Credit Transactions Case Digest.pdf

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PART I: CONCEPT OF CREDIT TRANSACTIONS PART II: LOAN (Articles 1933 – 1961) I. II.

Concept Commodatum PAJUYO VS. CA

FACTS: In June 1979, petitioner Pajuyo paid P400 to a certain Perez for the rights over a 250-square meter lot in Quezon City. Pajuyo then constructed a house on the lot and he and his family lived in the house from 1979 to 1985. On 8 December 1985, Pajuyo and private respondent Guevarra executed a Kasunduan or agreement. Pajuyo, as owner of the house, allowed Guevarra to live in the house for free provided Guevarra would maintain the cleanliness and orderliness of the house. Guevarra promised that he would voluntarily vacate the premises on Pajuyos demand. In September 1994, Pajuyo informed Guevarra of his need of the house and demanded that Guevarra vacate the house. Guevarra refused. Pajuyo filed an ejectment case against Guevarra with the MTC. Guevarra claimed that Pajuyo had no valid title or right of possession over the lot because the lot is within the 150 hectares set aside by Proclamation No. 137 for socialized housing. Guevarra pointed out that from December 1985 to September 1994, Pajuyo did not show up or communicate with him. Guevarra insisted that neither he nor Pajuyo has valid title to the lot (both were squatters).

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the agreement is not for a price certain. ISSUE: Whether or not the contractual relationship between Pajuyo and Guevarra was that of a commodatum. HELD: No. In a contract of commodatum, one of the parties delivers to another something not consumable so that the latter may use the same for a certain time and return it. Essential features of commodatum:  it is gratuitous.  the use of the thing belonging to another is for a certain period Thus, the bailor cannot demand the return of the thing loaned until after expiration of the period stipulated, or after accomplishment of the use for which the commodatum is constituted. If the bailor should have urgent need of the thing, he may demand its return for temporary use. If the use of the thing is merely tolerated by the bailor, he can demand the return of the thing at will, in which case the contractual relation is called a precarium, which is a kind of commodatum. The Kasunduan reveals that the accommodation accorded by Pajuyo to Guevarra was not essentially gratuitous. While the Kasunduan did not require Guevarra to pay rent, it obligated him to maintain the property in good condition. The imposition of this obligation makes the Kasunduan a contract different from a commodatum.

MTC rendered its decision in favor of Pajuyo. Pajuyo allowed Guevarra to use the house only by tolerance. Thus, Guevarras refusal to vacate the house on Pajuyos demand made Guevarras continued possession of the house illegal. RTC affirmed the MTC decision in toto.

The effects of the Kasunduan are also different from that of a commodatum. Case law on ejectment has treated relationship based on tolerance as one that is akin to a landlordtenant relationship where the withdrawal of permission would result in the termination of the lease. The tenants withholding of the property would then be unlawful.

CA reversed the MTC and RTC rulings and declared that Pajuyo and Guevarra illegally occupied the contested lot which the government owned. CA also declared that Pajuyo and Guevarra are in pari delicto or in equal fault. Moreover, the Kasunduan is not a lease contract but a commodatum because

Even assuming that the relationship between Pajuyo and Guevarra is one of commodatum, Guevarra as bailee would still have the duty to turn over possession of the property to Pajuyo, the bailor. The obligation to deliver or to return the thing received attaches to contracts for safekeeping,

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or contracts of commission, administration and commodatum.

Doronilla issued 3 postdated checks, all of which were dishonored.

Guevarra freely entered into the Kasunduan. Guevarra cannot now impugn the Kasunduan after he had benefited from it. The Kasunduan binds Guevarra.

Vives received a letter from Doronilla assuring him that his money was intact and would be returned to him. Doronilla issued a postdated check for P212k in favor of Vives. However, upon presentment to the drawee bank, the check was dishonored. Doronilla requested Vives to present the same check on a later date but it was again dishonored.

The Kasunduan is not void for purposes of determining who between Pajuyo and Guevarra has a right to physical possession of the contested property. The Kasunduan is the undeniable evidence of Guevarras recognition of Pajuyos better right of physical possession. Guevarra is clearly a possessor in bad faith. The absence of a contract would not yield a different result, as there would still be an implied promise to vacate. PRODUCERS BANK VS. CA FACTS: Sometime in 1979, private respondent Vives was asked by his neighbor and friend Sanchez to help her friend, Col. Doronilla, in incorporating his business (Sterela). Sanchez asked Vives to deposit in a bank a certain amount of money in the bank account of Sterela for purposes of its incorporation. She assured Vives that he could withdraw his money from said account within a months time. Vives, Sanchez, Doronilla and a certain Dumagpi, Doronillas private secretary, met and discussed the matter. Relying on the assurances and representations of Sanchez and Doronilla, Vives issued a check in the amount of P200k in favor of Sterela which was subsequently deposited under Sterela's account. Subsequently, Vives learned that Sterela was no longer holding office in the address previously given to him. He went to the Bank to verify if their money was still intact. Atienza, the assistant manager, informed them that part of the money had been withdrawn by Doronilla, and that only P90k remained therein. He likewise told them that they could not withdraw the remaining amount because it had to answer for some postdated checks issued by Doronilla. Sterela, through Doronilla, obtained a loan of P175k from the Bank. To cover payment,

Vives referred the matter to a lawyer, who made a written demand upon Doronilla for the return of his clients money. Doronilla issued another check but was again dishonored for insufficiency of funds. Vives instituted an action for recovery of sum of money in the RTC against Doronilla, Sanchez, Dumagpi and Producers Bank. He also filed criminal actions against Doronilla, Sanchez and Dumagpi in the RTC. RTC rendered a decision in favor of Vives. CA affirmed the decision of the RTC in Toto. Petitioner contends that the transaction between private respondent and Doronilla is a simple loan (mutuum) since all the elements of a mutuum are present: first, what was delivered by private respondent to Doronilla was money, a consumable thing; and second, the transaction was onerous as Doronilla was obliged to pay interest, as evidenced by the check issued by Doronilla in the amount of P212k, or P12k more than what Vives deposited in Sterelas bank account. ISSUE: Whether or not the transaction between Doronilla and Vives was one of simple loan or mutuum. HELD: No, it was a commodatum. Article 1933 of the Civil Code distinguishes between the two kinds of loans in this wise: By the contract of loan, one of the parties delivers to another, either something not consumable so that the latter may use the same for a certain time and return it, in which case the contract is called a commodatum; or money or other consumable thing, upon the condition that the same amount of the same kind and quality shall be paid, in which case

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the contract is simply called a loan or mutuum. Commodatum is essentially gratuitous. Simple loan may be gratuitous or with a stipulation to pay interest. In commodatum, the bailor retains the ownership of the thing loaned, while in simple loan, ownership passes to the borrower. The foregoing provision seems to imply that if the subject of the contract is a consumable thing, such as money, the contract would be a mutuum. However, there are some instances where a commodatum may have for its object a consumable thing.

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that the bailee in commodatum acquires the use of the thing loaned but not its fruits. Hence, it was only proper for Doronilla to remit the interest. Neither does the Court agree with petitioners contention that it is not solidarily liable for the return of private respondents money because it was not privy to the transaction between Doronilla and Vives. Under Article 2180 of the Civil Code, employers shall be held primarily and solidarily liable for damages caused by their employees acting within the scope of their assigned tasks.

Article 1936 of the Civil Code provides: Consumable goods may be the subject of commodatum if the purpose of the contract is not the consumption of the object, as when it is merely for exhibition. Thus, if consumable goods are loaned only for purposes of exhibition, or when the intention of the parties is to lend consumable goods and to have the very same goods returned at the end of the period agreed upon, the loan is a commodatum and not a mutuum. The rule is that the intention of the parties thereto shall be accorded primordial consideration in determining the actual character of a contract. The evidence shows that Vives agreed to deposit his money in the savings account of Sterela for the purpose of making it appear that said firm had sufficient capitalization for incorporation, with the promise that the amount shall be returned within 30 days. Vives merely accommodated Doronilla by lending his money without consideration, as a favor to Sanchez. It was however clear to the parties to the transaction that the money would not be removed from Sterelas savings account and would be returned to Vives after 30 days. Doronillas attempts to return the amount did not convert the transaction from a commodatum into a mutuum because such was not the intent of the parties and because the additional P12k corresponds to the fruits of the lending of the P200k. Article 1935 of the Civil Code expressly states

Atienzas acts of helping Doronilla, a customer of the petitioner, were obviously done in furtherance of petitioners interests. It was established that the transfer of funds from Sterelas savings account to its current account could not have been accomplished by Doronilla without the invaluable assistance of Atienza, and that it was their connivance which was the cause of private respondents loss. Under Article 2180 of the Civil Code, petitioner is liable for private respondents loss and is solidarily liable with Doronilla and Dumagpi for the return of the P200k since it is clear that petitioner failed to prove that it exercised due diligence to prevent the unauthorized withdrawals from Sterela's savings account. MINA VS. PASCUAL FACTS: Francisco Fontanilla and Andres Fontanilla were brothers. Francisco acquired a lot in Laoag, the property having been awarded to him through its purchase at a public auction. Andres, with the consent of his brother Francisco, erected a warehouse on a part of the said lot. Francisco, the former owner of the lot, being dead, the plaintiffs, Alejandro Mina, et al., were recognized as his heirs. Andres, the former owner of the warehouse, also having died, the children of Ruperta Pascual were recognized (though it is not said how) and consequently are entitled to the said building. The plaintiffs and the defendants are the owners of the warehouse, while the plaintiffs

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are undoubtedly, the owners of the part of the lot occupied by that building, as well as of the remainder thereof. This was the state of affairs when on May 6, 1909, Ruperta Pascual, as the guardian of her minor children (defendants), petitioned the CFI for authorization to sell "the 6/7 of the one-half of the warehouse, of 14 by 11 meters, together with its lot." The plaintiffs opposed the petition of Ruperta Pascual for the reason that the latter had included the lot occupied by the warehouse, which they claimed was their exclusive property. The plaintiffs requested the court to decide the question of the ownership of the lot before it pass upon the petition for the sale of the warehouse. But the court before determining the matter of the ownership of the lot occupied by the warehouse, ordered the sale of the building. The warehouse, together with the lot, was sold to Cu Joco (P2890) at a public auction. The plaintiffs insisted upon a decision of the question of the ownership of the lot, and the court decided it by holding that the land belonged to the owner of the warehouse which had been built thereon thirty years before. The plaintiffs appealed and this court reversed the judgment of the lower court and held that the appellants were the owners of the lot in question. When the judgment became final and executory, a writ of execution was issued and the plaintiffs were given possession of the lot; but soon thereafter the trial court annulled this possession for the reason that it affected Cu Joco, who had not been a party to the suit in which that writ was served. It was then that the plaintiffs commenced the present action for the purpose of having the sale of the said lot declared null and void and of no force and effect. An agreement was had add to the facts, the ninth paragraph of which is as follows: 9. That the herein plaintiffs excepted to the judgment and appealed therefrom to the

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Supreme Court which found for them by holding that they are the owners of the lot in question, although there existed and still exists a commodatum by virtue of which the guardianship (meaning the defendants) had and has the use, and the plaintiffs the ownership, of the property, with no finding concerning the decree of the lower court that ordered the sale. ISSUE: Whether or not there is a contract of commodatum. HELD: No. Although both litigating parties may have agreed in their idea of the commodatum, it is not, a question of fact but of law. The denomination given by them to the use of the lot granted by Francisco Fontanilla to his brother, Andres Fontanilla, is not acceptable. Contracts are not to be interpreted in conformity with the name that the parties thereto agree to give them, but must be construed, duly considering their constitutive elements, as they are defined and denominated by law. By the contract of loan, one of the parties delivers to the other, either anything not perishable, in order that the latter may use it during the certain period and return it to the former, in which case it is called commodatum . . . (art. 1740, Civil Code). It is, therefore, an essential feature of the commodatum that the use of the thing belonging to another shall for a certain period. Francisco Fontanilla did not fix any definite period or time during which Andres Fontanilla could have the use of the lot whereon the latter was to erect a stone warehouse of considerable value, and so it is that for the past 30 years of the lot has been used by both Andres and his successors in interest. The present contention of the plaintiffs that Cu Joco, now in possession of the lot, should pay rent for it at the rate of P5 a month, would destroy the theory of the commodatum sustained by them, since, according to the second paragraph of the aforecited article 1740, "commodatum is essentially

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gratuitous," With that expectation in view, it appears more likely that Francisco intended to allow his brother Andres a surface right; but this right supposes the payment of an annual rent, and Andres had the gratuitous use of the lot.

FELIX DE LOS SANTOS VS AGUSTINA JARRA (1910 CASE) FACTS: Felix de los Santos brought suit against Agusitina Jarra (the administratrix of the estate of Magdaleno Jimenea, he alleges that Jimenea borrowed and obtained from the plaintiff 10 first class carabos, to be used at the animal power mill of Jimenea’s hacienda, without recompense or remuneration for the use of it and under the sole condition that they should be returned to the owner as soon as the work at the mill was terminated. Jimenea however, did not return the carabaos even though de los Santos claimed their return after the work at the mill was finished. Jimenea died in 1904 (before the suit) and Jarra was appointed by the CFI as administratrix of his estate. De los Santos presented his claim to the commissioners of the estate of Jimenea for return of the carabaos. (for the carabaos to be exluded from the estate of Jimenea). The commissioners rejected his claim, and thus a lawsuit ensued. Jarra answered and said that it was true that the late Jimenea asked the plaintiff to loan him ten carabaos, but that he only obtained THREE (3) second-class carabaos, which were afterwards sold by the Delos Santos to Jimenea. (Basically Jarra denied all the allegations in the complaint) The case came up for trial and the court rendered judgment against Jarra and ordering her to return to de los Santos 6 second-class and third class carabaos. The value of which was 120 each so 720 pesos. Jarra moved for a new trial on the ground that the findings of fact were openly and manifestly contrary to the weight of the evidence. The record however, discloses that it has been fully proven from the testimonies of a number

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of witnesses that Santos, sent in charge of various persons, the 10 carabaos requested by Jimenea (it was revealed that Jimenea is the father in law of de los Santos). Also, de los Santos produced 2 letters proving that Jimenea received them in the presence of said persons (brother of Jimenea) who saw the animals arrive at the hacienda. FOUR of the carabaos died of rinderpest and thus the judgment appealed from only deals with 6 carabaos. THE ALLEGED PURCHASE of 3 carabaos by Jimenea from his son-in-law Santos is not evidenced by any trustworthy evidence. Therefore, it is not true. From the foregoing, it may be logically inferred that the carabaos loaned or given on commodatum to the deceased Jimenea were ten in number, that 6 survived and that these carabaos have not been returned to the owner delos Santos, and lastly, that the 6 carabaos were not the property of the deceased nor any of his descendants, it is the duty of the administratrix to return them or indemnify the owner for the value. ISSUE: W/N the contracts is one of a commodatum. HELD: YES. The carabaos were given on commodatum as these were delivered to be used by defendant. Upon failure of defendant to return the cattle upon demand, he is under the obligation to indemnify the plaintiff by paying him their value. Since the 6 carabaos were not the property of the deceased or of any of his descendants, it is the duty of the administratrix of the estate to either return them or indemnify the owner thereof of their value. It was not part of Jimenea’s estate. Therefore Agustina Jarra should exclude it or indemnify De los Santos… “for the reasons above set forth, by which the errors assigned to the judgment appealed from have been refuted, and considering that the same is in accordance with the law and the merits of the case, it is our opinion that it should be affirmed and we do hereby affirm it with the costs against appellant. RATIO: The ratio differentiates a loan from a

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

commodatum. Art 1740. (Old civil code) By the contract of loan, one of the parties delivers to the other, either anything not perishable (in the new civil code it’s consumable), in order that the latter may use it during a certain period and return it to the former, in which case it is called commodatum, or money or any other perishable thing, under the condition to return an equal amount of the same kind and quality, in which case it is merely called a loan. Commodatum is essentially gratuitous. A simple loan may be gratuitous, or made under a stipulation to pay interest. Art 1741. The bailor retains ownership of the thing loaned the bailee acquires the use thereof, but not its fruits; if any compensation is involved, to be paid by the person requiring the use, the agreement ceases to be a commodatum. Art 1742. The obligations and rights which arise from the commodatum pass to the heirs of both contracting parties, unless the loan has been made in consideration for the person of the bailee, in which case his heirs shall not have the right to continue using the thing loaned. The carabaos delivered to be used were not returned by Jiminea upon demand. There is no doubt that Jarra is under the obligation to indemnify delos Santos. Article 101. Those who in fulfilling their obligations are guilty of fraud, negligence or delay…. The obligation of the bailee or of his successors to return either the thing loaned or its value is sustained by the tribunal of Spain, which said in its decision - (Mentioned jurisprudence): legal doctrine touching commodatum as follows: Although it is true that in a contract of commodatum the bailor retains the ownership of thing loaned at the expiration of the period, or after the use for which it was loaned has been accomplished, it is the imperative duty of the bailee to return the thing itself to its owner, or to pay him damages if through the fault of the bailee

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the thing should have been lost or injured… REPUBLIC OF THE PHILIPPINES VS. JOSE BAGTAS, FELICIDAD BAGTAS, ADMINISTRATRIX OF THE INTESTATE ESTATE LEFT BY JOSE BAGTAS FACTS: On May 8, 1948, Jose Bagtas borrowed from the Bureau of Animal Industry 3 bulls for 1 year for breeding purposes, subject to breeding fee for 10% of the book value of the bulls. Upon the expiration of the contract, Bagtas asked for a renewal for another year. The renewal granted was only for 1 bull. Bagtas offered to buy the bulls at book value less depreciation, but the Bureau told him that he should either return the bulls or pay for their book value. Bagtas failed to pay the book value, and so the Republic commenced an action with the CFI Manila to order the return of the bulls of the payment of book value. Felicidad Bagtas, the surviving spouse and administratrix of the decedent’s estate, stated that the 2 bulls have already been returned in 1952, and that the remaining one died of gunshot during a Huk raid. As regards the two bulls, is was proven that they were returned and thus, there is no more obligation on the part of the appellant. As to the bull not returned, Felicidad contends that the obligation is extinguished since the contract is that of a commodatum and that the loss through fortuitous event should be borne by the owner. ISSUE: Whether, depending on the nature of the contract, the respondent is liable for the death of the bull HELD: A contract of commodatum is essentially gratuitous. If the breeding fee be considered a compensation, then the contract would be a lease of the bull. Under article 1671 of the Civil Code the lessee would be subject to the responsibilities of a possessor in bad faith, because she had continued possession of the bull after the expiry of the contract. And even if the contract be commodatum, still the appellant is liable, because article 1942 of the Civil Code provides that a bailee in a contract of commodatum . . . is liable for loss of the things, even if it should be through a fortuitous event: (2) If he keeps it longer than the period stipulated . . .

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(3) If the thing loaned has been delivered with appraisal of its value, unless there is a stipulation exempting the bailee from responsibility in case of a fortuitous event. The loan of one bull was renewed for another period of one year to end on 8 May 1950. But the appellant kept and used the bull until November 1953 when during a Huk raid it was killed by stray bullets. Furthermore, when lent and delivered to the deceased husband of the appellant the bulls had each an appraised book value. It was not stipulated that in case of loss of the bull due to fortuitous event the late husband of the appellant would be exempt from liability. Special proceedings for the administration and settlement of the estate of the deceased Jose V. Bagtas having been instituted in the Court of First Instance of Rizal (Q-200), the money judgment rendered in favor of the appellee cannot be enforced by means of a writ of execution but must be presented to the probate court for payment by the appellant, the administratrix appointed by the court.

CATHOLIC VICAR VS. CA FACTS: 1962: Catholic Vicar Apostolic of the Mountain Province (Vicar), petitioner, filed with the court an application for the registration of title over lots 1, 2, 3 and 4 situated in Poblacion Central, Benguet, said lots being used as sites of the Catholic Church, building, convents, high school building, school gymnasium, dormitories, social hall and stonewalls. 1963: Heirs of Juan Valdez and Heirs of Egmidio Octaviano claimed that they have ownership over lots 1, 2 and 3. (2 separate civil cases) 1965: The land registration court confirmed the registrable title of Vicar to lots 1, 2, 3 and 4. Upon appeal by the private respondents (heirs), the decision of the lower court was reversed. Title for lots 2 and 3 were cancelled. VICAR filed with the Supreme Court a petition for review on certiorari of the decision of the Court of Appeals dismissing his application for

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registration of Lots 2 and 3. During trial, the Heirs of Octaviano presented one (1) witness, who testified on the alleged ownership of the land in question (Lot 3) by their predecessor-in-interest, Egmidio Octaviano; his written demand to Vicar for the return of the land to them; and the reasonable rentals for the use of the land at P10,000 per month. On the other hand, Vicar presented the Register of Deeds for the Province of Benguet, Atty. Sison, who testified that the land in question is not covered by any title in the name of Egmidio Octaviano or any of the heirs. Vicar dispensed with the testimony of Mons. Brasseur when the heirs admitted that the witness if called to the witness stand, would testify that Vicar has been in possession of Lot 3, for 75 years continuously and peacefully and has constructed permanent structures thereon. ISSUE: WON Vicar had been in possession of lots 2 and 3 merely as bailee borrower in commodatum, a gratuitous loan for use. HELD: YES. Private respondents were able to prove that their predecessors' house was borrowed by petitioner Vicar after the church and the convent were destroyed. They never asked for the return of the house, but when they allowed its free use, they became bailors in commodatum and the petitioner the bailee. The bailees' failure to return the subject matter of commodatum to the bailor did not mean adverse possession on the part of the borrower. The bailee held in trust the property subject matter of commodatum. The adverse claim of petitioner came only in 1951 when it declared the lots for taxation purposes. The action of petitioner Vicar by such adverse claim could not ripen into title by way of ordinary acquisitive prescription because of the absence of just title. The Court of Appeals found that petitioner Vicar did not meet the requirement of 30 years possession for acquisitive prescription over Lots 2 and 3. Neither did it satisfy the requirement of 10 years possession for ordinary acquisitive prescription because of the absence of just title. The appellate court did not believe the findings of the trial court that

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Lot 2 was acquired from Juan Valdez by purchase and Lot 3 was acquired also by purchase from Egmidio Octaviano by petitioner Vicar because there was absolutely no documentary evidence to support the same and the alleged purchases were never mentioned in the application for registration.

MARGARITA QUINTOS and ANGEL A. ANSALDO vs. BECK FACTS: BECK was a tenant of the Quintos and as such occupied the latter's house on M. H. del Pilar street, No. 1175. On January 14, 1936, upon the novation of the contract of lease between them, the former gratuitously granted to the latter the use of the furniture subject to the condition that the BECK would return them to the Quintos upon the latter's demand. Quintos sold the property to Maria Lopez and Rosario Lopez and on September 14, 1936, these three notified BECK of the conveyance, giving him sixty days to vacate the premises under one of the clauses of the contract of lease. There after Quintos required BECK to return all the furniture transferred to him for them in the house where they were found. On November 5, 1936, BECK, through another person, wrote to Quintos reiterating that she may call for the furniture in the ground floor of the house. On the 7th of the same month, he wrote another letter to Quintos informing her that he could not give up the three gas heaters and the four electric lamps because he would use them until the 15th of the same month when the lease in due to expire. Quintos refused to get the furniture in view of the fact that BECK had declined to make delivery of all of them. On November 15th, before vacating the house, the BECK deposited with the Sheriff all the furniture belonging to Quintos and they are now on deposit in the warehouse situated at No. 1521, Rizal Avenue, in the custody of the said sheriff. ISSUE 1: WON BECK complied with his obligation to return the furniture upon the Quintos’ demand. NO. HELD 1: The contract entered into between the parties is one of commadatum, because

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under it Quintos gratuitously granted the use of the furniture to BECK, reserving for herself the ownership thereof; by this contract he bound himself to return the furniture to Quintos, upon the latter’s demand (clause 7 of the contract, Exhibit A; articles 1740, paragraph 1, and 1741 of the Civil Code). The obligation voluntarily assumed by BECK to return the furniture upon demand, means that he should return all of them to Quintos at the latter's residence or house. BECK did not comply with this obligation when he merely placed them at the disposal of the Quintos, retaining for his benefit the three gas heaters and the four eletric lamps. The provisions of article 1169 of the Civil Code cited by counsel for the parties are not squarely applicable. The trial court, therefore, erred when it came to the legal conclusion that the Quintos failed to comply with her obligation to get the furniture when they were offered to her. ISSUE 2: WON Quintos is bound to bear the deposit fees. NO. HELD 2: As BECK had voluntarily undertaken to return all the furniture to the Quintos, upon the latter's demand, the Court could not legally compel her to bear the expenses occasioned by the deposit of the furniture at the BECK's behest. The latter, as bailee, was not entitled to place the furniture on deposit; nor was Quintos under a duty to accept the offer to return the furniture, because he wanted to retain the three gas heaters and the four electric lamps. As to the value of the furniture, we do not believe that Quintos is entitled to the payment thereof by BECK in case of his inability to return some of the furniture because under paragraph 6 of the stipulation of facts, BECK has neither agreed to nor admitted the correctness of the said value. Should he fail to deliver some of the furniture, the value thereof should be later determined by the trial Court through evidence which the parties may desire to present. ISSUE 3: WON Quintos is entitled to the costs of litigation. YES. HELD 3: The costs in both instances should be borne by BECK because the plaintiff is the prevailing party (section 487 of the Code of

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Civil Procedure). He was the one who breached the contract of commodatum, and without any reason he refused to return and deliver all the furniture upon demand. In these circumstances, it is just and equitable that he pay the legal expenses and other judicial costs which the plaintiff would not have otherwise defrayed. POLICY: Commodatum is a contract where the bailor delivers to the bailee a nonconsumable thing so that the latter may use it for a certain time and return the identical thing.

III.

Mutuum

BPI INVESTMENT CORPORATION vs. HON. COURT OF APPEALS and ALS MANAGEMENT & DEVELOPMENT CORPORATION FACTS: Frank Roa obtained a loan at an interest rate of 16.25% per annum from Ayala Investment and Development Corporation (AIDC), 
 the predecessor of petitioner BPIIC, for the construction of a house on his lot in New Alabang Village, Muntinlupa. Said house and lot were mortgaged to AIDC to secure the loan. Sometime in 1980, Roa sold the house and lot to private respondents ALS and Antonio Litonjua for P850,000. They paid P350,000 in cash and assumed the P500,000 balance of Roa’s indebtedness with AIDC. 
 AIDC, however, was not willing to extend the old interest rate to ALS and proposed to grant them a new loan of P500,000 to be applied to Roa’s debt and secured by the same property, at an interest rate of 20% per annum and service fee of 1% per annum on the outstanding principal balance payable within ten years in equal monthly amortization. 
 Consequently, on March 1981, ALS executed a mortgage deed containing the above stipulations with the provision that payment of the monthly amortization shall commence on May 1, 1981. 
 On August 1982, ALS and Litonjua updated Roa’s arrearages by paying BPIIC the sum of P190,601.35. This reduced Roa’s principal balance to P457,204.90 which, in turn, was liquidated when BPIIC applied thereto the

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proceeds of ALS’s loan of P500,000. 
 On September 13, 1982, BPIIC released to ALS P7,146.87, purporting to be what was left of their loan after full payment of Roa’s loan. 
 In June 1984, BPIIC instituted foreclosure proceedings against ALS on the ground that they failed to pay the mortgage indebtedness which from May 1, 1981 to June 30, 1984, amounted to P475,585.31. 
 ALS and Litonjua filed a civil case against BPIIC. They alleged, among others, that they were not in arrears in their payment, but in fact made an overpayment as of June 30, 1984. They maintained that they should not be made to pay amortization before the actual release of the P500,000 loan in August and September 1982. Further, out of the P500,000 loan, only the total amount of P464,351.77 was released to ALS. 
 RTC favored ALS and Litonjua. CA affirmed in toto. 
 CA reasoned that a simple loan is perfected only upon the delivery of the object of the contract. The contract of loan between BPIIC and ALS & Litonjua was perfected only on September 13, 1982, the date when BPIIC released the purported balance of the P500,000 loan after deducting therefrom the value of Roa’s indebtedness. Thus, payment of the monthly amortization should commence only a month after the said date, as can be inferred from the stipulations in the contract. This, despite the express agreement of the parties that payment shall commence on May 1, 1981. From October 1982 to June 1984, the total amortization due was only P194,960.43. Evidence showed that ALS had an overpayment. Therefore, there was no basis for BPIIC to extrajudicially foreclose the mortgage. BPIIC contends among others that CA erred in ruling that because a simple loan is perfected upon the delivery of the object of the contract, the loan contract in this case was perfected only on September 13, 1982. BPIIC claims that a contract of loan is a consensual contract, and a loan contract is perfected at the time the contract of mortgage is executed conformably with SC’s ruling in Bonnevie v. CA, 125 SCRA

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122. ISSUE: WON a contract of loan is a consensual contract. NO, A CONTRACT OF LOAN IS A REAL CONTRACT. HELD: 
 A loan contract is not a consensual contract but a real contract. It is perfected only upon the DELIVERY of the object of the contract. BPIIC misapplied Bonnevie. The contract in Bonnevie declared by this Court as a perfected consensual contract falls under the first clause of Article 1934, CC. It is an accepted promise to deliver something by way of simple loan. 
 A perfected consensual contract, as shown above, can give rise to an action for damages. However, said contract does not constitute the real contract of loan which requires the delivery of the object of the contract for its perfection and which gives rise to obligations only on the part of the borrower. In the present case, the loan contract between BPI, on the one hand, and ALS and Litonjua, on the other, was perfected only on September 13, 1982, the date of the second release of the loan. Following the intentions of the parties on the commencement of the monthly amortization, as found by the CA, ALS’s obligation to pay commenced only on October 13, 1982, a month after the perfection of the contract. 
 A contract of loan involves a reciprocal obligation, wherein the obligation or promise of each party is the consideration for that of the other. As averred by ALS, the promise of BPIIC to extend and deliver the loan is upon the consideration that ALS and Litonjua shall pay the monthly amortization commencing on May 1, 1981, one month after the supposed release of the loan. It is a basic principle in reciprocal obligations that neither party incurs in delay, if the other does not comply or is not ready to comply in a proper manner with what is incumbent upon him. Only when a party has performed his part of the contract can he demand that the other party also fulfills his own obligation and if the latter fails, default sets in. Consequently, petitioner could only demand for the payment of the monthly amortization after September 13, 1982 for it was only then when it complied with its obligation under the loan contract. Therefore, in computing the amount

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due as of the date when BPIIC extrajudicially caused the foreclosure of the mortgage, the starting date is October 13, 1982 and not May 1, 1981. Other points raised by BPIIC in connection with this issue, such as the date of actual release of the loan and whether ALS were the cause of the delay in the release of the loan, are factual. CA decision was affirmed but with modification as to the award of damages.

YONG CHAN KIM vs. PEOPLE OF THE PHILIPPINES, HON. EDGAR D. GUSTILO Presiding Judge, RTC, 6th Judicial Region, Branch 28 Iloilo City and COURT OF APPEALS (13th Division), SOUTHEAST ASIAN FISHERIES DEVELOPMENT CENTER AQUACULTURE DEPARTMENT (SEAFDEC) FACTS: Petitioner Yong Chan Kim was employed as a Researcher at the Aquaculture Department of the Southeast Asian Fisheries Development Center (SEAFDEC) with head station at Tigbauan, Province of Iloilo. As Head of the Economics Unit of the Research Division, he conducted prawn surveys which required him to travel to various selected provinces in the country where there are potentials for prawn culture. On 15 June 1982, petitioner was issued Travel Order No. 2222 which covered his travels to different places in Luzon from 16 June to 21 July 1982, a period of thirty five (35) days. Under this travel order, he received P6,438.00 as cash advance to defray his travel expenses. Within the same period, petitioner was issued another travel order, T.O. 2268, requiring him to travel from the Head Station at Tigbauan, Iloilo to Roxas City from 30 June to 4 July 1982, a period of five (5) days. For this travel order, petitioner received a cash advance of P495.00. On 14 January 1983, petitioner presented both travel orders for liquidation, submitting Travel Expense Reports to the Accounting Section. When the Travel Expense Reports were audited, it was discovered that there was an overlap of four (4) days (30 June to 3 July

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1982) in the two (2) travel orders for which petitioner collected per diems twice. In sum, the total amount in the form of per diems and allowances charged and collected by petitioner under Travel Order No. 2222, when he did not actually and physically travel as represented by his liquidation papers, was P1,230.00. Petitioner was required to comment on the internal auditor's report regarding the alleged anomalous claim for per diems. In his reply, petitioner denied the alleged anomaly, claiming that he made make-up trips to compensate for the trips he failed to undertake under T.O. 2222 because he was recalled to the head office and given another assignment. In September 1983, two (2) complaints for Estafa were filed against the petitioner before the Municipal Circuit Trial Court at Guimbal, Iloilo. ISSUE: Whether or not petitioner can be held criminally liable on the ground of failure to liquidate her traveling expenses. NO. RULING: It is undisputed that petitioner received a cash advance from private respondent SEAFDEC to defray his travel expenses under T.O. 2222. It is likewise admitted that within the period covered by T.O. 2222, petitioner was recalled to the head station in Iloilo and given another assignment which was covered by T.O. 2268. The dispute arose when petitioner allegedly failed to return P1,230.00 out of the cash advance which he received under T.O. 2222. For the alleged failure of petitioner to return the amount of P1,230.00, he was charged with the crime of Estafa under Article 315, par. 1(b) of the Revised Penal Code. In order that a person can be convicted under the above-quoted provision, it must be proven that he had the obligation to deliver or return the same money, good or personal property that he had received. Was petitioner under obligation to return the same money (cash advance) which he had received? We believe not. Liquidation simply means the settling of indebtedness. An employee, such as herein petitioner, who liquidates a cash advance is in fact paying back his debt in the form of a loan

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of money advanced to him by his employer, as per diems and allowances. Similarly, as stated in the assailed decision of the lower court, "if the amount of the cash advance he received is less than the amount he spent for actual travel . . . he has the right to demand reimbursement from his employer the amount he spent coming from his personal funds. In other words, the money advanced by either party is actually a loan to the other. Hence, petitioner was under no legal obligation to return the same cash or money, i.e., the bills or coins, which he received from the private respondent. Article 1933 and Article 1953 of the Civil Code define the nature of a simple loan. Art. 1933. By the contract of loan, one of the parties delivers to another, either something not consumable so that the latter may use the same for a certain time and return it, in which case the contract is called a commodatum; or money or other consumable thing, upon the condition that the same amount of the same kind and quality shall be paid, in which case the contract is simply called a loan or mutuum. Commodatum is essentially gratuitous. Simple loan may be gratuitous or with a stipulation to pay interest. In commodatum the bailor retains the ownership of the thing loaned, while in simple loan, ownership passes to the borrower. Art. 1953.— A person who receives a loan of money or any other fungible thing acquires the ownership thereof, and is bound to pay to the creditor an equal amount of the same kind and quality. The ruling of the trial judge that ownership of the cash advanced to the petitioner by private respondent was not transferred to the latter is erroneous. Ownership of the money was transferred to the petitioner.

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Since ownership of the money (cash advance) was transferred to petitioner, no fiduciary relationship was created. Absent this fiduciary relationship between petitioner and private respondent, which is an essential element of the crime of estafa by misappropriation or conversion, petitioner could not have committed estafa. Additionally, it has been the policy of private respondent that all cash advances not liquidated are to be deducted correspondingly from the salary of the employee concerned. The evidence shows that the corresponding salary deduction was made in the case of petitioner vis-a-vis the cash advance in question. (Failure of bank to return the amount deposited, not a case of estafa)

SPOUSES ANTONIO and LOLITA TAN vs. CARMELITO VILLAPAZ
 FACTS: On February 6, 1992, respondent Villapaz issued a Philippine Bank of Communications (PBCom) crossed check in the amount of P250,000.00, payable to the order of petitioner Tony Tan. On that date, the check was deposited at the drawee bank, PBCom Davao City branch at Monteverde Avenue, to the account of petitioner Antonio Tan also at said bank. 
 On November 7, 1994 respondent filed a Complaint for sum of money against the spouses, alleging that on February 6, 1992, the spouses went to his place of business at Malita, Davao and obtained a loan of P250,000.00, hence, his issuance of the February 6, 1992 PBCom crossed check which loan was to be settled interest-free in six (6) months. On the maturity date of the loan or on August 6, 1992, petitioner Antonio Tan failed to settle the same, and despite repeated demands, petitioners never did, drawing Villapaz to file the complaint; and on account of the willful refusal of petitioners to honor their obligation, he suffered moral damages in the amount of P50,000.00, among other things. 
 The spouses denied having gone to Malita

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and having obtained a loan from respondent, alleging that the check was issued by respondent in Davao City on February 6, 1992 "in exchange for equivalent cash"; they never received from respondent any demand for payment, be it verbal or written, respecting the alleged loan; since the alleged loan was one with a period payable in six months, it should have been expressly stipulated upon in writing by the parties but it was not, hence, the essential requisite for the validity and enforceability of a loan is wanting; and the check is inadmissible to prove the existence of a loan for P250,000.00. 
 Petitioners maintain that they did not secure a loan from respondent, insisting that they encashed in Davao City respondent's February 6, 1992 crossed check; in the ordinary course of business, prudence dictates that a contract of loan must be in writing as in fact the New Civil Code provides that to be enforceable "contracts where the amount involved exceed[s] P500.00 must appear in writing even a private one," hence, respondent's "selfserving" claim does not suffice to prove the existence of a loan; respondent's allegation that no memorandum in writing of the transaction was executed because he and they are "kumpadres" does not inspire belief for respondent, being a businessman himself, was with more reason expected to be more prudent; and the mere encashment of the check is not a contractual transaction such as a sale or a loan which ordinarily requires a receipt and that explains why they did not issue a receipt when they encashed the check of respondent. Petitioners furthermore maintain that they were financially stable on February 6, 1992 as shown by the entries of their bank passbook hence, there was no reason for them to go to a distant place like Malita to borrow money. 
 The lower Court gave four reasons for ruling out a loan: (a) the defense of spouses Tan that they did not go to Villapaz's place on February 6, 1992, date the check was given to them; (b) Spouses Tan could not have borrowed money on that date because from January to March, 1992, they had an average daily deposit of P700,000 and on February 6, 1992, they had P1,211,400.64 in the bank, hence,

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they had "surely no reason nor logic" to borrow money from Villapaz; (c) the alleged loan was not reduced in writing and the check could not be a competent evidence of loan. ISSUE: Whether or not the transaction in dispute was a contract of loan and not a mere matter of check encashment as found by the trial court. YES. HELD: The four-fold reasoning cannot be sustained. They are faulty and do not accord either with law or ordinary conduct of men. For one thing, the first two given reasons partake more of alibi and speculation, hence, deserve scant consideration. For another, the last two miss the applicable provisions of law. 
 The existence of a contract of loan cannot be denied merely because it is not reduced in writing. Surely, there can be a verbal loan. Contracts are binding between the parties, whether oral or written. The law is explicit that contracts shall be obligatory in whatever form they may have been entered into, provided all the essential requisites for their validity are present. A loan (simple loan or mutuum) exists when a person receives a loan of money or any other fungible thing and acquires the ownership thereof. He is bound to pay to the creditor the equal amount of the same kind and quality. 
 Contracts are perfected by mere consent, and from that moment the parties are bound not only to the fulfillment of what has been expressly stipulated but also to all the consequences which, according to their nature, maybe in keeping with good faith, usage and law. 
 The lower Court misplaced its reliance on Article 1358 of the Civil Code providing that to be enforceable, contracts where the amount involved exceed five hundred pesos, must appear in writing. Such requirement, it has been held, is only for convenience, not for validity. It bears emphasis that at the time Villapaz delivered the crossed-check to the petitioner spouses, Villapaz had no account whatsoever with them. Spouses' contention that they did not obtain any loan but merely exchanged the latter's check for cash is not borne by any evidence.

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 That apart from the check, no written proof of the grant of the loan was executed was credibly explained by respondent when he declared that petitioners' son being his godson, he, out of trust and respect, believed that the crossed check sufficed to prove their transaction. 
 As for petitioners' reliance on Art. 1358[22] of the Civil Code, the same is misplaced for the requirement that contracts where the amount involved exceeds P500.00 must appear in writing is only for convenience. 
 At all events, a check, the entries of which are no doubt in writing, could prove a loan transaction. 
 PNB VS. CA AND IBARROLA FACTS: Province of Isabela issued several checks drawn against its account with PNB (P) in favor of Lyndon Pharmaceuticals Laboratories, a business operated by Ibarrola (R), as payments for the purchase of medicines. The checks were delivered to R’s agents who turned them over to R, except 23 checks amounting to P98k. Due to failure to receive full amount, R filed case against P. Trial Court, CA and SC ordered PNB to pay; however, all 3 courts failed to specify the legal rate of interest – 6% or 12%. ISSUE: WoN the rate to be used is 6%. HELD: YES. This case does not involve a loan, forbearance of money or judgment involving a loan or forbearance of money as it arose from a contract of sale whereby R did not receive full payment for her merchandise. When an obligation arises “from a contract of purchase and sale and not from a contract of loan or mutuum,” the applicable rate is 6% per annum as provided in Art. 2209 of the NCC and not the rate of 12% per annum as provided in (CB) Cir. No. 416. The rate of 12% interest referred to in Cir. 416 applies only to: Loan or forbearance of money,

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or to cases where money is transferred from one person to another and the obligation to return the same or a portion thereof is adjudged. Any other monetary judgment which does not involve or which has nothing to do with loans or forbearance of any money, goods or credit does not fall within its coverage for such imposition is not within the ambit of the authority granted to the Central Bank. When an obligation not constituting a loan or forbearance of money is breached then an interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum in accordance with Art. 2209 of the Civil Code. Indeed, the monetary judgment in favor of private respondent does not involve a loan or forbearance of money, hence the proper imposable rate of interest is six (6%) per cent. Therefore, the proper rate of interest referred to in the judgment under execution is only 6%. This interest shall be computed from the time of the filing of the complaint considering that the amount adjudged (P98,691.90) can be established with reasonable certainty. Said amount being merely the uncollected balance of the purchase price covered by the 23 checks encashed and appropriated by Ibarrola's agents. However, once the judgment becomes final and executory, the "interim period from the finality of judgment awarding a monetary claim and until payment thereof, is deemed to be equivalent to a forbearance of credit." *6% from filing of complaint until full payment before finality of judgment. *12% from finality of judgment. HERMOJINA ESTORES VS. SPOUSES ARTURO AND LAURA SUPANGAN FACTS: In Oct. 1993, Hermojina Estores and Spouses Supangan entered into a Conditional Deed of Sale where Estores offered to sell, and Spouses offered to buy a parcel of land in Cavite for P4.7M. After almost 7 years and despite the payment of P3.5M by the Spouses, Estores still failed to comply with her obligation to handle the peaceful transfer of ownership as stated in 5

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provisions in the contract. In a letter in 2000, Spouses demanded the return of the amount within 15 days from receipt. In reply, Estores promised to return the same within 120 days. Spouses agreed but imposed an interest of 12% annually. Estores still failed despite demands. Spouses filed a complaint with the RTC against Estores and Roberto Arias (allegedly acted as Estores’ agent). In Answer, Estores said they were willing to pay the principal amount but without the interest as it was not agreed upon. That since the Conditional Deed of Sale provided only for the return of the downpayment in case of breach, they cant be liable for legal interest as well. RTC ruled saying that the Spouses are entitled to the interest but only at 6% per annum and also entitled to atty’s fees. On appeal, CA said that the issue to resolve is whether it is proper to impose interest for an obligation that does not involve a loan or forbearance of money in the absence of stipulation of the parties. CA affirmed RTC. That interest should start on date of formal demand by Spouses to return the money not when contract was executed as stated by the RTC; That Arias not be solidarily liable as he acted as agent only and did not expressly bind himself or exceeded his authority. Estores contends: Not bound to pay interest because the deed only provided for the return of the downpayment in case of failure to comply with her obligations; That atty fees not proper because both RTC and CA sustained her contention that 12% interest was uncalled for so it showed that Spouses did not win. Spouses contend: It is only fair that interest be imposed because Estores failed to return the amount upon demand and used the money for her benefit. Estores failed to relocate the house outside the perimeter of the subject lot and complete the necessary documents. As to the fees, they claim that they were forced

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to litigate when Estores unjustly held the amount. ISSUES: Is the imposition of interest and attorney’s fees is proper? YES Interest based on Art 2209 of CC (6%) or under Central Bank Circular 416 (12%)? 12% HELD: Interest may be imposed even in the absence of stipulation in the contract. Article 2210 of the Civil Code expressly provides that “interest may, in the discretion of the court, be allowed upon damages awarded for breach of contract.” Estores failed on her obligations despite demand. She admitted that the conditions were not fulfilled and was willing to return the full amount of P3.5M but hasn’t done so she is now in default. The interest at the rate of 12% is applicable in the instant case. Gen Rule: the applicable interest rate shall be computed in accordance with the stipulation of the parties Exc: if no stipulation, applicable rate of interest shall be 12% per annum when obligation arises out of a loan or forbearance of money, goods or credits. In other cases, it shall be 6% In this case, no stipulation was made. Contract involved in this case is not a loan but a Conditional Deed of Sale. No question that the obligations were not met and the return of money not made Even if transaction was a Conditional Deed of Sale, the stipulation governing the return of the money can be considered as a forbearance of money which requires 12% interest In Crismina Garments, Inc. v. Court of Appeals, Forbearance-- “contractual obligation of lender or creditor to refrain during a given period of time, from requiring the borrower or debtor to repay a loan or debt then due and payable.” In such case, “forbearance of money, goods or credits” will have no distinct definition from a loan. However, the phrase “forbearance of money,

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goods or credits” is meant to have a separate meaning from a loan, otherwise there would have been no need to add that phrase as a loan is already sufficiently defined in the Civil Code Forbearance of money, goods or credits should therefore refer to arrangements other than loan agreements, where a person acquiesces to the temporary use of his money, goods or credits pending happening of certain events or fulfillment of certain conditions. Estores’ unwarranted withholding of the money amounts to forbearance of money which can be considered as an involuntary loan so rate is 12% starting in Sept. 2000 The award of attorney’s fees is warranted. No doubt that the Spouses were forced to litigate to protect their interest, i.e., to recover their money. The amount of P50,000.00 is more appropriate. PAN PACIFIC vs EQUITABLE PCI BANK FACTS: Pan Pacific is engaged in contracting mechanical works on airconditioning system. They entered into a contract of mechanical works with respondent for the total consideration for the whole project was P23,311,410.30. The Contract stipulated that Pan Pacific shall be entitled to a price adjustment in case of increase in labor costs and prices of materials under paragraphs 70.1 and 70.2 of the General Conditions for the Construction of PCIB Tower II Extension. Pan Pacific commenced the mechanical works in the project site. In 1990, labor costs and prices of materials escalated. On 5 April 1991, in accordance with the escalation clause, Pan Pacific claimed a price adjustment of P5,165,945.52. Respondents asked for a reduction in the price adjustment. To show goodwill, Pan Pacific reduced the price adjustment toP4,858,548.67. On 28 April 1992, respondent asked that the price adjustment should be pegged at P3,730,957.07, based on the DOLE Labor Indices and the General Conditions of their contract. Due to the extraordinary increases in the costs of labor and materials, Pan Pacific’s

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operational capital was becoming inadequate for the project. However, respondent withheld the payment of the price adjustment under the escalation clause despite Pan Pacifics repeated demands. Instead, respondent offered Pan Pacific a loan of P1.8 million. Pan Pacific was constrained to execute a promissory note in the amount of P1.8 million as a requirement for the loan. Pan Pacific also posted a surety bond. The P1.8 million was released directly to laborers and suppliers and not a single centavo was given to Pan Pacific. Pan Pacific made several demands for payment on the price adjustment but respondent merely kept on promising to release the same. Meanwhile, the P1.8 million loan matured and respondent demanded payment plus interest and penalty. Pan Pacific refused to pay the loan. Pan Pacific insisted that it would not have incurred the loan if respondent released the price adjustment on time. Pan Pacific alleged that the promissory note did not express the true agreement of the parties. Pan Pacific maintained that the P1.8 million was to be considered as an advance payment on the price adjustment. Therefore, there was really no consideration for the promissory note; hence, it is null and void from the beginning. Respondent stood firm that it would not release any amount of the price adjustment to Pan Pacific but it would offset the price adjustment with Pan Pacifics outstanding balance of P3,226,186.01, representing the loan, interests, penalties and collection charges. Pan Pacific refused the offsetting but agreed to receive the reduced amount of P3,730,957.07 as recommended by the TCGI Engineers for the purpose of extrajudicial settlement, less P1.8 million and P414,942 as advance payments. On 6 May 1994, petitioners filed a complaint for declaration of nullity/annulment of the promissory note, sum of money, and damages against the respondent with the RTC. On 12 April 1999, the RTC declared the promissory note as null and void and ordered Pan Pacific to pay P1,389,111.10 REPRESENTING UNPAID BALANCE OF THE ADJUSTMENT

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PRICE, AND INTEREST AT THE LEGAL RATE OF TWELVE (12%) PERCENT PER ANNUM The CA removed the deduction ofP126,903.97 because it represented the final payment on the basic contract price. Hence, the CA ordered respondent to pay P1,516,015.07 to petitioners, with interest at the legal rate of 12% per annum starting 6 May 1994. On MR he CA increased the loan rate to 18%, rate of equitable PCI. ISSUE: Whether the CA, in awarding the unpaid balance of the price adjustment, erred in fixing the interest rate at 12% instead of the 18% bank lending rate. YES HELD: The CA went beyond the intent of the parties by requiring respondent to give its consent to the imposition of interest before petitioners can hold respondent liable for interest at the current bank lending rate. This is erroneous. A review of Section 2.6 of the Agreement and Section 60.10 of the General Conditions shows that the consent of the respondent is not needed for the imposition of interest at the current bank lending rate, which occurs upon any delay in payment. Article 1956 of the Civil Code, which refers to monetary interest, specifically mandates that no interest shall be due unless it has been expressly stipulated in writing. Therefore, payment of monetary interest is allowed only if: (1) there was an express stipulation for the payment of interest; and (2) the agreement for the payment of interest was reduced in writing. The concurrence of the two conditions is required for the payment of monetary interest. The consent of the respondent is not needed in order to impose interest at the current bank lending rate. Under Article 2209 of the Civil Code, the appropriate measure for damages in case of delay in discharging an obligation consisting of the payment of a sum of money is the payment of penalty interest at the rate agreed upon in the contract of the parties. In the absence of a stipulation of a particular rate of penalty

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interest, payment of additional interest at a rate equal to the regular monetary interest becomes due and payable. Finally, if no regular interest had been agreed upon by the contracting parties, then the damages payable will consist of payment of legal interest which is 6%, or in the case of loans or forbearances of money, 12% per annum. It is only when the parties to a contract have failed to fix the rate of interest or when such amount is unwarranted that the Court will apply the 12% interest per annum on a loan or forbearance of money. The written agreement entered into between petitioners and respondent provides for an interest at the current bank lending rate in case of delay in payment and the promissory note charged an interest of 18%. To prove petitioners entitlement to the 18% bank lending rate of interest, petitioners presented the promissory note prepared by respondent bank itself. This promissory note, although declared void by the lower courts because it did not express the real intention of the parties, is substantial proof that the bank lending rate at the time of default was 18% per annum. Absent any evidence of fraud, undue influence or any vice of consent exercised by petitioners against the respondent, the interest rate agreed upon is binding on them.

