Pledge Digest.docx

ACME SHOE, RUBBER & PLASTIC CORPORATION and CHUA PAC, petitioners, vs. HON. COURT OF APPEALS, PRODUCERS BANK OF THE PHILIPPINES and REGIONAL SHERIFF OF CALOOCAN CITY, respondents. DECISION VITUG, J.:

Would it be valid and effective to have a clause in a chattel mortgage that purports to likewise extend its coverage to obligations yet to be contracted or incurred? This question is the core issue in the instant petition for review on certiorari. Petitioner Chua Pac, the president and general manager of co-petitioner "Acme Shoe, Rubber & Plastic Corporation," executed on 27 June 1978, for and in behalf of the company, a chattel mortgage in favor of private respondent Producers Bank of the Philippines. The mortgage stood by way of security for petitioner's corporate loan of three million pesos (P3,000,000.00). A provision in the chattel mortgage agreement was to this effect "(c) If the MORTGAGOR, his heirs, executors or administrators shall well and truly perform the full obligation or obligations above-stated according to the terms thereof, then this mortgage shall be null and void. x x x. "In case the MORTGAGOR executes subsequent promissory note or notes either as a renewal of the former note, as an extension thereof, or as a new loan, or is given any other kind of accommodations such as overdrafts, letters of credit, acceptances and bills of exchange, releases of import shipments on Trust Receipts, etc., this mortgage shall also stand as security for the payment of the said promissory note or notes and/or accommodations without the necessity of executing a new contract and this mortgage shall have the same force and effect as if the said promissory note or notes and/or accommodations were existing on the date thereof. This mortgage shall also 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." [1]

In due time, the loan of P3,000,000.00 was paid by petitioner corporation. Subsequently, in 1981, it obtained from respondent bank additional financial accommodations totalling P2,700,000.00. These borrowings were on due date also fully paid. [2]

On 10 and 11 January 1984, the bank yet again extended to petitioner corporation a loan of one million pesos (P1,000,000.00) covered by four promissory notes for P250,000.00 each.Due to financial constraints, the loan was not settled at maturity. Respondent bank thereupon applied for an extrajudicial foreclosure of the chattel mortgage, hereinbefore cited, with the Sheriff of Caloocan City, prompting petitioner corporation to forthwith file an action for injunction, with damages and a prayer for a writ of preliminary injunction, before the Regional Trial Court of Caloocan City (Civil Case No. C12081). Ultimately, the court dismissed the complaint and ordered the [3]

foreclosure of the chattel mortgage. It held petitioner corporation bound by the stipulations, aforequoted, of the chattel mortgage. Petitioner corporation appealed to the Court of Appeals which, on 14 August 1991, affirmed, "in all respects," the decision of the court a quo. The motion for reconsideration was denied on 24 January 1992. [4]

The instant petition interposed by petitioner corporation was initially denied on 04 March 1992 by this Court for having been insufficient in form and substance. Private respondent filed a motion to dismiss the petition while petitioner corporation filed a compliance and an opposition to private respondent's motion to dismiss. The Court denied petitioner's first motion for reconsideration but granted a second motion for reconsideration, thereby reinstating the petition and requiring private respondent to comment thereon. [5]

Except in criminal cases where the penalty of reclusion perpetua or death is imposed which the Court so reviews as a matter of course, an appeal from judgments of lower courts is not a matter of right but of sound judicial discretion. The circulars of the Court prescribing technical and other procedural requirements are meant to weed out unmeritorious petitions that can unnecessarily clog the docket and needlessly consume the time of the Court. These technical and procedural rules, however, are intended to help secure, not suppress, substantial justice. A deviation from the rigid enforcement of the rules may thus be allowed to attain the prime objective for, after all, the dispensation of justice is the core reason for the existence of courts. In this instance, once again, the Court is constrained to relax the rules in order to give way to and uphold the paramount and overriding interest of justice. [6]

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 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 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. [7]

[8]

[9]

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 [10]

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. [11]

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 that [12]

"x x x (the) mortgage is made for the purpose of securing the obligation specified in the conditions thereof, and for no other purpose, and that the same is a just and valid obligation, and one not entered into for the purpose of fraud." [13]

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. In Belgian Catholic Missionaries, Inc., vs. Magallanes Press, Inc., et al., the Court said [14]

"x x x 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." [15]

The significance of the ruling to the instant problem would be that since the 1978 chattel mortgage had ceased to exist coincidentally with the full payment of the P3,000,000.00 loan, there no longer was any chattel mortgage that could cover the new loans that were concluded thereafter. [16]

We find no merit in petitioner corporation's other prayer that the case should be remanded to the trial court for a specific finding on the amount of damages it has sustained "as a result of the unlawful action taken by respondent bank against it." This prayer is not reflected in its complaint which has merely asked for the amount of P3,000,000.00 by way of moral damages. In LBC Express, Inc. vs. Court of Appeals, we have said: [17]

[18]

[19]

"Moral damages are granted in recompense for physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, and similar injury. A corporation, being an artificial person and having existence only in legal contemplation, has no feelings, no emotions, no senses; therefore, it cannot experience physical suffering and mental anguish. Mental suffering can be experienced only by one having a nervous system and it flows from

real ills, sorrows, and griefs of life - all of which cannot be suffered by respondent bank as an artificial person." [20]

While Chua Pac is included in the case, the complaint, however, clearly states that he has merely been so named as a party in representation of petitioner corporation. Petitioner corporation's counsel could be commended for his zeal in pursuing his client's cause. It instead turned out to be, however, a source of disappointment for this Court to read in petitioner's reply to private respondent's comment on the petition his so-called "One Final Word;" viz: "In simply quoting in toto the patently erroneous decision of the trial court, respondent Court of Appeals should be required to justify its decision which completely disregarded the basic laws on obligations and contracts, as well as the clear provisions of the Chattel Mortgage Law and well-settled jurisprudence of this Honorable Court; that in the event that its explanation is wholly unacceptable, this Honorable Court should impose appropriate sanctions on the erring justices. This is one positive step in ridding our courts of law of incompetent and dishonest magistrates especially members of a superior court of appellate jurisdiction." (Italics [21]

supplied.)

The statement is not called for. The Court invites counsel's attention to the admonition in Guerrero vs. Villamor; thus: [22]

"(L)awyers x x x should bear in mind their basic duty `to observe and maintain the respect due to the courts of justice and judicial officers and x x x (to) insist on similar conduct by others.' This respectful attitude towards the court is to be observed, `not for the sake of the temporary incumbent of the judicial office, but for the maintenance of its supreme importance.' And it is `through a scrupulous preference for respectful language that a lawyer best demonstrates his observance of the respect due to the courts and judicial officers x x x.'" [23]

The virtues of humility and of respect and concern for others must still live on even in an age of materialism. WHEREFORE, the questioned decisions of the appellate court and the lower court are set aside without prejudice to the appropriate legal recourse by private respondent as may still be warranted as an unsecured creditor. No costs. Atty. Francisco R. Sotto, counsel for petitioners, is admonished to be circumspect in dealing with the courts. SO ORDERED.

G.R. No. L-33157 June 29, 1982 BENITO H. LOPEZ, petitioner, vs. THE COURT OF APPEALS and THE PHILIPPINE AMERICAN GENERAL INSURANCE CO., INC., respondents.

GUERRERO, J.: On June 2, 1959, petitioner Benito H. Lopez obtained a loan in the amount of P20,000.00 from the Prudential Bank and Trust Company. On the same date, he executed a promissory note for the same amount, in favor of the said Bank, binding himself to repay the said sum one (1) year after the said date, with interest at the rate of 10% per annum. In addition to said promissory note, he executed Surety Bond No. 14164 in which he, as principal, and Philippine American General Insurance Co., Inc. (PHILAMGEN) as surety, bound themselves jointly and severally in favor of Prudential Bank for the payment of the sum of P20,000.00. On the same occasion, Lopez also executed in favor of Philamgen an indemnity agreement whereby he agreed "to indemnify the Company and keep it indemnified and hold the same harmless from and against any and all damages, losses, costs, stamps, taxes, penalties, charges and expenses of whatever kind and nature which the Company shall or may at any time sustain or incur in consequence of having become surety upon the bond." 1 At the same time, Lopez executed a deed of assignment of 4,000 shares of the Baguio Military Institution entitled "Stock Assignment Separate from Certificate", which reads:

This deed of assignment executed by BENITO H. LOPEZ, Filipino, of legal age, married and with residence and postal address at Baguio City, Philippines, now and hereinafter called the "ASSIGNOR", in favor of the PHILIPPINE AMERICAN GENERAL INSURANCE CO., INC., a corporation duly organized and existing under and by virtue of the laws of the Philippines, with principal offices at Wilson Building, Juan Luna, Manila, Philippines, now and hereinafter called the "ASSIGNEE-SURETY COMPANY" — WITNESSETH — That for and in consideration of the obligations undertaken by the ASSIGNEESURETY COMPANY under the terms and conditions of SURETY BOND NO. 14164, issued on behalf of said BENITO H. LOPEZ and in favor of the PRUDENTIAL BANK & TRUST COMPANY, Manila, Philippines, in the amount of TWENTY THOUSAND PESOS ONLY (P20,000.00), Philippine Currency, and for value received, the ASSIGNOR hereby sells, assigns, and transfers unto THE PHILIPPINE AMERICAN GENERAL INSURANCE CO., INC., Four Thousand (4,000) shares of the Baguio military Institute, Inc. standing in the name of said Assignor on the books of said Baguio Military Institute, Inc. represented by Certificate No. 44 herewith and do hereby irrevocably constitutes and appoints THE PHILIPPINE AMERICAN GENERAL INSURANCE CO., INC. as attorney to transfer the said stock on the books of the within named military institute with full power of substitution in the premises. 2 With the execution of this deed of assignment, Lopez endorsed the stock certificate and delivered it to Philamgen. It appears from the evidence on record that the loan of P20,000.00 was approved conditioned upon the posting of a surety bond of a bonding company acceptable to the bank. Thus, Lopez persuaded Emilio Abello, Assistant Executive Vice-President of Philamgen and member of the Bond Under writing Committee to request Atty. Timoteo J. Sumawang, Assistant Vice- President and Manager of the Bonding Department, to accommodate him in putting up the bond against the security of his shares of stock with the Baguio Military Institute, Inc. It was their understanding that if he could not pay the loan, Vice-President Abello and Pio Pedrosa of the Prudential Bank would buy the shares of stocks and out of the proceeds thereof, the loan would be paid to the Prudential Bank.

On June 2, 1960, Lopez' obligation matured without it being settled. Thus, the Prudential Bank made demands for payment both upon Lopez and Philamgen. In turn, Philamgen sent Lopez several written demands for the latter to pay his note (Exhibit H, H-1 & H-2), but Lopez did not comply with said demands. Hence, the Prudential Bank sometime in August, 1961 filed a case against them to enforce payment on the promissory note plus interest. Upon receipt of the copies of complaint, Atty. Sumawang confronted Emilio Abello and Pio Pedrosa regarding their commitment to buy the shares of stock of Lopez in the event that the latter failed to pay his obligations to the Prudential Bank. Vice-President Abello then instructed Atty. Sumawang to transfer the shares of stock to Philamgen and made a commitment that thereafter he (Abello) and Pio Pedrosa will buy the shares of stock from it so that the proceeds could be paid to the bank, and in the meantime Philamgen will not pay the bank because it did not want payment under the terms of the bank. 3 Due to said commitment and instruction of Vice-President Abello, Assistant Treasurer Marcial C. Cruz requested the transfer of Stock Certificate No. 44 for 4,000 shares to Philamgen in a letter dated October 31, 1961. Stock Certificate No. 44 in the name of Lopez was accordingly cancelled and in lieu thereof Stock Certificate No. 171 was issued by the Baguio Military Institute in the name of Philamgen on November 17, 1961. The complaint was thereafter dismissed. But when no payment was still made by the principal debtor or by the surety, the Prudential Bank filed on November 8, 1963 another complaint for the recovery of the P20,000.00. On November 18, 1963, after being informed of said complaint, Lopez addressed the following letter to Philamgen: Dear Mr. Sumawang: This is with reference to yours of the 13th instant advising me of a complaint filed against us by Prudential Bank & Trust Co. regarding my loan of P20,000.00. In this connection, I would like to know what happened to my shares of stocks of Baguio Military Academy which were pledged to your goodselves to secure said obligation. These shares of stock I think are more than enough to answer for said obligation. 4 On December 9, 1963, Philamgen was forced to pay the Prudential Bank the sum of P27,785.89 which included the principal loan and accumulated interest and the Prudential Bank executed a subrogation receipt on the same date. On March 18, 1965, Philamgen brought an action in the Court of First Instance of Manila (Civil Case No. 60272, "The Philippine American General Insurance Co., Inc. vs. Benito H. Lopez") for reimbursement of the said amount. After hearing, the said court rendered judgment dismissing the complaint holding: The contention of the plaintiff that the stock of the defendant were merely pledged to it by the defendant is not borne out by the evidence. On the contrary, it appears to be contradicted by the facts of the case. The shares of stock of the defendant were actually transferred to the plaintiff when it became clear after the plaintiff and the defendant had been sued by the Prudential Bank that plaintiff would be compelled to make the payment to the Prudential Bank, in view of the inability of the defendant Benito H. Lopez to pay his said obligation. The certificate bearing No. 44 was cancelled and upon request of the plaintiff to the Baguio Military Institute a new certificate of stock was issued in the name of the plaintiff bearing No. 171, by means of which plaintiff became the registered owner of the 4,000 shares originally belonging to the defendant. It is noteworthy that the transfer of the stocks of the defendant in the name of the plaintiff company was made at the instance of Messrs. Abello and Pedrosa, who promised to buy the same from the plaintiff. Now that these shares of stock of the defendant had already been transferred in the name of the plaintiff, the defendant has already divested himself of the said stocks, and it would seem that the remedy of the plaintiff is to go after Messrs. Abello and Pedrosa on their promise to pay for the said stocks. To go after the defendant after the plaintiff had already become the owner of his shares of stock and compel him to pay his obligation to the Prudential Bank would be most unfair, unjust and illogical for it would amount to double payment on his part. After the plaintiff had already appropriated the said shares of

stock, it has already lost its right to recover anything from the defendant, for the reason that the transfer of the said stocks was made without qualification. This transfer takes the form of a reimbursement of what plaintiff had paid to the Prudential Bank, thereby depriving the plaintiff of its right to go after the defendant herein. 5 Philamgen appealed to the Court of Appeals raising these assignments of errors:

I The lower court erred in finding that the evidence does not bear out the contention of plaintiff that the shares of stock belonging to defendant were transferred by him to plaintiff by way of pledge. II The lower court erred in finding that plaintiff company appropriated unto itself the shares of stock pledged to it by defendant Benito Lopez and in finding that, with the transfer of the stock in the name of plaintiff company, the latter has already been paid or reimbursed what it paid to Prudential Bank. III The lower court erred in not finding that the instant case is one where the pledge has abandoned the security and elected instead to enforce his claim against the pledgor by ordinary action. 6 On December 17, 1970, the Court of Appeals promulgated a decision in favor of the Philamgen, thereby upholding the foregoing assignments of errors. It declared that the stock assignment was a mere pledge that the transfer of the stocks in the name of Philamgen was not intended to make it the owner thereof; that assuming that Philamgen had appropriated the stocks, this appropriation is null and void as a stipulation authorizing it is a pactum commissorium;and that pending payment, Philamgen is merely holding the stock as a security for the payment of Lopez' obligation. The dispositive portion of the said decision states: WHEREFORE, the decision of the lower court is hereby reversed, and another one is hereby entered ordering the defendant to pay the plaintiff the sum of P27,785.89 with interest at the rate of 12% per annum from December 9, 1963, 10% of the P27,785.89 as attorney's fees and the costs of the suit. 7 The motion for reconsideration with prayer to set the same for oral argument having been denied, Lopez brought this petition for review on certiorari presenting for resolution these questions: a) Where, as in this case, a party "sells, assigns and transfers" and delivers shares of stock to another, duly endorsed in blank, in consideration of a contingent obligation of the former to the latter, and, the obligations having arisen, the latter causes the shares of stock to be transferred in its name, what is the juridical nature of the transaction-a dation in payment or a pledge? b) Where, as in this case, the debtor assigns the shares of stock to the creditor under an agreement between the latter and determinate third persons that the latter would buy the shares of stock so that the obligations could be paid out of the proceeds, was there a novation of the obligation by substitution of debtor? 8 Philamgen failed to file its comment on the petition for review on certiorari within the extended period which expired on March 19, 1971. This Court thereby resolved to require Lopez to file his brief. 9

Under the first assignment of error, Lopez argues in his brief: That the Court of Appeals erred in holding that when petitioner "sold, assigned, transferred" and delivered shares of stock, duly endorsed in blank, to private respondent in consideration of a contingent obligation of the former to the latter and the obligation having thereafter arisen, the latter caused the shares of stock to be transferred to it, taking a new certificate of stock in its name, the transaction was a pledge, and in not holding instead that it was a dation in payment. 10

Considering the explicit terms of the deed denominated "Stock Assignment Separate from Certificate", hereinbefore copied verbatim, Lopez sold, assigned and transferred unto Philamgen the stocks involved "for and in consideration of the obligations undertaken" by Philamgen "under the terms and conditions of the surety bond executed by it in favor of the Prudential Bank" and "for value received". On its face, it is neither pledge nor dation in payment. The document speaks of an outright sale as there is a complete and unconditional divestiture of the incorporeal property consisting of stocks from Lopez to Philamgen. The transfer appears to have been an absolute conveyance of the stocks to Philamgen whether or not Lopez defaults in the payment of P20,000.00 to Prudential Bank. While it is a conveyance in consideration of a contingent obligation, it is not itself a conditional conveyance. It is true that if Lopez should "well and truly perform and fulfill all the undertakings, covenants, terms, conditions, and agreements stipulated" in his promissory note to Prudential Bank, the obligation of Philamgen under the surety bond would become null and void. Corollarily, the stock assignment, which is predicated on the obligation of Philamgen under the surety bond, would necessarily become null and void likewise, for want of cause or consideration under Article 1352 of the New Civil Code. But this is not the case here because aside from the obligations undertaken by Philamgen under the surety bond, the stock assignment had other considerations referred to therein as "value received". Hence, based on the manifest terms thereof, it is an absolute transfer. Notwithstanding the express terms of the "Stock Assignment Separate from Certificate", however, We hold and rule that the transaction should not be regarded as an absolute conveyance in view of the circumstances obtaining at the time of the execution thereof. It should be remembered that on June 2, 1959, the day Lopez obtained a loan of P20,000.00 from Prudential Bank, Lopez executed a promissory note for ?20,000.00, plus interest at the rate of ten (10%) per cent per annum, in favor of said Bank. He likewise posted a surety bond to secure his full and faithful performance of his obligation under the promissory note with Philamgen as his surety. In return for the undertaking of Philamgen under the surety bond, Lopez executed on the same day not only an indemnity agreement but also a stock assignment. The indemnity agreement and the stock assignment must be considered together as related transactions because in order to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall be principally considered. (Article 1371, New Civil Code). Thus, considering that the indemnity agreement connotes a continuing obligation of Lopez towards Philamgen while the stock assignment indicates a complete discharge of the same obligation, the existence of the indemnity agreement whereby Lopez had to pay a premium of P1,000.00 for a period of one year and agreed at all times to indemnify Philamgen of any and all kinds of losses which the latter might sustain by reason of it becoming a surety, is inconsistent with the theory of an absolute sale for and in consideration of the same undertaking of Philamgen. There would have been no necessity for the execution of the indemnity agreement if the stock assignment was really intended as an absolute conveyance. Hence, there are strong and cogent reasons to conclude that the parties intended said stock assignment to complement the indemnity agreement and thereby sufficiently guarantee the indemnification of Philamgen should it be required to pay Lopez' loan to Prudential Bank. The character of the transaction between the parties is to be determined by their intention, regardless of what language was used or what the form of the transfer was. If it was intended to secure the payment of money, it must be construed as a pledge; but if there was some other intention, it is not a pledge. However, even though a transfer, if regarded by itself, appears to have been absolute, its object and character might still be qualified and explained by a contemporaneous writing declaring it to have been a deposit of the property as collateral security. It has been said that a transfer of property by the debtor to a creditor, even if sufficient on its face to make an absolute conveyance, should be treated as a pledge if the debt continues in existence and is not discharged by the transfer, and that accordingly, the use of the terms ordinarily importing conveyance, of absolute ownership will not be given that effect in such a transaction if they are also commonly used in pledges and mortgages and therefore do not unqualifiedly indicate a transfer of absolute ownership, in the absence of clear and unambiguous language or other circumstances excluding an intent to pledge. 11 We agree with the holding of the respondent Court of Appeals that the stock assignment, Exhibit C, is in truth and in fact, a pledge. Indeed, the facts and circumstances leading to the execution of the

stock assignment, Exhibit C, and the admission of Lopez prove that it is in fact a pledge. The appellate court is correct in ruling that the following requirements of a contract of pledge have been satisfied: (1) that it be constituted to secure the fulfillment of a principal obligation; (2) that the pledgor be the absolute owner of the thing pledged; and (3) that the person constituting the pledge has the free disposal of the property, and in the absence thereof, that he be legally authorized for the purpose. (Article 2085, New Civil Code). Article 2087 of the New Civil Code providing that it is also the essence of these contracts (pledge, mortgage, and antichresis) 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, further supports the appellate court's ruling, which We also affirm. On this point further, the Court of Appeals correctly ruled: In addition to the requisites prescribed in article 2085, it is necessary, in order to constitute the contract of pledge, that the thing pledged be placed in the possession of the creditor, or of a third person by common agreement. (Art. 2093, N.C.C.) Incorporeal rights, including shares of stock may also be pledged (Art. 2095, N.C.C.) All these requisites are found in the transaction between the parties leading to the execution of the Stock Assignment, Exhibit C. And that it is a pledge was admitted by the defendant in his letter of November 18, 1963, Exhibit G, already quoted above, where he asked what had happened to his shares of stock "which were pledged to your goodselves to secure the said obligation". The testimony of the defendantappellee that it was their agreement or understanding that if he would be unable to pay the loan to the Prudential Bank, plaintiff could sell the shares of stock or appropriate the same in full payment of its debt is a mere after-thought, conceived after he learned of the transfer of his stock to the plaintiff in the books of the Baguio Military Institute. We also do not agree with the contention of petitioner that "petitioner's 'sale assignment and transfer' unto private respondent of the shares of stock, coupled with their endorsement in blank and delivery, comes exactly under the Civil Code's definition of dation in payment, a long recognized and deeply rooted concept in Civil Law denominated by Spanish commentators as 'adjudicacion en pago'". According to Article 1245 of the New Civil Code, dation in payment, whereby property is alienated to the creditor in satisfaction of a debt in money, shall be governed by the law of sales. Speaking of the concept of dation in payment, it is well to cite that: Dation in payment is the delivery and transmission of ownership of a thing by the debtor to the creditor as an accepted equivalent of the performance of the obligation. (2 Castan 525; 8 Manresa, 324) The property given may consist, not only of a thing, but also of a real right (such as a usufruct) or of a credit against a third person. (Perez Gonzales & Alguer :2-I Enneccerus, Kipp & Wolff 317). Thus, it has been held that the assignment to the creditor of the interest of the debtor in an inheritance in payment of his debt, is valid and extinguishes the debt. (Ignacio vs. Martinez, 33 Phil. 576) The modern concept of dation in payment considers it as a novation by change of the object, and this is to our mind the more juridically correct view. Our Civil Code, however, provides in this article that, where the debt is in money, the law on sales shall govern; in this case, the act is deemed to be a sale, with the amount of the obligation to the extent that it is extinguished being considered as the price. Does this mean that there can be no dation in payment if the debt is not in money? We do not think so. It is precisely in obligations which are not money debts, in which the true juridical nature of dation in payment becomes manifest. There is a real novation with immediate performance of the new obligation. The fact that there must be a prior agreement of the parties on the delivery of the thing in lieu of the original prestation shows that there is a novation which, extinguishes the original obligation, and the delivery is a mere performance of the new obligation. The dation in payment extinguishes the obligation to the extent of the value of the thing delivered, either as agreed upon by the parties or as may be proved, unless the parties by agreement, express or implied, or by their silence, consider the thing as

equivalent to the obligation, in which case the obligation is totally extinguished. (8 Manresa 324; 3 Valverde 174 fn Assignment of property by the debtor to his creditors, provided for in article 1255, is similar to dation in payment in that both are substitute forms of performance of an obligation. Unlike the assignment for the benefit of creditors, however, dation in payment does not involve plurality of creditors, nor the whole of the property of the debtor. It does not suppose a situation of financial difficulties, for it may be made even by a person who is completely solvent. It merely involves a change of the object of the obligation by agreement of the parties and at the same time fulfilling the same voluntarily. (8 Manresa 324). 12 Considering the above jurisprudence, We find that the debt or obligation at bar has not matured on June 2, 1959 when Lopez "alienated" his 4,000 shares of stock to Philamgen. Lopez' obligation would arise only when he would default in the payment of the principal obligation (the loan) to the bank and Philamgen had to pay for it. Such fact being adverse to the nature and concept of dation in payment, the same could not have been constituted when the stock assignment was executed. Moreover, there is no express provision in the terms of the stock assignment between Philamgen and Lopez that the principal obligation (which is the loan) is immediately extinguished by reason of such assignment.

In case of doubt as to whether a transaction is a pledge or a dation in payment, the presumption is in favor of pledge, the latter being the lesser transmission of rights and interests. Under American jurisprudence, A distinction might also be made between delivery of property in payment of debt and delivery of such property as collateral security for the debt. Generally, such a transfer was presumed to be made for collateral security, in the absence of evidence tending to show an intention on the part of the parties that the transfer was in satisfaction of the debt. This presumption of a transfer for collateral security arose particularly where the property given was commercial paper, or some other 'specialty' chose of action, that conferred rights upon transfer by delivery of a different nature from the debt, whose value was neither intrinsic nor apparent and was not agreed upon by the parties. 13 Petitioner's argument that even assuming, arguendo that the transaction was at its inception a pledge, it gave way to a dation in payment when the obligation secured came into existence and private respondent had the stocks transferred to it in the corporate books and took a stock certificate in its name, is without merit. The fact that the execution of the stock assignment is accompanied by the delivery of the shares of stock, duly endorsed in blank to Philamgen is no proof that the transaction is a dation in payment. Likewise, the fact that Philamgen had the shares of stock transferred to it in the books of the corporation and took a certificate in its name in lieu of Lopez which was cancelled does not amount to conversion of the stock to one's own use. The transfer of title to incorporeal property is generally an essential part of the delivery of the same in pledge. It merely constitutes evidence of the pledgee's right of property in the thing pledged. By the contract of pledge, the pledgor does not part with his general right of property in the collateral. The general property therein remains in him, and only a special property vests in the pledgee. The pledgee does not acquire an interest in the property, except as a security for his debt. Thus, the pledgee holds possession of the security subject to the rights of the pledgor; he cannot acquire any interest therein that is adverse to the pledgor's title. Moreover, even where the legal title to incorporeal property which may be pledged is transferred to a pledgee as collateral security, he takes only a special property therein Such transfer merely performs the office that the delivery of possession does in case of a pledge of corporeal property. xxx xxx xxx The pledgee has been considered as having a lien on the pledged property. The extent of such lien is measured by the amount of the debt or the obligation that is secured by the collateral, and the lien continues to exist as long as the pledgee retains actual or symbolic possession of the property, and the debt or obligation remains unpaid. Payment of the debt extinguishes the lien.

Though a pledgee of corporation stock does not become personally liable as a stockholder of the company, he may have the shares transferred to him on the books of the corporation if he has been authorized to do so. The general property in the pledge remains in the pledgor after default as well as prior thereto. The failure of the pledgor to pay his debt at maturity in no way affects the nature of the pledgee's rights concerning the property pledged, except that he then becomes entitled to proceed to make the security available in the manner prescribed by law or by the terms of the contract, ... . 14 In his second assignment of error, petitioner contends that the Court of Appeals erred in not holding that since private respondent entered into an agreement with determinate third persons whereby the latter would buy the said shares so sold, assigned and transferred to the former by the petitioner for the purpose of paying petitioner's obligation out of the proceeds, there was a novation of the obligation by substitution of debtor. We do not agree. Under Article 1291 of the New Civil Code, obligations may be modified by: (1) changing their object or principal condition; (2) substituting the person of the debtor; (3) subrogating a third person in the rights of the creditor. And in order that an obligation may be extinguished by another which substitute the same, it is imperative that it be so declared in unequivocal terms, or that the old and the new obligations be on every point incompatible with each other. (Article 1292, N.C.C.) Novation which consists in substituting a new debtor in the place of the original one, may be made even without the knowledge or against the will of the latter, but not without the consent of the creditor. Payment by the new debtor gives him the rights mentioned in Articles 1236 and 1237. (Article 1293, N.C.C.) Commenting on the second concept of novation, that is, substituting the person of the debtor, Manresa opines, thus: In this kind of novation it is pot enough to extend the juridical relation to a third person; it is necessary that the old debtor be released from the obligation, and the third person or new debtor take his place in the relation. Without such release, there is no novation; the third person who has assumed the obligation of the debtor merely becomes a co-debtor or a surety. If there is no agreement as to solidarity, the first and the new debtor are considered obligated jointly. (8 Manresa 435, cited in Tolentino, Commentaries and Jurisprudence on the Civil Code of the Philippines, Vol. IV, p. 360) In the case at bar, the undertaking of Messrs. Emilio Abello and Pio Pedrosa that they would buy the shares of stock so that Philamgen could be reimbursed from the proceeds that it paid to Prudential Bank does not necessarily imply the extinguishment of the liability of petitioner Lopez. Since it was not established nor shown that Lopez would be released from responsibility, the same does not constitute novation and hence, Philamgen may still enforce the obligation. As the Court of Appeals correctly held that "(t)he representation of Mr. Abello to Atty. Sumawang that he and Mr. Pedrosa would buy the stocks was a purely private arrangement between them, not an agreement between (Philamgen) and (Lopez)" and which We hereby affirm, petitioner's second assignment of error must be rejected. In fine, We hold and rule that the transaction entered into by and between petitioner and respondent under the Stock Assignment Separate From Certificate in relation to the Surety Bond No. 14164 and the Indemnity Agreement, all executed and dated June 2, 1959, constitutes a pledge of the 40,000 shares of stock by the petitioner-pledgor in favor of the private respondent-pledgee, and not a dacion en pago. It is also Our ruling that upon the facts established, there was no novation of the obligation by substitution of debtor. The promise of Abello and Pedrosa to buy the shares from private respondent not having materialized (which promise was given to said respondent only and not to petitioner) and no action was taken against the two by said respondent who chose instead to sue the petitioner on the Indemnity Agreement, it is quite clear that this respondent has abandoned its right and interest over the pledged properties and must, therefore, release or return the same to the petitioner-pledgor upon the latter's satisfaction of his obligation under the Indemnity Agreement.

It must also be made clear that there is no double payment nor unjust enrichment in this case because We have ruled that the shares of stock were merely pledged. As the Court of Appeals said: The appellant (Philam) is not enriching himself at the expense of the appellee. True, the stock certificate of the appellee had been in the name of the appellant but the transfer was merely nominal, and was not intended to make the plaintiff the owner thereof. No offer had been made for the return of the stocks to the defendant. As the appellant had stated, the appellee could have the stocks transferred to him anytime as long as he reimburses the plaintiff the amount it had paid to the Prudential Bank. Pending payment, plaintiff is merely holding the certificates as a pledge or security for the payment of defendant's obligation. The above holding of the appellate court is correct and We affirm the same. As to the third assignment of error which is merely the consequence of the first two assignments of errors, the same is also devoid of merit. WHEREFORE, IN VIEW OF ALL THE FOREGOING, the decision of the Court of Appeals is hereby AFFIRMED in toto, with costs against the petitioner. SO ORDERED.

UNION BANK THE PHILIPPINES, Petitioner,

OF

G.R. No. 171569

Present: - versus-

CORONA, C.J., Chairperson, LEONARDO-DE CASTRO, BERSAMIN, DEL CASTILLO, and VILLARAMA, JR. JJ.

ALAIN⃰ JUNIAT, WINWOOD APPAREL, INC., WINGYAN APPAREL, INC., NONWOVEN Promulgated: FABRIC PHILIPPINES, Respondents. August 1, 2011 x--------------------------------------------------------x

DECISION DEL CASTILLO, J.: To have a binding effect on third parties, a contract of pledge must appear in a public instrument.[1] This Petition for Review on Certiorari[2] under Rule 45 of the Rules of Court assails the June 23, 2005 Decision[3] and the February 9, 2006 Resolution[4] of the Court of Appeals (CA) in CA-G.R. CV No. 66392. Factual Antecedents Petitioner Union Bank of the Philippines (Union Bank) is a universal banking corporation organized and existing under Philippine laws.[5] Respondents Winwood Apparel, Inc. (Winwood) and Wingyan Apparel, Inc. (Wingyan) are domestic corporations engaged in the business of apparel manufacturing.[6] Both respondent corporations are owned and operated by respondent Alain Juniat (Juniat), a French national based in Hongkong.[7] Respondent Nonwoven Fabric Philippines, Inc. (Nonwoven) is a Philippine corporation engaged in the manufacture and sale of various types of nonwoven fabrics.[8] On September 3, 1992, petitioner filed with the Regional Trial Court (RTC) of Makati, Branch 57, a Complaint[9] with prayer for the issuance of ex-parte writs of preliminary attachment and replevin against Juniat, Winwood, Wingyan, and the person in possession of the mortgaged motorized sewing machines and equipment.[10] Petitioner alleged that Juniat, acting for and in behalf of Winwood and Wingyan, executed a promissory note[11] dated April 11, 1992 and a Chattel Mortgage[12] dated March 27, 1992 over several motorized sewing machines and other allied equipment to secure their

obligation arising from export bills transactions to petitioner in the amount of P1,131,134.35;[13] that as additional security for the obligation, Juniat executed a Continuing Surety Agreement[14] dated April 11, 1992 in favor of petitioner;[15] that the loan remains unpaid;[16] and that the mortgaged motorized sewing machines are insufficient to answer for the obligation.[17] On September 10, 1992, the RTC issued writs of preliminary attachment and replevin in favor of petitioner.[18] The writs were served by the Sheriff upon Nonwoven as it was in possession of the motorized sewing machines and equipment.[19] Although Nonwoven was not impleaded in the complaint filed by petitioner, the RTC likewise served summons upon Nonwoven since it was in possession of the motorized sewing machines and equipment.[20] On September 28, 1992, Nonwoven filed an Answer,[21] contending that the unnotarized Chattel Mortgage executed in favor of petitioner has no binding effect on Nonwoven and that it has a better title over the motorized sewing machines and equipment because these were assigned to it by Juniat pursuant to their Agreement[22] dated May 9, 1992.[23] Juniat, Winwood, and Wingyan, on the other hand, were declared in default for failure to file an answer within the reglementary period.[24] On November 23, 1992, petitioner filed a Motion to Sell Chattels Seized by Replevin,[25] praying that the motorized sewing machines and equipment be sold to avoid depreciation and deterioration.[26] However, on May 18, 1993, before the RTC could act on the motion, petitioner sold the attached properties for the amount of P1,350,000.00.[27] Nonwowen moved to cite the officers of petitioner in contempt for selling the attached properties, but the RTC denied the same on the ground that Union Bank acted in good faith.[28] Ruling of the Regional Trial Court On May 20, 1999, the RTC of Makati, Branch 145,[29] rendered a Decision[30] in favor of petitioner. The RTC ruled that both the Chattel Mortgage dated March 27, 1992 in favor of petitioner and the Agreement dated May 9, 1992 in favor of Nonwoven have no obligatory effect on third persons because these documents were not notarized.[31] However, since the Chattel Mortgage in favor of petitioner was executed earlier, petitioner has a better right over the motorized sewing machines and equipment under the doctrine of first in time, stronger in right (prius tempore, potior jure).[32] Thus, the RTC disposed of the case in this wise: WHEREFORE, above premises considered, judgment is hereby rendered as follows:

1.] Declaring the [petitioner] UNION BANK OF THE PHILIPPINES, as having the better right to the goods and/or machineries subject of the Writs of Preliminary Attachment and Replevin issued by this Court on September 10, 1992. 2.] Declaring the [petitioner] as entitled to the proceeds of the sale of the subject machineries in the amount of P1,350,000.00; 3.] Declaring [respondents] Allain Juniat, Winwood Apparel, Inc. and Wingyan Apparel, Inc. to be jointly and severally liable to the [petitioner], for the deficiency between the proceeds of the sale of the machineries subject of this suit [P1,350,000.00] and original claim of the plaintiff [P1,919,907.03], in the amount of P569,907.03, with legal interest at the rate of 12% per annum from date of this judgment until fully paid; and 4.] Declaring [respondents] Allain Juniat, Winwood Apparel, Inc. and Wingyan Apparel, Inc. to be jointly and severally liable to the [petitioner] for the amount of P50,000.00 as reasonable attorneys fees; and 5.] Cost of this suit against the [respondents]. SO ORDERED.[33]

Nonwoven moved for reconsideration[34] but the RTC denied the same in its Order[35] dated July 14, 1999. Ruling of the Court of Appeals On appeal, the CA reversed the ruling of the RTC. The CA ruled that the contract of pledge entered into between Juniat and Nonwoven is valid and binding, and that the motorized sewing machines and equipment were ceded to Nonwoven by Juniat by virtue of a dacion en pago.[36] Thus, the CA declared Nonwoven entitled to the proceeds of the sale of the attached properties.[37] The fallo reads: WHEREFORE, premises considered, the assailed decision is hereby REVERSED and SET ASIDE. [Petitioner] Union Bank of the Philippines is hereby DIRECTED to pay Nonwoven Fabric Philippines, Inc. P1,350,000.00, the amount it holds in escrow, realized from the May 18, 1993 sale of the machineries to avoid deterioration during pendency of suit. No pronouncement as to costs. SO ORDERED.[38]

Petitioner sought reconsideration[39] which was denied by the CA in a Resolution[40] dated February 9, 2006. Issues

Hence, the present recourse where petitioner interposes the following issues: 1. Whether x x x the Court of Appeals committed serious reversible error in setting aside the Decision of the trial court holding that Union Bank of the Philippines had a better right over the machineries seized/levied upon in the proceedings before the trial court and/or the proceeds of the sale thereof; 2. Whether x x x the Court of Appeals seriously erred in holding that [Nonwoven] has a valid claim over the subject sewing machines.[41]

Petitioners Arguments Echoing the reasoning of the RTC, petitioner insists that it has a better title to the proceeds of the sale.[42] Although the Chattel Mortgage executed in its favor was not notarized, petitioner insists that it is nevertheless valid, and thus, has preference over a subsequent unnotarized agreement.[43] Petitioner further claims that except for the said agreement, no other evidence was presented by Nonwoven to show that the motorized sewing machines and equipment were indeed transferred to them by Juniat/Winwood/Wingyan.[44] Respondent Nonwovens Arguments Nonwoven, on the other hand, claims ownership over the proceeds of the sale under Article 1544[45] of the Civil Code on double sale, which it claims can be applied by analogy in the instant case.[46] Nonwoven contends that since its prior possession over the motorized sewing machines and equipment was in good faith, it has a better title over the proceeds of the sale.[47]Nonwoven likewise maintains that petitioner has no right over the proceeds of the sale because the Chattel Mortgage executed in its favor was unnotarized, unregistered, and without an affidavit of good faith.[48] Our Ruling The petition has merit. Nonwoven lays claim to the attached motorized sewing machines and equipment pursuant to the Agreement it entered into with Juniat, to wit: Hong Kong, 9th May, 1992 With reference to talks held this morning at the Holiday Inn Golden Mile Coffee Shop, among the following parties: a. b.

Redflower Garments Inc. Mrs. Maglipon Nonwoven Fabrics Phils. Inc. Mr. J. Tan

c.

Winwood Apparel Inc./Wing Yan Apparel, Inc. Mr. A. Juniat, Mrs. S. Juniat

IT WAS AGREED THAT: a. Settlement of the accounts between Nonwoven Fabrics Phils. Inc. and Winwood Apparel Inc./Wing Yan Apparel, Inc. should be effected as agreed through partial payment by L/C with the balance to be settled at a later date for which Winwood Apparel, Inc. agrees to consign 94 sewing machines, 3 snap machines and 2 boilers, presently in the care of Redflower Garments Inc., to the care of Nonwoven Fabrics Phils., Inc. as guarantee. Meanwhile, Nonwoven will resume delivery to Winwood/Win Yang as usual. x x x x[49] (Emphasis supplied.)

It insists that since the attached properties were assigned or ceded to it by Juniat, it has a better right over the proceeds of the sale of the attached properties than petitioner, whose claim is based on an unnotarized Chattel Mortgage. We do not agree. Indeed, the unnotarized Chattel Mortgage executed by Juniat, for and in behalf of Wingyan and Winwood, in favor of petitioner does not bind Nonwoven.[50] However, it must be pointed out that petitioners primary cause of action is for a sum of money with prayer for the issuance of ex-parte writs of attachment and replevin against Juniat, Winwood, Wingyan, and the person in possession of the motorized sewing machines and equipment.[51] Thus, the fact that the Chattel Mortgage executed in favor of petitioner was not notarized does not affect petitioners cause of action. Petitioner only needed to show that the loan of Juniat, Wingyan and Winwood remains unpaid and that it is entitled to the issuance of the writs prayed for.Considering that writs of attachment and replevin were issued by the RTC,[52] Nonwoven had to prove that it has a better right of possession or ownership over the attached properties. This it failed to do. A perusal of the Agreement dated May 9, 1992 clearly shows that the sewing machines, snap machines and boilers were pledged to Nonwoven by Juniat to guarantee his obligation. However, under Article 2096 of the Civil Code, [a] pledge shall not take effect against third persons if a description of the thing pledged and the date of the pledge do not appear in a public instrument. Hence, just like the chattel mortgage executed in favor of petitioner, the pledge executed by Juniat in favor of Nonwoven cannot bind petitioner. Neither can we sustain the finding of the CA that: The machineries were ceded to THIRD PARTY NONWOVEN by way of dacion en pago, a contract later entered into by WINWOOD/WINGYAN and THIRD PARTY NONWOVEN.[53] As aptly pointed out by petitioner, no evidence was presented by Nonwoven to show that the attached properties were subsequently sold to it by way of a dacion en pago. Also, there is nothing in the

Agreement dated May 9, 1992 to indicate that the motorized sewing machines, snap machines and boilers were ceded to Nonwoven as payment for the Wingyans and Winwoods obligation. It bears stressing that there can be no transfer of ownership if the delivery of the property to the creditor is by way of security.[54] In fact, in case of doubt as to whether a transaction is one of pledge or dacion en pago, the presumption is that it is a pledge as this involves a lesser transmission of rights and interests.[55] In view of the foregoing, we are constrained to reverse the ruling of the CA. Nonwoven is not entitled to the proceeds of the sale of the attached properties because it failed to show that it has a better title over the same. WHEREFORE, the petition is hereby GRANTED. The assailed June 23, 2005 Decision and the February 9, 2006 Resolution of the Court of Appeals in CA-G.R. CV No. 66392 are hereby REVERSED and SET ASIDE. The May 20, 1999 Decision of the Regional Trial Court of Makati, Branch 145, is hereby REINSTATED and AFFIRMED. SO ORDERED.

PHILNICO INDUSTRIAL CORPORATION, Petitioner, v. PRIVATIZATION AND MANAGEMENT OFFICE, Respondent. G.R. NO. 199432 PRIVATIZATION AND MANAGEMENT OFFICE, Petitioner, v. PHILNICO INDUSTRIAL CORPORATION, Respondent. DECISION LEONARDO-DE CASTRO, J.: Before the Court are the consolidated Petitions for Review on Certiorari under Rule 45 of the Rules of Court involving the Decision1 dated January 31, 2011 and Resolution2 dated November 18, 2011 of the Court of Appeals in CA-G.R. SP. No. 111108, which affirmed the Order3 dated August 25, 2009 of the Regional Trial Court (RTC), Branch 64 of Makati City in Civil Case No. 03-114. THE PARTIES The Petition in G.R. No. 199420 was filed by Philnico Industrial Corporation (PIC). It is a corporation duly organized under the laws of the Philippines and which, together with Philnico Processing Corporation (PPC) and Pacific Nickel Philippines, Inc. (PNPI), form the Philnico Group. The Philnico Group is engaged in nickel mining and refining business. PIC and PNPI hold a Mineral Production Sharing Agreement over nickel mining areas in Nonoc and Dinagat Islands in Surigao, while PPC owns a nickel refinery complex also in Nonoc Island.4 cralawred

The Petition in G.R. No. 199432 was filed by the Privatization and Management Office (PMO), an attached agency of the Department of Finance. PMO succeeded the Asset Privatization Trust (APT), when the latter’s life ended on December 31, 2000.5 The PMO serves as the marketing arm of the Government with respect to Transferred Assets, Government Corporations and other properties assigned to it by the Privatization Council (PrC) for disposition. Together, the mission of the PMO and PrC is to take title to and possession of, conserve, provisionally manage, and dispose of assets previously identified for privatization; and, in the process, reduce the Government’s maintenance expense on non-performing assets, generating maximum cash recovery for the National Government.6 cralawred

ANTECEDENT FACTS The Development Bank of the Philippines and Philippine National Bank, by virtue of foreclosure proceedings, became the holders of all the shares of stock in PPC (then still the Nonoc Mining and Industrial Corporation). The banks eventually transferred their PPC shares of stock to PMO (then still the APT) in 1987. On May 10, 1996, PMO, PIC (then still the Philnico Mining and Industrial Corporation), and PPC executed a contract, denominated as the Amended and Restated Definitive Agreement (ARDA), which laid down the terms and conditions of the purchase and acquisition by PIC from PMO of 22,500,000 shares of stock of PPC (representing 90% of ownership of PPC), as well as receivables of PMO from PPC. Under the ARDA, PIC agreed to pay PMO the peso equivalent of US$333,762,000.00 as purchase price, payable in installments and in accordance with the schedule also set out in the ARDA.7 cralawred

Among the provisions of the ARDA relevant to the instant cases are Sections 2.04 and 2.07, which govern the rights and obligations of the parties as regards the PPC shares of stock, viz: ChanRoblesVi rt ualawlib ra ry

2.04 Security (a) As security for the payment of the Purchase Price in accordance with the terms of this Agreement, the Buyer shall pledge the Shares to the Seller and execute a pledge agreement (the “Pledge Agreement”) in favor of the Seller in substantially the form of Annex A. The Buyer shall also pledge to the Seller the Converted Shares and the New Shares as security for the payment of the Purchase Price upon the issuance of such shares in the name of the Buyer. xxxx 2.07 Closing (a) The closing of the sale and purchase of the Shares and the Tranche B Receivables under this Agreement shall take place on the Closing Date and at such place as may be agreed between the Buyer and the Seller upon the fulfillment of all of the conditions precedent specified in Sections 4.01 and 4.02 (unless any such condition precedent shall

have been waived by the Buyer or the Seller, as the case may be). At the closing, the following transactions shall take place: (1) the Seller shall execute and deliver to the Buyer the necessary deed of sale transferring to the Buyer all of the Seller’s right, title and interest in and to the Shares and deliver to the Buyer the stock certificates representing such shares, each duly endorsed, or with separate stock transfer powers attached, in favor of the Buyer together with the duly executed resignations of the directors of the Company named in Schedule 6; (2) the Company shall issue in the name of, and deliver to, the Buyer new stock certificates representing the Shares; (3) the Buyer shall execute and deliver the Pledge Agreement covering the Shares and deliver to the Seller the stock certificates representing such shares; xxxx (b) From and after the Closing Date, the Buyer shall exercise all the rights (including the right to vote) of a shareholder in respect of the Shares (subject to the negative covenants contained in the Pledge Agreement).8 Also worthy of note herein is Section 8 of the ARDA on default, which states: SECTION 8.

ChanRoblesVi rtualaw lib rary

DEFAULT AND DEFAULT REMEDIES

8.01 Events of Default Subject to any applicable curing period, each of the following events shall constitute an Event of Default hereunder: (a) The Buyer shall, subject to the provisions of Section 2.03(b), fail to pay any two consecutive installments on the Purchase Price in accordance with the terms of Section 2.03. (b) The Buyer shall fail to comply with or observe any other material term, obligation or covenant contained in this Agreement or in the Pledge Agreement. (c) The Buyer shall commit any act of bankruptcy or insolvency, or shall file any petition or action for relief under any bankruptcy, reorganization, insolvency or moratorium law or other law or laws for the relief of debtors. 8.02 Consequence of Default At any time after the happening of an Event of Default, and provided that the same shall not have been remedied within ninety (90) days from receipt by the Buyer of written notice from the Seller, the Seller may declare the buyer in default and, as a consequence thereof, exercise such rights and remedies as it may have under this Agreement and applicable laws (including the cancellation of these Agreement); provided that in case of default under Section 8.01(a), the title to the Existing Shares and the Converted Shares shall ipso facto revert to the Seller without need of demand in case such payment default is not remedied by the Buyer within ninety (90) days from the due date of the second installment. (Emphasis supplied.)9 In accordance with the ARDA, PMO executed and delivered to PIC the necessary documents to transfer the former’s rights, title, and interests to and in the PPC shares of stock to the latter; and PPC issued new certificates for the same shares of stock in the name of PIC and/or its nominees. On May 2, 1997, PIC and PNPI as pledgors and PMO as pledgee executed a Pledge Agreement10 which began with “Whereas Clauses” that read: ChanRobles Vi rtua lawlib rary

WHEREAS, [PIC] and the [PMO] have entered into an Amended and Restated Definitive Agreement, dated May 10, 1996, involving the purchase by the [PIC] from the [PMO] of 22,500,000 shares of common stock of [PPC] and certain receivables of the [PMO] from said corporation; and WHEREAS, to secure the obligation of [PIC] to pay the purchase price and all other amounts due the [PMO]

under the aforesaid Definitive Agreement and the performance by [PIC] of its other obligations thereunder and under this Pledge Agreement, the [PIC and PNPI] have agreed to execute and deliver this Pledge Agreement, giving unto the [PMO] a good and valid pledge over the pledge[d] shares[.]11 Sections 3.01 and 3.02 of the Pledge Agreement expressly acknowledged that PIC delivered its certificates of shares of stock in PPC and that PMO received said certificates.12 Section 5 of the same Agreement covered default and the available remedies in case thereof, thus: ChanRoblesVi rtua lawlib rary

SECTION [5]. DEFAULT REMEDIES, ETC. 5.01 Events of Default The following shall be considered Events of Default under this Pledge Agreement:

ChanRob les Vi rtualaw lib rary

(a) [PIC] shall fail to pay when due the obligations after giving effect to any applicable period of grace; or (b) [PIC] or PNPI shall fail to comply with or observe any other material term, obligation or covenant contained in this Pledge Agreement or the Definitive Agreement; or (c) [PIC] or PNPI shall commit any act of bankruptcy or insolvency, or shall file any petition or action for relief under any bankruptcy, reorganization, insolvency or moratorium law or other x x x laws for the relief of debtors; or (d) The priority of the lien of or the security interest granted by this Pledge Agreement shall be impaired, or this Pledge Agreement shall cease to be a first and preferred lien upon the Pledged Shares. 5.02 Consequences of Default If an Event of Default shall have occurred, then at any time thereafter, if any such event shall then be continuing after the applicable grace period, if any, the [PMO] is hereby authorized: ChanRoble sVi rtua lawlib rary

(a) To sell in one or more sales, either public or private, at any time the whole or any part of the Pledged Shares in such order and number as the [PMO] may elect at its place of business or elsewhere and the [PMO] may, in all allowable cases, be the purchaser of any or all Pledged Shares so sold and hold the same thereafter in its own right free from any claim of [PIC] or any right of redemption; (b) To issue receipts and to execute and deliver any instrument or document or do any act necessary for the transfer and assignment of all rights, title and interest of [PIC] in the Pledged Shares to the purchaser or purchasers thereof; and (c) To apply, at the [PMO’s] option, the proceeds of any said sale, as well as all sums received or collected by the [PMO] from or on account of such Pledged Shares to (i) the payment of expenses incurred or paid by the [PMO] in connection with any sale, transfer or delivery of the Pledged Shares and (ii) the payment of the Obligations or any part thereof.13 In the meantime, the nickel refinery complex of PPC, which last operated in the 1980s, had become obsolete and much of the facilities therein were already scrap. The estimated cost in 2003 for building an entirely new refinery plant based on new technology was about US$1 Billion. The Philnico Group, which had already invested at least US$60 Million, was inviting and negotiating with prospective foreign investors who could assist in its business. On account of the huge financial cost of building a new nickel refinery plant, coupled with the economic problems then affecting the Asia-Pacific Region, PMO, PIC, and PPC executed an Amendment Agreement14 on September 27, 1999 which provided for the restructuring of the payment terms of the entire obligation under the ARDA, the repayment of advances, the conditions for borrowings or financing, a new cash break-even formula, and the adoption of an investment plan. Three years later, in a letter dated November 6, 2002, PMO notified PIC that the latter had defaulted in the payment of its obligations and demanded that PIC settle its unpaid amortizations in the total amount of US$275,000.00 within 90 days, or on or about February 5, 2003, or else the PMO would enforce the automatic reversion of the PPC shares of stock under Section 8.02 of the ARDA. PIC replied in a letter dated January 7, 2003 requesting PMO to set aside its notice of default; to not rescind the sale of the PPC shares of stock; and to give PIC an opportunity to conclude its fund-raising efforts for its business, particularly with a group of investors from China. In another letter dated January 22, 2003 to PIC, PMO clearly indicated its intention to enforce Section 8.02 of the ARDA should PIC fail to settle its outstanding obligations after February 5, 2003. On February 4, 2003, a day before the deadline for payment set by PMO in its letters, PIC filed before the RTC a Complaint for Prohibition against Reversion of Shares with Prayer for Writ of Preliminary Injunction and/or Temporary Restraining Order, Suspension of Payment and Fixing of Period of Payment, against PMO, PPC, and the PPC Corporate Secretary. On February 7, 2003, PIC filed an Amended Complaint raising, among other arguments, the need for mutual restitution in case the ARDA is rescinded by the RTC. Ultimately, PIC prayed of the RTC that: ChanRoblesVi rtua lawlib rary

(a) Upon the filing of this complaint, a temporary restraining order be issued under Sec. 5 of Rule 58 of [the] 1997 Rules of Civil Procedure prohibiting [PMO, PPC, and the PPC Corporate Secretary] from reverting the 22,500,000 shares covered by Stock Certificate Nos. 018, 022, 024, 025, 026, 027, 028, 030 and 031 x x x in the name of [PIC] to defendant PMO. (b) After hearing – (i) A writ of preliminary injunction be issued prohibiting [PMO, PPC, and the PPC Corporate Secretary] from effecting the reversion of the aforementioned shares in favor of defendant PMO until further orders from the Court; and thereafter, (c) Judgment issue – (i) Making the injunction permanent and ordering the suspension of the payment of the amortizations as provided for in the ARDA and fixing a reasonable period within which said payment should be due; and (d) Or in the alternative, in the remote possibility that the ARDA x x x be considered rescinded, mutual restitution be ordered by the Honorable Court as provided by the Civil Code relative to reciprocal obligations. [PIC] prays for such further and equitable relief as may be just and equitable in the premises.15 After the summary hearing held on February 7, 2003, the RTC issued a temporary restraining order (TRO), effective for 20 days, restraining PMO, PPC, and the PPC Corporate Secretary from effecting the reversion of the 22,500,000 shares of stock of PPC. The RTC then conducted hearings on the prayer of PIC for the issuance of a writ of preliminary injunction. The RTC subsequently issued an Order16 on February 27, 2003 finding PIC entitled to the issuance of such a writ for the following reasons: ChanRoble sVirtualawl ibra ry

While the failure of [PIC] to meet its amortization with respect to the smaller portion of the purchase price cannot be denied, said default cannot automatically result in the reversion of the shares of stocks to PMO. The provision in the ARDA providing for ipso factoreversion of the shares of stock is null and void for being a pactum commissorium. x x x. xxxx The automatic reversion of the shares of stock is by itself automatic appropriation of the thing pledged, which is contrary to good morals and public policy. It would also result in unjust enrichment on the part of defendant PMO. Even in case of rescission, mutual restitution is allowed so as not to enrich one party to the prejudice of the other. It would be tantamount to confiscation of property without due process. The seller had the option of foreclosing the property pledged. The seller cannot automatically appropriate the same to himself when the ownership is already transferred to [PIC]. Thus, even for the time being when foreclosure of the shares pledge[d] is being considered, and the question of rescission is being deliberated, [PIC] has a right to be protected and therefore entitled to the relief of preliminary injunction. Regarding the provision on referral to arbitration, granting that the case is proper for arbitration, [PIC] is nonetheless entitled to the writ of preliminary injunction pending the arbitration proceeding. xxxx One of the requirements for the issuance of the writ of preliminary injunction is when there is an urgent and paramount necessity for the writ to prevent an irreparable damage. Irreparable means one that can not be rectified. [PIC] is in danger of losing its investment in the project without any recourse if PMO will be allowed the automatic reversion of the ownership of the 22,500,000 shares. The right of [PIC] will be prejudiced if the writ of preliminary injunction will not be issued in the meantime.17 cralaw red

The RTC thus decreed:

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WHEREFORE, premises considered, the Writ of Preliminary Injunction is GRANTED. Until further Order from this Court, and subject to [PIC’s] filing of a bond in the amount of P100,000,000.00 to pay for all the damages which [PMO, PPC, and the PPC Corporate Secretary] may sustain by reason of the injunction if the Court will finally decide that [PIC] is not entitled thereto, defendants Privatization and Management Office (PMO), Philnico Processing Corporation (PPC), and the Corporation Secretary of PPC are enjoined from effecting the reversion to PMO of the 22,500,000 shares purchased by plaintiff Philnico Industrial Corporation and from selling the same to any third party.18 PMO filed a Motion for Reconsideration of the RTC Order dated February 27, 2003, insisting that the provision on ipso facto reversion in the ARDA did not constitute pactum commissorium and would not result in unjust enrichment on the part of PMO. PMO likewise filed a Motion to Dismiss on the ground that the complaint of PIC did not state a cause of action. In its Order19 dated June 19, 2003, the RTC found no merit in both Motions and held that: ChanRobles Vi rtualaw lib rary

1. The Motion for Reconsideration is DENIED. This Court maintains that [PIC] is entitled to the issuance of the Writ of Preliminary Injunction.

[PIC] has already acquired ownership of the 22,500,000 shares when the ARDA was executed between the parties. The ARDA merely provides for the transfer of the subject shares to [PIC]. As a matter of fact, [PIC] has executed a Pledge Agreement as a security for the payment of [PIC’s] obligation with defendant PMO. xxxx Under the ARDA, the relationship of [PIC] and defendant PMO is that of a pledgor and pledgee and no longer as a buyer and seller. As such, the ipso facto reversion of the shares in the ARDA constitutes pactum commissorium. The execution of the Pledge Agreement is precisely made to secure the payment of [PIC’s] obligation with defendant PMO. The automatic reversion of the shares if allowed will in fact constitute automatic appropriation of the thing pledged which is proscribed being pactum commissorium. The automatic appropriation itself will prejudice the investment made by [PIC] in the said project and all improvements will inure to defendant PMO which the law abhors. Even in case of rescission, mutual restitution is allowed so as not to enrich one party at the expense of the other. This forfeiture clause in the ARDA is contrary to law, good morals and public policy. 2. With respect to the Motion To Dismiss, the same is DENIED. Cause of action is the act or omission by which a party violates a right of another (Sec. 2, Rule 2 of the 1997 Rules on Civil Procedure). As already stated in the resolution of the motion for reconsideration, the ipso facto reversion of the shares pursuant to Section 8.02 of the ARDA constitute[s] pactum commissorium, and therefore null and void being contrary to morals, law and public policy. As such, the ipso facto reversion of the shares will result in unjust enrichment on the part of defendant PMO for the reason that all investment of [PIC] with the said project will inure to the benefit of defendant PMO with [PIC] getting nothing. The present case does not violate the principles of autonomy of contract[s]. [PIC] seeks to prohibit the implementation of the ipso facto reversion clause in the ARDA, which is contrary to law being a pactum commissorium. This is a limitation imposed by law, which is considered to be part of a contract. Contracts must respect the law, for the law forms part of the contract. While the contract is the law between the parties, the Court may stop its enforcement if it is contrary to law, morals, good customs or public policy (San Andres vs. Rodriguez, 332 SCRA 69). While the ARDA provides for arbitration as mode of settlement of the dispute (Section 9.05), the present complaint involves interpretation of the provisions of the ARDA. Interpretation of contracts is within the domain of the Court. The ipso facto reversion of the shares in the ARDA can never be subject of arbitration but it is within the domain of the court to declare whether or not the same is valid or null and void.20 In the same Order, the RTC directed PMO, PPC, and the PPC Secretary to file their answer to the complaint of PIC. PMO no longer challenged the RTC Orders dated February 27, 2003 and June 19, 2003 before the appellate courts. Instead, PMO complied with the RTC directive and already filed with the said trial court its Answer and Amended Answer to the complaint of PIC. The RTC proceeded to pre-trial when the parties failed to arrive at an amicable settlement. On February 6, 2009, the RTC issued its Pre-trial Order21 in which it enumerated the respective issues for resolution submitted by PIC and PMO, to wit: ChanRobles Vi rtua lawlib rary

ISSUES ([PIC]) 1.

Whether or not the ipso facto reversion clause in the ARDA is valid, and, whether or not it is a specie[s] of pactum commissorium which is outlawed.

2.

Whether or not [PIC] is in default under the terms of the ARDA which clearly contemplates the actual operation of the plant before the subsequent installments after the third year will be due, as it even recognizes deferment of payment of installment if the Nonoc mining plant and refinery is not yet in full operation and has not produced sufficient cash equivalent for payment to seller.

3.

Even assuming that the schedule of payment is not modified by the other terms of the ARDA (as actual operation of the plant and refinery), whether or not [PIC] may be considered as in default considering the fortuitous events which are unforeseen and beyond the control of [PIC] which had prevented [PIC] from complying with its obligation under the scheduled amortization.

4.

Whether or not [PIC] is entitled to be reimbursed what it had already paid and spent to implement the contract, in the remote event that APT/PMO may be allowed to exercise right [of] rescission.

5.

Whether or not plaintiff [PIC] is required to resort to arbitration to enforce its cause of action in the complaint.

ISSUES ([PMO])

1.

Whether or not defendant PMO may be prohibited from ipso facto reverting the shares pursuant to the ARDA considering that [PIC] defaulted in its payment and there is an express provision in the ARDA providing for the said provision.

2.

Whether or not the terms and modes of payments as provided in the ARDA may be suspended or fixed anew by reason of unforeseen events cited by [PIC].

3.

Whether or not defendant PMO may be enjoined by this Honorable Court in the performance of its functions and duties in connection with the sale or disposition of assets transferred to it pursuant to Proclamation No. 50-A.22 (Emphases supplied.)

PIC filed a Manifestation and Motion praying for the modification of the foregoing Pre-trial Order dated February 6, 2009 of the RTC by deleting Issue Nos. 1 and 5 in the Statement of Issues of PIC. PIC posited that these two issues were already resolved by the RTC in the Order dated June 19, 2003 and should no longer be among the issues to be tried in the course of subsequent proceedings. PMO countered in its Comment/Opposition that the RTC Orders dated February 27, 2003 and June 19, 2003 concerned only the issuance of the Writ of Preliminary Injunction; and the findings and conclusions of the trial court on the propriety of the issuance of the injunctive writ are premised on initial and incomplete evidence, which should be considered merely as provisional. Said RTC Orders should not bind the trial court in its determination of the merits of the case and to hold otherwise would result in the prejudgment of the case or disposition of the main case without a full-blown trial. Consequently, PMO prayed that the RTC deny the Manifestation and Motion of PIC. PMO also successively filed an Omnibus Motion and a Supplement to Omnibus Motion, asserting that: (1) the Writ of Preliminary Injunction was issued in 2003 by the RTC without jurisdiction and was therefore void, because there was no compliance with the arbitration clause in the ARDA; (2) the continuance of the Writ of Preliminary Injunction is causing irreparable damage to the National Government; (3) since the issuance of the Writ of Preliminary Injunction six years before, PIC had effectively achieved and obtained the reliefs it had prayed for in its complaint as it was able to suspend the payment of monthly amortization and prevent the reversion, or even the selling, of the PPC shares of stock in the event of default; (4) the amount of injunction bond is insufficient and grossly disproportionate to the enormity of the damages that PMO stands to suffer; (5) the injunctive writ is supposed to be a “strong arm of equity” and should not be used as an instrument of perpetrating injustice against the National Government; (6) in accordance with Rule 58, Section 6 of the Rules of Court, PMO is signifying its intention to post a counterbond that would answer for the damages PIC might suffer by the dissolution of the Writ of Preliminary Injunction; and (7) PMO thought it prudent to no longer assail the RTC Orders dated February 27, 2003 and June 19, 2003 before the appellate courts believing that such a move would only cause further delay in the resolution of the case and cause more irreparable damage to the National Government. PMO sought several reliefs from the RTC in its Omnibus Motion, quoted as follows: ChanRob les Virtualawl ibra ry

(1) That the Writ of Preliminary Injunction be dissolved; (2) That a representative of defendant PMO be appointed to the PPC’s and PNPI’s board of directors or management; and (3) That [PIC] be required to submit an accounting of its books and financial reports from the year 2003 to 2008. Other just and equitable reliefs are also prayed for.23

cralawre d

Following hearings and exchange of pleadings by the parties, the RTC collectively resolved the pending motions of PIC and PMO in its Order dated August 25, 2009. The RTC determined that there was sufficient basis to grant the Manifestation and Motion of PIC to delete two issues from the Pre-Trial Order dated February 6, 2009: ChanRobles Vi rtua lawlib rary

The Court will not disturb the earlier findings of the previous judge that the ipso factoreversion clause in the ARDA is invalid and that it constitute[s] pactum commissorium. The Court finds no legal and factual reasons to change the previous findings of the Honorable Delia H. Panganiban that [PIC] has already acquired ownership of the 22,500,000 shares sold to it and that the ARDA is merely a scheme for the transfer of the said share to the latter. As such, the relation between [PIC] and defendant PMO has become that of a mortgagor and mortgagee. Accordingly, the proviso in the ARDA for the ipso facto reversion constitutes pactum commissorium. The Court disagrees with [PMO] that the said finding is merely initiatory as it was a finding on a legal issue. No other evidence is needed to change the same. In fact, said issue was extensively and exhaustively argued by the parties in their respective pleadings in relation thereto. It is presumed that the previous Presiding Judge of this Court has considered all the arguments raised by the parties. Section 3(o) of Rule 131 of the Revised Rules of Court provides: that all matters within an issue raised in a case were laid before the court and passed upon by it. In addition, based on the personal analysis of its new Presiding Judge, the Court is judiciously convinced of the soundness of its earlier findings. More importantly, it appears from the records that defendant PMO never challenged such finding in a higher judicial arena. Thus, this Court deems its resolution to be incontestable at this stage. Consequently, since the said

finding has attained finality, any error that this Court may have committed in resolving the said issue may only be raised in an appeal to be made by the adverse party. This Court also finds merit [i]n plaintiff’s prayer for the deletion of the fifth issue raised during the pre-trial of this case. The denial of the motion to dismiss previously filed by defendant PMO also [constitutes] as an adjudication on the issue as to whether or not the subject matter of this case is a proper subject of arbitration proceedings as provided for in ARDA. The Court reached the said conclusion based on jurisprudential law which up to this date is unchanged. Said conclusion has also become immutable when [PMO, PPC, and the PPC Corporate Secretary] similarly failed to challenge the same.24 As for the Omnibus Motion and Supplement to Omnibus Motion of PMO, the RTC only conceded to requiring PIC to submit accounting and financial reports to PMO: ChanRoblesVi rt ualawlib rary

On defendant PMO’s omnibus motion and its supplemental thereto, the Court resolves the first motion in the negative. As stated above[,] this instant case does not involve matters which can be adjudicated through arbitration. It involves the interpretation of contract which falls within the jurisdiction of this Court. This Court agrees with [PIC] that there can be no damage when what is being restrained is an illegal act. It need not be said that no right can emanate from an illegal act. In this instant case, what is being restrained by the Writ is the enforcement by defendant PMO of the reversion clause in the ARDA. Having unequivocally declared such reversion clause illegal, the Court has no reason to terminate the efficacy of the Writ it issued. The Court notes that defendant PMO did not lift a finger during the time that it should have done so. Thus, the delay, if there be any, is not solely attributable to [PIC]. Having impliedly consented thereto, defendant PMO must suffer the consequences of its inaction. The same is true on the allegation of insufficiency of the injunction bond filed by [PIC]. The defendant PMO’s failure to question the same within reasonable time the amount of the injunction bond posted by [PIC] is fatal to its cause as it galvanized the resolution of the Court on the matter. The Court will not act on defendant PMO’s prayer for the appointment of a representative in [PIC’s] Board of Director[s]. As stated by [PIC] in its opposition to the pending incident, that it is not preventing defendant PMO to appoint a representative [in the] former, the Court will no longer discuss the said motion. The parties, however, are directed to notify this Court of the appointment by [PMO] of a representative in [PIC’s] Board of Director[s]. On defendant PMO’s motion to submit accounting report, while it may be true that [PIC] is submitting its financial statements to the Bureau of Internal Revenue and the Securities and Exchange Commission, the Court finds no legal obstacle not to direct [PIC] to submit a copy of the said documents to [PMO]. Lastly, on the motion of [PMO] to post counter bond, the Court finds the same to [be] without merit. The Court cannot allow, even if a bond is posted, [PMO] to commit an act which it has declared to be illegal. There is no premium for an illegal act.25 cralaw red

The dispositive portion of the RTC Order dated August 25, 2009 reads:

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WHEREFORE, premises considered, the Court GRANTS the following motion: 1.

Manifestation [and] Motion filed by [PIC] and hereby DELETES issues numbers 1 and 5 in pages 5 and 6 of its Pre-Trial Order of February 6, 2009.

2.

The Omnibus Motion on requiring [PIC] to submit an accounting and financial report to the defendant [PMO], and submit to this Court a manifestation of its compliance thereto;

and DENIES the following: 1.

The dissolution of the Writ of Preliminary Injunction for lack of merit.

2.

The appointment of a representative of [PMO to the] Board of Directors for lack of merit.

3.

The posting of counter bond for lack of merit.26

PMO assailed the RTC Order dated August 25, 2009 before the Court of Appeals via a Petition for Certiorari, averring that: ChanRobles Virtualawl ibra ry

I. PUBLIC RESPONDENT COMMITTED GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN HOLDING THAT THE IPSO FACTO REVERSION CLAUSE IN THE ARDA IS A SPECIE[S] OF PACTUM COMMISSORIUM AND SUCH DISPOSITION IS A FINAL DETERMINATION OF THE COURT WHICH CAN ONLY BE QUESTIONED ON APPEAL; AND II. PUBLIC RESPONDENT COMMITTED GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF

JURISDICTION IN DENYING [PMO’S] MOTION TO DISSOLVE THE WRIT OF PRELIMINARY INJUNCTION AND MOTION TO FILE A COUNTERBOND FOR THE DISSOLUTION THEREOF.27 The Court of Appeals, in its Decision dated January 31, 2011, disagreed with the finding of the RTC that the instant case involves a pactum commissorium, but still affirmed the denial by the RTC of the motion of PMO to dissolve the Writ of Preliminary Injunction issued in 2003. According to the Court of Appeals, Section 8.02 of the ARDA does not constitute pactum commissorium:

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The elements of pactum commissorium are: (1) that there should be a pledge or mortgage wherein a property is pledged or mortgaged by way of security for the payment of the principal obligation; and (2) that there should be a stipulation for an automatic appropriation by the creditor of the thing pledged or mortgaged in the event of nonpayment of the principal obligation within the stipulated period. In the instant case, the subject ARDA basically pertains to the contract of sale of shares of stock. There was nothing given by way of pledge or mortgage in said contract, through which [PMO] could have appropriated the shares to itself should default in the payment thereof arise. At this point, We have to agree with [PMO] that the ARDA is separate and distinct from the Pledge Agreement. The two agreements have separate terms and conditions, especially concerning the consequences of default. Under the ARDA, [PMO] may effect the ipso factoreversion of the title over the shares of stock of [PIC], without need of demand. On the other hand, under the Pledge Agreement, [PMO] may conduct a public or private sale of the shares of stock of [PIC], wherein it may opt to buy the same. Furthermore, the first element of pactum commissorium only holds true under the Pledge Agreement while the second element with respect to the stipulation for automatic appropriation can be found under the ARDA. Thus, it is plainly irreconcilable how pactum commissorium can be made to apply in the present case, absent the two elements concurring in one contract.28 Notwithstanding its aforequoted pronouncements, the Court of Appeals still declared the ipso factoreversion clause in the ARDA invalid: ChanRobles Vi rtualaw lib rary

Nevertheless, the questioned provision on automatic reversion of shares still cannot be held valid. While the contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, they should, however, be not contrary to law, morals, good customs, public order, or public policy. In a contract of sale involving shares of stock, ownership is deemed transferred upon the issuance of certificate of stock. Section 63 of the Corporation Code provides that “shares of stock so issued are personal property and may be transferred by delivery of the certificate or certificates indorsed by the owner or his attorney-in-fact or other person legally authorized to make the transfer.” The word “transfer,” as contemplated in that particular section of the Corporation Code, means any act by which the share of stock of one person is vested in another, that is, he is divested and another acquires ownership of such stock. Applying these principles, ownership over the stock of shares was already transferred to [PIC] when it was issued new certificates of stock. [PMO] cannot oblige [PIC] to automatically part with its ownership over the shares in favor of the former on the occasion of default or nonpayment, even if they have previously agreed upon the same. Such stipulation contained in the ARDA is contrary to law, hence, null and void. It bears stressing that what is being declared null and void here is the “automatic reversion of shares” clause and not the provision for the rescission/cancellation of ARDA, as what has been impressed by [PMO] in its arguments. Accordingly, [PIC] is entitled to be protected of his rights through the issuance of the Writ of Preliminary Injunction. And it is but proper to deny the dissolution of said writ. It should be of no moment that it has been in effect for several years now. Until the matter has been settled on whether [PIC] has substantially breached its obligation as to constitute default, then, the shares of stock cannot as yet be foreclosed and sold, in accordance with the terms and conditions of the Pledge Agreement, to satisfy [PMO’s] alleged claims.29(Citations omitted.) The Court of Appeals accordingly ruled in the end:

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In view of all the foregoing, We simply cannot ascribe grave abuse of discretion to public respondent. While We may have a different take on the matter at hand, it is axiomatic that not every erroneous conclusion of law or fact is abuse of discretion. WHEREFORE, premises considered, the instant petition is DENIED. The assailed Order dated 25 August 2009 issued by public respondent, Hon. Judge Gina M. Bibat-Palamos of RTC Makati, Branch 64, in Civil Case No. 03-114 is hereby AFFIRMED.30 (Citation omitted.) PIC filed a Motion for Partial Reconsideration, while PMO filed a Motion for Reconsideration of the Decision dated January 31, 2011 of the Court of Appeals, which the appellate court both denied in its Resolution

dated November 18, 2011. Hence, the instant Petitions. In its Petition in G.R. No. 199420, PIC assigned the following errors on the part of the Court of Appeals:

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I THE HONORABLE COURT OF APPEALS COMMITTED GROSS ERROR, ACTED WITH GRAVE ABUSE OF DISCRETION WHEN IT DECIDED A QUESTION OF SUBSTANCE NOT IN ACCORD WITH LAW AND ESTABLISHED JURISPRUDENCE BY HOLDING THAT THE ESSENTIAL ELEMENTS OF PACTUM COMMISSORIUM, NAMELY, 1) THAT THERE SHOULD BE A [PLEDGE] OR [MORTGAGE] WHEREIN A PROPERTY PLEDGED OR MORTGAGED BY WAY OF SECURITY FOR THE PAYMENT OF THE PRINCIPAL OBLIGATION; AND 2) THAT THERE SHOULD BE A STIPULATION FOR AN AUTOMATIC APPROPRIATION BY THE CREDITOR OF THE THING PLEDGED OR MORTGAGED IN THE EVENT OF NONPAYMENT OF THE PRINCIPAL OBLIGATION WITHIN THE STIPULATED PERIOD, MUST CONCUR OR BE PRESENT IN ONE CONTRACT UNLIKE IN THE CASE AT BENCH WHERE ONE ELEMENT PURPORTEDLY APPEARS IN THE ARDA WHILE THE OTHER APPEARS IN THE PLEDGE AGREEMENT. II THE HONORABLE COURT OF APPEALS COMMITTED GROSS ERROR, ACTED WITH GRAVE ABUSE OF DISCRETION AND NOT IN ACCORD WITH LAW AND ESTABLISHED JURISPRUDENCE WHEN IT GAVE DUE COURSE AND RULED ON [PMO’S] PETITION FOR CERTIORARI ASSAILING THE ORDER ISSUED BY THE TRIAL COURT ON FEBRUARY 27, 2003 HOLDING THAT THE IPSO FACTO OR AUTOMATIC REVERSION TO PMO OF THE PLEDGED SHARES OF STOCK UNDER SECTION 8.02 OF THE ARDA IS PACTUM COMMISSORIUM WHEN SAID ORDER HAD LONG BECOME FINAL AND THEREFORE THE PETITION ASSAILING IT IS TIME-BARRED AND SHOULD HAVE BEEN DISMISSED OUTRIGHT.31 On the other hand, PMO raised the following arguments in its Petition in G.R. No. 199432:

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I THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT THE IPSO FACTO REVERSION CLAUSE OF THE ARDA IS CONTRARY TO LAW IN THE ABSENCE OF ANY LAW ALLEGEDLY VIOLATED BY THE SAID CLAUSE. II THE HONORABLE COURT OF APPEALS ERRED IN DENYING [PMO’S] PRAYER FOR THE DISSOLUTION OF THE WRIT OF PRELIMINARY INJUNCTION EVEN IF THE PURPOSE FOR WHICH IT WAS ISSUED HAD ALREADY BEEN MET AND ITS CONTINUED IMPLEMENTATION DEPRIVED [PMO] OF REMEDIES UNDER THE LAW AND THE ARDA. III THE DISSOLUTION OF THE WRIT AFTER THE LAPSE OF ALMOST NINE (9) YEARS IS IN ORDER AND IN THE INTEREST OF EQUITABLE JUSTICE.32 cralawred

RULING OF THE COURT The allegations and arguments of PIC and PMO in their respective Petitions essentially boil down to two fundamental issues: (1) Whether Section 8.02 of the ARDA on ipso facto or automatic reversion of the PPC shares of stock to PMO in case of default by PIC constitutes pactum commissorium; and (2) Whether the Writ of Preliminary Injunction should be dissolved. The Court resolves the first issue in the positive and the second issue in the negative. Section 8.02 of the ARDA constitutes pactum commissorium and, thus, null and void for being contrary to Article 2088 of the Civil Code. Article 1305 of the Civil Code allows contracting parties to establish such stipulation, clauses, terms, and conditions as they may deem convenient, provided, however, that they are not contrary to law, morals, good customs, public order, or public policy. Pactum commissorium is among the contractual stipulations that are deemed contrary to law. It is defined as “a stipulation empowering the creditor to appropriate the thing given as guaranty for the fulfillment of the obligation in the event the obligor fails to live up to his undertakings, without further formality, such as foreclosure proceedings, and a public sale.”33 It is explicitly prohibited under Article 2088 of the Civil Code which provides: ChanRob les Vi rtualaw lib rary

ART. 2088. The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of them. Any stipulation to the contrary is null and void. There are two elements for pactum commissorium to exist: (1) that there should be a pledge or mortgage wherein a property is pledged or mortgaged by way of security for the payment of the principal obligation; and (2) that there should be a stipulation for an automatic appropriation by the creditor of the thing pledged or mortgaged in the event of nonpayment of the principal obligation within the stipulated period.34 cra lawred

Both elements of pactum commissorium are present in the instant case: (1) By virtue of the Pledge Agreement dated May 2, 1997, PIC pledged its PPC shares of stock in favor of PMO as security for the fulfillment of the former’s obligations under the ARDA dated May 10, 1996 and the Pledge Agreement itself; and (2) There is automatic appropriation as under Section 8.02 of the ARDA, in the event of default by PIC, title to the PPC shares of stock shall ipso facto revert from PIC to PMO without need of demand. The Court of Appeals, in ruling that there is no pactum commissorium, adopted the position of PMO that the ARDA and the Pledge Agreement are entirely separate and distinct contracts. Neither contract contains both elements of pactum commissorium: the ARDA solely has the second element, while the Pledge Agreement only has the first element. The Court disagrees. In Blas v. Angeles-Hutalla,35 the Court recognized that the agreement of the parties may be embodied in only one contract or in two or more separate writings. In case of the latter, the writings of the parties should be read and interpreted together in such a way as to render their intention effective. The agreement between PMO and PIC is the sale of the PPC shares of stock by the former to the latter, to be secured by a pledge on the very same shares of stock. The ARDA and the Pledge Agreement herein, although executed in separate written instruments, are integral to one another. On one hand, Section 2.04 of the ARDA explicitly requires the execution of a pledge agreement as security for the payment by PIC of the purchase price for the PPC shares of stock and receivables, and even provides the form for said pledge agreement in Annex A thereof. Section 2.07 of the ARDA also states that the closing of the sale and purchase of the PPC shares of stock and receivables shall take place on the same date that PIC shall execute and deliver the pledge agreement, together with the certificates of shares of stock, to PMO. On the other hand, the “Whereas Clauses” of the Pledge Agreement expressly mentions the ARDA and explains that the Pledge Agreement is being executed to secure payment by PIC of the purchase price and all other amounts due to PMO under the ARDA, as well as the performance by PIC of its other obligations under the ARDA and the Pledge Agreement itself. Clearly, it was the intention of the parties to enter into and execute both contracts for a complete effectuation of their agreement. To reiterate, the Pledge Agreement secures, for the benefit of PMO, the performance by PIC of its obligations under both the ARDA and the Pledge Agreement itself. It is with the execution of the Pledge Agreement that PIC turned over possession of its certificates of shares of stock in PPC to PMO. As the RTC pertinently observed in its Order dated June 19, 2003, there had already been a shift in the relations of PMO and PIC, from mere seller and buyer, to creditor-pledgee and debtor-pledgor. Having enjoyed the security and benefits of the Pledge Agreement, PMO cannot now insist on applying Section 8.02 of the ARDA and conveniently and arbitrarily exclude and/or ignore the Pledge Agreement so as to evade the prohibition against pactum commissorium. More importantly, the Court, in determining the existence of pactum commissorium, had focused more on the evident intention of the parties, rather than the formal or written form. In A. Francisco Realty and Development Corporation v. Court of Appeals,36 therein petitioner similarly denied the existence of pactum commissorium because the proscribed stipulation was found in the promissory note and not in the mortgage deed. The Court held that: ChanRoblesVi rtua lawlib rary

The contention is patently without merit. To sustain the theory of petitioner would be to allow a subversion of the prohibition in Art. 2088. In Nakpil v. Intermediate Appellate Court, which involved the violation of a constructive trust, no deed of mortgage was expressly executed between the parties in that case. Nevertheless, this Court ruled that an agreement whereby property held in trust was ceded to the trustee upon failure of the beneficiary to pay his debt to the former as secured by the said property was void for being a pactum commissorium. It was there held: ChanRoble sVirtualawl ibra ry

The arrangement entered into between the parties, whereby Pulong Maulap was to be “considered sold to him (respondent) x x x” in case petitioner fails to reimburse Valdes, must then be construed as tantamount to a pactum commissorium which is expressly prohibited by Art. 2088 of the Civil Code. For, there was to be automatic appropriation of the property by Valdez in the event of failure of petitioner to pay the value of the advances. Thus, contrary to respondent’s manifestations, all the elements of a pactum commissorium were present: there was a creditor-debtor relationship between the parties; the property was used as security for the loan; and, there was automatic appropriation by respondent of Pulong Maulap in case of default of petitioner. Similarly, the Court has struck down such stipulations as contained in deeds of sale purporting to be pacto de retro sales but found actually to be equitable mortgages.

It has been consistently held that the presence of even one of the circumstances enumerated in Art. 1602 of the New Civil Code is sufficient to declare a contract of sale with right to repurchase an equitable mortgage. This is so because pacto de retro sales with the stringent and onerous effects that accompany them are not favored. In case of doubt, a contract purporting to be a sale with right to repurchase shall be construed as an equitable mortgage. Petitioner, to prove her claim, cannot rely on the stipulation in the contract providing that complete and absolute title shall be vested on the vendee should the vendors fail to redeem the property on the specified date. Such stipulation that the ownership of the property would automatically pass to the vendee in case no redemption was effected within the stipulated period is void for being a pactum commissorium which enables the mortgagee to acquire ownership of the mortgaged property without need of foreclosure. Its insertion in the contract is an avowal of the intention to mortgage rather that to sell the property. Indeed, in Reyes v. Sierra, this Court categorically ruled that a mortgagee’s mere act of registering the mortgaged property in his own name upon the mortgagor’s failure to redeem the property amounted to the exercise of the privilege of a mortgagee in a pactum commissorium. Obviously, from the nature of the transaction, applicant’s predecessor-in-interest is a mere mortgagee, and ownership of the thing mortgaged is retained by Basilia Beltran, the mortgagor. The mortgagee, however, may recover the loan, although the mortgage document evidencing the loan was nonregistrable being a purely private instrument. Failure of mortgagor to redeem the property does not automatically vest ownership of the property to the mortgagee, which would grant the latter the right to appropriate the thing mortgaged or dispose of it. This violates the provision of Article 2088 of the New Civil Code, which reads: The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose by them. Any stipulation to the contrary is null and void. The act of applicant in registering the property in his own name upon mortgagor’s failure to redeem the property would amount to a pactum commissorium which is against good morals and public policy. Thus, in the case at bar, the stipulations in the promissory notes providing that, upon failure of respondent spouses to pay interest, ownership of the property would be automatically transferred to petitioner A. Francisco Realty and the deed of sale in its favor would be registered, are in substance a pactum commissorium. They embody the two elements of pactum commissorium as laid down in Uy Tong v. Court of Appeals, x x x. (Citations omitted.) Appreciating the ARDA together with the Pledge Agreement, the Court can only conclude that Section 8.02 of the ARDA constitutes pactum commissorium and, therefore, null and void. PMO though insists that there is no valid Pledge Agreement, arguing that PIC could not have validly pledged the PPC shares of stock because it is not yet the absolute owner of said shares. According to PMO, the sale of the PPC shares of stock to PIC is subject to the resolutory condition of nonpayment by PIC of the installments due on the purchase price. Again, the Court is unconvinced. Among the requirements of a contract of pledge is that the pledgor is the absolute owner of the thing pledged.37 Based on the provisions of the ARDA, ownership of the PPC shares of stock had passed on to PIC, hence, enabling PIC to pledge the very same shares to PMO. In accordance with Section 2.07(a)(1) and 2.07(a)(2) of the ARDA, PMO had transferred to PIC all rights, title, and interests in and to the PPC shares of stock, and delivered to PIC the certificates for said shares for cancellation and replacement of new certificates already in the name of PIC. In addition, Section 2.07(b) of the ARDA explicitly declares that PIC as buyer shall exercise all the rights, including the right to vote, of a shareholder in respect of the PPC shares of stock. PMO cannot maintain that the ownership of the PPC shares of stock did not pass on to PIC, but in the same breath claim that non-payment by PIC of the installments due on the purchase price is a resolutory condition for the contract of sale – these two arguments are actually contradictory. As the Court clearly explained in Heirs of Paulino Atienza v. Espidol38: ChanRob les Vi rtualawl ib rary

Regarding the right to cancel the contract for nonpayment of an installment, there is need to initially determine if what the parties had was a contract of sale or a contract to sell. In a contract of sale, the title to the property passes to the buyer upon the delivery of the thing sold. In a contract to sell, on the other hand, the ownership is, by agreement, retained by the seller and is not to pass to the vendee until full payment of the purchase price. In the contract of sale, the buyer’s nonpayment of the price is a negative resolutory condition; in the contract to sell, the buyer’s full payment of the price is a positive suspensive condition to the coming into effect of the agreement. In the first case, the seller has lost and cannot recover the ownership of the property unless he takes action to set aside the contract of sale. In the second case, the title simply remains in the seller if the buyer does not comply with the condition precedent of making payment at the time specified in the contract. x x x. (Emphases supplied, citation omitted.) So that it could invoke the resolutory condition of nonpayment of an installment, PMO must necessarily concede that its contract with PIC was a one of sale and that ownership of the PPC shares of stock had indeed passed on to PIC. And even then, having lost ownership of the shares, PMO cannot automatically

recover the same without taking steps to set aside the contract of sale. Moreover, the general rule is that in the absence of a stipulation, a party cannot unilaterally and extrajudicially rescind a contract. A party must invoke the right to rescind a contract judicially.39 It is also settled that the rescission of a contract based on Article 1191 of the Civil Code requires mutual restitution to bring back the parties to their original situation prior to the inception of the contract. Rescission creates the obligation to return the object of the contract. It can be carried out only when the one who demands rescission can return whatever he may be obliged to restore.40 cra lawred

Even though PMO had previously acknowledged the need for restitution or restoration following rescission, it also qualified that such restitution or restoration shall still be “subject x x x to the fair determination of the amount to be restored as may be deemed reasonable and substantiated.”41 cralawred

Section 8.02 of the ARDA provides for the ipso facto reversion of the pledged shares of PIC to PMO in case of default on the part of the former, which as explained above, is prohibited by Article 2088 of the Civil Code. The said Section does not mention the broader concept of rescission of the entire ARDA. In its Petition in G.R. No. 199432, PMO is asking the Court, among other things, to already declare the ARDA rescinded. The Court cannot grant or deny such prayer at this point for there are questions of fact and law which are still under litigation before the RTC. There is no basis for dissolving the Writ of Preliminary Injunction. The Court emphasizes that the Writ of Preliminary Injunction was granted in the RTC Order dated February 27, 2003; and the Motion for Reconsideration of the issuance of said Writ filed by the PMO was denied in the RTC Order dated June 19, 2003 – both of which are interlocutory orders. Under Rule 65 of the Rules of Court, the PMO only had 60 days from notice to file with the Court of Appeals a petition for certiorari assailing said orders. However, PMO did not file such a petition and lost the right to avail itself of the remedy. PMO, in challenging the RTC Order dated August 25, 2009, cannot be allowed to revive the issues of pactum commissorium and the arbitration clause, together with its opposition to the Writ of Preliminary Injunction, which were already settled and ruled upon six years before in the RTC Orders dated February 27, 2003 and June 19, 2003. The removal of said issues from those submitted for trial before the RTC is thus justified. That the RTC issued the aforementioned Orders of 2003 based only on initial and incomplete evidence is incorrect. The issues of pactum commisorium and arbitration clause are questions of law that do not require the review or evaluation of evidence. The RTC, before issuing said Orders of 2003, conducted hearings and required the submission of pleadings, so the parties were given the opportunity to present their arguments on said questions of law. In particular, the ruling of the RTC that Section 8.02 of the ARDA constitutes pactum commissorium, cannot be set aside and the Writ of Injunction issued based on such ruling cannot be dissolved, even if there be changes in the factual circumstances of the parties, for as long as the applicable law remains the same. There are still several remaining issues in the Pre-Trial Order dated February 6, 2009 that the RTC needs to resolve, among others, the alleged default under the ARDA. They involve both questions of fact and law, so their resolution requires further hearings for presentation of evidence by the parties. Hence, PMO cannot claim pre-judgment of its case with the issuance by the RTC of the Orders dated February 27, 2003 and June 19, 2003. Despite the declaration that Section 8.02 of the ARDA is null and void as it constitutes pactum commissorium, PMO and PIC shall have the opportunity to thresh-out other issues between them which are not resolved in these cases, such as the issue of default, during the trial on the merits before the RTC. WHEREFORE, premises considered, the Court:

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(1) GRANTS the Petition for Review of PIC in G.R. No. 199420 by declaring that Section 8.02 of the ARDA constitutes pactum commissorium and, thus, null and void; (2) DENIES the Petition for Review of PMO in G.R. No. 199432 for lack of merit; and (3) DIRECTS the RTC to resolve Civil Case No. 03-114 with utmost dispatch. SO ORDERED.

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Sereno, CJ., (Chairperson), Bersamin, Perez, and Mendoza,* JJ., concur.