00 Credit Finals - Cases

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Credit Transaction Finals Reviewer – case annotations Prof. Joven 2 nd semester, AY ’10-‘11

 Janz Hanna Ria N. Serrano  Serrano  Ong v. PCIB. PCIB . Under the suretyship contract entered into by petitioners-spouses petitioners-spouses with respondent bank, the former obligated themselves to be solidarily bound with the principal debtor BMC for the payment of its debts to respondent bank amounting to five million pesos (P5,000,000.00). Under Article 1216 of the Civil Code, respondent bank as creditor may proceed against petitioners-spouses as sureties despite the execution of the MOA which provided for the suspension of payment and filing of collection suits against BMC. Respondent bank's right to collect payment from the surety exists independently of its right  to proceed directly against the principal debtor. In fact, the creditor bank may go against the surety alone without prior de mand for payment on the principal debtor. Guaranty Surety insures the solvency of the debtor an insurer of the debt itself  gives rise to a subsidiary obligation on the part of the guarantor the benefit of excussion is not available to the surety as he is principally liable for the payment of the debt  It is only after the creditor has proceeded against the properties of the principal debtor and the debt remains unsatisfied that a guarantor can As the surety insures the debt itself, he obligates himself  be held liable to answer for any unpaid amount  – PRINCIPLE OF to pay the debt if the principal debtor will not pay, EXCUSSION regardless of whether or not the latter is financially capable to fulfill his obligation Thus, a creditor can go directly against the surety although the principal debtor is solvent and is able to pay or no prior demand is made on the principal debtor. A surety is directly, equally and absolutely bound with the principal debtor for the payment of the debt and is deemed as an original promissor and debtor from the beginning. IFC v. Imperial Textile Mills. Mills . [After extrajudicially foreclosing the mortgage, there still remained deficiency so IFC asked surety to pay the outstanding balance] The Agreement uses "guarantee" and "guarantors," prompting ITM to base its argument on those words. This Court is not convinced that the use of  the two words limits the Contract to a mere guaranty. The specific stipulations in the Contract show otherwise. While referring to ITM as a guarantor, the Agreement specifically stated that the corporation was "jointly and severally" liable. To put emphasis on the nature of that liability, the Contract further stated that ITM was a primary obligor, not a mere surety. Those stipulations meant only one thing: that at bottom, and to all legal intents and purposes, it was a surety. || The use of the word "guarantee" does not ipso facto make the contract one of guaranty. This Court has recognized that the word is frequently employed in business transactions to describe the intention to be bound by a primary or an independent obligation. The very terms of a contract govern the obligations of the parties or the extent of the obligor's liability. Thus, this Court has ruled in favor of suretyship, even though contracts were denominated as a "Guarantor's Undertaking" or a "Continuing Guaranty." E Zobel Inc v. CA. CA. [Claveria obtained a loan with Consolidated Bank. As security, they constituted chattel mortgage on boats and executed a Continuing Guaranty by E. Zobel. They defaulted so Solid Bank filed a cased against Claveria and Zobel. SB did not foreclose. Zobel: it was relieved as guarantor when it  lost its right to be subrogated to the chattel mortgage for SB’s failure to register with CMR] Based on the aforementioned definitions, it appears that the contract executed by petitioner in favor of SOLIDBANK, albeit denominated as a "Continuing Guaranty," is a contract of surety. The terms of the contract  categorically obligates petitioner as "surety" to induce SOLIDBANK to extend credit to respondent spouses. The contract clearly disclose that petitioner assumed liability to SOLIDBANK, as a regular party to the undertaking and obligated itself as an original promissor. It bound itself jointly and severally to t he obligation with the respondent spouses. In fact, SOLIDBANK need not resort to all other legal remedies or exhaust respondent spouses' properties before it  can hold petitioner liable for the obligation. | The use of the term "guarantee" does not ipso facto mean that the contract is one of guaranty. Authorities recognize that the word "guarantee" is frequently employed in business transactions to describe describe not the security of the debt but an intention to be bound by a primary or independent obligation. As aptly observed by the trial court, the interpretation of a contract is not limited to the title alone but to the contents and intention of the parties. Tocao v. CA. CA . Belo’s denial that he financed the partnership tings hollow in the face of the established fact that he presided over meetings regarding matters affecting the operation of the business. His claim that he was merely a guarantor is belied by that personal act of proprietorship in the business. Moreover, if  he was indeed a guarantor of future debts of Tocao under CC, 2053, he should have presented documentary evidence therefor. While CC, 2055 simply   provides that guaranty must be “express”, CC, 1403 requires that “a special promise to answer for the debt, default or miscarriage of another” be in writing.  Astro Electronics v. Phil. Export . It appears that Roxas signed twice, first as president and second in his personal capacity. Roxas became a co-maker of the PNs and cannot escape liability arising from it. Sps. Toh v. Solidbank . The Continuing Guaranty is a valid and binding contract of sps. Toh as it is a public instrument that enjoys the presumption of  authenticity and due execution. If Sps. Toh intended not to be charged as sureties after their withdrawal from FBPC, they could have simply terminated the agreement by serving notice of revocation. However, since solid bank did not comply with the requirement as regards the extension of the due date, spouses Toh’s liability as surety surety is extinguished.

Filipinas Textile v. CA. As a final issue, Villanueva contended that the comprehensive surety agreement is null and void for lack of consent of Filtex and SIHI. He also alleged that SIHI materially altered the terms and conditions of the comprehensive surety agreement by granting Filtex an extension of the period for payment thereby releasing him from his obligation obligation as surety. We find these contentions specious.|| In the first place, the consent of Filtex to the surety ma y be assumed from the fact that Villanueva was the signatory to the sight drafts and trust receipts on behalf of Filtex . Moreover, in its  Answer with Counterclaim Filtex admitted the execution of the comprehensive surety agreement with the only qualification that it was not a means to induce SIHI to issue the domestic letters of credit. Clearly, had Filtex not consented to the comprehensive surety agreement, it could have easily objected to its validity and specifically denied the same. SIHIs consent to the surety is also understood from the fact that it demanded payment from both Filtex and Villanueva. As regards the purported material alteration of the terms and conditions of the comprehensive surety agreement, we rule that the extension of time granted to Filtex to pay its obligation did not release Villanueva from his liability  The neglect of the creditor to sue the principal at the time the debt falls due does not discharge the surety, even if such delay continues until the principal becomes insolvent. || The raison d’être for the rule is that there is nothing to prevent the creditor from proceeding against the principal at any time. At any rate, if the surety is dissatisfied with the degree of activity displayed by the creditor in the pursuit of his principal, he may pay the debt himself and become subrogated to all the rights and remedies of the creditor. Severino v. Severino. A guarantor or surety is bound by the same consideration that makes the contract effective between the principal parties thereto. (Pyle vs. Johnson, 9 Phil., 249.) The compromise and dismissal of a lawsuit is recognized in law as a valuable consideration; consideration; and the dismissal of the action which Felicitas Villanueva and Fabiola Severino had instituted against Guillermo Severino was an adequate consideration to support the promise on the part  of Guillermo Severino to pay the sum of money stipulated in the contract which is the subject of this action. The promise of the appellant Echaus as guarantor therefore binding. It is never necessary that the guarantor or surety should receive any part of the benefit , if such there be, accruing to his principal. But  the true consideration of this contract was the detriment suffered by the plaintiffs in the former action in dismissing that proceeding, and it is immaterial that  no benefit may have accrued either to the principal or his guarantor. Willex Plastic v. CA. CA. In El Vencedor vs. Canlas, Canlas, we held that a contract of suretyship “ is not retroactive and no liability attaches for defaults occurring before it  is entered into unless an intent to be so liable is indicated.” There we found nothing in the contract to show that the parties intended the surety bonds to

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Credit Transaction Finals Reviewer – case annotations Prof. Joven 2 nd semester, AY ’10-‘11

 Janz Hanna Ria N. Serrano  Serrano  provided  answer for the debt contracted previous to the execution of the bonds. In contrast, in this case, the parties to the “Continuing Guaranty” clearly provided  that the guaranty would cover “sums obtained and/or to be obtained” by Inter -Resin Inter -Resin Industrial from Interbank. || On the other hand, in Diño vs. Court of  Appeals, the issue was whether the sureties sureties could be held liable for an obligation contracted after the execution execution of the continuing surety agreement. It was hat by its very nature a continuing suretyship suretyship contemplates a future course course of dealing. “It is prospective in its operation and is generally intended to held t hat provide security with respect to future transactions.” By no means, however, was it meant in that case that in all instances a contract of guaranty or suretyship should be prospective in application . Diño v. CA. CA. A contract of guaranty stating that the same is to secure advance to be made from “time to time” is valid. It will be constru ed as a continuing guaranty/surety given to secure future debts and is not limited to a single transaction but which contemplates a future course of dealing, covering a series of  transactions generally for an indefinite period of time or until revoked.  Atok v. CA. Comprehensive or continuing surety agreements are in fact quite commonplace in present day financial and commercial practice. A bank or a financing company which anticipates entering into a series of credit transactions with a particular company, commonly requires the projected principal debtor to execute a continuing surety agreement along with its sureties. By executing such an agreement, the principal places itself in a position to enter into the projected series of transactions with its creditor; with such suretyship agreement, there would be no need to execute a separate surety contract or bond for each financing or credit accommodation extended to the principal debtor. As we understand it, this is precisely what happened in the case at bar.

Tañedo v. Allied Banking. The amendatory agreement between the respondent Allied Banking Corporation and Cheng Ban Yek & Co., Inc. extended the maturity of the promissory notes without notice or consent of the petitioner as surety of the obligations. However, the "cont inuing guarantee" executed by the petitioner provided that he consents and agrees that the bank may, at any time or from time to time extend or change the time of payments and/or the manner, place or terms of payment of all such instruments, loans, advances, credits or other obligations guaranteed by the surety. Hence, the extensions of the loans did not release the surety. || As to the second issue, even if the "continuing guarantee" were considered as one of adhesion, we find the contract of  "surety" valid because petitioner was "free to reject it entirely." Southern Motors v. Barbosa. Barbosa . The rights of guarantors under A2058 to demand exhaustion exists only when a pledge or mortgage has not been given as special security for the payment. A mortgagor is not entitled to exhaustion, because a mortgage directly and immediately subjects the property upon which it  is imposed. Baylon v. CA. CA. Baylon, as guarantor, is entitled to the right of excussion. The liabilities of a guarantor is only subsidiary. All properties of the debtor must first  be exhausted before the guarantor’s property may be levied upon. Since there is no judgment obtained against the principal debtor de btor in the case at bar, the guarantor cannot be held liable pursuant to A2062. Wise & Co. v. Tanglao. The POA empowers empowers David, as Tanglao’s agent, to enter into a contract of surety and a contract of mortgage. However, David used the POA only to mortgage the property but not to enter into a surety contract. Nothing is stated in the contract that Tanglao bec ame D’s surety surety – it cannot be inferred, since under the law, a guaranty must be express and can’t be presumed. Syquia v. Jacinto. Jacinto . The case against petitioner is premature. Up to present, the judgment creditor has made no demand on Palma. Joining him in the suit  against the principal debtor is NOT the demand intended in A1832 [OCC]. The demand can be made only after judgment on t he debt, f or or it is only that that G’s right of excussion may be determined.  Arroyo v. Jungsay. The property pointed out by the sureties is not sufficient to pay the indebtedness; it is not salable; it is so incumbered that third parties have, as we have indicated, full possession under claim of ownership without leaving to the absconding guardian a fractional or reversionary interest without  without  determining first whether the claim of one or more of the occupants is well founded. In all these respects the sureties have failed to meet the requirements of  article 1832 of the Civil Code. Luzon Steel Corp. v. Sia. The counterbond contemplated in the rule is evidently an ordinary guaranty where the sureties assume a subsidiary liability. This is not the case here, because the surety in the present case bound itself "jointly and severally" ( in solidum) solidum) with the defendant; and it is prescribed in Article 2059, paragraph 2, of the Civil Code of the Philippines that  excusion (previous exhaustion of the property of the debtor) shall not take place "if he (the guarantor) has bound himself solidarily with the debtor". The rule heretofore quoted cannot be construed as requiring that an execution against the debtor be first returned unsatisfied even if  the bond were a solidary one; for a procedural rule may not amend the substantive law expressed in the Civil Code, and further would nullify the express stipulation of the parties that the surety's obligation should be solidary with that of the defendant  Tower Assurance Corrp v. Ororama. Hearing before exhaustion can be issued against guarantor – A guarantor is entitled to be heard before an execution can be issued against him where he is not a party in the case involving his principal. Notice & hearing constitute the essence of procedural due process Cochingyan v. R&B Surety. Surety. The Surety Bond was not novated by the Trust Agreement. Both agreements can co-exist. The Trust Agreement merely furnished to PNB another party obligor to the Principal Obligation in addition to PAGRICO and R & B Surety. What the trust agreement did was, at most, merely to bring in another person or persons - the Trustors - to assume the same obligation that R & B Surety was bound to perform under the Surety Bond. It is not unusual in business for a stranger to a contract to assume obligations thereunder; thereunder; a contract of suretyship or guarantee is the classical example. The precise legal effect  is the increase of the number of persons liable to the obligee, and not t he extinguishment of the liability of the first debtor. Mercantile Insurance v. Ysmael. Ysmael . The stipulation in the indemnity agreement allowing the surety to recover even before it paid the creditor is enforceable. In accordance therewith, the surety may demand from the indemnitors even before paying the c reditors. [but after demand] PNB v. CA. CA . Surety should be discharged from liability under its surety bond; written consent and knowledge of the surety to an increase in the amount of the principal obligation is necessary. PBTC v. Tambunting. Tambunting. "The contract of absolute guaranty, ..., expressly authorized the plaintiff bank to extend the time of payment and to release or surrender any security or part thereof held by it without notice to, the consent of, Santana. He had consented in advance the release of the guaranty which the bank  might make, Santana cannot now complain that the release of the pledge was without his consent, and that it deprived hi m of the right to be subrogated to the rights of the creditor. The waiver is not contrary to law, nor is it contrary to public policy. The law does not prohibit the debtor-guarantor from agreeing in advance and without notice to the release of any security which had been given to assure payment of the obligation. The waiver is not contrary to public policy, because the right is purely personal, and does not affect public interest nor does it violate any public policy. Neither does the return of the shares of  stocks novate the original contract for the obligation remains the same; and if it is a novation, it is a novation made with the consent of Santana. Moreover, the pledge is merely an accessory obligation, and its release does not vary the terms of the pr incipal obligation." PNB v. Manila Surety. Surety . The Court of Appeals did not hold the Bank answerable for negligence in failing to collect  from  from the principal debtor but debtor but for its neglect in collecting the sums due to the debtor from the Bureau of Public Works, contrary to its duty as holder of an exclusive and irrevocable power of attorney to

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Credit Transaction Finals Reviewer – case annotations Prof. Joven 2 nd semester, AY ’10-‘11

 Janz Hanna Ria N. Serrano  Serrano  make such collections, since an agent is required to act with the care of a good father of a family (Civ. Code, Art. 1887) and becomes liable for the damages which the principal may suffer through his non-performance (Civ. Code, Art. 1884). Certainly, the Bank could not expect that the Bank would diligently perform its duty under its power of attorney, but because they could not have collected from the Bureau even if they had attempted to do so. It must not be forgotten that the Bank's power to collect was expressly made irrevocable, irrevocable, so that the Bureau of Public Works could very well refuse to make payments to the principal debtor itself, and a fortiori a fortiori reject any demands by the surety. Prudencio v. CA. There is, therefore, no question that as accommodation makers, petitioners would be primarily and unconditionally liable on the promissory promissory note to a holder for value, regardless of whether they stand as sureties or solidary co-debtors since such distinction would be entirely immaterial and inconsequential as far as a holder for value is concerned. Consequently, the petitioners cannot claim to have been released from their obligation simply because the time of payment of such obligation was temporarily deferred by PNB without their knowledge and consent. There has to be another basis for their claim of having been freed from their obligation. The question which should be resolved in this instant petition, therefore, is whether or not PNB can be considered a holder for value under Section 29 of the Negotiable Instruments Law such that the petitioners must be necessarily barred from setting up the defense of want of consideration or some other personal defenses which may be set up against a party who is not a holder in due course. Security Bank v. Cuenca. Cuenca . It has been held that a contract of surety “cannot extend to more than what is stipulated. It i s strictly construed against t he he creditor, every doubt being resolved against enlarging the liability of the surety. Manila Banking v. Teodoro. Teodoro. An assignment of rights, receivables, title or interest under a contract to guarantee an obligation, is, in effect, a pledge or mortgage and not an absolute conveyance of title which confers ownership on the assignee. In case of doubt as to whether a transaction is a  pledge/mortgage  pledge/mortgage or a dation in payment, the presumption presumption is in favor favor of pledge, the latter latter being the lesser transmission of rights and interests.  Arenas v. Raymundo. Raymundo. Jewelry delivered to agent for sale on commission was pledge by him without knowledge of owner to pawnshop which acted in good faith. Held : Contract of pledge null and void, since pledgor wasn’t the owner of the jewelry pledged. The business of pawnshops is alway s exposed to the contingency of receiving in pledge or security for the loans. Rural Bank v. CA. CA . Thus, as a result of the fraud upon Castro and the misrepresentation to the bank inflicted by the Valencias both Castro and the bank  committed mistake in giving their consents to the contracts. In other words, substantial mistake vitiated their consents given. For if Castro had been aware of  what she signed and the bank of the true qualifications of the loan applicants, it is evident that they would not have given their consents to the contracts. | From the foregoing, it is evident that the bank was as much , guilty as Castro was, of negligence in giving its consent to the contracts. It apparently relied on representations made by the Valencia spouses when it should have directly obtained the needed data from Castro who was the acknowledged owner of the property offered as collateral. Moreover, considering Castro's personal circumstances – her lack of education, ignorance and old age – she cannot be considered utterly neglectful for having been defrauded. On the contrary, it is demanded of petitioners to exercise the highest order of care and prudence in its business dealings with the Valencias considering that it is engaged in a banking business –a business affected with public interest. It should have ascertained Castro's awareness of what she was signing or made her understand what obligations she was assuming, considering that she was giving accommodation to, without any consideration from the Valencia spouses.  Alcantara v. Alinea. Alinea. If sum loaned is not paid, property of debtor would be considered as absolutely sold to creditor for said sum. Held : NO pactum commissorrium. we have in this case a contract of loan and a promise of sale of property, the price of which should be the amount loaned, if within a fixed period of time such amount should not be paid by the debtor-vendor. PC indicates the existence of the contracts of mortgage, or of pledge, or of  antichresis, none of which has coincided with the loan in question. question. Francisco Realty v. CA. CA . In the case at bar, the stipulations in the promissory note provide that, upon failure of spouses to pay interest, ownership of the property would be automatically transferred to A. Francisco and the deed of sale in its favor would be registered. These stipulations are in substance a pactum commissorium. commissorium. They embody the two elements of pactum commissorium, commissorium, to wit: (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; (2) that there should be a stipulation for an automatic appropriation by the creditor of the thing pledged or mortgaged in the event of non-payment of the principal obligation within the stipulated period Reyes v. Sierra. The act of the of the mortgagee in registering the property mortgaged in his own name upon the mortgagor’s failure to redeem the property would amount to the exercise of the privilege of a mortgagee in a pactum commissorium commissorium Uy Tong v. CA. CA. Buyer executed a Deed of Assignment in favor of seller of property sold, pursuant to a judgment rendered in an action for specific performance filed by the seller. Held : NO PC. There was no contract of pledge or mortgage entered into by the parties; nor a case of automatic appropriation of the property because it took the intervention of the trial court to exact fulfillment of the obligation. Olea v. CA. CA . It has been held that a contract should be construed as a mortgage or a loan instead of a pacto de retro sale when its terms are ambiguous or the circumstances surrounding its execution or its performance are incompatible or inconsistent with the theory that it is a sale. Even when a document appears on its face to be a sale with pacto de retro the owner of the property may prove that the contract is really a loan with mortgage by raising as an issue the fact that the document does not express the true intent and agreement of the parties. In this case, parol evidence then becomes competent and admissible to prove that the instrument was in truth and in fact given merely as a security for the repayment of a loan. And upon proof of the truth of such allegations, the court will enforce the agreement or understanding in consonance with the true intent of the parties at the time of execution of the contract. 5 This principle is applicable even if the purported Sale Con Pacto de Retro was registered in the name of the transferee and a new certificate of title was issued in the name of the latter. Dayrit v. CA. CA . All of the properties are liable for the totality of the debt and the creditor does NOT have to divide his action distributing the debt among the various things pledged/mortgaged. Even when only a part of the debt remains unpaid, all the things are liable for such balance. The debtor cannot ask for the release of one or some of the several properties pledged or mortgaged or the proportionate extinguishment of the pledge or mortgaged unless and  until the debt secured has been fully paid. Central Bank v. CA. CA. The rule of indivisivility presupposes several heirs of the debtor or creditor. It was held not applicable to a situation where out of an 80K loan agreement, only 17K was released, such that the real estate mortgage on the loan became unenforceable to the extent of 63K. Belo v. PNB. PNB . An accommodation mortgage is not necessarily void simply because the accommodation pledgor/mortgagor did not benefit from the same. Ordinarily, he is not himself a recipient of the loan, otherwise that would be contrary to his designation as such. It is not always necessary that he should be appraised beforehand of the entire amount of the loan. || An accommodation mortgagor as such is NOT in any way liable for the payment of the loan or principal obligation of the debtor/borrower. His liability extends only up to the loan value of his mortgaged property and not the entire loan itself. Hence, he may redeem his mortgaged property by paying only the winning bid price thereof at the public auction sale

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Credit Transaction Finals Reviewer – case annotations Prof. Joven 2 nd semester, AY ’10-‘11

 Janz Hanna Ria N. Serrano  Serrano   Ajax Marketing v. CA. CA . “x x x as well as those that the mortgagee may extend to the mortgagor”  clearly means that the mortgage is not limited to just the fixed amount but also covers other c redit accommodations in excess thereof. Such stipulation is valid and binding between the parties. Yuliongsui v. PNB. PNB . Because vessels pledged pledged remained in pledgor’s possession, merely “subject to the order of the pledge,” pledgor contended that pledge was not effective [property pledged = vessels used in maritime business] business] Held : The parties here agreed that the vessels be delivered by the pledgor to the pledgee who shall hold the property subject to the order of the pledge. Considering the circumstances of the case and the nature of the objects pledged, such delivery is sufficient  PaciComm v. National Bank. In the very nature of things, a pledge is confined and limited to personal property and it cannot be extended or made to apply to real property. PNB v. Atendido. Atendido . . The delivery of said palay being merely by way of security, it follows that by the very nature of the transaction its owner ship remains with the pledgor subject only to foreclose in ca se of non-fulfillment of the obligation. By this we mean that if the obligation is not paid upon maturity the most that  the pledgee can do is to sell the property and apply the proceeds to the payment of the obligation and to return the balance, if any, to the pledgor (Article 1872, Old Civil Code). This is the essence of this contract, for, according to law, a pledgee cannot become the owner of, nor appropriate to himself, the thing given in pledge (Article 1859, Old Civil Code). If by the contract of pledge the pledgor continues to be the owner of the thing pledged during the pendency of  the obligation, it stands to reason that in case of loss of the property, the loss should be borne by the pledgor. The fact that the warehouse receipt covering the palay was delivered, endorsed in blank, to the bank does not alter the situation, the purpose of such endorsement being merely to transfer the juridical possession of the property to the pledgee and to forestall any possible disposition disposition thereof on the part of the pledgor. Caltex v. CA. CA. The requirement of recording in a public instrument is not a mere rule of adjective law prescribing the mode whereby proof may be made of the date of the pledge contract, but a rule of substantive law prescribing a condition without which the execution of a contract of pledge cannot affect 3 rd persons adversely. Sarmiento and Villasenor v. Javellana. Javellana . From the foregoing it follows that, as the jewels in question were in the possession of the defendant to secure the payment of a loan of P1,500, with interest thereon at the rate of 25 per cent per annum from Augusts 31, 1911, to August 31, 1912, and the defendant having subsequently extended the term of the loan indefinitely, and so long as the value of the jewels pledged was sufficient to secure the payment of the capital and the accrued interest, the defendant is bound to return the jewels or their value (P12,000) to plaintiffs, and the plaintiffs have the right to demand the same upon the payment by them of the sum of P1,5000, plus t he interest thereon at the rate of 25 per c ent per annum from August 28, 1911. Manila Surety v. Velayo. Velayo . The creditor may sue on the principal obligation instead of electing to sell the thing pledged, and in such case, he may recover the deficiency from the debtor Isaguirre v. de Lara. Lara . A mortgage does not give a mortgagee a right to the possession of the property unless the mortgage should contain some provision to that effect  Canlas v. CA. CA. Doctrine of mortgagee in good faith: Rule does NOT apply to banks which should exercise more care and prudence in dealing with registered lands, than private individuals, for their business is one affected with public interest  Samanilla v. Cajucom. Cajucom. Registration only operates as a notice of the mortgage to others but neith adds to its validity nor converts an invalid mortgage into a valid one between the parties. || Until such action is filed and decided, it would be dangerous to the rights of the mortgagee to deny registration of his mortgage because his rights may be easily defeated by a transfer or conveyance of the mortgaged property to an innocent 3 rd person. If the purpose of  registration is merely to give notice, the questions regarding the effect or invalidity of instruments are expected to be decided after, not before, registration. it  must follow as a necessary consequence that registration must first be allowed and its validity or effect litigated afterwards. Mobil Phils. v. Diocares. Diocares . An order of foreclosure cannot be refused on the ground that the mortgage had not been registered, provided no innocent third parties are involved. Cruz v. Bancom Finance. The due diligence required of banks extends even to persons regularly engaged in the business of lending money secured by REM Medida v. CA. CA . What is divested from the mortgagor is only his full right as owner thereof to dispose of and sell t he property, i.e., the mortgagor does not have the unconditional power to absolutely sell the property since the same is encumbered by a lien of a third person.  Actually, what is delimited in NOT the mortgagor’s jus disponendi, as an attribute of ownership, but merely the rights conferred by such act of disposal which may c  orrespondingly be restricted. || Since the mortgagor remains the absolute owner dutring the redemption period and has the free disposal of his property  constitution of  another mortgage = valid || Title to the property sold under a mortgage foreclosure remains with the mortgagor or hs grantee until the expiration of the redemption period expires. The right of the purchaser is merely inchoate until after the period of redemption has expired wit hout the right being exercised || Redemption by the debtor eliminates from his title the lien created by the levy or attachment or judgment or registration of the mortgage thereon. the redemption defeats the inchoate right of the purchaser and restores the property to the same condition as if no sale had been made DBP v. CA. CA. Mortgagor appoints mortgagee in deed of assignment as atty-in-fact with authority to dispose of mortgaged properties in case of default of  mortgagor and to apply the proceeds in the payment of the loan. Held : No PC, but DBP exceeded authority vested by condition because without foreclosure proceedings, whether judicial or extra-judicial, appropriated the leasehold rights of plaintiff over t he fishpond in question PBTC v. Dahican. Dahican. A stipulation subjecting to the mortgage lien, properties [improvements], which the mortgagor may subsequently acquire, install or use in connection with real property already mortgaged belonging to the mortgagor is valid. Such stipulation is neither unlawful nor immoral, its obvious purpose being to maintain, to the extent allowed by the circumstances, the original value of the properties given as security Mojica v. CA. CA . “…for the payment of loan of 20K and for such other loans or advances already obtained or still to be obtained by the mortgagors as makers.” makers.” – dragnet clause valid || “Where the annotation on the back of a certificate of title about a first mortgage states “t hat hat the mortgage secured the payment of a certain sum of money plus interest plus other obligations arising thereunder,” there was no necessity for any annotation annotation of the later loans on the mortgagor’s title. It was incumbent upon any subsequent mortgagee t o examine the books and records of the bank, as firs mortgagee regarding the standing of  the debtor.” Santiago v. Pioneer Savings . The assignment of receivables made by the original mortgagee, FINASIA, to Defendant Bank was valid, since a mortgage credit  may be alienated or assigned to a third person, in whole or in part, with the formalities required by law. 7 Said formalities were complied with in this case. The assignment was made in a public instrument and proper recording in the Registry of Property was made. 8 While notice may not have been given to plaintiffappellant personally, the publication of the Notice of Sheriff's Sale, as required by law, is notice to t he whole world.

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Credit Transaction Finals Reviewer – case annotations Prof. Joven 2 nd semester, AY ’10-‘11

 Janz Hanna Ria N. Serrano  Serrano  Prudential Prudential Bank v. Alviar. Alviar. A dragnet c lause operates as a convenience and accommodation to the borrowers as it makes it available additional funds without  their having to execute additional security documents, thereby saving time, travel, loan closing costs, costs of extra legal services, recording fees, etc. || A mortgage must sufficiently describe the debt sought to be secured and an obligation is not secured by a mortgage unless it c omes fairly within the terms of the mortgage. Caltex v. IAC. IAC. When the mortgagee chooses the foreclosure of the mortgage as a remedy, he enforces his lien by the sale on foreclosure of the mortgaged property. The proceeds of the sale will be applied to the satisfaction of the debt. With this remedy, he has a prior lien on the property. In case of a deficiency, the mortgagee has the right to claim for the deficiency resulting from the price obtained in the sale of the real property at public auction and the outstanding obligation at the time of the foreclosure proceedings || On the other hand, if the mortgagee resorts to an action to collect the debt, he thereby waives his mortgage lien. He will have no more priority over the mortgaged property. If the judgment in the action to collect is favorable to him, and it becomes final and executory, he can enforce said judgment by execution. He can even levy execution on the same mortgaged property, but he will not have priority over the latter and there may be other creditors who have better lien on the properties of the mortgagor. Pineda v. CA. CA. Therefore, TCT 13138 issued in the name of Mojica is void. However, what is void is the transfer certificate of title and not the not  the title over the Property. The title refers to the ownership of the Property covered by the transfer certificate of title while the transfer certificate of title merely evidences that  ownership. A certificate of title is not equivalent to title. The prior mortgage of the Property by the Spouses Benitez to Pineda and Sayoc did not prevent the Spouses Benitez, as owners of the Property, from selling the Property to Mojica. A mortgage is merely an encumbrance on the property and does not  extinguish the title of the debtor who does not lose his principal attribute as owner to dispose of the property. The law even considers void a stipulation forbidding the owner of the property from alienating the mortgaged immovable. Sy v. CA. CA . It must be emphasized that the above section is applicable not only to "banks and banking institutions," but also to "credit institutions." And, as certified by the Central Bank,* SIHI is a credit institution, i.e. financial intermediary engaged in quasi-banking functions within the purview of Section 78, it  being an entity authorized to engage in the lending of funds or purchasing of receivables or other obligations obligations with funds obtained from the public as provided in the General Banking Act under Section 2-A (a); ** and, to lend, invest or place funds deposited with them, acquired by them or otherwise coursed through them, either for their own account or for the account of others under Section 2-D(c) Selegna v. UCPB. UCPB . Foreclosure is valid only when the debtor is in default in the payment of his obligation Makati Leasing v. Wearever Textile. Textile. To be able to secure financial accommodations from the petitioner, the private respondent discounted and assigned several receivables under a Receivable Purchase Agreement. To secure the collection of the receivables, a chattel mortgage was executed over machinery found in the factory of the private respondent . respondent . As the private respondent failed to pay, the mortgage was extrajudicially extrajudicially foreclosed. Nonetheless, the sheriff sheriff was unable unable to seize the machinery. machinery. This prompted petitioner to file an action for replevin.

There is no logical justification to exclude the rule out that the machinery may be considered as personal property, and subject to a chattel mortgage. If a house may be considered as personal personal property for purposes of executing a chattel mortgage, what more a machinery, which is movable by nature and becomes immobilized immobilized only only by destination or purpose, may not be likewise treated as such. Tumalad doctrine applies.

The CA reversed the decision of the trial court and ordered ordered the return of the drive motor, after ruling that the machinery may not be the subject of a chattel mortgage, given that it was an immovable under the provisions of  Article 415. The same was attached to the ground ground by means of bolts and the only way to remove it from the plant would be to drill the ground. Torres v. Limjap. Limjap. Coverage of c hattel mortgage extends only to property described therein | stipulation including after-acquired property valid and binding WHERE, the after-acquired property is in renewal of, or ins substitution for goods on hand when the mortgage was executed Tumalad v. Vicencio Vicencio.. Vicencio and Simeon executed a chattel mortgage in favor of the Tumalads over their house of strong materials located at 550 Int. 3, Quezon Boulevard, Quiapo, Manila, over Lot 6-B and 7-B, Block 2554, which were being rented from Madrigal & Company, Inc. When Vicencio and Simeon defaulted in paying, the mortgage was extrajudicially foreclosed, and on 27 March 1956, the house was sold at  public auction pursuant to the said contract. As highest bidder, the Tumalads were issued the corresponding certificate of sale. On 18 April 1956, the Tumalads commenced Civil Case 43073 in the municipal court of Manila, praying, among other things, that the house be vacated and its possession surrendered to them, and for Vicencio and Simeon to pay rent of P200.00 monthly from 27 March 1956 up to the time the possession is surrendered. MC ruled in favor of Tumalad

Certain deviations from the rule in Lopez and Iya, however, have been allowed for various reasons. Hence, if a house belonging to a person stands on a rented land belonging to another person, it may be mortgaged as a personal property as so stipulated in the document of mortgage. It should be noted, however that  the principle is predicated on statements by the owner declaring his house to be a chattel, a conduct that may conceivably estop him from subsequently claiming otherwise. Unlike in the Iya cases, Lopez vs. Orosa, Jr. and Plaza Theatreand Leung Yee vs. F. L. Strong Machinery and Williamson, wherein third persons assailed the validity of the chattel mortgage, it is the defendants-appellants themselves, as debtors-mortgagors, who are attacking the validity of the chattel mortgage in this case. The doctrine of estoppel therefore applies to the herein defendants-appellants, having treated the subject house as personalty.

Nearly a year after the foreclosure sale the mortgaged house had been demolished on 14 and 15 January 1957 by virtue of a decision obtained by the lessor of the land on which t he house stood.  Acme Shoe v. CA. CA. Refusal on the part of the borrower to execute such agreement so as t o 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 recover the debts extant at the time of the constitution and during the life of the CM sought to be foreclosed. Servicewide Specialist v. CA. CA . Applying by analogy CC, 2128, a chattel mortgage credit may be alienated or assigned to a 3rd person. The rule is settled that the chattel mortgagor continues to be the owner of the property, and therefore, has the power to alienate the same; however, he is obliged under pain of penal

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Credit Transaction Finals Reviewer – case annotations Prof. Joven 2 nd semester, AY ’10-‘11

 Janz Hanna Ria N. Serrano  Serrano  liability, to secure the written consent of the mortgagee. (Francisco, Vicente, Jr., Revised Rules of Court in the Philippine s, (1972), Volume IV-B Part 1, p. 525). Thus, the instruments of mortgage are binding, while they subsist, not only upon the parties executing them but also upon those who later, by purchase or otherwise, acquire the properties properties referred to therein. || The absence of the written consent of the mortgagee to the sale of the mortgaged property in favor of a third person, therefore, affects not the validity of the sale but only the penal liability of the mortgagor under the Revised Penal Code and the binding effect of  such sale on the mortgagee under the Deed of Chattel Mortgage. Dy v. CA. CA. The mortgagor who gave the property as security under a chattel mortgage did not part with the ownership over the same. He had the right to sell it  although he was under the obligation to secure the written consent of the mortgagee or he lays himself open to criminal prosecution under the provision of  Article 319 par. 2 of the Revised Penal Code. And even if no consent was obtained from the mortgagee, the validity of the sale would still not be affected. Pameca Wood Treatment Plant v. CA. CA . Where the obligation is one of a loan by a chattel mortgage and not a sale where the price is payable on installments, an independent civil action may be instituted for the recovery of said deficiency if after extra judicial foreclosure of such chattel mortgage a deficiency exist. If  the mortgagee has foreclosed the mortgage judicially, he may ask for the execution of the judgment against any other property of the mortgagor for the payment of the balance. To deny to the mortgagee the right to maintain an action to recover the deficiency after foreclosure of the chattel mortgage would be to overlook the fact that the chattel mortgage is only given as a security and not as payment for the debt in case of failure of payment. || Under Article 1216 of  the Civil Code, the creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The demand made against one of them shall not be an obstacle to those which may subsequently be directed against the others, so long as the debt has not been fully collected. And therefore, where the private respondent binds himself solidarily solidarily with the principal debtor to pay the latter's debt, he may be proceeded against by the principal debtor. Private respondent as solidary co- maker is also a surety (Art. 2047) and that under the law, the bringing of an action against the principal debtor to enforce the payment of the obligation is not inconsistent with, and does not preclude, the bringing of another action to compel the surety to fulfill his obligation under the agreement  Superlines v. ICC. ICC . The evidence on record shows that under the Promissory Note, Chattel Mortgage and Continuing Guaranty, respondent was the creditormortgagee of petitioner Superlines and not the vendor of the new buses. Hence, petitioners cannot find refuge in Article 1484(3) of the New Civil Code. As correctly held by the Court of Appeals, what should apply was the Chattel Mortgage executed by petitioner Superlines and respondent in relation to the Chattel Mortgage Law. Law.28 This Court had consistently ruled that if in a n extra-judicial foreclosure of a chattel mortgage a deficiency exists, an independent civil action may be instituted for the recovery of said deficiency. To deny the mortgagee the right to maintain an action to recover the deficiency after foreclosure of  the chattel mortgage would be to overlook the fact that the chattel mortgage is only given as security and not as payment for the debt in case of failure of  payment .29 Both the Chattel Mortgage Law and Act 3135 governing extra-judicial foreclosure of real estate mortgage, do not contain any provision, expressly or impliedly, precluding the mortgagee from recovering deficiency of the principal obligation. California Bus Line v. SIHI. SIHI. Delta and CBLI entered into a compromise agreement wherein the latter agreed that Delta would exercise its right to extrajudicially foreclose on the chattel mortgages over the 35 buses. However, CBLI refused to pay SIHI the value of the 5 promissory notes arguing that the compromise compromise agreement was in full settlement of its obligations to Delta including the said promissory notes. || the restructuring agreement did not expressly state that it would novate the promissory notes Pando v. Gimenez. Gimenez . The right which the creditor acquires by virtue of antichresis to enjoy the fruits of the property delivered to him, carries two obligations which are a necessary consequence of the contract, because they arise from its very nature. || And the plaintiff having failed in his obligation to pay the tax on the house and the rent of the lot, he is by law required to pay indemnity for damages Considering the evidence of record as to the value and condition of the house and the improvements made by the appellant upon said lot, as well as the other circumstances of the case the total amount of the damages sustained by said appellant must be fixed at P5,000 DBP v. NLRC. NLRC . Thus, the right of preference as regards unpaid wages in LC, 110 DOES NOT constitute a lien on the property of the insolvent debtor in favor of  workers. It is but a preference of credit in their favor, a preference in application. It is a method adopted to determine and specify the order in which credits should be paid in the final distribution of the proceeds of the insolvent’s assets. it is a right to a first preferen ce in the discharge of the funds of  the judgment debtor || debtor  || The preference given to workers in LC, 110 when not falling within 2241(6) and 2242(3) and not attached to any specific property is an ordinary preferred credit although its impact is to move it from 2nd  priority to 1 st  priority in the order of preference established by A2244 || What   A2244 creates are simply simply rights in favor of certain certain creditors to have the cash cash and other assets of the insolvent applied applied in a certain sequence sequence or order of   priority   Atlantic Erectors v. Herbal Cove. Cove. As a general rule, the only instances in which a notice of  lis pendens may be availed of are as follows: (a) an action to recover possession of real estate; (b) an action for partition; and (c) any other court proceedings that directly affect the title to the land or the building thereon or the use or the occupation thereof . 10 Additionally, this Court has held that resorting to lis pendens is not necessarily confined to cases that involve title to or possession of real property. This annotation also applies to suits seeking to establish a right to, or an equitable estate or interest in, a specific real property; or to enforce a lien, a charge or an encumbrance against it . ||Apparently, petitioner proceeds on the premise that its money claim involves the enforcement of a lien. Since the money claim is for the nonpayment of materials and labor used in the construction of townhouses, the lien referred to would have to be that  provided under Article 2242 of the Civil Code. || However, a careful examination of petitioners Complaint, as well as the reliefs it seeks, reveals that no such lien or interest over the property was ever al leged. The Complaint merely asked for the payment of construction services and materials plus damages, without  mentioning -- much less asserting -- a lien or an encumbrance over the property. Verily, it was a purely personal action and a simple collection case. It did not  contain any material averment of any enforceable right, interest or lien in connection with the subject property. || As it is, petitioners money claim cannot be characterized as an action that involves the enforcement of a lien or an encumbrance, one that would thus warrant the annotation of the Notice of Lis of Lis Pendens. Indeed, the nature of an action is determined by the allegations of the complaint. Consuelo Metal v. Planters Bank . Foreclosure proceeding have in their favor the presumption of regularity and the burden of evidence to rebut the same is on the party that seeks to challenge the proceedings.