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As of January 4, 1997, respondent found that the petitioners still had an outstanding balance of P1,364,151.00, to which respondent applied a 4% monthly interest. On August 28, 1997, respondent filed a complaint for sum of money to enforce the unpaid balance, plus 4% monthly interest. The petitioners admitted the loan of P1,240,000.00, but denied the stipulation on the 4% monthly interest, arguing that the interest was not provided in the promissory note. Pantaleon also denied that he made himself personally liable and that he made representations that the loan would be repaid within six (6) months. RTC found that the respondent issued a check for P1M in favor of the petitioners for a loan that would earn an interest of 4% or P40,000.00 per month, or a total of P240,000.00 for a 6-month period. RTC ordered the petitioners to jointly and severally pay the respondent the amount of P3,526,117.00 plus 4% per month interest from February 11, 1999 until fully paid. Petitioners appealed to CA insisting that there was no express stipulation on the 4% monthly interest. CA favored respondent but noted that the interest of 4% per month, or 48% per annum, was unreasonable and should be reduced to 12% per annum. MR denied hence this petition.

PRISMA CONSTRUCTION & DEVELOPMENT CORPORATION and ROGELIO S. PANTALEON vs ARTHUR F. MENCHAVEZ

ISSUE: Whether the parties agreed to the 4% monthly interest on the loan. If so, does the rate of interest apply to the 6-month payment period only or until full payment of the loan?

FACTS: December 8, 1993, Pantaleon, President and Chairman of the Board of PRISMA, obtained a P1M loan from the respondent, with monthly interest of P40,000.00 payable for 6 months, or a total obligation of P1,240,000.00 payable within 6 months.

RULING: Interest due should be stipulated in writing; otherwise, 12% per annum APPLIES.

To secure the payment of the loan, Pantaleon issued a promissory. Pantaleon signed the promissory note in his personal capacity and as duly authorized by the Board of Directors of PRISMA. The petitioners failed to completely pay the loan within the 6-month period.

Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith. When the terms of a contract are clear and leave no doubt as to the intention of the contracting parties, the literal meaning of its stipulations governs. Courts have no authority to alter the contract by construction or to make a new contract for the parties; a court’s duty is confined to the interpretation of the contract the parties made for themselves without regard to its wisdom or folly, as the court cannot supply material stipulations or read into the

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contract words the contract does not contain. It is only when the contract is vague and ambiguous that courts are permitted to resort to the interpretation of its terms to determine the parties’ intent.

The facts show that the parties agreed to the payment of a specific sum of money of P40,000.00 per month for six months, not to a 4% rate of interest payable within a 6-month period.

In the present case, the respondent issued a check for P1M. In turn, Pantaleon, in his personal capacity and as authorized by the Board, executed the promissory note. Thus, the P1M loan shall be payable within 6 months. The loan shall earn an interest of P40,000.00 per month, for a total obligation of P1,240,000.00 for the six-month period. We note that this agreed sum can be computed at 4% interest per month, but no such rate of interest was stipulated in the promissory note; rather a fixed sum equivalent to this rate was agreed upon.

No issue on the excessiveness of the stipulated amount of P40,000.00 per month was ever put in issue by the petitioners; they only assailed the application of a 4% interest rate, since it was not agreed upon.

Article 1956 of the Civil Code specifically mandates that “no interest shall be due unless it has been expressly stipulated in writing.” The payment of interest in loans or forbearance of money is allowed only if: (1) there was an express stipulation for the payment of interest; and (2) the agreement for the payment of interest was reduced in writing. The concurrence of the two conditions is required for the payment of interest at a stipulated rate. The collection of interest without any stipulation in writing is prohibited by law. The interest of P40,000.00 per month corresponds only to the six-month period of the loan, or from January 8, 1994 to June 8, 1994, as agreed upon by the parties in the promissory note. Thereafter, the interest on the loan should be at the legal interest rate of 12% per annum. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.

It is a familiar doctrine in obligations and contracts that the parties are bound by the stipulations, clauses, terms and conditions they have agreed to, which is the law between them, the only limitation being that these stipulations, clauses, terms and conditions are not contrary to law, morals, public order or public policy. The payment of the specific sum of money of P40,000.00 per month was voluntarily agreed upon by the petitioners and the respondent. There is nothing from the records and, in fact, there is no allegation showing that petitioners were victims of fraud when they entered into the agreement with the respondent. Therefore, as agreed by the parties, the loan of P1M shall earn P40,000.00 per month for a period of 6 months, for a total principal and interest amount of P1,240,000.00. Thereafter, interest at the rate of 12% per annum shall apply. The amounts already paid by the petitioners during the pendency of the suit, amounting toP1,228,772.00 as of February 12, 1999, should be deducted from the total amount due, computed as indicated above. We remand the case to the trial court for the actual computation of the total amount due.

EASTERN SHIPPING LINES, INC. vs. HON. COURT OF APPEALS AND MERCANTILE INSURANCE COMPANY, INC FACTS: This is an action against defendants shipping company, arrastre operator and broker-forwarder for damages sustained by a shipment while in defendants' custody, filed by the insurer-subrogee who paid the consignee the value of such losses/damages.

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

On December 4, 1981, two fiber drums of riboflavin were shipped from Yokohama, Japan for delivery vessel "SS EASTERN COMET" owned by defendant Eastern Shipping Lines. The shipment was insured under plaintiff's Marine Insurance Policy No. 81/01177 for P36,382,466.38. Upon arrival of the shipment in Manila on December 12, 1981, it was discharged unto the custody of defendant Metro Port Service, Inc. The latter excepted to one drum, said to be in bad order, which damage was unknown to plaintiff. On January 7, 1982 defendant Allied Brokerage Corporation received the shipment from defendant Metro Port Service, Inc., one drum opened and without seal. On January 8 and 14, 1982, defendant Allied Brokerage Corporation made deliveries of the shipment to the consignee's warehouse. The latter excepted to one drum which contained spillages, while the rest of the contents was adulterated/fake. Plaintiff contended that due to the losses/damage sustained by said drum, the consignee suffered losses totaling P19,032.95, due to the fault and negligence of defendants. Claims were presented against defendants who failed and refused to pay the same. As a consequence of the losses sustained, plaintiff was compelled to pay the consignee P19,032.95 under the aforestated marine insurance policy, so that it became subrogated to all the rights of action of said consignee against defendants The Court, among others, ordered defendants to pay plaintiff, jointly and severally The amount of P19,032.95, with the present legal interest of 12% per annum from October 1, 1982, the date of filing of this complaints, until fully paid (the liability of defendant Eastern Shipping, Inc. shall not exceed US$500 per case or the CIF value of the loss, whichever is lesser, while the liability of defendant Metro Port Service, Inc. shall be to the extent of the actual invoice value of each package, crate box or container in no case to exceed P5,000.00 each, pursuant to Section 6.01 of the Management Contract)

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ISSUE: 1. Whether or not a claim for damage sustained on a shipment of goods can be a solidary, or joint and several, liability of the common carrier, the arrastre operator and the customs broker. YES 2. Whether the payment of legal interest on an award for loss or damage is to be computed from the time the complaint is filed or from the date the decision appealed from is rendered. 3. Whether the applicable rate of interest, referred to above, is twelve percent (12%) or six percent (6%). 6% HELD: 1. Solidary. Since it is the duty of the ARRASTRE to take good care of the goods that are in its custody and to deliver them in good condition to the consignee, such responsibility also devolves upon the CARRIER. Both the ARRASTRE and the CARRIER are therefore charged with the obligation to deliver the goods in good condition to the consignee. The common carrier's duty to observe the requisite diligence in the shipment of goods lasts from the time the articles are surrendered to or unconditionally placed in the possession of, and received by, the carrier for transportation until delivered to, or until the lapse of a reasonable time for their acceptance by, the person entitled to receive them (Arts. 1736-1738, Civil Code; Ganzon vs. Court of Appeals, 161 SCRA 646; Kui Bai vs. Dollar Steamship Lines, 52 Phil. 863). When the goods shipped either are lost or arrive in damaged condition, a presumption arises against the carrier of its failure to observe that diligence, and there need not be an express finding of negligence to hold it liable. 2. It may not be unwise, by way of clarification and reconciliation, to suggest the following rules of thumb for future guidance. I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts is breached, the contravenor can be held liable for damages. The provisions under Title XVIII on "Damages" of the Civil Code govern in determining the measure of recoverable damages.

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of interest, as well as the accrual thereof, is imposed, as follows: 1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code. 2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand can be established with reasonable certainty. Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably established at the time the demand is made, the interest shall begin to run only from the date the judgment of the court is made (at which time the quantification of damages may be deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount finally adjudged. 3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit. 3. The legal interest to be paid is SIX PERCENT (6%) on the amount due computed from the decision, dated 03 February 1988, of the court a quo. A TWELVE PERCENT (12%) interest, in lieu of SIX PERCENT (6%), shall be imposed on such amount upon finality of this decision until the payment thereof.

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NOTE: The Central Bank Circular imposing the 12% interest per annum applies only to loans or forbearance of money, goods or credits, as well as to judgments involving such loan or forbearance of money, goods or credits, and that the 6% interest under the Civil Code governs when the transaction involves the payment of indemnities in the concept of damage arising from the breach or a delay in the performance of obligations in general. Observe, too, that in these cases, a common time frame in the computation of the 6% interest per annum has been applied, i.e., from the time the complaint is filed until the adjudged amount is fully paid.

PILIPINAS BANK vs. COURT OF APPEALS FACTS: Private respondent Lilia Echaus filed a complaint against petitioner and its president, Constantino Bautista, for collection of a sum of money. The complaint alleged: (1) that petitioner and Greatland Realty Corporation executed a "Dacion en Pago," wherein Greatland conveyed to petitioner several parcels of land in consideration of the sum of P7,776,335.69; (2) that Greatland assigned P2,300,000.00 out of the total consideration of the Dacion en Pago, in favor of private respondent; and (3) that notwithstanding her demand for payment, petitioner in bad faith, refused and failed to pay the said amount assigned to her. The trial court ordered petitioner and its codefendant, jointly and severally, to pay private respondent P2,300,000.00 the total amount assigned by Greatland in her favor out of the P2,300,000.00 liability of defendant Pilipinas to Greatland plus legal interest from the dates of assignments until fully paid. On March 22, 1985, petitioner appealed the decision of the trial court to the Court of Appeals. On the same day, private respondent filed a motion for Immediate Execution Pending Appeal which the trial court granted. Petitioner complied with the writ of execution pending appeal by issuing two manager's checks in the total amount of P5,517,707.00 and which was encashed by the private respondent.

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

On June 28, 1990, the Court of Appeals rendered a decision in CA-G.R. No. CV-06017, which modified the judgment and ordered Pilipinas Bank to pay 2,300,000,00 Pesos, representing the total amount assigned by Greatland to her, with interest at the legal rate starting July 24, 1981, date when demand was first made. On September 4, 1990, petitioner filed a motion in the trial court praying that private respondent to refund to her the excess payment of P1,898,623.67 with interests at 6%. Private respondent opposed the motion of petitioner with respect to the rate of interest to be charged on the amount of P2,300,000.00. According to private respondent, the legal interest on the principal amount of P2,300,000.00 due her should be 12% per annum pursuant to CB Circular No. 416 and not 6% per annum as computed by petitioner. On October 12, 1990, the trial court, while ordering the refund to petitioner of the excess payment, fixed the interest rate due on the amount of P2,300.000.00 at 12% per annum as proposed by private respondent, instead of 6% per annum as proposed by petitioner. The Court of Appeals was of the theory that the action in Civil Case No. 239-A filed by private respondent against petitioner "involves forbearance of money, as the principal award to plaintiff-appellee (private respondent) in the amount of P2,300.000.00 was the overdue debt of defendant-appellant to her since July 1981. The case is, in effect, a simple collection of the money due to plaintiff-appellee, as the unpaid creditor from the defendant bank, the debtor" (Resolution, p.3; Rollo, p. 33). Applying Central Bank Circular No. 416, the Court of Appeals held that the applicable rate of interest is 12% per annum. Petitioner argues that the applicable law is Article 2209 of the Civil Code, not the Central Bank Circular No. 416. Said Article 2209 provides: Art. 2209. If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for damages,

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there being no stipulation to the contrary, shall be the payment of the interest agreed upon, and in the absence of stipulation, the legal interest, which is six per cent per annum. ISSUE: Whether or not the legal rate of interest on the amount of P2,300,000.00 adjudged to be paid by petitioner to private respondent is 12% per annum. RULING: Presidential Decree No. 116 authorized the Monetary Board to prescribe the maximum rate or rates of interest for the loan or renewal thereof or the forbearance of any money, goods or credits and amended the Usury Law (Act No. 2655) for that purpose. As amended, the Usury Law now provides: Sec. The rate of interest for the loan or forbearance of any money, goods, or credits and the rate allowed in judgments, in the absence of express contract as to such rate of interest, shall be six per centum per annum or such rate as may be prescribed by the Monetary Board of the Central Bank of the Philippines for that purpose in accordance with the authority hereby granted. Sec. 1-a. The Monetary Board is hereby authorized to prescribe the maximum rate or rates of interest for the loan or renewal thereof or the forbearance of any money, goods or credits, and to charge such rate or rates whenever warranted by prevailing economic and social conditions:Provided, That such changes shall not be made oftener that once every twelve months. In the exercise of the authority herein granted, the Monetary Board may prescribe higher maximum rates for consumer loans or renewals thereof as well as such loans made by pawnshops, finance companies and other similar credit institutions although the rates prescribed for these institutions need not necessarily be uniform. Acting on the authority vested on it by the Usury Law, as amended by P.D. No. 116, the Monetary Board of Central Bank issued Central Bank Circular No. 416, which provides:

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

By virtue of the authority granted to it under Section 1 of Act 2655, as amended, otherwise known as the "Usury Law" the Monetary Board in its Resolution No. 1622 dated July 29, 1974, has prescribed that the rate of interest for the loan, or forbearance of any money, goods, or credits and the rate allowed in judgments, in the absence of express contract as to such rate of interest, shall be twelve (12%) per cent per annum. This Circular shall take effect immediately. Note that Circular No. 416, fixing the rate of interest at 12% per annum, deals with (1) loans; (2) forbearance of any money, goods or credit; and (3) judgments. What then is the nature of the judgment ordering petitioner to pay private respondent the amount of P2,300,000.00? The said amount was a portion of the P7,776,335.69 which petitioner was obligated to pay Greatland as consideration for the sale of several parcels of land by Greatland to petitioner. The amount of P2,300,000.00 was assigned by Greatland in favor of private respondent. The said obligation therefore arose from a contract of purchase and sale and not from a contract of loan or mutuum. Hence, what is applicable is the rate of 6% per annum as provided in Article 2209 of the Civil Code of the Philippines and not the rate of 12% per annum as provided in Circular No. 416. Petitioner next contends that, consistent with its thesis that Circular No. 416 applies only to judgments involving the payment of loans or forbearance of money, goods and credit, the Court of Appeals should have ordered private respondent to pay interest at the rate of 12% on the overpayment collected by her pursuant to the advance execution of the judgment. We sustain petitioner's contention as correct. Private respondent was paid in advance the amount of P5,517,707.00 by petitioner to the order for the execution pending appeal of the judgment of the trial court. On appeal, the Court of Appeals reduced the total damages to P3,619,083.33, leaving a balance of P1,898,623.67 to be refunded by private respondent to petitioner. In an execution

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pending appeal, funds are advanced by the losing party to the prevailing party with the implied obligation of the latter to repay former, in case the appellate court cancels or reduces the monetary award. In the case before us, the excess amount ordered to refunded by private respondent falls within the ruling in Viloria and Buiser that Circular No. 416 applies to cases where money is transferred from one person to another and the obligation to return the same or a portion thereof is subsequently adjudged. CHUA vs. TIMAN FACTS: In February and March 1999, petitioners Salvador and Violeta Chua granted respondents Rodrigo, Ma. Lynn and Lydia Timan the following loans: a) P100,000; b) P200,000; c) P150,000; d) P107,000; e) P200,000; and f) P107,000. These loans were evidenced by promissory notes with interest of 7% per month, which was later reduced to 5% per month. Respondents paid the loans initially at 7% interest rate per month until September 1999 and then at 5% interest rate per month from October to December 1999. Sometime in March 2000, respondents offered to pay the principal amount of the loans through a Philippine National Bank manager’s check worth P764,000, but petitioners refused to accept the same insisting that the principal amount of the loans totalled P864,000. On May 3, 2000, respondents deposited P864,000 with the Clerk of Court of the RTC of Quezon City. Later, they filed a case for consignation and damages which was released to the petitioners. The RTC rendered a decision in favor of respondents which was affirmed by the CA. It ruled that the original stipulated interest rates of 7% and 5% per month were excessive. It further ordered petitioners to refund to respondents all interest payments in excess of the legal rate of 1% per month or 12% per annum. The Court of Appeals declared illegal the stipulated interest rates of 7% and 5% per

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

month for being excessive, iniquitous, unconscionable and exorbitant. Accordingly, the Court of Appeals reduced the stipulated interest rates of 7% and 5% per month (equivalent to 84% and 60% per annum, respectively) to a fair and reasonable rate of 1% per month or 12% per annum. The Court of Appeals also ordered petitioners to refund to respondents all interest payments in excess of 12% per annum. Petitioners aver that the stipulated interest of 5% monthly and higher cannot be considered unconscionable because these rates are not usurious by virtue of Central Bank (C.B.) Circular No. 905-82 which had expressly removed the interest ceilings prescribed by the Usury Law. Petitioners add that respondents were in pari delicto since they agreed on the stipulated interest rates of 7% and 5% per month. They further aver they honestly believed that the interest rates they imposed on respondents’ loans were not usurious. ISSUE: Whether or not the original stipulated interest rates of 7% and 5%, equivalent to 84% and 60% per annum, are unconscionable RULING: Yes. The stipulated interest rates of 7% and 5% per month imposed on respondents’ loans must be equitably reduced to 1% per month or 12% per annum. We need not unsettle the principle we had affirmed in a plethora of cases that stipulated interest rates of 3% per month and higher are excessive, iniquitous, unconscionable and exorbitant. Such stipulations are void for being contrary to morals, if not against the law. While C.B. Circular No. 905-82, which took effect on January 1, 1983, effectively removed the ceiling on interest rates for both secured and unsecured loans, regardless of maturity, nothing in the said circular could possibly be read as granting carte blanche authority to lenders to raise interest rates to levels which would either enslave their borrowers or lead to a hemorrhaging of their assets. Petitioners cannot also raise the defenses of in pari delicto and good faith. The defense of in pari delicto was not raised in the RTC, hence, such an issue cannot be raised for the first time on appeal. The defense of good faith must also fail because such an issue is a question of fact which may not be properly raised in a

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petition for review under Rule 45 of the Rules of Civil Procedure which allows only questions of law. As well set forth in Medel: We agree … that the stipulated rate of interest at 5.5% per month on the P500,000.00 loan is excessive, iniquitous, unconscionable and exorbitant. However, we can not consider the rate "usurious" because this Court has consistently held that Circular No. 905 of the Central Bank, adopted on December 22, 1982, has expressly removed the interest ceilings prescribed by the Usury Law and that the Usury Law is now "legally inexistent." In Security Bank and Trust Company vs. Regional Trial Court of Makati, it was held that CB Circular No. 905 "did not repeal nor in any way amend the Usury Law but simply suspended the latter’s effectivity." "Usury has been legally non-existent in our jurisdiction. Interest can now be charged as lender and borrower may agree upon." Nevertheless, we find the interest at 5.5% per month, or 66% per annum, stipulated upon by the parties in the promissory note iniquitous or unconscionable, and, hence, contrary to morals ("contra bonos mores"), if not against the law. The stipulation is void. DIO vs. SPOUSES JAPOR FACTS: Herein respondents Spouses Virgilio Japor and Luz Roces Japor were the owners of an 845.5 square-meter residential lot including its improvements. Adjacent to the Japor’s lot is another lot owned by respondent Marta Japor. On August 23, 1982, the respondents obtained a loan of P90,000 from the Quezon Development Bank (QDB), and as security therefor, they mortgaged the two lots as evidenced by a Deed of Real Estate Mortgage duly executed by and between the respondents and QDB. On December 6, 1983, respondents and QDB amended the Deed of Real Estate Mortgage increasing respondents’ loan to P128,000.

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

The respondents failed to pay their aforesaid loans. However, before the bank could foreclose on the mortgage, respondents, thru their broker, one Lucia G. Orian, offered to mortgage their properties to petitioner Teresita Dio. Petitioner prepared a Deed of Real Estate Mortgage, whereby respondents mortgaged anew the two properties already mortgaged with QDB to secure the timely payment of a P350,000 loan that respondents had from petitioner Dio. Under the terms of the deed, respondents agreed to pay the petitioner interest at the rate of five percent (5%) a month, within a period of two months or until April 14, 1989. In the event of default, an additional interest equivalent to five percent (5%) of the amount then due, for every month of delay, would be charged on them. The respondents failed to settle their obligation to petitioner on April 14, 1989, the agreed deadline for settlement. On August 27, 1991, petitioner made written demands upon the respondents to pay their debt. Despite repeated demands, respondents did not pay, hence petitioner applied for extrajudicial foreclosure of the mortgage. Meanwhile, on February 24, 1992, respondents filed an action for Fixing of Contractual Obligation with Prayer for Preliminary Mandatory Injunction/ Restraining Order, praying that the Deed of Real Estate Mortgage dated February 13, 1989 be declared null and void, and the plea that the trial court fix the contractual obligations of the Japors with Dio. On May 8, 1996, the bidding invoving the properties was conducted, with petitioner Dio as the sole bidder, purchased the properties for P3,500,000. The appellate court affirmed the decision of the trial court with respect to the validity of the Deed of Real Estate Mortgage, but modified the interest and penalty rates for being unconscionable and exorbitant.

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ISSUE: Whether or not the stipulations on interest and penalty in the Deed of Real Estate Mortgage is contrary to morals, if not illegal and were respondents entitled to any "surplus" on the auction sale price RULING: On the main issue, petitioner contends that The Usury Law1 has been rendered ineffective by Central Bank Circular No. 905, series of 1982 and accordingly, usury has become legally non-existent in this jurisdiction, thus, interest rates may accordingly be pegged at such levels or rates as the lender and the borrower may agree upon. Respondents admit they owe petitioner P350,000 and do not question any lawful interest on their loan but they maintain that the Deed of Real Estate Mortgage is null and void since it did not state the true intent of the parties, which limited the 5% interest rate to only two (2) months from the date of the loan and which did not provide for penalties and other charges in the event of default or delay. Respondents vehemently contend that they never consented to the said stipulations and hence, should not be bound by them. On the first issue, we are constrained to rule against the petitioner’s contentions. Central Bank Circular No. 905, which took effect on January 1, 1983, effectively removed the ceiling on interest rates for both secured and unsecured loans, regardless of maturity. However, nothing in said Circular grants lenders carte blanche authority to impose interest rates, which would result in the enslavement of their borrowers or to the hemorrhaging of their assets. While a stipulated rate of interest may not technically and necessarily be usurious under Circular No. 905, usury now being legally non-existent in our jurisdiction, nonetheless, said rate may be equitably reduced should the same be found to be iniquitous, unconscionable, and exorbitant, and hence, contrary to morals (contra bonos mores), if not against the law. What is iniquitous, unconscionable, and exorbitant shall depend upon the factual circumstances of each case. In the instant case, the Court of Appeals found that the 5% interest rate per month and 5%

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penalty rate per month for every month of default or delay is in reality interest rate at 120% per annum. This Court has held that a stipulated interest rate of 5.5% per month or 66% per annum is void for being iniquitous or unconscionable. We have likewise ruled that an interest rate of 6% per month or 72% per annum is outrageous and inordinate. Conformably to these precedent cases, a combined interest and penalty rate at 10% per month or 120% per annum, should be deemed iniquitous, unconscionable, and inordinate. Hence, we sustain the appellate court when it found the interest and penalty rates in the Deed of Real Estate Mortgage in the present case excessive, hence legally impermissible. Reduction is legally called for now in rates of interest and penalty stated in the mortgage contract. What then should the interest and penalty rates be? The evidence shows that it was indeed the respondents who proposed the 5% interest rate per month for two (2) months. Having agreed to said rate, the parties are now estopped from claiming otherwise. For the succeeding period after the two months, however, the Court of Appeals correctly reduced the interest rate to 12% per annumand the penalty rate to 1% per month, in accordance with Article 2227 of the Civil Code. But were respondents entitled to the "surplus" of P2,247,326 as a result of the "overpricing" in the auction? We note that the "surplus" was the result of the computation by the Court of Appeals of respondents’ outstanding liability based on a reduced interest rate of 12% per annum and the reduced penalty rate of 1% per month. In the instant case, however, there is no "surplus" to speak of. In adjusting the interest and penalty rates to equitable and conscionable levels, what the Court did was merely to reflect the true price of the land in the foreclosure sale. The amount of the petitioner’s bid merely represented the true amount of the mortgage debt. No surplus in the purchase price was thus created to which the respondents as the mortgagors have a vested right.

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** The interest rate for the subject loan owing to QDB is hereby fixed at five percent (5%) for the first two (2) months following the date of execution of the Deed of Real Estate Mortgage, and twelve percent (12%) for the succeeding period. The penalty rate thereafter shall be fixed at one percent (1%) per month. Petitioner Teresita Dio is declared free of any obligation to return to the respondents, the Spouses Virgilio Japor and Luz Roces Japor and Marta Japor, any surplus in the foreclosure sale price. There being no surplus, after the court below had applied our ruling in Sulit, respondents could not legally claim any overprice from the petitioner, much less the amount of P2,247,326.00. DARIO NACAR vs GALLERY FRAMES AND/OR FELIPE BORDEY, JR. FACTS: Petitioner Dario Nacar filed a complaint for constructive dismissal before the National Labor Relations Commission (NLRC) against Gallery Frames (GF) and/or Felipe Bordey, Jr. On October 15, 1998, the Labor Arbiter rendered a Decision in favor of petitioner and found that he was dismissed from employment without a valid or just cause and was never afforded due process. Thus, petitioner was awarded backwages and separation pay in lieu of reinstatement, in the amount of P158,919.92, computed only up to promulgation of this decision. Length of service was 8 yrs and 1 day. On November 5, 2002, petitioner filed a Motion for Correct Computation, praying that his backwages be computed from the date of his dismissal on January 24, 1997 up to the finality of the Resolution of the Supreme Court on May 27, 2002. Upon recomputation, NLRC arrived at an updated amount in the sum of P471,320.31.
 w Respondents filed a Motion to Quash Writ of Execution, arguing that no more recomputation is required after the decision becomes final and executory, the same cannot be altered or amended anymore. Denied. Reappealed and a recomputation was granted but only in the amount of P147,560.19.

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

Nacar then filed a Motion praying for the recomputation of the monetary award to include the appropriate interests. The Labor Arbiter granted the motion, but reasoned that it is the October 15, 1998 Decision that should be enforced considering that it was the one that became final and executory. However, the Labor Arbiter reasoned that since the decision states that the separation pay and backwages are computed only up to the promulgation of the said decision, it is the amount of P158,919.92 that should be executed. Thus, since petitioner already received P147,560.19, he is only entitled to the balance of P11,459.73. Nacar appealed to the CA. Denied. It opined that since petitioner no longer appealed the October 15, 1998 Decision of the Labor Arbiter, which already became final and executory, a belated correction thereof is no longer allowed. The CA stated that there is nothing left to be done except to enforce the said judgment. ISSUE: WON a re-computation in the course of execution of the labor arbiter's original computation of the awards made is legally proper. YES HELD: Computation should start from the time Nacar was illegally dismissed until judgment has become final and executory on May 27, 2013. Moreover, a recomputation is necessary and is not a violation of the principle of immutability of final judgments. The recomputation of the consequences of illegal dismissal upon execution of the decision does not constitute an alteration or amendment of the final decision being implemented. The illegal dismissal ruling stands; only the computation of monetary consequences of the dismissal is affected. As to the payment of legal interest, the guidelines laid down in the case of Eastern Shipping Lines are accordingly modified to embody BSP-MB Circular No. 799, as follows: I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts is breached, the contravenor can be held liable for damages. The provisions under Title XVIII on “Damages” of the Civil

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Code govern in determining the measure of recoverable damages. II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of interest, as well as the accrual thereof, is imposed, as follows: 1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 6% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code. 2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or damages, except when or until the demand can be established with reasonable certainty. Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code), but when such certainty cannot be so reasonably established at the time the demand is made, the interest shall begin to run only from the date the judgment of the court is made (at which time the quantification of damages may be deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount finally adjudged. 3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 6% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit.

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

The Decision of the CA is reversed and set aside. The case is remanded back to the LA for the proper recomputation. * The rate of interest starting July 1, 2013 is 6% per annum (since the original case was decided in 2002, 12% int was still applied) and applies prospectively. Computation of backwages and separation pay should start from the time an employee is illegally dismissed to the time judgment has become final and executory. Interest of such amount acrrues until full payment is made.

ECE REALTY AND DEVELOPMENT, INC., VS. HAYDYN HERNANDEZ FACTS: Haydn filed a complaint for specific performance with damages against EMIR and ECE Realty due to the failure of the respondents to deliver a condominium unit which he purchased from them. The respondents allegedly promised to turn over to him the unit by December 31, 1999, but failed to do so. Worse, he learned that the actual area was only 26 square meters, not 30 square meters as indicated in their contract to sell, and the company refused to grant his corresponding reduction in the purchase price; instead the companies told him to settle his arrears in amortizations. He learned later that that company sold Unit 808 to a third party. In their defense, the respondent faulted complainant for unjustifiably refusing to accept delivery of the condominium unit; that they were forced to cancel the contract to sell because of the refusal of the complainant to settle his past arrears. The HLURB ruled in favor of the complainant and ordered the company to reimburse the respondent the amount of P452,551.65, plus legal interest, from the filing of the complaint, and to pay the respondent P50,000.00 as moral damages, P50,000.00 as attorney’s fees, and P50,000.00 as exemplary damages.[11] The company appealed the case all the way to the CA and eventually to the Supreme Court. ISSUE: W/N ECE should reimburse Hernandez

be

liable

to

27

RULING: YES. The Supreme Court affirmed the ruling of the lower four and tribunals, with a slight modification of the legal interest imposable: “Article 2209 of the New Civil Code provides that “If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon, and in the absence of stipulation, the legal interest, which is six per cent per annum.” There is no doubt that ECE incurred in delay in delivering the subject condominium unit, for which reason the trial court was justified in awarding interest to the respondent from the filing of his complaint. There being no stipulation as to interest, under Article 2209 the imposable rate is six percent (6%) by way of damages, following the guidelines laid down in the landmark case of Eastern Shipping Lines v. Court of Appeals: II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of interest, as well as the accrual thereof, is imposed, as follows: 1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code. 2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand can be established with reasonable certainty. Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the time the

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claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably established at the time the demand is made, the interest shall begin to run only from the date the judgment of the court is made (at which time the quantification of damages may be deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount finally adjudged. 3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit.” “The term “forbearance,” within the context of usury law, has been described as a contractual obligation of a lender or creditor to refrain, during a given period of time, from requiring the borrower or debtor to repay the loan or debt then due and payable.

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credit, regardless of whether the award in fact pertained to one. Pursuant to Central Bank Circular No. 416 issued on July 29, 1974, in the absence of written stipulation the interest rate to be imposed in judgments involving a forbearance of credit was twelve percent (12%) per annum, up from six percent (6%) under Article 2209 of the Civil Code. This was reiterated in Central Bank Circular No. 905, which suspended the effectivity of the Usury Law beginning on January 1, 1983. But since July 1, 2013, the rate of twelve percent (12%) per annum from finality of the judgment until satisfaction has been brought back to six percent (6%). Section 1 of Resolution No. 796 of the Monetary Board of the Bangko Sentral ng Pilipinas dated May 16, 2013 provides: “The rate of interest for the loan or forbearance of any money, goods or credits and the rate allowed in judgments, in the absence of an express contract as to such rate of interest, shall be six percent (6%) per annum.” Thus, the rate of interest to be imposed from finality of judgments is now back at six percent (6%), the rate provided in Article 2209 of the Civil Code.”

Eastern Shipping Lines, Inc. synthesized the rules on the imposition of interest, if proper, and the applicable rate, as follows: The 12% per annum rate under CB Circular No. 416 shall apply only to loans or forbearance of money, goods, or credits, as well as to judgments involving such loan or forbearance of money, goods, or credit, while the 6% per annum under Art. 2209 of the Civil Code applies “when the transaction involves the payment of indemnities in the concept of damage arising from the breach or a delay in the performance of obligations in general,” with the application of both rates reckoned “from the time the complaint was filed until the [adjudged] amount is fully paid.” In either instance, the reckoning period for the commencement of the running of the legal interest shall be subject to the condition “that the courts are vested with discretion, depending on the equities of each case, on the award of interest.” (Emphasis ours)

FACTS: On May 14, 1978 and July 6, 1978, petitioner Antonio Tan obtained two (2) loans each in the principal amount of (P2,000,000.00), or in the total principal amount of Four Million Pesos (P4,000,000.00) from respondent Cultural Center of the Philippines (CCP) evidenced by two (2) promissory notes with maturity dates on May 14, 1979 and July 6, 1979, respectively. Petitioner defaulted but after a few partial payments he had the loans restructured by respondent CCP, and petitioner accordingly executed a promissory note on August 31, 1979 in the amount of (P3,411,421.32) payable in five (5) installments. Petitioner Tan failed to pay any installment on the said restructured loan of (P3,411,421.32), the last installment falling due on December 31, 1980.

Thus, from the finality of the judgment awarding a sum of money until it is satisfied, the award shall be considered a forbearance of

In a letter dated January 26, 1982, petitioner requested and proposed to respondent CCP a mode of paying the restructured loan, i.e., (a)

ANTONIO TAN v. COURT OF APPEALS and the CULTURAL CENTER OF THE PHILIPPINES

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

twenty percent (20%) of the principal amount of the loan upon the respondent giving its conformity to his proposal; and (b) the balance on the principal obligation payable in thirty-six (36) equal monthly installments until fully paid. On October 20, 1983, petitioner again sent a letter to respondent CCP requesting for a moratorium on his loan obligation until the following year allegedly due to a substantial deduction in the volume of his business and on account of the peso devaluation. No favorable response was made to said letters. Instead, respondent CCP, through counsel, wrote a letter dated May 30, 1984 to the petitioner demanding full payment, within ten (10) days from receipt of said letter, of the petitioner’s restructured loan which as of April 30, 1984 amounted to (P6,088,735.03). On August 29, 1984, respondent CCP filed in the RTC of Manila a complaint for collection of a sum of money against the petitioner after the latter failed to settle his said restructured loan obligation. The petitioner interposed the defense that he merely accommodated a friend, Wilson Lucmen, who allegedly asked for his help to obtain a loan from respondent CCP. Petitioner claimed that he has not been able to locate Wilson Lucmen. While the case was pending in the trial court, the petitioner filed a Manifestation wherein he proposed to settle his indebtedness to respondent CCP by proposing to make a down payment of (P140,000.00) and to issue twelve (12) checks every beginning of the year to cover installment payments for one year, and every year thereafter until the balance is fully paid. However, respondent CCP did not agree to the petitioner’s proposals and so the trial of the case ensued.

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findings, has allegedly made partial payments on the loan. And if penalty is to be awarded, the petitioner is asking for the non- imposition of interest on the surcharges inasmuch as the compounding of interest on surcharges is not provided in the promissory note marked Exhibit “A”. The petitioner takes exception to the computation of the private respondent whereby the interest, surcharge and the principal were added together and that on the total sum interest was imposed. Petitioner also claims that there is no basis in law for the charging of interest on the surcharges for the reason that the New Civil Code is devoid of any provision allowing the imposition of interest on surcharges. We find no merit in the petitioner’s contention. Article 1226 of the New Civil Code provides that: In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of interests in case of noncompliance, if there is no stipulation to the contrary. Nevertheless, damages shall be paid if the obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of the obligation. The penalty may be enforced only when it is demandable in accordance with the provisions of this Code. In the case at bar, the promissory note (Exhibit “A”) expressly provides for the imposition of both interest and penalties in case of default on the part of the petitioner in the payment of the subject restructured loan. The pertinent portion of the promissory note (Exhibit “A”) imposing interest and penalties provides that: xxx xxx xxx

TC: Ruled in favor of CCP. CA: Affirmed trial court’s decision. ISSUE (1): Whether there are contractual and legal bases for the imposition of the penalty, interest on the penalty and attorney’s fees. YES HELD 1: The petitioner imputes error on the part of the appellate court in not totally eliminating the award of attorney’s fees and in not reducing the penalties considering that the petitioner, contrary to the appellate court’s

With interest at the rate of FOURTEEN per cent (14%) per annum from the date hereof until paid. PLUS THREE PERCENT (3%) SERVICE CHARGE. In case of non-payment of this note at maturity/on demand or upon default of payment of any portion of it when due, I/We jointly and severally agree to pay additional penalty charges at the rate of TWO per cent (2%) per month on the total amount due until paid, payable and computed monthly. Default

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of payment of this note or any portion thereof when due shall render all other installments and all existing promissory notes made by us in favor of the CULTURAL CENTER OF THE PHILIPPINES immediately due and demandable. xxx xxx xxx The stipulated fourteen percent (14%) per annum interest charge until full payment of the loan constitutes the monetary interest on the note and is allowed under Article 1956 of the New Civil Code. On the other hand, the stipulated two percent (2%) per month penalty is in the form of penalty charge which is separate and distinct from the monetary interest on the principal of the loan. Penalty on delinquent loans may take different forms. In Government Service Insurance System v. Court of Appeals, this Court has ruled that the New Civil Code permits an agreement upon a penalty apart from the monetary interest. If the parties stipulate this kind of agreement, the penalty does not include the monetary interest, and as such the two are different and distinct from each other and may be demanded separately. The penalty charge of two percent (2%) per month in the case at bar began to accrue from the time of default by the petitioner. There is no doubt that the petitioner is liable for both the stipulated monetary interest and the stipulated penalty charge. The penalty charge is also called penalty or compensatory interest. ISSUE (2): whether interest may accrue on the penalty or compensatory interest without violating the provisions of Article 1959 of the New Civil Code. YES

30

penalty. He claims that since there is no law that allows imposition of interest on penalties, the penalties should notearn interest. But as we have already explained, penalty clauses can be in the form of penalty or compensatory interest. Thus, the compounding of the penalty or compensatory interest is sanctioned by and allowed pursuant to the above-quoted provision of Article 1959 of the New Civil Code considering that: First, there is an express stipulation in the promissory note (Exhibit “A”) permitting the compounding of interest. The fifth paragraph of the said promissory note provides that: “Any interest which may be due if not paid shall be added to the total amount when due and shall become part thereof, the whole amount to bear interest at the maximum rate allowed by law.” Therefore, any penalty interest not paid, when due, shall earn the legal interest of twelve percent (12%) per annum, in the absence of express stipulation on the specific rate of interest, as in the case at bar. Second, Article 2212 of the New Civil Code provides that “Interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent upon this point.” In the instant case, interest likewise began to run on the penalty interest upon the filing of the complaint in court by respondent CCP on August 29, 1984. Hence, the courts a quo did not err in ruling that the petitioner is bound to pay the interest on the total amount of the principal, the monetary interest and the penalty interest.

HELD 2: Art. 1959. Without prejudice to the provisions of Article 2212, interest due and unpaid shall not earn interest. However, the contracting parties may by stipulation capitalize the interest due and unpaid, which as added principal, shall earn new interest.

In the case at bar, however, equity cannot be considered inasmuch as there is a contractual stipulation in the promissory note whereby the petitioner expressly agreed to the compounding of interest in case of failure on his part to pay the loan at maturity. Inasmuch as the said stipulation on the compounding of interest has the force of law between the parties and does not appear to be inequitable or unjust, the said written stipulation should be respected.

According to the petitioner, there is no legal basis for the imposition of interest on the penalty charge for the reason that the law only allows imposition of interest on monetary interest but not the charging of interest on

The said statement of account also shows that the amounts stated therein are net of the partial payments amounting to a total of (P452,561.43) which were made during the period from May 13, 1983 to September 30,

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1983. The petitioner now seeks the reduction of the penalty due to the said partial payments. The principal amount of the promissory note (Exhibit “A”) was (P3,411,421.32) when the loan was restructured on August 31, 1979. As of August 28, 1986, the principal amount of the said restructured loan has been reduced to (P2,838,454.68). Thus, petitioner contends that reduction of the penalty is justifiable pursuant to Article 1229 of the New Civil Code which provides that: “The judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor. Even if there has been no performance, the penalty may also be reduced by the courts if it is iniquitous or unconscionable.” Petitioner insists that the penalty should be reduced to ten percent (10%) of the unpaid debt in accordance with Bachrach Motor Company v. Espiritu. There appears to be a justification for a reduction of the penalty charge but not necessarily to ten percent (10%) of the unpaid balance of the loan as suggested by petitioner. Inasmuch as petitioner has made partial payments which showed his good faith, a reduction of the penalty charge from two percent (2%) per month on the total amount due, compounded monthly, until paid can indeed be justified under the said provision of Article 1229 of the New Civil Code. In other words, we find the continued monthly accrual of the two percent (2%) penalty charge on the total amount due to be unconscionable inasmuch as the same appeared to have been compounded monthly. Considering petitioner’s several partial payments and the fact he is liable under the note for the two percent (2%) penalty charge per month on the total amount due, compounded monthly, for twenty-one (21) years since his default in 1980, we find it fair and equitable to reduce the penalty charge to a straight twelve percent (12%) per annum on the total amount due starting August 28, 1986, the date of the last Statement of Account. SEBASTIAN SIGA-AN vs ALICIA VILLANUEVA FACTS: Respondent Alicia Villanueva filed a

31

complaint for sum of money against petitioner Sebastian Siga-an alleging that she was a businesswoman engaged in supplying office materials and equipment to the Philippine Navy Office (PNO) while petitioner was a military officer and comptroller of the PNO. Respondent claimed that petitioner approached her inside the PNO and offered to loan her the amount of P540,000.00. Since she needed capital for her business transactions with the PNO, she accepted petitioner’s proposal. The loan agreement was not reduced in writing. Also, there was no stipulation as to the payment of interest for the loan. Respondent issued a check worth P500,000.00 as partial payment of the loan, another check of P200,000.00 as payment of the remaining balance of the loan. Petitioner told her that since she paid a total amount of P700,000.00 for theP540,000.00 worth of loan, the excess amount of P160,000.00 would be applied as interest for the loan. Not satisfied with the amount applied as interest, petitioner pestered her to pay additional interest and threatened to block or disapprove her transactions with the PNO if she would not comply. Thus she paid additional amounts for the loan. The total amount paid to petitioner for the loan and interest accumulated toP1,200,000.00. Respondent consulted a lawyer and her lawyer told her that petitioner could not validly collect interest because there was no agreement between her and petitioner regarding payment of interest thus she made overpayment to petitioner so she sent a demand letter to petitioner asking for the return of the excess amount of P660,000.00. But petitioner ignored her claim for reimbursement. ISSUE: WON respondent reimbursement? YES

is

entitled

to

HELD: Interest is a compensation fixed by the parties for the use or forbearance of money. This is referred to as monetary interest. Interest may also be imposed by law or by courts as penalty or indemnity for damages. This is called compensatory interest. The right to interest arises only by virtue of a contract or by virtue of damages for delay or failure to pay the principal loan on which interest is

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demanded. Article 1956 of the Civil Code, which refers to monetary interest, specifically mandates that no interest shall be due unless it has been expressly stipulated in writing. Payment of monetary interest is allowed only if: (1) there was an express stipulation for the payment of interest; and (2) the agreement for the payment of interest was reduced in writing. The concurrence of the two conditions is required. Thus, we have held that collection of interest without any stipulation therefor in writing is prohibited by law. Petitioner and respondent did not agree on the payment of interest for the loan. Neither was there convincing proof of written agreement between the two regarding the payment of interest.

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The principle of solutio indebiti applies where (1) a payment is made when there exists no binding relation between the payor, who has no duty to pay, and the person who received the payment; and (2) the payment is made through mistake, and not through liberality or some other cause. Respondent was under no duty to make such payment because there was no express stipulation in writing to that effect. There was no binding relation between petitioner and respondent as regards the payment of interest. The payment was clearly a mistake. Since petitioner received something when there was no right to demand it, he has an obligation to return it. POLICY: No interest shall be due unless it has been expressly stipulated in writing.

PART III: USURY LAW SOLIDBANK vs PERMANENT HOMES

As to the contention of petitioner that respondent executed a promissory note: the presented promissory note was in her handwriting because Siga-an told her to copy it and she did because she feared the threats of Sigaan to block her deals with the PhilNavy. And as to the alleged admission in the BP 22 cases that they had agreed on the payment of interest at the rate of 7%, respondent merely testified that after paying the total amount of loan, petitioner ordered her to pay interest. Respondent did not categorically declare in the same case that she and respondent made an express stipulation in writing as regards payment of interest at the rate of 7%. An interest may be imposed even in the absence of express stipulation, verbal or written, regarding payment of interest under Art 2209 of CC that if the obligation consists in the payment of a sum of money, and the debtor incurs delay, a legal interest of 12% per annum may be imposed as indemnity for damages if no stipulation on the payment of interest was agreed upon. It only applies to compensatory interest and not to monetary interest. The case at bar involves petitioner’s claim for monetary interest. Further, said compensatory interest is not chargeable in the instant case because it was not duly proven that respondent defaulted in paying the loan.

FACTS: PERMANENT HOMES is a real estate development company, and to finance its housing project known as the “Buena Vida Townhomes” located within Merville Subdivision, Parañaque City, it applied and was subsequently granted by SOLIDBANK with an “Omnibus Line” credit facility in the total amount of SIXTY MILLION PESOS. Of the entire loan, FIFTY NINE MILLION as time loan for a term of up to three hundred sixty (360) days, with interest thereon at prevailing market rates, and subject to monthly repricing. The remaining ONE MILLION was available for domestic bills purchase. To secure the aforesaid loan, PERMANENT HOMES initially mortgaged three (3) townhouse units within the Buena Vida project in Parañaque. At the time, however, the instant complaint was filed against SOLIDBANK, a total of 36 townhouse units were mortgaged with said bank. Of the 60 million available to PERMANENT HOMES, it availed of a total of 41.5 million pesos, covered by three (3) promissory notes, which contain the following provisions, thus: “xxx 5. We/I irrevocably authorize Solidbank to increase or decrease at any time the interest rate agreed in this Note or

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Loan on the basis of, among others, prevailing rates in the local or international capital markets. For this purpose, We/I authorize Solidbank to debit any deposit or placement account with Solidbank belonging to any one of us. The adjustment of the interest rate shall be effective from the date indicated in the written notice sent to us by the bank, or if no date is indicated, from the time the notice was sent. 6. Should We/I disagree to the interest rate adjustment, We/I shall prepay all amounts due under this Note or Loan within thirty (30) days from the receipt by anyone of us of the written notice. Otherwise, We/I shall be deemed to have given our consent to the interest rate adjustment.” Contrary, however, to the specific provisions as afore- quoted, there was a standing agreement by the parties that any increase or decrease in interest rates shall be subject to the mutual agreement of the parties. For the first loan availment of PERMANENT HOMES on March 20, 1997, in the amount of 19.6 MILLION, from the initial interest rate of14.25% per annum (p.a.), the rate was increased to 30% p.a. on January 16, 1998. For the second loan availment in the amount of 18 million, the rate was initially pegged at 15.75% p.a. on June 24, 1997 increased 30% p.a.from January 22, 1998 to February 20, 1998. For the third loan availment on July 15, 1997, in the amount of 3.9 million, the interest rate was initially pegged at 35% p.a., decreased at 29% p.a. for the month of February. It is Permanent’s stand that SOLIDBANK unilaterally and arbitrarily accelerated the interest rates without any declared basis of such increases, of which PERMANENT HOMES had not agreed to, or at the very least, been informed of. This is contrary to their earlier agreement that any interest rate changes will be subject to mutual agreement of the parties. PERMANENT HOMES further admits that it was not able to protest such arbitrary increases at the time they were imposed by SOLIDBANK, for fear that SOLIDBANK might cut off the credit facility it extended to PERMANENT HOMES.

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Permanent filed a case before the trial court seeking the following: (1) the annulment of the increases in interest rates on the loans it obtained from SOLIDBANK, on the ground that it was violative of the principle of mutuality of agreement of the parties, as enunciated in Article 1409 of the New Civil Code, (2) the fixing of the interest rates at the applicable interest rate, and (3) for the trial court to order SOLIDBANK to make an accounting of the payments it made, so as to determine the amount of refund PERMANENT is entitled to, as well as to order SOLIDBANK to release the remaining available balance of the loan it extended to PERMANENT. In addition, Permanent prays for the payment of compensatory, moral and exemplary damages. SOLIDBANK, on the other hand, avers that PERMANENT HOMES has no cause of action against it, in view of the pertinent provisions of the Omnibus Credit Line and the promissory notes agreed to and signed by PERMANENT HOMES. Thus, in accordance with said provisions, SOLIDBANK was authorized to, upon due notice, periodically adjust the interest rates on PERMANENT HOMES’ loan availments during the monthly interest repricing dates, depending on the changes in prevailing interest rates in the local and international capital markets. SOLIDBANK, to establish its defense, presented its lone witness, Mr. Cesar Lugtu, who testified to the effect that, contrary to PERMANENT HOMES’ assertions that it was not promptly informed of the repriced interest rates, SOLIDBANK’s officers verbally advised PERMANENT HOMES of the repriced rates at the start of the period, and even added that their transaction[s] were based on trust. Aside from these allegations, however, no written memorandum or note was presented by SOLIDBANK to support their assertion that PERMANENT HOMES was timely advised of the repriced interests. The trial court promulgated its Decision in favor of Solidbank. Permanent filed an appeal before the appellate court. The appellate court granted the appeal, and set aside the trial court’s ruling. The appellate court not only recognized the validity of escalation clauses, but also underscored the necessity of a basis

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admitted that it did not promptly send Permanent written repriced rates, but rather verbally advised Permanent’s officers over the phone at the start of the period.

for the increase in interest rates and of the principle of mutuality of contracts. ISSUE: WON the increases in the interest rates on Permanent’s loans are void for having been unilaterally imposed without basis. YES. HELD: The Usury Law had been rendered legally ineffective by Resolution No. 224 dated 3 December 1982 of the Monetary Board of the Central Bank, and later by Central Bank Circular No. 905 which took effect on 1 January 1983. These circulars removed the ceiling on interest rates for secured and unsecured loans regardless of maturity. The effect of these circulars is to allow the parties to agree on any interest that may be charged on a loan. The virtual repeal of the Usury Law is within the range of judicial notice which courts are bound to take into account. Although interest rates are no longer subject to a ceiling, the lender still does not have an unbridled license to impose increased interest rates. The lender and the borrower should agree on the imposed rate, and such imposed rate should be in writing. The stipulations, contained in the 3 promissory notes on interest rate repricing are valid because (1) the parties mutually agreed on said stipulations; (2) repricing takes effect only upon Solidbank’s written notice to Permanent of the new interest rate; and (3) Permanent has the option to prepay its loan if Permanent and Solidbank do not agree on the new interest rate. The phrases “irrevocably authorize,” “at any time” and “adjustment of the interest rate shall be effective from the date indicated in the written notice sent to us by the bank, or if no date is indicated, from the time the notice was sent,” emphasize that Permanent should receive a written notice from Solidbank as a condition for the adjustment of the interest rates. Solidbank’s range of lending rates were consistent with “prevailing rates in the local or international capital markets.” The interest rate repricing happened at the height of the Asian financial crises in late 1997, when banks clamped down on lendings because of higher credit risks across industries, particularly the real estate industry. The

SC

also

recognize

that

Solidbank

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Solidbank did not present any written memorandum to support its allegation that it promptly advised Permanent of the change in interest rates. Solidbank advised Permanent on the repriced interest rate applicable for the 30-day interest period only after the period had begun. Permanent presented a tabulation which showed that Solidbank either did not send a billing statement, or sent a billing statement 6 to 33 days late. Solidbank’s computation of the interest due from Permanent should be adjusted to take effect only upon Permanent’s receipt of the written notice from Solidbank. PART IV: DEPOSIT (Articles 1962 – 2009)

I.

Deposit in General and its Different Kinds BPI vs IAC FACTS: The original parties to the case were Zshornack and Commercial Bank and Trust Company of the Phils (Comtrust). In 1980, BPI absorbed Comtrust through a merger and was substituted as party to the case. Zshornack and his wife maintained in Comtrust a dollar savings account and a peso current account. On Dec 8, 1975, Zshornack delivered to the bank $3000 for safekeeping. When he requested the return of the money, Comtrust explained that the sum was disposed of in this manner: US$2,000.00 was sold on December 29, 1975 and the peso proceeds amounting to P14,920.00 were deposited to Zshornack's current account per deposit slip accomplished by Garcia; the remaining US$1,000.00 was sold on February 3, 1976 and the peso proceeds amounting to P8,350.00 were deposited to his current account per deposit slip also accomplished by Garcia. Aside from asserting that the US$3,000.00 was properly credited to Zshornack's current account at prevailing conversion rates, BPI now posits another ground to defeat private

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respondent's claim. It now argues that the contract embodied in the document is the contract of depositum (as defined in Article 1962, New Civil Code), which banks do not enter into. The bank alleges that Garcia exceeded his powers when he entered into the transaction. Hence, it is claimed, the bank cannot be liable under the contract, and the obligation is purely personal to Garcia.

business day from receipt. Otherwise, the contract of depositum would never have been entered into at all. Since the mere safekeeping of the greenbacks, without selling them to the Central Bank within one business day from receipt, is a transaction which is not authorized by CB Circular No. 20, it must be considered as one which falls under the general class of prohibited transactions. Hence, pursuant to Article 5 of the Civil Code, it is void, having been executed against the provisions of a mandatory/prohibitory law. More importantly, it affords neither of the parties a cause of action against the other. "When the nullity proceeds from the illegality of the cause or object of the contract, and the act constitutes a criminal offense, both parties being in pari delicto, they shall have no cause of action against each other. . ." [Art. 1411, New Civil Code.] The only remedy is one on behalf of the State to prosecute the parties for violating the law.

ISSUE: WON the contract between petitioner and respondent bank is a deposit. YES. HELD: The document which embodies the contract states that the US$3,000.00 was received by the bank for safekeeping. The subsequent acts of the parties also show that the intent of the parties was really for the bank to safely keep the dollars and to return it to Zshornack at a later time, Thus, Zshornack demanded the return of the money on May 10, 1976, or over five months later. The above arrangement is that contract defined under Article 1962, New Civil Code, which reads: Art. 1962. A deposit is constituted from the moment a person receives a thing belonging to another, with the obligation of safely keeping it and of returning the same. If the safekeeping of the thing delivered is not the principal purpose of the contract, there is no deposit but some other contract. Note that the object of the contract between Zshornack and COMTRUST was foreign exchange. Hence, the transaction was covered by Central Bank Circular No. 20, Restrictions on Gold and Foreign Exchange Transactions, promulgated on December 9, 1949, which was in force at the time the parties entered into the transaction involved in this case. Under the said circular, safekeeping of the greenbacks without selling them to Central Bank within 1 business day from receipt, is a transaction which is not authorized. As earlier stated, the document and the subsequent acts of the parties show that they intended the bank to safekeep the foreign exchange, and return it later to Zshornack, who alleged in his complaint that he is a Philippine resident. The parties did not intended to sell the US dollars to the Central Bank within one

35

Therefore, Zshornack cannot recover under this cause of action.

II.

Voluntary Deposit CALIBO, JR. VS COURT OF APPEALS FACTS: In 1985, Mike Abella rented a house owned by Atty. Dionisio Calibo, Jr. Meanwhile, Dr. Pablo Abella, Mike’s father, entrusted to Mike a tractor. Pablo delivered the tractor to Mike in order for the latter to safe-keep the same. In November 1986, Mike defaulted in his rental payments to Calibo. Calibo repeatedly demanded payments but Mike failed to pay. However, Mike assured Calibo that he will soon pay and Mike used his father’s tractor as a security. Hence, Calibo took possession of the tractor. Later, Mike advised Calibo that he can sell the tractor as payment for his debts. Pablo learned of the foregoing and so he contacted Calibo. He offered to pay a portion of Mike’s debt and in return Calibo must return the tractor. Calibo refused and he wanted Pablo to guarantee all of Mike’s debt which Pablo does not want. Eventually, to redeem his tractor, Pablo filed a replevin suit against

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Calibo, which Pablo won. On appeal, Calibo invoked that the replevin should not have been granted as there was a valid contract of pledge between him and Mike; and that Mike was Pablo’s agent because Pablo was aware of the fact that Mike pledged the tractor to him. In the alternative, Calibo invoked that if there’s no contract of pledge, there is at least a contract of deposit since Mike himself left the tractor with him in the concept of an innkeeper. ISSUE: Whether or not the arguments of Calibo are valid. HELD: No. There is no contract of pledge. The elements of a contract of pledge are as follows: 1. the pledge is constituted to secure the fulfillment of a principal obligation; 2. the pledgor be the absolute owner of the thing pledged; and 3. the person constituting the pledge has the free disposal of his property, and in the absence thereof, that he be legally authorized for the purpose. In this case, element number 2 is missing. Mike is not the absolute owner of the tractor. There is no contract of agency between Pablo and Mike. It was proven in court that Pablo only left the tractor in his son’s possession only for the purpose of safekeeping. Pablo was not aware that his son pledged it to Calibo and he never authorized his son to do so. There is no contract of deposit between Mike and Calibo. There is no deposit where the principal purpose for receiving the object is not safekeeping. In this case, Calibo himself admitted in court that Mike delivered the tractor to him as security for Mike’s debts. The judgment ordering Calibo to return the tractor to Pablo was affirmed by the Supreme Court.

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CHAN VS. MACEDA, JR. FACTS: On July 28, 1976, Bonifacio S. Maceda, Jr., herein respondent, obtained a P7.3 million loan from the Development Bank of the Philippines for the construction of his New Gran Hotel Project in Tacloban City. Thereafter, on September 29, 1976, respondent entered into a building construction contract with Moreman Builders Co., Inc., (Moreman). They agreed that the construction would be finished not later than December 22, 1977. Respondent purchased various construction materials and equipment in Manila. Moreman, in turn, deposited them in the warehouse of Wilson and Lily Chan, herein petitioners. The deposit was free of charge. Unfortunately, Moreman failed to finish the construction of the hotel at the stipulated time. Hence, on February 1, 1978, respondent filed with the then Court of First Instance (CFI, now Regional Trial Court), Branch 39, Manila, an action for rescission and damages against Moreman, docketed as Civil Case No. 113498. Meanwhile, during the pendency of the case, respondent ordered petitioners to return to him the construction materials and equipment which Moreman deposited in their warehouse. Petitioners, however, told them that Moreman withdrew those construction materials in 1977. Hence, on December 11, 1985, respondent filed with the Regional Trial Court, Branch 160, Pasig City, an action for damages with an application for a writ of preliminary attachment against petitioners,7 docketed as Civil Case No. 53044. ISSUES: 1. Has respondent presented proof that the construction materials and equipment were actually in petitioners' warehouse when he asked that the same be turned over to him? NO 2. If so, does respondent have the right to demand the release of the said materials and equipment or claim for damages? NO HELD: Under Article 1311 of the Civil Code, contracts are binding upon the parties (and their assigns and heirs) who execute them. When there is no privity of contract, there is

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likewise no obligation or liability to speak about and thus no cause of action arises. Specifically, in an action against the depositary, the burden is on the plaintiff to prove the bailment or deposit and the performance of conditions precedent to the right of action. A depositary is obliged to return the thing to the depositor, or to his heirs or successors, or to the person who may have been designated in the contract. In the present case, the record is bereft of any contract of deposit, oral or written, between petitioners and respondent. If at all, it was only between petitioners and Moreman. And granting arguendo that there was indeed a contract of deposit between petitioners and Moreman, it is still incumbent upon respondent to prove its existence and that it was executed in his favor. However, respondent miserably failed to do so. The only pieces of evidence respondent presented to prove the contract of deposit were the delivery receipts. Significantly, they are unsigned and not duly received or authenticated by either Moreman, petitioners or respondent or any of their authorized representatives. Hence, those delivery receipts have no probative value at all. While our laws grant a person the remedial right to prosecute or institute a civil action against another for the enforcement or protection of a right, or the prevention or redress of a wrong, every cause of action excontractu must be founded upon a contract, oral or written, express or implied. Moreover, respondent also failed to prove that there were construction materials and equipment in petitioners' warehouse at the time he made a demand for their return. Considering that respondent failed to prove (1) the existence of any contract of deposit between him and petitioners, nor between the latter and Moreman in his favor, and (2) that there were construction materials in petitioners' warehouse at the time of respondent's demand to return the same, we hold that petitioners have no corresponding obligation or liability to respondent with respect to those construction materials. Anent the issue of damages, petitioners are still not liable because, as expressly provided for in Article 2199 of the Civil Code, actual or

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compensatory damages cannot be presumed, but must be proved with reasonable degree of certainty. A court cannot rely on speculations, conjectures, or guesswork as to the fact and amount of damages, but must depend upon competent proof that they have been suffered by the injured party and on the best obtainable evidence of the actual amount thereof. It must point out specific facts which could afford a basis for measuring whatever compensatory or actual damages are borne. Considering our findings that there was no contract of deposit between petitioners and respondent or Moreman and that actually there were no more construction materials or equipment in petitioners' warehouse when respondent made a demand for their return, we hold that he has no right whatsoever to claim for damages.

SIA v. CA FACTS: Herein petitioner and respondent entered into a contract denominated as a Lease Agreement whereby the former rented a safety deposit box owned by the latter . Petitioner placed in the deposit box her stamp collection which was subsequently lost and damaged due to a flood that took place in 1985 and 1986. The defendant bank rejected the petitioner’ s claim for compensation for his damaged stamps collection, so, the plaintiff instituted an action for damages against the defendant bank. The bank alleged that the contract was that of lease and its liability was limited to the exercise of the diligence to prevent the opening of the safe by any person other than the Renter, his authorized agent or legal representative; The Bank is not a depository of the contents of the safe and it has neither the possession nor the control of the same. The Bank has no interest whatsoever in said contents, except as herein provided, and it assumes absolutely no liability in connection therewith. RTC ruled in favor of petitioner. CA reversed the decision. ISSUE: Is SBTC liable for damages and loss? YES

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HELD: SBTC is a Depository Notwithstanding the Contract of Lease. In the recent case CA Agro-Industrial Development Corp. vs. Court of Appeals, the Court held that the use of a safety deposit box is not a contract of lease and that it is actually a special kind of deposit. The prevailing rule in American jurisprudence — that the relation between a bank renting out safe deposit boxes and its customer with respect to the contents of the box is that of a bailor and bailee, the bailment for hire and mutual benefit — has been adopted in this jurisdiction, thus: In the context of our laws which authorize banking institutions to rent out safety deposit boxes, it is clear that in this jurisdiction, the prevailing rule in the United States has been adopted. Section 72 of the General Banking Act [R.A. 337, as amended] pertinently provides: "Sec. 72. In addition to the operations specifically authorized elsewhere in this Act, banking institutions other than building and loan associations may perform the following services: (a) Receive in custody funds, documents, and valuable objects, and rent safety deposit boxes for the safequarding of such effects. xxx xxx xxx The banks shall perform the services permitted under subsections (a), (b) and (c) of this section asdepositories or as agents. . . ."(emphasis supplied) Note that the primary function is still found within the parameters of a contract of deposit, i.e., the receiving in custody of funds, documents and other valuable objects for safekeeping. The renting out of the safety deposit boxes is not independent from, but related to or in conjunction with, this principal function. A contract of deposit may be entered into orally or in writing (Art. 1969, Civil Code] and, pursuant to Article 1306 of the Civil Code, the parties thereto may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order or public policy. The depositary's responsibility for the safekeeping of the objects deposited in the case at bar is governed by Title I, Book IV of the Civil Code. Accordingly,

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the depositary would be liable if, in performing its obligation, it is found guilty of fraud, negligence, delay or contravention of the tenor of the agreement [Art. 1170, id.]. In the absence of any stipulation prescribing the degree of diligence required, that of a good father of a family is to be observed [Art. 1173, id.]. Hence, any stipulation exempting the depositary from any liability arising from the loss of the thing deposited on account of fraud, negligence or delay would be void for being contrary to law and public policy. Condition 13 and 14 of the Contract of Lease are Void. Conditions 13 and l4 of the questioned contract of lease of the safety deposit box, which read: "13. The bank is a depositary of the contents of the safe and it has neither the possession nor control of the same. "14. The bank has no interest whatsoever in said contents, except as herein expressly provided, and it assumes absolutely no liability in connection therewith." are void as they are contrary to law and public policy. Said provisions are inconsistent with the respondent Bank's responsibility as a depositary under Section 72 (a) of the General Banking Act. Furthermore, condition 13 stands on a wrong premise and is contrary to the actual practice of the Bank. It is not correct to assert that the Bank has neither the possession nor control of the contents of the box since in fact, the safety deposit box itself is located in its premises and is under its absolute control; moreover, the respondent Bank keeps the guard key to the said box. As stated earlier, renters cannot open their respective boxes unless the Bank cooperates by presenting and using this guard key. Clearly then, to the extent above stated, the foregoing conditions in the contract in question are void and ineffective. It has been said: "With respect to property deposited in a safedeposit box by a customer of a safe-deposit company, the parties, since the relation is a contractual one, may by special contract define their respective duties or provide for increasing or limiting the liability of the deposit company, provided such contract is not in violation of law or public policy. It must clearly appear that there actually was such a special contract,

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however, in order to vary the ordinary obligations implied by law from the relationship of the parties; liability of the deposit company will not be enlarged or restricted by words of doubtful meaning. The company, in renting safe-deposit boxes, cannot exempt itself from liability for loss of the contents by its own fraud or negligence or that, of its agents or servants, and if a provision of the contract may be construed as an attempt to do so, it will be held ineffective for the purpose. Although it has been held that the lessor of a safe-deposit box cannot limit its liability for loss of the contents thereof through its own negligence, the view has been taken that such a lessor may limit its liability to some extent by agreement or stipulation. SBTC is Negligent. Respondent cannot invoke fortuitous event under Article 1174by reason of its negligence . SBTC's negligence aggravated the injury or damage to the stamp collection. SBTC was aware of the floods of 1985 and 1986; it also knew that the floodwaters inundated the room where Safe Deposit Box No. 54 was located. In view thereof, it should have lost no time in notifying the petitioner in order that the box could have been opened to retrieve the stamps, thus saving the same from further deterioration and loss. In this respect, it failed to exercise the reasonable care and prudence expected of a good father of a family, thereby becoming a party to the aggravation of the injury or loss. Accordingly, the aforementioned fourth characteristic of a fortuitous event is absent Article 1170 of the Civil Code is therefore applicable ; Those who in the performance of their obligation are guilty of fraud, negligence, or delay, and those who in any manner contravene the tenor thereof, are liable for damages.

CA AGRO-INDUSTRIAL DEVELOPMENT CORP. vs CA and SECURITY BANK AND TRUST COMPANY FACTS: On July 3, 1979, petitioner through its president Sergio Aguirre, and spouses Ramon

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and Paula Pugao entered into an agreement where the former purchased from the latter two parcels of land for P350,625. P75,725 was paid as downpayment while the balance was covered by three postdated checks. Among the terms and conditions of said agreement were that the titles to the lots shall be transferred to the petitioner upon full payment of the purchase price and that the owner's copies of the certificates of title shall be deposited in a safety deposit box. The same could be withdrawn only upon the joint signatures of petitioner and spouses Pugaos upon full payment of the purchase price. Petitioner and spouses Pugaos then rented safety deposit box no. 1448 of respondent Security Bank and Trust Company and for this purpose both signed a contract of lease which contained the following conditions: 13. The bank is not a depositary of the contents of the safe and it has neither the possession nor control of the same. 14. The bank has no interest whatsoever in said contents, except herein expressly provided, and it assumes absolutely no liability in connection therewith. Thereafter, a certain Mrs. Margarita Ramos offered to buy from the petitioner the two lots and demanded the execution the deed of sale which necessarily entailed the production of the certificates of title. However, when the safety deposit box was open, the box yielded no such certificates. The delay in the reconstitution of the title compelled Mrs. Ramos to withdraw her offer and as a consequence, petitioner allegedly suffered a loss which forced the latter to file a complaint for damages against Security Bank and Trust Company. The Court of First Instance (Regional Trial Court) decided in favor of respondent bank citing paragraph 13 and 14 of the contract of lease which exonerates the bank from any liability. The Court of Appeals in turn affirmed the decision of the trial court on the theory that the contract executed between petitioner and respondent bank is a contract of lease (Article 1643) by virtue of which respondent bank was divested of any possession nor control over the safety deposit box.

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ISSUE: Is the contractual relation between petitioner and respondent bank one of bailor and bailee or one of lessor and lessee? bailor and bailee HELD: The contract in the case at bar is a special kind of deposit. The Court agrees with the petitioner that the contract for the rent of the safety deposit box is not an ordinary contract of lease. However, the Court cannot fully subscribe to the view that the same contract is to be strictly governed by the provisions of the Civil Code on deposit. It cannot be characterized as a contract of lease because the full and absolute possession and control of the safety deposit box was not given to the joint renters. The guard key remained with the bank and without this, the renters cannot open the safety deposit box. On the other hand, the respondent bank could not likewise open the box without the renter's key. Thus, Article 1643 and Article 1975 which was invoked by the Court of Appeals does not apply in the present case. We observe, however, that the deposit theory itself does not altogether find unanimous support even in American jurisprudence. We agree with the petitioner that under the latter, the prevailing rule is that the relation between a bank renting out safe-deposit boxes and its customer with respect to the contents of the box is that of a bail or and bailee, the bailment being for hire and mutual benefit. This is just the prevailing view because: There is, however, some support for the view that the relationship in question might be more properly characterized as that of landlord and tenant, or lessor and lessee. It has also been suggested that it should be characterized as that of licensor and licensee. The relation between a bank, safe-deposit company, or storage company, and the renter of a safedeposit box therein, is often described as contractual, express or implied, oral or written, in whole or in part. But there is apparently no jurisdiction in which any rule other than that applicable to bailments governs questions of the liability and rights of the parties in respect of loss of the contents of safe-deposit boxes. In the context of Philippine laws which

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authorize banking institutions to rent out safety deposit boxes, it is clear that in this jurisdiction, the prevailing rules in the United States has been adopted. Section 72 of the General Banking Act provides: Sec. 72. In addition to the operations specifically authorized elsewhere in this Act, banking institutions other than building and loan associations may perform the following services: (a) Receive in custody funds, documents, and valuable objects, and rent safety deposit boxes for the safeguarding of such effects. xxx xxx xxx The banks shall perform the services permitted under subsections (a), (b) and (c) of this section as depositories or as agents. . . .(emphasis supplied) It is to be noted that the primary function is still found within the parameters of a contract of deposit, i.e., the receiving in custody of funds, documents and other valuable objects for safekeeping. The renting out of the safety deposit boxes is not independent from, but related to or in conjunction with, this principal function. . A contract of deposit may be entered into orally or in writing and, pursuant to Article 1306 of the Civil Code, the parties thereto may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order or public policy. Accordingly, the depositary would be liable if, in performing its obligation, it is found guilty of fraud, negligence, delay or contravention of the tenor of the agreement. N.B. 1. In the absence of any stipulation prescribing the degree of diligence required, that of a good father of a family is to be observed. Hence, any stipulation exempting the depositary from any liability arising from the loss of the thing deposited on account of fraud, negligence or delay would be void for being contrary to law and public policy. Thus, conditions 13 and 14 of the questioned contract of lease of the safety deposit box are void as they are contrary to law and public

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policy. 2. Although the contract between petitioner and respondent bank was considered as a contract of deposit, the Court still affirmed the CA's decision to dismiss the case because no competent proof was presented to show that respondent bank was aware of the agreement between the petitioner and spouses Pugaos to the effect that the certificates of title were withdrawable from the safety deposit box only upon both parties' joint signatures. Also, no evidence was submitted to reveal that the loss of the certificates of title was due to fraud or negligence of the respondent bank.

SILVESTRA BARON vs PABLO DAVID G.R. Nos. L-26948 and L-26949 (October 8, 1927) FACTS: Silvestra Baron and Guillermo Baron, plaintiffs in the present case are the aunt and uncle respectively of Pablo David, the defendant, who is engaged in running a rice mill in the municipality of Magalang, in the Province of Pampanga. In the months of March, April and May 1920, Silvestra placed a quantity of palay in Pablo's mill which amounted to 1,012 cavans and 24 kilos. During the same period, Guillermo placed 1,865 cavans and 43 kilos of palay in the same milll. On January 17, 1921, a fire occurred that destroyed the rice mill and its contents owned and in the possession of Pablo David. Silvestra and Guillermo now seek to recover the value of such palays as they both claim that the palay they delivered was sold to Pablo. Pablo, on the other hand, claims that the palay was deposited subject to future withdrawal by the depositors or subject to some future sale which was never effected. Pablo therefore seeks to relieved himself from all responsibility by virtue of the fire. ISSUES: 1) What is the nature of the contract between the parties? 2)Whether or not Pablo David is liable for the value of the palays HELD: 1) The contract between the parties is a

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contract of commodatum. Under Article 1768 of the Civil Code, when the depository has the permission to make use of the thing deposited, the contract loses the character of mere deposit and becomes a loan or a commodatum; and of course by appropriating the thing, the bailee becomes responsible for its value. In the present case, the parties agreed that Pablo was at liberty to convert it into rice and dispose of it at his pleasure. It was insignificant whether the contract between the parties is that of a sale or a deposit for even supposing that the palay may have been delivered in the character of deposit subject to future sale or withdrawal at plaintiff's election because it was understood that Pablo might mill the palay and he has in fact appropriated it to his own use, therefore he is bound to account for its value. 2) Pablo David is liable for the value of the palay. It should be stated that the palay in question was place by the plaintiffs in the defendant's mill with the understanding that the defendant was at liberty to convert it into rice and dispose of it at his pleasure. The mill was actively running during the entire season, and as palay was daily coming in from many customers and as rice was being constantly shipped by the defendant to Manila, or other rice markets, it was impossible to keep the plaintiffs' palay segregated. In fact the defendant admits that the plaintiffs' palay was mixed with that of others. In view of the nature of the defendant's activities and the way in which the palay was handled in the defendant's mill, it is quite certain that all of the plaintiffs' palay, which was put in before June 1, 1920, been milled and disposed of long prior to the fire of January 17, 1921. Considering the fact that the defendant had thus milled and doubtless sold the plaintiffs' palay prior to the date of the fire, it result that he is bound to account for its value, and his liability was not extinguished by the occurrence of the fire.

ANGEL JAVELLANA vs JOSE LIM, ET AL., G.R. No. 4015 (August 24, 1908) FACTS: On October 30, 1906, Angel Javellana filed a complaint with the Court of First

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Instance against Jose Lim and Ceferino Domingo Lim and be sentenced jointly and severally to pay the sum of P2.686.58 with interest at the rate of 15 per cent per annum. It was alleged that on May 26, 1897, the defendants executed and subscribed a document in favor of the plaintiff reading as follows: We have received from Angel Javellana, as a deposit without interest, the sum of two thousand six hundred and eighty-six cents of pesos fuertes, which we will return to the said gentleman, jointly and severally, on the 20th of January, 1898. — Jaro, 26th of May, 1897. — Signed Jose Lim. — Signed: Ceferino Domingo Lim. When the obligation became due, the defendants begged the plaintiff for an extension of time for the payment thereof, agreeing to pay interest at the rate of 15 per cent, to which the latter accepted. On May 15, 1902, the defendants paid on account of interest due the sum of P1,000, with the exception of either capital or interest, had thereby been subjected to loss and damages. The defendants admitted the statements of the plaintiff relative to the payment of P1,102.16 made on November 15, 1902, not as payment of interest but on account of the principal, and denied that there had been any agreement as to the extension of the time of payment and the payment of interest at the rate of 15 per cent per annum. ISSUE: Whether or not the contract between the parties is a contract of deposit HELD: The contract between the parties is a contract of loan. The document of indebtedness inserted in the complaint stated that the plaintiff left on deposit with the defendants a given sum of money which they were jointly and severally obliged to return on a certain date fixed in the document; but nevertheless it was acknowledged at the date thereof, November 15, 1902, the amount deposited had not yet been returned to the plaintiff, whereby he was subject to losses and damages. When the return was again stipulated with the further agreement that the amount deposited should bear interest at the rate of 15 per cent per annum, from the aforesaid date of January 20, and that the

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1,000 pesos paid to the plaintiff on the 15th of May, 1900, according to the receipt issued by him to the defendants, would be included, and that the said rate of interest would obtain until the defendants on the 20th of May, 1897, it is called a deposit consisted, and they could have accomplished the return agreed upon by the delivery of a sum equal to the one received by them. For this reason, it is understood that the defendants were lawfully authorized to make use of the amount deposited, which they have done, as shown when they asked for an extension of the time to return the amount, inasmuch as they have subjected the plaintiff to losses and damages for not complying with what was stipulated and being aware that they had used the money that they received apparently as a deposit, they promised to pay the interest from the date named until the time when the refund should be made. Such conduct on the part of the defendants is unquestionable evidence that the transaction was not a deposit, but a real contract of loan. Article 1767 of the Civil Code provides that — The depository cannot make use of the thing deposited without the express permission of the depositor. Otherwise he shall be liable for losses and damages. Article 1768 also provides that — When the depository has permission to make use of the thing deposited, the contract loses the character of a deposit and becomes a loan or bailment. The permission shall not be presumed, and its existence must be proven. When on one of the latter days of January, 1898, Jose Lim went to the office of the plaintiff asking for an extension of one year, and agreed to pay interest at the rate of 15 per cent per annum, it was because, as a matter of fact, he did not have in his possession the amount deposited, he having made use of the same in his business and for his own profit; and the plaintiff, by granting them the extension, evidently confirmed the express permission previously given to use and dispose of the

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amount deposited, which, in accordance with the loan, to all intents and purposes gratuitously, until the 20th of January, 1898, and from that dated with interest at 15 per cent per annum until its full payment, deducting from the total amount of interest the sum of 1,000 pesos, in accordance with the provisions of article 1173 of the Civil Code. Notwithstanding that it does not appear that Jose Lim signed the document executed in the presence of three witnesses on the 15th of November, 1902, by Ceferino Domingo Lim on behalf of himself and the former, nevertheless, the said document has not been contested as false, either by a criminal or by a civil proceeding, nor has any doubt been cast upon the authenticity of the signatures of the witnesses who attested the execution of the same; and from the evidence in the case one is sufficiently convinced that the said Jose Lim was perfectly aware of and authorized his joint co-debtor to liquidate the interest, to pay the sum of 1,000 pesos, on account thereof, and to execute the aforesaid document No. 2. A true ratification of the original document of deposit was thus made, and not the least proof is shown in the record that Jose Lim had ever paid the whole or any part of the capital stated in the original document. There was no renewal of the contract deposited converted into a loan, because, as has already been stated, the defendants received said amount by virtue of real loan contract under the name of a deposit, since the so-called bailees were forthwith authorized to dispose of the amount deposited. This they have done, as has been clearly shown. COMPAÑIA AGRICOLA VS. NEPOMUCENO FACTS: On March 17, 1927, the registered partnerships, Mariano Velasco & Co., Mariano Velasco, Sons, & Co., and Mariano Velasco & Co., Inc., were declared insolvent by the Court of First Instance of Manila. On the 16th day of April, 1927, the Compania Agricola de Ultramar filed a claim against one of the insolvents Mariano Velasco & Co., claiming the sum of P10,000, with the agreed interest thereon at the rate of 6 per cent per annum from April 5, 1918, until its full payment was a deposit with said Mariano Velasco & Co.

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and asked the court to declare it a preferred claim. The assignee of the insolvency answered the claim by interposing a general denial. On September 23, 1929, the court rendered a decision declaring that the alleged deposit was a preferred claim for the sum mentioned, with interest at 6 per cent per annum from April 5, 1918, until paid. From this decision the assignee appealed. The evidence presented by the claimant Compania Agricola de Ultramar consisted of a receipt in writing, and the testimony of Jose Velasco who was manager of Mariano Velasco & Co. at the time the note was executed. The receipt reads as follows: MANILA, P. I., April 5, 1918. Received from the "Compania Agricola de Ultramar" the sum of ten thousand Philippine pesos as a deposit at the interest of six per cent annually, for the term of three months from date. In witness thereof, I sign the present. MARIANO VELASCO & CO. By (Sgd.) JOSE VELASCO Manager. P10,000.00. In his testimony, Jose Velasco stated that his signature on the receipt was authentic and that he received the said sum of P10,000 from the appellee and deposited it with the bank in the current account of Mariano Velasco & Co. ISSUE: WON the claim filed is that of a deposit or a loan? LOAN HELD: The Supreme Court reiterated the ruling in the case of Gavieres vs. De Tavera (1 Phil., 17) which had a very similar facts to the present case. The court held that the transaction therein involved was a loan and not a deposit. The court said: Although in the document in question a deposit is spoken of, nevertheless from an examination of the entire document it clearly appears that the contract was a loan and that such was the intention of the parties. It is unnecessary to recur to the

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cannons of interpretation to arrive at this conclusion. The obligation of the depository to pay interest at the rate of 6 per cent to the depositor suffices to cause the obligation to be considered as a loan and makes it likewise evident that it was the intention of the parties that the depository should have the right to make use of the amount deposited, since it was stipulated that the amount could be collected after notice of two months in advance. Such being the case, the contract lost the character of a deposit and acquired that of a loan. (Art.1768, Civil Code.) Article 1767 of the Civil Code provides that — "The depository cannot make use of the thing deposited without the express permission of the depositor." "Otherwise he shall be liable for losses and damages." Article 1768 also provides that — "When the depository has permission to make use of the thing deposited, the contract loses the character of a deposit and becomes a loan or bailment." "The permission not be presumed, and its existence must be proven." Moreover it may be inferred that there was no renewal of the contract of deposit converted into a loan, because, as has already been stated, the defendants received said amount by virtue of a real loan contract under the name of a deposit, since the so-called bailees were forthwith authorized to dispose of the amount deposited. This they have done, as has been clearly shown. The ten thousand pesos delivered by the appellee to Mariano Velasco & Co. cannot be regarded as a technical deposit. But the appellee argues that it is at least an "irregular deposit." This argument is, we think, sufficiently answered in the case of Rogers vs. Smith, Bell & Co. (10 Phil., 319). There this court said: …Manresa, in his Commentaries on the Civil Code (vol. 11, p. 664), states that there are three points of difference between a loan and an irregular deposit. The first difference which he points out consists in the fact that in an irregular deposit the only benefit is that which accrues to the depositor, while in a loan the essential cause for the transaction is the

necessity

of

the

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borrower.

Nor does the contract in question fulfill the third requisite indicated by Manresa, which is, that in an irregular deposit, the depositor can demand the return of the article at any time, while a lender is bound by the provisions of the contract and cannot seek restitution until the time for payment, as provided in the contract, has arisen. It is apparent from the terms of this documents that the plaintiff could not demand his money at any time. He was bound to give notice of his desire for its return and then to wait for six months before he could insist upon payment. In the present case the transaction in question was clearly not for the sole benefit of the Compania Agricola de Ultramar; it was evidently for the benefit of both parties. Neither could the alleged depositor demand payment until the expiration of the term of three months. For the reasons stated, the appealed judgment is reversed, and we hold that the transaction in question must be regarded as a loan, without preference.

ROGERS VS. SMITH FACTS: Plaintiff Jose Rogers (Rogers) brought this action in the CFI city of Manila upon the following document:(the subject document of the case) No. 1418. $12,000. The sum of pesos twelve thousand has been deposited with us, received from Jose Rogers, which sum we will pay on the last day of the six months after the presentation of this document, to the order of Mr. Jose Rogers. Manila, February 17, 1876. SMITH, BELL & CO. The said sum of twelve thousand pesos shall bear interest at the rate of eight per centum (8%) per annum from this date, February 17, 1876. SMITH, BELL & CO. When this document was delivered by the defendants Smith, Bell & CO. (Smith) to Rogers, 12,000 pesos in silver were worth more than 12,000 pesos in gold.

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The only question in the case is, whether upon these documents Rogers is entitled to recover 12,000 pesos or 24,000 pesos. CFI held that he was entitled to recover only 12,000 pesos. Rogers has appealed. Rogers delivered to Smith, in consideration of the execution of the document, 12,000 in gold. Soon thereafter Rogers moved to Barcelona and has since resided there. Smith remitted the interest to him every three months at the rate of 8 per cent per annum until the 30th day of January, 1888, when they notified him that thereafter the interest would be 6 per cent. Rogers accepted this reduction and interest and that rate was remitted to him by Smith until the 10th of February, 1904. This interest was remitted in silver; that is to say, every three months the Smith took 180 pesos in silver and with it bought exchange on Barcelona or other European point converted into pesetas. Rogers received these payments in silver without any protest whatever until the 10th day of February, 1904. In his letter of that date, he called the attention of the Smith to the fact that by the new American law in force in the Philippines the gold standard had been introduced and that by reason thereof he was entitled to receive his interest in gold, in view of the fact that when he delivered the money to the Smith in 1876 he delivered it in gold coin. In another letter of the 15th of December, 1904, he expressly refers to the act of Congress of March 2, 1903, and to the subsequent proclamations of the GovernorGeneral relating to coinage. Rogers claims that, having paid to Smith 12,000 pesos in gold coin, he is now entitled to receive from them the value of 12,000 pesos in gold coin; that is to say, 24,000 pesos in silver. It is necessary to determine in the first place the nature of the contract evidenced by the document of the 17th of February, 1876.

ISSUE: WON the document is an evidence of an ordinary loan which created between the Rogers and the Smith the simple relation of debtor and creditor. YES

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HELD: The document is an evidence of ordinary loan. Rogers repeatedly calls it a deposit, that is, that the ownership of the particular coin which was delivered by him to Smith did not pass to Smith but remained in him and that Smith was bound to return to him the identical coin which they had received. It is apparent that no such claim could be maintained in view of that part of the instrument which provides for the payment of interest. But while not a deposit in the strict sense of the word, the document evidences what is known as an "irregular deposit." The Supreme Court cited Manresa's discussion on the differences of a loan and an irregular deposit namely: 1. in irregular deposit the benefit accrues to the depositor alone whereas in loan the benefit is for both parties, the essential cause is the necessity of the borrower; 2. in irregular deposit the depositor has a preference over other creditors whereas in loan there is no such preference; 3. in irregular deposit the depositor can demand the return of the article at any time whereas in loan the parties are bound by the contract. In the first difference, the contract in question does not fulfill this requirement of an irregular deposit. It is very apparent that is was not for the sole benefit of Rogers. It like any other loan of money was for the benefit of both parties. The benefit which Smith, Bell & Co. received was the use of the money; the benefit which Rogers received was the interest of his money. In the letter which Smith, Bell & Co. on the 30th of June, 1888, notified the plaintiff of the reduction of the interest, they said: "We call your attention to this matter in order that you may if you think best employ your money in some other place." The second difference which exists, according to Manresa, between an irregular deposit and a loan lies in the fact that in an irregular deposit the depositor has a preference over

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other creditors in the distribution of the debtor's property. It is apparent, therefore, that this document does not state those requisites which are essential to an irregular deposit. Nor does the contract in question fulfill the third requisite, which is, in an irregular deposit, the depositor can demand the return of the article at any time, while a lender is bound by the provisions of the contract and cannot seek restitution until the time for payment, as provided in the contract, has arisen. It is apparent from the terms of this document that the plaintiff could not demand his money at any time. He was bound to give notice of his desire for its return and then to wait for six months before he could insist upon payment. From the above discussions, it is very apparent that is was not for the sole benefit of Rogers. Like any other loan it was for the benefit of both parties. The benefit of Smith Bell Company was the use of the money while Jose Rogers' benefit was the interest on his money. Also, he was not able to demand for the money at any time for he is supposed to give notice and wait for six months first before payment. Thus, the transaction is that of an ordinary loan and not an irregular deposit. BPI v. CA FACTS: Private respondents Eastern Plywood Corporation (Eastern) and Benigno D. Lim (Lim), held one joint bank account with the Commercial Bank and Trust Co. (CBTC), the predecessor-in-interest of petitioner Bank of the Philippine Islands (BPI). Sometime in March 1975, a joint checking account with Lim in the amount of P120,000.00 was opened by Mariano Velasco with funds withdrawn from the account of Eastern and/or Lim. Velasco died. At the time of his death, the outstanding balance of the account stood at P662,522.87. On 5 May 1977, by virtue of an Indemnity Undertaking executed by Lim one-half of this amounts was provisionally released and transferred to one of the bank accounts of Eastern with CBTC. Thereafter, Eastern

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obtained a loan of P73,000.00 from CBTC as "Additional Working Capital,". Eastern issued a negotiable promissory note for P73,000.00 payable on demand to the order of CBTC with interest at 14% per annum. The note was signed by Lim. The loan is wholly/partly secured by the Hold-Out on a 1:1 on C/A No. 2310-001-42, which refers to the joint account of Velasco and Lim with a balance of P331,261.44. In addition, Eastern and Lim, and CBTC signed another document entitled "Holdout Agreement," On the other hand, a case for the settlement of Velasco's estate was filed. In the said case, the whole balance of P331,261.44 in the aforesaid joint account of Velasco and Lim was being claimed as part of Velasco's estate. The intestate court granted motion of the heirs of Velasco to withdraw the balance and authorized the heirs to divide among themselves the amount withdrawn. CBTC was merged with BPI. BPI filed a complaint against Lim and Eastern demanding payment of the promissory note for P73,000.00. Defendants Lim and Eastern, in turn, filed a counterclaim against BPI for the return of the balance in the disputed account subject of the Holdout Agreement and the interests thereon after deducting the amount due on the promissory note. RTC dismissed the complaint and CA affirmed the decision. BPI’s CONTENTION: BPI alleged that the Holdout Agreement in question was subject to a suspensive condition stated therein, viz., that the "P331,261.44 shall become a security for respondent Lim's promissory note only if respondents' Lim and Eastern Plywood Corporation's interests to that amount are established as a result of a final and definitive judicial action or a settlement between and among the contesting parties thereto." Hence, BPI asserts, the Court of Appeals erred in affirming the trial court's decision dismissing the complaint on the ground that it was the duty of CBTC to debit the account of the defendants to set off the amount of P73,000.00 covered by the promissory note. EASTERN and LIM’s CONTENTION: Eastern and Lim dispute the "suspensive condition"

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argument of the petitioner that they are rightful owners of the money in question, the suspensive condition does not find any application in this case and the bank had the duty to set off this deposit with the loan. ISSUES: 1. WON BPI can demand payment of the loan of P73,000.00 despite the existence of the Holdout Agreement? YES 2. WON BPI is still liable to the private respondents on the account subject of the Holdout Agreement after its withdrawal by the heirs of Velasco? YES HELD: ISSUE 1: It is clear in paragraph 02 of the “Holdout Agreement” that CBTC, or BPI as its successor-in-interest, had every right to demand that Eastern and Lim settle their liability under the promissory note. It cannot be compelled to retain and apply the deposit in Lim and Velasco's joint account to the payment of the note. What the agreement conferred on CBTC was a power, not a duty. Generally, a bank is under no duty or obligation to make the application. To apply the deposit to the payment of a loan is a privilege, a right of setoff which the bank has the option to exercise. Also, paragraph 05 of the Holdout Agreement itself states that notwithstanding the agreement, CBTC was not in any way precluded from demanding payment from Eastern and from instituting an action to recover payment of the loan. What it provides is an alternative, not an exclusive, method of enforcing its claim on the note. Its suit for the enforcement of the note was then in order and it was error for the trial court to dismiss it on the theory that it was set off by an equivalent portion in C/A No. 2310-001-42 which BPI should have debited. The "suspensive condition" theory of the petitioner is, therefore, untenable. ISSUE 2: The Court of Appeals correctly decided on the counterclaim. The counterclaim of Eastern and Lim for the return of the P331,261.44 was equivalent to a demand that they be allowed to withdraw their deposit with the bank. Article 1980 of the Civil Code expressly provides that "[f]ixed, savings, and current deposits of money in banks and similar institutions shall be governed by the provisions

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concerning simple loan." In Serrano vs. Central Bank of the Philippines, we held that bank deposits are in the nature of irregular deposits; they are really loans because they earn interest. The relationship then between a depositor and a bank is one of creditor and debtor. The deposit under the questioned account was an ordinary bank deposit; hence, it was payable on demand of the depositor. The account was proved and established to belong to Eastern even if it was deposited in the names of Lim and Velasco. As the real creditor of the bank, Eastern has the right to withdraw it or to demand payment thereof. BPI cannot be relieved of its duty to pay Eastern simply because it already allowed the heirs of Velasco to withdraw the whole balance of the account. The petitioner should not have allowed such withdrawal because it had admitted in the Holdout Agreement the questioned ownership of the money deposited in the account. Moreover, the order of the court merely authorized the heirs of Velasco to withdraw the account. BPI was not specifically ordered to release the account to the said heirs; hence, it was under no judicial compulsion to do so. Because the ownership of the deposit remained undetermined, BPI, as the debtor, had no right to pay to persons other than those in whose favor the obligation was constituted or whose right or authority to receive payment is indisputable. Payment made by the debtor to the wrong party does not extinguish the obligation as to the creditor who is without fault or negligence, even if the debtor acted in utmost good faith and by mistake as to the person of the creditor, or through error induced by fraud of a third person. The payment then by BPI to the heirs of Velasco, even if done in good faith, did not extinguish its obligation to the true depositor, Eastern. METROBANK VS BA FINANCE FACTS: Lamberto Bitanga obtained from respondent BA Finance a loan, to secure which, he mortgaged his car to respondent BA Finance. Bitanga had the mortgaged car insured by respondent Malayan Insurance.

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The car was stolen. On Bitanga's claim, Malayan Insurance issued a check payable to the order of "BA Finance Corporation and Lamberto Bitanga", drawn against China Bank. The check was crossed with the notation "For Deposit Payees' Account Only." Without the indorsement or authority of his co-payee BA Finance, Bitanga deposited the check to his account with the Asian Bank, now merged with herein petitioner Metrobank. Bitanga subsequently withdrew the entire proceeds of the check. In the meantime, Bitanga's loan became past due, but despite demands, he failed to settle it. BA Finance eventually learned of the loss of the car and of Malayan Insurance's issuance of a crossed check payable to it and Bitanga, and of Bitanga's depositing it in his account at Asian Bank and withdrawing the entire proceeds thereof. BA Finance thereupon demanded the payment of the value of the check from Asian Bank but to no avail, prompting it to file a complaint before the RTC for sum of money and damages against Asian Bank and Bitanga, alleging that, inter alia, it is entitled to the entire proceeds of the check. The RTC, holding that Asian Bank was negligent in allowing Bitanga to deposit the check to his account and to withdraw the proceeds thereof, without his co-payee BA Finance having indorsed it or authorized him to indorse it in its behalf, found Asian Bank and Bitanga jointly and severally liable to BA Finance following Section 41 of the NIL. The appellate court affirmed the RTC's decision and held that BA Finance has a cause of action against it even if the subject check had not been delivered to BA Finance by the issuer itself. Hence, this petition. ISSUE: WON the petitioner is liable for the full value of the check. YES HELD: The SC held that Sec 41 of the NIL provides: "Where an instrument is payable to the order of two or more payees or indorsees who are not partners, all must indorse unless the one indorsing it has no authority to indorse for the others. Bitanga alone endorsed the crossed check, and the petitioner allowed the deposit and release of the proceeds thereof, despite the absence of authority of Bitanga's co-payee BA Finance to endorse it on its

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behalf. The payment of an instrument over a missing indorsement is the equivalent of payment on a forged indorsement or an unauthorized indorsement in itself in the case of joint payees. Clearly, petitioner, through its employee, was negligent when it allowed the deposit of the crossed check, despite the lone endorsement of Bitanga, ostensibly ignoring the fact that the check did not, it bears repeating, carry the indorsement of BA Finance.

REYES vs CA FACTS: In view of the 20th Asian Racing Conference to be held in Sydney, Australia, the Philippine Racing Club, Inc. (PRCI) sent 4 delegates to the said conference. Petitioner Gregorio Reyes, as VP for finance racing manager, treasurer, and directory of PRCI, sent Godofredo Reyes, the club's chief cashier, to Far East Bank and Trust Company (respondent) to apply for a foreign exchange demand draft in Australian dollars (AU$ 1,610.00). Mr. Yasis, bank's assistant cashier, first denied the application for the reason that respondent bank did not have an Australian dollar account in any bank in Sydney. Since Godofredo asked if there could be a way for respondent bank to accommodate PRCI's urgent need to remit AUS$ to SYdney, Yasis informed him of another way of effecting the requested remittance. The respondent bank would draw a demand draft against Westpac-Sydney and have the latter reimburse itself from the US$ account of the respondent in Westpac-New York. This arrangement has been customarily resorted to since the 1960s and the procedure has proven to be problem-free. July 28, 1988, the respondent bank approved the said application of PRCI and issued Foreign Exchange Demand Draft(FXDD) No. 209968 in the sum applied for payable to the order of the 20th Asian Racing Conference Secretariat of Sydney, Australia, and addressed to Westpac-Sydney as the drawee bank. August 10, 1988, upon due presentment of the

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FXDD the same was dishonored, with the notice of dishonor stating; "xxx No account held with Westpac." Meanwhile, on August 16, 1988, Wespac-New York sent a cable to respondent bank informing the latter that its dollar account in the sum of AU$ 1,610.00 was debited. The respondent bank informed Wespac-New York requesting the latter to honor the reimbursement claim of WestpacSydney. Upon its second presentment for payment, FXDD No. 209968 was again dishonored by Westpac-Sydney for the same reason. When the petitioner Gregorio Reyes arrived in Sydney in the morning of September 18, 1988, he went directly to the lobby of Hotel Regent Sydney to register as a conference delegate. At the registration desk, the conference secretariat said that he could not register because the FXDD for his registration fee had been dishonored for the second time. The same situation was experienced by his wife Consuelo who is a member of the House of Rep representing the District of Makati, Metro Manila. The petitioners filed a complaint for damages against FEBTC. Claiming that as a result of the dishonor of the said demand draft, they were exposed to unnecessary shock, social humiliation, and deep mental anguish in a foreign country, and in the presence of an international audience. RTC and CA ruled in favor of the respondent. ISSUE: WON the respondent bank was negligent. NO HELD: The facts as found by the courts a quo show that respondent bank did not cause an erroneous transmittal of its SWIFT cable message to Westpac-Sydney. It was the erroneous decoding of the cable message on the part of Westpac-Sydney mistakenly read the printed figures in the SWIFT cable message of respondent bank as "MT799" instead of as "MT199". As a result, WestpacSydney construed the said cable message as a format for letter of credit, and not for a demand draft. The figure before '99' can still be distinctly seen as number '1' and not number '7' is in a slanting position while the line of a '1' id in a 1 horizontal position. Thus, the number '1' in 'MT199' cannot be construed as '7'.

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The degree of diligence required of banks, is more than that of a good father of a family where the fiduciary nature of their relationship with their depositors is concerned. In other words, banks are duty bound to treat the deposit accounts of their depositors with the highest degree of care. But the said ruling applies only to cases where bank act under their fiduciary capacity, that is, as depositary of the deposits of their depositors. But the same higher degree of diligence is not expected to be exerted by banks in commercial transactions that do not involve their fiduciary relationship with their depositors. Respondent bank was not required to exert more than the diligence of a good father of a family in regard to the sale and issuance of the subject FXDD. The case at bar does not involve the handling of the petitioner's deposit. Instead, the relationship involved was that of a buyer and seller, that is, between the respondent bank as the seller of the subject foreign exchange demand draft, and PRCI as the buyer of the same, with the 20th Asian Racing conference Secretariat in Sydney, Australia as the payee thereof. The FXDD was intended for the payment of the registration fees of the petitioners as delegates of the PRCI. The evidence shows that the respondent bank did everything within its power to prevent the dishonor of the subject FXDD. The erroneous reading of its cable message to WestpacSydney by an employee of the latter could not have been foreseen by the respondent bank. Being unaware that its employee erroneously read the said cable message, Westpac-Sydney merely stated that the respondent bank has no deposit account with it to cover for the amount AU$ 1,610.00 indicated in the FXDD. Thus, the respondent bank had the impression that Westpac-New York had not yet made available the amount for reimbursement to WestpacSydney despite the fact that respondent bank has a sufficient deposit dollar acct with Westpac-New York. That was the reason why the respondent bank had to re-confirm and repeatedly notify Westpac-New York to debit its (respondent bank's) deposit dollar with it and to transfer or credit the corresponding amount to Westpac-Sydney to cover the amount of the said demand draft.

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NOTE: The degree of diligence required of banks, is more than that of a good father of a family where the fiduciary nature of their relationship with their depositors is concerned. GUINGONA VS CITY FISCAL FACTS: From March 20, 1979 to March 1981, David invested with the Nation Savings and Loan Association (NSLA) the sum of P 1,145,546.20 on nine deposits, P 13,531.94 on savings account deposits (jointly with his sister, Denise Kuhne), US$10,000 on time deposit, US$15,000 under a receipt and guarantee of payment and US$50,000 under a receipt dated June 8, 1980 (jointly with Denise Kuhne), that David was induced into making the aforestated investments by Robert Marshal an Australian national who was allegedly a close associate of petitioner Guingona Jr., then NSLA President. NSLA was placed under receivership by the Central Bank, so that David filed claims therewith for his investments and those of his sister; On June 1981, Guingona and Martin, upon David's request, assumed the bank's obligation to David by executing a joint promissory note in favor of private respondent acknowledging an indebtedness of P1,336,614.02 and US$75,000. This promissory note was based on the statement of account as of June 30, 1981 prepared by the private respondent. The amount of indebtedness assumed appears to be bigger than the original claim because of the added interest and the inclusion of other deposits of private respondent's sister in the amount of P116,613.20.

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the Office of the City Fiscal. David charged petitioners with estafa and violation of Central Bank Circular No. 364 and related regulations on foreign exchange transactions. Petitioners moved to dismiss the charges against them for lack of jurisdiction because David's claims allegedly comprised a purely civil obligation, but the motion was denied. After the presentation of David's principal witness, petitioners filed this petition for prohibition and injunction because: a. The production of various documents showed that the transactions between David and NSLA were simple loans i.e., civil obligation which were novated when Guingona and Martin assumed them ISSUE: WON the contracted perfected was a contract of simple loan. YES HELD: It must be pointed out that when private respondent David invested his money on nine. and savings deposits with the aforesaid bank, the contract that was perfected was a contract of simple loan or mutuum and not a contract of deposit. Thus, Article 1980 of the New Civil Code provides that: Article 1980. Fixed, savings, and current deposits of-money in banks and similar institutions shall be governed by the provisions concerning simple loan. In the case of Central Bank of the Philippines vs. Morfe, the SC said: It should be noted that fixed, savings, and current deposits of money in banks and similar institutions are hat true deposits. are considered simple loans and, as such, are not preferred credits.

On July 17, 1981, petitioners Guingona and Martin agreed to divide the said indebtedness, and the petitioner Guingona executed another promissory note antedated to June 17, 1981 whereby he personally acknowledged an indebtedness of P668,307.01 and US$37,500 in favor of private respondent. On July 22, 1981, David received a report from the Central Bank that only P305,821.92 of those investments were entered in the records of NSLA.

This Court also declared in the recent case of Serrano vs. Central Bank of the Philippines (96 SCRA 102 [1980]) that: Bank deposits are in the nature of irregular deposits. They are really 'loans because they earn interest. All kinds of bank deposits, whether fixed, savings, or current are to be treated as loans and are to be covered by the law on loans. Current and saving deposits, are loans to a bank because it can use the same.

On Dec 1981, David filed I.S. No. 81-31938 in

Hence, the relationship between the private

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respondent and the Nation Savings and Loan Association is that of creditor and debtor; consequently, the ownership of the amount deposited was transmitted to the Bank upon the perfection of the contract and it can make use of the amount deposited for its banking operations, such as to pay interests on deposits and to pay withdrawals. While the Bank has the obligation to return the amount deposited, it has, however, no obligation to return or deliver the same money that was deposited. And, the failure of the Bank to return the amount deposited will not constitute estafa through misappropriation punishable under Article 315, par. l(b) of the Revised Penal Code, but it will only give rise to civil liability. The nature of simple loan is defined in Articles 1933 and 1953 of the Civil Code. "Art. 1933. — By the contract of loan, one of the parties delivers to another, either something not consumable so that the latter may use the same for a certain time- and return it, in which case the contract is called a commodatum; or money or other consumable thing, upon the condition that the same amount of the same kind and quality shall he paid in which case the contract is simply called a loan or mutuum. "Commodatum is essentially gratuitous. "Simple loan may be gratuitous or with a stipulation to pay interest. "In commodatum the bailor retains the ownership of the thing loaned while in simple loan, ownership passes to the borrower. "Art. 1953. — A person who receives a loan of money or any other fungible thing acquires the ownership thereof, and is bound to pay to the creditor an equal amount of the same kind and quality." It can be readily noted from the above-quoted provisions that in simple loan (mutuum), as contrasted to commodatum the borrower acquires ownership of the money, goods or personal property borrowed Being the owner, the borrower can dispose of the thing borrowed (Article 248, Civil Code) and his act will not be considered misappropriation thereof' (Yam vs. Malik).

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But even granting that the failure of the bank to pay the time and savings deposits of private respondent David would constitute a violation of paragraph 1(b) of Article 315 of the Revised Penal Code, nevertheless any incipient criminal liability was deemed avoided, because when the aforesaid bank was placed under receivership by the Central Bank, petitioners Guingona and Martin assumed the obligation of the bank to private respondent David, thereby resulting in the novation of the original contractual obligation arising from deposit into a contract of loan and converting the original trust relation between the bank and private respondent David into an ordinary debtorcreditor relation between the petitioners and private respondent. Consequently, the failure of the bank or petitioners Guingona and Martin to pay the deposits of private respondent would not constitute a breach of trust but would merely be a failure to pay the obligation as a debtor. NOTE: While the bank has the obligation to return the amount deposited, it has, however, no obligation to return or deliver the same money that was deposited.

PROVINCE OF BATAAN VS. VILLAFUERTE (G.R. No. 129995, October 19, 2001) FACTS: In its order, the lower court directed that petitioner Province of Bataan to remit to said court whatever lease rentals petitioner may receive from lessees 7-R Port and Marina Port Services, and that such lease rentals be placed under a special time deposit with the Land Bank for the account of the RTC-Balanga Branch 4, in escrow, for the person or persons, natural or juridical, who may be adjudged lawfully entitled thereto. The order denied herein petitioner’s motion for reconsideration of the 28 July, 1993 order. Pursuant to Presidential Decree No. 464, otherwise known as the Real Property Tax Code of 1974, the Provincial Treasurer of Bataan advertised for auction sale the BASECO property due to real estate tax delinquency amounting to P7,914,281.72, inclusive of penalties. At the auction sale, no bidder vied for said property as a result of which, the Provincial Treasurer of Bataan adjudged the property to, and acquired the

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same for, and in the name of herein petitioner Province of Bataan. Upon the expiration of the one-year redemption period, and without the owner exercising its right to redeem the subject property, the Provincial Government of Bataan consolidated its title thereon; the corresponding certificates of title were then issued in the name of herein petitioner Province of Bataan. Eventually, petitioner, thru then Provincial Governor Enrique T. Garcia, entered into a ten-year contract of lease with 7-R Port Services, Inc., whereby portions of the BASECO property including facilities and improvements thereon, were leased to the latter for a minimum escalating annual rental of P18 million. Petitioner forged another contract of lease with Marina Port Services, over a tenhectare portion of the BASECO property. Private respondent filed for annulment of sale, principally assailing the validity of the tax delinquency sale of the BASECO property in favor of petitioner Province of Bataan. PCGG filed for writ of preliminary injunction to enjoin herein petitioner “from entering into a lease contract with Marina Port Services, Inc. (Marina), or any other entity, and/or from implementing/enforcing such lease contract, if one has already been executed, and to maintain the status quo until further orders from the Court.” The lower court denied the motion ratiocinating that the lease contract with Marina was already a fait accompli when the motion was filed, and that Marina was not a party to the suit for not having been impleaded as party-defendant. The PCGG filed with the lower court an “Urgent Motion to Deposit Lease Rentals,” alleging inter alia that the rentals amounting to “Hundreds of Millions of Pesos” are “in danger of being unlawfully spent, squandered and dissipated to the great and irreparable damage of plaintiffs who are the rightful owners of the property leased.” The lower court granted the PCGG’s urgent motion and ordered the defendant Province of Bataan to remit to the court the lease rentals it may receive from the defendant 7-R Port Services and the Marina Port Services from the receipt of this order. It also ordered the clerk of court to deposit the amount under

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special time deposit with the Land Bank in the name or account of the Court to be held in trust for the person, natural or juridical, who may lawfully be entitled thereto. ISSUE: Whether or not the deposit of rentals in escrow was proper. YES HELD: In the main, petitioner insists that the issuance of the escrow order by the trial court “was patently irregular, if not downright anomalous”, reasoning that “nowhere in the Revised Rules of Court is the trial court, or any court for that matter, authorized to issue such escrow order, whether as a provisional or permanent remedy.” According to petitioner, “the escrow orders in question are null and void ab initio for having been issued absent any legal basis” and are “merely calculated to prejudice the petitioner province without any practical or worthwhile, much less legal objective.” The court does not agree. An escrow fills a definite niche in the body of the law; it has a distinct legal character. The usual definition is that an escrow is a written instrument which by its terms imports a legal obligation and which is deposited by the grantor, promisor, or obligor, or his agent with a stranger or third party, to be kept by the depositary until the performance of a condition or the happening of a certain event, and then to be delivered over to the grantee, promisee, or obligee. While originally, the doctrine of escrow applied only to deeds by way of grant, or as otherwise stated, instruments for the conveyance of land, under modern theories of law, the term escrow is not limited in its application to deeds, but is applied to the deposit of any written instrument with a third person. Particular instruments which have been held to be the subject of an escrow include bonds or covenants, deeds, mortgages, oil and gas leases, contracts for the sale of land or for the purchase of personal property, corporate stocks and stock subscriptions, promissory notes or other commercial paper, insurance applications and policies, contracts for the settlement of willcontest cases, indentures of apprenticeship, receipts assigning concessions and discontinuances and releases of causes of action. Moreover, it is no longer open to question that money may be delivered in

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escrow. “ X X X the impugned orders appear to us as a fair response to the exigencies and equities of the situation. Parenthetically, it is not disputed that even before the institution of the case, the Province of Bataan has been utilizing the rental payments on the Baseco Property to meet its financial requirements. To us, this circumstance adds a more compelling dimension for the issuance of the assailed orders. X X X” Applying the foregoing principles and considering the peculiarities of the instant case, the lower court, in the course of adjudicating and resolving the issues presented in the main suit, is clearly empowered to control the proceedings therein through the adoption, formulation and issuance of orders and other ancillary writs, including the authority to place the properties in custodia legis, for the purpose of effectuating its judgment or decree and protecting further the interests of the rightful claimants of the subject property. To trace its source, the court’s authority proceeds from its jurisdiction and power to decide, adjudicate and resolve the issues raised in the principal suit. Stated differently, the deposit of the rentals in escrow with the bank, in the name of the lower court, “is only an incident in the main proceeding.” To be sure, placing property in litigation under judicial possession, whether in the hands of a receiver, and administrator, or as in this case, in a government bank is an ancient and accepted procedure. Consequently, we find no cogency to disturb the questioned orders of the lower court and in effect uphold the propriety of the subject escrow orders.

III. Necessary Deposit YHT REALTY VS. CA (451 SCRA 638, G.R. No. 126780, February 17, 2005) FACTS: McLoughlin (private respondent), an Australian businessman, regularly stayed at Sheraton Hotel during

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trips to Philippines. McLoughlin became friends with Tan, who convinced the former to transfer from Sheraton Hotel to Tropicana Hotel were (petitioners) Lainez, Payam and Lopez. Lopez served as manager while Lainez and Payam had custody of the keys for the safety deposit boxes of Tropicana Hotel. The procedure for the safety deposit box at Tropicana Hotel was that it can be opened by 2 keys only. 1 key is given to the registered hotel guest while the other key is held by the hotel management. McLoughlin deposited $15,000 (US) and $10,000 (AUS) as well as letters, bankbooks, credit cards and a checkbook in the safety deposit box during his stay at Tropicana Hotel. After his trips abroad, McLoughlin discovered that some cash and valuables he deposited in the safety deposit box were missing. McLoughlin immediately confronted Lainez and Payam. Both admitted that Tan opened the safety deposit box with the key assigned to him. When McLoughlin confronted Tan, she admitted to have stolen the key with the assistance of Lopez, Payam and Lainez. A promissory note was written by Lopez, promising to pay the amount of $4,000 (AUS) and $2,000 (US). McLoughlin insisted that Tropicana Hotel be responsible for the loss. However, Lopez refused and relied on the conditions for renting the safety deposit box which provides that the hotel is free from any liability arising from loss should the key be lost and to return the key and execute the release in favor of the hotel upon giving up the use of the box. McLoughlin filed a case against petitioners. RTC ruled in favor of McLoughlin, making petitioners jointly and severally liable for the losses plus damages. The hotel conditions were ruled not valid for being contrary to Art 2003 of the NCC and public policy. The CA also ruled in favor of McLoughlin. ISSUE: Whether or not YHT Corporation is jointly and severally liable for the losses suffered by McLoughlin? – YES.

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HELD: SC appreciated the facts found and proven by the lower court that McLoughlin indeed deposited such cash and valuables as he claimed. The evidence also revealed that the hotel guest alone cannot open the safety deposit box without the assistance of the hotel management or its employees. In case of loss of any item deposited, it is inevitable to conclude that the management had at least a hand in the consummation of the taking, unless the reason for the loss is force majeure. Noteworthy is the fact that Payam and Lainez, who were employees of Tropicana, had custody of the master key of the management when the loss took place. They even admitted that they assisted Tan on 3 separate occasions in opening McLoughlin’s safety deposit box. It is proved that Tropicana had prior knowledge that a person aside from the registered guest had access to the safety deposit box. Yet the management failed to notify McLoughlin of the incident and waited for him to discover the taking before it disclosed the matter to him. Therefore, Tropicana should be held responsible for the damage suffered by McLoughlin by reason of the negligence of its employees. Tan’s acts should have prompted the management to investigate her relationship with McLoughlin. Then, petitioners would have exercised due diligence required of them. Failure to do so warrants the conclusion that the management had been remiss in complying with the obligations imposed upon hotel-keepers under the law. Under Art 1170 of NCC, those who, in the performance of their obligations, are guilty of negligence, are liable for damages. As to who shall bear the burden of paying damages, Art 2180 Par (4) of NCC provides that the owners and managers of an establishment are likewise responsible for damages caused by their employees in the service of the branches in which the latter are employed or on the occasion of their functions. Also, this Court has ruled that if an employee is found negligent, it is presumed that the employer was negligent in selecting and/or

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supervising him for it is hard for the victim to prove the negligence of such employer. Thus, given the fact that the loss of McLoughlin’s money was consummated through the negligence of Tropicana’s employees in allowing Tan to open the safety deposit box without the guest’s consent, both the assisting employees and YHT Realty Corporation itself, as owner and operator of Tropicana, should be held solidarily liable pursuant to Article 2193. Also, Art 2003 is controlling which provides that the hotel-keeper cannot free himself from responsibility by posting notices to the effect that he is not liable for the articles brought by the guest. Any stipulation between the hotelkeeper and the guest whereby the responsibility of the former as set forth in Articles 1998 to 2001 is suppressed or diminished shall be void. Petitioners contend that McLoughlin’s case was mounted on the theory of contract, but the trial court and the appellate court upheld the grant of the claims of the latter on the basis of tort. There is nothing anomalous in how the lower courts decided the controversy for this Court has pronounced a jurisprudential rule that tort liability can exist even if there are already contractual relations. The act that breaks the contract may also be tort. DURBAN APARTMENTS VS. PIONEER (639 SCRA 441, G.R. No. 179419, January 12, 2011) FACTS: On July 22, 2003, Pioneer Insurance and Surety Corporation, by right of subrogation, filed [with the RTC of Makati City] a Complaint for Recovery of Damages against Durban Apartments Corporation, doing business under the name and style of City Garden Hotel, and [defendant before the RTC] Vicente Justimbaste. Respondent’s contention: Respondent averred that it is the insurer for loss and damage of Jeffrey See’s Suzuki Grand Vitara in the amount of P1,175,000. On April 30, 2002, See arrived and checked in at the City Garden Hotel in Makati corner

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Kalayaan Avenues, Makati City before midnight, and its parking attendant, defendant Justimbaste got the key to said Vitara from See to park it.

was See himself who parked his Vitara within the premises of the hotel as evidenced by the valet parking customer’s claim stub issued to him.

On May 1, 2002 (1am) – the Hotel Chief Security Officer informed him that his car was carnapped while it was parked unattended at the parking area of Equitable PCI Bank along Makati Ave.

Defendant Justimbaste saw the Vitara speeding away from the place where it was parked; he tried to run after it, and blocked its possible path but to no avail.

See then reported the incident to the Operations Division of Makati City Police AntiCarnapping unit and then conducted investigation. The car has not yet been recovered since July 23, 2002. Respondent paid P1,163,250 money claim of See and mortagee ABN AMRO Savings Bank as indemnity for the loss of the car. The car was lost due to the negligence of Durban Apartments and Justimbaste because it was discovered that this was the second time that a similar incident of carnapping happened in the valet parking service of Durban Apartments and no necessary precautions were taken to prevent its repetition. Defendant Justimbaste and Durban Apartments failed and refused to pay Pioneer’s valid, just, and lawful claim despite written demands. Petitioner’s contention: See did not check in at its hotel, on the contrary, he was a guest of a certain Ching Montero x x x; defendant x x x Justimbaste did not get the ignition key of See’s Vitara, on the contrary, it was See who requested a parking attendant to park the Vitara at any available parking space, and it was parked at the Equitable Bank parking area, which was within See’s view, while he and Montero were waiting in front of the hotel. They made a written denial of the demand of [respondent] Pioneer Insurance for want of legal basis; valet parking services are provided by the hotel for the convenience of its customers looking for a parking space near the hotel premises; it is a special privilege that it gave to Montero and See; it does not include responsibility for any losses or damages to motor vehicles and its accessories in the parking area; and the same holds true even if it

RTC ruled in favor of respondent and ordered Durban Apartment to pay respondent the sum of P1, 163, 250.00. CA affirmed the decision of RTC. Hence, present petition. ISSUE: Whether or not petitioner is liable to respondent for the loss of See’s vehicle.YES. HELD: In this case, respondent substantiated the allegations in its complaint, i.e., a contract of necessary deposit existed between the insured See and petitioner. On this score, we find no error in the following disquisition of the appellate court. The records also reveal that upon arrival at the City Garden Hotel, See gave notice to the doorman and parking attendant of the said hotel, x x x Justimbaste, about his Vitara when he entrusted its ignition key to the latter. x x x Justimbaste issued a valet parking customer claim stub to See, parked the Vitara at the Equitable PCI Bank parking area, and placed the ignition key inside a safety key box while See proceeded to the hotel lobby to check in. The Equitable PCI Bank parking area became an annex of City Garden Hotel when the management of the said bank allowed the parking of the vehicles of hotel guests thereat in the evening after banking hours. Article 1962, in relation to Article 1998, of the Civil Code defines a contract of deposit and a necessary deposit made by persons in hotels or inns: Art. 1962. A deposit is constituted from the moment a person receives a thing belonging to another, with the obligation of safely keeping it and returning the same. If the safekeeping of the thing delivered is not the principal purpose of the contract, there is no deposit but some other contract. Art. 1998. The deposit of effects made by travelers in hotels or inns shall also be

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regarded as necessary. The keepers of hotels or inns shall be responsible for them as depositaries, provided that notice was given to them, or to their employees, of the effects brought by the guests and that, on the part of the latter, they take the precautions which said hotel-keepers or their substitutes advised relative to the care and vigilance of their effects. Plainly, from the facts found by the lower courts, the insured See deposited his vehicle for safekeeping with petitioner, through the latter’s employee, Justimbaste. In turn, Justimbaste issued a claim stub to See. Thus, the contract of deposit was perfected from See’s delivery, when he handed over to Justimbaste the keys to his vehicle, which Justimbaste received with the obligation of safely keeping and returning it. Ultimately, petitioner is liable for the loss of See’s vehicle. POLICY: A deposit is constituted from the moment a person receives a thing belonging to another, with the obligation of safely keeping it and returning the same.

IV. Sequestration or Judicial Deposit

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ownership of the subject property to Macy. On the strength of the forged Deed of Absolute Sale, Macy was able to cause the issuance of a TCT in her name, without the knowledge of any of herein petitioners. In March 1994, petitioners discovered that the subject property was mortgaged by Macy to the respondent bank. To protect their interests over the subject property, petitioners lodged an action in court against Macy and the respondent bank for Annulment of Title, Deed of Absolute Sale and Deed of Mortgage. The respondent bank in utter bad faith, foreclosed the subject property on June 11, 1996 without due notice to the petitioners, prompting the petitioners to amend [their] complaint, this time incorporating therein a prayer for the issuance of a temporary restraining order and/or writ of preliminary injunction, to stop the respondent bank from, among others, consolidating title to the subject property. Petitioner argues that respondents do not have a right to the relief demanded, because they merely have possession of the property, as the legal title is in the name of Macy Africa.9 Furthermore, it claims that the consolidation of title in its name does not constitute an "invasion of a right that is material and substantial.

LOS BAÑOS RURAL BANK VS AFRICA FACTS: Pacita Africa is the widow of Alberto Africa and the rest of her co-petitioners are their children. In June 1989, the Register of Deeds was razed by fire, destroying some of its records/documents among which was the original TCT covering a parcel of land registered in the name of petitioner Pacita. The aforesaid property was part of the conjugal property of petitioner Pacita and her late husband Alberto Africa. On request of Pacita, private respondent Macy Africa, the common-law wife of petitioner Antonio Africa, worked for the reconstitution of the TCT. While the reconstituted title was in her possession, Macy allegedly forged, or caused the forgery of, Pacita’s signature on a Deed of Absolute Sale purporting to transfer

On the other hand, respondents maintain that they would suffer great irreparable damage if the writ of preliminary injunction is not granted.11 They likewise contend that if petitioner is allowed to consolidate its title to the subject property, they would lose their ancestral home, a loss that would result in unnecessary and protracted proceedings involving third parties. ISSUE: Whether the appellate court erred in issuing a writ of preliminary injunction to stop petitioner’s consolidation of its title to the subject property.

HELD: Main Issue: Propriety of Preliminary Injunction We agree with respondents. The grounds for the issuance of a writ of

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preliminary injunction are enumerated in Rule 58, Section 3 of the Revised Rules of Court, which reads as follows: "Sec. 3. Grounds for issuance of preliminary injunction. – A preliminary injunction may be granted when it is established; (a)That the applicant is entitled to the relief demanded, and the whole or part of such relief consists in restraining the commission or continuance of the act or acts complained of, or in requiring the performance of an act or acts, either for a limited period or perpetually; (b)That the commission, continuance or nonperformance of the act or acts complained of during the litigation would probably work injustice to the applicant; or (c)That a party, court, agency or a person is doing, threatening, or is attempting to do, or is procuring or suffering to be done, some act or acts probably in violation of the rights of the applicant respecting the subject of the action or proceeding, and tending to render the judgment ineffectual." Injunction is a preservative remedy aimed at no other purpose than to protect the complainant’s substantive rights and interests 13 during the pendency of the principal action.14 A preliminary injunction, as the term itself suggests, is merely temporary.15 It is to be resorted to only when there is a pressing necessity to avoid injurious consequences that cannot be remedied under any standard of compensation. Moreover, injunction, like other equitable remedies, should be issued only at the instance of a suitor who has sufficient interest in or title to the right or the property sought to be protected.17 It is proper only when the plaintiff appears to be entitled to the relief demanded in the complaint.18 In particular, the existence of the right and the violation thereof must appear in the allegations of the complaint19 and must constitute at least a prima facie showing of a right to the final relief.20 Thus, there are two requisite conditions for the issuance of a preliminary injunction, namely, (1) the right to be protected exists prima facie, and (2) the acts sought to be enjoined are violative of that right.21 It must be proven that the violation sought to be prevented would cause an irreparable injustice. Further, while a clear showing of the right is

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necessary, its existence need not be conclusively established.22 In fact, the evidence required to justify the issuance of a writ of preliminary injunction in the hearing thereon need not be conclusive or complete. The evidence need only be a "sampling" intended merely to give the court an idea of the justification for the preliminary injunction, pending the decision of the case on the merits.23 Thus, to be entitled to the writ, respondents are only required to show that they have the ostensible right to the final relief prayed for in their Complaint. First Requisite:
 Existence of the Right In the case at bar, we find ample justification for the issuance of a writ of preliminary injunction.25 Evidently, the question on whether or not respondents possess the requisite right hinges on the prima facie existence of their legal title to the subject property.26 They have shown that they have that right, and that it is directly threatened by the act sought to be enjoined. First, Respondent Pacita Africa is the registered owner of the subject property. Her ownership is evidenced by the reconstituted Transfer Certificate of Title. Second, the validity of the Deed of Sale30 dated December 29, 1992, is still in dispute because Respondent Pacita Africa claims that her signature was forged by the vendee, Macy Africa.3 Third, there is doubt as to the validity of the mortgage in favor of petitioner, because there exists on record two TCTs covering the mortgaged property: (1) TCT No. 81519 32 registered in the name of Pacita Africa and (2) TCT No. 8151933 registered in the name of Macy Africa. If indeed the Deed of Sale is a forgery, no parcel of land was ever transferred to the purported buyer34 who, not being the owner, could not have validly mortgaged the property.35 Consequently, neither has petitioner -- the buyer and mortgagee of the same lot -ever acquired any title thereto.36 Significantly, no evidence was presented by petitioner to controvert these allegations put forward by respondents. Clearly then, on the basis of the evidence presented, respondents possess the

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right to prevent petitioner from consolidating the title in its name. The first requisite -- the existence of a right to be protected -- is thus present.37 Second Requisite:
 Violation of Applicant’s Right As to the second requisite, what is sought to be enjoined by respondents is the consolidation of the title to the subject property in petitioner’s name. After having discovered that the property had been mortgaged to petitioner, respondents filed on June 12, 1994 an action for Annulment of Title, Deed of Sale, and Mortgage to protect their rights over the property.38 This notwithstanding, petitioner foreclosed it on June 11, 1996.39 To enjoin petitioner from consolidating the title in its name, respondents then filed an Amended Complaint,40 praying for a writ of preliminary injunction. Unless legally stopped, petitioner may consolidate title to the property in its name and enjoy the unbridled freedom to dispose of it to third persons, to the damage and prejudice of respondents.41 What respondents stand to lose is material and substantial.42 They would lose their ancestral home even without the benefit of a trial.43 Clearly, the act sought to be enjoined is violative of their proprietary right over the property.44 A writ of preliminary injunction is issued precisely to preserve threatened or continuous irremediable injury to some of the parties before their claims can be thoroughly studied and adjudicated.45 Denial of the application for the writ may make the Complaint of respondents moot and academic. Furthermore, it would render ineffectual a final judgment in their favor or, at the very least, compel them to litigate needlessly with third persons who may have acquired an interest in the property.46 Such a situation cannot be countenanced.47 Lis Pendens Petitioner further contends that respondents are not entitled to the relief prayed for, because they caused a notice of lis pendens to be annotated at the back of TCT No. 81519, registered in the name of Macy P. Africa; thus, that notice provided ample protection of their rights and interests.48

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We are not persuaded. A notice of lis pendens serves as an announcement to the whole world that a particular real property is in litigation and as a warning that those who acquire an interest in the property do so at their own risk -they gamble on the result of the litigation over it.49 However, the cancellation of such notice may be ordered by the court that has jurisdiction over it at any given time.50 Its continuance or removal -- like the continuance or the removal of a preliminary attachment or injunction -- is not contingent on the existence of a final judgment on the action and ordinarily has no effect on the merits thereof.51 Thus, the notice of lis pendens does not suffice to protect herein respondents’ rights over the property.52 It does not provide complete and ample protection. Status Quo Ante Petitioner further claims that the RTC erred in enjoining the foreclosure sale of the subject property.53 It argues that the foreclosure may no longer be enjoined, because it has long been effected since 1996.54 We agree with petitioner. It is a well-entrenched rule that consummated acts can no longer be restrained by injunction 55 whose sole objective is to preserve the status quo until the merits of the case are fully heard.56 Status quo is defined as the last actual peaceful uncontested situation that precedes a controversy, and its preservation is the office of an injunctive writ.57 In the instant case, the status quo was the situation of the parties at the time of the filing of the Amended Complaint58 with a prayer for a writ of preliminary injunction. It was that point at which petitioner had already foreclosed the subject property and, hence, could no longer be enjoined from going on with the foreclosure. However, the last actual uncontested status that preceded the controversy was when the property in dispute was still registered in the name of Macy Africa, petitioner not having consolidated in its name the title thereto.59 Thus, the issuance of the writ would no doubt preserve the status quo.60 We cannot rule on the allegation of petitioner that this case is a "scam perpetrated by private

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respondents" to defraud it.61 The truth or the falsity of that assertion cannot be ascertained by this Court at this time. Verily, we refrain from expressing any opinion on the merits of the case, pending a full consideration of the evidence that would be presented by the parties.

PART V: WAREHOUSE RECEIPTS LAW PART VI: TRUST RECEIPTS LAW PART VII: GUARANTY & SURETYSHIP (Articles 2047-2084) I. Nature and Extent ESCAÑO & SILOS V. ORTIGAS, JR. FACTS: On April 28, 1980, Private Development Corporation of the Philippines (PDCP) entered into a loan agreement with Falcon Minerals, Inc. (Falcon) amounting to $320,000.00 subject to terms and conditions. On the same day, three (3) stockholder-officers of Falcon: Ortigas Jr., George A. Scholey, and George T. Scholey executed an Assumption of Solidary Liability “to assume in their individual capacity, solidary liability with Falcon for due and punctual payment” of the loan contracted by Falcon with PDCP. Two (2) separate guaranties were executed to guarantee payment of the same loan by other stockholders and officers of Falcon, acting in their personal and individual capacities. One guaranty was executed by Escaño, Silos, Silverio, Inductivo and Rodriguez. Two years later, an agreement was developed to cede control of Falcon to Escaño, Silos and Matti. Contracts were executed whereby Ortigas, George A. Scholey, Inductivo and the heirs of then already deceased George T. Scholey assigned their shares of stock in Falcon to Escaño, Silos and Matti. An Undertaking dated June 11, 1982 was executed by the concerned parties, namely: with Escaño, Silos and Matti as “sureties” and Ortigas, Inductivo and Scholeys as “obligors”. Falcon eventually availed of the sum of $178,655.59 from the credit line extended by PDCP. It would also execute a Deed of Chattel Mortgage over its personal properties to further

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secure the loan. However, Falcon subsequently defaulted in its payments. After PDCP foreclosed on the chattel mortgage, there remained a subsisting deficiency of Php 5,031,004.07 which falcon did not satisfy despite demands. ISSUE: Whether the obligation to repay is solidary, as contended by respondent and the lower courts, or merely joint as argued by petitioners. HELD: The obligation to repay is only jointly as declared by the Court. In case there is a concurrence of two or more creditors or of two or more debtors in one and the same obligation, Article 1207 of the Civil Code states that among them, “there is a solidary liability only when the obligation expressly so states, or when the law or the nature of the obligation requires solidarity.” Article 1210 supplies further caution against the broad interpretation of solidarity by providing: “The indivisibility of an obligation does not necessarily give rise to solidarity. Nor does solidarity of itself imply indivisibility.” These Civil Code provisions establish that in case of concurrence of two or more creditors or of two or more debtors in one and the same obligation, and in the absence of express and indubitable terms characterizing the obligation as solidary, the presumption is that the obligation is only joint. It thus becomes incumbent upon the party alleging that the obligation is indeed solidary in character to prove such fact with a preponderance of evidence. Note that Article 2047 itself specifically calls for the application of the provisions on joint and solidary obligations to surety ship contracts. Article 1217 of the Civil Code thus comes into play, recognizing the right of reimbursement from a co-debtor (the principal debtor, in case of suretyship) in favor of the one who paid (i.e. the surety). However, a significant distinction still lies between a joint and several debtor, on one hand, and a surety on the other. Solidarity signifies that the creditor can compel any one of the joint and several debtors or the surety alone to answer for the entirety of the principal debt. The difference lies in the respective faculties of the joint and several debtor and the surety to seek reimbursement for the sums they paid out to the creditor. In the case of joint and several debtors, Article1217 makes plain

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that the solidary debtor who effected the payment to the creditor “may claim from his codebtors only the share which corresponds to each, with the interest for the payment already made.” Such solidary debtor will not be able to recover from the co-debtors the full amount already paid to the creditor, because the right to recovery extends only to the proportional share of the other co-debtors, and not as to the particular proportional share of the solidary debtor who already paid. In contrast, even as the surety is solidarily bound with the principal debtor to the creditor, the surety who does pay the creditor has the right to recover the full amount paid, and not just any proportional share, from the principal debtor or debtors. Such right to full reimbursement falls within the other rights, actions and benefits which pertain to the surety by reason of the subsidiary obligation assumed by the surety. Decision: Petitioners and Matti are jointly liable to Ortigas, Jr. in the amount of P1.3M; Legal interest of 12% per annum on P 1.3M computed from March 14, 1994. Assailed rulings are affirmed. Costs against petitioners. Note: A guarantor who binds himself in solidum with the principal debtor under the provisions of the second paragraph does not become a solidary co-debtor to all intents and purposes. SURETY Outside of the liability he assumes to pay the debt before the property of the principal debtor has been exhausted

Has the right to recover the full amount paid, and not just any proportional share, from the principal debtor or debtors. Subsidiary

SOLIDARY CODEBTOR Solidarity signifies that the creditor can compel any one of the joint and several debtors or the surety alone to answer for the entirety of the principal debt. “May claim from his codebtors only the share which corresponds to each, with the interest for the payment already made.” Solidary

ASSET BUILDERS VS STRONGHOLD Asset Builders Corp (ABC) – obligee, petitioner

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Lucky Star Drilling & Construction Corporation (Lucky Star) - obligor Stronghold Insurance Company (Stronghold) – surety, respondent FACTS: ABC entered into an agreement with Lucky Star as part of the completion of its project to construct the ACG Commercial Complex. Lucky Star was to supply labor, materials, tools, and equipment including technical supervision to drill one (1) exploratory production well on the project site. To guarantee faithful compliance with their agreement, Lucky Star engaged respondent Stronghold which issued two (2) bonds in favor of petitioner ABC. ABC paid Lucky Star P575,000.00 as advance payment, representing 50% of the contract price. Lucky Star, thereafter, commenced the drilling work. On agreed completion date, Lucky Star managed to accomplish only 10% of the drilling work. ABC sent a demand letter to Lucky Star for the immediate completion of the drilling work. However, Lucky Star failed to fulfill its obligation. ABC sent Notice of Rescission of Contract with Demand for Damages to Lucky Star and a Notice of Claim for payment to Stronghold to make good its obligation under its bonds. Despite notice, ABC did not receive any reply either from Lucky Star or Stronghold, prompting it to file its Complaint for Rescission with Damages against both before the RTC. RTC rendered the assailed decision ordering Lucky Star to pay ABC but absolving Stronghold from liability. Relevant parts of the decision reads: “The surety bond and performance bond executed by defendants Lucky Star and Stronghold Insurance are in the nature of accessory contracts which depend for its existence upon another contract. Thus, when the agreement between the plaintiff Asset Builders and defendant Lucky Star was rescinded, the surety and performance bond were automatically cancelled.” Thus, Asset Builders filed this present petition for review on certiorari assailing decision of RTC which orders defendant Lucky Star to pay

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petitioner Asset Builders the sum of P575,000.00 with damages, but absolving respondent Stronghold Insurance of any liability on its Surety Bond and Performance Bond. ISSUE: Whether or not respondent insurance company, as surety, can be held liable under its bonds. HELD: Yes. As provided in Article 2047, the surety undertakes to be bound solidarily with the principal obligor. That undertaking makes a surety agreement an ancillary contract as it presupposes the existence of a principal contract. Although the contract of a surety is in essence secondary only to a valid principal obligation, the surety becomes liable for the debt or duty of another although it possesses no direct or personal interest over the obligations nor does it receive any benefit therefrom. Let it be stressed that notwithstanding the fact that the surety contract is secondary to the principal obligation, the surety assumes liability as a regular party to the undertaking. Suretyship, in essence, contains two types of relationship – the principal relationship between the obligee (petitioner) and the obligor (Lucky Star), and the accessory surety relationship between the principal (Lucky Star) and the surety (respondent). In this arrangement, the obligee accepts the surety’s solidary undertaking to pay if the obligor does not pay. Such acceptance, however, does not change in any material way the obligee’s relationship with the principal obligor. Neither does it make the surety an active party to the principal obligee-obligor relationship. Thus, the acceptance does not give the surety the right to intervene in the principal contract. The surety’s role arises only upon the obligor’s default, at which time, it can be directly held liable by the obligee for payment as a solidary obligor. In the case at bench, when Lucky Star failed to finish the drilling work within the agreed time frame despite petitioner’s demand for completion, it was already in delay. Due to this default, Lucky Star’s liability attached and, as a necessary consequence, respondent’s liability under the surety agreement arose.

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Undeniably, when Lucky Star reneged on its undertaking with the petitioner and further failed to return the P575,000.00 downpayment that was already advanced to it, respondent, as surety, became solidarily bound with Lucky Star for the repayment of the said amount to petitioner. Contrary to the trial court’s ruling, respondent insurance company was not automatically released from any liability when petitioner resorted to the rescission of the principal contract for failure of the other party to perform its undertaking. Precisely, the liability of the surety arising from the surety contracts comes to life upon the solidary obligor’s default. It should be emphasized that petitioner had to choose rescission in order to prevent further loss that may arise from the delay of the progress of the project. Without a doubt, Lucky Star’s unsatisfactory progress in the drilling work and its failure to complete it in due time amount to non-performance of its obligation. In fine, respondent should be answerable to petitioner on account of Lucky Star’s nonperformance of its obligation as guaranteed by the performance bond. Finally, Article 1217 of the New Civil Code acknowledges the right of reimbursement from a co-debtor (the principal co-debtor, in case of suretyship) in favor of the one who paid (the surety). Thus, respondent is entitled to reimbursement from Lucky Star for the amount it may be required to pay petitioner arising from its bonds.

CASTELLVI DE HIGGINS VS SELLNER (L-158025, November 5, 1920) FACTS: Higgins filed an action to recover against Sellner the sum of P10,000. The basis of the action is a letter written by defendant George C. Sellner to John T. Macleod, agent for Mrs. Horace L. Higgins, on May 31, 1915, of the following tenor: DEAR SIR: I hereby obligate and bind myself, my heirs, successors and assigns that if the promissory note executed the 29th day of May, 1915 by the Keystone Mining Co., W.H. Clarke,

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and John Maye, jointly and severally, in your favor and due six months after date for Pesos 10,000 is not fully paid at maturity with interest, I will, within fifteen days after notice of such default, pay you in cash the sum of P10,000 and interest upon your surrendering to me the three thousand shares of stock of the Keystone Mining Co. held by you as security for the payment of said note. Respectfully, (Sgd.) GEO. C. SELLNER. Higgins contends that he is a surety while Sellner contends that he is a guarantor. ISSUE: What is the status of the transaction? GUARANTY. HELD: In the original Spanish of the Civil Code now in force in the Philippine Islands, Title XIV of Book IV is entitled "De la Fianza." The Spanish word "fianza" is translated in the Washington and Walton editions of the Civil Code as "security." "Fianza" appears in the Fisher translation as"suretyship." The Spanish word "fiador" is found in all of the English translations of the Civil Code as "surety." The law of guaranty is not related of by that name in the Civil Code, although indirect reference to the same is made in the Code of Commerce. In terminology at least, no distinction is made in the Civil Code between the obligation of a surety and that of a guarantor. A surety and a guarantor are alike in that each promises to answer for the debt or default of another. A surety and a guarantor are unlike in that the surety assumes liability as a regular party to the undertaking, while the liability as a regular party to upon an independent agreement to pay the obligation if the primary pay or fails to do so. A surety is charged as an original promissory; the engagement of the guarantor is a collateral undertaking. The obligation of the surety is primary; the obligation of the guarantor is secondary. Turning back again to our Civil Code, we first note that according to article 1822 "By fianza (security or suretyship) one person binds himself to pay or perform for a third person in

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case the latter should fail to do so." But "If the surety binds himself in solidum with the principal debtor, the provisions of Section fourth, Chapter third, Title first, shall be applicable." What the first portion of the cited article provides is, consequently, seen to be somewhat akin to the contract of guaranty, while what is last provided is practically equivalent to the contract of suretyship. When in subsequent articles found in section 1 of Chapter II of the title concerning fianza, the Code speaks of the effects of suretyship between surety and creditor, it has, in comparison with the common law, the effect of guaranty between guarantor and creditor. The civil law suretyship is, accordingly, nearly synonymous with the common law guaranty; and the civil law relationship existing between codebtors liable in solidum is similar to the common law suretyship. It is perfectly clear that the obligation assumed by SELLNER was simply that of a guarantor, or, to be more precise, of the fiador whose responsibility is fixed in the Civil Code. The letter of Mr. Sellner recites that if the promissory note is not paid at maturity, then, within fifteen days after notice of such default and upon surrender to him of the three thousand shares of Keystone Mining Company stock, he will assume responsibility. Sellner is not bound with the principals by the same instrument executed at the same time and on the same consideration, but his responsibility is a secondary one found in an independent collateral agreement. Neither is Sellner jointly and severally liable with the principal debtors. With particular reference, therefore, to assignments of error, Sellner is a guarantor within the meaning of the provisions of the Civil Code. There is also an equitable aspect to the case which reenforces this conclusion. The note executed by the Keystone Mining Company matured on November 29, 1915. Interest on the note was not accepted by the makers until September 30, 1916. When the note became due, it is admitted that the shares of stock used as collateral security were selling at par; that is, they were worth pesos 30,000. Notice that the note had not been paid was not given to and when the Keystone Mining Company stock was worthless. Sellner, consequently, through

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the laches of plaintiff, has lost possible chance to recoup, through the sale of the stock, any amount which he might be compelled to pay as a surety or guarantor. The "indulgence," as this word is used in the law of guaranty, of the creditors of the principal, as evidenced by the acceptance of interest, and by failure promptly to notify the guarantor, may thus have served to discharge the guarantor. PALMARES VS CA (288 SCRA, 422, G.R. No. 126490, March 31, 1998) FACTS: Pursuant to a promissory note dated March 13, 1990, private respondent M.B. Lending Corporation extended a loan to the spouses Osmeña and Merlyn Azarraga, together with petitioner Estrella Palmares, in the amount of P30,000.00 payable on or before May 12, 1990, with compounded interest at the rate of 6% per annum to be computed every 30 days from the date thereof. On four occasions after the execution of the promissory note and even after the loan matured, petitioner and the Azarraga spouses were able to pay a total of P16,300.00, thereby leaving a balance of P13,700.00. No payments were made after the last payment on September 26, 1991. Consequently, on the basis of petitioner's solidary liability under the promissory note, Respondent Corporation filed a complaint against petitioner Palmares as the lone party defendant, to the exclusion of the principal debtors, allegedly by reason of the insolvency of the latter. In her Amended Answer with Counterclaim, petitioner alleged that sometime in August 1990, immediately after the loan matured, she offered to settle the obligation with respondent corporation but the latter informed her that they would try to collect from the spouses Azarraga and that she need not worry about it; that there has already been a partial payment in the amount of P17,010.00; that the interest of 6% per month compounded at the same rate per month, as well as the penalty charges of 3% per month, are usurious and unconscionable; and that while she agrees to be liable on the note but only upon default of the principal debtor, respondent corporation acted in bad

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faith in suing her alone without including the Azarragas when they were the only ones who benefited from the proceeds of the loan. ISSUE: Where a party signs a promissory note as a co-maker and binds herself to be jointly and severally liable with the principal debtor in case the latter defaults in the payment of the loan, is such undertaking of the former deemed to be that of a surety as an insurer of the debt, or of a guarantor who warrants the solvency of the debtor? SURETY HELD: The Civil Code pertinently provides: Art. 2047. By guaranty, a person called the guarantor binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so. If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I of this Book shall be observed. In such case the contract is called a suretyship. It is a cardinal rule in the interpretation of contracts that if the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulation shall control. In the case at bar, petitioner expressly bound herself to be jointly and severally or solidarily liable with the principal maker of the note. The terms of the contract are clear, explicit and unequivocal that petitioner's liability is that of a surety. A surety is an insurer of the debt, whereas a guarantor is an insurer of the solvency of the debtor. A suretyship is an undertaking that the debt shall be paid; a guaranty, an undertaking that the debtor shall pay. Stated differently, a surety promises to pay the principal's debt if the principal will not pay, while a guarantor agrees that the creditor, after proceeding against the principal, may proceed against the guarantor if the principal is unable to pay. A surety binds himself to perform if the principal does not, without regard to his ability to do so. A guarantor, on the other hand, does not contract that the principal will pay, but simply that he is able to do so. In other words, a surety undertakes directly for the payment and is so responsible at once if the principal debtor makes default, while a guarantor contracts to

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pay if, by the use of due diligence, the debt cannot be made out of the principal debtor. In a desperate effort to exonerate herself from liability, petitioner erroneously invokes the rule on strictissimi juris, which holds that when the meaning of a contract of indemnity or guaranty has once been judicially determined under the rule of reasonable construction applicable to all written contracts, then the liability of the surety, under his contract, as thus interpreted and construed, is not to be extended beyond its strict meaning. The rule, however, will apply only after it has been definitely ascertained that the contract is one of suretyship and not a contract of guaranty. It cannot be used as an aid in determining whether a party's undertaking is that of a surety or a guarantor. Prescinding from these jurisprudential authorities, there can be no doubt that the stipulation contained in the third paragraph of the controverted suretyship contract merely elucidated on and made more specific the obligation of petitioner as generally defined in the second paragraph thereof. Resultantly, the theory advanced by petitioner, that she is merely a guarantor because her liability attaches only upon default of the principal debtor, must necessarily fail for being incongruent with the judicial pronouncements adverted to above. In this regard, we need only to reiterate the rule that a surety is bound equally and absolutely with the principal, and as such is deemed an original promisor and debtor from the beginning. It will further be observed that petitioner's undertaking as co-maker immediately follows the terms and conditions stipulated between respondent corporation, as creditor, and the principal obligors. A surety is usually bound with his principal by the same instrument, executed at the same time and upon the same consideration; he is an original debtor, and his liability is immediate and direct. A surety usually enters into the same obligation as that of his principal, and the signatures of both usually appear upon the same instrument, and the same consideration usually supports the obligation for both the principal and the surety. There is no merit in petitioner's contention that the complaint was prematurely filed because

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the principal debtors cannot as yet be considered in default, there having been no judicial or extrajudicial demand made by respondent corporation. Significantly, paragraph (G) of the note states that "should I fail to pay in accordance with the above schedule of payment, I hereby waive my right to notice and demand." Hence, demand by the creditor is no longer necessary in order that delay may exist since the contract itself already expressly so declares. As a surety, petitioner is equally bound by such waiver. Even if it were otherwise, demand on the sureties is not necessary before bringing suit against them, since the commencement of the suit is a sufficient demand. On this point, it may be worth mentioning that a surety is not even entitled, as a matter of right, to be given notice of the principal's default. Inasmuch as the creditor owes no duty of active diligence to take care of the interest of the surety, his mere failure to voluntarily give information to the surety of the default of the principal cannot have the effect of discharging the surety. The surety is bound to take notice of the principal's default and to perform the obligation. He cannot complain that the creditor has not notified him in the absence of a special agreement to that effect in the contract of suretyship. A creditor's right to proceed against the surety exists independently of his right to proceed against the principal. 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 rule, therefore, is that if the obligation is joint and several, the creditor has the right to proceed even against the surety alone. Since, generally, it is not necessary for the creditor to proceed against a principal in order to hold the surety liable, where, by the terms of the contract, the obligation of the surety is the same that of the principal, then soon as the principal is in default, the surety is likewise in default, and may be sued immediately and before any proceedings are had against the principal. Perforce, in accordance with the rule that, in the absence of statute or agreement otherwise, a surety is primarily liable, and with the rule that his proper remedy is to pay the debt and

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pursue the principal for reimbursement, the surety cannot at law, unless permitted by statute and in the absence of any agreement limiting the application of the security, require the creditor or obligee, before proceeding against the surety, to resort to and exhaust his remedies against the principal, particularly where both principal and surety are equally bound. We agree with respondent corporation that its mere failure to immediately sue petitioner on her obligation does not release her from liability. Where a creditor refrains from proceeding against the principal, the surety is not exonerated. In other words, mere want of diligence or forbearance does not affect the creditor's rights vis-a-vis the surety, unless the surety requires him by appropriate notice to sue on the obligation. Such gratuitous indulgence of the principal does not discharge the surety whether given at the principal's request or without it, and whether it is yielded by the creditor through sympathy or from an inclination to favor the principal, or is only the result of passiveness. 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. And, in the absence of proof of resultant injury, a surety is not discharged by the creditor's mere statement that the creditor will not look to the surety, or that he need not trouble himself. The consequences of the delay, such as the subsequent insolvency of the principal, or the fact that the remedies against the principal may be lost by lapse of time, are immaterial. 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. It may not be amiss to add that leniency shown to a debtor in default, by delay permitted by the creditor without change in the time when the debt might be demanded, does not constitute an extension of the time of payment, which would release the surety. In order to constitute an extension discharging the surety, it should

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appear that the extension was for a definite period, pursuant to an enforceable agreement between the principal and the creditor, and that it was made without the consent of the surety or with a reservation of rights with respect to him. The contract must be one which precludes the creditor from, or at least hinders him in, enforcing the principal contract within the period during which he could otherwise have enforced it, and which precludes the surety from paying the debt. None of these elements are present in the instant case. Verily, the mere fact that respondent corporation gave the principal debtors an extended period of time within which to comply with their obligation did not effectively absolve here in petitioner from the consequences of her undertaking. Besides, the burden is on the surety, herein petitioner, to show that she has been discharged by some act of the creditor, herein respondent corporation, failing in which we cannot grant the relief prayed for. As a final issue, petitioner claims that assuming that her liability is solidary, the interests and penalty charges on the outstanding balance of the loan cannot be imposed for being illegal and unconscionable. Petitioner additionally theorizes that respondent corporation intentionally delayed the collection of the loan in order that the interests and penalty charges would accumulate. The statement, likewise traversed by said respondent, is misleading.

MACHETTI VS HOSPICIO DE SAN JOSE (G.R. No. L-16666, April 10, 1922) FACTS: Machetti undertook to construct a building for Hospicio de San Jose. In such written agreement, Macheti obtained the ‘guarantee’ of Fidelity and Surety Company of the Philippine Islands. Machetti undertook the construction with the supervision of the Hospicio architect. Machetti was paid for the work with the exception of P4, 978 to which the former filed a complaint. A counterclaim with damages was field by Hospicio alleging that the work has not been carried out in accordance with the specifications provided in the agreement.

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remedy against Machetti. Machetti was thereafter declared as insolvent and the proceeding was suspended. Hospicio filed a motion asking that Fidelity be made a cross defendant and that the proceeding continue as against such company. The Court granted the motion and Hospicio sought to recover from Fidelity the amount of P12, 800 as guaranty. The Court ruled in favor of Hospicio hence this present appeal. ISSUE: WON recourse can be had against Fidelity as guaranty? NO (not yet) HELD: (Discussion centered on the difference of surety and guaranty) It appear that the contract is the guarantor's separate undertaking in which the principal does not join, that its rests on a separate consideration moving from the principal and that although it is written in continuation of the contract for the construction of the building, it is a collateral undertaking separate and distinct from the latter. All of these circumstances are distinguishing features of contracts of guaranty. Now, while a surety undertakes to pay if the principal does not pay, the guarantor only binds himself to pay if the principal cannot pay. The one is the insurer of the debt, the other an insurer of the solvency of the debtor. This latter liability is what the Fidelity and Surety Company assumed in the present case. The undertaking is perhaps not exactly that of a fianza under the Civil Code, but is a perfectly valid contract and must be given the legal effect if ordinarily carries. The Fidelity and Surety Company having bound itself to pay only the event its principal, Machetti, cannot pay it follows that it cannot be compelled to pay until it is shown that Machetti is unable to pay. Such ability may be proven by the return of a writ of execution unsatisfied or by other means, but is not sufficiently established by the mere fact that he has been declared insolvent in insolvency proceedings under our statutes, in which the extent of the insolvent's inability to pay is not determined until the final liquidation of his estate. Therefore, Hospicio much first exhaust all its

GILAT SATELLITE NETWORKS LTD. v. UNITED COCONUT PLANTERS BANK GENERAL INSURANCE CO., INC. FACTS: On September 15, 1999, One Virtual placed with GILAT a purchase order for various telecommunications equipment, accessories, spares, services and software, at a total purchase price of US$ 2,128,250.00. Of the said purchase price for the goods delivered, One Virtual promised to pay a portion thereof totalling US$1.2 Million in accordance with the payment schedule dated 22 November 1999. To ensure the prompt payment of this amount, it obtained defendant UCPB’s surety bond dated 3 December 1999, in favor of GILAT. During the period between September 1999 and June 2000, GILAT shipped and delivered to One Virtual the purchased products and equipment, as evidenced by airway bills/Bill of Lading. All of the equipment, including the software components for which payment was secured by the surety bond, was shipped by GILAT and duly received by One Virtual. Under an endorsement dated December 23, 1999, the surety issued, with One Virtuals conformity, an amendment to the surety bond, Annex A thereof, correcting its expiry date from May 30, 2001 to July 30, 2001. One Virtual failed to pay GILAT the amount of US$ 400,000.00 on the due date of May 30, 2000 in accordance with the payment schedule to the surety bond, prompting GILAT to write the surety defendant UCPB on June 5, 2000, a demand letter for payment of the said amount of US$400,000.00. No part of the amount set forth in this demand has been paid to date by either One Virtual or defendant UCPB. One Virtual likewise failed to pay on the succeeding payment installment date of 30 November 2000 of the surety bond, prompting GILAT to send a second demand letter dated January 24, 2001, for the payment of the full amount of US$1,200,000.00 guaranteed under the surety bond, plus interests and expenses and which letter was received by the defendant surety on January 25, 2001. However, defendant UCPB failed to settle the amount of US$1,200,000.00 or a part thereof, hence, the instant complaint.

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Gilat filed a Complaint against respondent UCPB to recover the amounts supposedly covered by the surety bond, plus interests and expenses. ISSUES: 1. WON the CA erred in dismissing the case and ordering petitioner and One Virtual to arbitrate. 2. WON petitioner is entitled to legal interest due to the delay in the fulfillment by respondent of its obligation under the Suretyship Agreement. HELD: Suretyship Agreement The existence of a suretyship agreement does not give the surety the right to intervene in the principal contract, nor can an arbitration clause between the buyer and the seller be invoked by a non-party such as the surety. Petitioner alleges that arbitration laws mandate that no court can compel arbitration, unless a party entitled to it applies for this relief. This referral, however, can only be demanded by one who is a party to the arbitration agreement. Considering that neither petitioner nor One Virtual has asked for a referral, there is no basis for the CAs order to arbitrate. Moreover, Articles 1216 and 2047 of the Civil Code clearly provide that the creditor may proceed against the surety without having first sued the principal debtor. Even the Surety Agreement itself states that respondent becomes liable upon mere failure of the Principal to make such prompt payment. Thus, petitioner should not be ordered to make a separate claim against One Virtual (via arbitration) before proceeding against respondent. On the other hand, respondent maintains that a surety contract is merely an accessory contract, which cannot exist without a valid obligation. Thus, the surety may avail itself of all the defenses available to the principal debtor and inherent in the debt that is, the right to invoke the arbitration clause in the Purchase Agreement. We agree with petitioner.

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In suretyship, the oft-repeated rule is that a surety’s liability is joint and solidary with that of the principal debtor. This undertaking makes a surety agreement an ancillary contract, as it presupposes the existence of a principal contract. Nevertheless, although the contract of a surety is in essence secondary only to a valid principal obligation, its liability to the creditor or promise of the principal is said to be direct, primary and absolute; in other words, a surety is directly and equally bound with the principal. He becomes liable for the debt and duty of the principal obligor, even without possessing a direct or personal interest in the obligations constituted by the latter. Thus, a surety is not entitled to a separate notice of default or to the benefit of excussion. It may in fact be sued separately or together with the principal debtor. After a thorough examination of the pieces of evidence presented by both parties, the RTC found that petitioner had delivered all the goods to One Virtual and installed them. Despite these compliances, One Virtual still failed to pay its obligation, triggering respondent’s liability to petitioner as the formers surety. In other words, the failure of One Virtual, as the principal debtor, to fulfill its monetary obligation to petitioner gave the latter an immediate right to pursue respondent as the surety. Consequently, we cannot sustain respondents claim that the Purchase Agreement, being the principal contract to which the Suretyship Agreement is accessory, must take precedence over arbitration as the preferred mode of settling disputes. First, the acceptance of a surety agreement does not change in any material way the creditor’s relationship with the principal debtor nor does it make the surety an active party to the principal creditor-debtor relationship. In other words, the acceptance does not give the surety the right to intervene in the principal contract. The surety’s role arises only upon the debtors default, at which time, it can be directly held liable by the creditor for payment as a solidary obligor. Hence, the surety remains a stranger to the Purchase Agreement. We agree with petitioner that respondent cannot invoke in its favor the arbitration clause in the Purchase Agreement, because it is not a party

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to that contract. An arbitration agreement being contractual in nature, it is binding only on the parties thereto, as well as their assigns and heirs. Second, Section 24 of Republic Act No. 928542 is clear in stating that a referral to arbitration may only take place if at least one party so requests not later than the pre-trial conference, or upon the request of both parties thereafter. Respondent has not presented even an iota of evidence to show that either petitioner or One Virtual submitted its contesting claim for arbitration. Third, sureties do not insure the solvency of the debtor, but rather the debt itself. They are contracted precisely to mitigate risks of nonperformance on the part of the obligor. This responsibility necessarily places a surety on the same level as that of the principal debtor. The effect is that the creditor is given the right to directly proceed against either principal debtor or surety. This is the reason why excussion cannot be invoked. To require the creditor to proceed to arbitration would render the very essence of suretyship nugatory and diminish its value in commerce. 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. Interest; Delay Interest, as a form of indemnity, may be awarded to a creditor for the delay incurred by a debtor in the payment of the latter’s obligation, provided that the delay is inexcusable. Anent the issue of interests, petitioner alleges that it deserves to be paid legal interest of 12% per annum from the time of its first demand on respondent on 5 June 2000 or at most, from the second demand on 24 January 2001 because of the latter’s delay in discharging its monetary obligation. Citing Article 1169 of the Civil Code, petitioner insists that the delay started to run from the time it demanded the fulfilment of respondent’s obligation under the suretyship contract. Significantly, respondent does not contest this point, but instead argues that it is only liable for legal interest of 6% per annum from the date of petitioner’s last

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demand on 24 January 2001. We sustain petitioner. Article 2209 of the Civil Code is clear: if an obligation consists in the payment of a sum of money, and the debtor incurs a delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon, and in the absence of stipulation, the legal interest. Delay arises from the time the obligee judicially or extrajudicially demands from the obligor the performance of the obligation, and the latter fails to comply. Delay, as used in Article 1169, is synonymous with default or mora, which means delay in the fulfilment of obligations. It is the nonfulfillment of an obligation with respect to time.52 In order for the debtor (in this case, the surety) to be in default, it is necessary that the following requisites be present: (1) that the obligation be demandable and already liquidated; (2) that the debtor delays performance; and (3) that the creditor requires the performance judicially or extrajudicially. Having held that a surety upon demand fails to pay, it can be held liable for interest, even if in thus paying, its liability becomes more than the principal obligation. The increased liability is not because of the contract, but because of the default and the necessity of judicial collection. However, for delay to merit interest, it must be inexcusable in nature. As to the issue of when interest must accrue, our Civil Code is explicit in stating that it accrues from the time judicial or extrajudicial demand is made on the surety. This ruling is in accordance with the provisions of Article 1169 of the Civil Code and of the settled rule that where there has been an extra-judicial demand before an action for performance was filed, interest on the amount due begins to run, not from the date of the filing of the complaint, but from the date of that extra-judicial demand. Considering that respondent failed to pay its obligation on 30 May 2000 in accordance with the Purchase Agreement, and that the extrajudicial demand of petitioner was sent on 5 June 2000, we agree with the latter that interest must start to run from the time petitioner sent its first demand letter (5 June 2000), because the obligation was already due and demandable at that time.

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WILLEX PLASTIC, INC. V. CA, INTERNATIONAL CORPORATE BANK (1996) Doctrine: It is never necessary that a guarantor or surety should receive any part or benefit, if such there be, accruing to his principal FACTS: 1978: Inter-Resin took out a loan from Manila Bank. As additional security, InterResin and Investment Underwriting (IUCP) executed a Continuing Surety Agreement stating that they are liable to Manila Bank solidarily for the loan taken out by InterResin. 1979: Inter-Resin and Willex Plastic executed a Continuing Guarantee for the loan which Inter-Resin obtained from Investment Underwriting to the extent of P5M. 1981: Investment Underwriting (IUCP) paid Manila Bank P4M to satisfy Inter-Resin’s 1978 Obligation. Investment Underwriting (IUCP) then demanded payment of the P4M from both Inter-Resin and Willex. Inter-Resin paid IUCP P600K the proceeds of its fire insurance

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Willex denied obligation, it alleged that it is only a guarantor of the principal, hence its liability was only secondary to the principal and that it did not receive consideration nor benefit from the contract between the bank and Inter-Resin. Willex insisted that IUCP should pursue InterResin and apply to the loan the assets of the latter first before going after it. Willex further alleged that it is guarantor of a loan to Manila Bank and not to Interbank, hence the Continuing Guaranty cannot be retroactive applied as contracts of suretyship contemplates future dealing. ISSUE: WON Willex is liable as guarantor for the loans obtained by Inter-Resin to IUCP? – Yes

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HELD: Intent is controlling: clear from the evidence that the Continuing Guarantee executed by Willex with Inter-Resin would cover sums obtained (in the past– retroactive) and/or to be obtained by Inter-Resin Industrial from Interbank. Although a contract of suretyship is ordinarily not to be construed as retrospective, in the end the intention of the parties as revealed by the evidence is controlling– apply it to the 1978 loan. Guarantor or surety is bound by the same consideration that makes the contract effective between the principal parties thereto. . . . It is never necessary that a guarantor or surety should receive any part or benefit, if such there be, accruing to his principal.

RCBC VS. HON. JOSE P. ARRO 31 July 1982 FACTS: Private respondent Residoro Chua, with Enrique Go, Sr., executed a comprehensive surety agreement to guaranty, above all, any existing or future indebtedness of Davao Agricultural Industries Corporation (Daicor), and/or induce the bank at anytime or from time to time to make loans or advances or to extend credit to said Daicor, provided that the liability shall not exceed at any time Php100,000.00. A promissory note for Php100,000.00 (for additional capital to the charcoal buy and sell and the activated carbon importation business) was issued in favor of petitioner RCBC payable a month after execution. This was signed by Go in his personal capacity and in behalf of Daicor. Respondent Chua did not sign in said promissory note. As the note was not paid despite demands, RCBC filed a complaint for a sum of money against Daicor, Go and Chua. The complaint against Chua was dismissed upon his motion, alleging that the complaint states no cause of action against him as he was not a signatory to the note and hence he cannot be held liable. This was so despite RCBC’s opposition, invoking the comprehensive surety agreement which it holds to cover not just the note in question but also every other indebtedness that Daicor may

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incur from petitioner bank. RCBC moved for reconsideration of the dismissal but to no avail. ISSUE: WON respondent Chua may be held liable with Go and Daicor under the promissory note, even if he was not a signatory to it, in light of the provisions of the comprehensive surety agreement wherein he bound himself with Go and Daicor, as solidary debtors, to pay existing and future debts of said corporation. HELD: Yes, he may be held liable. The comprehensive surety agreement executed by Chua and Go, as president and general manager, respectively, of Daicor, was to cover existing as well as future obligations which Daicor may incur with RCBC. This was only subject to the proviso that their liability shall not exceed at any one time the aggregate principal amount of Php100,000.00. (Par.1 of said agreement). The agreement was executed to induce petitioner Bank to grant any application for a loan Daicor would request for. According to said agreement, the guaranty is continuing and shall remain in full force or effect until the bank is notified of its termination. During the time the loan under the promissory note was incurred, the agreement was still in full force and effect and is thus covered by the latter agreement. Thus, even if Chua did not sign the promissory note, he is still liable by virtue of the surety agreement. The only condition necessary for him to be liable under the agreement was that Daicor “is or may become liable as maker, endorser, accept or or otherwise.” The comprehensive surety agreement signed by Go and Chua was as an accessory obligation dependent upon the principal obligation, i.e., the loan obtained by Daicor as evidenced by the promissory note. The surety agreement unequivocally shows that it was executed to guarantee future debts that may be incurred by Daicor with petitioner, as allowed under NCC Art.2053. “A guaranty may also be given as security for future debts, the amount of which is not yet known; there can be no claim against the guarantor until the debt is liquidated. A conditional obligation may also be secured.”

ATOK CORPORATION vs. COURT OF APPEALS, SANYU CORPORATION, DANILO E. ARRIETA, NENITA B. ARRIETA, PABLITO BERMUNDO and LEOPOLDO HALILI FACTS: SANYU as principal and Sanyu Trading along with individual private stockholders of SC(Halili and Bermundo) as sureties, executed in the continuing Suretyship Agreement in favor of ATOK as creditor. Under this Agreement, Sanyu Trading and Halili and Bermudo jointly and severally unconditionally guarantee to ATOK CORPORATION the full, faithful and prompt payment and discharge of any and all indebtedness of SANYU. The word "indebtedness" is used herein in its most comprehensive sense and includes any and all advances, debts, obligations and liabilities of Principal or any one or more of them,here[to]fore, now or hereafter made, incurred or created, whether voluntary or involuntary and however arising, whether direct or acquired by the Creditor by assignment or succession, whether due or not due, absolute or contingent, liquidated or unliquidated, determined or undetermined and whether the Principal may be may be liable individually of jointly with others, or whether recovery upon such indebtedness may be or hereafter become barred by any statute of limitations, or whether such indebtedness may be or otherwise become unenforceable. SANYU assigned its trade receivables (P125K) in consideration of receipt from ATOK of the amount of P105,000.00. Later, additional trade receivables were assigned by SANYU to ATOK with a total face value of P100,378.45. Subsequently Atok commenced action against SANYU, the Arrieta spouses, Pablito Bermundo and Leopoldo Halili to collect the sum of P120,240.00 plus penalty charges amounting to P0.03 for every peso due and payable for each month starting from 1 September 1983.

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ATOK alleged that SANYU had failed to collect and remit the amount due under the trade receivables. SANYU et al sought dismissal of Atok's claim upon the ground that such claim had prescribed under Article 1629 of the Civil Code and for lack of cause of action. The private respondents contended that the Continuing Suretyship Agreement, being an accessory contract, was null and void since, at the time of its execution, SANYU had no pre-existing obligation due to ATOK. ISSUE: Whether the individual private respondents may be held solidarily liable with SANYU under the provisions of the Continuing Suretyship Agreement. YES OR Whether that Agreement must be held null and void as having been executed without consideration and without a pre-existing principal obligation to sustain it. NO HELD: It is true that a serious guaranty or a suretyship agreement is an accessory contract in the sense that it is entered into for the purpose of securing the performance of another obligation which is denominated as the principal obligation. It is also true that Article 2052 of the Civil Code states that "a guarantee cannot exist without a valid obligation." This legal proposition is not, however, like most legal principles, to be read in an absolute and literal manner and carried to the limit of its logic. Art. 2052. A guaranty cannot exist without a valid obligation. Nevertheless, a guaranty may be constituted to guarantee the performance of a voidable or an unenforceable contract. It may also guaranty a natural obligation." Art. 2053. A guaranty may also be given as security for future debts, the amount of which is not yet known; there can be no claim against the guarantor until the debt is liquidated. A conditional obligation may also be secured. In National Rice and Corn Corporation v. Jose A. Fojas and Alto Surety Co., Inc., appellant Fojas questions the validity of the additional bonds on the theory that when

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they were executed, the principal obligation referred to in said bonds had not yet been entered into, as no copy thereof was attached to the deeds of suretyship. This defense is untenable, because in its complaint the NARIC averred, and the appellant did not deny that these bonds were posted to secure the additional credit that Fojas has applied for, and the credit increase over his original contract was sufficient consideration for the bonds. That the latter were signed and filed before the additional credit was extended by the NARIC is no ground for complaint. Article 1825 of the Civil Code of 1889, in force in 1948, expressly recognized that "a guaranty may also be given as security for future debts the amount of which is not yet known." In Rizal Commercial Banking Corporation v. Arro, the Court was confronted again with the same issue, that is, whether private respondent was liable to pay a promissory note dated 29 April 1977 executed by the principal debtor in the light of the provisions of a comprehensive surety agreement which petitioner bank and the private respondent had earlier entered into on 19 October 1976. Under the comprehensive surety agreement, the private respondents had bound themselves as solidary debtors of the Diacor Corporation not only in respect of existing obligations but also in respect of future ones. In holding private respondent surety (Residoro Chua) liable under the comprehensive surety agreement, the Court said that the surety agreement which was earlier signed by Enrique Go, Sr. and private respondent, is an accessory obligation, it being dependent upon a principal one, which, in this case is the loan obtained by Daicor as evidenced by a promissory note. What obviously induced petitioner bank to grant the loan was the surety agreement whereby Go and Chua bound themselves solidarily to guaranty the punctual payment of the loan at maturity. By terms that are unequivocal, it can be clearly seen that the surety agreement was executed to guarantee future debts which Daicor may incur with petitioner, as is legally allowable under the Civil Code. In both Case Laws, the Court rejected the distinction which the Court of Appeals in the case at bar sought to make with respect to Article 2053, that is, that the "future debts" referred to in that Article relate to "debts

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already existing at the time of the constitution of the agreement but the amount of which is unknown," and not to debts not yet incurred and existing at that time. Of course, a surety is not bound under any particular principal obligation until that principal obligation is born. But there is no theoretical or doctrinal difficulty inherent in saying that the suretyship agreement itself is valid and binding even before the principal obligation intended to be secured thereby is born, any more that there would be in saying that obligations which are subject to a condition precedent are valid and binding before the occurrence of the condition precedent. Comprehensive or continuing surety agreements are in fact quite common place 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 surety 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.

JACINTO UY DIÑO and NORBERTO UY vs. HON. COURT OF APPEALS and METROPOLITAN BANK AND TRUST COMPANY FACTS: In 1977, Uy Tiam Enterprises and Freight Services, thru its representative Uy Tiam, applied for and obtained credit accommodations (LOC and TRA) METROBANK in the sum of P700,000.00. To secure the aforementioned credit accommodations Uy and Diño executed separate Continuing Suretyships, where Norberto UY agreed to pay METROBANK any indebtedness of UTEFS up to the aggregate sum of P300,000.00 while Jacinto Uy Diño agreed to be bound up to the aggregate sum of P800,000.00. This obligation was settled and paid by UTEFS.

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Again in 1979, UTEFS secured another credit accommodation which was fully settled. They then applied and obtained an irrevocable letter of credit in the sum of P815, 600.00, covered UTEFS' purchase of "8,000 Bags Planters Urea and 4,000 Bags Planters 21-0-0." It was applied for and obtain by UTEFS without the participation of Norberto Uy and Jacinto Uy Diño as they did not sign the document denominated as "Commercial Letter of Credit and Application." Also, they were not asked to execute any suretyship to guarantee its payment. Neither did METROBANK nor UTEFS inform them that the 1979 Letter of Credit has been opened and the Continuing Suretyships separately executed in February, 1977 shall guarantee its payment. UTEFS executed and delivered to METROBANK the Trust Receipt whereby the former acknowledged receipt in trust from the latter of the aforementioned goods from Planters Products which amounted to P815, 600.00. Being the entrusted, the former agreed to deliver to METROBANK the entrusted goods in the event of non-sale or, if sold, the proceeds of the sale thereof, on or before September 2, 1979. However, UTEFS did not acquiesce to the obligatory stipulations in the trust receipt. METROBANK sent letters to the said principal obligor and its sureties, Uy and Uy Diño, demanding payment of the amount due. Diño denied his liability saying that he cannot be held liable for the 1979 credit accommodation because it is a new obligation contracted without his participation. Besides, the 1977 credit accommodation which he guaranteed has been fully paid. Accordingly, the Continuing Suretyships executed in 1977 cannot be availed of to secure Uy Tiam's Letter of Credit obtained in 1979 because a guaranty cannot exist without a valid obligation. It was further argued that they cannot be held liable for the obligation contracted in 1979 because they are not privies thereto as it was contracted without their participation. METROBANK contends that the terms and conditions embodied in the comprehensive

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suretyships separately executed by suretiesdefendants, the bank argued that suretiesmovants bound themselves as solidary obligors of defendant Uy Tiam to both existing obligations and future ones based on Article 2053 ISSUE: Whether petitioners are liable as sureties for the 1979 obligations of Uy Tiam to METROBANK by virtue of the Continuing Suretyship Agreements they separately signed in 1977. YES but only for the amount or limit stated in the surety contract HELD: A continuing guaranty is one which covers all transactions, including those arising in the future, which are within the description or contemplation of the contract, of guaranty, until the expiration or termination thereof. A guaranty shall be construed as continuing when by the terms thereof it is evident that the object is to give a standing credit to the principal debtor to be used from time to time either indefinitely or until a certain period, especially if the right to recall the guaranty is expressly reserved. Hence, where the contract of guaranty states that the same is to secure advances to be made "from time to time" the guaranty will be construed to be a continuing one. The use of particular words and expressions such as payment of "any debt," "any indebtedness," "any deficiency," or "any sum," or the guaranty of "any transaction" or money to be furnished the principal debtor "at any time," or "on such time" that the principal debtor may require, have been construed to indicate a continuing guaranty. The Court looked into the provisions of the Surety entered by Diño. It shows that the suretyship agreement are continuing in nature. Petitioners do not deny this; in fact, they candidly admitted it. Neither have they denied the fact that they had not revoked the suretyship agreements. The purpose of the execution of the Continuing Suretyships was to induce appellant to grant any application for credit accommodation (letter of credit/trust receipt) UTEFS may desire to obtain from appellant bank. By its terms, each suretyship is a continuing one

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which shall remain in full force and effect until the bank is notified of its revocation. The Continuing Suretyship Agreements CAN be made applicable to the 1979 obligation even if the latter was not yet in existence when the agreements were executed in 1977, as stated in Art 2053 par 2. The limit of the petitioners respective liabilities must be determined from the suretyship agreement each had signed. The Continuing Suretyship Agreements signed by petitioner Diño and petitioner Uy fix the aggregate amount of their liability, at any given time, at P800,000.00 and P300,000.00, respectively. It is also stated in the contract that they are bound to pay for the interest and for a reasonable amount of cost of suit in case of judicial proceedings. The law is clear that a guarantor may bond himself for less, but not for more than the principal debtor, both as regards the amount and the onerous nature of the conditions. Thus, by express mandate of the Continuing Suretyship Agreements which they had signed, petitioners separately bound themselves to pay interest, expenses, attorney's fees and costs. Even without such stipulations, the petitioners would, nevertheless, be liable for the interest and judicial costs. Article 2055 of the Civil Code provides that … A guaranty is not presumed; it must be express and cannot extend to more than what is stipulated therein. If it be simple or indefinite, it shall comprise not only the principal obligation, but also all its accessories, including the judicial costs, provided with respect to the latter, that the guarantor shall only be liable for those costs incurred after he has been judicially required to pay. Interest and damages are included in the term accessories. However, such interest should run only from the date when the complaint was filed in court. Even attorney's fees may be imposed whenever appropriate, pursuant to Article 2208 of the Civil Code. FORTUNE MOTORS (PHILS.) CORPORATION and EDGAR L. RODRIGUEZA vs. THE HONORABLE

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COURT OF APPEALS and FILINVEST CREDIT CORPORATION FACTS: In 1981, Joseph Chua and Edgar Rodrigueza executed separate surety agreements in favor of Fortune Motors (Phils.) Corporation to cover obligations incurred by Fortune Motors whether they be enforced or thereafter made (from the time of said surety contracts). In 1982, Fortune Motors secured cars from Canlubang Automotive Resources Corporation (CARCO) via trust receipts and drafts made by CARCO. These were assigned to Filinvest Credit Corporation. Later Filinvest, when the obligation matured, demanded payment from Fortune Motor as well as from Chua and Rodrigueza. No payment was made. A case was filed. Rodrigueza averred that the surety agreement was void because when it was signed in 1981, the principal obligation (1982) did not yet exist. ISSUE: Whether surety can exist even if there was no existing indebtedness at the time of its execution. YES HELD: Surety May Secure Future Obligations The case at bench falls on all fours with Atok Finance Corporation vs. Court of Appeals which reiterated our rulings in National Rice and Corn Corporation (NARIC) vs. Court of Appeals and Rizal Commercial Banking Corporation vs. Arro. Future obligations can be covered by a surety. Comprehensive or continuing surety agreements are in fact quite commonplace in present day financial and commercial practice. A bank or 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.

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SOUTH CITY HOMES vs. BA FACTS: Fortune Motors Corporation (Phils.) has been availing of the credit facilities of plaintiff-appellant BA Finance Corporation. On January 17, 1983, Joseph L. G. Chua, President of Fortune Motors Corporation, executed in favor of plaintiff-appellant a Continuing Suretyship Agreement, in which he "jointly and severally unconditionally" guaranteed the "full, faithful and prompt payment and discharge of any and all indebtedness" of Fortune Motors Corporation to BA Finance Corporation. On February 3, 1983, Palawan Lumber Manufacturing Corporation plaintiff-appellant a Continuing Suretyship Agreement in which, said corporation "jointly and severally unconditionally" guaranteed the "full, faithful and prompt payment and discharge of any and all indebtedness of Fortune Motors Corporation to BA Finance Corporation. On the same date, South City Homes, Inc. represented by Edgar C. Rodrigueza and Aurelio F. Tablante, likewise executed a Continuing Suretyship Agreement in which said corporation "jointly and severally unconditionally" guaranteed the "full, faithful and prompt payment and discharge of any and all indebtedness" of Fortune Motors Corporation to BA Finance Corporation. Upon failure of the defendant-appellant Fortune Motors Corporation to pay the amounts due under the drafts and to remit the proceeds of motor vehicles sold or to return those remaining unsold in accordance with the terms of the trust receipt agreements, BA Finance Corporation sent demand letter to Edgar C. Rodrigueza, South City Homes, Inc., Aurelio Tablante, Palawan Lumber Manufacturing Corporation, Joseph L. G. Chua, George D. Tan and Joselito C. Baltazar. Since the defendants-appellants failed to settle their outstanding account with plaintiffappellant, the latter filed on December 22, 1983 a complaint for a sum of money with prayer for preliminary attachment. On January 19, 1984, the defendants filed a Motion to Dismiss. Therein, they alleged that conventional subrogation effected a novation without the consent of the debtor (Fortune

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Motors Corporation) and thereby extinguished the latter's liability; that pursuant to the trust receipt transaction, it was premature under P. D. No. 115 to immediately file a complaint for a sum of money as the remedy of the entruster is an action for specific performance; that the suretyship agreements are null and void for having been entered into without an existing principal obligation; and that being such sureties does not make them solidary debtors. ISSUE: Whether the suretyship agreement is valid HELD: On the first issue, petitioners assert that the suretyship agreement they signed is void because there was no principal obligation at the time of signing as the principal obligation was signed six (6) months later. The Civil Code, however, allows a suretyship agreement to secure future loans even if the amount is not yet known. Article 2053 of the Civil Code provides that: "Art. 2053. A guaranty may also be given as security for future debts, the amount of which is not yet known. x x x" In Fortune Motors (Phils.) Corporation v. Court of Appeals we held: "To fund their acquisition of new vehicles (which are later retailed or resold to the general public), car dealers normally enter into wholesale automotive financing schemes whereby vehicles are delivered by the manufacturer or assembler on the strength of trust receipts or drafts executed by the car dealers, which are backed up by sureties. These trust receipts or drafts are then assigned and/or discounted by the manufacturer to/with financing companies, which assume payment of the vehicles but with the corresponding right to collect such payment from the car dealers and/or the sureties. In this manner, car dealers are able to secure delivery of their stock-in-trade without having to pay cash therefor; manufacturers get paid without any receivables/ collection problems; and financing companies earn their margins with the assurance of payment not only from the dealers but also from the sureties. When the vehicles are eventually resold, the car dealers are supposed to pay the financing companies — and the business goes merrily on. However, in the event the car

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dealer defaults in paying the financing company, may the surety escape liability on the legal ground that the obligations were incurred subsequent to the execution of the surety contract? "x x x Of course, a surety is not bound under any particular principal obligation until that principal obligation is born. But there is no theoretical or doctrinal difficulty inherent in saying that the suretyship agreement itself is valid and binding even before the principal obligation intended to be secured thereby is born, any more than there would be in saying that obligations which are subject to a condition precedent are valid and binding before the occurrence of the condition precedent. "Comprehensive or continuing surety agreements are in fact quite commonplace in present day financial and commercial practice. A bank or 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."

PACIFIC BANKING CORPORATION vs. IAC FACTS: On October 24, 1975, Celia Syjuco Regala, applied for and obtained from the plaintiff the issuance and use of Pacificard credit card, under the Terms and Conditions Governing the Issuance and Use of Pacificard. On the same date, the defendant-appelant Robert Regala, Jr., spouse of defendant Celia Regala, executed a "Guarantor's Undertaking in favor of the appellee Bank, whereby the latter agreed "jointly and severally of Celia Aurora Syjuco Regala, to pay the Pacific Banking Corporation upon demand, any and all indebtedness, obligations, charges or liabilities due and incurred by said Celia Aurora Syjuco Regala with the use of the Pacificard, or renewals thereof, issued in her favor by the

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Pacific Banking Corporation". It was also agreed that "any changes of or novation in the terms and conditions in connection with the issuance or use of the Pacificard, or any extension of time to pay such obligations, charges or liabilities shall not in any manner release me/us from responsibility hereunder, it being understood that I fully agree to such charges, novation or extension, and that this understanding is a continuing one and shall subsist and bind me until the liabilities of the said Celia Syjuco Regala have been fully satisfied or paid. The defendant Celia Regala, as such Pacificard holder, had purchased goods and/or services on credit under her Pacificard, for which the plaintiff advanced the cost amounting to P92,803.98 at the time of the filing of the complaint. In view of defendant Celia Regala's failure to settle her account for the purchases made thru the use of the Pacificard, a written demand was sent to the latter and also to the defendant Roberto Regala, Jr. under his "Guarantor's Undertaking." Private respondent Roberto Regala, Jr. was made liable only to the extent of the monthly credit limit granted to Celia Regala, i.e., at P2,000.00 a month and only for the advances made during the one year period of the card's effectivity counted from October 29, 1975 up to October 29, 1976 ISSUE: What is the extent of Roberto’s liability? HELD: It is true that under Article 2054 of the Civil Code, "(A) guarantor may bind himself for less, but not for more than the principal debtor, both as regards the amount and the onerous nature of the conditions. 2 It is likewise not disputed by the parties that the credit limit granted to Celia Regala was P2,000.00 per month and that Celia Regala succeeded in using the card beyond the original period of its effectivity, October 29, 1979. We do not agree however, that Roberto Jr.'s liability should be limited to that extent. Private respondent Roberto Regala, Jr., as surety of his wife, expressly bound himself up to the extent of the debtor's (Celia) indebtedness likewise expressly waiving any "discharge in case of

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any change or novation of the terms and conditions in connection with the issuance of the Pacificard credit card." Roberto, in fact, made his commitment as a surety a continuing one, binding upon himself until all the liabilities of Celia Regala have been fully paid. All these were clear under the "Guarantor's Undertaking" Roberto signed, thus: . . . Any changes of or novation in the terms and conditions in connection with the issuance or use of said Pacificard, or any extension of time to pay such obligations, charges or liabilities shall not in any manner release me/us from the responsibility hereunder, it being understood that the undertaking is a continuing one and shall subsist and bind me/us until all the liabilities of the said Celia Syjuco Regala have been fully satisfied or paid. (p. 12, supra; emphasis supplied) Private respondent Roberto Regala, Jr. had been made aware by the terms of the undertaking of future changes in the terms and conditions governing the issuance of the credit card to his wife and that, notwithstanding, he voluntarily agreed to be bound as a surety. As in guaranty, a surety may secure additional and future debts of the principal debtor the amount of which is not yet known. The application by respondent court of the ruling in Government v. Tizon, supra is misplaced. It was held in that case that: . . . although the defendants bound themselves in solidum, the liability of the Surety under its bond would arise only if its co-defendants, the principal obligor, should fail to comply with the contract. To paraphrase the ruling in the case of Municipality of Orion vs. Concha, the liability of the Surety is "consequent upon the liability" of Tizon, or "so dependent on that of the principal debtor" that the Surety "is considered in law as being the same party as the debtor in relation to whatever is adjudged, touching the obligation of the latter"; or the liabilities of the two defendants herein "are so interwoven and dependent as to be inseparable." Changing the expression, if the defendants are held liable, their liability to pay the plaintiff would be solidary, but the nature of the Surety's undertaking is such that it does not incur liability unless and until the principal debtor is held liable.

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A guarantor or surety does not incur liability unless the principal debtor is held liable. It is in this sense that a surety, although solidarily liable with the principal debtor, is different from the debtor. It does not mean, however, that the surety cannot be held liable to the same extent as the principal debtor. The nature and extent of the liabilities of a guarantor or a surety is determined by the clauses in the contract of suretyship.

MOLINO vs. SECURITY DINERS FACTS: The Security Diners International Corporation ("SDIC') operates a credit card system under the name of Diners Club through which it extends credit accommodation to its cardholders for the purchase of goods and payment of services from its member establishments to be reimbursed later on by the cardholder upon proper billing. There are two types of credit cards issued: one, the Regular (Local) Card which entitles the cardholder to purchase goods and pay services from member establishments in an amount not exceeding P10,000.00; and two, the Diamond (Edition) Card which entitles the cardholder to purchase goods and pay services from member establishments in unlimited amounts. One of the requirements for the issuance of either of these cards is that an applicant should have a surety. On July 24, 1987, Danilo A. Alto applied for a Regular (Local) Card with SDIC. He got as his surety his own sister-in-law Jeanette Molino Alto. Thus, Danilo signed the printed application form and Jeanette signed the Surety Undertaking. On the basis of the completed and signed Application Form and Surety Undertaking, the SDIC issued to Danilo Diners Card No. 36510293216-0006. The latter used this card and initially paid his obligations to SDIC. On February 8, 1988, Danilo wrote SDIC a letter requesting it to upgrade his Regular (Local) Diners Club Card to a Diamond (Edition) one. As a requirement of SDIC, Danilo secured from Jeanette her approval. The latter obliged and so on March 2, 1988, she signed a Note which states:

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"This certifies that I, Jeanette D. Molino, approve of the request of Danilo and Gloria Alto with Card No. 3651-203216 0006 and 3651-203412-5007 to upgrade their card from regular to diamond edition." Danilo's request was granted and he was issued a Diamond (Edition) Diners Club Card. He used this card and made purchases from member establishments. On October 1, 1988 Danilo had incurred credit charged plus appropriate interest and service charges in the aggregate amount of P166,408.31. He defaulted in the payment of this obligation. SDIC demanded of Danilo and Jeanette to pay said obligation but they did not pay. So, on November 9, 1988, SDIC filed an action to collect said indebtedness against Danilo and Jeanette. Defendant Danilo Alto failed to file an Answer. Petitioner was left as the lone defendant, sued in her capacity as surety of Danilo. In the Answer petitioner claimed that her liability under the Surety Undertaking was limited to P10,000.00 and that she did not expressly and categorically agree to act as surety for Danilo in an amount higher than P10,000.00. Petitioner posits that she did not expressly give her consent to be bound as surety under the upgraded card. She points out that the note she signed, marked as Exhibit "C", registering her approval of the request of Danilo Alto to upgrade his card, renders the Surety Undertaking she signed under the terms of the previous card "without probative value, immaterial and irrelevant as it covers only the liability of the surety in the use of the regular credit card by the principal debtor x x x. " She argues further that because the principal debtor, Danilo Alto, was not held liable, having been dropped as a defendant, she could not be said to have incurred liability as surety. ISSUE: Whether petitioner is liable as surety under the Diamond card revolves around the effect of the upgrading by Danilo Alto of his card.

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HELD: There is no doubt that the upgrading was a novation of the original agreement covering the first credit card issued to Danilo Alto, basically since it was committed with the intent of canceling and replacing the said card. However, the novation did not serve to release petitioner from her surety obligations because in the Surety Undertaking she expressly waived discharge in case of change or novation in the agreement governing the use of the first credit card. The nature and extent of petitioner's obligations are set out in clear and unmistakable terms in the Surety Undertaking. Thus: 2. She declared that "any change or novation in the Agreement or any extension of time granted by SECURITY DINERS to pay such obligation, charges, and fees, shall not release (her) from this Surety Undertaking"; We cannot give any additional meaning to the plain language of the subject undertaking. The extent of a surety's liability is determined by the language of the suretyship contract or bond itself. This case is no different from Pacific Banking Corporation vs. IAC, supra, correctly applied by the Court of Appeals, which involved a Guarantor's Undertaking (although thus denominated, it was in substance a contract of surety signed by the husband for the credit card application of his wife. Like herein petitioner, the husband also argued that his liability should be limited to the credit limit allowed under his wife's card but the Court declared him liable to the full extent of his wife's indebtedness. Thus: We need not look elsewhere to determine the nature and extent of private respondent Roberto Regala, Jr.'s undertaking. As a surety he bound himself jointly and severally with the debtor Celia Regala "to pay the Pacific Banking Corporation upon demand, any and all indebtedness, obligations, charges or liabilities due and incurred by said Celia Syjuco Regala with the use of Pacificard or renewals thereof issued in (her) favor by Pacific Banking Corporation. x x x. xxx xxx xxx

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It is likewise not disputed by the parties that the credit limit granted to Celia Regala was P2,000.00 per month and that Celia Regala succeeded in using the card beyond the original period of its effectivity, October 29, 1979. We do not agree, however, that Roberto Jr.'s liability should be limited to that extent. Private respondent Roberto Regala, Jr., as surety of his wife, expressly bound himself up to the extent of the debtor's (Celia's) indebtedness likewise expressly waiving any "discharge in case of any change or novation of the terms and conditions in connection with the issuance of the Pacificard credit card." Roberto, in fact, made his commitment as a surety a continuing one, binding upon himself until all the liabilities of Celia Regala have been fully paid. All these were clear under the "Guarantor's Undertaking" Roberto signed, thus: "x x x Any changes of or novation in the terms and conditions in connection with the issuance or use of said Pacificard, or any extension of time to pay such obligations, charges or liabilities shall not in any manner release me/us from the responsibility hereunder, it being understood that the undertaking is a continuing one and shall subsist and bind me/us until all the liabilities of the said Celia Syjuco Regala have been fully satisfied or paid." As a last-ditch measure, petitioner asseverates that, being merely a surety, a pronouncement should first be made declaring the principal debtor liable before she herself can be proceeded against. The argument, which is hinged upon the dropping of Danilo as defendant in the complaint, is bereft of merit. The Surety Undertaking expressly provides that petitioner's liability is solidary. A surety is considered in law as being the same party as the debtor in relation to whatever is adjudged touching the obligation of the latter, and their liabilities are interwoven as to be inseparable. Although the contract of a surety is in essence secondary only to a valid principal obligation, his liability to the creditor is direct, primary and absolute; he becomes liable for the debt and duty of another although he possesses no direct or personal interest over the obligations

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nor does he receive any benefit therefrom. There being no question that Danilo Alto incurred debts of P166,408.31 in credit card advances, an obligation shared solidarily by petitioner, respondent was certainly within its rights to proceed singly against petitioner, as surety and solidary debtor, without prejudice to any action it may later file against Danilo Alto, until the obligation is fully satisfied. This is so provided 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 be subsequently directed against the others, so long as the debt has not been fully collected. Petitioner is a graduate of business administration, and possesses considerable work experience in several banks. She knew the full import and consequence of the Surety Undertaking that she executed. She had the option to withdraw her suretyship when Danilo upgraded his card to one that permitted unlimited purchases, but instead she approved the upgrading. While we commiserate in the financial predicament she now faces, it is also evident that the liability she incurred is only the legitimate consequence of an undertaking that she freely and intelligently obliged to.

GATEWAY ELECTRONICS CORPORATION and GERONIMO B. DELOS REYES, JR., VS. ASIANBANK CORPORATION (574 SCRA 698, G.R. No. 172041, December 18, 2008) FACTS: Petitioner Gateway Electronics Corporation (Gateway) is a domestic corporation that used to be engaged in the semi-conductor business. During the period material, petitioner Geronimo delos Reyes, Jr. was its president and one Andrew delos Reyes its executive vice-president. In July 1996, Geronimo and Andrew executed separate but almost identical deeds of suretyship for Gateway in favor of respondent Asianbank Corporation (Asianbank). Asianbank later extended to Gateway several export packing loans in the total aggregate amount of USD ~ 1.7Million. This loan package was later consolidated with a Dollar Promissory Note

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(PN) for the amount of USD ~1.7Million (same amount as above) and secured by a chattel mortgage over Gateway’s equipment for USD 2 million. Gateway initially made payments on its loan obligations, but eventually defaulted. Upon Gateway’s request, Asianbank extended the maturity dates of the loan several times. On July 15 and 30, 1999, Gateway issued two checks as payment for its arrearages and interests for the periods June 30 and July 30, 1999; However, both checks were dishonored for insufficiency of funds. Asianbank’s demands for payment made upon Gateway and its sureties went unheeded such that as of November 23, 1999, Gateway’s obligation to Asianbank, inclusive of principal, interest, and penalties, totaled USD ~2.2Million. Thus, Asianbank later filed with the RTC Makati a complaint for a sum of money against Gateway, Geronimo, and Andrew. RTC held Gateway, Geronimo and Andrew jointly and severally liable to pay Asianbank. Gateway, Geronimo and Andrew appealed to the CA. During the appeal, Gateway filed a petition for voluntary insolvency with the RTC Cavite in which Asianbank was listed as one of the creditors. CA affirmed the decision of the RTC Makati. Gateway, Geronimo and Andrew filed MR stating that RTC Cavite had issued an Order declaring Gateway insolvent. ISSUES: 1. WON Geronimo is liable as surety to pay Asianbank – YES 2. WON Geronimo should be liable to pay notwithstanding the order of insolvency of the SEC – YES HELD: 1. Gateway may be discharged from Liability but not Geronimo Under this issue, SC discussed the effect of the issuance of an order declaring Gateway insolvent under the Insolvency Law. Here, SC ruled that in accordance with said law, the issuance of the insolvency order had the effect of automatically staying the civil action for a

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sum of money filed by Asianbank against Gateway. In net effect, the proceedings before the CA, but only insofar as the claim against Gateway was concerned, was, or ought to have been, suspended after the date of the order. But according to SC, Geronimo’s liability is a different story. Suretyship is covered by Article 2047 of the CC, which states:

debt covered by the deed on suretyship, subject to the rule prohibiting double recovery from the same cause. This legal postulate becomes all the more logical in case of an insolvency situation where, as here, the insolvency court is bereft of jurisdiction over the sureties of the principal debtor.

By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so. If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I of this Book shall be observed. In such case the contract is called a suretyship. xxx A creditor’s right to proceed against the surety exists independently of his right to proceed against the principal. Under Article 1216 of the CC, the creditor may proceed against any one of the solidary debtors or some or all of them simultaneously.

As Asianbank aptly points out, A SUIT AGAINST THE SURETY, INSOFAR AS THE SURETY’S SOLIDARY LIABILITY IS CONCERNED, IS NOT AFFECTED BY AN INSOLVENCY PROCEEDING INSTITUTED BY OR AGAINST THE PRINCIPAL DEBTOR.

The rule, therefore, is that if the obligation is joint and several, the creditor has the right to proceed even against the surety alone. Since, generally, it is not necessary for the creditor to proceed against a principal in order to hold the surety liable, where, by the terms of the contract, the obligation of the surety is the same as that of the principal, then soon as the principal is in default, the surety is likewise in default, and may be sued immediately and before any proceedings are had against the principal. Perforce, x x x a surety is primarily liable, and with the rule that his proper remedy is to pay the debt and pursue the principal for reimbursement, the surety cannot at law, unless permitted by statute and in the absence of any agreement limiting the application of the security, require the creditor or obligee, before proceeding against the surety, to resort to and exhaust his remedies against the principal, particularly where both principal and surety are equally bound. Clearly, Asianbank’s right to collect payment for the full amount from Geronimo, as surety, exists independently of its right against Gateway as principal debtor; it could thus proceed against one of them or file separate actions against them to recover the principal

The same principle holds true with respect to the surety of a corporation in distress which is subject of a rehabilitation proceeding before the Securities and Exchange Commission (SEC). A surety of the distressed corporation can be sued separately to enforce his liability as such, notwithstanding an SEC order declaring the former under a state of suspension of payment. 2. Geronimo’s Argument: As things stand, his liability, as compared to that of Gateway, is contextually more onerous and burdensome, precluded as he is from seeking recourse against the insolvent corporation. From this premise, Geronimo claims that since Gateway cannot, owing to the order of insolvency, be made to pay its obligation, he, too, being just a surety, cannot also be made to pay, obviously having in mind Art. 2054 of the CC, as follows: A guarantor may bind himself for less, but not for more than the principal debtor, both as regards the amount and the onerous nature of the conditions. Should he have bound himself for more, his obligations shall be reduced to the limits of that of the debtor. SC’s Ruling: Provision does not free surety from liability. Liability may be less, but not free. Art. 2054 pronounces the rule that the obligation of a guarantor may be less, but cannot be more than the obligation of the principal debtor. The rule, however, cannot possibly be stretched to mean that a guarantor or surety is freed from liability as

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such guarantor or surety in the event the principal debtor becomes insolvent or is unable to pay the obligation. This interpretation would defeat the very essence of a suretyship contract which, by definition, refers to an agreement whereunder one person, the surety, engages to be answerable for the debt, default, or miscarriage of another known as the principal. Geronimo’s position that a surety cannot be made to pay when the principal is unable to pay is clearly erroneous and must be rejected. * When a creditor goes after a debtor and its surety, and then the debtor is subsequently declared insolvent by the court/SEC, such declaration of insolvency neither invalidates the suretyship nor does it mean that the surety is no longer liable to pay for the amount owed by the debtor to the creditor.

SECURITY BANK AND TRUST COMPANY, Inc. vs. RODOLFO M. CUENCA, (341 SCRA 781, G.R. No. 138544, October 3, 2000) FACTS: Sta. Ines Melale (‘Sta. Ines’) is a corporation engaged in logging operations. It was a holder of a Timber License Agreement issued by DENR. November 10, 1980, Security Bank and Trust Co. granted Sta. Ines Melale Corporation [SIMC] a credit line in the amount of P8,000,000.00 to assist the latter in meeting the additional capitalization requirements of its logging operations. The Credit Approval Memorandum expressly stated that the P8M Credit Loan Facility shall be effective until 30 November 1981. To secure the payment of the amounts drawn by SIMC from the above-mentioned credit line, SIMC executed a Chattel Mortgage over some of its machinery and equipment in favor of SBTC. As additional security for the payment of the loan, Rodolfo M. Cuenca executed an Indemnity Agreement dated 17 December 1980 in favor of SBTC whereby he solidarily bound himself with SIMC stating by virtue of aforesaid credit accommodation(s) including the substitutions, renewals, extensions, increases, amendments, conversions and revivals of the aforesaid credit accommodation(s).

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On 26 November 1981, four (4) days prior to the expiration of the period of effectivity of the P8M-Credit Loan Facility, SIMC made a first drawdown from its credit line with SBTC in the amount of P6,100,000.00 To cover said drawdown, SIMC duly executed promissory note. Sometime in 1985, Cuenca resigned as President and Chairman of the Board of Directors of defendant-appellant Sta. Ines. Subsequently, the shareholdings of Cuenca in Sta. Ines were sold at a public auction. Subsequently, appellant SIMC repeatedly availed of its credit line and obtained six (6) other loans from SBTC in the aggregate amount P6,369,019.50 which were covered by promissory notes. SIMC, however, encountered difficulty in making the amortization payments on its loans and requested SBTC for a complete restructuring of its indebtedness. SBTC accommodated SIMC’s request and signified its approval in a letter dated 18 February 1988 wherein SBTC and defendant appellant Sta. Ines, without notice to or the prior consent of Cuenca, agreed to restructure the past due obligations of Sta. Ines. Security Bank agreed to extend to Sta. Ines loans amounting to 8.8M and 3.4M. It should be pointed out that in restructuring Sta. Ines’ obligations to Security Bank, Promissory Note in the amount P6,100,000.00, which was the only loan incurred prior to the expiration of the P8M-Credit Loan Facility on 30 November 1981 and the only one covered by the Indemnity Agreement dated 19 December 1980. Pursuant to the agreement to restructure its past due obligations to Security Bank, Sta. Ines thus executed the 2 more promissory notes (total: 12.2M), both dated 09 March 1988 in favor of Security Bank. To formalize their agreement to restructure the loan obligations of Sta. Ines, Security Bank and Sta. Ines executed a Loan Agreement dated 31 October 1989 the purpose of which is “The First Loan shall be applied to liquidate the principal portion of the Borrower’s present total outstanding indebtedness to the Lender (the ‘indebtedness’) while the Second Loan shall be applied to liquidate the past due interest and penalty portion of the Indebtedness.” SIMC defaulted in the payment of its restructured loan obligations to SBTC despite demands made upon appellant SIMC and CUENCA.

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Appellants individually and collectively refused to pay the SBTC. Thus, SBTC filed a complaint for collection of sum of money on 14 June 1993, resulting after trial on the merits in a decision by the court a quo, x x x from which Cuenca appealed. The CA ruled that the 1989 Loan Agreement had novated the 1980 credit accommodation earlier granted by the bank to Sta. Ines. It noted that the 1989 Loan Agreement had been executed without notice to, much less consent from, Cuenca who at the time was no longer a stockholder of the corporation. It further held that the restructuring of Sta. Ines’ obligation under the 1989 Loan Agreement was tantamount to a grant of an extension of time to the debtor without the consent of the surety. Under Article 2079 of the Civil Code, such extension extinguished the surety. ISSUE: WON the liability of Mr. Cuenca was extinguished by the extension granted to the debtor. HELD: YES. RELEASE WITHOUT CONSENT OF GUARANTOR The 1989 Loan Agreement expressly stipulated that its purpose was to “liquidate,” not to renew or extend, the outstanding indebtedness. Moreover, respondent did not sign or consent to the 1989 Loan Agreement, which had allegedly extended the original P8 million credit facility. Hence, his obligation as a surety should be deemed extinguished, pursuant to Article 2079 of the Civil Code, which specifically states that “[a]n extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the guaranty. x x x.” In an earlier case, the Court explained the rationale of this provision in this wise: “The theory behind Article 2079 is that an extension of time given to the principal debtor by the creditor without the surety’s consent would deprive the surety of his right to pay the creditor and to be immediately subrogated to the creditor’s remedies against the principal debtor upon the maturity date. The surety is said to be entitled to protect himself against the contingency of the principal debtor or the indemnitors becoming insolvent during the extended period.”

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It is emphasized that an essential alteration in the terms of the Loan Agreement without the consent of the surety extinguishes the latter’s obligation. As the Court held in National Bank v. Veraguth, “[i]t is fundamental in the law of suretyship that any agreement between the creditor and the principal debtor which essentially varies the terms of the principal contract, without the consent of the surety, will release the surety from liability.” While respondent held himself liable for the credit accommodation or any modification thereof, such clause should be understood in the context of the P8 million limit and the November 30, 1981 term. It did not give the bank or Sta. Ines any license to modify the nature and scope of the original credit accommodation, without informing or getting the consent of respondent who was solidarily liable. Taking the bank’s submission to the extreme, respondent (or his successors) would be liable for loans even amounting to, say, P100 billion obtained 100 years after the expiration of the credit accommodation, on the ground that he consented to all alterations and extensions thereof. Indeed, it has been held that a contract of surety “cannot extend to more than what is stipulated. It is strictly construed against the creditor, every doubt being resolved against enlarging the liability of the surety.” In the absence of an unequivocal provision that respondent waived his right to be notified of or to give consent to any alteration of the credit accommodation, we cannot sustain petitioner’s view that there was such a waiver. It should also be observed that the Credit Approval Memorandum clearly shows that the bank did not have absolute authority to unilaterally change the terms of the loan accommodation. Indeed, it may do so only upon notice to the borrower. The present controversy must be distinguished from Philamgen v. Mutuc, in which the Court sustained a stipulation whereby the surety consented to be bound not only for the specified period, “but to any extension thereafter made, an extension x x x that could be had without his having to be notified.”

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In that case, the surety agreement contained this unequivocal stipulation: “It is hereby further agreed that in case of any extension of renewal of the bond, we equally bind ourselves to the Company under the same terms and conditions as herein provided without the necessity of executing another indemnity agreement for the purpose and that we hereby equally waive our right to be notified of any renewal or extension of the bond which may be granted under this indemnity agreement.” In the present case, there is no such express stipulation. At most, the alleged basis of respondent’s waiver is vague and uncertain. It confers no clear authorization on the bank or Sta. Ines to modify or extend the original obligation without the consent of the surety or notice thereto. NOVATION Clearly, the requisites of novation are present in this case. The 1989 Loan Agreement extinguished the obligation obtained under the 1980 credit accomodation. This is evident from its explicit provision to “liquidate” the principal and the interest of the earlier indebtedness, as the following shows: “1.02. Purpose. The First Loan shall be applied to liquidate the principal portion of the Borrower’s present total outstanding Indebtedness to the Lender (the “Indebtedness”) while the Second Loan shall be applied to liquidate the past due interest and penalty portion of the Indebtedness. Furthermore, several incompatibilities between the 1989 Agreement and the 1980 original obligation demonstrate that the two cannot coexist. While the 1980 credit accommodation had stipulated that the amount of loan was not to exceed P8 million, the 1989 Agreement provided that the loan was P12.2 million. The periods for payment were also different. Since the 1989 Loan Agreement had extinguished the original credit accommodation, the Indemnity Agreement, an accessory obligation, was necessarily extinguished also, pursuant to Article 1296 of the Civil Code, which provides that when the principal obligation is extinguished in consequence of a novation, accessory obligations may subsist only insofar as they

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may benefit third persons who did not give their consent.” CONTINUING SURETY In the present case, the Indemnity Agreement was subject to the two limitations of the credit accommodation: (1) that the obligation should not exceed P8 million, and (2) that the accommodation should expire not later than November 30, 1981. Hence, it was a continuing surety only in regard to loans obtained on or before the aforementioned expiry date and not exceeding the total of P8 million. Accordingly, the surety of Cuenca secured only the first loan of P6.1 million obtained on November 26, 1991. It did not secure the subsequent loans, purportedly under the 1980 credit accommodation, that were obtained in 1986. Certainly, he could not have guaranteed the 1989 Loan Agreement, which was executed after November 30, 1981 and which exceeded the stipulated P8 million ceiling. Petitioner, however, cites the Dino ruling in which the Court found the surety liable for the loan obtained after the payment of the original one, which was covered by a continuing surety agreement. At the risk of being repetitious, we hold that in Dino, the surety Agreement specifically provided that “each suretyship is a continuing one which shall remain in full force and effect until this bank is notified of its revocation.” Since the bank had not been notified of such revocation, the surety was held liable even for the subsequent obligations of the principal borrower. No similar provision is found in the present case. On the contrary, respondent’s liability was confined to the 1980 credit accommodation, the amount and the expiry date of which were set down in the Credit Approval Memorandum.

CONSUELO P. PICZON, RUBEN O. PICZON and AIDA P. ALCANTARA, , vs. ESTEBAN PICZON and SOSING-LOBOS & CO., INC., (G.R. No. L-29139, November 15, 1974) FACTS: This an appeal from the decision of the Court of First Instance of Samar in its Civil Case No. 5156, entitled Consuelo P. Piczon, et al. vs. Esteban Piczon, et al., sentencing defendants-appellees, Sosing Lobos and Co., Inc., as principal, and Esteban Piczon, as

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guarantor, to pay CONSUELO P. PICZON, RUBEN O. PICZON and AIDA P. ALCANTARA "the sum of P12,500.00 with 12% interest from August 6, 1964 until said principal amount of P12,500.00 shall have been duly paid, and the costs." Annex "A", the actionable document of appellants reads thus: AGREEMENT OF LOAN KNOW YE ALL MEN BY THESE PRESENTS: That I, ESTEBAN PICZON, of legal age, married, Filipino, and resident of and with postal address in the municipality of Catbalogan, Province of Samar, Philippines, in my capacity as the President of the corporation known as the "SOSINGLOBOS and CO., INC.," as controlling stockholder, and at the same time as guarantor for the same, do by these presents contract a loan of Twelve Thousand Five Hundred Pesos (P12,500.00), Philippine Currency, the receipt of which is hereby acknowledged, from the "Piczon and Co., Inc." another corporation, the main offices of the two corporations being in Catbalogan, Samar, for which I undertake, bind and agree to use the loan as surety cash deposit for registration with the Securities and Exchange Commission of the incorporation papers relative to the "Sosing-Lobos and Co., Inc.," and to return or pay the same amount with Twelve Per Cent (12%) interest per annum, commencing from the date of execution hereof, to the "Piczon and Co., Inc., as soon as the said incorporation papers are duly registered and the Certificate of Incorporation issued by the aforesaid Commission. IN WITNESS WHEREOF, I hereunto signed my name in Catbalogan, Samar, Philippines, this 28th day of September, 1956. (signed)Esteban Piczon. ISSUES: (a) SHOULD THE PAYMENT OF 12% INTEREST ON THE PRINCIPAL OF P12,500.00 FROM AUGUST 6, 1964, ONLY, OR FROM SEPTEMBER 28, 1956, WHEN ANNEX "A" WAS DULY EXECUTED? SEPTEMBER 28, 1956 (b) Is Esteban Piczon liable a guarantor or a surety? GUARANTOR HELD: a. Instead of requiring appellees to pay interest at 12% only from August 6, 1964, the

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trial court should have adhered to the terms of the agreement which plainly provides that Esteban Piczon had obligated Sosing-Lobos and Co., Inc. and himself to "return or pay (to Piczon and Co., Inc.) the same amount (P12,500.00) with Twelve Per Cent (12%) interest per annum commencing from the date of the execution hereof", Annex A, which was on September 28, 1956. Under Article 2209 of the Civil Code "(i)f the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon, and in the absence of stipulation, the legal interest, which is six per cent per annum." In the case at bar, the "interest agreed upon" by the parties in Annex A was to commence from the execution of said document. b. Under the terms of the contract, Annex A, Esteban Piczon expressly bound himself only as guarantor, and there are no circumstances in the record from which it can be deduced that his liability could be that of a surety. A guaranty must be express, (Article 2055, Civil Code) and it would be violative of the law to consider a party to be bound as a surety when the very word used in the agreement is "guarantor." Moreover, as well pointed out in appellees' brief, under the terms of the pre-trial order, appellants accepted the express assumption of liability by Sosing-Lobos & Co., Inc. for the payment of the obligation in question, thereby modifying their original posture that inasmuch as that corporation did not exist yet at the time of the agreement, Piczon necessarily must have bound himself as insurer. As already explained earlier, appellants' prayer for payment of legal interest upon interest due from the filing of the complaint can no longer be entertained, the same not having been made an issue in the pleadings in the court below. We do not believe that such a substantial matter can be deemed included in a general prayer for "any other relief just and equitable in the premises", especially when, as in this case, the pre-trial order does not mention it in the enumeration of the issues to be resolved by the court.

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BA FINANCE vs. CA FACTS: Renato Gaytano, doing business under the name Gebbs International, applied for and was granted a loan with respondent Traders Royal Bank in the amount of P60,000.00. As security for the payment of said loan, the Gaytano spouses executed a deed of suretyship whereby they agreed to pay jointly and severally to Traders Royal Bank bank the amount of the loan including interests, penalty and other bank charges. In a letter addressed toTraders Royal Bank, Philip Wong as credit administrator of BA Finance Corporation for and in behalf of the latter, undertook to guarantee the loan of the Gaytano spouses. Partial payments were made on the loan leaving an unpaid balance in the amount of P85,807.25. Since the Gaytano spouses refused to pay their obligation, Traders Royal Bank filed with the trial court complaint for sum of money against the Gaytano spouses and petitioner BA Finance Corporation as alternative defendant. The Gaytano spouses did not present evidence for their defense. BA Finance Corporation corporation, on the other hand, raised the defense of lack of authority of its credit administrator to bind the corporation. The trial court rendered a decision in favor of plaintiff and against defendants Gaytano spouses, ordering the latter to jointly and severally pay the plaintiff. Not satisfied with the decision, Traders Royal Bank appealed with the Court of Appeals. Respondent appellate court rendered judgment modifying the decision of the trial court. Hence, this petition. ISSUE: WON the letter of guaranty is ultra vires and thus invalid and/or unenforceable. YES HELD: It is a settled rule that persons dealing with an assumed agent, whether the assumed agency be a general or special one are bound at their peril, if they would hold the principal liable, to ascertain not only the fact of agency but also the nature and extent of authority, and in case either is controverted, the burden of proof is upon them to establish it (Harry Keeler v. Rodriguez, 4 Phil. 19).

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Hence, the burden is on Traders Royal Bank to satisfactorily prove that the credit administrator with whom they transacted acted within the authority given to him by his principal, BA Finance Corporation. The only evidence presented by Traders Royal Bank was the testimony of Philip Wong, credit administrator, w ho testifiedthat he had authority to issue guarantees as can be deducedfrom the wording of the memorandum given to him by BA Finance Corporation on his lending authority. The said memorandum allegedly authorized Wong not only to approve and grant loans but also to enter into contracts of guaranty in behalf of the corporation. Although Wong was clearly authorized to approve loans even up to P350,000.00 without any security requirement, which is far above the amount subject of the guaranty in the amount of P60,000.00, nothing in the said memorandum expressly vests on the credit administrator power to issue guarantees. We cannot agree with respondent's contention that the phrase "contingent commitment" set forth in the memorandum means guarantees. It has been held that a power of attorney or authority of an agent should not be inferred from the use of vague or general words. Guaranty is not presumed, it must be expressed and cannot be extended beyond its specified limits (Director v. Sing Juco, 53 Phil. 205). In one case, where it appears that a wife gave her husband power of attorney to loan money, this Court ruled that such fact did not authorize him to make her liable as a surety for the payment of the debt of a third person (Bank of Philippine Islands v. Coster, 47Phil. 594). The sole allegation of the credit administrator in the absence of any other proof that he is authorized to bind BA Finance Corporation in a contract of guaranty with third persons should not be given weight. The representation of one who acts as agent cannot by itself serve as proof of his authority to act as agent or of the extent of his authority as agent (Velasco v. La Urbana, 58Phil. 681). Wong's testimony that he had entered into similar transactions of guaranty in the past for and in behalf of the BA Finance Corporation, lacks credence due to his failure

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to show documents or records of the alleged past transactions. The actuation of Wong in claiming and testifying that he has the authority is understandable. He would naturally take steps to save himself from personal liability for damages to respondent bank considering that he had exceeded his authority. The rule is clear that an agent who exceeds his authority is personally liable for damages. Anent the conclusion of respondent appellate court that BA Finance Corporation is estopped from alleging lack of authority due to its failure to cancel or disallow the guaranty, the Court rules that said conclusion has no basis in fact. Respondent bank had not shown any evidence aside from the testimony of the credit administrator that the disputed transaction of guaranty was in fact entered into the official records or files of petitioner corporation, which will show notice or knowledge on the latter's part and its consequent ratification of the said transaction. In the absence of clear proof, it would be unfair to hold BA Finance Corporation guilty of estoppel in allowing its credit administrator to act as though the latter had power to guarantee.

TEXAS COMPANY vs ALONZO FACTS: On November 5, 1935 Leonor S. Bantug and Tomas Alonso were sued by the Texas Company (P.I.), Inc. for the recovery of the sum of P629, unpaid balance of the account of Leonora S. Bantug in connection with the agency contract with the Texas Company for the faithful performance of which Tomas Alonso signed the following: For value received, we jointly and severally do hereby bind ourselves and each of us, in solidum, with Leonor S. Bantug the agent named in the within and foregoing agreement, for full and complete performance of same hereby waiving notice of non-performance by or demand upon said agent, and the consent to any and all extensions of time for performance. Liability under this undertaking, however, shall not exceed the sum of P2,000, Philippine currency. Witness the hand and seal of the undersigned affixed in the presence of two witness, this

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12th day of August, 1929. Leonor S. Bantug was declared in default as a result of her failure to appear or answer, but Tomas Alonso filed an answer setting up a general denial and the special defenses that Leonor S. Bantug made him believe that he was merely a co-security of one Vicente Palanca and he was never notified of the acceptance of his bond by the Texas Company. The CFI of Cebu sentenced Leonor S. Bantug and Tomas Alonso to pay jointly and severally to the Texas Company the sum of P629, with interest at the rate of six per cent (6%) from the date of filing of the complaint, and with proportional costs. The CA modified the judgment; Leonor S. Bantug was held solely liable for the payment of the aforesaid sum of P629 to the Texas Company, with the consequent absolution of Tomas Alonso. According to the petitioner, the CA erred in holding that there was merely an offer of guaranty on the part of the respondent, Tomas Alonso, and that the latter cannot be held liable thereunder because he was never notified by the Texas Company of its acceptance. ISSUE: WON there was merely an offer of guaranty on the part of Alonso? YES HELD: The CA has placed reliance upon our decision in National Bank vs. Garcia (47 Phil., 662), while the petitioner invokes the case of National Bank vs. Escueta, (50 Phil., 991). In the first case, it was held that there was merely an offer to give bond and, as there was no acceptance of the offer, this court refused to give effect to the bond. In the second case, the sureties were held liable under their surety agreement which was found to have been accepted by the creditor, and it was therein ruled that an acceptance need not always be express or in writing. The Court of Appeals found as a fact, and that the bond in question was executed at the request of the petitioner by virtue of the following clause of the agency contract: Additional Security. — The Agent shall whenever requested by the Company in addition to the guaranty herewith provided,

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furnish further guaranty or bond, conditioned upon the Agent's faithful performance of this contract, in such individuals of firms as joint and several sureties as shall be satisfactory to the Company. In view of the foregoing clause which should be the law between the parties, it is obvious that, before a bond is accepted by the petitioner, it has to be in such form and amount and with such sureties as shall be satisfactory hereto; in other words, the bond is subject to petitioner's approval. The logical implication arising from this requirement is that, if the petitioner is satisfied with any such bond, notice of its acceptance or approval should necessarily be given to the proper party in interest, namely, the surety or guarantor. There is no evidence in this case tending to show that the respondent, Tomas Alonso, ever had knowledge of any act on the part of petitioner amounting to an implied acceptance, so as to justify the application of our decision in National Bank vs. Escueta. The decision appealed of CA is affirmed. POLICY: Where there is merely an offer of, or proposition for, a guaranty, or merely a conditional guaranty in the sense that it requires action by the creditor before the obligation becomes fixed, it does not become a binding obligation until it is accepted and, unless there is a waiver of notice of such acceptance is given to, or acquired by, the guarantor, or until he has notice or knowledge that the creditor has performed the conditions and intends to act upon the guaranty. The acceptance need not necessarily be express or in writing, but may be indicated by acts amounting to acceptance. Where, upon the other hand, the transaction is not merely an offer of guaranty but amounts to direct or unconditional promise of guaranty, unless notice of acceptance is made a condition of the guaranty, all that is necessary to make the promise binding is that the promise should act upon it, and notice of acceptance is not necessary, the reason being that the contract of guaranty is unilateral.

VISAYAN SURETY vs CA

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FACTS: On February 1993, the spouses Danilo Ibajan and Mila Ambe Ibajan (plantiffs) filed with the RTC a complaint against spouses Jun and Susan Bartolome (defendants), for replevin to recover from them the possession of an Isuzu jeepney, with damages. Spouses Ibajan alleged that they were the owners of an Isuzu jeepney which was forcibly and unlawfully taken by Spouses Bartolome on December 1992, while parked at their residence. Spouses Ibajan filed a replevin bond through petitioner Visayan Surety & Insurance Corporation. The contract of surety provided thus: "WHEREFORE, we, sps. Danilo Ibajan and Mila Ibajan and the VISAYAN SURETY & INSURANCE CORP., jointly and severally bind ourselves in the sum of P300,000 for the return of the property to the defendant, if the return thereof be adjudged, and for the payment to the defendant of such sum as he/she may recover from the plaintiff in the action." RTC granted issuance of a writ of replevin and as such, the sheriff seized the subject vehicle and turned over the same to spouses Ibajan. However on May 1993, Dominador Ibajan, father of Danilo Ibajan, filed a motion for leave of court to intervene, stating that he has a right superior to the spouses Ibajan over the ownership and possession of the subject vehicle. RTC granted the motion to intervene. Then later, RTC issued an order granting the motion to quash the writ of replevin and ordered Mila Ibajan to return the subject jeepney to the intervenor Dominador Ibajan. RTC thereafter ordered the issuance of a writ of replevin in favor of the intervenor Dominador who was the registered owner. This writ of replevin in favor of intervenor Dominador was however returned unsatisfied. Thus, in March 1994, intervenor Dominador filed with RTC a motion/application for judgment against spouses Ibajan’s bond. RTC ruled in favor of Dominador and ordered spouses Ibajan and Visayan Surety and Insurance Corporation to pay the former jointly and severally the value of the jeepney in the amount of P150,000 and other damages. CA affirmed RTC decision.

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ISSUE: WON the surety is liable to an intervenor on a replevin bond posted by Visayan Surety in favor of defendants. NO

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RELATIONSHIP AND OBLIGATION OF THE SURETY IS LIMITED TO THE DEFENDANTS SPECIFIED IN THE CONTRACT OF SURETY. Here, the defendants are the spouses Bartolome.

HELD: Who is an intervenor? An intervenor is a person, not originally impleaded in a proceeding, who has legal interest in the matter in litigation, or in the success of either of the parties, or an interest against both, or is so situated as to be adversely affected by a distribution or other disposition of property in the custody of the court or of an officer thereof. An intervenor is not a party to a contract of surety which he did not sign and which was executed by plaintiffs and defendants. It is a basic principle in law that contracts can bind only the parties who had entered into it; it cannot favor or prejudice a third person. Contracts take effect between the parties, their assigns, and heirs, except in cases where the rights and obligations arising from the contract are not transmissible by their nature, or by stipulation or by provision of law. A contract of surety is an agreement where a party called the surety guarantees the performance by another party called the principal or obligor of an obligation or undertaking in favor of a third person called the obligee. Specifically, suretyship is a contractual relation resulting from an agreement whereby one person, the surety, engages to be answerable for the debt, default or miscarriage of another, known as the principal.

SC ruled that Visayan Surety is not liable under the replevin bond to the intervenor Dominador. POLICY: Recall in your OBLICON: Stipulations in the contract govern. Thus, you cannot extend the obligations of a party beyond what is stipulated in the contract.

ESTATE OF HEMADY VS. LUZON SURETY FACTS: The Luzon Surety Co. had filed a claim against the Estate based on twenty different indemnity agreements, or counter bonds, each subscribed by a distinct principal and by the deceased K. H. Hemady, a surety solidary guarantor) in all of them, in consideration of the Luzon Surety Co.’s of having guaranteed, the various principals in favor of different creditors. The Luzon Surety Co., prayed for allowance, as a contingent claim, of the value of the twenty bonds it had executed in consideration of the counterbonds, and further asked for judgment for the unpaid premiums and documentary stamps affixed to the bonds, with 12 per cent interest thereon.

The obligation of a surety cannot be extended by implication beyond its specified limits. "When a surety executes a bond, it does not guarantee that the plaintiff’s cause of action is meritorious, and that it will be responsible for all the costs that may be adjudicated against its principal in case the action fails. The extent of a surety’s liability is determined only by the clause of the contract of suretyship." A contract of surety is not presumed; it cannot extend to more than what is stipulated.

Before answer was filed, and upon motion of the administratrix of Hemady’s estate, the lower court, by order of September 23, 1953, dismissed the claims of Luzon Surety Co., on two grounds: (1) that the premiums due and cost of documentary stamps were not contemplated under the indemnity agreements to be a part of the undertaking of the guarantor (Hemady), since they were not liabilities incurred after the execution of the counterbonds; and (2) that “whatever losses may occur after Hemady’s death, are not chargeable to his estate, because upon his death he ceased to be guarantor.”

Since the obligation of the extended by implication, IT THE SURETY CANNOT BE THE INTERVENOR

Lower Court’s ruling: The administratrix further contends that upon the death of Hemady, his liability as a guarantor terminated, and therefore, in the absence of a showing that a

surety cannot be FOLLOWS THAT HELD LIABLE TO WHEN THE

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loss or damage was suffered, the claim cannot be considered contingent. This Court believes that there is merit in this contention and finds support in Article 2046 of the new Civil Code. It should be noted that a new requirement has been added for a person to qualify as a guarantor, that is: integrity. As correctly pointed out by the Administratrix, integrity is something purely personal and is not transmissible. Upon the death of Hemady, his integrity was not transmitted to his estate or successors. Whatever loss therefore, may occur after Hemady’s death, are not chargeable to his estate because upon his death he ceased to be a guarantor. Another clear and strong indication that the surety company has exclusively relied on the personality, character, honesty and integrity of the now deceased K. H. Hemady, was the fact that in the printed form of the indemnity agreement there is a paragraph entitled ‘Security by way of first mortgage, which was expressly waived and renounced by the security company. The security company has not demanded from K. H. Hemady to comply with this requirement of giving security by way of first mortgage. In the supporting papers of the claim presented by Luzon Surety Company, no real property was mentioned in the list of properties mortgaged which appears at the back of the indemnity agreement.” ISSUE: WON the liability of Hemady as guarantor terminated upon his death. NO HELD: We find this reasoning untenable. Under the present Civil Code (Article 1311), as well as under the Civil Code of 1889 (Article 1257), the rule is that — “Contracts take effect only as between the parties, their assigns and heirs, except in the case where the rights and obligations arising from the contract are not transmissible by their nature, or by stipulation or by provision of law.” While in our successional system the responsibility of the heirs for the debts of their decedent cannot exceed the value of the inheritance they receive from him, the principle remains intact that these heirs succeed not only to the rights of the deceased but also to his obligations. Articles 774 and 776 of the New Civil Code (and Articles 659 and 661 of the preceding one) expressly so provide, thereby confirming Article 1311 already

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quoted. (See Art. 774 and 776) In Mojica vs. Fernandez, 9 Phil. 403, this Supreme Court ruled: “Under the Civil Code the heirs, by virtue of the rights of succession are subrogated to all the rights and obligations of the deceased (Article 661) and cannot be regarded as third parties with respect to a contract to which the deceased was a party, touching the estate of the deceased (Barrios vs. Dolor, 2 Phil. 44). The binding effect of contracts upon the heirs of the deceased party is not altered by the provision in our Rules of Court that money debts of a deceased must be liquidated and paid from his estate before the residue is distributed among said heirs (Rule 89). The reason is that whatever payment is thus made from the estate is ultimately a payment by the heirs and distributees, since the amount of the paid claim in fact diminishes or reduces the shares that the heirs would have been entitled to receive. Under our law, therefore, the general rule is that a party’s contractual rights and obligations are transmissible to the successors. The rule is a consequence of the progressive “depersonalization” of patrimonial rights and duties that, as observed by Victorio Polacco, has characterized the history of these institutions. Of the three exceptions fixed by Article 1311, the nature of the obligation of the surety or guarantor does not warrant the conclusion that his peculiar individual qualities are contemplated as a principal inducement for the contract. What did the creditor Luzon Surety Co. expect of K. H. Hemady when it accepted the latter as surety in the counterbonds? Nothing but the reimbursement of the moneys that the Luzon Surety Co. might have to disburse on account of the obligations of the principal debtors. This reimbursement is a payment of a sum of money, resulting from an obligation to give; and to the Luzon Surety Co., it was indifferent that the reimbursement should be made by Hemady himself or by someone else in his behalf, so long as the money was paid to it. The second exception of Article 1311, p. 1, is intransmissibility by stipulation of the parties.

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Being exceptional and contrary to the general rule, this intransmissibility should not be easily implied, but must be expressly established, or at the very least, clearly inferable from the provisions of the contract itself, and the text of the agreements sued upon nowhere indicate that they are nontransferable. Because under the law (Article 1311), a person who enters into a contract is deemed to have contracted for himself and his heirs and assigns, it is unnecessary for him to expressly stipulate to that effect; hence, his failure to do so is no sign that he intended his bargain to terminate upon his death. Similarly, that the Luzon Surety Co., did not require bondsman Hemady to execute a mortgage indicates nothing more than the company’s faith and confidence in the financial stability of the surety, but not that his obligation was strictly personal. The third exception to the transmissibility of obligations under Article 1311 exists when they are “not transmissible by operation of law”. The provision makes reference to those cases where the law expresses that the rights or obligations are extinguished by death, as is the case in legal support (Article 300), parental authority (Article 327), usufruct (Article 603), contracts for a piece of work (Article 1726), partnership (Article 1830 and agency (Article 1919). By contract, the articles of the Civil Code that regulate guaranty or suretyship (Articles 2047 to 2084) contain no provision that the guaranty is extinguished upon the death of the guarantor or the surety. The lower court sought to infer such a limitation from Art. 2056, to the effect that “one who is obliged to furnish a guarantor must present a person who possesses integrity, capacity to bind himself, and sufficient property to answer for the obligation which he guarantees”. It will be noted, however, that the law requires these qualities to be present only at the time of the perfection of the contract of guaranty. It is selfevident that once the contract has become perfected and binding, the supervening incapacity of the guarantor would not operate to exonerate him of the eventual liability he has contracted; and if that be true of his capacity to bind himself, it should also be true of his integrity, which is a quality mentioned in the article alongside the capacity.

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The foregoing concept is confirmed by the next Article 2057, that runs as follows: “ART. 2057. — If the guarantor should be convicted in first instance of a crime involving dishonesty or should become insolvent, the creditor may demand another who has all the qualifications required in the preceding article. The case is excepted where the creditor has required and stipulated that a specified person should be guarantor.” From this article it should be immediately apparent that the supervening dishonesty of the guarantor (that is to say, the disappearance of his integrity after he has become bound) does not terminate the contract but merely entitles the creditor to demand a replacement of the guarantor. But the step remains optional in the creditor: it is his right, not his duty; he may waive it if he chooses, and hold the guarantor to his bargain. Hence Article 2057 of the present Civil Code is incompatible with the trial court’s stand that the requirement of integrity in the guarantor or surety makes the latter’s undertaking strictly personal, so linked to his individuality that the guaranty automatically terminates upon his death. The contracts of suretyship entered into by K. H. Hemady in favor of Luzon Surety Co. not being rendered intransmissible due to the nature of the undertaking, nor by the stipulations of the contracts themselves, nor by provision of law, his eventual liability thereunder necessarily passed upon his death to his heirs. The contracts, therefore, give rise to contingent claims provable against his estate under section 5, Rule 87. “The most common example of the contigent claim is that which arises when a person is bound as surety or guarantor for a principal who is insolvent or dead. Under the ordinary contract of suretyship the surety has no claim whatever against his principal until he himself pays something by way of satisfaction upon the obligation which is secured. When he does this, there instantly arises in favor of the surety the right to compel the principal to exonerate the surety. But until the surety has contributed something to the payment of the debt, or has performed the secured obligation in whole or in part, he has no right of action against anybody — no claim that could be reduced to judgment.

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For Defendant administratrix it is averred that the above doctrine refers to a case where the surety files claims against the estate of the principal debtorand it is urged that the rule does not apply to the case before us, where the late Hemady was a surety, not a principal debtor. The argument evinces a superficial view of the relations between parties. If under the Gaskell ruling, the Luzon Surety Co., as guarantor, could file a contingent claim against the estate of the principal debtors if the latter should die, there is absolutely no reason why it could not file such a claim against the estate of Hemady, since Hemady is a solidary co-debtor of his principals. What the Luzon Surety Co. may claim from the estate of a principal debtor it may equally claim from the estate of Hemady, since, in view of the existing solidarity, the latter does not even enjoy the benefit of exhaustion of the assets of the principal debtor. Our conclusion is that the solidary guarantor’s liability is not extinguished by his death, and that in such event, the Luzon Surety Co., had the right to file against the estate a contingent claim for reimbursement. NOTE: The liability of the solidary guarantor is not terminated by his death.

III.

Effects of Guaranty WISE CO. VS. TANGLAO

FACTS: In the CFI of Manila, Wise & Co filed a civil case against Cornelio C. David for the was an agent of Wise & Co. and the amount claimed from him was the result of a liquidation of accounts showing that he was indebted in said amount. In said case Wise & Co. asked and obtained a To avoid the execution of said attachment, David succeeded in having the defendant Atty. Tanglao sign a power of attorney in his favor, with a clause (considered a special POA to David) “ To sign as guarantor for himself in his indebtedness to Wise & Company of Manila, and to mortgage the Attorney’s lot” Subsequently, David made a compromise

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agreement with the petitioner Wise&Co. to pay for the sum of P640, payable at the rate of P80 per month and he pledged the lot owned by the Atty. Dionisio Tanglao as a guaranty for the balance. David paid the sum of P343.47 to Wise & Co., on account of the P640 which he bound himself to pay leaving an unpaid balance of P296.53. Wise & Co. now institutes this case against Tanglao for the recovery of said balance of P296.53. ISSUE: WON Atty. Dionisio Tanglao is liable for the unpaid balance. NO. HELD: NOTE: Exhibit A – power of attorney; Exhibit B- Compromise agreement. There is no doubt that under Exhibit A, Tanglao empowered David, in his name, to enter into a contract of suretyship and a contract of mortgage of the property described in the document, with Wise & Co. However, David used said power of attorney only to mortgage the property and did not enter into contract of suretyship. Nothing is stated in Exhibit B to the effect that Tanglao became David's surety for the payment of the sum in question. Neither is this inferable from any of the clauses thereof, and even if this inference might be made, it would be insufficient to create an obligation of suretyship which, under the law, must be express and cannot be presumed. It appears from the foregoing that defendant, Tanglao could not have contracted any personal responsibility for the payment of the sum of P640. The only obligation which Exhibit B, in connection with Exhibit A, has created on the part of Tanglao, is that resulting from the mortgage of a property belonging to him to secure the payment of said P640. However, a foreclosure suit is not instituted in this case against Tanglao, but a purely personal action for the recovery of the amount still owed by defendant Tanglao may be considered as a surety under Exhibit B, the action does not yet lie against him on the ground that all the legal remedies against the debtor have not previously been exhausted (art. 1830 of the

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Civil Code, and decision of the Supreme Court of Spain of March 2, 1891). The plaintiff has in its favor a judgment against debtor David for the payment of debt. It does not appear that the execution of this judgment has been asked for and Exhibit B, on the other hand, shows that David has two pieces of property the value of which is in excess of the balance of the debt the payment of which is sought of Tanglao in his alleged capacity as surety.

PHILIPPINE BANK OF COMMUNICATIONS VS. COURT OF APPEALS, JOSEPH L.G. CHUA AND JALECO DEV’T, INC. FACTS: On April 14, 1976, Fortune Motors (Phils.), Inc. executed a Surety Agreement in favor of Philippine Bank of Communications (PBCOM for short) with Joseph L.G. Chua, as one of the sureties. On March 6, 1981, Forte Merchant Finance, Inc., executed a Surety Agreement in favor of PBCOM with Joseph L.G. Chua as one of the sureties On October 24, 1983 Chua executed a Deed of Exchange transferring a parcel of land with improvements thereon covered by TCT No. S52808 (343721) to JALECO Development, Inc. As a result, TCT No. 126573 of the Register of Deeds of Rizal covering the aforementioned parcel of land was issued in the name of JALECO Development, Inc., on November 24, 1983. On November 2, 1983, Chua sold 6,000 shares of JALECO Development, Inc., to Mr. Chua Tiong King for P600,000.00 and another 6,000 shares of JALECO Development, Inc. to Guillermo Jose, Jr. also for P600,000.00 and Caw Le Ja Chua, wife of Chua sold the 6,000 share of JALECO Development, Inc., to Chua Tiong King for P200,000.00 In the meanwhile, for failure of both Fortune Motors (Phils.), Inc. and Forte Merchant Finance, Inc. to meet their respective financial obligations with PBCOM, the latter filed Civil Case No. 84-25159 against Fortune Motors (Phils.), Inc., Joseph L. G. Chua et. al. and Civil Case No. 84-25160 against Forte

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Merchant Finance, Inc., Joseph L. G. Chua et. al. with the Regional Trial Court of Manila, both for Sum of Money with Writ of Preliminary Attachment where PBCOM was able to obtain a notice of levy on the properties of Fortune Motors (Phils.) When plaintiff was able to locate Chua's former property situated in Dasmariñas, Makati, Metro Manila, covered by TCT No. S-52808 containing an area of 1,541 square meters which was already transferred to JALECO Development, Inc., under TCT No. 126573 by virtue of the Deed of Exchange dated October 24, 1983, PBCOM filed Civil Case No. 7889 for annulment of Deed of Exchange with the Regional Trial Court of Makati, Metro Manila. Chua admitted the Deed of Exchange in favor of JALECO and contended that it was done in good faith and in accordance with law. ISSUE: WON the Deed of Exchange should be cancelled. YES HELD: For failure of both Fortune Motors (Phils), Inc. and Forte Merchant Finance, Inc. to pay their obligations with the petitioner, the latter filed the two civil cases against Fortune Motors (Phils.), Inc. and Forte Merchant Finance, Inc. and respondent Chua, among others with the Regional Trial Court of Manila. The petitioner was granted a writ of attachment as a result of which properties belonging to Fortune Motors (Phils.) were attached. It turned out, however, that the attached properties of Fortune Motors (Phils.), Inc. were already previously attached/mortgaged to prior lien holders in the amount of about P70,000,000.00. As regards Forte Merchant Finance, Inc., it appears that it has no property to satisfy the debts it incurred with PBCOM. The record further shows that as regards Chua, the property subject of the Deed of Exchange between him and JALECO was his only property. Under these circumstances, the petitioner's petition for annulment of the deed of exchange on the ground that the deed was executed in fraud of creditors, despite the pendency of the two (2) other civil cases is well-taken. As surety for the financial obligations of Fortune Motors (Phils.), Inc. and the Forte Merchant Finance, Inc., with the petitioner,

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respondent Chua bound himself solidarily liable with the two (2) principal debtors. (Article 2047, Civil Code) The petitioner may therefore demand payment of the whole financial obligations of Fortune Motors (Phils.), Inc. and Forte Finance, Inc., from Chua, if the petitioner chooses to go directly after him. Hence, since the only property of Chua was sold to JALECO after the debts became due, the petitioner has the right to file an annulment of the deed of exchange between Chua and JALECO wherein Chua sold his only property to JALECO to protect his interests and so as not to make the judgments in the two (2) cases illusory. Parenthetically, the appellate court's observation that the petitioner's interests are sufficiently protected by a writ of attachment on the properties of Fortune Finance (Phils.), Inc. has neither legal nor factual basis. PRUDENTIAL BANK vs. INTERMEDIATE APPELLATE COURT, PHILIPPINE RAYON MILLS, INC. and ANACLETO R. CHI FACTS: This case involves an action for the recovery of sum of money representing the amount paid by Prudential Bank to Nissho Company Ltd. of Japan for textile machinery imported by Philippine Rayon Mills Inc. On August 8, 1962, Philippine Rayon Mills Inc. entered into a contract with Nissho Co., Ltd. of Japan for the importation of textile machineries under a five-year deferred payment plan. Philippine Rayon applied for a commercial letter of credit with the Prudential Bank and Trust Company in favor of Nissho in the amount of $128,548,78. Nissho withdrew twelve drafts against the letter of credit which Prudential Bank paid to the Bank of Tokyo but only two of these drafts were accepted by Anacleto Chi, the president of Philippine Rayon. Upon the arrival of the machineries, the Prudential Bank indorsed the shipping documents to the defendant-appellant which accepted delivery of the same. They executed, by prior arrangenment, a trust receipt which was signed by Anacleto Chi to enable Philippine Rayon Mills to take delivery of the machines.

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At the back of the trust receipt is a printed form to be accomplished by two sureties who, by the very terms and conditions thereof, were to be jointly and severally liable to the Prudential Bank should the defendant-appellant fail to pay the total amount or any portion of the drafts issued by Nissho and paid for by Prudential Bank. The defendant-appellant was able to take delivery of the textile machineries and installed the same at its factory site at 69 Obudan Street, Quezon City. Sometime in 1967, the defendant-appellant ceased business operation. On December 29, 1969, defendant-appellant's factory was leased by Yupangco Cotton Mills for an annual rental of P200,000.00. The lease was renewed on January 3, 1973. On January 5, 1974, all the textile machineries in the defendant-appellant's factory were sold to AIC Development Corporation for P300,000.00. The obligation of the defendant-appellant arising from the letter of credit and the trust receipt remained unpaid and unliquidated. Repeated formal demands for the payment of the said trust receipt yielded no result Hence, the present action for the collection of the principal amount of P956,384.95 was filed on October 3, 1974 against the defendantappellant and Anacleto R. Chi. In their respective answers, the defendants interposed identical special defenses, viz., the complaint states no cause of action; if there is, the same has prescribed; and the plaintiff is guilty of laches. The trial court rendered judgment holding Philippine Rayon Mills Inc. liable for the sum of P153,645.22 which represented the two drafts accepted by Anacleto. The case against Anacleto Chi was dismissed. Petitioner appealed the decision to the then Intermediate Appellate Court. In urging the said court to reverse or modify the decision, petitioner alleged in its Brief that the trial court erred in (a) disregarding its right to reimbursement from the private respondents for the entire unpaid balance of the imported machines, the total amount of which was paid to the Nissho Company Ltd., thereby violating the principle of the third party payor's right to reimbursement provided for in the second

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paragraph of Article 1236 of the Civil Code and under the rule against unjust enrichment; (b) refusing to hold Anacleto R. Chi, as the responsible officer of defendant corporation, liable under Section 13 of P.D No 115 for the entire unpaid balance of the imported machines covered by the bank's trust receipt (c) finding that the solidary guaranty clause signed by Anacleto R. Chi is not a guaranty at all; (d) controverting the judicial admissions of Anacleto R. Chi that he is at least a simple guarantor of the said trust receipt obligation; (e) contravening, based on the assumption that Chi is a simple guarantor, Articles 2059, 2060 and 2062 of the Civil Code and the related evidence and jurisprudence which provide that such liability had already attached; (f) contravening the judicial admissions of Philippine Rayon with respect to its liability to pay the petitioner the amounts involved in the draft; and (g) interpreting "sight" drafts as requiring acceptance by Philippine Rayon before the latter could be held liable thereon. ISSUES:(only the 3rd issue is related to the topic) 1. Whether presentment for acceptance of the drafts was indispensable to make Philippine Rayon liable thereon; - NO 2. Whether Philippine Rayon is liable on the basis of the trust receipt; - YES 3. Whether private respondent Chi is jointly and severally liable with Philippine Rayon for the obligation sought to be enforced NO and if not, whether he may be considered a guarantor -YES; in the latter situation, whether the case should have been dismissed on the ground of lack of cause of action as there was no prior exhaustion of Philippine Rayon's properties. -NO HELD: ISSUE #1: A letter of credit is defined as an engagement by a bank or other person made at the request of a customer that the issuer will honor drafts or other demands for payment upon compliance with the conditions specified in the credit. Through a letter of credit, the bank merely substitutes its own promise to pay for one of its customers who in return promises to pay the bank the amount of funds mentioned in the letter of credit plus credit or commitment fees mutually agreed upon. In the instant case then, the drawee was necessarily the herein petitioner. It was to the latter that the drafts

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were presented for payment. In fact, there was no need for acceptance as the issued drafts are sight drafts. Presentment for acceptance is necessary only in the cases expressly provided for in Section 143 of the Negotiable Instruments Law (NIL). The said section reads: Sec. 143. When presentment for acceptance must be made. — Presentment for acceptance must be made: (a) Where the bill is payable after sight, or in any other case, where presentment for acceptance is necessary in order to fix the maturity of the instrument; or (b) Where the bill expressly stipulates that it shall be presented for acceptance; or (c) Where the bill is drawn payable elsewhere than at the residence or place of business of the drawee. In no other case is presentment for acceptance necessary in order to render any party to the bill liable. Obviously then, sight drafts do not require presentment for acceptance. The acceptance of a bill is the signification by the drawee of his assent to the order of the drawer; this may be done in writing by the drawee in the bill itself, or in a separate instrument. ISSUE #2: The trial court and the public respondent likewise erred in disregarding the trust receipt and in not holding that Philippine Rayon was liable thereon. In People vs. Yu Chai Ho, this Court explains the nature of a trust receipt by quoting In re Dunlap Carpet Co., thus: By this arrangement a banker advances money to an intending importer, and thereby lends the aid of capital, of credit, or of business facilities and agencies abroad, to the enterprise of foreign commerce. Much of this trade could hardly be carried on by any other means, and therefore it is of the first importance that the fundamental factor in the transaction, the banker's advance of money and credit, should receive the amplest protection. Accordingly, in order to secure that the banker shall be repaid at the critical point

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— that is, when the imported goods finally reach the hands of the intended vendee — the banker takes the full title to the goods at the very beginning; he takes it as soon as the goods are bought and settled for by his payments or acceptances in the foreign country, and he continues to hold that title as his indispensable security until the goods are sold in the United States and the vendee is called upon to pay for them. This security is not an ordinary pledge by the importer to the banker, for the importer has never owned the goods, and moreover he is not able to deliver the possession; but the security is the complete title vested originally in the bankers, and this characteristic of the transaction has again and again been recognized and protected by the courts. Of course, the title is at bottom a security title, as it has sometimes been called, and the banker is always under the obligation to reconvey; but only after his advances have been fully repaid and after the importer has fulfilled the other terms of the contract. As further stated in National Bank vs. Viuda e Hijos de Angel Jose, trust receipts: . . . [I]n a certain manner, . . . partake of the nature of a conditional sale as provided by the Chattel Mortgage Law, that is, the importer becomes absolute owner of the imported merchandise as soon an he has paid its price. The ownership of the merchandise continues to be vested in the owner thereof or in the person who has advanced payment, until he has been paid in full, or if the merchandise has already been sold, the proceeds of the sale should be turned over to him by the importer or by his representative or successor in interest. Under P.D. No. 115, otherwise known an the Trust Receipts Law, which took effect on 29 January 1973, a trust receipt transaction is defined as "any transaction by and between a person referred to in this Decree as the entruster, and another person referred to in this Decree as the entrustee, whereby the entruster, who owns or holds absolute title or security interests' over certain specified goods, documents or instruments, releases the same to the possession of the entrustee upon the latter's execution and delivery to the entruster of a signed document called the "trust receipt" wherein the entrustee binds himself to hold the

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designated goods, documents or instruments in trust for the entruster and to sell or otherwise dispose of the goods, documents or instruments with the obligation to turn over to the entruster the proceeds thereof to the extent of the amount owing to the entruster or as appears in the trust receipt or the goods, instruments themselves if they are unsold or not otherwise disposed of, in accordance with the terms and conditions specified in the trusts receipt, or for other purposes substantially equivalent to any one of the following: . . ." ISSUE #3: We also conclude, for the reason hereinafter discussed, and not for that adduced by the public respondent, that private respondent Chi's signature in the dorsal portion of the trust receipt did not bind him solidarily with Philippine Rayon. The statement at the dorsal portion of the said trust receipt, which petitioner describes as a "solidary guaranty clause", reads: In consideration of the PRUDENTIAL BANK AND TRUST COMPANY complying with the foregoing, we jointly and severally agree and undertake to pay on demand to the PRUDENTIAL BANK AND TRUST COMPANY all sums of money which the said PRUDENTIAL BANK AND TRUST COMPANY may call upon us to pay arising out of or pertaining to, and/or in any event connected with the default of and/or non-fulfillment in any respect of the undertaking of the aforesaid: PHILIPPINE RAYON MILLS, INC. We further agree that the PRUDENTIAL BANK AND TRUST COMPANY does not have to take any steps or exhaust its remedy against aforesaid: before making demand on me/us. (Sgd.) Anacleto R. Chi ANACLETO R. CHI Our own reading of the questioned solidary guaranty clause yields no other conclusion than that the obligation of Chi is only that of a guarantor. This is further bolstered by the last sentence which speaks of waiver of exhaustion, which, nevertheless, is ineffective in this case because the space therein for the party whose property may not be exhausted

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was not filled up. Under Article 2058 of the Civil Code, the defense of exhaustion (excussion) may be raised by a guarantor before he may be held liable for the obligation. Petitioner likewise admits that the questioned provision is a solidary guaranty clause, thereby clearly distinguishing it from a contract of surety. It, however, described the guaranty as solidary between the guarantors; this would have been correct if two (2) guarantors had signed it. The clause "we jointly and severally agree and undertake" refers to the undertaking of the two (2) parties who are to sign it or to the liability existing between themselves. It does not refer to the undertaking between either one or both of them on the one hand and the petitioner on the other with respect to the liability described under the trust receipt. Elsewise stated, their liability is not divisible as between them, i.e., it can be enforced to its full extent against any one of them. Furthermore, any doubt as to the import, or true intent of the solidary guaranty clause should be resolved against the petitioner. The trust receipt, together with the questioned solidary guaranty clause, is on a form drafted and prepared solely by the petitioner; Chi's participation therein is limited to the affixing of his signature thereon. It is, therefore, a contract of adhesion; as such, it must be strictly construed against the party responsible for its preparation. Neither can We agree with the reasoning of the public respondent that this solidary guaranty clause was effectively disregarded simply because it was not signed and witnessed by two (2) persons and acknowledged before a notary public. While indeed, the clause ought to have been signed by two (2) guarantors, the fact that it was only Chi who signed the same did not make his act an idle ceremony or render the clause totally meaningless. By his signing, Chi became the sole guarantor. The attestation by witnesses and the acknowledgement before a notary public are not required by law to make a party liable on the instrument. The rule is that contracts shall be obligatory in whatever form they may have been entered into, provided all the essential requisites for their validity are present;

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however, when the law requires that a contract be in some form in order that it may be valid or enforceable, or that it be proved in a certain way, that requirement is absolute and indispensable. With respect to a guaranty, which is a promise to answer for the debt or default of another, the law merely requires that it, or some note or memorandum thereof, be in writing. Otherwise, it would be unenforceable unless ratified. While the acknowledgement of a surety before a notary public is required to make the same a public document, under Article 1358 of the Civil Code, a contract of guaranty does not have to appear in a public document. The remaining issue to be resolved concerns the propriety of the dismissal of the case against private respondent Chi. The trial court based the dismissal, and the respondent Court its affirmance thereof, on the theory that Chi is not liable on the trust receipt in any capacity — either as surety or as guarantor — because his signature at the dorsal portion thereof was useless; and even if he could be bound by such signature as a simple guarantor, he cannot, pursuant to Article 2058 of the Civil Code, be compelled to pay until after petitioner has exhausted and resorted to all legal remedies against the principal debtor, Philippine Rayon. The records fail to show that petitioner had done so. Reliance is thus placed on Article 2058 of the Civil Code which provides: Art. 2058. The guarantor cannot be compelled to pay the credit unless the latter has exhausted all the property of the debtor, and has resorted to all the legal remedies against the debtor. Simply stated, there is as yet no cause of action against Chi. Excussion is not a condition sine qua non for the institution of an action against a guarantor. In Southern Motors, Inc. vs. Barbosa, this Court stated: Although an ordinary personal guarantor — not a mortgagor or pledgor — may demand the aforementioned exhaustion, the creditor may, prior thereto, secure a judgment against said guarantor, who shall be entitled, however, to a deferment of the execution of said judgment

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against him until after the properties of the principal debtor shall have been exhausted to satisfy the obligation involved in the case. However, Chi's liability is limited to the principal obligation in the trust receipt plus all the accessories thereof including judicial costs; with respect to the latter, he shall only be liable for those costs incurred after being judicially required to pay. Interest and damages, being accessories of the principal obligation, should also be paid; these, however, shall run only from the date of the filing of the complaint. Attorney's fees may even be allowed in appropriate cases.

FIDELIZA J. AGLIBOT vs. INGERSOL L. SANTIA G.R. No. 185945 (December 05, 2012) FACTS: Engr. Ingersol L.Santia loaned P2,500,000 to Pacific Lending and Capital Corporation, through its manager Fideliza J. Aglibot. The loan was evidence by a promisorry note date July 1, 2003 and payable in one year subject to interest at 24% per annum. Aglibot then issued and delivered to Santia eleven post-dated personal checks drawn from her own demand account as a guaranty or security for the payment of the note. Upon presentation of the checks, they were dishonored by the bank for having been drawn against insufficient funds or closed account. Santia then demanded payment from PLCC and Aglibot of the face value of the checks, but neither of them heeded his demand. As a result, eleven Informations for violation of BP 22 were filed against Aglibot. Aglibot, in her defense, admitted that she did obtain the loan from Santia, but claimed that she did so in behalf of PLCC; that before granting the loan, Santia demanded and obtained from her a security for the repayment thereof, but with the understanding that upon remittance in case of the face amount of the checks, Santia would correspondingly return to her each check so paid. Aglibot also mainted that she was a mere guarantor of the PLCC's debt and Santia failed to exhaust all means to collect the debt from PLCC and therefore she is not subsidiary liable.

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ISSUE: Whether or not Aglibot is a guarantor and thus, can invoke the benefit of excussion NO, Aglibot is an accommodation party HELD: The RTC in its decision held that Aglibot signed the promissory note on behalf of PLCC as manager and nowhere does it appear that she signed as a accommodation party. The RTC further ruled that what Aglibot agreed to do by issuing her personal checks was merely to guarantee the indebtedness of PLCC, and thus she must be accorded the benefit of excussion- prior exhaustion of the property of the debtor- as provided under Article 2058 of the Civil CodeArt. 2058. The guarantor cannot be compelled to pay the creditor unless the latter has exhausted all the property of the debtor, and has resorted to all the legal remedies against the debtor. However, in the present case, Aglibot's claim as a mere guarantor is bereft of merit for want of proof as provided under Article 1403(2) of the Civil Code, embodying the Statute of Frauds which providesArt. 1403. The following contracts unenforceable, unless they are ratified:

are

(2) Those that do not comply with the Statute of Frauds as set forth in this number. In the following cases an agreement hereafter made shall be unenforceable by action, unless the same, or some note or memorandum thereof, be in writing, and subscribed by the party charged, or by his agent; evidence, therefore, of the agreement cannot be received without the writing, or a secondary evidence of its contents: a) An agreement that by its terms is not to be performed within a year from the making thereof; b) A special promise to answer for the debt, default, or miscarriage of another; c) An agreement made in consideration of marriage, other than a mutual promise to marry; d) An agreement for the sale of goods, chattels or things in action, at a price not less than five hundred pesos, unless the buyer accept and receive part of such goods and chattels, or the

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evidences, or some of them, or such things in action, or pay at the time some part of the purchase money; but when a sale is made by auction and entry is made by the auctioneer in his sales book, at the time of the sale, of the amount and kind of property sold, terms of sale, price, names of purchasers and person on whose account the sale is made, it is a sufficient memorandum; e) An agreement for the leasing of a longer period than one year, or for the sale of real property or of an interest therein; f) A representation to the credit of a third person. Under the above provision, concerning a guaranty agreement, which is a promise to answer for the debt or default of another, the law clearly requires that it, or some note or memorandum thereof, be in writing. Otherwise, it would be unenforceable unless ratified, although under Article 1358 of the Civil Code, a contract of guaranty does not have to appear in a public document. Under Article 2055 of the Civil Code, it is provided that a guaranty is not presumed, but must be express and cannot extend to more than what is stipulated therein. This is the obvious rationale why a contract of guaranty is unenforceable unless made in writing or evidenced by some writing. For as pointed out by Santia, Aglibot has not shown any proof, such as a contract, a secretary’s certificate or a board resolution, nor even a note or memorandum thereof, whereby it was agreed that she would issue her personal checks in behalf of the company to guarantee the payment of its debt to Santia. Certainly, there is nothing shown in the Promissory Note signed by Aglibot herself remotely containing an agreement between her and PLCC resembling her guaranteeing its debt to Santia. And neither is there a showing that PLCC thereafter ratified her act of "guaranteeing" its indebtedness by issuing her own checks to Santia. N.B.: Why Aglibot is an accommodation party The appellate court ruled that by issuing her own post-dated checks, Aglibot thereby bound herself personally and solidarily to pay Santia, and dismissed her claim that she issued her said checks in her official capacity as PLCC’s

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manager merely to guarantee the investment of Santia. It noted that she could have issued PLCC’s checks, but instead she chose to issue her own checks, drawn against her personal account with Metrobank. It concluded that Aglibot intended to personally assume the repayment of the loan, pointing out that in her Counter-Affidavit, she even admitted that she was personally indebted to Santia, and only raised payment as her defense, a clear admission of her liability for the said loan. The facts below present a clear situation where Aglibot, as the manager of PLCC, agreed to accommodate its loan to Santia by issuing her own post-dated checks in payment thereof. She is what the Negotiable Instruments Law calls an accommodation party.

BENJAMIN BITANGA vs PYRAMID CONSTRUCTION ENGINEERING CORPORATION G.R. No. 173526 (August 28, 2008) FACTS: On March 26, 1997, Pyramid Construction Engineering Corporation entered into an agreement with Macrogen Realty, of which Benjamin Bitanga is the president, to construct in favor of the latter, the Shoppers Gold Building. Pyramid commenced the construction project on May 1997. However, Macrogen Realty failed to settle Pyramid's progress billings, which resulted to the suspension of the work. In August 1998, Pyramid once again suspended the construction work because the conditions that is imposed for its continuation, including payment of the unsettled accounts had not been complied with by Macrogen Realty. Pyramid then instituted a case with the Construction Industry Association Commission against Macrogen Realty seeking payment from the latter for the unpaid billings and project costs. On April 17, 2000, before the arbitration case could be set for trial, both parties entered into a compromise agreement whereby Macrogen Realty agreed to pay the total amount of P6,000,000 in six equal monthly installments. Bitanga guaranteed the obligations of Macrogen Realty under the compromise agreement by executing a Contract of

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Guaranty in favor of Pyramid, by virtue of which he irrevocably and unconditionally guaranteed the full and complete payment of the principal liability of Macrogen Realty.

is otherwise excussion.

However, contrary to petitioner’s assurances, Macrogen Realty failed and refused to pay all the monthly installments agreed upon in the Compromise Agreement. Hence, on 7 September 2000, respondent moved for the issuance of a writ of execution8 against Macrogen Realty, which CIAC granted.

Art. 2060. In order that the guarantor may make use of the benefit of excussion, he must set it up against the creditor upon the latter’s demand for payment from him, and point out to the creditor available property of the debtor within Philippine territory, sufficient to cover the amount of the debt.

On 29 November 2000, the sheriff9 filed a return stating that he was unable to locate any property of Macrogen Realty, except its bank deposit of P20,242.33, with the Planters Bank, Buendia Branch. Respondent then made, on 3 January 2001, a written demand on petitioner, as guarantor of Macrogen Realty, to pay the P6,000,000.00, or to point out available properties of the Macrogen Realty within the Philippines sufficient to cover the obligation guaranteed. It also made verbal demands on petitioner. Yet, respondent’s demands were left unheeded. As a special and affirmative defense, petitioner argued that the benefit of excussion was still available to him as a guarantor since he had set it up prior to any judgment against him. According to petitioner, respondent failed to exhaust all legal remedies to collect from Macrogen Realty the amount due under the Compromise Agreement, considering that Macrogen Realty still had uncollected credits which were more than enough to pay for the same. Given these premise, petitioner could not be held liable as guarantor. ISSUE: Whether or not Benjamin Bitanga can avail himself of the benefit of excussion - NO HELD: Under a contract of guarantee, the guarantor binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so. The guarantor who pays for a debtor, in turn, must be indemnified by the latter. However, the guarantor cannot be compelled to pay the creditor unless the latter has exhausted all the property of the debtor and resorted to all the legal remedies against the debtor. This is what

known

as

the

benefit

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of

Article 2060 of the Civil Code reads:

The afore-quoted provision imposes a condition for the invocation of the defense of excussion. Article 2060 of the Civil Code clearly requires that in order for the guarantor to make use of the benefit of excussion, he must set it up against the creditor upon the latter’s demand for payment and point out to the creditor available property of the debtor within the Philippines sufficient to cover the amount of the debt. It must be stressed that despite having been served a demand letter at his office, petitioner still failed to point out to the respondent properties of Macrogen Realty sufficient to cover its debt as required under Article 2060 of the Civil Code. Such failure on petitioner’s part forecloses his right to set up the defense of excussion. Worthy of note as well is the Sheriff’s return stating that the only property of Macrogen Realty which he found was its deposit of P20,242.23 with the Planters Bank. Article 2059(5) of the Civil Code thus finds application and precludes petitioner from interposing the defense of excussion. We quote: Art. 2059. This excussion shall not take place: xxxx (5) If it may be presumed that an execution on the property of the principal debtor would not result in the satisfaction of the obligation. Benjamin Bitanga had not genuinely controverted the return made by Sheriff Joseph F. Bisnar, who affirmed that, after exerting diligent efforts, he was not able to locate any

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property belonging to the Macrogen Realty, except for a bank deposit with the Planter’s Bank at Buendia, in the amount of P20,242.23. It is axiomatic that the liability of the guarantor arises when the insolvency or inability of the debtor to pay the amount of debt is proven by the return of the writ of execution that had not been unsatisfied.

JN DEVELOPMENT CORPORATION, and SPS. RODRIGO and LEONOR STA. ANA vs. PHILIPPINE EXPORT AND FOREIGN LOAN GUARANTEE CORPORATION FACTS: Traders Royal Bank (TRB) extended to JN Development Corporation (JN) an Export Packing Credit Line for P2,000,000. The loan was covered by a real estate mortgage and a letter of guarantee from respondent Philippine Export and Foreign Loan Guarantee Corporation (PhilGuarantee). Upon JN’s failure to pay the loan when it matured, PhilGuarantee, upon TRB’s request to make good its guarantee, paid the latter. Subsequently, PhilGuarantee made several demands on JN, but the latter proposed to settle the obligation by way of development and sale of the mortgaged property instead, which PhilGuarantee rejected. PhilGuarantee thus filed a complaint for collection of money and damages against herein petitioners. The RTC ruled that since TRB was able to foreclose the real estate mortgage executed by JN the obligation was extinguished and thus the latter is not liable to reimburse PhilGuarantee. In addition, the RTC held that since the guarantee was good for only one year, which was not renewed after the expiry of said period, PhilGuarantee had no more legal duty to pay TRB. On appeal, the CA reversed the RTC’s decision. ISSUES:

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1. Whether or not PhilGuarantee’s payment to TRB amounts to a waiver of its right under Article 2058 of the Civil Code 2. Whether or not PhilGuarantee had no obligation to pay TRB because of the alleged expiration of contract of guarantee RULING: 1. Under a contract of guarantee, the guarantor binds himself to the creditor to fulfil the obligation of the principal debtor in case the latter should fail to do so. The guarantor who pays for a debtor, in turn, must be indemnified by the latter. Under Article 2058, the guarantor cannot be compelled to pay the creditor unless the latter has exhausted all the property of the debtor and resorted to all the legal remedies against the debtor (benefit of excussion). The creditor must first obtain a judgment against the principal debtor before assuming to run after the alleged guarantor since the exhaustion of the principal’s property’ cannot begin to take place before judgment has been obtained. In order that the guarantor may make use of the benefit of excussion, he must set it up against the creditor upon the latter’s demand for payment and point out to the creditor available property of the debtor within the Philippines sufficient to cover the amount of the debt. Excussion is a right granted to the guarantor by law and as such he may opt to make use of it or waive it. PhilGuarantee’s waiver of the right of excussion cannot prevent it from demanding reimbursement from petitioners. While a guarantor enjoys the benefit of excussion, nothing prevents him from paying the obligation once demand is made on him. The law clearly requires the debtor to indemnify the guarantor what the latter has paid. 2. The guarantee was only up to December 17, 1980. JN’s obligation with TRB fell due on June 30, 1980, and demand on PhilGuarantee was made by TRB on October 8, 1980. That payment was actually made only on March 10, 1981 does not take it out of the terms of the guarantee. What is controlling is that default and demand on PhilGuarantee had taken place while the guarantee was still in

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force. The benefit of excussion, as well as the requirement of consent to extensions of payment, is a protective device pertaining to and conferred on the guarantor. These may be invoked by the guarantor against the creditor as defenses to bar the unwarranted enforcement of the guarantee. However, PhilGuarantee did not avail of these defenses when it paid its obligation once demand was made on it.

MIRA HERMANOS, INC. vs. MANILA TOBACCONISTS, INC., ET AL.,; PROVIDENT INSURANCE CO. FACTS: By virtue of a written contract entered into between Mira Hermanos, Inc., and Manila Tobacconists, Inc., the former agreed to deliver to the latter merchandise for sale on consignment under certain specified terms and the latter agreed to pay to the former on or before the 20th day of each month the invoice value of all the merchandise sold during the preceding month. Mira Hermanos, Inc., required of the Manila Tobacconists, Inc., a bond of P3,000, which was executed by the Provident Insurance Co., on September 2, 1939, to secure the fulfillment of the obligation of the Tobacconists under the contract up to the sum of P3,000. In October, 1940, the volume of the business of the Tobacconists having increased so that the merchandise received by it on consignment from Mira Hermanos exceeded P3,000 in value, Mira Hermanos required of the Tobacconist an additional bond of P2,000, and in compliance with that requirement the defendant Manila Compañia de Seguros, on October 16, 1940, executed a bond of P2,000 with the same terms and conditions (except as to the amount) as the bond of the Provident Insurance Co. On June 1, 1941, a final and complete liquidation was made of the transactions between Mira Hermanos and the Tobacconists, as a result of which there was found a balance due from the latter to the former of P2,272.79, which indebtedness the Tobacconists recognized but was unable to pay. Thereupon Mira Hermanos made a demand upon the two surety companies for

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the payment of said sum. The Provident Insurance Co., paid only the sum of P1,363.67, which is 60% of the amount owned by the Tobacconists to Mira Hermanos, alleging that the remaining 40% should be paid by the other surety, Manila Compañia de Seguros, in accordance with Article 8137 of the Civil Code. The Manila Compañia de Seguros refused to pay the balance, contending that so long as the liability of the Tobacconists did not exceed P3,000, it was not bound to pay anything because its bond referred only to the obligation of the Tobacconists in excess of P3,000 and up to P5,000. Hence Mira Hermanos, Inc., brought this to recover from them jointly and severally the sum of P909.12 with legal interest thereon from the date of the complaint. ISSUE: WON Provident Insurance Co. is entitled to the "benefit of division" provided in article 1837 of the Civil Code HELD: Article 1837 of the [Old] Civil Code reads as follows: Art. 1837. Should there be several sureties of only one debtor for the same debt, the liability therefor shall be divided among them all. The creditor can claim from each surety only his proportional part unless liability in solidum has been expressly stipulated. The right to the benefit of division against the co-sureties for their respective shares ceases in the same cases and for the same reason as that to an exhaustion of property against the principal debtor. While on its face the bond given by the Manila Compañia de Seguros contains the same terms and conditions (except as to the amount) as those of the bond given by the Provident Insurance Co., nevertheless it was pleaded by the Manila Compañia de Seguros and found proven by the trial court. As the trial court observed, there would have been no need for the additional bond of P2,000

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if its purpose were to cover the first P2,000 already covered by the P3,000 bond of the Provident Insurance Co. Indeed, if the purpose of the additional bond of P2,000 were to cover not the excess over and above P3,000 but the first P2,000 of the obligation of the principal debtor like the bond of P3,000 which covered only the first P3,000 of said obligation, then it would result that had the obligation of the Tobacconists exceeded P3,000, neither of the two bonds would have responded for the excess, and that was precisely the event against which Mira Hermanos wanted to protect itself by demanding the additional bond of P2,000. For instance, suppose that the obligation of the principal debtor, the Tobacconists, amounted to P5,000; if both bonds were co-extensive up to P2,000 — as would logically follow if appellant's contention were correct — the result would be that the first P2,000 of the obligation would have to be divided between and paid equally by the two surety companies, which should pay P1,000 each, and of the balance of P3,000 the Provident Insurance Co. would have to pay only P1,000 more because its liability is limited to the first P3,000, thus leaving the plaintiff in the lurch as to the excess of P2,000. That was manifestly not the intention of the parties. As a matter of fact, when the Provident gave its bond and fixed the premiums thereon it assumed an obligation of P3,000 in solidum with the Tobacconists without any expectation of any benefit of division with any other surety. The additional bond of P2,000 was, more than a year later, required by the creditor of the principal debtor for the protection of said creditor and certainly not for the benefit of the original surety, which was not entitled to expect any such benefit. The foregoing considerations, which fortify the trial court's conclusion as to the real intent and agreement of the parties with regard to the bond of P2,000 given by the Manila Compañia de Seguros, destroys at the same time the theory of the appellant regarding the applicability of article 1837 of the Civil Code. That article refers to several sureties of only

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one debtor for the same debt. In the instant case, altho the two bonds on their face appear to guarantee the same debt coextensively up to P2,000 — that of the Provident Insurance Co. alone extending beyond that sum up to P3,000 — it was pleaded and conclusively proven that in reality said bonds, or the two sureties, do not guarantee the same debt because the Provident Insurance Co. guarantees only the first P3,000 and the Manila Compañia de Seguros, only the excess over and above said amount up to P5,000. Article 1837 does not apply to this factual situation.

TUASON, TUASON, INC. vs. ANTONIO MACHUCA FACTS: "Manila Compañia de Seguros" obtained from the Universal Trading Company and Tuason, Tuason & Co., a solidary note for the sum of P9,663 executed by said companies in its favor. Before signing said note, Tuason, Tuason & Co., in turn, caused the Universal Trading Company and its president Antonio Machuca, personally, to sign a document (Exhibit B), wherein they bound themselves solidarily to pay, reimburse, and refund to the company all such sums or amounts of money as it, or its representative, may pay or become bound to pay, upon its obligation with "Manila Compañia de Seguros," whether or not it shall have actually paid such sum or sums or any part thereof. The Universal Trading Company having been declared insolvent, "Manila Compañia de Seguros" brought an action in the lower court against Tuason, Tuason & Co. to recover the value of the note for P9,663 and obtained final judgment therein, which was affirmed by this court on appeal, for the total sum of P12,197.27, which includes the value of the note with interest thereon. Subsequently, all the rights of Tuason, Tuason & Co. were transferred to the plaintiff Tuason, Tuason, Inc. Later on Tuason, Tuason, Inc., brought this action to recover of Antonio Machuca the sum of P12,197.27 which it was sentenced to pay in

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the case filed against it by "Manila Compañia de Seguros," plus P3,000 attorney's fees, and P155.92 court's costs and sheriff's fees, that is, a total of P15,353.19. ISSUES: a) WON Tuason, Tuason Inc. Is entitled to the relief sought in view of the above facts? b) WON Tuason, Tuason Inc. has the right to recover from Machuca more than the value of the note executed by Tuason, Tuason, Inc. in favor of Manila Compania de Seguros? HELD: The plaintiff company argues that, at all events, it is entitled to bring this action under article 1843 of the Civil Code, which provides that the surety may, even before making payment, bring action against the principal debtor. This contention of the plaintiff is untenable. The present action, according to the terms of the complaint, is clearly based on the fact of payment. It is true that, under article 1843, an action lies against the principal debtor even before the surety pays the debt, but it clearly appears in the complaint that this is not the action brought by the plaintiff. Moreover this article 1843 provided several cumulative remedies in favor of the surety, at his election, and the surety who brings an action under this article must choose the remedy and apply for it specifically. At any rate this article does not provide for the reimbursement of any amount, as is sought by the plaintiff. But although the plaintiff has not as yet paid "Manila Compañia de Seguros" the amount of the judgment against it, and even considering that this action cannot be held to come under article 1843 of the Civil Code, yet the plaintiff is entitled to the relief sought in view of the facts established by the evidence. The plaintiff became bound, by virtue of a final judgment, to pay the value of the note executed by it in favor of "Manila Compañia de Seguros." According to the document executed solidarily by the defendant and the Universal Trading Company, the defendant bound himself to pay the plaintiff as soon as the latter may have become bound and liable, whether or not it shall have actually paid. It is indisputable that the plaintiff became bound and liable by a final judgment to pay the value of the note to "Manila Compañia de Seguros."

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The defendant also contends that the document executed by Albina Tuason in favor of "Manila Compañia de Seguros" assuming and making hers the obligation of Tuason, Tuason & Co., was a novation of the contract by substitution of the debtor, and relieved Tuason, Tuason & Co. from all obligation in favor of "Manila Compañia de Seguros." As to this, it is enough to say that if this was what Albina Tuason contemplated in signing the document, evidently it was not what "Manila Compañia de Seguros" accepted. As above stated, "Manila Compañia de Seguros" accepted this document only as additional security for its credit and not as a novation of the contract. Our conclusion is that the plaintiff has the right to recover of the defendant the sum of P9,663, the value of the note executed by the plaintiff in favor of "Manila Compañia de Seguros" which the plaintiff is under obligation to pay by virtue of final judgment. We do not believe, however, that the defendant must pay the plaintiff the expenses incurred by it in the litigation between it and "Manila Compañia de Seguros." That litigation was originated by the plaintiff having failed to fulfill its obligation with "Manila Compañia de Seguros," and it cannot charge the defendant with expenses which it was compelled to make by reason of its own fault. It is entitled, however, to the expenses incurred by it in this action brought against the defendant, which are fixed at P1,653.65 as attorney's fees. KUENZLE & STREIFF VS. TAN SUNCO FACTS: Kuenzle & Streiff instituted an action against Chung Chu Sing for the recovery of indebtedness. Before Kuenzle & Streiff could secure judgment, Tan Sunco brought an action against Chung Chu Sing for the payment of another obligation for which Tan Sunco acted as guarantor. Chung Chu Sing confessed judgment in favor of Tan Sunco. Immediately after obtaining judgment, Tan Sunco caused to be levied upon under execution all the properties of Chung Chu Sing. Kuenzle & Streiff commenced an action to set aside the judgment, claiming it was obtained by the fraud and collusion, and that Tan Sunco had not paid

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the debt for which as guarantor he obtained the judgment. ISSUE: WON a guarantor who sues his principal debtor before paying the debt himself entitled to recover judgment for the debt? HELD: No, while the surety has the right to obtain judgment against his principal debtor, he will not be permitted to realize on said judgment to the point of actual collection until he has satisfied, or caused to be satisfied, the obligation the payment of the obligation of which he assures. A guarantor who obtains judgment against his principal cannot execute said judgment against the latter’s property until he has paid the debt for which he stands as guarantor.

MANILA SURETY v BATU CONSTRUCTION FACTS:` On July 8, 1950, the defendant Batu Construction & Company, as principal, and the plaintiff Manila Surety & Fidelity Co. Inc., as surety, executed a surety bond for the sum of P8,812.00 to insure faithful performance of the former's obligation as contractor for the construction of the Bacarra Bridge, Project PR72 (No. 3) Ilocos Norte Province. On the same date, July 8,1950, the Batu Construction & Company and the defendants Carlos N. Baquiran and Gonzales P. Amboy executed an indemnity agreement to protect the Manila Surety & Fidelity Co. Inc.., against damage, loss or expenses which it may sustain as a consequence of the surety bond executed by it jointly with Batu Construction & Company. On or about May 30, 1951, the plaintiff received a notice from the Director of Public Works (Exhibit B) annulling its contract with the Government for the construction of the Bacarra Bridge because of its failure to make satisfactory progress in the execution of the works, with the warning that ,any amount spent by the Government in the continuation of the work, in excess of the contract price, will be charged against the surety bond furnished by the plaintiff. It also appears that a complaint by the laborers in said project of the Batu Construction & Company was filed against it and the Manila Surety and Fidelity Co., Inc., for unpaid wages amounting to P5,960.10.

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Trial Court dismissed the case holding that provisions of article 2071 of the new Civil Code may be availed of by a guarantor only and not by a surety the complaint, with costs against the plaintiff. ISSUE: The main question to determine is whether the last paragraph of article 2071 of the new Civil Code taken from article 1843 of the old Civil Code may be a vailed of by a surety. HELD: YES Provision of law under guaranty available to surety In suretyship the surety becomes liable to the creditor without the benefit of the principal debtor's exclusion of his properties, for he (the surety) maybe sued independently. So, he is an insurer of the debt and as such he has assumed or undertaken a responsibility or obligation greater or more onerous than that of guarantor. Such being the case, the provisions of article 2071, under guaranty, are applicable and available to a surety. Hence, a surety, even before having paid, may proceed against the principal debtor to obtain release from the surety, or to demand a security that shall protect him from any proceedings by the creditor or from the danger of insolvency of the debtor, when the surety is sued for payment.

PNB VS MANILA SURETY FACTS: PNB had opened a letter of credit and advanced thereon $120,000 to Edgington Oil Refinery for 8,000 tons of hot asphalt. Of this amount, 2,000 tons worth P279,000 were released and delivered to ATACO under a trust receipt guaranteed by Manila Surety and Fidelity. To pay for the asphalt, ATACO constituted PNB its assignee and attorney-in-fact to receive and collect for Bureau of Public Works the amount out of the funds payable to the assignor. ATACO delivered to the Bureau of Public Works and the latter accepted. Of this amount the Bank regularly collected. Thereafter for unexplained reasons, the Bank ceased to collect from the bureau. It was later on discovered that more money were payable to

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ATACO from the Public Works office but the bank allowed another creditor to collect the funds due to ATACO. Its demands on the principal debtor and the Surety having been refused, the Bank sued both in the Court of First Instance of Manila to recover the balance of P158,563.18 as of February 15, 1950, plus interests and costs. The bank contends that the power of attorney obtained from ATACO was merely in additional security in its favor, and that it was the duty of the surety, and not that of the creditor, owed see to it that the obligor fulfills his obligation, and that the creditor owed the surety no duty of active diligence to collect any, sum from the principal debtor. ISSUE: W/N Manila Surety is released from the obligation as surety. HELD: Yes. Surety is released when assigned funds permitted by the creditor to be exhausted is made without notifying the former. By allowing the assigned funds to be exhausted without notifying the surety, the Bank deprived the former of any possibility of recoursing against that security, therefore the surety is released.

The appellant points out to its letter of demand, Exhibit "K", addressed to the Bureau of Public Works, on May 5, 1949, and its letter to ATACO, Exhibit "G", informing the debtor that as of its date, October 31, 1949, its outstanding balance was P156,374.83. Said Exhibit "G" has no bearing on the issue whether the Bank has exercised due diligence in collecting from the Bureau of Public Works, since the letter was addressed to ATACO, and the funds were to come from elsewhere. As to the letter of demand on the Public Works office, it does not appear that any reply thereto was made; nor that the demand was pressed, nor that the debtor or the surety were ever apprised that payment was not being made. The fact remains that because of the Bank's inactivity the other creditors were enabled to collect P173,870.31, when the balance due to appellant Bank was only P158,563.18. The finding of negligence made by the Court of

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Appeals is thus not only conclusive on us but fully supported by the evidence. Even if the Court of Appeals erred on the second reason it advanced in support of the decision now under appeal, because the rules on application of payments, giving preference to secured obligations are only operative in cases where there are several distinct debts, and not where there is only one that is partially secured, the error is of no importance, since the principal reason based on the Bank's negligence furnishes adequate support to the decision of the Court of Appeals that the surety was thereby released.

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STRONGHOLD VS. REPUBLIC (492 SCRA 179, G.R. No. 147561, June 22, 2006) FACTS: On May 24, 1989, [respondent] Republic-Asahi Glass Corporation (Republic-Asahi) entered into a contract with Jose D. Santos, Jr., the proprietor of JDS Construction (JDS), for the construction of roadways and a drainage system in Republic-Asahi’s compound. In order ‘to guarantee the faithful and satisfactory performance of its undertakings’ JDS, shall post a performance bond of seven hundred ninety five thousand pesos (P795,000.00). Hence, JDS executed, jointly and severally with [petitioner] Stronghold Insurance Co., Inc (SICI). Republic-Asahi’s engineers called the attention of JDS to the alleged alarmingly slow pace of the construction. However, said reminders went unheeded by JDS. Dissatisfied with the progress of the work undertaken by, Republic-Asahi extrajudicially rescinded the contract pursuant to Article XIII of said contract, and wrote a letter to JDS informing the latter of such rescission. Such rescission, according to Article XV of the contract shall not be construed as a waiver of Asahi’s right to recover damages from JDS and the latter’s sureties. Republic-Asahi alleged that, as a result of JDS’s failure to comply with the provisions of the contract, which resulted in the said contract’s rescission, it had to hire another contractor to finish the project, for which it incurred an additional expense. Subsequently, Republic-Asahi sent a letter to Stronghold SICI filing its claim under the bond for not less than P795,000.00. On January 6, 1990, Republic-Asahi again sent another letter reiterating its demand for payment under the aforementioned bond. Both letters allegedly went unheeded.

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Republic-Asahi then filed [a] complaint against JDS and SICI. It sought from JDS payment of P3,256,874.00 representing the additional expenses for the completion of the project using another contractor, and from JDS and SICI, jointly and severally, payment of P750,000.00 as damages in accordance with the performance bond. Summons were duly served on defendantappellee SICI. However, not in the case Jose D. Santos, Jr. who already died and JDS Construction was no longer at its address and its whereabouts were unknown. SICI filed its answer, alleging that the Republic- Asahi’s money claims against SICI and JDS have been extinguished by the death of Jose D. Santos, Jr. It further alleged that:  Republic-Asahi can no longer prove its claim for damages in view of the death of Santos.  SICI was not informed by RepublicAsahi of the death of Santos.  SICI was not informed by RepublicAsahi of the unilateral rescission of its contract with JDS, thus SICI was deprived of its right to protect its interests as surety under the performance bond, and therefore it was released from all liability. Lower court dismissed the complaint of Republic- Asahi against JDS and SICI, on the ground that the claim against JDS did not survive the death of its sole proprietor, Jose D. Santos, Jr. Upon Motion for Reconsideration the dismissal of the case against Stronghold Insurance Company, Inc., is reconsidered. However, the case against defendant Jose D. Santos, Jr. (deceased) remains undisturbed. The CA ruled that SICI’s obligation under the surety agreement was not extinguished by the death of Jose D. Santos, Jr. Consequently, Republic-Asahi could still go after SICI for the bond.

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ISSUE: WON petitioner’s liability under the performance bond was automatically extinguished by the death of Santos, the principal. NO

HELD: As a general rule, the death of either the creditor or the debtor does not extinguish the obligation. Obligations are transmissible to the heirs, except when the transmission is prevented by the law, the stipulations of the parties, or the nature of the obligation. Only obligations that are personal or are identified with the persons themselves are extinguished by death. Section 5 of Rule 86 of the Rules of Court expressly allows the prosecution of money claims arising from a contract against the estate of a deceased debtor. Evidently, those claims are not actually extinguished. What is extinguished is only the obligee’s action or suit filed before the court, which is not then acting as a probate court. In the present case, whatever monetary liabilities or obligations Santos had under his contracts with respondent were not intransmissible by their nature, by stipulation, or by provision of law. Hence, his death did not result in the extinguishment of those obligations or liabilities, which merely passed on to his estate. Death is not a defense that he or his estate can set up to wipe out the obligations under the performance bond. Consequently, petitioner as surety cannot use his death to escape its monetary obligation under its performance bond. As a surety, petitioner is solidarily liable with Santos in accordance with the Civil Code, which provides as follows: "Art. 2047. By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so.

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If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I of this Book shall be observed. In such case the contract is called a suretyship." xxxxxxxxx "Art. 1216. 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." Thus, the surety’s obligation is not an original and direct one for the performance of his own act, but merely accessory or collateral to the obligation contracted by the principal. Nevertheless, although the contract of a surety is in essence secondary only to a valid principal obligation, his liability to the creditor or promisee of the principal is said to be direct, primary and absolute; in other words, he is directly and equally bound with the principal. Under the law and jurisprudence, respondent may sue, separately or together, the principal debtor and the petitioner herein, in view of the solidary nature of their liability. The death of the principal debtor will not work to convert, decrease or nullify the substantive right of the solidary creditor. Evidently, despite the death of the principal debtor, respondent may still sue petitioner alone, in accordance with the solidary nature of the latter’s liability under the performance bond. POLICY: A surety company’s liability under the performance bond it issues is solidary. The death of the principal obligor does not, as a rule, extinguish the obligation and the solidary nature of that liability.

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SPOUSES TOH VS. SOLID BANK (G.R. No. 154183, August 7, 2003) FACTS: RESPONDENT SOLID BANK extended an "omnibus line" credit facility worth P10 million in favor of respondent First Business Paper Corporation (FBPC). A letter-advise dated May 16, 1993 was sent to FBPC which stated the terms and conditions of the agreement as well as the checklist of documents among which is the Continuing Guaranty for any and all amounts signed by petitioner-spouses Luis Toh and Vicky Tan Toh, and respondentspouses Kenneth and Ma. Victoria Ng Li. The spouses Toh were then Chairman of the Board and Vice-President while respondent-spouses Li were President and General Manager, respectively, of the same corporation. On 10 May 1993, spouses Toh and spouses Li signed the required Continuing Guaranty, which defined the contract arising therefrom as a surety agreement and provided for the solidary liability of the signatories. The Continuing Guaranty set forth no maximum limit on the indebtedness that respondent FBPC may incur and for which the sureties may be liable. The surety also contained a de facto acceleration clause if "default be made in the payment of any of the instruments, indebtedness, or other obligation" guaranteed by petitioners and respondents. So as to strengthen this security, the Continuing Guaranty waived rights of the sureties against delay or absence of notice or demand on the part of respondent Bank, and gave future consent to the Bank's action to "extend or change the time payment, and/or the manner, place or terms of payment," including renewal, of the credit facility in such manner and upon such terms as the Bank without notice to or further assent from the sureties.

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By November 17 1993, FBPC opened 13 letters of credit and obtained loans totaling P15,227,510.00. As the letters of credit were secured, FBPC through its officers Kenneth Ng Li, Ma. Victoria Ng Li and Redentor Padilla as signatories executed a series of trust receipts over the goods allegedly purchased from the proceeds of the loans. But the Spouses Li had fraudulently departed from their conjugal home. The Bank served a demand letter upon FBPC and petitioner Luis Toh invoking the acceleralation clause in the trust receipts of FBPC and claimed payment for P10,539,758.68 as unpaid overdue accounts on the letters of credit plus interests and penalties. On 17 January 1994 respondent Bank filed a complaint for sum of money with ex parte application for a writ of preliminary attachment against FBPC, spouses Li, and spouses Toh. Hence, properties of FBPC were impounded but was later released to third party claimants. Spouses Toh alleged that they were made to sign papers in blank and the Continuing Guaranty could have been one of them , it was impossible and absurd for them to have freely and consciously executed the surety on 10 May 1993, the date appearing on its face since beginning March of that year they had already divested their shares in FBPC and assigned them in favor of respondent Kenneth Ng Li although the deeds of assignment were notarized only on 14 June 1993. They also contended that through FBPC Board Resolution dated 12 May 1993 petitioner Luis Toh was removed as an authorized signatory for FBPC and replaced by spouses Li and Redentor Padilla for all the transactions of FBPC with respondent Bank. They even resigned from their respective positions in FBPC as reflected in the 12 June 1993 Secretary's Certificate submitted to the Securities and

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Exchange Commission as petitioner Luis Toh was succeeded as Chairman by respondent Ma. Victoria Ng Li, while one Mylene C. Padilla took the place of petitioner Vicky Tan Toh as Vice-President. Finally, Toh averred that sometime in June 1993 they obtained from respondent Kenneth Ng Li their exclusion from the several surety agreements they had entered into with different banks, i.e., Hongkong and Shanghai Bank, China Banking Corporation, Far East Bank and Trust Company, and herein respondent Bank. As a matter of record, these other banks executed written surety agreements that showed respondent Kenneth Ng Li as the only surety of FBPC's indebtedness. TC-FBPC liable to pay Solid Bank Corporation the principal of P10,539,758.68 plus twelve percent (12%) interest per annum from finality of the Decision until fully paid, but absolving petitioner-spouses Toh of any liability.

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in an amount beyond the credit limit of P10 million pesos; (v) the inordinate delay of the Bank in demanding the payment of the indebtedness; (vi) the presence of ghost deliveries and fictitious purchases using the Bank's letters of credit and trust receipts; (vii) the extension of the due dates of the letters of credit without the required 25% partial payment per extension; (viii) the approval of another letter of credit, L/C 93-0042, even after respondentspouses Li had defaulted on their previous obligations; and, (ix) the unmistakable pattern of fraud. ISSUE: WON the spouses Toh are liable as sureties to Solidbank. NO

CA-modified the Decision and held that by signing the Continuing Guaranty, petitioner-spouses became solidarily liable with FBPC citing that they failed to execute any written revocation of the Continuing Guaranty with notice to respondent Bank, the instrument remained in full force and effect when the letters of credit were availed of by respondent FBPC.

HELD: The Continuing Guaranty is a valid and binding contract of petitioner-spouses as it is a public document that enjoys the presumption of authenticity and due execution. We are bound by the consistent finding of the courts a quo that petitionerspouses Toh "voluntarily affixed their signature[s]" on the surety agreement and were thus "at some given point in time willing to be liable under those forms." In the absence of clear, convincing and more than preponderant evidence to the contrary, our ruling cannot be otherwise.

Petitioner-spouses Luis Toh and Vicky Tan Toh maintain that the Continuing Guaranty is not legally valid and binding against them for having been executed long after they had withdrawn from FBPC. Lastly, they claim that the surety agreement has been extinguished by the material alterations thereof and of the "letter-advise" which were allegedly brought about by: (ii) the provision of an acceleration clause in the trust receipts; (iii) the flight of their co-sureties, Li; (iv) the grant of credit facility despite the non- payment of marginal deposits

Similarly, there is no basis for petitioners to limit their responsibility so long as they were corporate officers and stockholders of FBPC. Nothing in the Continuing Guaranty restricts their contractual undertaking to such condition or eventuality. In fact the obligations assumed by them therein subsist "upon the undersigned, the heirs, executors, administrators, successors and assigns of the undersigned, and shall inure to the benefit of, and be enforceable by you, your successors, transferees and assigns," and that their commitment "shall remain in full force and effect until written

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notice shall have been received by [the Bank] that it has been revoked by the undersigned." Verily, if petitioners intended not to be charged as sureties after their withdrawal from FBPC, they could have simply terminated the agreement by serving the required notice of revocation upon the Bank as expressly allowed therein. In Garcia v. CA we ruled – Regarding the petitioner's claim that he is liable only as a corporate officer of WMC, the surety agreement shows that he signed the same not in representation of WMC or as its president but in his personal capacity. He is therefore personally bound. There is no law that prohibits a corporate officer from binding himself personally to answer for a corporate debt. While the limited liability doctrine is intended to protect the stockholder by immunizing him from personal liability for the corporate debts, he may nevertheless divest himself of this protection by voluntarily binding himself to the payment of the corporate debts. The petitioner cannot therefore take refuge in this doctrine that he has by his own acts effectively waived. Insofar as petitioners stipulate in the Continuing Guaranty that respondent Bank "may at any time, or from time to time, in [its] discretion x x x extend or change the time payment," this provision even if understood as a waiver is confined per se to the grant of an extension and does not surrender the prerequisites therefor as mandated in the "letter-advise." In other words, the authority of the Bank to defer collection contemplates only authorized extensions, that is, those that meet the terms of the "letter-advise." Certainly, while the Bank may extend the due date at its discretion pursuant to the Continuing Guaranty, it should nonetheless comply with the requirements that domestic letters of credit be supported by fifteen percent (15%) marginal deposit

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extendible three (3) times for a period of thirty (30) days for each extension, subject to twenty-five percent (25%) partial payment per extension. Any doubt on the terms and conditions of the surety agreement should be resolved in favor of the surety. Stated otherwise, an extension of the period for enforcing the indebtedness does not by itself bring about the discharge of the sureties unless the extra time is not permitted within the terms of the waiver, i.e., where there is no payment or there is deficient settlement of the marginal deposit and the twenty-five percent (25%) consideration, in which case the illicit extension releases the sureties. Under Art. 2055 of the Civil Code, the liability of a surety is measured by the terms of his contract, and while he is liable to the full extent thereof, his accountability is strictly limited to that assumed by its terms. Respondent Bank extended several letters of credit were for 90 days with alarmingly flawed and inadequate consideration - the indispensable marginal deposit of fifteen percent (15%) and the twenty-five percent (25%) prerequisite for each extension of thirty (30) days. It bears stressing that the requisite marginal deposit and security for every thirty (30) - day extension specified in the "letter-advise" were not set aside or abrogated nor was there any prior notice of such fact, if any was done. The foregoing extensions of the letters of credit made by respondent Bank without observing the rigid restrictions for exercising the privilege are not covered by the waiver stipulated in the Continuing Guaranty. Evidently, they constitute illicit extensions prohibited under Art. 2079 of the Civil Code, "[a]n extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the guaranty."

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This act of the Bank is not mere failure or delay on its part to demand payment after the debt has become due, as was the case in unpaid five (5) letters of credit which the Bank did not extend, defer or put off, but comprises conscious, separate and binding agreements to extend the due date. As a result of these illicit extensions, petitionerspouses Luis Toh and Vicky Tan Toh are relieved of their obligations as sureties of respondent FBPC under Art. 2079 of the Civil Code. Further, we note several suspicious circumstances that militate against the enforcement of the Continuing Guaranty against the accommodation sureties. Firstly, the guaranty was executed more than thirty (30) days from the original acceptance period as required in the "letter-advise." Thereafter, barely two (2) days after the Continuing Guaranty was signed, corporate agents of FBPC were replaced on 12 May 1993 and other adjustments in the corporate structure of FBPC ensued in the month of June 1993, which the Bank did not investigate although such were made known to it. By the same token, there is no explanation on record for the utter worthlessness of the trust receipts in favor of the Bank when these documents ought to have added more security to the indebtedness of FBPC. The Bank has in fact no information whether the trust receipts were indeed used for the purpose for which they were obtained. The consequence of these omissions is to discharge the surety, the spouses Toh,, under Art. 2080 of the Civil Code, or at the very least, mitigate the liability of the surety up to the value of the property or lien released – If the creditor x x x has acquired a lien upon the property of a principal, the creditor at once becomes charged with the duty of retaining such security, or maintaining such lien in the interest of the surety, and any release or impairment of

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this security as a primary resource for the payment of a debt, will discharge the surety to the extent of the value of the property or lien released x x x x [for] there immediately arises a trust relation between the parties, and the creditor as trustee is bound to account to the surety for the value of the security in his hands. For the same reason, the grace period granted by respondent Bank represents unceremonious abandonment and forfeiture of the fifteen percent (15%) marginal deposit and the twenty-five percent (25%) partial payment as fixed in the "letter-advise." These payments are unmistakably additional securities intended to protect both respondent Bank and the sureties in the event that the principal debtor FBPC becomes insolvent during the extension period. Compliance with these requisites was not waived by petitioners in the Continuing Guaranty. For this unwarranted exercise of discretion, respondent Bank bears the loss; due to its unauthorized extensions to pay granted to FBPC, petitioner-spouses Luis Toh and Vicky Tan Toh are discharged as sureties under the Continuing Guaranty. Finally, the foregoing omission or negligence of respondent Bank in failing to safe-keep the security provided by the marginal deposit and the twenty-five percent (25%) requirement results in the material alteration of the principal contract, i.e., the "letter-advise," and consequently releases the surety. This inference was admitted by the Bank through the testimony of its lone witness that "[w]henever this obligation becomes due and demandable, except when you roll it over, (so) there is novation there on the original obligations." As has been said, "if the suretyship contract was made upon the condition that the principal shall furnish the creditor additional security, and the security being furnished under these conditions is

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afterwards released by the creditor, the surety is wholly discharged, without regard to the value of the securities released, for such a transaction amounts to an alteration of the main contract." Petition granted. Decision of CA is reversed and set aside. Spouses Toh are absolved.

CALIBO VS. CA (G.R. No. 120528, January 29, 2001) FACTS: January 25, 1979, Dr. Pablo U. Abella purchased an MF 210 agricultural tractor which he used in his farm in Dagohoy, Bohol. Sometime in October or November 1985, Pablo Abella’s son, Mike Abella rented for residential purposes the house of defendant-appellant Dionisio R. Calibo, Jr., in Tagbilaran City. In October 1986, Pablo Abella pulled out his aforementioned tractor from his farm in Dagohoy, Bohol, and left it in the safekeeping of his son, Mike Abella, in Tagbilaran City. Mike kept the tractor in the garage of the house he was leasing from Calibo. Since he started renting Calibo’s house, Mike had been religiously paying the monthly rentals therefor, but beginning November of 1986, he stopped doing so. The following month, Calibo learned that Mike had never paid the charges for electric and water consumption in the leased premises which the latter was dutybound to shoulder. Thus, Calibo confronted Mike about his rental arrears and the unpaid electric and water bills. During this confrontation, Mike informed Calibo that he (Mike) would be staying in the leased property only until the end of December 1986. Mike also assured Calibo that he would be settling his account with the latter, offering the tractor as security. Mike even asked Calibo to help him find a buyer for the tractor so he

could sooner obligation.

pay

his

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outstanding

In January 1987 when a new tenant moved into the house formerly leased to Mike, Calibo had the tractor moved to the garage of his father’s house, also in Tagbilaran City. After a long while, or on November 22, 1988, Mike’s father, Pablo Abella, came to Tagbilaran City to claim and take possession of the tractor. Calibo, however, informed Pablo that Mike left the tractor with him as security for the payment of Mike’s obligation to him. Pablo offered to write Mike a check for P2,000.00 in payment of Mike’s unpaid lease rentals, in addition to issuing postdated checks to cover the unpaid electric and water bills the correctness of which Pablo said he still had to verify with Mike. Calibo told Pablo that he would accept the P2,000.00-check only if the latter would execute a promissory note in his favor to cover the amount of the unpaid electric and water bills. Pablo was not amenable to this proposal. The two of them having failed to come to an agreement, Pablo left and went back to Cebu City, unsuccessful in his attempt to take possession of the tractor.” On November 25, 1988, Dr. Abella instituted an action for replevin, claiming ownership of the tractor and seeking to recover possession thereof from petitioner. RTC: ruled in favor of Dr. Abella. CA: sustained the ruling of the trial court that Mike Abella could not have validly pledged the subject tractor to petitioner since he was not the owner thereof, nor was he authorized by its owner to pledge the tractor. ISSUE: WON the tractor in question was validly pledged to Atty. Calibo. NO. HELD: Atty. Calibo claims that the tractor in question was validly pledged to him by

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Dr. Abella’s son Mike Abella to answer for the latter’s monetary obligations to petitioner. In the alternative, petitioner asserts that the tractor was left with him, in the concept of an innkeeper, on deposit and that he may validly hold on thereto until Mike Abella pays his obligations. He maintains that even if Mike Abella were not the owner of the tractor, a principalagent relationship may be implied between Mike Abella and Dr. Abella. He contends that the latter failed to repudiate the alleged agency, knowing that his son is acting on his behalf without authority when he pledged the tractor to petitioner. Calibo argues that, under Article 1911 of the Civil Code, Dr. Abella is bound by the pledge, even if it were beyond the authority of his son to pledge the tractor, since he allowed his son to act as though he had full powers. In a contract of pledge, the creditor is given the right to retain his debtor’s movable property in his possession, or in that of a third person to whom it has been delivered, until the debt is paid. For the contract to be valid, it is necessary that: the pledge is constituted to secure the fulfillment of a principal obligation; the pledgor be the absolute owner of the thing pledged; and the person constituting the pledge has the free disposal of his property, and in the absence thereof, that he be legally authorized for the purpose. As found by the trial court and affirmed by respondent court, the pledgor in this case, Mike Abella, was not the absolute owner of the tractor that was allegedly pledged to petitioner. The tractor was owned by his father, Dr. Abella, who left the equipment with him for safekeeping. Clearly, the second requisite for a valid pledge, that the pledgor be the absolute owner of the property, is absent in this case. Hence,

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there is no valid pledge. “He who is not the owner or proprietor of the property pledged or mortgaged to guarantee the fulfillment of a principal obligation, cannot legally constitute such a guaranty as may validly bind the property in favor of his creditor, and the pledgee or mortgagee in such a case acquires no right whatsoever in the property pledged or mortgaged.” (Discussion regarding Agency) There also does not appear to be any agency in this case. We agree with the Court of Appeals that: “As indicated in Article 1869, for an agency relationship to be deemed as implied, the principal must know that another person is acting on his behalf without authority. Here, appellee categorically stated that the onlypurpose for his leaving the subject tractor in the care and custody of Mike Abella was for safekeeping, and definitely not for him to pledge or alienate the same. If it were true that Mike pledged appellee’s tractor to appellant, then Mike was acting not only without appellee’s authority but without the latter’s knowledge as well. (Discussion regarding Deposit) There is likewise no valid deposit in this case. In a contract of deposit, a person receives an object belonging to another with the obligation of safely keeping it and of returning the same. Petitioner himself states that he received the tractor not to safely keep it but as a form of security for the payment of Mike Abella’s obligations. There is no deposit where the principal purpose for receiving the object is not safekeeping.

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DEVELOPMENT BANK OF THE PHILIPPINES V PRUDENTIAL BANK Litex could not have subjected the goods under the trust receipt to a chattel mortgage. Thus, the inclusion in the mortgage was void and had no legal effect. There being no valid mortgage, there could also be no valid foreclosure or valid auction sale. Thus, DBP could not be considered either as a mortgagee or as a purchaser in good faith. FACTS: Lirag Textile Mills, Inc. (Litex) opened an irrevocable commercial letter of credit with respondent Prudential Bank for US$498,000. This was in connection with its importation of 5,000 spindles for spinning machinery with drawing frame, simplex fly frame, ring spinning frame and various accessories, spare parts and tool gauge. These were released to Litex under covering “trust receipts” it executed in favor of Prudential Bank. Litex installed and used the items in its textile mill located in Montalban, Rizal. 9 years later, DBP granted a foreign currency loan in the amount of US$4,807,551 to Litex. To secure the loan, Litex executed real estate and chattel mortgages on its plant site in Montalban, Rizal, including the buildings and other improvements, machineries and equipments there. Among the machineries and equipments mortgaged in favor of DBP were the articles covered by the “trust receipts.” Sometime in June 1982, Prudential Bank learned about DBP’s plan for the overall rehabilitation of Litex. In a July 14, 1982 letter, Prudential Bank notified DBP of its claim over the various items covered by the “trust receipts” which had been installed and used by Litex in the textile mill. Prudential Bank informed DBP that it was the absolute and juridical owner of the said items and they were thus not part of the mortgaged assets that could be legally ceded to DBP.

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For the failure of Litex to pay its obligation, DBP extra-judicially foreclosed on the real estate and chattel mortgages, including the articles claimed by Prudential Bank. During the foreclosure sale held on April 19, 1983, DBP acquired the foreclosed properties as the highest bidder. Learning of the intended public auction, Prudential Bank wrote a letter dated September 6, 1984 to DBP reasserting its claim over the items covered by “trust receipts” in its name and advising DBP not to include them in the auction. It also demanded the turn-over of the articles or alternatively, the payment of their value. ISSUE: Whether or not the chattel mortgage covers the goods under the trust receipt HELD: No. Article 2085 (2) of the Civil Code requires that, in a contract of pledge or mortgage, it is essential that the pledgor or mortgagor should be the absolute owner of the things pledged or mortgaged. Article 2085 (3) further mandates that the person constituting the pledge or mortgage must have the free disposal of his property, and in the absence thereof, that he be legally authorized for the purpose. Litex had neither absolute ownership, free disposal nor the authority to freely dispose of the articles. Litex could not have subjected them to a chattel mortgage. Their inclusion in the mortgage was void and had no legal effect. There being no valid mortgage, there could also be no valid foreclosure or valid auction sale. Thus, DBP could not be considered either as a mortgagee or as a purchaser in good faith. No one can transfer a right to another greater than what he himself has. Nemo dat quod non habet. Hence, Litex could not transfer a right that it did not have over the disputed items. Corollarily, DBP could not acquire a right greater than what its predecessor-in-interest had. The spring cannot rise higher than its source. DBP merely stepped into the shoes of Litex as

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trustee of the imported articles with an obligation to pay their value or to return them on Prudential Bank’s demand. By its failure to pay or return them despite Prudential Bank’s repeated demands and by selling them to Lyon without Prudential Bank’s knowledge and conformity, DBP became a trustee ex maleficio. As a consequence of the release of the goods and the execution of the trust receipt, a two-fold obligation is imposed on the entrustee, namely: (1) to hold the designated goods, documents or instruments in trust for the purpose of selling or otherwise disposing of them and (2) to turn over to the entruster either the proceeds thereof to the extent of the amount owing to the entruster or as appears in the trust receipt, or the goods, documents or instruments themselves if they are unsold or not otherwise disposed of, in accordance with the terms and conditions specified in the trust receipt. In the case of goods, they may also be released for other purposes substantially equivalent to (a) their sale or the procurement of their sale; or (b) their manufacture or processing with the purpose of ultimate sale, in which case the entruster retains his title over the said goods whether in their original or processed form until the entrustee has complied fully with his obligation under the trust receipt; or (c) the loading, unloading, shipment or transshipment or otherwise dealing with them in a manner preliminary or necessary to their sale. Thus, in a trust receipt transaction, the release of the goods to the entrustee, on his execution of a trust receipt, is essentially for the purpose of their sale or is necessarily connected with their ultimate or subsequent sale.

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CAVITE DEVELOPMENT vs. SPOUSES LIM FACTS: One Rodolfo Guansing obtained a loan in the amount of P90,000.00 from Cavite Development Bank (CDB). As a security, he mortgaged a parcel of land situated La Loma, Quezon City and covered by TCT No. 300809 registered in his name. Guansing defaulted on the payment of the loan, which led CDB to foreclose the mortgage and later on emerged as the highest bidder and subsequently, the owner of the lot after Guansing failed to redeem the same. The Spouses Lim, through a broker, offered to purchase the property from CDB. The formal written offer stated a payment of P30,000 (10% of P300,000) as option money, provided that the land be cleared of illegal occupants. For payment of the option money, CDB issued an official receipt. However, after following up on the sale, Lim discovered that the original owner of the land is PERFECTO GUANSING, the father of Rodolfo. In a civil case instituted by Perfecto for the cancellation of Rodolfo’s title, the Supreme Court adjudged Perfecto as the real owner after proving that Rodolfo fraudulently obtained it. Thus, Rodolfo’s title was cancelled and a new one was issued to Perfecto. Aggrieved, the Spouses Lim instituted an action for specific performance and damages questioning the ability of CDB, and its mother company Far East Bank and Trust Company (FEBTC), to sell the subject property. The Regional Trial Court rendered a decision in favor of the Spouses Lim, which was affirmed by the Court of Appeals.

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ISSUES: (1) What is the legal relation between the parties? (2) Whether or not Rodolfo Guansing/CDB was the absolute owner of the subject property as required under Art. 2085 to effect a valid mortgage/sale? (3) Whether or not CDB is a “mortgagee in good faith”? HELD: (1) The parties entered into a CONTRACT OF SALE.  The formal written offer of the Spouses Lim was accepted by CDB.  The Spouses Lim paid the option money, which left only the balance of the purchase price to be paid.  In the Law on Sales, one does not need to be the owner at the perfection of the contract.  HOWEVER, NEMO DAT QUOD NON HABET [One cannot give what he does not have]. At the consummation stage, it was impossible for CDB to comply with its legal obligation. (2) NO. The sale by CDB to Lim of the property mortgaged in 1983 by Rodolfo Guansing must, therefore, be deemed a nullity for CDB did not have a valid title to the said property.  CDB never acquired a valid title to the property because the foreclosure sale, by virtue of which the property had been awarded to CDB as highest bidder, is likewise void since the mortgagor was not the owner of the property foreclosed  A “forced sale” is still a sale within the contemplation of the law. Thus, the principle that the seller must be the owner of the thing sold also applies.

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(3) NO. CDB cannot be considered as a mortgagee in good faith.  CDB was remiss in its duty as bank and failed to exercise the due diligence required of it. In short, CDB was negligent.  Citing jurisprudence, it is standard practice for banks, before approving a loan, to send representatives to the premises of the land offered as collateral and to investigate who are the real owners thereof, noting that banks are expected to exercise more care and prudence than private individuals in their dealings, even those involving registered lands, for their business is affected with public interest  No evidence to the contrary. o Extrajudicial Settlement of the Estate With Waiver, a self-executed deed by Rodolfo, should have placed CDB on guard. o Report of the purported ocular inspection by its representatives was never admitted into evidence.

MAMERTA VDA. DE JAYME VS CA FACTS: The spouses Graciano and Mamerta Jayme are the registered owners of Lot 2700, situated in the Municipality of Mandaue On January 8, 1973, they entered into a Contract of Lease 5 with George Neri, president of Airland Motors Corporation (now Cebu Asiancars Inc.), covering one-half of Lot 2700. The lease was for twenty (20) years. The terms and conditions of the lease contract stipulated that Cebu Asiancars Inc. (hereafter, Asiancars) may use the leased premises as a collateral to secure payment of a loan which Asiancars may obtain from any bank, provided that the

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proceeds of the loan shall be used solely for the construction of a building which, upon the termination of the lease or the voluntary surrender of the leased premises before the expiration of the contract, shall automatically become the property of the Jayme spouses (the lessors). A Special Power of Attorney\7 dated January 26, 1974, was executed in favor of respondent George Neri, who used the lot to secure a loan of P300,000 from the General Bank and Trust Company. The loan was fully paid on August 14, 1977. In October 1977, Asiancars obtained a loan of P6,000,000 from the Metropolitan Bank and Trust Company (MBTC). The entire Lot 2700 was offered as one of several properties given as collateral for the loan. As mortgagors, the spouses signed a Deed of Real Estate Mortgage dated November 21, 1977 in favor of MBTC. It stated that the deed was to secure the payment of a loan obtained by Asiancars from the bank. To assure the Jayme spouses, Neri and the other officers of Asiancars, executed an undertaking .In it they promised, in their personal capacities and/or in representation of Cebu Asiancars, Inc., "to compensate Mr. & Mrs. Graciano Jayme for any and all or whatever damage they may sustain or suffer by virtue and arising out of the mortgage to MBTC. In addition, Neri wrote a letter dated September 1, 1981 addressed to Mamerta Jayme acknowledging her "confidence and help" extended to him, his family and Asiancars. He promised to pay their indebtedness to MBTC before the loan was due. Meeting financial difficulties and incurring an outstanding balance on the loan, Asiancars conveyed ownership of the building on the leased premises to MBTC, by way of "dacion en pago." Asiancars failed to pay.

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Eventually, MBTC extrajudicially foreclosed the mortgage. A public auction was held on February 4, 1981. MBTC was the highest bidder for P1,067,344.35. A certificate of sale was issued and was registered with the Register of Deeds. Petitioners claim that Neri and Asiancars did not tell them that the indebtedness secured by the mortgage was for P6,000,000 and that the security was the whole of Lot 2700. Petitioners allege that the deed presented to the Jayme spouses was in blank, without explanation on the stipulations contained therein, except that its conditions were identical to those of the stipulations when they mortgaged half the lot’s area previously with General Bank. Petitioners also alleged that the Jayme spouses were illiterate and only knew how to sign their names. That because they did not know how to read nor write, and had given their full trust and confidence to George Neri, the spouses were deceived into signing the Deed of Real Estate Mortgage. Their intention as well as consent was only to be bound as guarantors. ISSUE: WON the dacion en pago by Asiancars in favor of MBTC is valid and binding despite the stipulation in the lease contract that ownership of the building will vest on the Jaymes at the termination of the lease. HELD: In the case at bar, when Asiancars failed to pay its obligations with MBTC, the properties given as security (one of them being the land owned by the Jaymes) became subject to foreclosure. When several things are given to secure the same debt in its entirety, all of them are liable for the debt, and the creditor does not have to divide his action by distributing the debt among the various things pledged or mortgaged. Even when only a part of the debt remains unpaid, all the things are liable for such balance.

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The debtor cannot ask for the release of one or some of the several properties pledged or mortgaged (or any portion thereof) or proportionate extinguishment of the pledge or mortgage unless and until the debt secured has been fully paid. The alienation of the building by Asiancars in favor of MBTC for the partial satisfaction of its indebtedness is, in our view, also valid. The ownership of the building had been effectively in the name of the lesseemortgagor (Asiancars), though with the provision that said ownership be transferred to the Jaymes upon termination of the lease or the voluntary surrender of the premises. The lease was constituted on January 8, 1973 and was to expire 20 years thereafter, or on January 8, 1993. The alienation via dacion en pago was made by Asiancars to MBTC on December 18, 1980, during the subsistence of the lease. At this point, the mortgagor, Asiancars, could validly exercise rights of ownership, including the right to alienate it, as it did to MBTC.

HECHANOVA vs ADIL FACTS: Pio Servando sought to annul the sale made by Jose Servando of three parcels of land which according to him were mortgaged in his favor. Alternatively, if the sale is not annulled, to order the defendant Jose Servando to pay the amount of P20,000.00, plus interests, and to order defendants to pay damages. Attached to the complaint was a copy of the private document evidencing the alleged mortgage (Annex A), which is quoted hereunder: August 20, 1970 This is to certify that I, Jose Yusay Servando, the sole owner of three parcel of land under Tax Declaration No. 28905, 44123 and 31591 at Lot No. 1, 1863Portion of 1863 & 1860 situated at Sto. Nino St., Arevalo, Compania St. &

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Compania St., Interior Molo, respectively, have this date mortgaged the said property to my cousin Pio Servando, in the amount of TWENTY THOUSAND PESOS (P20,000.00), redeemable for a period not exceeding ten (10) years, the mortgage amount bearing an interest of 10% per annum. I further certify that in case I fail to redeem the said properties within the period stated above, my cousin Pio Servando, shall become the sole owner thereof. ISSUE: WON the sale can be annulled by reason that a mortgages has been constituted on the subject properties. NO HELD: Plaintiff has no standing to question the validity of the deed of sale executed by the deceased defendant Jose Servando in favor of his co-defendants Hechanova and Masa. No valid mortgage has been constituted plaintiff's favor, the alleged deed of mortgage being a mere private document and not registered; moreover, it contains a stipulation (pacto comisorio) which is null and void under Article 2088 of the Civil Code. Even assuming that the property was validly mortgaged to the plaintiff, his recourse was to foreclose the mortgage, not to seek annulment of the sale.

MANILA BANKING vs TEODORO FACTS: On April 25, 1966, Anastacio Jr. & Grace Anna, together with Anastacio Teodoro, Sr., jointly and severally, executed in favor of Manila Banking Copr. (MB) a Promissory Note (No. 11487) for the sum of P10,420.00 payable in 120 days, or on August 25, 1966, at 12% interest per annum. Teodoros failed to pay the said amount inspire of repeated demands and the obligation as of September 30, 1969 stood at P 15,137.11 including accrued interest and service charge.

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On May 3, 1966 and June 20, 1966, Anastacio Sr. (Father) and Anastacio, Jr. (Son) executed in favor of MB two Promissory Notes (Nos. 11515 and 11699) for P8,000.00 an P1,000.00 respectively, payable in 120 days at 12% interest per annum. They made a partial payment on the May 3, 1966 promissory Note but none on the June 20, 1966 Promissory Note, leaving still an unpaid balance of P8,934.74 as of September 30, 1969 including accrued interest and service charge.

due on the Promissory Note, this action was instituted on November 13, 1969, originally against the Father, Son, and the latter's wife. The Father died. The action, then is against Son and his wife for the collection of the sum of P 15,037.11 on Promissory Note No. 14487; and against Son for the recovery of P 8,394.7.4 on Promissory Notes Nos. 11515 and 11699, plus interest on both amounts at 12% per annum from September 30, 1969 until fully paid, and 10% of the amounts due as attorney's fees.

The three Promissory Notes stipulated that any interest due if not paid at the end of every month shall be added to the total amount then due, the whole amount to bear interest at the rate of 12% per annum until fully paid. It appears that on January 24, 1964, the Son executed in favor of plaintiff a Deed of Assignment of Receivables from the Emergency Employment Administration in the sum of P44,635.00. The Deed of Assignment provided that it was for and in consideration of certain credits, loans, overdrafts and other credit accommodations extended to Teodoros as security for the payment of said sum and the interest thereon, and that they do hereby remise, release and quitclaim all its rights, title, and interest in and to the accounts receivables.

ISSUE 1: WON the assignment of receivables has the effect of payment of all the loans contracted by appellants from appellee bank. NO

In their stipulations of Fact, it is admitted by the parties that MB extended loans to Teodoros on the basis and by reason of certain contracts entered into by the defunct Emergency Employment Administration (EEA) with Teodoros for the fabrication of fishing boats, and that the Philippine Fisheries Commission succeeded the EEA after its abolition; that non-payment of the notes was due to the failure of the Commission to pay Teodoros after the latter had complied with their contractual obligations. For failure of Teodoros to pay the sums

HELD 1: Assignment of credit is an agreement by virtue of which the owner of a credit, known as the assignor, by a legal cause, such as sale, dation in payment, exchange or donation, and without the need of the consent of the debtor, transfers his credit and its accessory rights to another, known as the assignee, who acquires the power to enforce it to the same extent as the assignor could have enforced it against the debtor. ... It may be in the form of a sale, but at times it may constitute a dation in payment, such as when a debtor, in order to obtain a release from his debt, assigns to his creditor a credit he has against a third person, or it may constitute a donation as when it is by gratuitous title; or it may even be merely by way of guaranty, as when the creditor gives as a collateral, to secure his own debt in favor of the assignee, without transmitting ownership. The character that it may assume determines its requisites and effects. Its regulation, and the capacity of the parties to execute it; and in every case, the obligations between assignor and assignee will depend upon the judicial relation which is the basis of the assignment.

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It is evident that the assignment of receivables executed by appellants on January 24, 1964 did not transfer the ownership of the receivables to appellee bank and release appellants from their loans with the bank incurred under promissory notes Nos. 11487,11515 and 11699. The Deed of Assignment provided that it was for and in consideration of certain credits, loans, overdrafts, and their credit accommodations in the sum of P10,000.00 extended to appellants by appellee bank, and as security for the payment of said sum and the interest thereon; that appellants as assignors, remise, release, and quitclaim to assignee bank all their rights, title and interest in and to the accounts receivable assigned (lst paragraph). It was further stipulated that the assignment will also stand as a continuing guaranty for future loans of appellants to appellee bank and correspondingly the assignment shall also extend to all the accounts receivable; appellants shall also obtain in the future, until the consideration on the loans secured by appellants from appellee bank shall have been fully paid by them (No. 9). The position of Teodoros, however, is that the deed of assignment is a quitclaim in consideration of their indebtedness to appellee bank, not mere guaranty, in view of the provisions of the deed of assignment. The character of the transactions between the parties is not, however, determined by the language used in the document but by their intention. The characters 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. However, even though a transfer, if

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regarded by itself, appellate 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 Id that a transfer of property by the debtor to a creditor, even if sufficient on its farm 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 exporting 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 ambiguous language or other circumstances excluding an intent to pledge. (Lopez v. Court of Appeals, 114 SCRA 671 [1982]). Definitely, the assignment of the receivables did not result from a sale transaction. It cannot be said to have been constituted by virtue of a dation in payment for appellants' loans with the bank evidenced by promissory note Nos. 11487, 11515 and 11699 which are the subject of the suit for collection in Civil Case No. 78178. At the time the deed of assignment was executed, said loans were nonexistent yet. The deed of assignment was executed on January 24, 1964 (Exh. "G"), while promissory note No. 11487 is dated April 25, 1966 (Exh. 'A), promissory note 11515, dated May 3, 1966 (Exh. 'B'), promissory note 11699, on June 20, 1966 (Exh. "C"). At most, it was a dation in payment for P10,000.00, the amount of credit from appellee bank indicated in the deed of assignment. At the time the assignment was executed, there was no obligation to be extinguished except the amount of P10,000.00. Moreover, in order that an obligation may be extinguished by another which substitutes the same, it is imperative that it be so declared in unequivocal terms, or that the old and the

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new obligations be on every point incompatible with each other (Article 1292, New Civil Code). Obviously, the deed of assignment was intended as collateral security for the bank loans of appellants, as a continuing guaranty for whatever sums would be owing by defendants to plaintiff, as stated in stipulation No. 9 of the deed. 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 (Lopez v. Court of Appeals, supra). ISSUE 2: WON Manila Banking must first exhaust all legal remedies against the Philippine Fisheries Commission before it can proceed against appellants for collections of loan under the promissory notes which are plaintiffs bases in the action for collection in Civil Case No. 78178. NO. HELD 2: The obligation of Teodoros under the promissory notes not having been released by the assignment of receivables, appellants remain as the principal debtors of MB rather than mere guarantors. The deed of assignment merely guarantees said obligations. That the guarantor cannot be compelled to pay the creditor unless the latter has exhausted all the property of the debtor, and has resorted to all the legal remedies against the debtor, under Article 2058 of the New Civil Code does not therefore apply to them. It is of course of the essence of a contract of pledge or mortgage 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 (Article 2087, New Civil Code). In the instant case, Teodooros are both the principal debtors and the pledgors or mortgagors. Resort to one is, therefore, resort to the other.

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MB did try to collect on the pledged receivables. As the Emergency Employment Agency (EEA) which issued the receivables had been abolished, the collection had to be coursed through the Office of the President which disapproved the same. The receivable became virtually worthless leaving Teodoros' loans from MB unsecured. It is but proper that after their repeated demands made on appellants for the settlement of their obligations, appellee bank should proceed against appellants. It would be an exercise in futility to proceed against a defunct office for the collection of the receivables pledged.

ALCANTARA vs ALINEA et al FACTS: Alcantara filed a complaint in the Court of First Instance of La Laguna, praying that judgment be rendered in his behalf ordering the defendants to deliver to him the house and lot claimed, and to pay him in addition thereto as rent the sum of 8 pesos per month from February of that year, and to pay the costs of the action. Alcantara alleged in effect that on the 29th day of February, 1904, the defendants, Ambrosio Alinea and Eudosia Belarmino, borrowed from him the sum of 480 pesos, payable in January of said year 1905 under the agreement that if, at the expiration of the said period, said amount should not be paid it would be understood that the house and lot, the house being constructed of strong materials, owned by the said defendants and located in the town of San Pablo on the street of the same name, Province of La Laguna, be considered as absolutely sold to the plaintiff for the said sum; that the superficial extent and boundaries of said property are described in the complaint; and that, notwithstanding that the time for the payment of said sum has expired and no payment has been made, the defendants refuse to deliver to plaintiff the said property, openly violating

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that which they contracted to do and depriving him to his loss of the rents which plaintiff should receive, the same counting from February, 1905. After having taken the evidence of both parties and attaching the documents presented in evidence to the record, the judge on November 27, 1905, rendered a judgment ordering the defendants to deliver to the plaintiff the house and lot, the object of this litigation, and to pay the costs of the action, not making any finding upon the question of loss or damages by reason of the absence of proof on these points. The defendants duly took exception to this decision, and asked for a new trial of the case on the ground that the findings of the court below in its decision were plainly contrary to law, which motion was overruled and from which ruling defendants also excepted. ISSUE: WON the two contracts entered into between the parties are void? NO HELD: The fact that the parties have agreed at the same time, in such a manner that the fulfilment of the promise of sale would depend upon the non-payment or return of the amount loaned, has not produced any charge in the nature and legal conditions of either contract, or any essential defect which would tend to nullify the same. If the promise of sale is not vitiated because, according to the agreement between the parties thereto, the price of the same is to be the amount loaned and not repaid, neither would the loan be null or illegal, for the reason that the added agreement provides that in the event of failure of payment the sale of property as agreed will take effect, the consideration being the amount loaned and not paid. The property, the sale of which was agreed to by the debtors, does not appear mortgaged in favor of the creditor, because

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in order to constitute a valid mortgage it is indispensable that the instrument be registered in the Register of Property, in accordance with article 1875 of the Civil Code. In the case at bar, the transaction does not constitute a mortgage, nor could it possibly be a mortgage, for the reason of said document is not vested with the character and conditions of a public instrument. Also, the said property could not be pledged, not being personal property, and notwithstanding the said double contract the debtor continued in possession thereof and the said property has never been occupied by the creditor. Neither was there ever any contract of antichresis by reason of the said contract of loan, inasmuch as the creditor plaintiff has never been in possession thereof, nor has he enjoyed the said property, nor for one moment ever received its rents; therefore, there are no proper terms in law, taking into consideration the terms of the conditions contained in the aforesaid contract, whereby this court can find that the contract was null, and under no consideration whatever would it be just to apply to the plaintiff articles 1859 and 1884 of the same code. The contract (pactum commissorium), indicates the existence of the contracts of mortgage or of pledge or that of antichresis, none of which have coincided in the loan indicated herein. It is a principle in law, that the will of the contracting parties is the law of contracts. It was agreed between plaintiff and defendants herein that if defendants should not pay the loan of 480 pesos in January1905, the property belonging to the defendants and described in the contract should remain sold for the aforesaid sum. The document of contract has been recognized by the defendant Alinea and by the witnesses who signed same with him, being therefore an authentic and efficacious document, in accordance with

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article 1225 of the Civil Code; and as the amount loaned has not been paid and continues in possession of the debtor, it is only just that the promise of sale be carried into effect, and the necessary instrument be executed by the vendees. Therefore, by virtue of the reasons given above and accepting the findings given in the judgment appealed from, we affirm the said judgment herein, with the costs against the appellants. After expiration of twenty days from the date of the notification of this decision let judgment be entered in accordance herewith and ten days thereafter let the case be remanded to the court from whence it came for proper action.

UY TONG VS. CA G.R. No. 77465, May 21, 1988 FACTS: Uy Tong (also known as Henry Uy) and Kho Po Giok (Spouses Uy) used to be the owners of Apartment No. 307 of the Ligaya Building, together with the leasehold right for 99 years over the land on which the building stands. The land is registered in the name of Ligaya Investments, Inc. It appears that Ligaya Investments, Inc. owned the building which houses the apartment units but sold Apartment No. 307 and leased a portion of the land in which the building stands to the Spouses. 1969, the Spouses purchased from Bayanihan Automotive, Inc. (Bayanihan) 7 units of motor vehicles for a total amount of P47,700.00 payable in 3 installments. After making a down payment of P7,700.00, the Spouses failed to pay the balance of P40,000.00. Due to these unpaid balances, Bayanihan filed an action for specific performance against the Spouses. The trial court rendered a judgment in favor of Bayanihan, ordering the Spouses, jointly

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and severally, to pay them the sum of P40,000.00, with interest at the legal rate from July 1, 1970 until full payment. In the event of their failure to do so within 30 days from notice of this judgment, they are ordered to execute the corresponding deed of absolute sale in favor of the plaintiff and/or the assignment of leasehold rights over the defendant's apartment located at 307 Ligaya Building, Pursuant to said judgment, an order for execution pending appeal was issued by the trial court and a deed of assignment dated May 27, 1972, was executed by the Spouses over Apartment of the Ligaya Building together with the leasehold right over the land on which the building stands. Notwithstanding the execution of the deed of assignment, the Spouses remained in possession of the premises. This prompted BAYANHAN to file an ejectment case against the spouses. Spouses contend that the deed of assignment is null and void because it is in the nature of a pactum commissorium and/or was borne out of the same. ISSUE: WON the deed of assignment is void because it is in the nature of pactum commissorium? NO HELD: The prohibition on pactum commissorium stipulations is provided for by Article 2088 of the Civil Code: Art. 2088. The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of the same. Any stipulation to the contrary is null and void. The aforequoted provision furnishes the 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

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(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. A perusal of the terms of the questioned agreement evinces no basis for the application of the pactum commissorium provision. First, there is no indication of any contract of mortgage entered into by the parties. It is a fact that the parties agreed on the sale and purchase of trucks. Second, there is no case of automatic appropriation of the property by Bayanihan. When the Spouses defaulted in their payments of the second and third installments of the trucks they purchased, Bayanihan filed an action in court for specific performance. The trial court rendered favorable judgment for Bayanihan and ordered the Spouses to pay the balance of their obligation and in case of failure to do so, to execute a deed of assignment over the property involved in this case. The Spouses elected to execute the deed of assignment pursuant to said judgment. Clearly, there was no automatic vesting of title on Bayanihan because it took the intervention of the trial court to exact fulfillment of the obligation, which, by its very nature is "anathema to the concept of pacto commissorio." And even granting that the original agreement between the parties had the badges of pactum commissorium, the deed of assignment does not suffer the same fate as this was executed pursuant to a valid judgment in Civil Case No. 80420 as can be gleaned from its very terms and conditions. This being the case, there is no reason to impugn the validity of the said deed of assignment.

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SPOUSES ONG VS. ROBAN LENDING 557 SCRA 516 ; G.R. No. 172592, July 9, 2008 FACTS: Throughout 1999 and 2000, spouses Ong borrowed through mutiple loans a total of 4m from Roban Lending. These loans were covered by a real estate mortgage (REM) over the spouses’ parcels of land in Tarlac. In 2001, both parties consolidated their loans, which now totaled 5.9m. They then executed two documents: a Dacion in Payment agreement, where the sps assigned the properties covered by the REM to Roban Lending; and a Memorandun of Agreement, which stated that if the sps fail to pay the restructured loan, then Roban can validly enforce the Dacion en Pago. In 2002, the sps moved to declare the dacion en pago agreement and memorandum of agreement executed in 2001 were void for being pactum commissorium. Roban Lending claimed that dacion en pago is recognized under Art 1245, as a special form of payment whereby the debtor-Plaintiffs alienates their property to the creditor-Defendant in satisfaction of their monetary obligation. ISSUE: WON the memorandum of agreement and dacion en pago agreement amounted to pactum commissorium and thus void? YES HELD: Both documents in effect automatically allow Roban Lending to acquire ownership of the properties should the sps fail to pay. The SC found that both documents worked as a way to circumvent the prohibition found in Article 2088: “The creditor cannot appropriate the things given by way of pledge or mortgage, or

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dispose of them. Any stipulation to the contrary is null and void." The elements of pactum commissorium, which enables the mortgagee to acquire ownership of the mortgaged property without the need of any foreclosure proceedings, are: (1) there should be a property mortgaged by way of security for the payment of the principal obligation, and (2) there should be a stipulation for automatic appropriation by the creditor of the thing mortgaged in case of nonpayment of the principal obligation within the stipulated period. In the case at bar, the Memorandum of Agreement and the Dacion in Payment contain no provisions for foreclosure proceedings nor redemption. Under the Memorandum of Agreement, the failure by the petitioners to pay their debt within the one-year period gives respondent the right to enforce the Dacion in Payment transferring to it ownership of the properties covered by the REM. Why there is no dacion in this case: the ‘dacion’ did not extinguish the sps’ obligation In a true dacion en pago, the assignment of the property extinguishes the monetary debt. In the case at bar, the alienation of the properties was by way of security, and not by way of satisfying the debt. The Dacion in Payment did not extinguish petitioners’ obligation to respondent. On the contrary, under the Memorandum of Agreement executed on the same day as the Dacion in Payment, petitioners had to execute a promissory note for P5,916,117.50 which they were to pay within one year. That the questioned contracts were freely and voluntarily executed by petitioners and

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respondent is of no moment, pactum commissorium being void for being prohibited by law. Side issue on interest rate: The monthly interest rate of 3.5% per month (42% annum) – found unconscionable and reduced to 12% Penalty interest of 5% per month (60% annum) – found iniquitous and reduced to 12% per annum from date of demand.

MCMICKING VS. MARTINEZ 15 Phil. 204, G.R. No. L-5219, February 15, 1910 FACTS: Sometime during the year 1908, Pedro Martinez, defendant, obtained judgment in the CFI of the city of Manila against one Maria Aniversario. Thereafter execution was issued upon said judgment and the sheriff levied upon a pailebot (“pilots boat”) alleged to be the property of said Maria Aniversario. Defendant Go Juna intervened and claimed a lien upon said boat by virtue of a pledge of the same to him by the said Maria Aniversario made on the 27th day of February, 1907, which said pledge was evidenced by a public instrument bearing that date. This action was brought by the sheriff against Go Juna and Pedro Martinez to determine the rights of the parties to the funds in his hands. Maria Aniversario was not made a party. Pedro Martinez alleged as a defense that the pledge which said document was intended to constitute had not been made effective by delivery of the property pledged, as required by article 1863 of the Civil Code, and that, therefore, there existed no preference in favor of said Go Juna. The court declared a preference in favor of Pedro Martinez, and ordered the sheriff to pay over the said funds in consonance therewith. An appeal was taken from said

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judgment. ISSUE: WON there was a pledge. NO. HELD: The court concluded that the property was not delivered in accordance with the provisions of article 1863 of the Civil Code. The pledge was ineffective against Martinez. It appears, however, that the document of pledge is a public document which contains an admission of indebtedness. In other words, while it is intended to be a pledge, it is also a credit which appears in a public document. Article 1924, paragraph 3, letter a, is therefore applicable; and, said public document antedating the judgment of defendant Martinez, takes preference thereover. The validity of that document in so far as it shows an indebtedness against Maria Aniversario and its effectiveness against her have not, however, been determined. She is not a party to this action. No judgment can be rendered affecting her rights or liabilities under said instrument. If said instrument is invalid or for any other cause unenforceable against her, it would be wholly unjust, by declaring its preference over a debt acknowledged by and conclusive against her, to require that said funds be paid over to the holder of said document. That would be to require her to pay a debt which has not only been shown to be enforceable against her but which, as a witness for the defendant Martinez on the trial of this cause, she expressly and vehemently repudiated as a valid claim against her. Where a pledge in the form of a public instrument, duly executed as such, contains an admission of the indebtedness in a specified amount to secure which debt said pledge was made, and said pledge is void for failure to deliver to the creditor, or to a third person agreed upon, the property pledged, said indebtedness is,

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nevertheless, one appearing in a public instrument under article 1924 of the Civil Code, and such debt takes preference over a judgment secured against the pledgor subsequent to the date of said public instrument. The judgment is, therefore, reversed; and it is ordered that the cause be returned to the court below; that the plaintiff bring in Maria Aniversario as a party to this action, and that she be given an opportunity to make her defense, if she has any, to the document in question under proper procedure. POLICY: A pledge (not a chattel mortgage) of personal property to secure an indebtedness is without force or effect unless the property pledged is delivered to the pledgee or to some third person agreed upon.

CALTEX vs PNB (1992) FACTS: PNB issued 280 certificates of time deposit (CTDs) in favor of Angel dela Cruz who deposited with PNB the aggregate amount of P1,120,000.00. Angel delivered the CTD to Caltex in connection with his purchased of fuel products. Thereafter, Angel informed PNB that she lost all the CTD. Ultimately 280 replacement CTDs were issued in favor of Angel. Angel negotiated and obtained a loan from PNB amounting toP875,000.00. Angel executed a notarized Deed of Assignment of TD, surrendering to PNB "full control of the indicated time deposits from and after date" of the assignment and further authorizes said bank to pre-terminate, setoff and "apply the said time deposits to the payment of whatever amount or amounts may be due" on the loan upon its maturity. Credit Manager Caltex went to PNB and presented for verification the CTDs

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declared lost by Angel alleging that the same were delivered to Caltex "as security for purchases made with Caltex Philippines, Inc." by said Angel. When the loan of Angel with PNB matured and fell due PNB set-off and applied the time deposits in question to the payment of the matured loan ISSUE: Whether CALTEX can rightfully recover on the CTDs. NO HELD: Although the CTDs are bearer instruments, a valid negotiation thereof for the true purpose and agreement between it and De la Cruz, as ultimately ascertained, requires both delivery and indorsement. However, the CTDs were delivered to Caltex not as payment but as a security for payment. If it were true that the CTDs were delivered as payment and not as security, petitioner's credit manager could have easily said so, instead of using the words "to guarantee" in the letter aforequoted. Had Caltex produced the receipt prayed for by PNB, it could have proved, if such truly was the fact, that the CTDs were delivered as payment and not as security. 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 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

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continues in inexistence 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. Petitioner's insistence that the CTDs were negotiated to it begs the question. Under the Negotiable Instruments Law, an instrument is negotiated when it is transferred from one person to another in such a manner as to constitute the transferee the holder thereof, and a holder may be the payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof. In the present case, however, there was no negotiation in the sense of a transfer of the legal title to the CTDs in favor of petitioner in which situation, for obvious reasons, mere delivery of the bearer CTDs would have sufficed. Here, the delivery thereof only as security for the purchases of Angel de la Cruz (and we even disregard the fact that the amount involved was not disclosed) could at the most constitute petitioner only as a holder for value by reason of his lien. Accordingly, a negotiation for such purpose cannot be effected by mere delivery of the instrument since, necessarily, the terms thereof and the subsequent disposition of such security, in the event of non-payment of the principal obligation, must be contractually provided for. Where the holder has a lien on the instrument arising from contract, he is deemed a holder for value to the extent of his lien. As such holder of collateral security, he would be a pledgee but the requirements therefor and the effects thereof, not being provided for by the Negotiable Instruments Law, shall be

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governed by the Civil Code provisions on pledge of incorporeal rights, which inceptively provide: Art. 2095. Incorporeal rights, evidenced by negotiable instruments, . . . may also be pledged. The instrument proving the right pledged shall be delivered to the creditor, and if negotiable, must be indorsed. Art. 2096. 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. Aside from the fact that the CTDs were only delivered but not indorsed, the factual findings of respondent court quoted at the start of this opinion show that petitioner failed to produce any document evidencing any contract of pledge or guarantee agreement between it and Angel de la Cruz. Consequently, the mere delivery of the CTDs did not legally vest in petitioner any right effective against and binding upon respondent bank. The requirement under Article 2096 aforementioned is not a mere rule of adjective law prescribing the mode whereby proof may be made of the date of a pledge contract, but a rule of substantive law prescribing a condition without which the execution of a pledge contract cannot affect third persons adversely.

ESTATE OF LITTON V MENDOZA AND CA | 1998 FACTS: In 1963, CMB Products, with Mendoza as president, offered to sell textile cotton materials to the Bernal spouses, who were engaged in manufacture of embroidery, garments and cotton materials. For this purpose, Mendoza introduced the spouses to Alfonso Tan. The spouses purchased on credit from Tan cotton materials amounting to 80,000.

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Mendoza guaranteed the payment of the debt. Tan then delivered the cotton materials to the spouses. In view of the arrangement, CBM Products (thru Mendoza) asked for and received a post-dated check for the payment of the spouses’ debt. It was understood that Mendoza will retain the check until the cotton materials are finally manufactured into garments, after which Mendoza will sell the finished products for the spouses. Meanwhile, the check matured without having been cashed so Mendoza demanded for another check without a date. Feb. 28, 1964, Mendoza issued two checks in favour of Tan. He told the spouses of the same and told them they are indebted to him and asked the spouses to sign an instrument whereby Mendoza assigned the said amount to Insular Products, Inc.. Tan had the two checks discounted but were later returned with words ‘stop payment’. It appears it was ordered by Mendoza for failure of the spouses to deposit sufficient funds for the check issued by the spouses in his favour. Tan sued Mendoza while the spouses brought an action for interpleader for not knowing whom to pay. Pendente lite, Tan assigned in favour of Littion, Sr his litigatious credit (in action of spouses) against Mendoza, duly submitted to the court, with notice to the parties. TC ordered Mendoza to pay Tan 76k, which was affirmed by the CA. Mendoza entered into Compromise Agreement with Tan wherein the latter recognized that his claims against Mendoza had been settled and because of that, both waives any claim against the other; with a provision that it no way affects

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Tan’s right to go against the spouses. Mendoza filed MFR saying that there was the compromise agreement which absolved him from liability. Tan opposed this saying the Compromise agreement was null and void because of the deed of assignment executed in favour of Litton, Sr.; he says that with such, he has no more right to alienate said credit; The compromise agreement was approved: a. It said that the assignment was by way of securing only his obligation to Litton, Sr.; b. Thus, Tan retained possession and dominion over the credit (2085); c. Although considered as a litigatious credit, such may be validly alienated by Tan; such alienation is subject to the remedies of Litton under 6 of CC whereby, the assignment if proven prejudicial to Litton, may entitle Littion to pursue his remedies against Tan; d. The alienation of a litigatious credit is further subject to the debtor’s right of redemption under 1634; ISSUE: Can a plaintiff in a case, who had previously assigned in favor of his creditor his litigated credit in said case, by a deed of assignment which was duly submitted to the court, validly enter into a compromise agreement thereafter releasing the defendant therein from his claim without notice to his assignee? NO HELD: The purpose of compromise is to replace and terminate controverted claims. Once approved, it has the force of res judicata (except for vices of consent or forgery). Petitioner seeks to set aside the compromise agreement since prior thereto, Tan executed a deed of assignment in favour of Littion, Sr. involving the same litigated credit. Fact that assignment was done by way of

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securing Tan’s obligation in favour of Littion, Sr. does not affect the resolution of the matter. Also, the validity of pledge/guaranty in favour of Liiton has not been questioned. Deed of requirements mortgage.

assignment fulfils the of a valid pledge or

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

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DIOSDADO YULIONGSIU vs. PHILIPPINE NATIONAL BANK FACTS: Yuliongsiu was the owner of two (2) vessels, namely: The M/S Surigao, valued at P109,925.78 and the M/S Don Dino, valued at P63,000.00, and operated the FS-203, valued at P210,672.24, which was purchased by him from the Philippine Shipping Commission, by installment or on account. As of January or February, 1943, plaintiff had paid to the Philippine Shipping Commission only the sum of P76,500 and the balance of the purchase price was payable at P50,000 a year, due on or before the end of the current year. Yuliongsiu obtained a loan of P50,000 from PNB. To guarantee its payment, plaintiff pledged the M/S Surigao, M/S Don Dino and its equity in the FS-203, as evidenced by the pledge contract , duly registered with the office of the Collector of Customs for the Port of Cebu. Yuliongsiu effected partial payment of the loan in the sum of P20,000. The remaining balance was renewed by the execution of 2 promissory notes in the bank's favor. These two notes were never paid at all by Yuliongsiu on their respective due dates. PNB filed criminal charges against Yuliongsiu and two other accused for estafa thru falsification of commercial documents, and they were convicted by the trial court and sentenced to indemnify PNB in the sum of P184,000. CA affirmed conviction. The corresponding writ of execution issued to implement the order for indemnification was returned unsatisfied as Yuliongsiu was totally insolvent .Meanwhile, together with the institution of the criminal action, PNB took physical possession of three pledged vessels while they were at the Port of Cebu, and after the first note fell due and was not paid, the Manager of PNB, acting as attorney-in-fact of Yuliongsiu pursuant to the terms of the pledge contract, executed a document of sale, transferring

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the two pledged vessels and Yuliongsiu's equity in FS-203, to PNB for P30,042.72.The FS-203 was subsequently surrendered by PNB to the Philippine Shipping which rescinded the sale to Yuliongsiu, for failure to pay the remaining instalments on the purchase price. The other two boats were sold by PNB to third parties. Yuliongsiu commenced action in the CFI to recover the three vessels or their value and damages from PNB. The lower court rendered its decision ruling: (a) that the bank's taking of physical possession of the vessels was justified by the pledge contract and the law; (b) that the private sale of the pledged vessels by PNB to itself without notice to the plaintiff-pledgor as stipulated in the pledge contract was likewise valid; and (c) that the PNB should pay the sums of P1,153.99 and P8,000, as his remaining account balance, or set-off these sums against the indemnity which Yuliongsiu was ordered to pay to it in the criminal cases. ISSUE: W/N the contract was a chattel mortgage so that PNB cannot take possession of the chattels until after there has been default. NO, PLEDGE HELD: The parties stipulated as a fact that Exhibit "A" & "1-Bank" is a pledge contract. Necessarily, this judicial admission binds Yuliongsiu. Without any showing that this was made thru palpable mistake, no amount of rationalization can offset it. PNB as pledgee was therefore entitled to the actual possession of the vessels. While it is true that Yuliongsiu continued operating the vessels after the pledge contract was entered into, his possession was expressly made “subject to the order of the pledgee." The provision of Art. 2110 of the present Civil Code being new, cannot apply to the pledge contract here which was entered into on June 30, 1947. On the other hand, there is an authority supporting the proposition that the pledgee

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can temporarily entrust the physical possession of the chattels pledged to the pledgor without invalidating the pledge. In such a case, the pledgor is regarded as holding the pledged property merely as trustee for the pledgee. Yuliongsiu also urge Us to rule that constructive delivery is insufficient to make pledge effective. The type of delivery will depend upon the nature and the peculiar circumstances of each case. The parties here agreed that the vessels be delivered by the "pledgor to the pledgor who shall hold said property subject to the order of the pledgee."Considering the circumstances of this case and the nature of the objects pledged, i.e., a vessel used in maritime business, such delivery is sufficient. Since PNB was, pursuant to the terms of pledge contract, in full control of the vessels thru Yuliongsiu, the former could take actual possession at any time during the life of the pledge to make more effective its security. Its taking of the vessels therefore was not unlawful. Nor was it unjustified considering that Yuliongsiu had just defrauded the PNB in the huge sum of P184,000

LIM TAY vs. COURT OF APPEALS FACTS: On January 8, 1980, Respondent-Appellee Sy Guiok and Alfonso Sy Lim secured a loan from the [p]etitioner in the amount of P40,000 each payable within six (6) months. To secure the payment of the aforesaid loan and interest thereon, Respondent Guiok executed a Contract of Pledge in favor of the [p]etitioner whereby he pledged his three hundred (300) shares of stock in the Go Fay & Company Inc., Respondent Corporation, for brevity's sake. Under said "Contracts of Pledge," Respondent[s] Guiok and Sy Lim covenanted, that:

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3. In the event of the failure of the PLEDGOR to pay the amount within a period of six (6) months from the date hereof, the PLEDGEE is hereby authorized to foreclose the pledge upon the said shares of stock hereby created by selling the same at public or private sale … Respondent Guiok and Sy Lim endorsed their respective shares of stock in blank and delivered the same to the [p]etitioner. However, Respondent Guiok and Sy Lim failed to pay their respective loans and the accrued interests thereon to the [p]etitioner. In October, 1990, the [p]etitioner filed a "Petition for Mandamus" against Respondent Corporation, with the SEC e praying that an order be issued directing the corporate secretary of [R]espondent Go Fay & Co., Inc. to register the stock transfers and issue new certificates in favor of Lim Tay. The corporate secretary of Respondent Corporation refused to record the transfer of the shares of stock of Respondent Guiok and Sy Lim in favor of and under the name of the [p]etitioner and to issue new certificates of stock to the [p]etitioner stating that the pledge entered by the parties did not automatically vest [i]n complainant ownership of the pledged shares. ISSUE: Whether or not the pledgor in this case became the owner of the pledged share by virtue of the contract of pledge entered by the parties. NO. HELD: The contractual stipulation, which was part of the Complaint, shows that plaintiff was merely authorized to foreclose the pledge upon maturity of the loans, not to own them. Such foreclosure is not automatic, for it must be done in a public or private sale. Nowhere did the Complaint mention that petitioner had in fact foreclosed the pledge and purchased the

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shares after such foreclosure. His status as a mere pledgee does not, under civil law, entitle him to ownership of the subject shares. It is also noteworthy that petitioner's Complaint did not aver that said shares were acquired through extraordinary prescription, novation or laches. Moreover, petitioner's claim, subsequent to the filing of the Complaint, that he acquired ownership of the said shares through these three modes is not indubitable and still has to be resolved. In fact, as will be shown, such allegation-has no merit. