041. Yau Chu v. Court of Appeals.doc

041. Yau Chu v. Court of Appeals G.R. No. L-78519/26 September 1989/First Division/Petition for Review on Certiorari Victoria Yau Chu (assisted by her husband, Michael) – petitioners Court of Appeals, Family Savings Bank, and/or CAMS Trading Enterprises, Inc. – respondents Decision by J. Grino-Aquino, Digest by Pip Short Version: Victoria bought cement from CAMS and secured her payments with deeds of assignment over her time deposits in Family Savings Bank. She assigned about P320K worth but her obligations to CAMS came up to about P404K. CAMS requested the bank to encash the time deposit certificates, which the bank did only after calling up and obtaining Victoria’s consent. Victoria then sued the bank and CAMS for alleged pactum commissorium. The Court ruled against her, as the prohibition on pactum commissorium was enacted in order to protect debtors from creditors who automatically appropriate pledged or mortgaged property which might have a higher value than the debt. Where the security for the debt is also money deposited in a bank, the amount of which is even less than the debt, it is not illegal for the creditor to encash the time deposit certificates to pay the debtors’ overdue obligation, with the latter’s consent. Facts: Since 1980, Victoria Yau Chu had been purchasing cement on credit from CAMS. To guaranty payment for her cement withdrawals, she executed in favor of CAMS deeds of assignment of her time deposits in Family Savings Bank. The total amount came up to P320K. Except for serial numbers and the dates of the time deposit certificates, the deeds of assignment prepared by Victoria’s lawyer uniformly read: ... That the assignment serves as a collateral or guarantee for the payment of my obligation with the said CAMS TRADING ENTERPRISES, INC. on account of my cement withdrawal from said company, per separate contract executed between us. In July 1980, CAMS notified the bank that Victoria had an unpaid account with it in the sum of about P314K and requested the encashment of the time deposit certificates assigned to it by Victoria. As proof, it submitted to the bank a letter from Victoria admitting her outstanding account with CAMS reaching P404.5K. The bank verbally advised Victoria of CAMS’ request and after she verbally agreed, the bank encashed the certificates and delivered about P283K because one time deposit lacked the proper signatures. Victoria then turned around and demanded that the bank and CAMS restore her time deposit. When both refused, she filed a complaint to recover the sum from them before the RTC of Makati. The RTC dismissed the complaint for lack of merit. Court of Appeals affirmed. Before the Supreme Court she argued that the encashment of her time deposit certificates was pactum commissorium. Issue: Did the encashment of Victoria’s time deposit certificates amount to pactum commissorium? NO. Ruling: Petition denied. Ratio: Since the collateral in this case was also money, there was no need to sell the thing pledged at public auction in order to satisfy the pledgor’s obligation. All that had to be done to convert the pledgor's time deposit certificates into cash was to present them to the bank for encashment after due notice to the debtor.

The encashment of the deposit certificates was not a pactum commissorium as prohibited under Article 2088 of the Civil Code. A pactum commissorium is a provision for the automatic appropriation of the pledged or mortgaged property by the creditor in payment of the loan upon its maturity. This prohibition is intended to protect the obligor, pledgor, or mortgagor against being overreached by his creditor who holds a pledge or mortgage over property whose value is much more than the debt. Where, as in this case, the security for the debt is also money deposited in a bank, the amount of which is even less than the debt, it is not illegal for the creditor to encash the time deposit certificates to pay the debtors’ overdue obligation, with the latter’s consent. Voting: Narvasa, Cruz and Medialdea, JJ., concur. Gancayco, J., no part.