed by the Court of Appeals, why was there one (1) publication of the notice of sale scheduled on 26 January 1968? The presumption of compliance with official duty has been rebutted by the failure to present proof of posting and publication of the notice of sale of 26 January 1968. At this juncture, it should be carefully stressed that, while the foreclosure or auction sale of 26 January 1968 is null and void, the real estate mortgage as well as the Cruzes' loan obligation to the Tambuntings remain valid and effective as ruled in the decisions of the trial court and the Court of Appeals.

125

question. In other words, the accounting sought and granted is merely an incident of the declared respondents' right of ownership under the Civil Code. The petition for accounting is based on the rationale underlying a related rule in the Rules of Court – Sec. 34, Rule 39. What clearly appears from this provision is the right of the debtor to demand for an accounting of the rents and profits received by a creditor during the period of redemption. Thus, while the Rules of Court allow the purchaser in an execution sale to receive the rentals if the purchased property is occupied by tenants, he is, however, accountable to the judgment debtor or mortgagor, as the case may be, for the amounts so received and the same will be duly credited against the redemption price when said debtor or mortgagor effects the redemption.

publication thereof in a newspaper of general circulation. We take judicial notice of the fact that newspaper publications have more far-reaching effects than posting on bulletin boards in public places. There is a greater probability that an announcement or notice published in a newspaper of general circulation which is distributed nationwide, shall have a readership of more people than that posted in a public bulletin board, no matter how strategic its location may be, which caters only to a limited few. Hence the publication of

Langkaan Realty Development, Inc. vs. United Coconut Planters Bank & CA, G.R. No. 139437, December 8, 2000 (347 SCRA 542) Facts: Langkaan Realty was the registered owner of 631,693 square meter parcel of land located at Langkaan, Dasmariñas, Cavite. Langkaan Realty executed a real estate mortgage over the property in favor of UCPB for a loan obtained by Guimaras Agricultural Development, Inc. in the amount of P3,000,000. Langkaan and Guimaras agreed to share in the total loan proceeds obtained from UCPB. Another P2,000,000 loan was secured by Guimaras from UCPB which was secured by the real estate mortgage. Guimaras defaulted on its loan. UCPB foreclosed the mortgage and bought the property during the auction sale in 1986. There was no redemption, so UCPB consolidated its title. In 1989, Langkaan wrote UCPB to buy back the foreclosed property for P4,000,000, but UCPB refused claiming the market price of the property is now P6,500,000. Langkaan then filed a complaint for annulment of extrajudicial foreclosure and sale. The complaint was dismissed. CA affirmed. Issue: Whether an irregularity in the posting requirement will invalidate a foreclosure sale. Whether the holding of the foreclosure sale at the wrong venue without any opposition will invalidate the foreclosure sale. Held: No. No. Affirmed. Ratio: Even if it were true that the Notice of Sale was not posted in three public places as required, this would not invalidate the foreclosure conducted. As explained in Olizon vs. Court of Appeals, 238 SCRA 148, 155-156 – ‘Furthermore, unlike the situation in previous cases where the foreclosure sales were annulled by reason of failure to comply with the notice requirement under Section 3 of Act 3135, as amended, what is allegedly lacking here is the posting of the notice in three public places, and not the

126

the notice of sale in the newspaper of general circulation alone is more than sufficient compliance with the noticeposting requirement of the law. By such publication, a reasonably wide publicity had been effected such that those interested might attend the public sale, and the purpose of the law had been thereby subserved. The object of a notice of sale is to inform the public of the nature and condition of the property to be sold, and of the time, place and terms of the sale. Notices are given for the purpose of securing bidders and to prevent a sacrifice of the property. If these objects are attained, immaterial errors and mistakes will not affect the sufficiency of the notice; but if mistakes or omissions occur in the notices of sale which are calculated to deter or mislead bidders, to depreciate the value of the property, or to prevent it from bringing a fair price, such mistakes or omissions will be fatal to the validity of the notice, and also to the sale made pursuant thereto.’ In the case at bench, this objective was attained considering that there was sufficient publicity of the sale through the Record Newsweekly. In ascertaining whether or not the venue of the extra-judicial foreclosure sale was improperly laid, it is imperative to consult Act No. 3135, as amended, the law applicable to such a sale. Section 2 provides that the sale cannot be made legally outside of the province which the property sold is situated; and in case the place within said province in which the sale is to be made is the subject of stipulation, such sale shall be made in said place or in the municipal building of the municipality in which the property or part thereof is situated. The mortgage contract specifically provided that the auction sale shall be held at the capital of the province, if the property is within the territorial jurisdiction of the province concerned, or shall be held in the city, if the property is within the territorial jurisdiction of the city concerned. The foreclosed property is located in Dasmarinas, a municipality in Cavite. Dasmarinas is within the territorial jurisdiction of the province of Cavite, but not within that of the provincial capital, Trece Martires City, nor of any other city in Cavite. The territorial jurisdiction of Dasmarinas is covered by the RTC of Imus, another municipality in Cavite. The petitioner contends that the extra-judicial foreclosure sale should have been held in Trece Martires City, the capital of Cavite, following the above- quoted stipulation in the real estate mortgage contract; or, in the alternative, Section 2 of Act 3135 should have been applied, and the sale conducted at the municipal building of Dasmarinas where the property is situated. On the other hand, the private respondent argues that the extra-judicial foreclosure sale was properly held at the main entrance of the Office of the Clerk of Court and Ex-officio Sheriff of the RTC of Imus which has territorial jurisdiction over Dasmarinas, as provided in the Supreme Court Administrative Order No. 7 (1983) issued pursuant to Section 18 of B.P. Blg. 129. The private respondent further contends that Section 18 of B.P. Blg. 129 repealed the provision on venue under Section 2 of Act 3135. We agree with the petitioner that under the terms

of the contract, the extra-judicial foreclosure sale could be held at Trece Martires, the capital of the province which has territorial jurisdiction over the foreclosed property. The stipulation of the parties in the real estate mortgage contract is clear, and therefore, should be respected absent any showing that such stipulation is contrary to law, morals, good customs, public policy or public order. A contract is the law between the parties. However, since the stipulation of the parties lack qualifying or restrictive words to indicate the exclusivity of the agreed forum, the stipulated place is considered only as an additional, not a limiting venue.

127

Therefore, the stipulated venue and that provided under Act 3135 can be applied alternatively. Now, applying Act 3135, the venue of the sale should be at the municipal building of Dasmarinas since the foreclosed property is located in the municipality of Dasmarinas. We cannot sustain the contention of the private respondent that the proper venue for the sale of the Dasmarinas property is the RTC of Imus which has territorial jurisdiction thereon as provided under SC Administrative Order No. 7 issued pursuant to Section 18 of B.P. Blg. 129, which allegedly repealed the venue provision under Section 2 of Act 3135. Section 18 of B.P. Blg. 129 provides for the power of the Supreme Court to define the territorial jurisdiction of the Regional Trial Courts. Pursuant thereto, the Supreme Court issued Administrative Order No. 7, placing the municipalities of Imus, Dasmarinas and Kawit within the territorial jurisdiction of the RTC of Imus. On the other hand, Section 2 of Act 3135 refers to the venue of an extra-judicial foreclosure sale. t is difficult to fathom how a general law such as B.P. Blg. 129 can repeal a special law like Act 3135. Aside from involving two entirely different legal concepts such as jurisdiction (B.P. Blg. 129) and venue (Section 2 of Act 3135), this proposition goes against a basic rule in statutory construction that the enactment of a later legislation which is a general law cannot be construed to have repealed a special law. Much less can the private respondent invoke Supreme Court administrative issuances as having amended or repealed Section 2 of Act 3135. A statute is superior to an administrative issuance, and the former cannot be repealed or amended by the latter. Notwithstanding the foregoing, however, this Court finds the extra-judicial foreclosure sale held at the RTC of Imus to be valid and legal. Well-known is the basic legal principle that venue is waivable. Failure of any party to object to the impropriety of venue is deemed a waiver of his right to do so. In the case at bar, we find that such waiver was exercised by the petitioner. An extra-judicial foreclosure sale is an action in rem, and thus requires only notice by publication and posting to bind the parties interested in the foreclosed property. No personal notice is necessary. As such, the due publication and posting of the extra-judicial foreclosure sale of the Dasmarinas property binds the petitioner, and failure of the latter to object to the venue of the sale constitutes waiver. From 1986 to April 1989, despite knowledge of the foreclosure sale of their property, Langkaan did not take any step to question the propriety of the venue of the sale. It was only on May 30, 1989 that the petitioner filed a Complaint for Annulment of the foreclosure sale, and only after its offer to repurchase the foreclosed property, the title to which had been consolidated in the name of private respondent UCPB, had been rejected by the bank. Nowhere can it be found that the petitioner objected to or opposed the holding of the sale at the RTC of Imus. By neglecting to do so, Langkaan is deemed to have waived its right to object to the venue of the sale, and cannot belatedly raise its objection in this

petition filed before us. Spouses Guillermo Agbada & Maxima Agbada vs. InterUrban Developers, Inc. & RTC Br. 105, QC, G.R. No. 144029, September 19, 2002 (389 SCRA 430) Facts: On 21 February 1991 petitioner-spouses Guillermo Agbada and Maxima Agbada borrowed P1,500,000.00 from respondent Inter-Urban Developers, Inc. through its president, Simeon L. Ong Tiam. To secure the loan, the parties concurrently executed a

128

Deed of Real Estate Mortgage over a parcel of land and the improvements thereon situated in Tandang Sora, Quezon City owned by the spouses. The loan was payable within six (6) months from 21 February 1991 at three percent (3%) interest per month, otherwise, failure to discharge the loan within the stipulated period would entitle Inter- Urban Developers, Inc. to foreclose the mortgage judicially or extra-judicially. The spouses failed to pay the loan within the six-month period despite several out-of-court demands made by respondent InterUrban Developers, Inc. On 10 December 1993 Inter-Urban Developers, Inc. filed with the Regional Trial Court of Quezon City, Branch 105, a complaint for foreclosure of real estate mortgage. On 2 March 1994, without assistance of counsel, the spouses filed their unverified answer admitting that they had borrowed the amount of P1,500,000.00 from respondent and had executed the real estate mortgage to secure the loan but alleging that it was payable within five (5) years and at twelve percent (12%) interest per annum. Pre-trial was set, but reset several times on account of the spouses Agbada. Guillermo Agbada submitted a 1-page handwritten letter admitting his liability to pay Inter-Urban Developers, Inc. A motion for summary judgment was filed supported by an affidavit of the treasurer who witnessed the transaction. The spouses Agbada, this time represented by a lawyer, attempted to submit an amended answer that denied any obligation to the interest. The judge disallowed the amended answer and promulgated a summary judgment against the spouses Agbada. The spouses Agbada did not appeal the summary judgment nor did they pay the judgment debt. A decree of foreclosure was issued and a foreclosure sale was held with Inter-Urban Developers, Inc. winning the bidding. The court confirmed the sale over the opposition of the spouses Agbada that the purchase price of the property was below the appraised value as stated in an appraisal report. After the sale became final, Inter-Urban Developers, Inc. prayed for a writ of possession. The spouses Agbada filed other dilatory motions which were denied. They then filed a petition for annulment of the summary judgment on the ground that violated their right to due process. The petition was dismissed.

opportunity to cross-examine whatever such evidence would tend to establish. Equally significant, the low purchase price could have worked in the petitionerspouses' favor if they promptly exercised their equity of redemption. As held in Tarnate v. Court of Appeals, "[a]nent the contention that the property has been sold at an extremely low price, suffice it to say that, if correct, it would have, in fact, favored an easy redemption of the property. That remedy could have well been availed of but petitioners did not."

Issue: Whether a foreclosure sale can be reversed because the purchase price of the property is below its appraised value. Held: No. Affirmed. Ratio: There is no merit in the spouses claim that the purchase price of the mortgaged real property was way below its appraised value. To begin with, they deliberately withheld the presentation of their own evidence which might have proved this matter and thus unfortunately deprived respondent Inter-Urban Developers, Inc. the

129

The instant case is not unprecedented. In Tarnate v. Court of Appeals involving a case of foreclosure of real estate mortgage that was resolved by means of summary judgment where neither the existence of the loans and the mortgage deeds nor the fact of default on the due repayments was disputed, we rejected as genuine issue the contention of petitioners therein that they were misled by respondent bank to believe that the loans were long-term accommodations since the loan documents admittedly executed by the parties clearly contradicted petitioners’ asseverations and the parties must have realized that when the terms of the agreement were unequivocally reduced in writing, they could hardly be controverted by oral evidence to the contrary. Similarly, in Heirs of Amparo del Rosario v. Santos, where we rejected the alteration of the conditions imposed in the deed of sale, this Court ruled that appellants therein could not be allowed to introduce evidence of conditions allegedly agreed upon by them other than those stipulated in the deed of sale because when they reduced their agreement in writing, it is presumed that they have made the writing the only repository and memorial of truth, and whatever is not found in the writing must be understood to have been waived and abandoned.

sheriff filed a motion to confirm the sale to Lopez, which was set down for hearing on March 9, 1923, and due notice was given to all the parties in interest. At a hearing on that date, the court made an order duly confirming the sale. On April 5, 1923, Gonzalez filed a motion for reconsideration. The court, in consideration of the disparity between the real value of the land and the price at the auction sale, set aside the confirmation and ordered a resale to give defendant Gonzalez a

Philippine National Bank vs. Manuel Ernesto Gonzalez. Saturnino Lopez, G.R. No. 21026, February 13, 1924 (45 Phil 693) Facts: On November 23, 1921, the Philippine National Bank commenced a suit against Manuel Ernesto Gonzalez to foreclose a real mortgage made to secure a promissory note for P15,000. On March 17, 1922, the plaintiff bank filed an amended complaint against the same defendant, in which the original was reproduced, to foreclose a second mortgage for P15,000 upon the same land described in the original complaint. The defendant was duly served in both proceeding with both the original and amended complaints, and made defaults in both cases. On April 21, 1922, the bank filed a motion for default. August 8, 1922, the court declared the defendant in default, and set the case for hearing on August 23, 1922, at which time the bank appeared and presented proofs of all the facts alleged in its original and amended complaints. August 28, 1922, the court rendered judgment in favor of the bank and against the defendant, requiring him within three months from that date to pay the plaintiff the amount of the two mortgage in question, with the interest and costs, and that in default thereof, execution should be issued for the sale of the property to satisfy the judgment. On December 7, 1922, and for want of any payment, the plaintiff moved the court for an execution, and on January 11, 1923, an execution was issued for the sale of the real property described in the mortgages to satisfy the amount of the judgment. On August 28, 1922, the total of the judgment in the first cause of action, including the interest, was P17,313.59, and in the second mortgage, on the same date, it was P17,755. The property was sold in an auction sale. On February 16, 1923, the

130

greater opportunity in order to obtain a better price. The complainant and the buyer appealed. Issue: Whether the court can set aside the foreclosure sale of a mortgaged property due to the disparity between the selling price at the auction and the actual value of the property. Held: No. Reversed. Ratio: In Graffam and Doble vs. Burgess (117 US 180), a judicial sale of real estate will not be set aside for inadequacy of price, unless the inadequacy be so great as to shock the conscience, or unless there be additional circumstances against its fairness. If the inadequacy of price paid for the purchase of real estate at a sale on an execution be so gross as to shock the conscience, or if in addition to gross inadequacy the purchaser has been guilty of fairness or has taken any undue advantage, or if the owner of the property or the party interested in it has been for any other reason misled or surprised, then the sale will be regarded as fraudulent and void, and the party injured will be permitted to redeem the property sold. In Warner, Barnes & Co. vs. Santos (14 Phil., 446), a judicial sale of real estate in an action to foreclose will not be set aside for inadequacy of price, unless the inadequacy be so great as to shock the conscience or unless the inadequacy be so great as to shock the conscience or unless there be additional circumstances against its fairness. It is by no means a matter of discretion with the court to rescind a sale which it has once confirmed, nor is the sale to be rescinded for mere inadequacy of price, or for an increase of price alone, irregularity, and the like. Some special ground must be laid such as fraud and collusion, accident mutual mistake, breach of trust, or misconduct upon the part of the purchaser, or other party connected with the sale, which has worked injustice to the party complaining and was unknown to him at the time the sale was confirmed. In the instant case there is no claim or pretense that there was any fraud or collusion, or that in any way Gonzalez was misled or deceived. The bank was personally represented at the sale, and there is no showing whatever that, if the property was resold, it would sell for a centavo more than the P15,000.

Republic Act No. 3135, as amended. Conformably to this stipulation, upon breach of the conditions of the mortgage, DBP foreclosed extrajudicially the mortgage on December 10, 1952, and the Provincial Sheriff of Pangasinan posted the requisite notice of the sale at public auction of the mortgaged property. The property was sold at public auction on June 10, 1957 to DBP, being the highest bidder. Because the proceeds of the sale were not sufficient to satisfy the balance of appellant's indebtedness, appellee sued the appellants for the deficiency. The trial court found for appellee and ordered the appellants to pay the

Development Bank of the Philippines vs. Jovencio A. Zaragoza & Avelina E. Zaragoza, G.R. No. L-23493, August 23, 1978 (84 SCRA 668) Facts: The Zaragozas obtained a P30,000 loan from DBP which was secured by a real estate mortgage. It was stipulated that upon failure of the Zaragozas to pay the amortization due, according to the terms and conditions thereof, DBP shall have the authority to foreclose extrajudicially the mortgaged property, pursuant to

131

deficiency, with interest thereon at the legal rate until fully paid plus the sum equivalent to 10% of the amount due as attorney's fees and cost of suit. Issue: Whether the mortgagee who purchased the foreclosed property can still hold the mortgagor liable for any deficiency from the foreclosure sale. Whether the mortgagor can be held liable for the payment of interest until the completion of the foreclosure.

is then clear that absence of a similar provision in Act No. 3135, as amended, it can not be concluded that the creditor loses his right given him under the Mortgage Law and recognized in the Rules of Court, to take action for the recovery of any unpaid balance on the principal obligation, simply because he has chosen to foreclose his mortgage extrajudicially pursuant to a special power of attorney given him by the mortgagor in the mortgage contract. As stated by this Court in Medina vs. Philippine National Bank (56 Phil. 651), a case analogous to the one

Held: Yes. Yes. Affirmed. Ratio: In Philippine Bank of Commerce v. Tomas de Vera, this Court ruled that in extrajudicial foreclosure of mortgage where the proceeds of the sale is insufficient to cover the debt, the mortgagee is entitled to claim the deficiency from the debtor. A reading of the provisions of Act No. 3135, as amended (re extrajudicial foreclosure) discuss nothing, it is true, as to the mortgagee's right to recover such deficiency. But neither do we find, provision thereunder which expressly or impliedly prohibits such recovery. Article 2131 of the new Civil Code, on the contrary, expressly provides that 'The form, extent and consequences of a mortgage, both as to its constitution, modification and extinguishment, and as to other matters not included in this Chapter, shall be governed by the provisions of the Mortgage Law and of the Land Registration Law.' Under the Mortgage Law, which is still in force, the mortgagee has the right to claim for the deficiency resulting from the price obtained in the sale of the real property at public auction and standing obligation at the time of the foreclosure proceedings. (See Soriano v. Enriquez, 24 Phil. 584; Banco de Islas Filipinas v. Concepcion e Hijos, 53 Phil. 86; Banco Nacional v. Barreto, 53 Phil. 101). Under the Rules of Court (Sec. 6, Rule 70), 'Upon the sale of any real property, under an order for a sale to satisfy a mortgage or other incumbrance thereon, if there be a balance due to the plaintiff after applying the proceeds of the sale, the court, upon motion, should render a judgment against the defendant for any such balance for which by the record of the case, he may be personally liable to the plaintiff.' It is true that this refers to a judicial foreclosure, but the underlying principle is the same, that the mortgage is but a security and not a satisfaction of indebtedness. Let it be noted that when the legislature intends to foreclose the right of a creditor to sue for any deficiency resulting from the foreclosure of the security given to guarantee the obligation, it so expressly provides. Thus, in respect to pledges, Article 2115 of the Civil Code expressly states: 'If the price of the sale is less (than the amount of the principal obligation) neither shall creditor be entitled to recover the deficiency, notwithstanding stipulation to the contrary.' Likewise, in the event of a foreclosure of a chattel mortgage on the thing sold in installments 'he (the vendor shall have no further action against the purchaser to recover an paid balance of the price. Any agreement to the contrary shall be void.' (Article 1484, paragraph 3, ibid.). It

132

at bar, the step taken by the mortgagee-bank in resorting to extra-judicial foreclosure under Act 3135, was merely to find a proceeding for the sale, and its action can not be taken to mean a waiver of its right to demand the payment of the whole debt.' The Zaragozas argue that since the appellee held in abeyance the sale of the property for a period of four (4) years, they alone should suffer the consequences of such delay. It was further contended that the debtor's liability in judicial foreclosures is limited to the amount due at the time of the foreclosure and, therefore, such should also apply to extrajudicial foreclosures. By way of refutation, DBP explained that the seemingly long interval between the date of issuance of the Sheriff's Notice of Sale and the date of sale was due to the numerous transfers made of the date of the sale upon requests of the Zaragozas themselves. Under such circumstances, the Zaragozas cannot take advantage of the delay which was their own making, to the prejudice of the other party. Apart from this consideration, it must be noted that a foreclosure of mortgage means the termination of all rights of the mortgagor in the property covered by the mortgage. It denotes the procedure adopted by the mortgagee to terminate the rights of the mortgagor on the property and includes the sale itself. In judicial foreclosures, the "foreclosure" is not complete until the Sheriff's Certificate executed, acknowledges and recorded. In the absence of a Certificate of Sale, no title passes by the foreclosure proceedings to the vendee. It is only when the foreclosure proceedings completed and the mortgaged property sold to the purchaser that all interests of the mortgagor are cut off from the property. This principle is applicable to extrajudicial foreclosures. Consequently, in the case at bar, prior to the completion of foreclosure, the mortgagor is, therefore, liable for the interest on the mortgage.

The loan was not paid. RFC foreclosed the mortgage properties and was able to purchase most of them, including the Soriano land, during the auction sale at very deflated prices. Francisco Soriano, through Teofila Soriano del Rosario, offered to repurchase the Soriano lot for P14,000. The offer was rejected, and they were told to participate in the public sale of the land to be conducted by the RFC. Ponce de Leon did not offer to redeem the foreclosed properties. The RFC scheduled a public sale of the Soriano land on February 20, 1956. On February 18, 1956, Ponce de Leon instituted this action. A preliminary injunction was

Jose L. Ponce de Leon vs. Rehabilitation Finance Corporation, Rosalina Soriano, Teofila Soriano & Rev. Fr. Eugenio R. Soriano, G.R. No. L-24571, December 18, 1970 (36 SCRA 289) Facts: Jose Ponce De Leon & Francisco Soriano (father of the Sorianos) obtained a P10,000 loan from PNB, mortgaging a parcel of land situated in Parañaque, Rizal in the name of Francisco Soriano as security for the loan. Ponce de Leon gave P2,000 to Soriano from the proceeds of the loan. The loan was subsequently increased to P17,500, and an amendment to the real estate mortgage was executed. Ponce de Leon filed with the RFC a loan application for putting up a sawmill in the amount of P800,000 offering as security certain parcels of land, among which, was the parcel which Ponce de Leon and Soriano mortgaged to the PNB. The application stated that the properties offered for security for the RFC loan are encumbered to the PNB. The application was approved for P495,000.

133

issued due to the failure of RFC to attend the hearing. A notice of lis pendens was caused to be recorded by Ponce de Leon. Francisco Soriano then wrote a letter to the President of RFC asking that he be allowed to redeem the property. RFC allowed him to redeem the property for not less than its appraised value of P59,647.05, payable 20% down and the balance in 10 years with 6% interest. Soriano did not redeem the lot. He then filed a 3 rd party

3135. On July 28, 1981, the aforecited house and lots of the plaintiff- spouses were sold at public auction with the defendant bank as the highest bidder. Thereafter, the Certificate of Sale was executed. The ownership of the subject house and lots was consolidated in favor of the defendant bank by virtue of the final deed of sale. On December 19, 1984, the defendant bank sold the aforementioned real estates to

complaint. Due to his death, he was substituted by his children. The children claimed that the mortgaged property was conjugal property which was half-owned by them, and they did not consent to the mortgage. The lower court sustained the RFC, but ruled that the mortgage over ½ of Soriano lot was void.

Issue: Whether a mortgagor of a bank loan can redeem the foreclosed property by paying the amount the property was purchased at public auction and not the amount fixed by the court in its order. Held: No. Affirmed with modifications. Ratio: Section 78 of RA 337 provides that in the event of foreclosure, the mortgagor or debtor whose real property has been sold at public auction for payment of an obligation to any bank, banking or credit institution, shall have the right to redeem the property by paying the amount fixed by the court in the order of execution, not the amount for which it had been purchased by the buyer at public auction. RA 337 applies, not Act 3135. Act 3135 was promulgated to regulate the sale of property under special powers inserted in or annexed to real estate mortgages. RA 337, otherwise known as the General Banking Act, regulates mortgages where banks are involved. RA 337 has the effect of amending Sec. 6 of Act No. 3135, insofar as the redemption price is concerned, when the mortgagee is a bank or a banking or credit institution. The whole of the Soriano property should be foreclosed since the Sorianos failed to prove the conjugal nature of the property. Sta. Ignacia Rural Bank, Inc. vs. CA & Sps. Conrado Pablo & Juanita Gonzales, G.R. No. 97872, March 1, 1994 (230 SCRA 513) Facts: On January 14, 1980, the defendants Sta. Ignacia Rural Bank, Inc. extended to the plaintiff-spouses Conrado Pablo and Juanita Gonzales a loan totalling P12,109.75. As a security, the plaintiff-spouses executed in favor of the defendant bank a Real Estate Mortgage over their residential house and two (2) lots covered by Free Patent Title located at Poblacion Norte, Mayantoc, Tarlac. The plaintiff-spouses defaulted in the payment of their obligation, as a result of which, the defendant bank filed with the Provincial Sheriff of Tarlac a petition for extrajudicial foreclosure of their real estate mortgage under Act

134

defendant-spouses Alberto Lucas and Nelia Rico for P47,500.00, and Transfer Certificates of Title over the house and lots were subsequently issued in the name of said defendant-spouses. Hence, the complaint for the repurchase of the subject house and lots, annullment of title and damages filed on March 20, 1986 by the plaintiff-spouses. The lower court dismissed the complaint. The CA reversed. Issue: Whether the owner of a homestead has 5 more years to repurchase his land after the 2 year redemption period has lapsed.

been mortgaged to banks or banking institutions — i.e., to resolutely and unqualifiedly apply the 5-year period provided for in Section 119 of C.A. No. 141 and, as categorically stated in Paras and Belisario, to reckon the commencement of the said period from the expiration of the one-year period of redemption allowed in extrajudicial foreclosure. If such be the case in foreclosure sales of lands mortgaged to banks other than rural banks, then, by reason of the express policy

Held: Yes. Affirmed. Ratio: It is well-known that the homestead laws were designed to distribute disposable agricultural lots of the State to land-destitute citizens for their home and cultivation. Pursuant to such benevolent intention the State prohibits the sale or encumbrance of the homestead (Section 116) within five years after the grant of the patent. After that five- year period the law impliedly permits alienation of the homestead, but in line with the primordial purpose to favor with the homesteader and his family the statute provides that such alienation or conveyance (Section 117) shall be subject to the right of repurchase by the homesteader, his widow or heirs within five years. This Section 117 is undoubtedly a complement of Section 116. It aims to preserve and keep in the family of the homesteader that portion of public land which the State had gratuitously given to him. It would, therefore, be in keeping with this fundamental idea to hold, as we hold, that the right to repurchase exists not only when the original homesteader makes the conveyance, but also when it is made by his widows or heirs. This construction is clearly deducible from the terms of the statute. Because of such underlying policy and reason, the right to repurchase under Section 119 cannot be waived by the party entitled thereto, and applies with equal force to both voluntary and involuntary conveyances. And, as early as 1951, in Cassion vs. Banco Nacional Filipino, this Court declared that such right is available in foreclosure sales of lands covered by homestead or free patent. Consistently therewith, We have ruled in a number of cases that said Section 119 prevails over statutes which provide for a shorter period of redemption in extrajudicial foreclosure sales. We thus have consistent pronouncements in Paras vs. Court of Appeals, Oliva vs. Lamadrid, Belisario vs. Intermediate Appellate Court and Philippine National Bank vs. De los Reyes. These cases, with the exception of Oliva, involved the question of which between the five (5) year repurchase period provided in Section 119 of C.A. No. 141 or the one (1) year redemption period under Act No. 3135 should prevail. While Oliva is the only case, among those cited, that involves the Rural Banks' Act, the other cases reveal the clear intent of the law on redemption in foreclosure sales of properties acquired under the free patent or homestead statutes which have

135

behind the Rural Banks' Act, and following the rationale of Our ruling in Oliva, it is with greater reason that the 2-year redemption period in Section 5 of the Rural Banks' Act should yield to the period prescribed in Section 119 of C.A. No. 141. Moreover, if this Court is to be consistent with Paras and Belisario, the 5-year repurchase period under C.A. No. 141 should begin to run only from the expiration of the 2-year period under the Rural Banks' Act. Furthermore, We wish to stress here that We are unable to read in Section 5 of R.A. No. 720, as amended, any legislative intent to modify or repeal Section 199 of the Public Land Act. Each speaks of and deals with a different right. Specifically, the former merely liberalized the duration of an existing right of redemption in extrajudicial foreclosure sales by extending the period of one (1) year fixed in Act No. 3135, as amended by Act No. 4118, to two (2) years insofar as lands acquired under free patent and homestead statutes are concerned. the second speaks of the right to repurchase and prescribes the period within which it may be exercised. These two (2) rights are by no means synonymous. Under Act No. 3135, the purchaser in a foreclosure sale has, during the redemption period, only an inchoate right and not the absolute right to the property with all the accompanying incidents. He only becomes an absolute owner of the property if it is not redeemed during the redemption period. Upon the other hand, the right to repurchase is based on the assumption that the person under obligation to reconvey the property has the full title to the property because it was voluntarily conveyed to him or that he had consolidated his title thereto by reason of redemptioner's failure to reason of a redemptioner's failure to exercise his right of redemption. As a consequence of the inchoate character of the right during the redemption period, Act No. 3135 allows the purchaser at the foreclosure sale to take possession of the property only upon the filing of a bond in an amount equivalent to the use of the property for a period of twelve (12) months, indemnify the mortgagor in case it be shown that the sale was made without violating the mortgage or without complying with the requirements of the Act. That bond is not required after the purchaser has consolidated his title to the property following the mortgagor's failure to exercise his right of redemption for in such a case, the former has become the absolute owner thereof. Thus, the rules on redemption in the case of an extrajudicial foreclosure of land acquired under free patent or homestead statutes may be summarized as follows: If the land is mortgaged to a rural bank under R.A. No. 720, as amended, the mortgagor may redeem the property within two (2) years from the date of foreclosure or from the registration of the sheriff's certificate of sale at such foreclosure if the property is not covered or is covered, respectively, by a Torrens title. If the mortgagor fails to exercise such right, he or his heirs may still repurchase the property within five (5) years from the expiration of the two (2) year redemption period pursuant to Section 119 of the Public Land Act (C.A. No. 141). If the land is mortgaged to

parties other than rural banks, the mortgagor may redeem the property within one (1) year from the registration of the certificate of sale pursuant to Act No. 3135. If he fails to do so, he or his heirs may repurchase the property within five (5) years from the expiration of the redemption period also pursuant to Section 119 of the Public Land Act. Following the doctrine enunciated in the Rural Bank of Davao City case, it is clear from a perusal of the factual antecedents at bar that the plea for repurchase was not time-barred at the time it was made. When the certificate of sale in favor of petitioner

136

was registered with the Register of Deeds on November 5, 1981, private respondents had two years, reckoned from said date, within which to redeem the property from petitioner, and another five years, under Commonwealth Act no. 141, counted from the expiration of the redemption period, to effect repurchase which private respondents precisely did when the suit below was initiated on March 20, 1986. Spouses Antonio S. Pahang & Lolita T. Pahang vs. Hon. Augustine A. Vestil, Presiding Judge of RTC- Br. 56, Mandaue City, Deputy Sheriff, RTC – Br. 56 & Metropolitan Bank & Trust Company, G.R. No. 148595, July 12, 2004 (434 SCRA 139)

petitioners averred that the filing of their complaint within the period to redeem the foreclosed property was equivalent to an offer to redeem the same, and had the effect of preserving such right. They also asserted that the respondent acted in bad faith in procuring the title over the property despite the pendency of their complaint. On March 28, 2000, the RTC of Mandaue City, Branch 56, rendered a decision granting the petition and ordering the issuance of a writ of possession in favor of the

Facts: On January 5, 1996, the petitioners, Spouses Antonio and Lolita Pahang, received a short-term loan of P1,500,000.00 from MBTC payable on December 27, 1996. The loan was covered by Non-Negotiable Promissory Note and was, likewise, secured by a real estate mortgage on a parcel of land. As the petitioners failed to pay the loan, the interest and the penalties due thereon, the respondent foreclosed the real estate mortgage extrajudicially. As a consequence, the mortgaged property was sold at public auction on January 8, 1998 to the respondent bank as the highest bidder. A certificate of sale was executed on January 14, 1998 and was registered with the Register of Deeds of Mandaue City on January 27, 1998. On December 29, 1998, the respondent wrote the petitioners that the one-year redemption period of the property would expire on January 27, 1999. Instead of redeeming the property, the petitioners filed, on January 19, 1999, a complaint for annulment of extrajudicial sale against the respondent bank and the Sheriff in the Regional Trial Court of Cebu (Mandaue City), Branch 56. Therein, the petitioners alleged that the respondent bloated their obligation of P1,500,000.00 to P2,403,770.73 by including excessive past due interest, penalty charges, attorney’s fees and sheriff’s expense. They claimed that such exorbitant charges were made to frustrate their chance to pay the loan, and to ensure that the respondent bank would be the highest bidder during the auction sale. They also asserted that the respondent failed to remit to the Sheriff the purchase price of the property and was, likewise, guilty of fraud, collusion, breach of trust or misconduct in the conduct of the auction sale of their property. After the expiration of the one-year redemption period, the respondent consolidated its ownership over the foreclosed property. Consequently, TCT No. 44668 was issued by the Register of Deeds in its name. On July 23, 1999, the respondent filed a Petition for Writ of Possession before the RTC of Mandaue City. The petitioners, citing the ruling of this Court in Belisario v. The Intermediate Appellate Court, opposed the petition on the ground that the core issue in their complaint constituted a prejudicial question, which warranted a suspension of the proceedings before the court. The

137

respondent. A petition for certiorari for the nullification of the decision was filed before the CA. CA affirmed. Issue: Whether the period to redeem is suspended upon the filing of an action to enforce the right to redeem. Held: No. Affirmed.

the said writ of possession. Manuel D. Medida, Deputy Sheriff of the Province of Cebu, City Savings Bank (formerly Cebu City Saving & Loan Assoc, Inc.) & Teotimo Abellana vs. CA & Sps. Andres Dolino & Pascuala Dolino, G.R. No.98334, May 8, 1992 (208 SCRA 887)

Ratio: A prejudicial question is one that arises in a case the resolution of which is a logical antecedent of the issue involved therein, and the cognizance of which pertains to another tribunal. It generally comes into play in a situation where a civil action and a criminal action are both pending and there exists in the former an issue that must be preemptively resolved before the criminal action may proceed, because howsoever the issue raised in the civil action is resolved would be determinative juris et de jure of the guilt or innocence of the accused in the criminal case. The rationale behind the principle of prejudicial question is to avoid two conflicting decisions. In the present case, the complaint of the petitioners for Annulment of Extrajudicial Sale is a civil action and the respondent’s petition for the issuance of a writ of possession is but an incident in the land registration case and, therefore, no prejudicial question can arise from the existence of the two actions. Our ruling in Belisario has no application in this case because in the said case, no prejudicial question was involved. We merely held therein that the filing of an action to enforce redemption within the period of redemption is equivalent to a formal offer to redeem, and should the Court allow the redemption, the redemptioner should then pay the amount already determined. In fine, the filing of an action by the redemptioner to enforce his right to redeem does not suspend the running of the statutory period to redeem the property, nor bar the purchaser at public auction from procuring a writ of possession after the statutory period of redemption had lapsed, without prejudice to the final outcome of such complaint to enforce the right of redemption. The remedy of the petitioners from the assailed decision of the RTC in LRC Case No. 3 was to appeal by writ of error to the Court of Appeals. However, instead of appealing by writ of error, the petitioners filed their petition for certiorari. Certiorari is not proper where the aggrieved party has a plain, speedy and adequate remedy at law. Moreover, the error of the trial court in granting the respondent bank a writ of possession, if at all, was an error of judgment correctible only by an ordinary appeal. It bears stressing that the proceedings in a petition and/or motion for the issuance of a writ of possession, after the lapse of the statutory period for redemption, is summary in nature. The trial court is mandated to issue a writ of possession upon a finding of the lapse of the statutory period for redemption without the redemptioner having redeemed the property. It cannot be validly argued that the trial court abused its discretion when it merely complied with its ministerial duty to issue

138

Facts: On October 10, 1974 plaintiff spouses, alarmed of losing their right of redemption over a parcel of land to the purchaser of the aforesaid lot at the foreclosure sale of the previous mortgage in favor of Cebu City Development Bank, went to Teotimo Abellana, president of defendant Association, to obtain a loan of P30,000.00. Prior thereto or on October 3, 1974, their son Teofredo Dolino filed a similar loan application for Twenty- Five Thousand (P25,000.00) Pesos with lot No. 4731 offered as security. When the loan became due and demandable without plaintiff paying the same, defendant association caused the extrajudicial foreclosure of the mortgage. After the posting and publication requirements were complied with, the land was sold at public auction. No redemption having been effected, a new TCT was issued in favor of the association. The spouses Dolino filed a case for the annulment of the sale at public auction, as well as the corresponding certificate of sale issued pursuant thereto by assailing the validity of the extrajudicial foreclosure sale of their property, claiming that the same was held in violation of Act No. 3135. The lower court rendered judgment upholding the validity of the loan and the real estate mortgage, but annulling the extrajudicial foreclosure sale inasmuch as the same failed to comply with the notice requirements in Act No. 3135. Not satisfied, the spouses Dolino interposed a partial appeal with respect to the portions in the decision declaring that the mortgage executed is valid. CA modified the decision of the lower court and declared the mortgage null and void.

redemption period without his credit having been discharged, it is illogical to hold that during that same period of twelve months the mortgagor was "divested" of his ownership, since the absurd result would be that the land will consequently be without an owner although it remains registered in the name of the mortgagor. That is why the discussion in said case carefully and felicitously states that what is divested from the mortgagor is only his "full right as owner thereof to dispose (of) and sell the lands," in effect, merely

Issue: Whether a mortgagor, whose property has been extrajudicially foreclosed and sold at the corresponding foreclosure sale, may validly execute a mortgage contract over the same property in favor of a third party during the period of redemption. Held: Yes. Reversed. Ratio: The CA declared the real estate mortgage in question null and void for the reason that the mortgagor spouses, at the time when the said mortgage was executed, were no longer the owners of the lot, having supposedly lost the same when the lot was sold to a purchaser in the foreclosure sale under the prior mortgage. This holding cannot be sustained. Preliminarily, the issue of ownership of the mortgaged property was never alleged in the complaint nor was the same raised during the trial, hence that issue should not have been taken cognizance of by the Court of Appeals. An issue which was neither averred in the complaint nor ventilated during the trial in the court below cannot be raised for the first time on appeal as it would be offensive to the basic rule of fair play, justice and due process. If, as admitted, the purchaser at the foreclosure sale merely acquired an inchoate right to the property which could ripen into ownership only upon the lapse of the

139

clarifying that the mortgagor does not have the unconditional power to absolutely sell the land since the same is encumbered by a lien of a third person which, if unsatisfied, could result in a consolidation of ownership in the lienholder but only after the lapse of the period of redemption. Even on that score, it may plausibly be argued that what is delimited is not the mortgagor's jus disponendi, as an attribute of ownership, but merely the rights conferred by such act of disposal which may correspondingly be restricted. At any rate, even the foregoing considerations and arguments would have no application in the case at bar and need not here be resolved since what is presently involved is a mortgage, not a sale, to petitioner bank. Such mortgage does not involve a transfer, cession or conveyance of the property but only constitutes a lien thereon. There is no obstacle to the legal creation of such a lien even after the auction sale of the property but during the redemption period, since no distinction is made between a mortgage constituted over the property before or after the auction sale thereof. Thus, a redemptioner is defined as a creditor having a lien by attachment, judgment or mortgage on the property sold, or on some part thereof, subsequent to the judgment under which the property was sold. Of course, while in extrajudicial foreclosure the sale contemplated is not under a judgment but the proceeding pursuant to which the mortgaged property was sold, a subsequent mortgage could nevertheless be legally constituted thereafter with the subsequent mortgagee becoming and acquiring the rights of a redemptioner, aside from his right against the mortgagor. In either case, what bears attention is that since the mortgagor remains as the absolute owner of the property during the redemption period and has the free disposal of his property, there would be compliance with the requisites of Article 2085 of the Civil Code for the constitution of another mortgage on the property. To hold otherwise would create the inequitable situation wherein the mortgagor would be deprived of the opportunity, which may be his last recourse, to raise funds wherewith to timely redeem his property through another mortgage thereon. Coming back to the present controversy, it is undisputed that the real estate mortgage in favor of petitioner bank was executed by respondent spouses during the period of redemption. We reiterate that during said period it cannot be said that the mortgagor is no longer the owner of the foreclosed property since the rule up to now is that the right of a purchaser at a foreclosure sale is merely inchoate until after the period of redemption has expired without the right being exercised. The title to land sold under mortgage foreclosure remains in the mortgagor or his grantee until the expiration of the redemption period and conveyance by the master's deed. To repeat, the rule has always been that it is only upon the expiration of the redemption period, without the judgment debtor having made use of his right of redemption, that the ownership of the land sold becomes consolidated in the purchaser.

Parenthetically, therefore, what actually is effected where redemption is seasonably exercised by the judgment or mortgage debtor is not the recovery of ownership of his land, which ownership he never lost, but the elimination from his title thereto of the lien created by the levy on attachment or judgment or the registration of a mortgage thereon. The American rule is similarly to the effect that the redemption of property sold under a foreclosure sale defeats the inchoate right of the purchaser and restores the property to the same condition as if no sale had been attempted. Further, it

140

does not give to the mortgagor a new title, but merely restores to him the title freed of the encumbrance of the lien foreclosed. Estanislao Bodiongan vs. CA & Lea Simeon, G.R. No. 114418, September 21, 1995 (248 SCRA 496)

Held: Yes. Affirmed. Ratio: In order to effect a redemption, the judgment debtor must pay the purchaser the redemption price composed of the following: (1) the price which the purchaser paid for the property; (2) interest of 1% per month on the purchase price; (3) the amount of any

Facts: On October 4, 1982, respondent Lea Simeon obtained from petitioner Estanislao Bodiongan and his wife a loan of P219,117.39 secured by a mortgage on three (3) parcels of land with a four-storey hotel building and personal properties located at Gango, Ozamiz City. Private respondent failed to pay the loan. Petitioner thus instituted against her a case for collection of sum of money or foreclosure of mortgage. A judgment was issued against the private respondent. The decision was affirmed by the CA and later became final and executory. Private respondent again failed to pay the judgment debt hence, the mortgaged properties were foreclosed and sold on execution. At the auction sale, petitioner submitted to the sheriff a written bid of P309,000.00 and at the same time reserved in said bid a deficiency claim of P439,710.57. The properties were awarded to petitioner as sole bidder and a certificate of sale was issued in his name and registered with the Register of Deeds of Ozamiz City. Petitioner then took possession of the properties after filing, per order of the trial court, a guaranty bond of P350,000.00 to answer for any damage thereon during the redemption period. On January 8, 1988, private respondent offered to redeem her properties and tendered to the Provincial Sheriff a check in the amount of P337,580.00. This amount was based on a tentative computation by the sheriff. The check was received by petitioner on the same day after which the sheriff issued a certificate of redemption to private respondent also on the same day. On January 11, 1988, petitioner, claiming additional interest at 38% per annum, moved to correct the computation of the redemption price and to suspend the issuance of a writ of possession pending computation. The motion was denied by the trial court. On July 8, 1988, the trial court issued the said writ and private respondent took possession of her properties. Petitioner filed a case for annulment of redemption and confirmation of the foreclosure sale on the ground of insufficiency of the redemption price. On October 7, 1988, petitioner consigned the redemption money with the court. The trial court dismissed the complaint but reduced the 12% interest rate on the purchase price to 6% and ordered petitioner to refund private respondent the excess 6%. The CA affirmed except for the refund of the 6%. Issue: Whether the redemption price should be the purchase price at the auction sale and not the amount stated in the judgment.

141

assessments or taxes which the purchaser may have paid on the property after the purchase; and (4) interest of 1% per month on such assessments and taxes. The redemption price must be for the full amount, otherwise the offer to redeem will be ineffectual. And if the tender is for less than the entire amount, the purchaser may justly refuse acceptance thereof. In the instant case, the redemption price covers the purchase price of P309,000.00 plus 1% interest thereon per month for twelve months at P37,080.00. Petitioner does not claim ant taxes or assessments he may have paid on the property after his purchase. He, however, add P5,000.00 to the price to cover the attorney's fees awarded him by the trial court. In the redemption of property sold at an extrajudicial foreclosure sale, the amount payable is no longer the judgment debt but the purchase price at the auction sale. In other words, the attorney's fees awarded by the trial court should not have been added to the redemption price because the amount payable is no longer the judgment debt, but that which is stated in Section 30 of Rule 39. The redemption price for the mortgaged properties in this case should therefore be P346,080.00, not P531,080.00. Private respondent's tender was P337,580.00 which is still short by P8,500.00. The Provincial Sheriff declared that private respondent ordered him to deduct from the redemption price the value of certain personal properties in the hotel. During petitioner's possession of the lots, he sold some of the furniture, water pump and electrical installations in the hotel and appropriated the proceeds to himself without private respondent's knowledge and approval. Petitioner does not deny the fact that he sold the personal properties and appropriated the proceeds of P13,500.00 to himself. He has expressly admitted this in his written bid to the sheriff. He, however, cannot be considered in estoppel because the deduction for the loss of the personal properties was not authorized under Section 30 of Rule 39. In the first place, the sheriff should not have issued the certificate of redemption without a final determination of the amount of the redemption price. This unauthorized deduction of the value of private respondent's personal properties and the sheriff's over zealousness in issuing the certificate of redemption are aggravated by the fact that private respondent later sought for and was actually compensated for the said loss. Indeed, if we were to allow the deduction of the value of private respondent's personal properties from the redemption price, this will amount to double compensation and unjust enrichment at the expense of petitioner. On the other hand, it would be highly unjust to deprive private respondent of her right to redeem by a strict application of the Rules of Court. It must be remembered that the policy of the law is to aid rather than defeat the right of redemption. Inasmuch as in the instant case tender of the redemption price was timely made and in good faith, and the deficiency in said price is not substantial, we are inclined to give private respondent the opportunity

to complete the redemption of her properties within fifteen days from the time this decision becomes final. Development Bank of the Philippines vs. West Negros College, Inc., G.R. No. 152359, October 28, 2002 (391 SCRA 330) Facts: On December 12, 1967, Bacolod Medical Center (BMC) obtained a loan from the Development Bank of the Philippines (DBP) in the amount of P2,400,000.00 secured by

142

a mortgage on two (2) parcels of land. The mortgage was expressly constituted subject to the provisions of Republic Act No. 85 (R.A. 85) creating the Rehabilitation Finance Corporation, a predecessor agency of DBP. For failure of BMC to pay the loan, DBP instituted on January 30, 1989 an extrajudicial foreclosure of mortgage under Act 3135. On August 24, 1989, the mortgaged properties were sold at public auction with DBP emerging as the highest and only bidder for the sum of P4,090,117.36. On August 25, 1989, the Ex-Officio Provincial Sheriff of Bacolod City executed the certificate of sale in favor of DBP. On July 11, 1990, the sale was registered in the Registry of Deeds and annotated on the TCTs of the mortgaged properties. Prior to the expiration of the redemption period on July 11, 1991, BMC and the Bacolod branch office of DBP agreed to peg the redemption price at P21,500,000.00 representing the compromise settlement of the outstanding account subject to the approval of DBP’s head office. BMC further resolved to pay an installment of 20% of the compromise amount, or P4,300,000.00, on or before August 31, 1991. After several extensions of the deadline to pay the installment, BMC finally settled the amount in three (3) separate payments. In the meantime, on July 10, 1991, in the course of paying the 20% installment, BMC and West Negros executed a Deed of Assignment which assigned to the latter BMC’s interests in the foreclosed properties and vested upon West Negros the right to redeem them. While acknowledging that redemption should be based on the outstanding loan obligation of BMC to DBP, West Negros demanded the reduction of the redemption price from P21,500,000.00 to P12,768,432.90 allegedly because of excessive interest charges. On October 27, 1991, the head office of DBP rejected the compromise amount of P21,500,000.00 since the amount was way below the reappraised value of the foreclosed parcels of land which stood at P28,895,500.00 as of May 31, 1991. On November 8, 1991, West Negros requested the Ex-Officio Provincial Sheriff to issue the certificate of redemption in view of the payment to DBP of P4,300,000.00 representing 20% of the compromise amount, with one percent (1%) interest thereon including other expenses defrayed by DBP at the extrajudicial sale. The computation of the redemption price made by West Negros was based on Section 30, Rule 39 of the Rules of Court and Act 3135. The ExOfficio Provincial Sheriff concurred with West Negros’ basis for the redemption price but responded that the amount paid was still short of P358,128.58. In a letter of even date to the DBP, the Ex-Officio Provincial Sheriff informed DBP of the request for a certificate of redemption and the amount pegged for the full redemption of the foreclosed properties based on Section 30, Rule 39 of the Rules of Court, and requested the surrender of the TCTs covering the redeemed properties. On November 12, 1991, West Negros settled the deficit of P358,128.58. The Sheriff then requested the Manager of DBP on November 12, 1991 to get the deposit in the amount of P358,128.58

and bring with him the owner’s duplicate copies of the TCTs covering the subject properties. DBP responded that West Negros has no personality to enter into the picture and that whatever transaction may have been entered between BMC and West Negros does not bind DBP. DBP further objected to the issuance of the certificate of redemption and argued that the redemption price must be based on the charter of the DBP requiring payment of the amount owed as of the date of the foreclosure sale with interest on the total indebtedness at the rate agreed upon in the obligation. It also refused to hand over

143

the TCTs of the foreclosed properties and caused the registration of its adverse claim thereon. This prompted West Negros to file a petition against DBP. The trial court found merit in the petition and ordered DBP to surrender the TCTs and, in case of failure to turn them over, instructed the Register of Deeds to issue new certificates of title for the foreclosed properties. Because DBP manifested that it was not relinquishing the documents, new TCTs were issued in the name of West Negros. CA affirmed.

from the petitioner. On November 3, 1981, the respondent judge ordered the attachment of CMI's properties. On November 26, 1981, notice of the attachment of real properties of the CMI was served on the Register of Deeds of Makati.

Issue: Whether the redemption price of a property foreclosed by DBP is the amount owed to DBP. Held: Yes. Reversed. Ratio: In Development Bank of the Philippines v. Jimenez this Court clarified the proper applications of Sec. 31 of CA 459 and Sec. 30, Rule 39 of the Rules of Court when we held that "Section 31 of Commonwealth Act No. 459, and not Section 26, Rule 39, of the Rules of Court, is applicable in case of redemption of real estate mortgaged to the DBP to secure a loan. As such, the redemption price to be paid by the mortgagor or debtor to the DBP is 'all the amount he owes the latter on the date of the sale, with interest on the total indebtedness at the rate agreed upon,’ and not merely the amount paid for by the purchaser at the public auction, pursuant to Section 26, Rule 39, of the Rules of Court." Clearly the redemption of properties mortgaged with the Development Bank of the Philippines and foreclosed either judicially or extrajudicially is governed by special laws which provide for the payment of all the amounts owed by the debtor. This special protection given to a government lending institution is not accorded to judgment creditors in ordinary civil actions. Top Rate International Services, Inc. vs. IAC & Rodrigo Tan, doing business under the name and style “Astro Automotive Supply”, G.R. No. L-67496, July 7, 1986 (142 SCRA 467) Facts: Rodrigo Tan filed a complaint against Consolidated Mines Inc. and Jose Marino Olondriz, the president of said corporation, for the payment of the purchase price of certain heavy equipment, parts and accessories sold to Consolidated Mines, Inc. with a total cost of P271,372.20. In said complaint, plaintiff asked that a writ of preliminary attachment be issued against defendants on the ground that said defendants were guilty of fraud in securing said equipment. A writ of preliminary attachment was issued, and the sheriff levied on the properties of the defendant, although there were already prior encumbrances on these properties. Polaris Motor Supply, Co. also brought suit against Consolidated Mines, Inc. for the collection of P71,855.20. The amount represents the price of the heavy equipment and accessories which the respondent CMI had purchased

144

On May 31, 1981, several banks, constituting the Consortium Banks, filed a third party claim with the sheriff, alleging that they were the mortgagees of the real and personal properties of the CMI. They, therefore, asked that the properties be released from attachment. The petitioner filed a motion to quash the third party claim which was denied. The court ruled that the Consortium Banks, as mortgagees of the real and personal properties of the CMI had a superior lien on the properties and that the petitioner could validly levy only on the mortgagor's (CMI's) equity of redemption after the sale of the mortgaged properties. The personal properties were foreclosed by the Consortium Banks to which the properties were sold as the highest bidder and the certificate of sale issued. The petitioner then asked that it be allowed to exercise its right of redemption. But the Consortium Banks opposed the motion on the ground that there was an equity in redemption only in case of foreclosure sale of real properties but not in the case of chattels. In the meantime, an insolvency court authorized the sale of CMI properties to Top Rate International as assignee of the El Grande Development Corp. On the basis of the sale to it, Top Rate International filed a third party claim with the sheriff. It asked that the properties be discharged from attachment. After hearing on the matter, one trial court ordered the lifting and setting aside of the levy on attachment on the properties while the other trial court issued the same order maintaining, however, the levy on attachment on the properties. An appeal was made. The IAC ordered the levy on the 2 properties maintained.

We, therefore, hold that the appellate court did not commit any error in ruling that there was no over-levy on the disputed properties. What was actually attached by respondents was Consolidated Mines' right or equity of redemption, an incorporeal and

Issue: Whether the sheriff should levy only on the right or equity of redemption and not on the property itself. Held: Yes. Affirmed. Ratio: Equity of redemption is the right of the mortgagor to redeem the mortgaged property after his default in the performance of the conditions of the mortgage but before the sale of the property or the confirmation of the sale, whereas the right of redemption means the right of the mortgagor to repurchase the property even after confirmation of the sale, in cases of foreclosure by banks, within one year from the registration of the sale. When herein private respondents prayed for the attachment of the properties to secure their respective claims against Consolidated Mines, Inc., the properties had already been mortgaged to the consortium of twelve banks to secure an obligation of US$62,062,720.66. Thus, like subsequent mortgagees, the respondents' liens on such properties became inferior to that of the banks, which claims in the event of foreclosure proceedings, must first be satisfied. The appellate court, therefore, was correct in holding that in reality, what was attached by the respondents was merely Consolidated Mines' right or equity of redemption.

145

intangible right, the value of which can neither be quantified nor equated with the actual value of the properties upon which it may be exercised. Spouses Ricardo Rosales & Erlinda Sibug vs. Spouses Alfonso & Lourdes Suba, the City Sheriff of Manila, G.R. No. 137792, August 12, 2003 (408 SCRA 664) Facts: A judgment was rendered declaring a sale as an equitable mortgage and ordering the debtors, spouses Rosales and Sibut to pay the amount of the debt to Macaspac and Jiao within 90 days. The decision became final. The debtors failed to pay the debt, so the creditor filed a motion for execution. The trial court ordered the sale of the property to satisfy the judgment. An auction sale was held, and the spouses Suba gave the highest bid. The trial court confirmed the sale and issued a final deed of sale to the winning bidder. The register of deeds issued new TCTs. The new owners then filed a motion for the issuance of a writ of possession which was granted. A petition was filed questioning the issuance of the writ before the CA which was denied.

certificate of foreclosure sale. Where the foreclosure is judicially effected, however, no equivalent right of redemption exists. The law declares that a judicial foreclosure sale, ‘when confirmed by an order of the court, shall operate to divest the rights of all the parties to the action and to vest their rights in the purchaser, subject to such rights of redemption as may be allowed by law.’ Such rights exceptionally ‘allowed by law’ (i.e., even after the confirmation by an order of the court) are those granted by the charter of the Philippine National Bank (Act Nos. 2747 and 2938), and the General Banking Act (R.A.337). These laws confer on the mortgagor,

Issue: Whether a judgment debtor has a right to redeem property which was judicially sold to satisfy the judgment. Held: No. Affirmed. Ratio: The decision of the trial court, which is final and executory, declared the transaction between petitioners and Macaspac an equitable mortgage. In Matanguihan vs. Court of Appeals, this Court defined an equitable mortgage as “one which although lacking in some formality, or form or words, or other requisites demanded by a statute, nevertheless reveals the intention of the parties to charge real property as security for a debt, and contains nothing impossible or contrary to law.” An equitable mortgage is not different from a real estate mortgage, and the lien created thereby ought not to be defeated by requiring compliance with the formalities necessary to the validity of a voluntary real estate mortgage. Since the parties’ transaction is an equitable mortgage and that the trial court ordered its foreclosure, execution of judgment is governed by Sections 2 and 3, Rule 68 of the 1997 Rules of Civil Procedure, as amended. The right of redemption in relation to a mortgage–understood in the sense of a prerogative to reacquire mortgaged property after registration of the foreclosure sale– exists only in the case of the extrajudicial foreclosure of the mortgage. No such right is recognized in a judicial foreclosure except only where the mortgagee is the Philippine National bank or a bank or a banking institution. Where a mortgage is foreclosed extrajudicially, Act 3135 grants to the mortgagor the right of redemption within one (1) year from the registration of the sheriff’s

146

his successors in interest or any judgment creditor of the mortgagor, the right to redeem the property sold on foreclosure–after confirmation by the court of the foreclosure sale– which right may be exercised within a period of one (1) year, counted from the date of registration of the certificate of sale in the Registry of Property. But, to repeat, no such right of redemption exists in case of judicial foreclosure of a mortgage if the mortgagee is not the PNB or a bank or banking institution. In such a case, the foreclosure sale, ‘when confirmed by an order of the court, x x x shall operate to divest the rights of all the parties to the action and to vest their rights in the purchaser.’ There then exists only what is known as the equity of redemption. This is simply the right of the defendant mortgagor to extinguish the mortgage and retain ownership of the property by paying the secured debt within the 90-day period after the judgment becomes final, in accordance with Rule 68, or even after the foreclosure sale but prior to its confirmation. Clearly, as a general rule, there is no right of redemption in a judicial foreclosure of mortgage. The only exemption is when the mortgagee is the Philippine National Bank or a bank or a banking institution. Since the mortgagee in this case is not one of those mentioned, no right of redemption exists in favor of petitioners. They merely have an equity of redemption, which, to reiterate, is simply their right, as mortgagor, to extinguish the mortgage and retain ownership of the property by paying the secured debt prior to the confirmation of the foreclosure sale. However, instead of exercising this equity of redemption, petitioners chose to delay the proceedings by filing several manifestations with the trial court. Thus, they only have themselves to blame for the consequent loss of their property.

then moved for confirmation of the foreclosure sale, but the Court confirmed the sale of only two lots, refusing to do so as regards the two which had been subject of the execution sale in Limpin's favor. It was to resolve the resulting dispute that Ponce instituted a special civil action in the Intermediate Appellate Court, impleading Limpin and Sarmiento as indispensable parties respondents. That Court rendered judgment on February 28, 1985 in Ponce's favor; Limpin and Sarmiento appealed; this Court denied their appeal.

Gregorio Y. Limpin & Rogelio M. Sarmiento vs. IAC & Guillermo Ponce, G.R. No. L-70987, September 29, 1988 (166 SCRA 87) Facts: The proceedings concern two (2) lots which, together with two (2) others, were originally mortgaged in 1973 to herein private respondent Ponce by their former owners, the Spouses Jose and Marcelina Aquino. These two lots were afterwards sold in 1978 by the same Aquino Spouses to Butuan Bay Wood Export Corporation. Against this corporation, herein petitioner Limpin obtained a money judgment in 1979; and to satisfy the judgment, the two lots were levied on and sold at public auction in 1980, Limpin being the highest bidder. Limpin later sold the lots to his co-petitioner, Sarmiento. Earlier however — or a day before levy was made on the two lots in execution of the judgment against Butuan Bay Wood Export Corporation — Ponce had initiated judicial proceedings for the foreclosure of the mortgage over said two (2) lots (together with the two (2) others mortgaged to him). Judgment was rendered in his favor and became final; and at the ensuing foreclosure sale, the lots were acquired by Ponce himself as highest bidder. Ponce

147

It was not until March 11, 1988 — nine months or so after entry of the judgment recognizing his equity of redemption as successor-in-interest of the original mortgagors — that Sarmiento finally bestirred himself to attempt to exercise his unforeclosed equity of redemption. On that day he filed a motion with the Court presided over by Hon. Judge Antonio Solano, manifesting that he would exercise the right and asked the Court to fix the redemption price. The Court opined that "this should be the subject of the agreement between Ponce and Sarmiento." Sarmiento then wrote to Ponce on March 23, 1988 offering "P2.6 million as redemption price for the two lots originally covered by TCTs Nos. 92836 and 92837, now 307100 and 307124." Ponce's answer, dated March 25, 1988, rejected the offer and averred that the period within which Sarmiento could have exercised such right had lapsed. Sarmiento filed a motion in court to fix the redemption price which was opposed by Ponce. The court ruled for Sarmiento. Ponce filed a Motion for Clarification with the Supreme Court.

case of judicial foreclosure of a mortgage if the mortgagee is not the PNB or a bank or banking institution. In such a case, the foreclosure sale, "when confirmed by an order of the court . . . shall operate to divest the rights of all the parties to the action and to vest their rights in the purchaser." There then exists only what is known as the equity of redemption. This is simply the right of the defendant mortgagor to extinguish the mortgage and retain ownership of the property by paying the secured debt within the 90-day period after the judgment becomes

Issue: Whether redemption may still be made after confirmation of a judicial foreclosure. Held: No. Equity of redemption has already lapsed. Ratio: The equity of redemption is, to be sure, different from and should not be confused with the right of redemption. The right of redemption in relation to a mortgage — understood in the sense of a prerogative to re-acquire mortgaged property after registration of the foreclosure sale — exists only in the case of the extrajudicial foreclosure of the mortgage. No such right is recognized in a judicial foreclosure except only where the mortgagee is the Philippine National Bank or a bank or banking institution. Where a mortgage is foreclosed extrajudicially, Act 3135 grants to the mortgagor the right of redemption within one (1) year from the registration of the sheriffs certificate of foreclosure sale. Where the foreclosure is judicially effected, however, no equivalent right of redemption exists. The law declares that a judicial foreclosure sale, "when confirmed by an order of the court, shall operate to divest the rights of all the parties to the action and to vest their rights in the purchaser, subject to such rights of redemption as may be allowed by law." Such rights exceptionally "allowed by law" (i.e., even after confirmation by an order of the court) are those granted by the charter of the Philippine National Bank (Acts No. 2747 and 2938), and the General Banking Act (R.A. 337). These laws confer on the mortgagor, his successors in interest or any judgment creditor of the mortgagor, the right to redeem the property sold on foreclosure — after confirmation by the court of the foreclosure sale — which right may be exercised within a period of one (1) year, counted from the date of registration of the certificate of sale in the Registry of Property. But, to repeat, no such right of redemption exists in

148

final, in accordance with Rule 68, or even after the foreclosure sale but prior to its confirmation. The mortgagor’s equity of redemption may be exercised by him even beyond the 90-day period "from the date of service of the order," and even after the foreclosure sale itself, provided it be before the order of confirmation of the sale. After such order of confirmation, no redemption can be effected any longer. It is this same equity of redemption that is conferred by law on the mortgagor's successors-in-interest, or third persons acquiring rights over the mortgaged property subsequent, and therefore subordinate, to the mortgagee's lien. If these subsequent or junior lien-holders be not joined in the foreclosure action, the judgment in the mortgagor's favor is ineffective as to them, of course. In that case, they retain what is known as the "unforeclosed equity of redemption," and a separate foreclosure proceeding should be brought to require them to redeem from the first mortgagee, or the party acquiring title to the mortgaged property at the foreclosure sale, within 90 days, under penalty of losing that prerogative to redeem. In the case at bar, however, there is no occasion to speak of any "unforeclosed equity of redemption" in Sarmiento's favor since he was properly impleaded in the judicial proceeding where his and Ponce's rights over the mortgaged property were ventilated and specifically adjudicated. Under the circumstances obtaining in this case, the plain intendment of the Intermediate Appellate Court was to give to Sarmiento, not the unforeclosed equity of redemption pertaining to a stranger to the foreclosure suit, but the same equity of redemption possessed by the mortgagor himself. The judgment cannot be construed as contemplating or requiring the institution of a separate suit by Ponce to compel Sarmiento to exercise his unforeclosed equity of redemption, or as granting Sarmiento the option to redeem at any time that he pleases, subject only to prescription. This would give rise to that multiplicity of proceedings which the law eschews. The judgment plainly intended that Sarmiento exercise his option to redeem, as successor of the mortgagor. The rejection by this Court of Sarmiento's and Limpin's appeal in its own Decision of January 30, 1987, which imported nothing less than a total affirmance of the Decision of the Appellate Court, should therefore have sufficiently alerted Sarmiento that confirmation could come at any time after this Court's Decision became final, with or without any action from Ponce. He cannot, in the circumstances, claim unfair surprise. He should, upon being notified of this Court's Decision, have taken steps to redeem the properties in question or, at the very least, served the Trial Court and Ponce with notice of his intention to exercise his equity of redemption. There was certainly time enough to do this — the order confirming the foreclosure sale issuing only on June 17, 1987 — had he not occupied himself with the fruitless maneuverings to relitigate the issues already recounted. Indeed, had he made an attempt to redeem, even belatedly but within a reasonable period of time after learning of the order of

confirmation (the record shows he did learn of it within three [3] days after its issuance), he might perhaps have given the Court some reason to consider his bid on equitable grounds. He did not. He let nine (9) months pass, to repeat, in carrying out improper (and contumacious) stratagems to negate the judgments against him, before making any such move. Ramon Herrera, et al. vs. Hon. Francisco Arellano, et al., G.R. No. L-8164, October 27, 1955 (97 Phil 776)

149

Facts: In September of 1920, Ramon Herrera, in his capacity as judicial guardian of his minor children Ricardo, Arturo, Dulcelina, and Cristeto Herrera, borrowed P7,000 from Siuliong & Co., payable with 12 per cent annual interest. Between 1920 and 1930, he also borrowed various other sums of money, and upon liquidation made on June 31, 1930, the total sum due was ascertained to be P14,176.26 after deducting payments made. While these acts of the guardian appeared to be unauthorized by the Court, the wards, upon attaining majority, by public document, confirmed the previous arrangements and manifested their entire agreement to the liquidation of their accounts, and compromised the case by promising to pay Siuliong & Co., Inc., the acknowledged balance of P14,176.26. By a separate notarial instrument, the spouses Ramon Herrera and Rosa Gallo compromised the pending civil case filed against them by Siuliong & Co., Inc., by acknowledging an indebtedness in favor of the latter, promising to pay said sum, jointly and in solidum, and guaranteeing payment by mortgage of their 1/4 interest in the Hacienda San Roque, the house on Lot 91 of the Manapla Cadastre, plus the parcels of land. Both mortgage credits were assigned by the creditor Siuliong & Co., Inc. to Francisco Cu Unjieng, by public instrument. Hacienda San Roque was later leased by the mortgagors to Ricardo Herrera and Lope Ilustre without the consent of the creditor. Siuliong & Co., Inc. gave notice of its intention to foreclose on the properties. Apparently, the sale was not carried out, for on August 28, 1936, the lawyers of the mortgagee wrote the debtors complaining that the land taxes of the mortgaged property had not been paid and the mortgagee had been forced to disburse the same. Once again, on July 12, 1937, the mortgagees demanded satisfaction of the indebtedness, but attempts to settle and compromise were useless. The mortgagors filed a case for an accounting and to set aside an extrajudicial foreclosure. An answer was filed with a counterclaim for nonpayment and breach of the obligations and prayed for judgment thereon with interest and attorneys' fees, and for a decree of judicial foreclosure. The case was dismissed, but no decision was made on the defendants’ claims. Upon motion by the parties, the court granted a reopening of the case, but no decision was rendered. The lower court, on petition, later decided in favor of the defendants and gave the mortgagors 90 days to pay, otherwise the mortgaged properties will be sold at a public auction. The mortgagors appealed, from this decision, to the Court of Appeals. CA affirmed the indebtedness, but reversed the order decreeing the sale of mortgaged properties. The CA ruled that no action lies to enforce the indebtedness until the moratiorium law expires or is lifted. On May 18, 1953 this Court rendered its decision in the case of Rutter vs. Esteban (93 Phil., 63), declaring that "the continued operation and enforcement of Republic Act No. 342 (the Moratorium Law) at the present time is

unreasonable and oppressive and should not be prolonged a minute longer." The mortgagee then filed a motion for execution which was granted. A writ of execution was issued. In compliance therewith, on September 8, 1953, the Provincial Sheriff of Negros Occidental sold, at public auction, the mortgaged properties to the mortgagee, Cu Unjieng o& Sons, Inc. On motion of the latter, the court confirmed this sale by an order dated October 9, 1953. The mortgagors filed 2 motions for reconsideration which were denied. Hence, this case.

150

Issue: Whether an order executing a judgment which neither contains an order requiring the mortgagors to pay their obligation to the mortgagees nor grants said mortgagors the 90-day period within which to pay the mortgaged debt is valid. Whether the 90 day period for payment should be counted from the date of service of the order directing the mortgagors to pay their obligation.

Spouses Rempson Samson & Milagros Samson, & Rempson Realty & Development Corporation vs. Judge Mauricio M. Rivera, in his capacity as Presiding Judge of the RTC of Antipolo City, Br. 73, Atty. Joselito MalibagoSantos, in her capacity as Ex- Officio Sheriff, RTC of Antipolo City, & Lenjul Realty Corporation, G.R. No. 154344, May 20, 2004 (428 SCRA 759)

Held: No. Yes. Reversed. Ratio: Invoking our decision in Rutter vs. Esteban (93 Phil., 63), it must be noted that the 90-day period granted the mortgage debtor within which to pay the amount of the mortgage is in Section 2 of Rule 70 of the Rules of Court, and it is to be counted 'from the date of the service of the order,' not from the date thereof. The order referred to in the rule is the order requiring the debtor to pay the judgment within 90 days. This 90-day period given in the rule is not a procedural requirement merely; it is a substantive right granted to the mortgage debtor as the last opportunity to pay the debt and save his mortgaged property from final disposition at the foreclosure sale. It is one of the two steps necessary to destroy what is law is known as the mortgagor's 'equity of redemption,' the other being the sale. It may not be omitted. As the writ of execution or the order allowing the sale of the mortgaged property was issued without granting the mortgage debtor said 90-day period, the order for the sale of the property would be a denial of a substantial right and void. It is true that the original judgment of this Court required payment within 90 days, but this same judgment was expressly held in abeyance; therefor, the 90-day period never began to run. Neither was it effective while the moratorium was in force. The order of execution that was held in abeyance did not ipso facto become effective upon the lifting of the moratorium. A new order of the court become necessary to revive the order of payment, and this new order may not suppress or deny the 90-day period originally fixed and required by the rules. The order complained of does not grant this 90-day period, and, therefore, invalid. In this case, the provision for payment of the debt within 90 days found in the original decision of the court of first instance was reversed by the Court of Appeals. In other words, in the case at bar, respondent Judge directed the execution of a judgment which neither contained an order requiring the mortgagors to pay their obligation to the mortgagees nor granted said mortgagors any period within which to effect said payment. At any rate, the 90-day period, prescribed in Section 2 of Rule 70 of the Rules of Court, should be counted "from the date of service of the order" directing the mortgagors to pay their obligation to the mortgagees and no such order having, as yet, been issued, it follows that the orders complained of, directing the sale of the mortgaged property and denying the reconsideration prayed for by petitioners herein, are "null and void," as held in the aforementioned De Leon case.

151

Facts: Sps. Rempson and Samson incurred from FEBTC a loan for P55M which was secured by a real estate mortgage over 5 parcels of property. The spouses failed to settle their obligation. FEBTC extrajudicially foreclosed the properties. An auction sale was held which was won by Lenjul Realty Corp. The sale was confirmed, and a certificate of sale was issued. Lenjul Realty filed a petition for the issuance of a writ of possession. While the Petition was pending, Spouses Samson and Rempson Corporation filed with the Antipolo City RTC, an action for Annulment of Extra-Judicial Foreclosure and/or Nullification of Sale and the Certificates of Title. The judge then granted the prayer for the issuance of a writ of possession. CA affirmed.

Products Co., Inc. v. Court of Appeals is misplaced. In that case, the sole issue was the consolidation of a civil case regarding the validity of the mortgage and a land registration case for the issuance of a writ of possession. It did not declare that the writ of possession must be stayed until the questions on the mortgage or the foreclosure sale were resolved. Moreover, the issue of

Issue: Whether a writ of possession may be issued even before the expiration of the redemption period. Whether the issuance of a writ of possession may be stayed by the filing of an action for the annulment of the foreclosure. Held: Yes. No. Affirmed. Ratio: The purchaser in a foreclosure sale may apply for a writ of possession during the redemption period by filing for that purpose an ex parte motion under oath, in the corresponding registration or cadastral proceeding in the case of a property with torrens title. Upon the filing of such motion and the approval of the corresponding bond, the court is expressly directed to issue the writ. This Court has consistently held that the duty of the trial court to grant a writ of possession is ministerial. Such writ issues as a matter of course upon the filing of the proper motion and the approval of the corresponding bond. No discretion is left to the trial court. Any question regarding the regularity and validity of the sale, as well as the consequent cancellation of the writ, is to be determined in a subsequent proceeding as outlined in Section 8 of Act 3135. Such question cannot be raised to oppose the issuance of the writ, since the proceeding is ex parte. The recourse is available even before the expiration of the redemption period provided by law and the Rules of Court. The purchaser, who has a right to possession that extends after the expiration of the redemption period, becomes the absolute owner of the property when no redemption is made. Hence, at any time following the consolidation of ownership and the issuance of a new transfer certificate of title in the name of the purchaser, he or she is even more entitled to possession of the property. In such a case, the bond required under Section 7 of Act 3135 is no longer necessary, since possession becomes an absolute right of the purchaser as the confirmed owner. This Court has long settled that a pending action for annulment of mortgage or foreclosure does not stay the issuance of a writ of possession. Therefore, the contention of petitioners that the RTC should have consolidated Civil Case No. 01-6219 with LR Case No. 01-2698 and resolved the annulment case prior to the issuance of the Writ of Possession is unavailing. Their reliance on Active Wood

152

consolidation in the present case has become moot, considering that the trial court has already granted it. The Court of Appeals correctly declared that petitioners pursued the wrong remedy. A special civil action for certiorari could be availed of only if the lower tribunal has acted without or in excess of jurisdiction, or with grave abuse of discretion amounting to lack or excess of jurisdiction; and if there is no appeal or any other plain, speedy, and adequate remedy in the ordinary course of law. A party may petition for the setting aside of a foreclosure sale and for the cancellation of a writ of possession in the same proceedings where the writ of possession was requested. In petitioners’ case, the filing of the Petition is no longer necessary because the pendency of Civil Case No. 016219 (which was consolidated with the present case) already challenged the foreclosure sale

respondents against petitioner DBP. It seeks to declare the sale of the property to Torrefranca void and to order petitioner DBP “to respect respondents’ right of preemption;” and maintain the status quo between the parties. Upon the other hand, Civil Case No. 6097 is a petition for the issuance of a writ of possession filed by petitioner DBP, being the purchaser of the lot

Development Bank of the Philippines vs. Spouses Wilfredo Gatal & Azucena Gatal, G.R. No. 138567, March 4, 2005 (452 SCRA 697) Facts: Spouses Gatal obtained a P1.5M loan from the DBP which was secured by a real estate mortgage over a commercial lot. For failure to pay their loan, DBP foreclosed. The property was offered for sale at an auction, but no one was able to meet the bid price ceiling. DBP offered the property for negotiated sale. The spouses Gatal submitted a bid, but another bidder, Torrefranca, submitted a higher bid. The spouses Gatal offered to match the higher bid, but this was denied because Torrefranca was already considered a preferred bidder. The spouses Gatal filed a case for injunction. A writ of preliminary injunction was issued. DBP, on the other hand, filed a petition for the issuance of a writ of possession which was granted. The spouses Gatal filed a motion to dismiss the petition of DBP and to quash the writ of possession on the ground that there is another case pending with the same subject matter and issues. The petition of DBP was dismissed and the writ of possession was recalled. DBP filed a petition for certiorari with the CA, but this was dismissed. Issue: Whether a separate action should be filed for a writ of possession to issue. Held: No. Reversed. Ratio: For litis pendentia to lie as a ground for a motion to dismiss, the following requisites must be present: (1) that the parties to the action are the same; (2) that there is substantial identity in the causes of action and reliefs sought; and (3) that the result of the first action is determinative of the second in any event and regardless of which party is successful. It is undisputed that both cases involve the same parties and the same property. Civil Case No. 5996 is an action for injunction filed by

153

at the public auction. Clearly, the rights asserted and the reliefs sought by the parties in both cases are not identical. Thus, respondents’ claim of litis pendentia is unavailing. In Tan Soo Huat vs. Ongwico, we ruled that “once a mortgaged estate is extrajudicially sold, and is not redeemed within the reglementary period, no separate and independent action is necessary to obtain possession of the property. The purchaser at the public auction has only to file a petition for issuance of a writ of possession pursuant to Section 33 of Rule 39 of the Rules of Court.” To give effect to the right of possession, the purchaser must invoke the aid of the court and ask for a writ or possession without need of bringing a separate independent suit for this purpose. Records show that title to the property has been consolidated to petitioner DBP. Thus, its petition for a writ of possession is in order. Obviously, the RTC (Branch 47) erred when it granted respondents’ motion to dismiss and recalled the writ of possession it earlier issued. Where, as here, the title is consolidated in the name of the mortgagee, the writ of possession becomes a matter of right on the part of the mortgagee, and it is a ministerial duty on the part of the trial court to issue the same. The pendency of a separate civil suit questioning the validity of the sale of the mortgaged property cannot bar the issuance of the writ of possession. The rule equally applies to separate civil suits questioning the validity of the mortgage or its foreclosure and the validity of the public auction sale.

request, petitioner sued the former for accounting, alleging that the two deeds did not express their true intent, the transaction being one of an equitable mortgage and not an absolute sale. The trial court ordered the instruments reformed in the sense that the true agreement is one whereby private respondent, in consideration of the use of petitioner's properties until reimbursement, would assume the latter's debts. The Court of Appeals affirmed the decision, with the modification that petitioner "has the right to reimburse"

Jose P. Dizon vs. Alfredo G. Gaborro (Substituted by Pacita de Guzman Gaborro, as Judicial Administratrix of the Estate of Alfredo G. Gaborro) & Development Bank of the Philippines, G.R. No. L-36821, June 22, 1978 (83 SCRA 688) Facts: Petitioner Dizon was the owner of 3 parcels of land. He constituted a first mortgage lien in favor of the Development Bank of the Philippines in order to secure a loan in the sum of P38,000.00 and a second mortgage lien in favor of the Philippine National Bank to secure his indebtedness to said bank in the amount of P93,831.91. Dizon himself executed the deed of sale in favor of DBP. After his properties were extrajudicially foreclosed by DBP, but before the expiration of the redemption period, petitioner Dizon met respondent Gaborro. Petitioner executed a "Deed of Sale with Assumption of Mortgage" in favor of the private respondent, who in turn executed on the same day an "Option to Purchase Real Estate" in favor of petitioner. Thereafter, private respondent made several payments to the mortgagees (DBP and PNB), took possession of, cultivated, and paid taxes, on the land. Petitioner Dizon also executed a document entitled “Assignment of Right of Redemption and Assumption of Obligation”. Two years later, petitioner offered to reimburse what private respondent had paid to the mortgagee without, however, tendering any cash, and demanded an accounting. When private respondent dishonored the

154

respondent at 8% per annum, which right shall be exercised within one year from the finality of decision. Issue: Whether a contract denominated as a sale which is actually a contract for the use of land in the nature of an antichresis can be reformed to convey the true intention of the parties.

With Assumption of Mortgage earlier executed between them which We have ruled out as an absolute sale. The only legal effect of this Option Deed is the grant to petitioner the right to recover the properties upon reimbursing respondent Gaborro of the total sums of money that the latter may have paid to DBP and PNB on account of the mortgage debts, the said right to be exercised within the stipulated 5 years period.

Held: Yes. Affirmed. Ratio: A judgment debtor, whose property is levied on execution, may transfer his right of redemption to any one whom he may desire. The right to redeem land sold under execution within 12 months is a property right and may be sold voluntarily by its owner and may also be attached and sold under execution. Upon foreclosure and sale, the purchaser is entitled to a certificate of sale executed by the sheriff. (Section 27, Revised Rules of Court) After the termination of the period of redemption and no redemption having been made, the purchaser is entitled to a deed of conveyance and to the possession of the properties. (Section 35, Revised Rules of Court). The weight of authority is to the effect that the purchaser of land sold at public auction under a writ of execution only has an inchoate right in the property, subject to be defeated and terminated within the period of 12 months from the date of sale, by a redemption on the part of the owner. Therefore, the judgment debtor in possession of the property is entitled to remain therein during the period allowed for redemption. In the case before Us, after the extrajudicial foreclosure and sale of his properties, petitioner Dizon retained the right to redeem the lands, the possession, use and enjoyment of the same during the period of redemption. And these are the only rights that Dizon could legally transfer, cede and convey unto respondent Gaborro under the instrument captioned Deed of Sale with Assumption of Mortgage, likewise the same rights that said respondent could acquire in consideration of the latter's promise to pay and assume the loan of petitioner Dizon with DBP and PNB. Such an instrument cannot be legally considered a real and unconditional sale of the parcels of land, firstly, because there was absolutely no money consideration therefor, as admittedly stipulated, the sum of P131,831.91 mentioned in the document as the consideration "receipt of which was acknowledged" was not actually paid; and secondly, because the properties had already been previously sold by the sheriff at the foreclosure sale, thereby divesting the petitioner of his full right as owner thereof to dispose and sell the lands. In legal consequence thereby, respondent Gaborro as transferee of these certain limited rights or interests, cannot grant to petitioner Dizon more than said rights, such as the option to purchase the lands as stipulated in the document called Option to Purchase Real Estate. This is necessarily so for the reason that respondent Gaborro did not purchase or acquire the full title and ownership of the properties by virtue of the Deed of Sale

155

In the light of the foreclosure proceedings and sale of the properties, a legal point of primary importance here, as well as other relevant facts and circumstances, We agree with the findings of the trial and appellate courts that the true intention of the parties is that respondent Gaborro would assume and pay the indebtedness of petitioner Dizon to DBP and PNB, and in consideration therefor, respondent Gaborro was given the possession, the enjoyment and use of the lands until petitioner can reimburse fully the respondent the amounts paid by the latter to DBP and PNB, to accomplish the following ends: (a) payment of the bank obligations; (b) make the lands productive for the benefit of the possessor, respondent Gaborro; (c) assure the return of the land to the original owner, petitioner Dizon, thus rendering equity and fairness to all parties concerned. In view of all these considerations, the law and jurisprudence, and the facts established, We find that the agreement between petitioner Dizon and respondent Gaborro is one of those innominate contracts under Art. 1307 of the New Civil Code whereby petitioner and respondent agreed "to give and to do" certain rights and obligations respecting the lands and the mortgage debts of petitioner which would be acceptable to the bank, but partaking of the nature of the antichresis insofar as the principal parties, petitioner Dizon and respondent Gaborro, are concerned. Mistake is a ground for the reformation of an instrument when, there having been a meeting of the minds of the parties to a contract, their true intention is not expressed in the instrument purporting to embody the agreement, and one of the parties may ask for such reformation to the end that such true intention may be expressed. (Art. 1359, New Civil code). When a mutual mistake of the parties causes the failure of the instrument to disclose their real agreement, said instrument may be reformed. (Art. 1361, New Civil Code.) It was a mistake for the parties to execute the Deed of Sale With Assumption of Mortgage and the Option to Purchase Real Estate and stand on the literal meaning of the terms and stipulations used therein. On the issue of the accounting of the fruits, harvests and other income received from the three parcels of land from October 6, 1959 up to the present, prayed and demanded by Dizon of Gaborro or the Judicial Administratrix of the latter's estate, We hold that in fairness and equity and in the interests of justice that since We have ruled out the obligation of petitioner Dizon to reimburse respondent Gaborro of any interests and land taxes that have accrued or been paid by the latter on the loans of Dizon with DBP and PNB, petitioner Dizon in turn is not entitled to an accounting of the fruits, harvests and other income received by respondent Gaborro from the lands, for certainly, petitioner cannot have both benefits and the two may be said to offset each other.

Facts: On August 8, 1938, Perfecto Adrid and his wife Carmen Silangcruz, then owners of a lot in San Francisco Malabon Estate Subdivision, situated in General Trias, Cavite, executed a document entitled "Sale with Right to Repurchase", purporting to sell the lot to Eugenio Morga for the sum of P2,000 with the right to repurchase the same within two years for the same sum of P2,000, plus 12% interest per annum. The vendors never repurchased the lot. But in 1956, Perfecto Adrid and his son, brought the present action against the administratrix of the deceased Eugenio Morga to recover the same lot and

Perfecto Adrid, et al. vs. Rosario Morga, etc., and Mamerto Morga, et al., G.R. No. L-13299, July 25, 1960 (108 Phil 927)

156

asking for accounting of all the produce of the lot since 1938, this on the theory that the original contract of sale with pacto de retro was by acts of the parties to the said contract, converted into one of antichresis. The lower court upheld the pacto de retro sale. Issue: Whether a pacto de retro sale or an equitable mortgage is converted into an antichresis because the vendee or mortgagee took possession of the land.

Arcade building on its premises at Escolta, Manila. To secure this loan, the corporation executed a first mortgage on said premises and on the building proposed to be erected thereon. On February 11, 1932, Tavera-Luna, Inc., secured from El Hogar Filipino an additional loan of P300,000 with the same security executed for the original loan. The Tavera-Luna, Inc., thereafter, defaulted in the payment of the monthly amortizations on the loan; whereupon, El Hogar Filipino foreclosed the mortgage and proceeded with the

Held: No. Reversed. Ratio: The intention of the parties was merely for Perfecto and his wife Carmen to borrow the sum of P2,000 from Eugenio Morga, Lot No. 550 being given as security. In other words, we have here a clear case of equitable mortgage. Otherwise, there would be no reason for the agreement made for the payment of 12% interest per annum. This interest must refer to the use of P2,000 by the alleged vendors until the same shall have been paid to Eugenio. The parties to the contract must have contemplated the lot remaining in the possession of the vendors inasmuch as it was considered a mere security. However, after the execution of the contract, the creditor, Morga according to the contention of the plaintiff, decided to take possession of the land, pending payment of the loan, finding it financially advantageous to receive the products thereof, valued at P300.00 a year, in lieu of the payment of interest at 12% a year, which would only be P240.00. But this did not convert, as contended by plaintiffs, the contract from a sale with pacto de retro to that of antichresis. The contention of plaintiffs that although the original contract was one of sale with right to repurchase, it was converted into one of antichresis just because the vendee took possession of the land, is clearly untenable. There is nothing in the document, Exhibit A, nor in the acts of the parties subsequent to its execution to show that the parties had entered into a contract of antichresis. In the case of Alojado vs. Lim Siongco, 51 Phil., 339, what characterizes a contract of antichresis is that the creditor acquires the right to receive the fruits of the property of his debtor with the obligation to apply them to the payment of interest, if any is due, and then to the principal of his credit, and when such a covenant is not made in the contract, which speaks unequivocally of a sale with right of repurchase, the contract is a sale with the right to repurchase and not an antichresis. Carlos Pardo de Tavera & Carmen Pardo de Tavera Manzano vs. El Hogar Filipino, Inc., Tavera-Luna Inc., Vicente Madrigal, G.R. No. 45963, October 12, 1939 (68 Phil 712) Facts: On January 17, 1931, defendant corporation, TaveraLuna, Inc., obtained a loan of P1,000,000 from El Hogar Filipino, Inc., for the purpose of constructing the Crystal

157

of extra-judicial sale of the Crystal Arcade building. One day before the expiration of the period of redemption, Carlos Y. Pardo de Tavera and Carmen Pardo de Tavera Manzano, in their capacity as stockholders of the Tavera-Luna, Inc., instituted the present action against Tavera-Luna, Inc., and El Hogar Filipino, Inc., to annul the two secured loans as well as the extra-judicial sale. The complaint was dismissed.

by the sheriff. No third party claim was filed for such properties at the time of the sales thereof as is borne out by the record made by the plaintiff herein. Indeed the bidder, which was the plaintiff in that action, and the defendant herein having consummated the sale, proceeded to take possession of the machinery and other properties described in the corresponding certificates of sale executed in its favor by the sheriff of Davao.

Issue: Whether stipulations in a contract of anthichresis for the extrajudicial foreclosure of the security may be allowed. Held: Yes. Affirmed. Ratio: A loan given on a property which may be considered as a public building, is not, in itself, null and void. It is unlawful to make loans on that kind of security, but the law does not declare the loans, once made, to be null and void. The unlawful taking of the security may constitute a misuser of the powers conferred upon the corporation by its charter, for which it may be made to answer in an action for ouster or dissolution; but certainly the stockholders and depositors of the corporation should not be punished with a loss of the money loaned nor the borrower be rewarded with it. It is contended that the contracts in question are not of mortgage, but of antichresis. The distinction, however, is immaterial, for even if the contracts are of antichresis, the extra-judicial foreclosure of the security is valid. Stipulations in a contract of antichresis for the extrajudicial foreclosure of the security may be allowed in the same manner as they are allowed in contracts of mortgage and of pledge. Davao Saw Mill Co., Inc. vs. Aproniano G. Castillo & Davao Light & Power Co., Inc., G.R. No. 40411, August 7, 1935 (61 Phil 709) Facts: The Davao Saw Mill Co., Inc. is the holder of a lumber concession from the Government of the Philippine Islands. However, the land upon which the business was conducted belonged to another person. On the land, the sawmill company erected a building which housed the machinery used by it. Some of the implements thus used were clearly personal property. The conflict concerns machines which were placed and mounted on foundations of cement. The contract between the sawmill company and the owner of the land explicity provides that all improvements and buildings introduced to and erected on the land will pass to the owner upon the expiration of the lease, except machineries and accessories. In another action, wherein the Davao Light & Power Co., Inc., was the plaintiff and the Davao Saw Mill Co., Inc., was the defendant, a judgment was rendered in favor of the plaintiff in that action against the defendant in that action; a writ of execution issued thereon, and the properties now in question were levied upon as personalty

158

Davao Saw Mill Co., Inc., has, on a number of occasions, treated the machinery as personal property by executing chattel mortgages in favor of third persons. One of such persons is the appellee by assignment from the original mortgagees. Davao Saw Mill Co., Inc. filed a case against Davao Light & Power Co., Inc. to recover the properties executed upon on the claim that such properties were real properties that were attached to the land and are exempt from execution. The lower court ruled that the properties were personal properties and dismissed the case.

accretions to the above properties. PBCom granted a second loan of P3.356M to Evertex which was secured by a Chattel Mortgage over personal properties enumerated in a list attached thereto. After the date of the execution of the 2 nd mortgage, Evertex purchased various marchineries and equipment. Due to business reverses, Evertex filed for insolvency, and the court declared it insolvent. Upon failure of Evertex to pay, PBCom commenced extrajudicial foreclosure

Issue: Whether machineries which are immobilized by a tenant are real properties. Held: No. Affirmed. Ratio: In the first place, it must again be pointed out that the appellant should have registered its protest before or at the time of the sale of this property. It must further be pointed out that while not conclusive, the characterization of the property as chattels by the appellant is indicative of intention and impresses upon the property the character determined by the parties. In this connection the decision of this court in the case of Standard Oil Co. of New York vs. Jaramillo ([1923], 44 Phil., 630), whether obiter dicta or not, furnishes the key to such a situation. It is machinery which is involved in this case; moreover, machinery not intended by the owner of any building or land for use in connection therewith, but intended by a lessee for use in a building erected on the land by the latter to be returned to the lessee on the expiration or abandonment of the lease. A similar question arose in Puerto Rico, and on appeal being taken to the United States Supreme Court, it was held that machinery which is movable in its nature only becomes immobilized when placed in a plant by the owner of the property or plant, but not when so placed by a tenant, a usufructuary, or any person having only a temporary right, unless such person acted as the agent of the owner. Ruby L. Tsai vs. CA, Ever Textile Mills, Inc. & Mamerto R. Villaluz, G.R. No. 120098, October 2, 2001 Philippine Bank of Communications vs. CA, Ever Textile Mills & Mamerto R. Villaluz, G.R. No. 120109, October 2, 2001 (366 SCRA 324) Facts: Ever Textile Mills obtained a P3M loan from PBCom. As security for the loan, Evertex executed a deed of Real and Chattel Mortgage over the lot where its factory stands and the chattels located therein as enumerated in a schedule attached to the mortgage contract. The mortgage covered the land, all buildings and improvements now existing or hereafter to exist, machineries and equipment situated, located, or installed, and any and all replacements, substitutions, additions, increases and

159

under Act 3135. The properties were sold in public auction, and PBCom was the highest bidder. PBCom consolidated its ownership over the properties and sold these to Tsai. Evertex filed a complaint for annulment of sale and reconveyance on the ground that the extrajudicial foreclosure was a violation of the Insolvency Law. The RTC found the lease and sale of the properties illegal and irregular. CA affirmed.

property originally mortgaged, anything in the mortgage to the contrary notwithstanding.” And, since the disputed machineries were acquired in 1981 and could not have been involved in the 1975 or 1979 chattel mortgages, it was consequently an error on the part of the Sheriff to include subject machineries with the properties enumerated in said chattel mortgages.

Issue: Whether properties acquired after the execution of the chattel mortgage are covered by the chattel mortgage. Whether immovables can be treated as movables for purposes of executing a chattel mortgage. Held: No. Yes. Affirmed. Ratio: Petitioners contend that the nature of the disputed machineries, i.e., that they were heavy, bolted or cemented on the real property mortgaged by EVERTEX to PBCom, make them ipso facto immovable under Article 415 (3) and (5) of the New Civil Code. This assertion, however, does not settle the issue. Mere nuts and bolts do not foreclose the controversy. We have to look at the parties’ intent. While it is true that the controverted properties appear to be immobile, a perusal of the contract of Real and Chattel Mortgage executed by the parties herein gives us a contrary indication. In the case at bar, both the trial and the appellate courts reached the same finding that the true intention of PBCOM and the owner, EVERTEX, is to treat machinery and equipment as chattels. Too, assuming arguendo that the properties in question are immovable by nature, nothing detracts the parties from treating it as chattels to secure an obligation under the principle of estoppel. As far back as Navarro v. Pineda, 9 SCRA 631 (1963), an immovable may be considered a personal property if there is a stipulation as when it is used as security in the payment of an obligation where a chattel mortgage is executed over it, as in the case at bar. In the instant case, the parties herein: (1) executed a contract styled as “Real Estate Mortgage and Chattel Mortgage,” instead of just “Real Estate Mortgage” if indeed their intention is to treat all properties included therein as immovable, and (2) attached to the said contract a separate “LIST OF MACHINERIES & EQUIPMENT”. These facts, taken together, evince the conclusion that the parties’ intention is to treat these units of machinery as chattels. A fortiori, the contested after-acquired properties, which are of the same description as the units enumerated under the title “LIST OF MACHINERIES & EQUIPMENT,” must also be treated as chattels. Inasmuch as the subject mortgages were intended by the parties to involve chattels, insofar as equipment and machinery were concerned, the Chattel Mortgage Law applies, which provides in Section 7 thereof that: “a chattel mortgage shall be deemed to cover only the property described therein and not like or substituted property thereafter acquired by the mortgagor and placed in the same depository as the

160

As the auction sale of the subject properties to PBCom is void, no valid title passed in its favor. Consequently, the sale thereof to Tsai is also a nullity under the elementary principle of nemo dat quod non habet, one cannot give what one does not have. ACME Shoe Rubber & Plastic Corporation & Chua Pac vs. CA, Producers Bank of the Philippines & Regional Sheriff of Caloocan City, G.R. No. 103576, August 22, 1996 (260 SCRA 714)

instrument granting to the creditor the right to receive the fruits of an immovable property with the obligation to apply such fruits to the payment of interest, if owing, and thereafter to the principal of his credit – upon the essential condition that if the principal obligation becomes due and the debtor defaults, then the property encumbered can be alienated for the payment of the obligation, but that should

Facts: Chua Pac, the president and general manager of ACME executed, for and in behalf of the company, a chattel mortgage in favor of Producers Bank of the Philippines. The mortgage stood by way of security for petitioner's corporate loan of three million pesos (P3,000,000). The mortgage provided that it shall stand as security for said obligations and any and all other obligations of the MORTGAGOR to the MORTGAGEE of whatever kind and nature, whether such obligations have been contracted before, during or after the constitution of this mortgage. In due time, ACME was able to pay the loan. Subsequently, in 1981, the company obtained from the bank additional financial accommodations totaling P2.7M. These borrowings were also paid on due date. In January 1984, the bank yet again extended to the corporation a loan of P1M, but this was not paid. The bank thereupon applied for an extrajudicial foreclosure of the chattel mortgage. ACME was prompted to file an action for injunction. The court dismissed the action and ordered the foreclosure of the chattel mortgage. CA affirmed. The petition before the SC was originally denied for having been insufficient in form and substance. Its motion for reconsideration was denied, but its 2 nd motion for reconsideration was granted and the petition was reinstated.

Issue: Whether a clause in a chattel mortgage that purports to likewise extend its coverage to obligations yet to be contracted or incurred is valid and effective. Held: No. Reversed. Ratio: Contracts of security are either personal or real. In contracts of personal security, such as a guaranty or a suretyship, the faithful performance of the obligation by the principal debtor is secured by the personal commitment of another (the guarantor or surety). In contracts of real security, such as a pledge, a mortgage or an antichresis, that fulfillment is secured by an encumbrance of property - in pledge, the placing of movable property in the possession of the creditor; in chattel mortgage, by the execution of the corresponding deed substantially in the form prescribed by law; in real estate mortgage, by the execution of a public instrument encumbering the real property covered thereby; and in antichresis, by a written

161

the obligation be duly paid, then the contract is automatically extinguished proceeding from the accessory character of the agreement. As the law so puts it, once the obligation is complied with, then the contract of security becomes, ipso facto, null and void. While a pledge, real estate mortgage, or antichresis may exceptionally secure after-incurred obligations so long as these future debts are accurately described, a chattel mortgage, however, can only cover obligations existing at the time the mortgage is constituted. Although a promise expressed in a chattel mortgage to include debts that are yet to be contracted can be a binding commitment that can be compelled upon, the security itself, however, does not come into existence or arise until after a chattel mortgage agreement covering the newly contracted debt is executed either by concluding a fresh chattel mortgage or by amending the old contract conformably with the form prescribed by the Chattel Mortgage Law. Refusal on the part of the borrower to execute the agreement so as to cover the after-incurred obligation can constitute an act of default on the part of the borrower of the financing agreement whereon the promise is written but, of course, the remedy of foreclosure can only cover the debts extant at the time of constitution and during the life of the chattel mortgage sought to be foreclosed. 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. While it is not doubted that if such an affidavit is not appended to the agreement, the chattel mortgage would still be valid between the parties (not against third persons acting in good faith), the fact, however, that the statute has provided that the parties to the contract must execute an oath makes it obvious that the debt referred to in the law is a current, not an obligation that is yet merely contemplated. In the chattel mortgage here involved, the only obligation specified in the chattel mortgage contract was the P3,000,000.00 loan which petitioner corporation later fully paid. By virtue of Section 3 of the Chattel Mortgage Law, the payment of the obligation automatically rendered the chattel mortgage void or terminated.

cash or materials, foodstuffs, and or equipment from the company. The payment of such account was to be made either in cash and/or by the Jacas turning over all the logs that they produce in the aforesaid concession to the company. While the aforesaid business relationship between the parties was subsisting, the company made Urbano Jaca execute in its favor a chattel mortgage, a copy of which instrument, however, was never furnished to the Jacas. Urbano Jaca executed assignments of letters of credit in favor of the company, in order that the latter may be able to use, as it did use, the said letters of credit for bank negotiations of the former in

Urbano Jaca & Bonifacio Jaca vs. Davao Lumber Company & Honorable Manases Reyes, as Judge of the CFI of Davao, G.R. No. L-25771, March 29, 1982 (113 SCRA 107) Facts: Urbano Jaca is a licensee of a logging concession in Davao, together with Bonifacio Jaca. They are engaged in the logging business of producing timber and logs for export and/or domestic purposes. Davao Lumber Company is a business corporation with which plaintiffs had business dealings covering the sale and/or exportation of their logs. Sometime in 1954, the parties entered into an agreement whereby the Jacas may secure, by way of advances, either

162

the exportation of logs. The business relationship of the parties continued from 1954 up to August 1963. The Jacas made repeated demands on the company for a formal accounting of their business relationship from 1954 up to August, 1963, but the company failed and refused, and still fails and refuses, to effect such formal accounting, asserting that it had no time as yet to examine into all the details of the accounting. Sometime on October 30, 1963, much to their surprise, the Jacas received letters of demand from the company in which they were requested to pay their allegedly overdue accounts. The Jacas filed this case in order to compel the company to have a formal accounting between them. Davao Lumber Company filed its Answer with Affirmative Defenses and Counterclaim. In its counterclaim, the Davao Lumber Company alleged that Plaintiffs Urbano Jaca and Bonifacio Jaca are the ones indebted to the defendant in the sum of P756,236.52 and P91,651.97, respectively. The company also alleged that Urbano Jaca executed a chattel mortgage in favor of the defendant to secure the payment of any and all obligations contracted by him in favor of the defendant covering several chattels valued at P532,000. The lower court dismissed the complaint and granted the counterclaim. A motion pending appeal was granted. The Jacas are questioning the execution

the court. This report was assailed by the petitioners as null and void in a motion to strike out the report from the records of the case. The reasons stated in the order of execution pending appeal are not well founded. The first reason stated in the order was the consistent refusal of petitioner to deliver the mortgaged chattels to the receiver. The records disclose that respondent Davao Lumber Company is not even entitled to the appointment of a receiver. It is an established rule

Issue: Whether a chattel mortgage that secures any and all obligations hereinbefore and hereinafter contracted is void. Held: Yes. Reversed. Ratio: As provided in Sec. 2, Rule 39 of the New Rules of Court, the existence of good reasons is what confers discretionary power on a court of first instance to issue a writ of execution pending appeal. The reasons allowing execution must constitute superior circumstances demanding urgency which will outweigh the injury or damage should the losing party secure a reversal of the judgment on appeal. The decision in Civil Case No. 4189 requires petitioners to pay the enormous amount of P867,887.52. Clearly, premature execution of said decision will result in irreparable damage to petitioners as the collection of said amount may be enforced through the seizure of money and/or sale of properties used in the logging business of petitioners. In other words, execution of the decision in Civil Case No. 4189 may result in the termination of petitioner's business. Thus, any damage to the petitioners brought about by the premature execution of the decision will be justified only upon a finding that the appeal is being taken only for the purpose of delay and of rendering the judgment nugatory. The facts of record show that the petitioner's appeal is not frivolous and not intended for delay. The findings of the respondent judge that the petitioners are indebted to the respondent Davao Lumber Company are based solely on the report submitted by Estanislao R. Lagman, the commissioner appointed by

163

that the applicant for receivership must have an actual and existing interest in the property for which a receiver is sought to be appointed. The Davao Lumber Company's proof of interest in the property is the deed of chattel mortgage executed by Urbano Jaca in favor of the Davao Lumber Company on January 24, 1961. This deed of chattel mortgage is void because it provides that the security stated therein is for the payment of any and all obligations herein before contracted and which may hereafter be contracted by the Mortgagor in favor of the Mortgagee. In the case of Belgian Catholic Missionaries vs. Magallanes Press this Court held that a mortgage that contains a stipulation in regard to future advances in the credit will take effect only from the date the same are made and not from the date of the mortgage. Where the statute provides that the parties to a chattel mortgage must make oath that the debt is a just debt, honestly due and owing from the mortgagor to the mortgagee, it is obvious that a valid mortgage cannot be made to secure a debt to be thereafter contracted. The second reason stated was the fact that petitioner Urbano Jaca violated Article 319 of the Revised Penal Code by selling to a certain Teodoro Alagon some of the mortgaged properties. As already discussed, the deed of chattel mortgage executed by Urbano Jaca in favor of the Davao Lumber Company is void. Hence, petitioner Urbano Jaca could not have violated Article 319 of the Revised Penal Code. Moreover, the respondent Davao Lumber Company has not successfully refuted the allegation of the petitioners that the sale of the wrecker to Teodoro Alagon, was exclusively negotiated by the lumber company's managing partner, Tian Se, and that the latter caused Urbano Jaca to sign the deed of sale because he was the owner of the wrecker. The third reason stated is the fact that petitioners have no properties and assets to satisfy the judgment. The basis of respondent judge's conclusion that petitioners do not have sufficient assets is an unsubstantiated allegation in the motion for execution pending appeal of respondent lumber company.

The lower court granted the claims, and set an order of preference. Some of the claimants appealed the order of preference. Issue: Whether the failure to present the document of Chattel Mortgage will prevent the mortgagee from getting preference. Whether a chattel mortgage is valid between the parties even though it was not notarized and it contained no affidavit of good faith.

Aleko E. Lilius, for himself and as guardian ad litem of his minor child, Brita Marianne Lilius, and Sonja Maria Lilius vs. Manila Railroad Company, Laura Lindley Shuman, Manila Wine Merchants, Ltd., BPI & Manila Motor Co., Inc., and W. H. Waterous, M. Marfori, John R. Mcfie, Jr., Erlanger & Galinger, Inc., Philippine Education Co., Inc. Hamilton Brown Shoe Co., Estrella Del Norte & Eastern & Philippine Shipping Agencies, Ltd., G.R. No. 42551, September 4, 1935 (62 Phil 56) Facts: There was a train accident. A case was filed involving 28 claimants. Among the claimants were the doctors who treated victims, the victims, the owners of damaged goods, and the creditors. One creditor, the Manila Motor Co., Inc., executed a Chattel Mortgage which, however, was not registered.

164

Held: Yes. Yes. Affirmed. Ratio: Manila Motor Co., Inc. has not proven that its credit is evidenced by a public document within the meaning of article 1924 of the Civil Code. The only evidence offered by the Manila Motor Co., Inc., in support of its claim of preference against the fund of Aleko E. Lilius was a certified copy of its judgment against him in civil case No. 41159 of the Court of First Instance of Manila, together with a certified copy of the writ of execution and the garnishment issued by virtue of said judgment. These documents appear in the record. The alleged public document evidencing its claim was not offered in evidence and counsel of the Manila Motor Co., Inc., merely stated at the hearing in the lower court that its judgment was based on a public document dated May 10, 1931. There is no explanation as to why it was not presented as evidence. Manila Motor Co., Inc. merely assume that its credit is evidenced by a public document dated May 10, 1931, because the court, in its judgment in said civil case No. 41159, refers to a mortgage appearing in the evidence in that case as the basis of its judgment, without mentioning the date of the execution of that exhibit. This reference in said judgment to a mortgage is not competent or satisfactory evidence as against third persons upon which to base a finding that the Manila Motor Company's credit is evidenced by a public document within the meaning of article 1924 of the Civil Code. This court is not authorized to make use of that judgment as a basis for its findings of fact in this proceeding. But even if the court is authorized to accept the statement in that judgment as a basis for its finding of fact in relation to this claim, still it would not establish the claim of preference of the Manila Motor Co., Inc. Granting that a mortgage existed between the Manila Motor Co., Inc., and Aleko E. Lilius, this does not warrant the conclusion that the instrument evidencing that mortgage is a public document entitled to preference under article 1924 of the Civil Code. Under section 5 of Act No. 1507 as amended by Act No. 2496, a chattel mortgage does not have to be acknowledged before a notary public. As against creditors and subsequent encumbrancers, the law does require an affidavit of good faith appended to the mortgage and recorded with it. (See Giberson vs. A. N. Jureidini Bros., 44 Phil., 216, and Betita vs. Ganzon, 49 Phil., 87.) A chattel mortgage may, however, be valid as between the parties without such an affidavit of good faith. In 11 Corpus Juris, 482, the rule is expressly stated that as between the parties and as to third persons who have no rights against the mortgagor, no affidavit of good faith is necessary. It will thus be seen that under the law, a valid mortgage may exist between the parties without its being evidenced by a public document. This court would not be justified, merely from the reference by the lower court in that case to a mortgage, in assuming that its date appears in a public document. If the Manila Motor Co., Inc.,

desired to rely upon a public document in the form of a mortgage as establishing its preference in this case, it should have offered that document in evidence, so that the court might satisfy itself as to its nature and unquestionably fix the date of its execution. There is nothing either in the judgment relied upon or in the evidence to show the date of said mortgage. The burden was upon the claimant to prove that it actually had a public instrument within the meaning of article 1924 of the Civil Code. It is essential that the nature and the date of the document be established by competent evidence before the court can allow a preference as against the other parties to this proceeding. Inasmuch as

165

the claimant failed to establish its preference, based on a public document, the lower court properly held that its claim against the said Aleko E. Lilius was based on the final judgment in civil case No. 41159 of the Court of First Instance of Manila of May 3, 1932. That court, therefore, committed no error in holding that the claim of the Manila Motor Co., Inc., was inferior in preference to those of the appellees in this case.

executed and delivered to the said Kilayko a chattel mortgage covering machinery, crops and a number of carabaos. To comply with their obligation, the mortgagors had to deliver to the mortgagee (Kilayko) in the city of Iloilo their entire crop of sugar for the years 1912-13. Finally, a liquidation was made and there was found to be still due the mortgagee (Kilayko) the sum of P650. The balance was sent to the mortgagee by a representative of the mortgagors, Antonio Horrileno. Upon delivery of

Northern Motors, Inc. vs. Hon. Jorge R. Coquia, etc., et al., Filinvest Credit Corporation, G.R. No. L-40018, December 15, 1975 (68 SCRA 374) Facts: Northern Motors, Inc. has chattel mortgages over several taxicabs owned by Manila Yellow Taxicab, Inc. It foreclosed on these chattel mortgages. Honesto Ong, on the other hand, is an assignee of an unsecured judgment creditor of Manila Yellow Taxicab, Inc. and was able to levy on the taxicabs. Northern Motors is claiming to have a superior lien over Honesto Ong. The Supreme Court agreed. There is now a motion for reconsideration of the Supreme Court decision. Issue: Whether a chattel mortgage lien is superior to an execution levy. Whether registration of a chattel mortgage is an effective and binding notice to a judgment creditor. Held: Yes. Yes. MFR Denied. Ratio: Ong has no right to levy upon the mortgaged taxicabs. He could have levied only upon the mortgagor’s equity of redemption. The essence of the chattel mortgage is that the mortgaged chattels should answer for the mortgage credit and not for the judgment credit of the mortgagor’s unsecured creditor. The mortgagee is not obligated to file an independent action for the enforcement of his credit. To require him to do so would be a nullification of his lien and would defeat the purpose of the chattel mortgage which is to give him preference over the mortgaged chattels fro the satisfaction of his credit. Ong’s theory that Manila Yellow Taxicab’s breach of the chattel mortgage should not affect him because he is not privy of such contract is untenable. The registration of the chattel mortgage is an effective and binding notice to him of its existence. The mortgage creates a real right or a lien which, being recorded, follows the chattel wherever it goes. Jose Sison & Emilio Sison vs. F.M. Yap Tico & Amando Avanceña, provincial sheriff of Iloilo, G.R. No. L-11583, February 8, 1918 (37 Phil 584) Facts: The Sisons borrowed from Eugenio Kilayko the sum of P2,000. To guarantee the payment of said sum, they

166

the sum on or about May 14, 1914, Kilayko executed and delivered a cancellation of said mortgage. It turns out Kilayko assigned and transferred said mortgage to F.M. Yap Tico. The assignment and transfer were duly registered upon the 14th day of April, 1913, nearly one year after the transfer had been made. The cancellation of said mortgage as above indicated was duly registered on the 19th day of December, 1914. Neither Kilayko nor Yap Tico gave notice to the Sisons that said mortgage had been transferred. Yap Tico proceeded to foreclose the mortgage. The sheriff attached and took possession of all the property which said mortgage covered. This action was brought for the purpose of recovering the property, together with damages caused by said alleged illegal attachment. The lower court ruled for Yap Tico and relieved him of all liability.

debtor. Carson, concurring: I accept the ruling of the majority, but I cannot give my assent to the dictum of the principal opinion to the effect that "if the law does not require a particular instrument to be recorded or registered, the recording of the instrument will not be constructive notice of its existence to any one." As I read them, none of the cases or

Issue: Whether the registration of the assignment of chattel mortgage operates as notice to the mortgagors. Held: No. Reversed. Ratio: The question, whether or not the registration of the assignment operated as notice, ipso facto, to the mortgagors, we are inclined to answer in the negative, for the reason that the law does not require such assignments to be recorded. While such assignments may be recorded, the law is permissible and not mandatory. The filing and recording of an instrument in the office of the registrar, when the law does not require such filing and recording, does not constitute notice to the parties. (Burck vs. Taylor, 152 U.S., 634; 5 Corpus Juris, 934.) The debtor or party liable on contracts like the one is question is not affected by the assignment until he has notice thereof, and consequently he may set up against the claim of the assignee any defense acquired before notice that would avail him against the assignor had there been no assignment, and payment by the debtor to the assignor, or any compromise or release of the assigned claim by the latter before notice will be valid against the assignee and discharge the debtor. (Vanbuskirk vs. Hartford Fire Insurance Co., 14 Conn. 141; Clodfelter vs. Cox, 1 Sneed [Tenn.], 330; 60 Am. Dec., 157; Johnston vs. Allen, 22 Fla., 224; Shields vs. Taylor & Tarpley, 25 Miss., 13.) It is generally held that if the law does not require a particular instrument to be recorded or registered, the recording of that instrument will not be constructive notice of its existence to anyone. (Burck vs. Taylor, 152 U.S., 634; Stewart vs. Kirkland, 19 Ala., 162; Lambert vs. Morgan, 110 Md., 1; Dial vs. Inland Logging Co., 52 Wash., 81.) It seems to be clear, then, that a debtor is protected if he pays his creditor without actual notice that the debt has been assigned. Such notice must be actual, and the recording of the assignment, there being no law requiring the same, will not operate as constructive notice to the

167

authorities cited in the principal opinion support that proposition. The ratio decidendi of all these cases and authorities would seem to be that if the law does not authorize or require a particular instrument to be recorded or registered, the recording of that instrument will be constructive notice of its existence to anyone. The distinction between the two propositions in this jurisdiction is vital. Our statute, though it does not require the registry of transfers of chattel mortgages, expressly authorizes and provides for the registry of such transfers. (Sec. 15, "The Chattel Mortgage Law," Act No. 1508.) Our statute does not require the registry of transfer of chattel mortgages, but it expressly authorizes and provides for their registry in the public records, and the reasoning of all the authorities clearly indicate that when such a transfer is actually recorded in the manner and form provided by law, all persons, who thereafter acquire an interest in the mortgage or the mortgaged property, are charged with constructive notice of the transfer. It affirmatively appears that the transfer of the mortgage from the mortgagee to the defendant, Yap Tico, was made soon after the date of the execution of the mortgage. that although Yap Tico recorded the transfer of the mortgage, he thereafter held himself out to the plaintiff (the mortgagor) as the agent of the mortgagee, and did in fact act as the agent of the mortgagee for the purpose of collecting payments upon the mortgage indebtedness, which payments, as it appears, were turned over to his principal, the mortgagee, or credited in his account with Yap Tico; that he continued to hold himself out as the agent of the mortgagee throughout the entire course of these transactions, and as such agent accepted on behalf of his principal a number of shipments of sugar, delivered by the mortgagor on account of his mortgage indebtedness and in strict compliance with the terms of the mortgage instrument; that the mortgagor had no actual notice of the transfer of the mortgage until after he had paid the total amount of the mortgage indebtedness, the last payment being made to the mortgage himself, in total ignorance of the transfer of the mortgagee's interest therein to the defendant, Yap Tico; and that it was not until after the mortgage indebtedness had been paid in full the mortgagee that the defendant Yap Tico gave actual notice of the assignment of the mortgage, and demanded payment of the full amount of the indebtedness. In the light of these facts, Yap Tico cannot be heard to demand payment of the mortgage indebtedness on the ground that he is entitled thereto as the registered assignee of the mortgage, and that payment to the mortgagee did not extinguish the debt. By his own conduct he is stopped from setting up such a claim. Having held himself out to be the agent of the mortgagee and accepted payment of the greater part of the indebtedness after the date of the assignment, in the name of and in behalf of the mortgagee, it is inconceivable that he should be permitted to enforce payment of the amounts thus collected a second time. And even as to the balance of the indebtedness paid directly to the mortgagee, it seems clear that Yap Tico is estopped from

demanding repayment, because his own conduct was such as to lull any suspicion on the part of the debtor that the mortgagee indebtedness had been assigned to him, and to justify the debtor in the belief that so far as he, Yap Tico, was concerned there was no reason to suspect the existence of the assignment or to search the records in order to ascertain in the true nature of Yap Tico's relations with the mortgagee. In truth, Yap Tico's willful silence and failure to give actual notice of the assignment under all the circumstances fairly justifies the inference of an intent to defraud the mortgage debtor, and to take advantage of his lack of knowledge of his indebtedness twice over.

168

Street, concurring: The Chattel Mortgage Law was adopted by the Philippine Commission from the laws relative to registration prevailing in the States of the American Union; and the problem presented in the present case if therefore one arising upon the interpretation of an Act applying the principles of that system to these Islands. It may be well to explain in a word that, according to the common-law ideas, registration is merely a species of notice. The act of registering a document is never necessary in order to give it legal effect between the parties. The purpose of the Legislature in providing a system of registration is to afford means of publicity so that persons dealing with property may search the records and thereby acquire security against instruments the execution of which has not been revealed. It is sometimes stated in the decisions that the recording of a conveyance is notice to all the world, but this is too broad; and the more accurate statement is that the record imparts constructive notice to such persons only as would have been entitled to protection against the conveyance in case it had not been recorded, or, in other words, to such persons as are under a legal obligation to search for it. The operation of the record is prospective and not retrospective. It is only a subsequent conveyance which defeats a prior unrecorded conveyance, and therefore only persons who acquire their rights subsequently to the registration can be said to be charged with notice of a recorded conveyance. Of course, it would have been competent for the Legislature to declare that the registration of the transfer of a mortgage should operate as constructive notice to prior parties as well as subsequent purchasers; but we have never seen any enacted law in which a rule so sweeping has been declared. In the absence of such a provision it is apparent that registration should be considered prospective in its operation, as indicated in the authorities already cited.

So, the boat was twice sold: first privately by its owner Sy Qui to the defendant Florentino E. Rivera on January 4, 1915, and afterwards by the sheriff at public auction in conformity with the order contained in the judgment rendered by the justice of the peace court, on January 23 of the same year, against the Chinaman Sy Qui and in behalf of the plaintiff, Fausto Rubiso. It is undeniable that the defendant Rivera acquired by purchase the pilot boat Valentina on behalf of the plaintiff Rubiso; but it is no less true that the sale of the vessel by Sy Qui to Florentino E. Rivera, on January 4, 1915, was entered in the

Fausto Rubiso & Bonifacio Gelito vs. Florentino E. Rivera, G.R. No. L-11407, October 30, 1917 (37 Phil 72) Facts: Valentina, a pilot boat, belonged to Gelito & Co., Bonifacio Gelito being a copartner thereof to the extent of two-thirds, and the Chinaman Sy Qui, to that of one- third of the value of said vessel. Bonifacio Gelito sold his share to his copartner Sy Qui, through an instrument which was registered in the office of the Collector of Customs. Sy Qui, in turn, sold the boat to Florentino Rivera through a deed executed on January 4, 1915 which was registered in the Bureau of Customs on March 17, 1915. A case was filed against Sy Qui by his creditor, Fausto Rubiso, to enforce payment of a certain sum of money. Rubiso acquired the vessel at an auction sale on January 23, 1915, and the sale was recorded on January 27, 1915.

169

customs registry only on March 17, 1915, while its sale in public auction to Fausto Rubiso on the 23rd of January of the same year, 1915, was recorded in the office of the Collector of Customs on the 27th of the same month, and in the commercial registry on the 4th of March, following; that is, the sale on behalf of the defendant Rivera was prior to that made at public auction to Rubiso, but the registration of this latter sale was prior by many days to the sale made to the defendant. The lower court judge ordered Rivera to give the boat to Rubiso. Rivera appealed.

to enjoy the protection of the law, which considers him the absolute owner of the purchased boat, an this latter to be free of all encumbrance and all claims by strangers for, pursuant to article 582 of the said code, after the bill of the judicial sale at auction has been executed and recorded in the commercial registry, all the other liabilities of the vessel in favor of the creditors shall be considered canceled.

Issue: Whether a prior registrant has better rights than a prior buyer over a pilot boat. Held: Yes. Affirmed. Ratio: Article 573 of the Code of Commerce provides that merchant vessels constitute property which may be acquired and transferred by any of the means recognized by law. The acquisition of a vessel must be included in a written instrument, which shall not produce any effect with regard to third persons if not recorded in the commercial registry. So, inscription in the commercial registry was indispensable, in order that said acquisition might affect and produce consequences with respect to third persons. The requisite of registration on the registry, of the purchase of a vessel, is necessary and indispensable in order that the purchaser's rights may be maintained against a claim filed by a third person. Such registration is required both by the Code of Commerce and by Act No. 1900. The amendment solely consisted in charging the Insular Collector of Customs, as at present, with the fulfillment of the duties of the commercial register concerning the registering of vessels; so that the registration of a bill of sale of a vessel shall be made in the office of the Insular Collector of Customs, who, since May 18, 1909, has been performing the duties of the commercial register in place of this latter official. In view of said legal provisions, it is undeniable that the defendant Florentino E. Rivera's rights cannot prevail over those acquired by Fausto Rubiso in the ownership of the pilot boat Valentina, inasmuch as, though the latter's acquisition of the vessel at public auction, on January 23, 1915, was subsequent to its purchase by the defendant Rivera, nevertheless said sale at public auction was antecedently record in the office of the Collector of Customs, on January 27, and entered in the commercial registry. — An unnecessary proceeding-on March 4th; while the private and voluntary purchase made by Rivera on a prior date was not recorded in the office of the Collector of Customs until many days afterwards, that is, not until March 17, 1915. The legal rule set down in the Mercantile Code subsists, inasmuch as the amendment solely refers to the official who shall make the entry; but, with respect to the rights of the two purchases, whichever of them first registered his acquisition of the vessel in the one entitled

170

The purchaser at public auction, Fausto Rubiso, who was careful to record his acquisition, opportunely and on prior date, has, according to the law, a better right than the defendant Rivera who subsequently recorded his purchase. The latter is a third person, who was directly affected by the registration which the plaintiff made of the acquisition. Ships or vessels, whether moved by steam or by sail, partake, to a certain extent, of the nature and conditions of real property, on account of their value and importance in the world commerce; and for this reason the provisions of article 573 of the Code of Commerce are nearly identical with article 1473 of the Civil Code.

possession shall prevail over a prior mortgage registered under the Chattel Mortgage Law only, without annotation thereof in the Motor Vehicles Office. Held: Yes. Affirmed.

Olaf N. Borlough vs. Fortune Enterprises, Inc. & CA, G.R. No. L-9451, March 29, 1957 (100 Phil 1063) Facts: United Car Exchange sold to the Fortune Enterprises, Inc. a Chevrolet car. The same car was sold by the Fortune Enterprises, Inc. to one Salvador Aguinaldo on installments. To secure the payment of this note, Aguinaldo executed a deed of chattel mortgage over said car. The deed was duly registered in the office of the Register of Deeds of Manila. When Aguinaldo failed to pay, a demand letter was sent to him. It appears that the said car found its way again to United Car Exchange which sold the car in cash to Mr. Borlough. Borlough took possession of the vehicle from the time he purchased it. Fortune Enterprises, Inc. brought action against Salvador Aguinaldo to recover the balance of the purchase price. Borlough filed a third-party complaint, claiming the vehicle. Thereupon, Fortune Enterprises, Inc. amended its complaint, including Borlough as a defendant and alleging that he was in connivance with Salvador Aguinaldo and was unlawfully hiding and concealing the vehicle in order to evade seizure by judicial process. The vehicle was seized by the sheriff of Manila on August 4, 1952 and was later sold at public auction. The Court of First Instance rendered judgment in favor of Borlough, and against plaintiff, ordering the latter to pay Borlough the sum of P4,000, with interest at 6 per cent per annum, from the date of the seizure of the car on August 4, 1952, and in addition thereto, attorney's fees in the sum of P1,000. The CA rendered judgment ordering that Emil B. Fajardo pay Borlough P4,000 plus attorney's fees and that plaintiff pay to Borlough any amount received by it in excess of its credits and judicial expenses. The reason for the modification of the judgment is that the mortgage was superior, being prior in point of time, to whatever rights may have been acquired by Borlough by reason of his possession and by the registration of his title in the Motor Vehicles Office. Issue: Whether the sale of a car subsequently registered with the Motor Vehicles Office coupled with actual

171

Ratio: While the question can be resolved by the general principles found in the Civil Code and expressly stated in Article 559, there is no need of resorting thereto (the general principles) in view of the express provisions of the Revised Motor Vehicles Law, which expressly and specifically regulate the registration, sale or transfer and mortgage of motor vehicles. It is to be noted that under section 4(b) of the Revised Motor Vehicles Law the Chief of the Motor Vehicles Office is required to enter or record, among other things, transfers of motor vehicles "with a view of making and keeping the same and each all of them as accessible as possible to and for persons and officers properly interested in the same," and to issue such reasonable regulations governing the search and examination of the documents and records as will be consistent with their availability to the public and their safe and secure preservation." The Revised Motor Vehicles Law is a special legislation enacted to "amend and compile the laws relative to motor vehicles," whereas the Chattel Mortgage Law is a general law covering mortgages of all kinds of personal property The former is the latest attempt to assemble and compile the motor vehicle laws of the Philippines, all the earlier laws on the subject having been found to be very deficient in form as well as in substance (Villar and De Vega Revised Motor Vehicles Law, p. 1); it had been designed primarily to control the registration and operation of motor vehicles (section 2, Act No. 3992). The recording provisions of the Revised Motor Vehicles Law, therefore, are merely complementary to those of the Chattel Mortgage Law. A mortgage in order to affect third persons should not only be registered in the Chattel Mortgage Registry, but the same should also be recorded in the Motor Vehicles Office as required by section 5(e) of the Revised Motor Vehicles Law. And the failure of the respondent mortgagee to report the mortgage executed in its favor had the effect of making said mortgage ineffective against Borlough, who had his purchase registered in the said Motor Vehicles Office.

of his obligation. So, the said truck was taken by GAMI'S agents while the same was in the possession of Esguerra's driver, Carlito Padua. Esguerra filed a complaint to recover the truck. The lower court dismissed the complaint. The CA affirmed the decision, but took exception at the failure of GAMI to sell the truck at a public auction. Due to this failure, attorney’s fees and damages were awarded to Esguerra.

Montelibano Esguerra vs. CA, G.A. Machineries, Inc., Jose Tino & Manuel Dore, G.R. No. 40062, May 3, 1989 G.A. Machineries, Inc. vs. CA & Montelibano Esguerra, G.R. No. 40102, May 3, 1989 (173 SCRA 1) Facts: A Ford-Trader cargo truck was sold by GAMI to Hilario-Lagmay and Bonifacio Masilungan. Subsequently, the right to the same was bought by Montelibano Esguerra, the latter assuming the unpaid purchase price of P20,454.74. In so doing, Esguerra executed in favor of GAMI a promissory note and a chattel mortgage over the said truck. On February 20, 1966, Esguerra having defaulted in his obligation and GAMI having granted his request for extension, a new chattel mortgage and a new promissory note were executed. Esguerra was unable to comply with the terms

172

Issue: Whether the mortgagee-vendor of personal property sold on installment is legally obligated to foreclose the chattel mortgage and sell the chattel subject thereof at public auction in case the mortgagor-vendee defaults in the payment of the agreed installments. Held: Yes. Affirmed with modifications. Ratio: Esguerra admitted that he is in arrears in the payments of his account. Consequently, the mortgagee, under the above cited provision of the mortgage contract has the option to foreclose the mortgage either judicially or extrajudicially and in case of foreclosure, it was expressly agreed by the parties that the mortgagee may take the property outside the municipality or city where the mortgagee may conveniently sell the same. Both the trial court and the Court of Appeals found that there was no forcible taking of the cargo truck. Esguerra consented to the repossession of the truck or at least did not make any objection thereto. He simply requested that he be given a chance to settle the account, which was evidently granted as on the following day, June 14, 1966, appellant sent his wife with P500.00 with which to partially settle his account. However, the respondent appellate court did not err in holding that while the mortgagee can take possession of the chattel, such taking did not amount to the foreclosure of the mortgage. Otherwise stated, the taking of Esguerra's truck without proceeding to the sale of the same at public auction, but instead, appropriating the same in payment of Esguerra's indebtedness, is not lawful. As clearly stated in the chattel mortgage contract, the express purpose of the taking of the mortgaged property is to sell the same and/or foreclose the mortgage constituted thereon either judicially or extrajudicially and thereby, liquidate the indebtedness in accordance with law. More than that, even if such automatic appropriation of the cargo truck in question can be inferred from or be contemplated under the aforesaid mortgage contract, such stipulation would be pactum commissorium which is expressly prohibited by Article 2088 of the Civil Code and therefore, null and void. Having opted to foreclose the chattel mortgage, respondent GAMI can no longer cancel the sale. The three remedies of the vendor in case the vendee defaults, in a contract of sale of personal property the price of which is payable in installment under Article 1484 of the Civil Code, are alternative and cannot be exercised simultaneously or cumulatively by the vendor-creditor. Should the vendee or purchaser of a personal property default in the payment of two or more of the agreed installments, the vendor or seller has the option to avail of any one of these three remedies - either to exact fulfillment by the purchaser of the obligation, or to cancel the sale, or to foreclose the mortgage on the purchased personal property, if one was constituted. These remedies have been

recognized as alternative, not cumulative, that the exercise of one would bar the exercise of the others. It may also be stated that the established rule is to the effect that the foreclosure and actual sale of a mortgaged chattel bars further recovery by the vendor of any balance on the purchaser's outstanding obligation not so satisfied by the sale. It will be observed, however, that the award of exemplary damages is apparently unwarranted, there being no showing that the mortgagee acted in a wanton, fraudulent,

173

reckless or oppressive manner. It will be recalled, that under the chattel mortgage contract, the mortgagee is expressly authorized to sell the mortgaged property and the mortgagee had already commenced foreclosure of the chattel mortgage, but the sale presumably could not be immediately made because of the request of the mortgagor himself to give him a chance to settle his account.

made by the court, and the Bank is entitled to collect the balance. Alberta B. Cabral & Renato Cabral vs. Teodora Evangelista, & Juan N. Evangelista, & George L. Tunaya, G.R. No. L-26860, July 30, 1969 (28 SCRA 1000)

Philippine National Bank vs. Manila Investment & Construction, Inc. & Cipriano S. Allas, G.R. No. L-27132, April 29, 1971 (38 SCRA 462) Facts: A decision was rendered against Manila Investment & Construction, Inc. to pay PNB a sum of money. In case of non-payment of the amount, the decision provided for the sale at public auction of the personal properties covered by a chattel mortgage and for the disposition of the proceeds in accordance with law. Instead of having the mortgaged personal properties sold at public auction, the parties agreed to have them sold at a private sale. The proceeds were applied to the partial satisfaction of the judgment. 5 years after the finality of the decision, PNB revived the case to seek for the payment of the deficiency amount. The court ruled for PNB. Issue: Whether a private sale of mortgaged chattels may be agreed upon by the parties. Whether a chattel mortgagee may collect on the deficiency. Held: Yes. Yes. Affirmed. Ratio: While the decision ordered a public auction, there is nothing illegal, immoral or against public order in an agreement to have the mortgaged chattels sold in a private sale. This agreement was entered into freely and voluntarily. This is in line with the provisions of the substantive law giving the contracting parties full freedom to contract provided their agreement is not contrary to law, morals, good customs, public order or public policy (Art. 1306). As the disposition of the mortgaged personalties in a private sale was by agreement between the parties, it is clear that they are now in estoppel to question it except on the ground of fraud or duress. As for the argument that the bank is not entitled to a deficiency judgment based on Art. 2115 NCC, it is clear from Art. 2141 NCC that the provisions on pledge shall apply to chattel mortgage only insofar as they are not counter to any provisions of the Chattel Mortgage Law, otherwise the provisions of the latter will not apply. The provisions of the Chattel Mortgage with regard to the effects of the foreclosure of a chattel mortgage are precisely contrary to the provisions of Art. 2115 NCC. It is clear, therefore, that the proceeds of the sale of the mortgaged personal properties constitute only a pro tanto satisfaction of the monetary award

174

Facts: George Tunaya executed in favor of the Cabrals a chattel mortgage covering a “Morrison” English piano and a Frigidaire General Motors Electric Stove with 4 burners and double oven as security for payment of a promissory note. The chattel mortgage deed was duly inscribed in the Chattel Mortgage Register. Meanwhile, the Evangelista spouses obtained a final money judgment against Tunaya. They caused the levy in execution on personal properties of Tunaya, including the piano and stove. The properties levied on were sold at public auction. Subsequently, 8 months after the maturity of Tunaya’s promissory note and his having defaulted in the payment thereof, the Cabrals filed a complaint against Tunaya and the Evangelista spouses. The city court rendered judgment in favor of the Cabrals as against Tunaya, but dismissed the case as against the Evangelista spouses. The CFI upheld the superior rights of the Cabrals as mortgage creditors to the personal properties, holding that the Evangelistas, being subsequent judgment creditors in another case, have only the right of redemption. Tunaya and the spouses Evangelista were found jointly and solidarily liable to pay the Cabrals.

Article 559 CC which provides that “If the possessor of a movable lost or of which the owner has been unlawfully deprived, has acquired it in good faith at a public sale, the owner canot obtain its return without reimbursing the price therefore” has no application in this case because the chattels were acquired subject to the existing mortgage lien. The record shows that the Evangelistas disposed of the mortgaged chattels to other persons at a discounted rate and, therefore, appropriated the same as if

Issue: Whether a mortgagee’s action to sell foreclosed mortgaged chattels after 30 days from breach of contract is barred by prescription. Whether a purchaser of mortgaged chattels in an execution sale has a superior right over the mortgagee. Whether a judgment creditor who levies on mortgaged properties can be held solidarily liable with the mortgagor. Held: No. No. Yes. Affirmed. Ratio: A proper reading of Sec 14 of the Chattel Mortgage Law (Act No. 1508) will show that the 30 day period is the minimum period after violation of the mortgage condition for the mortgage creditor to cause the sale at public auction of the mortgaged chattels, with at least 10 days notice to the mortgagor and posting of public notice of the time, place & purpose of such sale. It is a period of grace for the mortgagor, who has no right of redemption after the sale is held, to discharge the mortgage obligation. The prescription period for recovery of movables for foreclosure purposes is 8 years, and here the Cabrals had timely filed their action within 8 months from the mortgage debtor’s default. The purchasers of mortgaged chattels at the execution sale and the delivery of the chattels to them with a certificate of sale did not give them a superior right to the chattels. The rules of court precisely provides that the sale conveys to the purchaser all the right which the debtor had in such property on the day the execution or attachment was levied. The right of those who so acquire said properties should not and cannot be superior to that of the creditor who has in his favor an instrument of mortgage executed with the formalities of the law, in good faith, and without the least indication of fraud.

175

the chattels were of their absolute ownership, in complete derogation of the Cabral’s superior mortgage lien and in disregard of the demand to them prior to the filing of the complaint to pay or exercise the right of redemption. The Evangelistas, by their act of disposing the mortgaged chattels, whose value were admittedly more than adequate to secure the mortgage obligation, have thus practically nullified the mortgagee’s superior right to foreclose the mortgage and collect the amount due them. Considering the long period that has elapsed when the mortgagees tried to enforce their claim and the Evanglista’s adamant resistance thereof and unjust refusal to recognize the clearly superior right to the chattels, which were admittedly disposed of without lawful right to other unknown persons obviously to defeat the mortgagee’s right over the same, justice and equity justify the judgment holding the Evangelistas solidarily liable for the amount due.

however, under indemnity from Valdez, retained the property and sold it in due course at an execution sale, Valdez becoming purchaser at the price of P500. Pursuant to this sale Valdez now took possession, and Tizon filed this case to recover possession of the property. The case was dismissed. Issue: Whether a first mortgagee loses his priority once he opts to have the property mortgaged attached and executed upon, instead of foreclosed.

Domiciano Tizon vs. Emiliano J. Valdez & Luis Morales, sheriff of the Province of Tarlac, G.R. No. 24797, March 16, 1926 (48 Phil 910) Facts: A steam engine and boiler were originally owned by Leon Sibal, Sr. who mortgaged the properties to Valdez. On October 7, 1920, this mortgage was filed in the office of the register of the Province of Tarlac and was thereupon duly registered in the registry of chattel mortgages. On May 18, 1921, Sibal again mortgaged the same chattels to Domiciano Tizon whose mortgage was likewise duly registered in the chattel mortgage registry of Tarlac in June, 1921. When the stipulated date of payment arrived, Sibal defaulted in the making of payment, and Valdez thereupon instituted a civil action to recover the indebtedness, in connection with which he sued out a writ of attachment and on June 24, 1921, caused the same to be levied upon the property which is the subject of this action. The property, however, was not retained by the attaching officer for the reason that Tizon gave a counterbond. The court ruled in favor of Valdez, and Valdez caused an execution to be issued, which, on April 24, 1924, was levied upon the property now in question, being the same property included in Valdez's chattel mortgage. Meanwhile Domiciano Tizon, proceeding under his own mortgage, had caused the sheriff to sell the same property in a foreclosure proceeding conducted in conformity with the provisions of the Chattel Mortgage Law (Act No. 1508, sec. 14). The sale in these proceedings was effected on June 28, 1923, Tizon becoming purchaser for the consideration of P1,000. As purchaser at his own foreclosure sale, Tizon assumed possession of the property, and it was found in his possession when the sheriff levied upon it by virtue of the execution issued in the civil case. At the time this levy was made, or soon thereafter, Tizon filed a claim with the sheriff, asserting that the property belonged to him and was not liable to be taken upon an execution directed against Sibal. The sheriff,

176

Held: No. Affirmed. Ratio: It is the settled doctrine of this court that a chattel mortgage, though written in the form of a conditional sale defeasible upon performance of a condition subsequent, is really no more than a mere security for a debt and creates only a lien in favor of the creditor. (Bachrach Motor Co. vs. Summers, 42 Phil., 3.) At the same time a writ of execution in this jurisdiction reaches both legal and equitable interests, with the result that the equity of redemption of the mortgagor will pass to the purchaser at an execution sale. The better rule, we think, and the rule which is certainly more in accord with other doctrines here prevailing is that announced by the Supreme Court of Ohio in Green vs. Bass (83 Ohio St., 378; Ann. Cas. [1912], 828). It was there declared that the owner of a senior mortgage does not, by recovering a judgment on the note which it secures and causing execution to be levied on the mortgaged chattels, waive the priority of his lien. It is suggested that the suing out of an attachment by Valdez at the beginning of his civil action to recover upon the debt secured by his mortgage introduces a vital difference; and attention is directed to the fact that upon suing out an attachment under section 426 of the Code of Civil Procedure the creditor is required to make oath that he has no other sufficient security for the claim sought to be enforced by the action. The making of such affidavit shows an election on the part of the creditor, so it is contended, to waive the mortgage lien. This argument in our opinion is not valid for two reasons, first, because the creditor is not required to state peremptorily under oath that he has no other security at all but only that he has no other sufficient security; and, secondly, because this court has held that the provision which prohibits the issuance of an attachment when there is other sufficient security has no application where the attachment is levied upon the property constituting the security in an action to recover the debt so secured. (Pepperell vs. Taylor, 5 Phil., 636.) From whatever angle the matter be viewed we can discover no sound reason for holding that either the suing out of the attachment or the subsequent sale of the property under execution had the effect of destroying the prior mortgage lien, that is, as between the parties to this lawsuit. What Valdez may have obtained by purchasing at the execution sale, and whether he obtained anything at all, is a different question, and one that is really not necessary to be here decided. It is enough to say that the first mortgage in favor of Valdez continues to subsist unaffected by what happened as a result of the civil action. If anybody had been misled to his prejudice as a consequence of the course pursued by Valdez, this would have constituted a ground of estoppel; but nothing of the sort appears. We have before us then the simple situation of a first mortgagee in possession attacked by the second mortgagee after foreclosure of the second mortgage; and a little reflection will show, we think, that the second

mortgagee cannot prevail. After a first mortgage is executed there remains in the mortgagor a mere right of redemption, and only this right passes to the second mortgagee by virtue of the second mortgage. As between the first and second mortgagees, therefore, the second mortgagee has at most only the right to redeem, and even when the second mortgagee goes through the formality of an extrajudicial foreclosure, the purchaser acquires no more than the right of redemption from the first mortgagee.

177

The remedy of the plaintiff in this case must therefore be limited to the right to redeem by paying off the debt secured by the first mortgage. But the action is not directed to this end, and in the controversy over the title the purchaser at the foreclosure sale under the second mortgage must fail. Valdez, as first mortgagee, even supposing that he acquired nothing by his purchase at his own execution sale, is yet entitled to possession for the purpose at least of foreclosing his first mortgage (Bachrach Motor Co. vs. Summers, 42 Phil., 3), the lien of which, as we have already demonstrated, still subsists; and since Valdez is entitled to possession Tizon cannot maintain an action to recover the property.

was found in the possession of Roberto Reyes from whom it was seized. Summons could not be served to the Manahans, so the lower court dismissed the action for failure to prosecute. The order was recalled, but summons still could not be served on the Manahans. So, the trial court dismissed the case and ordered that the vehicle be returned to Reyes. The CA affirmed.

Johns, Dissenting: The majority opinion holds that Valdez has two liens on the same property, one being an attachment, and the other a chattel mortgage lien. That might be true as between Valdez and Sibal, but it cannot be true as between Valdez and Tizon. When Valdez made his affidavit for an attachment, in legal effect, he said: My debt is not secured by any lien. It was necessary for him to do that to procure the attachment. Having made that affidavit and procured the attachment of the property upon which he had a chattel mortgage lien, he ought to be legally estopped to now claim or assert that he did not have a chattel mortgage lien. In the authority cited in the majority opinion, there was no attachment, and the property was seized for the first time on execution. That is a very different case. Again, the property in dispute is personal property, from which, after a sale, there is no redemption; another important item that is overlooked in the majority opinion. It should be borne in mind that the property involved in this case is personal property, for which there is no legal right of redemption from a sale when made, and that this is not an action between a mortgagor and a mortgagee. Upon such a state of facts, the majority opinion does not cite the decision of any court which sustains the legal principles which it lays down. Under it, at the time the property was sold by Tizon on his chattel mortgage, Valdez had two liens on the same property, one under his chattel mortgage, and the other by his attachment, which was secured by his affidavit to the effect that he did not have a chattel mortgage lien. That is not good law. BA Finance Corporation vs. CA & Roberto Reyes, G.R. No. 102998, July 5, 1996 (258 SCRA 102) Facts: The spouses Reynaldo and Florencia Manahan executed a promissory note binding themselves to pay Carmasters, Inc. the amount of P83,080. To secure payment, the Manahan spouses executed a deed of chattel mortgage over a motor vehicle, a Ford Cortina. When the Manahans failed to pay, demand letters were sent which went unheeded. A complaint for replevin was filed praying for the recovery of the vehicle with the alternative prayer for the payment of a sum of money. A writ of replevin was issued. The vehicle

178

Issue: Whether a mortgagee can maintain an action for replevin against a possessor of the object of a chattel mortgage who is not a party to the mortgage, in the absence of the mortgagor. Held: No. Affirmed. Ratio: Replevin, broadly understood, is both a form of principal remedy and of a provisional relief. It may refer either to the action itself, i.e., to regain the possession of personal chattels being wrongfully detained from the plaintiff by another, or to the provisional remedy that would allow the plaintiff to retain the thing during the pendency of the action and hold it pendente lite. The action is primarily possessory in nature and generally determines nothing more than the right of possession. Replevin is so usually described as a mixed action, being partly in rem and partly in personam. It is in rem insofar as the recovery of specific property is concerned, and in personam as regards to damages involved. As an "action in rem," the gist of the replevin action is the right of the plaintiff to obtain possession of specific personal property by reason of his being the owner or of his having a special interest therein. Consequently, the person in possession of the property sought to be replevied is ordinarily the proper and only necessary party defendant, and the plaintiff is not required to so join as defendants other persons claiming a right on the property but not in possession thereof. Rule 60 of the Rules of Court allows an application for the immediate possession of the property but the plaintiff must show that he has a good legal basis, i.e., a clear title thereto, for seeking such interim possession. Where the right of the plaintiff to the possession of the specific property is so conceded or evident, the action need only be maintained against him who so possesses the property. In rem actio est per quam rem nostram quae ab alio possidetur petimus, et semper adversus eum est qui rem possidet. In Northern Motors, Inc. vs. Herrera, there can be no question that persons having a special right of property in the goods the recovery of which is sought; such as a chattel mortgagee, may maintain an action for replevin therefor. Where the mortgage authorizes the mortgagee to take possession of the property on default, he may maintain an action to recover possession of the mortgaged chattels from the mortgagor or from any person in whose hands he may find them. In effect then, the mortgagee, upon the mortgagor's default, is constituted an attorney-in-fact of the mortgagor enabling such mortgagee to act for and in behalf of the owner. Accordingly, that the defendant is not privy to the chattel mortgage should be inconsequential. By the fact that the object of replevin is traced to his possession, one properly can be a defendant in an action for replevin. It is here assumed that the plaintiffs right to possess the thing is not or cannot be disputed. A chattel mortgagee, unlike a pledgee, need not be in, nor entitled to the possession of the property unless and

until the mortgagor defaults and the mortgagee thereupon seeks to foreclose thereon. Since the mortgagee's right of possession is conditioned upon the actual fact of default which itself may be controverted, the inclusion of other parties like the debtor or the mortgagor himself, may be required in order to allow a full and conclusive determination of the case. When the mortgagee seeks a replevin in order to effect the eventual foreclosure of the mortgage, it is not only the

179

existence of, but also the mortgagor's default on, the chattel mortgage that, among other things, can properly uphold the right to replevy the property. The burden to establish a valid justification for that action lies with the plaintiff. An adverse possessor, who is not the mortgagor, cannot just be deprived of his possession, let alone be bound by the terms of the chattel mortgage contract, simply because the mortgagee brings up an action for replevin.

the spouses Simeon G. Toribio and Maximiana Escobar de Toribio mortgaged to the RFC, the plaintiff's lien on the chattels no longer existed. The court dismissed the case. Issue: Whether a prior mortgagee who obtains a personal judgment against the mortgagor waives his right to enforce the mortgage securing the loan.

Jose Movido vs. Rehabilitation Finance Corporation & The Provincial Sheriff of Samar, G.R. No. L-11990, May 29, 1959 (105 Phil 886) Facts: On 1 July 1946 the Vet Bros. & Company, Inc. mortgaged to Jose S. Movido its rights, title, interest and participation in a complete sawmill with all its machineries, tools and equipment in good running condition to secure the payment of a loan of P15,000. On 28 February 1947 the chattel mortgage was registered in the Office of the Register of Deeds in and for the province of Samar. On 28 July 1948 Jose S. Movido brought an action against Vet Bros. & Company, Inc. to recover a sum of money. On 7 February 1949 the parties thereto, assisted by their respective counsel, entered into and submitted to the Court a compromise agreement terminating their dispute and renouncing their respective claims for damages and any other claim in connection with the subject matter of the case which was approved and the Court rendered judgment in accordance therewith. On 3 March 1949, by an instrument duly executed, Vet Bros. & Company, Inc. and the spouses Simeon G. Toribio and Maximiana Escobar de Toribio mortgaged the real estate and chattels therein enumerated and described in favor of the Rehabilitation Finance Corporation to secure the payment of a loan of P46,000. When Vet Bros. & Company, Inc. failed to pay, Rehabilitation Finance Corp. moved for the sale of the properties in a public auction. On 24 April 1953 Jose S. Movido filed with the Sheriff a third party claim on the chattels advertised for sale at public auction asserting a prior and superior right in them because of his chattel mortgage recorded before that of the Rehabilitation Finance Corporation and by virtue of a judgment in his favor rendered by the lower court. Despite such claim the Sheriff proceeded to carry out the sale and on 11 June 1953, after the sale had been successively postponed to 14 May and 28 May, sold the chattels, except those expressly excluded from the public auction sale, to the successful bidders. Movido filed an action against RFC for having unlawfully, fraudulently and maliciously disregarded his third party claim on the chattels. The court rendered judgment holding that the compromise agreement entered into by and between the parties in the civil case and the judgment rendered by the Court pursuant thereto novated the plaintiff's credit secured by the chattel mortgage, and that when the Vet Bros. Company, Inc. and

180

Held: Yes. Affirmed. Ratio: A mortgagee who sues and obtains a personal judgment against a mortgagor upon his credit waives thereby his right to enforce the mortgage securing it. By instituting the civil case and by securing a judgment in his favor upon the compromise agreement, the appellant abandoned his mortgage lien on the chattels in question. The rule in Tizon vs. Valdez, 48 Phil., 910 and Matienzo vs. San Jose, G. R. No. 39510, 16 June 1934, relied upon by the appellants, has been abandoned in Bachrach Motor Company vs. Icarangal (68 Phil 287). Moreover, the appellant secured a writ of execution of the judgment rendered in the civil case on 26 June 1953 only or fifteen days after the public auction sale had been carried out.

court, is not applicable in this instant case because it was a case of sale on installment, where after foreclosure of the units the plaintiffs-guarantors who had likewise executed a real estate mortgage of up to P50,000, cannot be held answerable anymore for the deficiency. The conclusion therefore reached by the lower court was erroneous because in the case at bar, the obligation

Bicol Savings & Loan Association vs. Jaime Guinhawa & The Honorary Presiding Judge of the CFI of Camarines Sur (10 th Judicial District), Br. III, G.R. No. 62415, August 20, 1990 (188 SCRA 642)

Facts: Victorio Depositario together with private respondent Jaime Guinhawa, acting as solidary co-maker, took a loan from petitioner Bicol Savings and Loan Association (BISLA). To secure the payment of the foregoing loan obligation, the principal borrower Victorio Depositario put up as security a chattel mortgage which was a Yamaha Motorcycle. Said motorcycle was eventually foreclosed by reason of the failure of Depositario and Guinhawa to pay the loan. As a result of the foreclosure, there was a deficiency in the amount of P5,158.06 as of July 31, 1981, and BISLA made a demand to pay the same. BISLA filed a complaint for the recovery of a sum of money constituting the deficiency after foreclosure of the chattel mortgage. The City Court ruled for BISLA. The CFI reversed. Issue: Whether a creditor can collect the deficiency amount after foreclosure of the chattel mortgage. Held: Yes. Reversed. Ratio: If in an extrajudicial foreclosure of a chattel mortgage a deficiency exists, an independent civil action may be instituted for the recovery of said deficiency. If the mortgagee has foreclosed the mortgage judicially, he may ask for the execution of the judgment against any other property of the mortgagor for the payment of the balance. To deny to the mortgagee the right to maintain an action to recover the deficiency after foreclosure of the chattel mortgage would be to overlook the fact that the chattel mortgage is only given a security and not as payment for the debt in case of failure of payment. (Bank of the Philippine Islands v. Olutanga Lumber Co., 47 Phil. 20; Manila Trading & Supply Co. v. Tamaraw Plantation Co., 47 Phil. 513.) The case of Pascual, as cited by the respondent

181

contracted by the principal debtor (Depositario) with a solidary co-maker (private respondent herein), was one of loan secured by a chattel mortgage, executed by the principal debtor, and not a sale where the price is payable on installments and where a chattel mortgage on the thing sold was constituted by the buyer and, further, the obligation to pay the installments having been guaranteed by another. Lorenzo Pascual & Leonila Torres vs. Universal Motors Corporation, G.R. No. L27862, November 20, 1974 (61 SCRA 121)

Facts: On May 15, 1924, Alejo de la Flor recovered a judgment against Tiburcia Buhayan. Under this judgment, the sheriff levied execution on 4 carabaos which were found in the possession of Simon Jacinto but registered in the name of Tiburcia Buhayan. Eulogio Betita presented a 3rd party claim (terceria) alleging that the carabaos were already mortgaged to him as evidenced by a document dated May 6, 1924. The sheriff, nevertheless, proceeded with the sale of the animals at public auction which were

Facts: A real estate mortgage was executed by spouses Lorenzo Pascual and Leonila Torres to secure the payment of an indebtedness of PDP Transit, Inc. for the purchase of 5 units of Mercedes Benz trucks. The obligation is further guaranteed by separate deeds of chattel mortgages on the Mercedes Benz units. Upon failure to pay, Universal Motors Corporation filed a complaint against PDP Transit, Inc. before the CFI with a prayer for the issuance of a writ of replevin to collect the balance and to repossess all the units. UMC was able to repossess all the units and to sell them in a public auction. Spouses Pascual and Torres, the real estate mortgagors, filed an action for the cancellation of the mortgage they constituted on 2 parcels of land in favor of UMC to guarantee the obligation of PDP. The court ordered the cancellation of the mortgage. UMC appealed. Issue: Whether a vendor in an installment sale has a right to recover any deficiency from any additional security after the foreclosure of the chattel mortgage. Held: No. Affirmed. Ratio: It is contended by UMC that what Article 1484 NCC withholds from the vendor is the right to recover any deficiency from the purchaser after the foreclosure of the chattel mortgage and not a recourse to the additional security put up by a third party to guarantee the purchaser’s performance of his obligation. To sustain this argument is to overlook the fact that if the guarantor should be compelled to pay the balance of the purchase price, the guarantor will in turn be entitled to recover what she has paid from the debtor vendee; so that ultimately, it will be the vendee who will be made to bear the payment of the balance of the price, despite the earlier foreclosure of the chattel mortgage given to him. Thus, the protection given by Article 1484 would be indirectly subverted and public policy overturned. Eulogio Betita vs. Simeon Ganzon, Alejo de la Flor, & Clemente Pedreña, G.R. No. 24137, March 29, 1926 (49 Phil 87)

182

purchased by Clemente Pedreña. The lower court ruled that the mortgage was a preferred credit because it was a prior document. Issue: Whether a pledge whose date does not appear in a public instrument is effective against 3rd persons. Whether

a pledge is effective when there has been no actual delivery of the thing pledged.

Facts: Diosdado Yuliongsiu was the owner of two (2) vessels, namely: the M/S Surigao and the M/S Don Dino, and operated the FS-203 which was purchased by him from the Philippine Shipping Commission, by installment or on account. As of January or February, 1948, Yuliongsiu had paid to the Philippine Shipping Commission only the

Held: No. No. Reversed. Ratio: The judgment must be reversed unless the document abovequoted can be considered either a chattel mortgage or else a pledge. That it is not a sufficient chattel mortgage is evident; it does not meet the requirements of section 5 of the Chattel Mortgage Law (Act No-1508), has not been recorded and, considered as a chattel mortgage, is consequently of no effect as against third parties. Neither did the document constitute a sufficient pledge of the property valid against third parties. Article 1865 of the Civil Code provides that "no pledge shall be effective as against third parties unless evidence of its date appears in a public instrument." The document in question is not in public, but it is suggested that its filing with the sheriff in connection with the terceria gave it the effect of a public instrument and served to fix the date of the pledge, and that it therefore fulfills the requirements of article 1865. Assuming, without conceding, that the filing of the document with the sheriff had that effect, it seems nevertheless obvious that the pledge only became effective as against the plaintiff in execution from the date of the filing and did not rise superior to the execution attachment previously levied (see Civil Code, article 1227). The alleged pledge is also ineffective for another reason, namely, that the plaintiff pledgee never had actual possession of the property within the meaning of article 1863 of the Civil Code. But it is argued that at the time of the levy the animals in question were in the possession of one Simon Jacinto; that Jacinto was the plaintiff's tenant; and that the tenant's possession was the possession of his landlord. The evidence actually shows that Simon Jacinto and Tiburcia Buhayan were living together as husband and wife and had been so living for many years. It is, of course, evident that the delivery of possession referred to in article 1863 implies a change in the actual possession of the property pledged and that a mere symbolic delivery is not sufficient. In the present case the animals in question were in the possession of Tiburcia Buhayan and Simon Jacinto before the alleged pledge was entered into and apparently remained with them until the execution was levied, and there was no actual delivery of possession to the plaintiff himself. There was therefore in reality no change in possession. Diosdado Yuliongsiu vs PNB (Cebu branch), G.R. No. L19227, February 17, 1968 (22 SCRA 585)

183

sum of P76,500 and the balance of the purchase price was payable at P50,000 a year, due on or before the end of the current year. Yuliongsiu obtained a loan from PNB. To guarantee payment, he pledged his 2 boats and his equity in the FS-203. The pledge document was duly registered with the office of the Collector of Customs. Yuliongsui made partial payment, but failed to pay the balance. PNB filed criminal charges against Yuliongsiu for estafa thru falsification of commercial documents, because plaintiff had, as last indorsee, deposited with defendant bank, from March 11 to March 31, 1948, seven Bank of the Philippine Islands checks. However, in connivance with one employee of defendant bank, Yuliongsiu was able to withdraw the amount credited to him before the discovery of the defraudation on April 2, 1948. Yuliongsiu was convicted and sentenced to indemnify the bank. CA affirmed. Meanwhile, together with the institution of the criminal action, the bank took physical possession of the three pledged vessels while they were at the Port of Cebu. After the first not fell due and was not paid, the branch manager, pursuant to the terms of the pledge contract, executed a document of sale transferring the two pledged vessels and the equity in FS-203 to the bank. The FS-203 was subsequently surrendered by the bank to the Philippine Shipping Commission which rescinded the sale for failure to pay the remaining installments on the purchase price thereof. The other two boats, the M/S Surigao and the M/S Don Dino were sold by the bank to third parties. Yuliongsui filed an action to recover the 3 boats. The lower court upheld the actions of the bank and the validity of the pledge contract.

pledged to the pledgor without invalidating the pledge. In such a case, the pledgor is regarded as holding the pledged property merely as trustee for the pledgee. Plaintiffappellant would also urge Us to rule that constructive delivery is insufficient to make pledge effective. He points to Betita v. Ganzon, 49 Phil. 87 which ruled that there has to be actual delivery of the chattels pledged. But then there is also Banco Espanol Filipino v. Peterson, 7 Phil. 409 ruling that symbolic delivery would suffice. An examination of the peculiar nature of the things pledged in the two cases will

Issue: Whether a judicial admission that the contract is a pledge is binding. Whether constructive delivery is sufficient to make the pledge effective. Whether the formalities required in mortgage is also required in pledge. Whether the bank, as pledgee, can purchase the thing pledged. Held: Yes. Yes. No. Yes. Affirmed. Ratio: The parties stipulated as a fact that the contract is a pledge contract. Necessarily, this judicial admission binds the plaintiff. Without any showing that this was made thru palpable mistake, no amount of rationalization can offset it. The defendant bank as pledgee was therefore entitled to the actual possession of the vessels. While it is true that plaintiff continued operating the vessels after the pledge contract was entered into, his possession was expressly made "subject to the order of the pledgee." The provision of Art. 2110 of the present Civil Code being newcannot apply to the pledge contract here which was entered into on June 30, 1947. On the other hand, there is authority supporting the proposition that the pledgee can temporarily entrust me physical possession of the chattels

184

readily dispel the apparent contradiction between the two rulings. In Betita v. Ganzon, the objects pledged — carabaos — were easily capable of actual, manual delivery unto the pledgee. In Banco Espanol-Filipino v. Peterson, the objects pledged — goods contained in a warehouse — were hardly capable of actual, manual delivery in the sense that it was impractical as a whole for the particular transaction and would have been an unreasonable requirement. Thus, for purposes of showing the transfer of control to the pledgee, delivery to him of the keys to the warehouse sufficed. In other words, the type of delivery will depend upon the nature and the peculiar circumstances of each case. The parties here agreed that the vessels be delivered by the "pledgor to the pledgor who shall hold said property subject to the order of the pledgee." Considering the circumstances of this case and the nature of the objects pledged, i.e., vessels used in maritime business, such delivery is sufficient. It is contended first that the cases holding that the statutory requirements as to public sales with prior notice in connection with foreclosure proceedings are waivable, are no longer authoritative in view of the passage of Act 3135, as amended; second, that the charter of defendant bank does not allow it to buy the property object of foreclosure in case of private sales; and third, that the price obtained at the sale is unconscionable. There is no merit in the claims. The rulings in Philippine National Bank v. De Poli, 44 Phil. 763 and El Hogar Filipino v. Paredes, 45 Phil. 178 are still authoritative despite the passage of Act 3135. This law refers only, and is limited, to foreclosure of real estate mortgages. So, whatever formalities there are in Act 3135 do not apply to pledge. Regarding the bank's authority to be the purchaser in the foreclosure sale, Sec. 33 of the Act 612, as amended by Acts 2747 and 2938 only states that if the sale is public, the bank could purchase the whole or part of the property sold "free from any right of redemption on the part of the mortgagor or pledgor." This even argues against plaintiff’s case since the import thereof is that if the sale were private and the bank became the purchaser, the mortgagor or pledgor could redeem the property. Hence, plaintiff could have recovered the vessels by exercising this right of redemption. He is the only one to blame for not doing so.

In addition to the securities above stated as mortgaged and pledged, Reyes likewise placed his other assets, present and future, as security. The bank made further advances to Reyes, and Reyes, in turn, executed a pledge of certain specified items of personal property. Therafter, to secure the debt to the plaintiff, Reyes executed a second mortgage and pledge on the same properties in favor of the plaintiff. Then all of the properties referred to passed into the custody and control of the bank. Portions of the same were disposed of from time to time, and proceeds were credited to the account of Reyes. The amounts applied to the account of Reyes included

Congregacion de la Mision de San Vicente de Paul vs. Francisco Reyes Y Mijares & El Banco Español-Filipino, G.R. No. 5508, August 14, 1911 (19 Phil 524) Facts: Francisco Reyes was indebted to the Banco EspañolFilipino in the sum of P84,415.38; to the Hongkong & Shanghai Bank in the sum of P141,702; and to the plaintiff in the sum of P45,286. Banco Español-Filipino advanced Reyes the money to pay the Hongkong & Shanghai Bank, thus becoming his creditor in the sum total of P226,117.38. Reyes thereupon executed a first mortgage upon certain specified real property, to secure the payment of said debt.

185

an amount worth P96,781.75 which was paid by Reyes to the bank and obtained from assets and credits other than those covered by the mortgage and pledge. From time to time, the bank cashed checks for Reyes and paid drafts and other obligations in favor of third persons. The plaintiff now contends that the first mortgage is wholly paid and satisfied, thus the mortgaged properties should be released and the 2 nd mortgage should now be equivalent to the 1st mortgage. The bank countered that the security is liable for any and all liabilities Reyes had with the bank and that it did not apply all of the proceeds to the secured debt, but also to the unsecured debt. The lower court ruled for the plaintiff so far as concerns the proceeds of the mortgaged property and the excess obtained from the special pledges, but holds that the P96,781.75 paid into the bank from independent sources is not legally applicable to the satisfaction of the mortgage debt. Plaintiff appealed the ruling on the sole issue of the proceeds arising from independent sources.

instantly be withdrawn and paid to the discharge of obligations wholly apart from the business itself. In the meantime he must have something for the support and maintenance of his family. From these facts we can readily see that not every peso delivered to the bank by Reyes was necessarily to be applied to the payment of the mortgage debt, even though said peso came by way of rents and income from the property actually included by specific description in the mortgage. Moreover, Reyes had a large amount of property not

Issue: Whether the proceeds from the sale of properties that were not covered by a mortgage or pledge can be applied to pay for a debt that has been secured by a mortgage and pledge. Held: No. Affirmed. Ratio: The provision which obligates all of the debtor’s property, present and future, to the payment of the mortgage debt, and agreed to pay its proceeds into the bank so long as that mortgage debt was not wholly liquidated, is wholly without force or effect. The property sought to be pledged is not described or identified. We do not know, from the terms of the clause or from any other source, that any of it really existed at the time of the execution of the clause. As a pledge of personalty, it is wholly ineffective, not only for indefiniteness but also for the reason that the property pledged, if any, was not delivered. As a mortgage of realty it is equally ineffective for the reason that, to be valid under the provisions of the Civil Code and the Mortgage Law, the mortgage must describe the property mortgaged so that it is clearly identified and identifiable. This paragraph being entirely ineffective and valueless as a mortgage or pledge, the agreement to pay the proceeds of any portion of the property or credits therein mentioned upon the mortgage debt would be equally ineffective and valueless, as such an agreement is purely subsidiary to the agreement of mortgage and pledge, and is wholly dependent upon it. The latter failing for illegality, or at least, invalidity, the dependent agreement falls with it. It is obvious that Reyes could not run a business without using money to do so. If he were obliged to pay upon said mortgage debt every dollar which came to him, from whatever source, the provision permitting him to continue in business would be farcical. A business can not be run if the money received in the course thereof must

186

included in the bank's mortgage and pledge. This property was entirely unencumbered and was free to be used by him in his business conducted after the execution of the mortgage and pledge to the bank. It is the admitted evidence in the case that he actually did use substantially all of said property in that way. As a result, such property, converted into cash or used as security, was delivered to the bank to that end. Witness to this fact not only said P96,781.75 but also the properties that were pledged. Here again we see moneys delivered to the bank which were not necessarily to be applied to the payment of the debt secured by the mortgage and pledge of the bank. Desiring to continue his business, Reyes was confronted with a stern necessity. He must have money to run that business and he must have a bank in which to put it. If every dollar which he could muster and deposit in the bank had to be applied to the payment of an old obligation by the very fact of that deposit, his business was in a sorry plight. The stipulation between him and the bank that he should continue such business would, under such conditions, lose all significance. It is thus clear that it is at least possible that there was some money delivered at different times to the bank which, strictly speaking, was not intended to be used in reduction of said original debt. It is, as we have seen, conceded that said sum of P96,781.75 is composed of such moneys. There was also the fact that at the time of the delivery of said sum to the bank, the original debt with the bank was not yet due. Reyes was under no legal obligation to pay any part of the indebtedness secured by the mortgage and pledge to the bank until June 4, 1905. But the bank had absolutely no right, before the debt was due, to apply to its payment moneys deposited by Reyes which had been obtained from other sources. There was no agreement to which Reyes was a party that he should apply all of his assets to the payment of the said debt, especially before it was due. The pledge executed by Reyes in favor of the bank on his account current with the bank refers to a check and deposit account, not just a current account. It was clearly not the intention of Reyes, in delivering money to be checked against; that it should go in satisfaction of the original debt. If it were so applied, it could not be checked against, as it legally ceased to exist as soon as applied to such payment. It borders on the absurd to say that one would deposit money to create a checking account with the intention that said account should be instantly destroyed by the application of the sum deposited to the satisfaction of another obligation. Under such circumstances no check account could possibly be created till the obligation was fully paid. But this would defeat the very object of the deposit. The purpose and intention of Reyes and the bank were to provide means and facilities by which Reyes could continue his business. To do this he must have resources, banking facilities, must make deposits and draw checks. But if, by the application of his deposits instantly to the payment of an outside obligation, it was impossible to create a check account, what would he draw against? He

could not draw against the original debt, as that was a debt and not a credit. He could not draw against the deposit, as that had been destroyed by its application to the debt. There is nothing which a check can be drawn against except a checking account. It is manifest, therefore, that no part of the personal property or the income therefrom, if any, could have been applied to relieve the real estate from its share of the burden of the debt during the time included within the scope of this action. On the other hand, a considerable part of the charge imposed upon the personal property still remains unpaid, a portion of said property still remaining in the hands of the bank unsold and

187

unused for the reduction of said debt. There has been realized from the personal property the sum of P126,575.92. Its share of the burden was P138,117.38. With-interest added, there would remain a considerable balance due from the personal property. The Bachrach Motor Co., Inc. vs. Mariano Lacson Ledesma, Talisay-Silay Milling Co, Inc., & PNB, G.R. No. 42462, August 31, 1937 (64 Phil 681) Facts: Bachrach Motor Co., Inc. obtained judgment in a civil case against Mariano Lacson Ledesma. A writ of execution of said judgment was issued. In compliance with the writ, the sheriff attached all right, title to and interest which Mariano Lacson Ledesma may have in any bonus, dividend, shares of stock, money, or other property which Ledesma is entitled to receive from the Talisay-Silay Milling Co., Inc., by virtue of the fact that he has mortgaged his land in favor of the PNB to guarantee the indebtedness of the Talisay-Silay Milling Co., Inc., or which he is entitled to receive from the Talisay- Silay Milling Co., Inc., on account of being stockholder in that corporation or which he is entitled to receive from that corporation for any other cause or pretext whatsoever. Bachrach Motor Co., Inc. then obtained another judgment against Ledesma. A writ of execution of said judgment was issued, thereby causing the attachment, sale and adjudication to Bachrach Motor Co., Inc. of Ledesma's right of redemption over certain mortgaged real properties. These properties were mortgaged to PNB. The instrument of mortgage also contained, as part of the securities to ensure compliance with his obligation, 1,540 shares in Talisay-Silay Milling Co., Inc. Central Talisay-Silay Milling Co. resolved to grant a bonus or compensation to the owners of the real properties mortgaged to answer for the debts contracted by said central with the Philippine National Bank, for the risk incurred by said properties upon being subjected to said mortgage lien. Under the resolution, Ledesma was allotted the sum of P19,911.11, which sum, however, would not be payable until the month of January, 1930. PNB brought action against Ledesma and his wife for the recovery of a mortgage credit. PNB amended its complaint to include Bachrach Motor Co., Inc. as party defendant because they claim to have some right to certain properties which are the subject matter of the complaint. The lower court ruled for PNB against Ledesma. The court granted PNB the authority to sell the shares of stocks of Ledesma. Bachrach Motor Co., Inc. brought an action against the Talisay-Silay Milling Co., Inc., to recover from it the sum of P13,850 against the bonus or dividend which, by virtue of the resolution of December 22, 1923, said Central TalisaySilay Milling Co., Inc., had declared in favor of Ledesma as one of the owners of the hacienda which had been mortgaged to PNB. PNB intervened alleging that in had a preferred right to said bonus, not only by virtue of the

properties being mortgaged to it, but also by virtue of the said bonus being a civil fruit of the mortgaged lands. The lower court rendered a judgment in favor of Bachrach Motor Co., Inc. The Supreme Court affirmed the judgment of the lower court, holding that the bonus had no immediate relation to the lands in question but merely a remote and accidental one and, therefore, it was not a civil fruit of the real properties mortgaged to PNB. Talisay-Silay Milling Co., Inc., issued stock certificate No. 772 for 6,300 shares, as stock dividend, to Mariano Lacson Ledesma, which certificate was ordered by

188

Mariano Lacson Ledesma to be delivered to Roman Lacson, attorney for PNB. PNB then informed Talisay-Silay Milling Co., Inc. that the 6,300 shares had been given to it by Mariano Lacson Ledesma as pledge. Bachrach Motor Co., on the other hand, by virtue of an alias execution, attached all right, title to and interest which Ledesma might have in the bonus of P19, 911.11 which Ledesma is entitled to receive from the Talisay-Silay Milling Co., Inc., by virtue of the fact that such defendant has mortgaged his lands in favor of PNB to guarantee the indebtedness of the TalisaySilay Milling Co. Inc. PNB then foreclosed on the shares of stock of Ledesma and bought these during the public auction. Bachrach Motor Co., Inc. wants the sale declared null and void. The lower court ruled for PNB.

effects and consequences, provided it appears to have been in some manner perfected and that the things pledged have been delivered, and in a contrary case, and even if the creditor has not received them or has not retained them in his custody, provided that the contract of pledge or chattel mortgage appears in a notarial document and is inscribed in the registry of deeds of the province." Therefore, this court holds that the pledge of the 6,300 stock dividends is valid

Issue: Whether a pledge that is not recorded in a dated public instrument but has been delivered to the pledgee is effective. Whether certificate of stocks can be pledged. Held: Yes. Yes. Affirmed. Ratio: It is true, according to article 1865 of the Civil Code, that in order that a pledge may be effective as against third persons, evidence of its date must appear in a public instrument in addition to the delivery of the thing pledged to the creditor. This provision has been interpreted in the sense that for the contract to affect third persons, it must appear in a public instrument in addition to delivery of the thing pledged. It cannot be denied, however, that section 4 of Act No. 1508, otherwise known as the Chattel Mortgage Law, implicitly modified article 1865 of the Civil Code in the sense that a contract of pledge and that of chattel mortgage, to be effective as against third persons, need not appear in public instruments provided the thing pledged or mortgaged be delivered or placed in the possession of the creditor. In the case of Mahoney vs. Tuason (39 Phil., 952, 958), where this doctrine was laid down, it was stated: "From the foregoing provisions of the above-cited Act, it is inferred that the same does not entirely repeal the provisions of the Civil Code, but only modify them in part and amplify them in another, as may be seen from an examination of, and comparison between, the provisions of the Civil Code regarding pledge and the above-quoted provisions of Act No. 1508. Article 1865 of the Civil Code provides that no pledge shall be effective against a third person unless evidence of its date appears in a public instrument. The provision of this article has, undoubtedly, been modified by section 4 of the Chattel Mortgage Law, in so far as it provides that a chattel mortgage shall not be valid against any person except the mortgagor, his executors or administrators, unless the possession of the property is delivered to and retained by the mortgagee or unless the mortgage is recorded in the office of the register of deeds of the province in which the mortgagor resides. From the date the said Act No. 1508 was in force, a contract of pledge or chattel mortgage should be deemed legally entered into and should produce all its

189

against the plaintiff for the reason that the certificate was delivered to the creditor bank, notwithstanding the fact that the contract does not appear in a public instrument. The plaintiff further contends that the pledge could not legally exist because the certificate was not the shares themselves, making it understood that a certificate of stock or of stock dividends can not be the subject matter of the contract of pledge or of chattel mortgage. Neither is this contention tenable. Certificates of stock or of stock dividends, under the Corporation Law, are quasi negotiable instruments in the sense that they may be given in pledge or mortgage to secure an obligation.

contract, was 5,000 piculs. Upon making this discovery, the bank's representative, accompanied by a lawyer, went immediately to see Chua Teng Chong, and the latter informed him that the rest of the sugar covered by the pledge agreement was stored in another warehouse (where Ocejo delivered). The bank's representative immediately went to this warehouse and upon arrival there found some 3,200 piculs of sugar, of which he took immediate possession, closing the warehouse with the bank's padlocks. An attempt was made by Ocejo, Perez & Co. to recover the sugar, but to no avail.

Ocejo, Perez & Co. vs The International Banking Corporation. Francisco Chua Seco, as assignee, G.R. No. L-10658, February 14, 1918 (37 Phil 631) Facts: On March 7, 1914, Chua Teng Chong of Manila, executed and delivered to the International Banking Corporation, a promissory note, payable one month after date. Attached to this note was another private documents, signed Chua Teng Chong, in which it was stated that he had deposited with the bank, as security for the said note, 5,000 piculs of sugar, which in said document were said to be stored in a warehouse situated in Binondo, Manila. It appears from the evidence, assuming that sugar was in the warehouse on that date, that the bank did not take possession of it when the document was executed and delivered, and that Chua Teng Chong continued to retain the sugar in his possession and control. The bank made no effort to exercise any active ownership over said merchandise until the 16th of April, when it discovered that the amount of sugar stored in the said warehouse was much less than P5,000 piculs mentioned in the contract. The agreement between the bank and Chua Teng Chong with respect to the alleged pledge of the sugar was never recorded in a public instrument. On March 24, 1914, Ocejo, Perez & Co., entered into a contract with Chua Teng Chong for the sale to him of a lot of sugar. It was agreed that delivery should be made in the month of April, the sugar to be weighed in the buyer's warehouse. It appears that this sugar was brought to Manila by a steamer in the month of April, and 5,000 piculs were delivered by plaintiff to Chua Teng Chong. The delivery was completed April 16, 1914, and the sugar was stored in the buyer's warehouse. On April 17, 1914, Ocejo, Perez & Co. presented, for collection, its account for the purchase price of the sugar, but the buyer refused to make the payment, and up to the present time the sellers have been to collect the purchase price of the merchandise question. On the same date as that on which the 5,000 piculs of sugar were delivered into the warehouse on Muelle de la Industria, the bank sent an employee to inspect the sugar described in the pledge agreement. The bank's representative then discovered that the amount of sugar in the warehouse did not exceed 1,800 piculs, whereas the amount which should have been there, according to the

190

Chua Teng Chong was judicially declared to be insolvent, and Francisco Chua Seco was appointed as assignee of the insolvency. On the same date, and a few minutes after insolvency proceedings were commenced, Ocejo, Perez & Co. filed a complaint, naming the bank as defendant, alleging that it was unlawfully holding the sugar, and prayed for a writ of replevin. By agreement of the parties, the sugar was sold and the proceeds of the sale were deposited in the bank. Chua Seco, the assignee of the insolvency, intervened in the case. The lower court ruled for Ocejo, Perez & Co.

evident that the pledge asserted by the International Bank is inefficacious. The seller also has no right in the property because it did not file an action to rescind the contract. Title had already passed to the buyer by the delivery of the product to him, despite the nonpayment. Replevin is not the proper remedy in this case, but rescission which the seller failed to avail. The property is, thus, given to the assignee in insolvency, while the seller is reserved the right to file his claim in the insolvency proceeding.

Issue: Whether a pledge is valid over other properties of the pledgor that are of the same kind which were not even pledged. Held: No. Reversed. Ratio: It is evident that the sugar therein mentioned is not the same as that here in dispute. An attempt was made to pledge the lot of sugar deposited in warehouse No. 1008, Calle Toneleros, Manila. The sugar in dispute has never been in that warehouse, as the seller delivered it into the bodega at No. 119, Muelle de la Industria. The sugar here in question could not possibly have been the subject matter of the contract of pledge which the parties undertook to create by the private document dated March 7, 1914, inasmuch as it was not at that time the property of the defendant, and this constitutes an indispensable requisite for the creation of a pledge. (Civil Code, art. 1857.) It does not appear from the record that any effort was made to pledge the sugar which is the subject matter of this case. The bank took possession of that sugar under the erroneous belief, based upon the false statement of Chua Teng Chong, that it was a part of the lot mentioned in the private document dated March 7, 1914. But even if it were assumed that on the afternoon of April 16, 1914, an attempt was made to pledge the sugar and that delivery was made in accordance with the agreement, the pledge so established would be void as against third persons. Article 1865 of the Civil Code provides that a pledge is without effect as against third persons “if the certainty of the date does not appear by public instrument.” In the case of Tec Bi & Co. vs. Chartered Bank of India, Australia and China, 16 Off. Gaz., 908 decided February 5, 1916, this court held that when the contract of pledge is not recorded in a public instrument, it is void as against third persons; that the seller of the thing pledged, seeking to recover the purchase price thereof, is a third person within the meaning of the article cited; and that the fact that the person claiming as pledge has taken actual physical possession of the thing sold will not prevent the pledge from being declared void as against the seller. The court held that the principle established by article 1865 of the Civil Code is not adjective in its character, but that “it prescribes a condition without which the contract of pledge cannot adversely affect third persons.” Applying the doctrine of the decision cited, It is

191

Involuntarty Insolvency of The Gulf Plantation Co. Pacific Commercial Company, Philippine-American Drug Company & Standard Oil Company vs. PNB. H.B. Hugnes, assignee, G.R. No. 24893, August 23, 1926 (49 Phil 236) Facts: Gulf Plantation Company, through its President, executed to the PNB a pledge over public land, buildings, hemp, carabaos, and boats. The pledge was contained in a public instrument. An insolvency petition was filed to have the Gulf Plantation Company declared insolvent, and it was declared insolvent. The court ordered the sheriff to take possession of all the assets of the insolvent estate. The assignee in insolvency filed a petition for authority to sell at public auction all the properties of the insolvent estate. The PNB also filed a petition to seek enforcement of the pledge in its favor. The lower court ruled for PNB.

Estate of George Litton vs. Ciriaco B. Mendoza & CA, G.R. No. L-49120, June 30, 1988 (163 SCRA 246) Facts: Bernal spouses are engaged in the manufacture of embroidery, garments and cotton materials. Sometime in September 1963, C.B.M. Products, with Mendoza as president, offered to sell to the Bernals textile cotton materials and, for this purpose,

Issue: Whether a pledge is effective even though the pledgee had no possession over the thing pledged. Whether immovables can be the subject of pledge. Whether the pledge covers the increase in quantity of the thing pledged. Held: No. No. No. Reversed. Ratio: It is very apparent from the language used in the instrument that it was prepared on the customary blank form of a pledge for the taking of properties under a pledge. To make the instrument valid as a pledge, as to the personal property therein described, it was the duty of the bank to take the actual, physical possession of the property, and to continue and remain in such possession, and to make it valid against creditors or the assignee, the bank must have been in such actual, physical possession at the time the Plantation Company was declared insolvent. Upon that question, there is no evidence in the record. Without it, the instrument is void as a pledge, and the bank would not have a preference, and would not now be entitled to the possession of the property of the Plantation Company, or to have it sold and the proceeds applied to the satisfaction of its claim. Again, in the very nature of things, a pledge or chattel mortgage is confined and limited to personal property, and it cannot be extended or made to apply to real property. It will also be noted that the pledge was executed in 1918, and it is very probable that the one thousand piculs of hemp have long since been sold. As to the twenty-three carabaos, thirty-eight bullocks and eighteen horses, there is no provision for the increase. Hence, the pledge, if valid for any purpose, should be confined and limited to the particular property described in the pledge, and would not include any increase.

192

Mendoza introduced the Bernals to Alfonso Tan. Thus, the Bernals purchased on credit from Tan some cotton materials, payment of which was guaranteed by Mendoza. Thereupon, Tan delivered the said cotton materials to the Bernals. Mendoza received checks from the Bernals with the understanding that the said check will remain in the possession of Mendoza until the cotton materials are finally manufactured into garments after which time Mendoza will sell the finished products for the Bernals. Meanwhile, the said check matured without having been cashed and Mendoza demanded the issuance of another check in the same amount without a date. On the other hand, Mendoza issued two (2) PNB checks in favor of Tan. He informed the Bernals of the same and told them that they are indebted to him and asked the latter to sign an instrument whereby Mendoza assigned the said amount to Insular Products Inc. Tan had the two checks issued by Mendoza discounted in a bank. However, the said checks were later returned to Tan with the words stamped "stop payment" which appears to have been ordered by Mendoza for failure of the Bernals to deposit sufficient funds for the check that the Bernals issued in favor of Mendoza. Tan brought an action against Mendoza while the Bernals brought an action for interpleader for not knowing whom to pay. While both actions were pending resolution by the trial court, Tan assigned in favor of George Litton, Sr. his litigatious credit against Mendoza duly submitted to the court with notice to the parties. After due trial, the lower court ruled that the said PNB checks were issued by Mendoza in favor of Tan for a commission and held Mendoza liable as a drawer whose liability is primary and not merely as an indorser. CA affirmed. Meanwhile, pending the resolution of the said appeal, Mendoza entered into a compromise agreement with Tan wherein the latter acknowledged that all his claims against Mendoza had been settled and that by reason of said settlement both parties mutually waive, release and quit whatever claim, right or cause of action one may have against the other, with a provision that the said compromise agreement shall not in any way affect the right of Tan to enforce by appropriate action his claims against the Bernal spouses. Mendoza filed a motion for reconsideration praying that the decision be set aside, principally anchored upon the ground that a compromise agreement was entered into between him and Tan which in effect released Mendoza from liability. Tan filed an opposition to this motion claiming that the compromise agreement is null and void as he was not properly represented by his counsel of record and principally because of the deed of assignment that he executed in favor of George Litton, Sr. alleging that with such, he has no more right to alienate said credit. While the case was still pending reconsideration, Tan, the assignor, died leaving no properties whatsoever to satisfy the claim of the estate of the late George Litton, Sr. The CA set aside its decision and approved the compromise

agreement. Issue: Whether an assignor (Tan) can dispose or alienate a pledged credit (credit of Mendoza) without notice and consent of the assignee (Litton Sr.). Held: No. Reversed.

193

Ratio: The validity of the guaranty or pledge in favor of Litton has not been questioned. Our examination of the deed of assignment shows that it fulfills the requisites of a valid pledge or mortgage. Although it is true that Tan may validly alienate the litigatious credit as ruled by the appellate court, citing Article 1634 of the Civil Code, said provision should not be taken to mean as a grant of an absolute right on the part of the assignor Tan to indiscriminately dispose of the thing or the right given as security. The Court rules that the said provision should be read in consonance with Article 2097 of the same code. Although the pledgee or the assignee, Litton, Sr. did not ipso facto become the creditor of private respondent Mendoza, the pledge being valid, the incorporeal right assigned by Tan in favor of the former can only be alienated by the latter with due notice to and consent of Litton, Sr. or his duly authorized representative. To allow the assignor to dispose of or alienate the security without notice and consent of the assignee will render nugatory the very purpose of a pledge or an assignment of credit. Moreover, under Article 1634, the debtor has a corresponding obligation to reimburse the assignee, Litton, Sr. for the price he paid or for the value given as consideration for the deed of assignment. Failing in this, the alienation of the litigated credit made by Tan in favor of private respondent by way of a compromise agreement does not bind the assignee, petitioner herein.

Josefina Rocco. On the same date, Detective Corporal Oswaldo Mateo of the Manila Police also claims to have gone to the pawnshop, showed Yu An Kiong the report of Serrano and left the latter a note asking him to hold the jewelry and notify the police in case someone should redeem the same. The next day, on 10 July 1968, Yu An Kiong permitted one Tomasa de Leon, exhibiting the appropriate pawnshop ticket, to redeem the jewelry.

Loreta Serrano vs CA & Long Life Pawnship, Inc., G.R. No. 45125, April 22, 1991 (196 SCRA 107) Facts: Sometime in early March 1968, Loreta Serrano bought some pieces of jewelry from Niceta Ribaya. Serrano, then in need of money, instructed her private secretary, Josefine Rocco, to pawn the jewelry. Josefina Rocco went to Long Life Pawnshop, Inc., pledged the jewelry with its principal owner and General Manager, Yu An Kiong, and then absconded with said amount and the pawn ticket. The pawnshop ticket issued to Josefina Rocco stipulated that it was redeemable "on presentation by the bearer." Three (3) months later, Gloria Duque and Amalia Celeste informed Niceta Ribaya that a pawnshop ticket issued by Long Life Pawnshop, Inc. was being offered for sale. They told Niceta the ticket probably covered jewelry once owned by the latter which jewelry had been pawned by one Josefina Rocco. Suspecting that it was the same jewelry she had sold to Serrano, Niceta informed Serrano of this offer and suggested that Serrano go to the Long Life pawnshop to check the matter out. Serrano claims she went to the pawnshop, verified that indeed her missing jewelry was pledged there and told Yu An Kiong not to permit anyone to redeem the jewelry because she was the lawful owner thereof. Petitioner claims that Yu An Kiong agreed. Serrano went to the Manila Police Department to report the loss, and a complaint first for qualified theft and later changed to estafa was subsequently filed against

194

Serrano filed a complaint for damages against Long Life Pawnshop, Inc. for failure to hold the jewelry and for allowing its redemption without first notifying petitioner or the police. The trial court ruled for Serrrano. CA reversed. Issue: Whether a pledgee has the duty to give notice to the true owner of any attempt to redeem a stolen property that was pledged. Held: Yes. Reversed.

represented the value of the bracelet and pawn tickets and that it was understood that Lee would become the absolute owner of the articles pledges if Cruz should not return said sum of money within the period of sixty days. One week thereafter, Cruz again presented himself at the place of business of Lee and received the further sum of P3,500, at the same time delivering two pawn tickets of the Monte de Pieded. At the same time, Cruz signed a further receipt containing a stipulation that the sale of the articles pledged would become absolute unless the amount stated in the receipt should be returned within sixty days.

Ratio: Having been notified by petitioner and the police that jewelry pawned to it was either stolen or involved in an embezzlement of the proceeds of the pledge, private respondent pawnbroker became duty bound to hold the things pledged and to give notice to petitioner and the police of any effort to redeem them. Such a duty was imposed by Article 21 of the Civil Code. The circumstance that the pawn ticket stated that the pawn was redeemable by the bearer, did not dissolve that duty. The pawn ticket was not a negotiable instrument under the Negotiable Instruments Law nor a negotiable document of title under Articles 1507 et seq. of the Civil Code. If the third person Tomasa de Leon, who redeemed the things pledged a day after petitioner and the police had notified Long Life, claimed to be owner thereof, the prudent recourse of the pawnbroker was to file an interpleader suit, impleading both petitioner and Tomasa de Leon. The respondent pawnbroker was, of course, entitled to demand payment of the loan extended on the security of the pledge before surrendering the jewelry, upon the assumption that it had given the loan in good faith and was not a "fence" for stolen articles and had not conspired with the faithless Josefina Rocco or with Tomasa de Leon. Respondent pawnbroker acted in reckless disregard of that duty in the instant case and must bear the consequences, without prejudice to its right to recover damages from Josefina Rocco. Cornelio Cruz & Ciriaca Serrano vs. Chua A.H. Lee, G.R. No. 31018, November 6, 1929 (54 Phil 10) Facts: Cornelio Cruz pledged valuable jewelry to two different pawnshops in the City of Manila, namely, the Monte de Piedad and Ildefonso Tambunting, receiving therefor twelve pawn tickets showing the terms upon which the articles pledged were held by the pledgees. On the date stated, Cruz, being desirous of obtaining a further loan upon the same and other jewels, presented himself to Chua A. H. Lee and pledged to him six pawn tickets of the Monte de Pieded and a bracelet set with seventeen diamonds of different sizes. Upon receiving the bracelet and the six tickets, Lee delivered to the plaintiff a sum of money, for which the plaintiff executed a receipt containing words to the effect that the amount of P3,020, therein stated,

195

The right of repurchasing the jewelry, which was conceded to Cruz in the two receipts above mentioned, was never exercised by him; and on September 25, 1926, Lee filed a complaint against Cruz, in which it was alleged that the receipts above mentioned had been drawn in the form of a sale with stipulation for repurchase in sixty days but that it was understood between the parties that the transaction was a loan and that the jewelry and pawn tickets held by Lee constituted a mere security for the money advanced by him to Cruz. The court ruled for Lee, and this was affirmed in the Supreme Court. Execution was suspended pending the outcome of this case.

1930 (54 Phil 361) Facts: On September 15, 1925, Go Chulian executed a mortgage on 2 parcels of land in favor of Genoveva Gamboa de Jayme, in order to secure the payment of a loan. The mortgage provides that if upon maturity the mortgagor shall be unable to satisfy the amount owed, he will authorize the mortgagee to take over the aforesaid parcels of land, and to dispose of them after the sugarcane crop has been harvested for milling in the season of 19251926, the ownership of the aforesaid lots being thus transferred to the

Issue: Whether a pledgee is obligated to take care of the thing pledged with the diligence of a good father of a family. Whether a person who takes a pawn ticket in pledge is bound to renew the ticket from time to time, by the payment of interest, or premium, as required by the pawnbroker, until the rights of the pledgor are finally foreclosed. Held: Yes. Yes. Modified. Ratio: It appears that all of the pawned jewelry was still subject to redemption when civil case No. 30569 was first called for trial and apparently the right of redemption on only one piece of jewelry had been foreclosed by sale when the decision was rendered. Art. 1967 CC provides that the creditor must take care of the thing given in pledge with the diligence of a good father of a family; he shall be entitled to recover any expenses incurred for its preservation and shall be liable for its loss or deterioration, in accordance with the provisions of this Code. In applying this provision to the situation before us it must be borne in mind that the ordinary pawn ticket is a document by virtue of which the property in the thing pledged passes from hand to hand by mere delivery of the ticket; and the contract of the pledge is, therefore, absolvable to bearer. It results that one who takes a pawn ticket in pledge acquires domination over the pledge; and it is the holder who must renew the pledge, if it is to be kept alive. Article 1867 contemplates that the pledgee may have to undergo expenses in order to prevent the pledge from being lost; and these expenses the pledgee is entitled to recover from the pledgor. From this it follows that where, in a case like this, the pledge is lost by the failure of the pledgee to renew the loan, he is liable for the resulting damage. Nor, in this case, was the duty of the pledgee destroyed by the fact that the pledgee had obtained a judgment for the debt of the pledgor which was secured by the pledge. The duty to use the diligence of a good father of the family in caring for the pledge subsists as long as the pledged article remains in the power of the pledgee. Tan Chun Tic vs. West Coast Life Insurance Co. & Jose C. Locsin, Provincial Sheriff of Occidental Negros, G.R. No. 30882, February 1,

196

mortgagee who shall then be the owner thereof in fee simple, dispensing with expensive lawsuits. On September 16, 1925, West Coast Life Insurance Company filed a complaint against Go Chulian, Julio Gonzaga, and Francisco Sanchez for the recovery of a sum of money. On the same day, the West Coast Life Insurance Company obtained from the court a writ of preliminary attachment of which the sheriff attached the 2 parcels of land mentioned above. On March 30, 1926, the date on which the mortgage fell due, Genoveva de Jayme assigned and transferred her rights and actions in the mortgage contract to Tan Chun Tic. On March 7, 1927, Tan Chun Tic presented to the registrar of deeds of Occidental Negros an affidavit wherein he stated that the period granted to the debtor in the said mortgage had already elapsed without payment of its value. The registrar of deeds then cancelled the certificates of title in the name of Go Chulian, and in lieu thereof issued others in the name of Tan Chun Tic, but preserved the annotation of the preliminary attachment in favor of the West Coast Life Insurance Company. Tan Chun Tic filed a complaint to seek the annulment and cancellation of the preliminary attachment. This was granted by the lower court.

515) Facts: Manila Surety & Fidelity Co., Inc., upon request of Rodolfo Velayo, executed a bond for P2,800.00 for the dissolution of a writ of attachment obtained by one Jovita Granados in a suit against Rodolfo Velayo. Velayo undertook to pay the surety company

Issue: Whether a pledge with a stipulation for pactum commissorium is valid. Held: No. Reversed. Ratio: An agreement that the creditor may appropriate the thing pledged as if it had been sold to him, merely because the period for the payment of the loan had lapsed is void. There can be no rational basis, having in mind the precedents of our ancient law, to consider it lawful with respect to the pledgee, who, in the absence of other conditions which may have been validly stipulated, cannot disregard, in the alienation of the property pledged, the provisions of article 1872 conferring a right to the creditor, which, even though he may renounce, does also constitute a guaranty of the debtor which the latter cannot lose simply by the will of the former or by a stipulation which cannot be enforced in law." The doctrines which recognize the right of owners of mortgaged property to transmit freely the ownership thereof to the mortgagee in payment of his credit, are not applicable to the case at bar, where the additional stipulation in question is entirely different from that which the judge took into consideration as the ground of the judgment appealed from. This being so, it is held that the court below erred in upholding the validity of the additional stipulation in question, and in ordering the cancellation of the annotation of the preliminary attachment upon said lots in favor of the defendant West Coast Life Insurance Company. Manila Surety & Fidelity Company, Inc. vs. Rodolfo R. Velayo, G.R. No. L-21069, October 26, 1967 (21 SCRA

197

an annual premium of P112 to indemnify the Company for any damage and loss of whatsoever kind and nature that it shall or may suffer, as well as reimburse the same for all money it should pay or become liable to pay under the bond including costs and attorneys' fees. As "collateral security and by way of pledge" Velayo also delivered four pieces of jewelry to the Surety Company "for the latter's further protection", with power to sell the same in case the surety paid or become obligated to pay any amount of money in connection with said bond, applying the proceeds to the payment of any amounts it paid or will be liable to pay, and turning the balance, if any, to the persons entitled thereto, after deducting legal expenses and costs. Judgment having been rendered in favor of Jovita Granados and against Rodolfo Velayo, and execution having been returned unsatisfied, the surety company was forced to pay P2,800.00 that it later sought to recoup from Velayo; and upon the latter's failure to do so, the surety caused the pledged jewelry to be sold, realizing therefrom a net product of P235.00 only. Thereafter and upon Velayo's failure to pay the balance, the surety company brought suit in the Municipal Court. Velayo countered with a claim that the sale of the pledged jewelry extinguished any further liability on his part under Article 2115 of the 1950 Civil Code. The municipal court disallowed Velayo’s claims and rendered judgment against him. CFI affirmed.

in installments, and which originated in Act 4110 promulgated by the Philippine Legislature in 1933. Zosimo D. Uy vs. Jose R. Zamora, The Allied Finance, Inc., G.R. No. L-19482, March 31, 1965 (13 SCRA 508)

Issue: Whether the auction sale of the thing pledged extinguishes the principal obligation and disallows the recovery of the deficiency. Held: Yes. Reversed. Ratio: The accessory character is of the essence of pledge and mortgage. As stated in Article 2085 of the 1950 Civil Code, an essential requisite of these contracts is that they be constituted to secure the fulfillment of a principal obligation, which in the present case is Velayo's undertaking to indemnify the surety company for any disbursements made on account of its attachment counterbond. Hence, the fact that the pledge is not the principal agreement is of no significance nor is it an obstacle to the application of Article 2115 of the Civil Code. Article 2115, in its last portion, clearly establishes that the extinction of the principal obligation supervenes by operation of imperative law that the parties cannot override. The provision is clear and unmistakable, and its effect cannot be evaded. By electing to sell the articles pledged, instead of suing on the principal obligation, the creditor has waived any other remedy, and must abide by the results of the sale. No deficiency is recoverable. It is well to note that the rule of Article 2115 is by no means unique. It is but an extension of the legal prescription contained in Article 1484(3) of the same Code, concerning the effect of a foreclosure of a chattel mortgage constituted to secure the price of the personal property sold

198

Facts: Uy had a motor vehicle of Zamora attached in court. The writ of attachment was levied on the vehicle on August 11, 1960. Subsequently, the Municipal Court rendered judgment for Uy. Zamora appealed. While the case was thus pending appeal, the Allied Finance, Inc. sought and was allowed to intervene. According to the intervenor, the motor vehicle, which was attached by the Sheriff, had previously been mortgaged to it by defendant Zamora to secure the payment of a loan of P3,060 and that at the time of the filing of the complaint in intervention on December 19, 1960 there remained a balance of P2,451.93 in its favor. Meanwhile, Uy and Zamora submitted to the court a compromise agreement wherein Zamora admitted being indebted to Uy. Since the motor vehicle had already been sold on order of the Court for P2,500 to prevent depreciation, defendant Zamora agreed to have plaintiff Uy's credit paid out of the proceeds of the sale. The court found Zamora liable to both Uy and Allied Finance, Inc. Since the proceeds of the sale of the vehicle was not enough to cover the two debts, there is now a controversy on who has preference. In resolving the issue, the lower court held that intervenor's claim could not be considered specially preferred credit under Article 2241(4) of the Civil Code because an unregistered chattel mortgage is void. However, the court held that the same could be considered a credit appearing in a public instrument under Article 2244(14) so that it could be considered preferred over plaintiff's attachment lien because of priority of its date. Uy appealed.

Vehicles Law. There is no doubt that with respect to defendant Zamora and the intervenor Allied Finance, Inc., plaintiff Uy is a third person. We, therefore, hold that plaintiff's credit should first be paid. Carried Lumber Company vs. Agricultural Credit & Cooperative Financing Administration (ACCFA), G.R. No. L-21836, April 22, 1975 (63 SCRA 411)

Issue: Whether an unregistered chattel mortgage credit is preferred to an attachment lien. Held: No. Reversed. Ratio: Considering the fact that the intervenor Allied Finance, Inc. registered its mortgage only on August 24, 1960, or subsequent to the date of the writ of attachment obtained by plaintiff Uy on August 11, 1960, the credit of the intervenor cannot prevail over that of the plaintiff. The lower court upheld intervenor's credit on the ground that, being embodied in a public instrument of an earlier date (June 20, 1960), it should take precedence over plaintiff's lien by attachment (August 11, 1960), pursuant to Article 2244 of the Civil Code. This is untenable, for the reason that, as already stated, the credit of the intervenor cannot be considered as preferred until the same has been recorded in the Motor Vehicles Office. Thus, in Borlough v. Fortune Enterprises, Inc., 53 O.G. 4070, it was held that a mortgage of motor vehicles, in order to affect third persons, should not only be registered in the Chattel Mortgage Registry, but the same should also be recorded in the Motor Vehicles Office (now the Land Transportation Commission), as required in Section 5 (e) of the then Revised Motor

199

Facts: Sta Barbara Farmer’s Cooperative Marketing Association, Inc. (Facoma) purchased on credit from Carried Lumber Company lumber and materials which were used in the construction of Facom’s warehouse. The company extended credit to the Facoma after having been informed by the ACCFA’s General Manager in a telegram that a loan had been approved for the construction of the Facoma’s warehouse. Facoma made partial payments to Carried Lumber Company, but was unable to pay the balance. The company sued Facoma. In a decision dated September 26, 1960, based on compromise, the lower court ordered Facoma to make monthly installment payments to the company and the failure to pay any installment will render the whole unpaid balance due. Since Facoma failed to make the installments, the company enforced the judgment and levied upon the Facoma’s lease rights, warehouse and ricemill building. ACCFA filed a 3rd party claim with the sheriff on

building as the lien is only on the warehouse. There is no necessity of initiating a liquidation or insolvency proceeding in this case in order to assert a pro rata satisfaction of the debt. In this case, there are no other creditors aside from the lumber company and ACCFA.

the ground that the properties had already been sold to ACCFA on November 6, 1960. Facoma was granted by ACCFA a loan for the construction of a warehouse. As security for that loan, Facoma mortgaged to ACCFA its lease rights over the land and the warehouse to be constructed. This mortgage was recorded. When Facoma defaulted, ACCFA extrajudicially foreclosed on the properties and came out as the highest bidder. The sheriff, nevertheless, proceeded with the auction sale and the company came out as the highest bidder. A certificate of sale was issued. Since no redemption was made, a final deed of sale was issued. The company sued ACCFA for the purpose of asserting its preferential lien. ACCFA raised the defense that the company waived its lien when it filed an ordinary action to recover its claim instead of enforcing its lien. After trial, the lower court held that the lumber company’s materialman’s lien was superior to ACCFA’s mortgage lien. Issue: Whether preferred credits on a specific immovable property should be satisfied pro rata and should be considered as concurrent. Whether an insolvency proceeding is required in order to have a concurrence of credits. Held: Yes. No. Reversed. Ratio: The lower court was mistaken in assuming that the enumeration of 10 claims, mortgages and liens in Art. 2242 creates an order of preference. It is not correct to say that the materialman’s lien or refectionary credit of the lumber company being listed as No. 4 in Art. 2242 is superior to ACCFA’s mortgage credit which is listed as No. 5. The enumeration is not in order of preference. The article lists the credits which may concur with respect to specific real properties and which would be satisfied pro rata according to Art. 2249. The lumber company has no lien on the ricemill

200

Magdalena C. De Barreto, et al. vs. Jose G. Villanueva, et al., G.R. No. L-14938, January 28, 1961 (1 SCRA 288) Facts: Rosario Cruzado, for herself and as administratrix of the intestate estate of her deceased husband Pedro Cruzado, obtained from Rehabilitation Finance Corporation (RFC) an P11,000 loan which was secured by a parcel of land owned by the spouses. When she failed to pay installments on the loan, the mortgage was foreclosed and the RFC acquired the property. Upon application, the land was sold back to Rosario conditionally for an amount payable in 7 years. 2 years later, Rosario was authorized by the court to sell the land with the previous consent of RFC. Pursuant to such authority and consent, Rosario sold the land to Pura L. Villanueva with the condition that the latter will now assume the obligation owed to RFC. Pura made partial payments and was able to secure the land title in her name. She then mortgaged the property to Magdalena C. Barretto as security for a loan. Pura failed to pay the remaining installments on the unpaid balance for the sale of the property. A complaint for recovery of the same was filed with a levy in attachment upon the property in favor of the vendor (Rosario Cruzado). After trial, the court ruled for the vendor. Pura also failed to pay Magdalena Baretto. An action for foreclosure of mortgage impleading the Cruzados was filed. A decision was promulgated against Pura. The court ordered the issuance of a writ of execution. The Cruzados filed their Vendor’s lien over the property, and the court gave due course to the lien and ordered its annotation. The court also decreed that should the realty be sold at public auction, the Cruzados shall be credited with their pro-rata share in the proceeds. At the sale, the Barrettos were able to buy the property. The Barrettos sought reconsideration of the order of the court giving due course to the lien of the Cruzados which the court denied. They appealed on this issue.

As to the point made that the articles of the Civil Code on concurrence and preference of credits are applicable only to the insolvent debtor, suffice it to say that nothing in the law shows any such limitation. If we are to interpret this portion of the Code as intended only for insolvency cases, then other creditor-debtor relationships

Issue: Whether an unregistered vendor’s lien shall be satisfied pro-rata together with a mortgage lien. Held: Yes then No. Affirmed. Reversed upon MFR. Ratio: Art. 2242 NCC enumerates the claims that constitute as encumbrance on specific immovable property and lists as No. (2) the vendor’s lien and as No. (5) the mortgage lien. Art. 2249 provides that if there are 2 or more credits with respect to the same specific real property or real rights, they shall be satisfied pro-rata. The law does not make any distinction between registered and unregistered vendor’s lien, which only goes to show that any lien of that kind enjoys the preferred credit status. Section 70 of the Land Registration Act itself respects without reserve or qualification the paramount rights of lien holders on real property.

201

where there are concurrence of credits would be left without any rules to govern them, and it would render purposeless the special laws on insolvency. Ratio of MFR: Under the system of the Civil Code, only taxes enjoy an absolute preference. All the remaining classes of preferred creditors under Art. 2242 enjoy no priority among themselves, but must be paid pro rata, i.e. in proportion to the amount of the respective credits. But in order to make this prorating fully effective, the preferred creditors must necessarily be convened, and the import of their claims ascertained. It is thus apparent that the full application of Art. 2249 and 2242 demands that there must be first some proceeding where the claims of all the preferred creditors may be bindingly adjudicated, such as insolvency, the settlement of decedent’s estate, or other liquidation proceedings of similar import. This explains the rule of Art. 2243 NCC that the claims or credits enumerated shall be considered as mortgages or pledges of real or personal property or liens within the purview of legal provisionsgoverninginsolvency. Thus, it becomes evident that one preferred creditor’s 3 rd party claim to the

property when they failed to pay RFC the purchase price. What they sold to Pura was their rights, title, interest and dominion to the property. They merely assigned whatever rights or claims they might still have thereto. The ownerhip of the property rested with RFC which was the one that sold the property to Pura. The sale from Cruzado to Villanueva, therefore, was not so much a sale of the land as it was a quitclaim deed in favor of Villanueva.

proceeds of a foreclosure sale is not the proceeding contemplated by law for the enforcement of preferences under Art. 2242, unless the claimant was enforcing a credit for taxes that enjoys absolute priority. If none of the claims is for taxes, a dispute between 2 creditors will not enable the Court to ascertain the pro rata dividend corresponding to each, because the rights of the other creditors likewise enjoying preference under Article 2242 cannot be ascertained. In the absence of insolvency proceedings, the conflict between the parties now before us must be decided pursuant to the well established principle concerning registered lands; that a purchaser in good faith and for value takes registered property free from liens and encumbrances other than statutory liens and those recorded in the certificate of title. There being no insolvency or liquidation, the claim of the unpaid vendor did not acquire the character and rank of a statutory lien co-equal to the mortgagee’s recorded encumbrance, and must remain subordinate to the latter. The court is understandably loathed to adopt a rule that would undermine the faith and credit to be accorded to registered Torrens titles and nullify the beneficent objectives sought to be obtained by the Land Registration Act. No argument is needed to stress that if a person dealing with registered land were to be held to take in every instance subject to all 14 preferred claims enumerated in Art. 2242 NCC, even if the existence and import thereof cannot be ascertained from the records, all confidence in Torrens titles would be destroyed. Upon the other hand, it does not appear excessively burdensome to require the privileged creditors to cause their claims to be recorded in the books of the Register of Deeds should they desire to protect their rights even outside of insolvency or liquidation proceedings. The Cruzados also cannot be considered as unpaid vendors since they lost their rights as owners of the

202

J.L. Bernardo Construction, represented by attorneysin-fact Santiago R. Sugay, Edwin A. Sugay & Fernando S.A. Erana, Santiago R. Sugay, Edwin A. Sugan & Fernando S.A. Erana vs CA & Mayor Jose L. Salonga, G.R. No. 105827, January 31, 2000 (324 SCRA 24) Facts: The municipal government of San Antonio, Nueva Ecija approved the construction of San Antonio Public Market to be funded by the Economic Support Fund Secretariat (ESFS), a government agency working with the USAID. The petitioners entered into a business venture for the purpose of participating in the bidding for the public market. The contract was awarded to them. Under the Construction Agreement, the municipality agreed to assume the expenses for the demolition, and clearing and site filling and to provide cash equity. Although the whole amount of the cash equity became due, the municipality refused to pay despite repeated demand and notwithstanding that the public market was 98% complete. Furthermore, the petitioners advanced the expenses for the demolition, clearing and site filling, and they have not yet been reimbursed. The petitioners filed a case. The court granted a preliminary attachment. Although the usual way of enforcing a lien is by a decree of sale of the property and the application of the proceeds to the payment of the debt secured by it, the court found it more practical and reasonable to permit the petitioners to operate the public market and to apply to their claims the income derived therefrom, in the form of rentals and goodwill from the prospective stallholders of the market. The CA reversed the order of the lower court.

The action filed by the petitioners in the trial court does not partake of the nature of an insolvency proceeding. It is basically for specific performance and damages. Thus, even if it is finally adjudicated that petitioners actually stand in the position of unpaid contractors and are entitle to invoke the contractor’s lien, such lien cannot be enforced in the present action for there is no way of determining whether or not there exist other preferred creditors with respect to such property. The fact that no 3 rd party claims have

Issue: Whether a contractor’s lien can be enforced without an insolvency proceeding. Held: No. Affirmed. Ratio: Art. 2241 and 2242 of the Civil Code enumerates certain credits which enjoy preference with respect to specific personal or real property of the debtor. Specifically, the contractor’s lien is granted under the third paragraph of Art. 2242. However, Art. 2242 only finds application when there is a concurrence of credits, i.e. when the same specific property of the debtor is subjected to the claims of several creditors and the value of such property of the debtor is insufficient to pay in full all the creditors. In such a situation, the question of preference will arise, that is, there will be a need to determine which of the creditors will be paid ahead of the others. Fundamental tenets of due process will dictate that this statutory lien should then only be enforced in the context of some kind of a proceeding where the claims of all the preferred creditors may be bindingly adjudicated, such as insolvency proceedings.

203

been filed in the trial court will not bar other creditors from subsequently bringing actions and claiming that they also have preferred liens against the property involved. Petitioners may only obtain possession and use of the public market by means of a preliminary attachment upon such property, in the event that they obtain a favorable judgment in the trial court. Clearly, the trial court’s order granting possession and use of the public market to the petitioners does not adhere to the procedure for attachment laid out in the Rules of Court.

when an account has reached certain arrearages, thus they were only fulfilling a duty when they foreclosed on the properties. In the absence of liquidation proceedings, the claim of Remington cannot be enforced against DBP. The ruling in the Barretto case applies to this case. Although

Development Bank of the Philippines vs. CA & Remington Industrial Sales Corporation, G.R. No. 126200, August 16, 2001 (363 SCRA 307) Facts: Marinduque Mining Industrial Corporation obtained from the PNB various loan accommodations. To secure the loans, the mining company executed real estate mortgage and chattel mortgage in favor of PNB. The mortgage covered all of the mining company’s real properties located at Surigao del Norte, Sipalay, Negros Occidental, and Antipolo, including improvements. The Mining Company executed in favor of PNB and DBP a second Mortgage Trust Agreement over all its real properties, including improvements. The mortgage also covered all chattels, as well as assets of whatever kind, nature and description which the mining company may subsequently acquire in substitution or replenishment or in addition to th properties covered by the previous Deed of Real and Chattel Mortgage. An amendment to the Mortgage Trust Agreement was made in favor of PNB and DBP over all other real and personal properties and other real rights subsequently acquired. The mining company failed to settle its loan obligations, thus PNB and DBP instituted extrajudicial foreclosure proceedings. In the meantime, the mining company purchased and caused to be delivered construction materials and other merchandise from Remington Industrial Sales Corporation. The purchases remained unpaid when Remington filed a complaint for sum of money and damages. The complaint was amended to include PNB and DBP in view of the foreclosure by the latter of the real and chattel mortgages on real and personal properties, chattels, mining claims, machinery, equipment and other assets of the mining company. Several other amendments to the complaint were made to implead other parties. The lower court ruled for Remington. CA affirmed. Issue: Whether an unpaid seller’s lien on movables shall be given preference in the absence of a liquidation proceeding. Held: No. Reversed. Ratio: DBP and PNB are mandated by law to foreclose

204

Barretto involved specific immovable property, the ruling therein should apply equally in this case where specific movable property is involved. As the extrajudicial foreclosure instituted by PNB and DBP is not the liquidation proceeding contemplated by the Civil Code, Remington cannot claim its pro rata share from DBP. RP, represented by the Bureau of Customs & BIR vs. Honorable E.L. Peralta, Presiding Judge of the CFI of Manila, Branch XVII, Quality Tobacco Corp., Francisco Candeleria, Federacion Obrero de la Industria Tabaquera Y Otros Trabajadores de Filipinas (FOITAF), USTC Employees Association Workers Union-PTGWO, G.R. No. L-56568, May 20, 1987 (150 SCRA 37)

form part of the free property of the insolvent. In contrast, Art. 2244 creates no liens on determinate property which follow such property. What Art. 2244 creates is simply rights in favor of certain creditors to have the cash and other assets of the insolvent applied in a certain sequence or order of priority. In this sequence, certain taxes and assessments also figure but these do not have the same kind of overriding preference that Art. 2241 No. 1 and 2242 No. 1 create for taxes which constitutes liens on the taxpayer’s property.

Facts: In the voluntary insolvency proceedings commenced by Quality Tobacco Corp, the following claims of creditors were filed: separation pay of workers; BIR tobacco inspection fees; and BOC customs duties and importation taxes which appear to be secured by surety bonds. The trial court ruled that the separation pay of workers were to be preferred over the claims of BOC and BIR as provided by Art. 110 of the Labor Code. The Solgen seeks the reversal of this judgment on the ground that Art. 110 does not apply since it speaks of wages which does not include separation pay. Issue: Whether separation pay claims of laborers is preferred over BIR and BOC claims. Held: Yes. Affirmed. Ratio: Art. 110 of the Labor Code cannot be viewed in isolation. Rather, Art. 110 must be read in relation to the provisions of the Civil Code concerning the classification, concurrence and preference of credits, which provisions find particular application in insolvency proceedings, where the claims of all creditors, preferred or nonpreferred, may be adjudicated in a binding manner. Art. 2241 and 2242 NCC are special preferred credits. These credits constitute liens or encumbrances on specific movable or immovable property to which they relate. These credits, except for taxes, are not preferred one over another inter se. Non-tax liens or special preferred credits which subsist in respect of specific movable or immovable property are to be treated on an equal basis and to be satisfied concurrently and proportionately. Put succinctly, Art. 2241 & 2242 jointly with Arts. 2246 to 2249 establish a 2-tier order of preference. The first tier includes only taxes, duties and fees due on specific movable or immovable property. All other special preferred credits stand on the same 2nd tier to be satisfied, pari passu and pro rata, out of any residual value of the specific property to which such other credits relate. If the value of the specific proerty involved is greater than the sum total of the tax liens and other specially preferred credits, the residual value will

205

The claim of the BOC for unpaid customs duties and taxes enjoys the status of specially preferred credit under Art. 2241 No. 1, only in respect of the articles of importation which are still in the custody or subject to the control of the BOC. Unsatisfied claims of the BOC which is No. 9 in the order of Art. 2244 will have to be paid out of the insolvent’s free property. The claim of BIR for Tobacco Inspection Fees are imposed both as a regulatory measure and as a revenueraising measure. It follows that the claim of the BIR is a tax lien upon all the properties and assets, movable and immovable, of the insolvent as taxpayer under Art. 2241 No.1 and 2242 No. 2. Art. 110 LC does not purport to create a lien in favor of workers or employees for unpaid wages. Claims for unpaid wages do not therefore fall at all within the category of specially preferred claims, except to the extent that such claims of unpaid wages are already covered by Art. 2241 No. 6 and 2242 No. 3. Under, Art. 2241 No. 6, the claim for separation pay constitutes as liens attaching to the processed leaf tobacco, cigars and cigarettes, and other products produced or manufactured by the insolvent, but not to other assets. The claims of the unions may be given effect only after the BIR’s claim. Art. 110 LC did not sweep away the overriding preference accorded to tax claims of the government or any subdivision thereof. It cannot be assumed simpliciter that the legislative authority, by using the words “first preference” and “any provision of law to the contrary notwithstanding” intended to disrupt the elaborate and symmetrical structure set up in the Civil Code. Neither can it be assumed casually that Art. 110 intended to subsume the sovereign itself within the term “other creditors” in stating that “unpaid wages shall be paid in full before other creditors may establish any claim to a share in the assets of employer.” Insistent considerations of public policy prevent us from giving to “other creditors” a linguistically unlimited scope that would embrace the universe of creditors save only unpaid employees. Art. 110, however, has an impact on the provisions of the Civil Code. Bearing in mind the overriding precedence given to taxes, duties and fees and the fact that the Labor Code does not impress any lien on the property of an employer, the use of the phrase “first preference” in Art. 110 indicates that what Art. 110 intended to modify is the order of preference found in Art. 2244 which order relates, as we have seen, to properties of the insolvent that are not burdened with liens or encumbrances created or recognized by Art. 2241 and 2242. Art. 110 modified Art. 2244 in 2 respects: (a) by removing the 1-year limitation found in Art. 2244, No. 2. And (b) by moving up claims for unpaid wages of laborers or workers of the insolvent from 2nd priority to 1st

6. In case there are no more inventory, the claim of the unions will have to be satisfied out of the free property under Art. 2244 as modified by Art. 110 LC. The BOC will have preference in importations still in its custody. If there are no such importations or if such importations are insufficient, it will only have 9 th priority by virtue of Art. 2244 No. 9. In respect of the free property, the unions will enjoy first priority and will be paid ahead of the claims of the BOC. The claims of the Union do not include the 10% claim for attorney’s fees which do not stand on the same footing as separation pay.

priority.

The BIR will have preference in the processed or manufactured tobacco products. The remaining value will be subject to a lien in favor of unions by virtue of Art. 2241 No.

206

Cruz, dissenting: If the law had intended an exception, it would have – and could easily have – provided for it. The Labor Code was promulgated by President Marcos who was aware of the usual preference of tax claims. So informed, he would have reserved that primacy in the above article if that was what he really wanted. The fact that he did not is to me certain indication of his intention, viz., that under the said article the claims of laborers for unpaid wages shall have priority above all else. It is axiomatic that the words of a statute are to be given their normal and ordinary connotation. Moreover, the Labor Code was promulgated later than the Civil Code, the Insolvency Law, and the Internal Revenue Code. The Labor Code prevails over these earlier statutes as it represents the later expression of legislative will.

scheme of concurrence and preference of credit is to raise the worker’s claim into first priority under Art. 2244 NCC. Not being an absolutely preferred credit, as taxes under Art. 2241 (1) and 2242 (1), Dizon’s claims cannot be paid ahead of other credits and outside of the liquidation proceeding because the free property has not yet been determined. Thus, Dizon’s adjudicated claims should be submitted to the liquidators for processing. If it is later adjudicated that the liquidation is improper, then the NLRC’s decision may be executed

Banco Filipino Savings & Mortgage Bank (Represented by its liquidator, Ms. Carlota P. Valenzuela) vs. NLRC, Labor Arbiter Evangeline Lubaton, & Fortunato Dizon, Jr., G.R. No. 82135, August 20, 1990 (188 SCRA 700) Facts: Banco Filipino Savings & Mortgage Bank was placed under receivership and later ordered liquidated by the Monetary Board of the Central Bank. Mr. Fortunato Dizon, the EVP and COO of the bank, filed with the liquidator a request for the payment to him of the cash equivalent of his vacation and sick leave credits and unexpended/unused reimbursable allowance. His claims were not paid by the liquidator. Dizon then filed with the labor arbiter a complaint against the bank for recovery of unpaid salary, the cash equivalent of his accumulated vacation and sick leaves, termination pay, damages and attorney’s fees. The liquidator moved for dismissal on grounds of jurisdiction. The Labor Arbiter upheld her jurisdiction and ruled for Dizon. The NLRC affirmed. Issue: Whether labor claims against a bank under liquidation are still under the jurisdiction of the NLRC. Whether Art. 110 LC upgraded the laborer’s claim to an absolutely preferred credit. Held: Yes. No. Affirmed. Ratio: There is nothing in Section 29 of the Central Bank Act that suggests that the jurisdiction of the liquidation court to adjudicate claims against the insolvent bank is exclusive. On the other hand, Art. 217 LC explicitly provides that labor arbiters have original and exclusive jurisdiction over money claims of an employee against his employer. The Court does not think that this jurisdiction would be lost simply because a former employer has been placed under liquidation. Under normal circumstances, the decision of the NLRC is immediately executory. The Court ruled that Art. 110 LC did not upgrade the worker’s claim as absolutely preferred credit. The significance of Art. 110 in the

207

under normal procedure. If the contrary is proven, then the bank’s liquidation shall proceed and Dizon’s established claims should be treated as an ordinary preferred credit enjoying first preference.

which would result from the questioned decision in this case.

DBP vs. Hon. Labor Arbiter Ariel C. Santos, Phil. Association of Free Labor Unions (PAFLU-RMC Chapter) and its members, Michael Penalosa, et al., Samahang Diwang Manggagawa sa RMC-FFW Chapter, and its members, Jaime Arada, et al., G.R. Nos. 78261-62, March 8, 1989 (171 SCRA 138) Facts: PAFLU-RMC and its members filed a labor case against Riverside Mills Corporation. The labor arbiter ruled for the complainants. Other laborers also filed cases against the corporation which was also decided in their favor. A notice of levy on execution of certain real properties was annotated. Meanwhile, DBP obtained a writ of possession from the RTC on all the properties of RMC after having extrajudicially foreclosed the same at public auction earlier in 1983. DBP subsequently leased the properties to Egret Trading and Manufacturing Corporation, Rasario Textile Mills, and General Textile Mills. The writ of possession prevented the scheduled auction sale of RMC properties to execute the award for the laborers. The laborers filed an incidental petition with the NLRC to declare their preference over the levied properties. The Labor Arbiter issued an order recognizing and declaring the laborer’s first preference. The NLRC set aside the decision and remanded the case for further proceedings. The Labor Arbiter again affirmed the preference of the laborers’ claims. Issue: Whether a declaration of bankruptcy or a judicial liquidation is required before the worker’s preference may be enforced. Held: Yes. Reversed. Ratio: A declaration of bankruptcy or a judicial liquidation must be present before the worker’s preference may be enforced. Thus, Art. 110 of the Labor Code and its implementing rule cannot be invoked in this case absent a formal declaration of bankruptcy or a liquidation order. Following the rule in Republic vs. Peralta, to hold that Art. 110 is also applicable in extrajudicial proceedings would be putting the worker in a better position than the State which could not assert its own preference in case of a judicial proceeding. Therefore, Art. 110 must not be viewed in isolation and must always be reckoned with the provisions of the Civil Code. The claims of all creditors, whether preferred or non-preferred, the identification of the preferred ones and the totality of the employer’s asset should be brought into the picture. There can then be an authoritative, fair, and binding adjudication instead of the piecemeal settlement

208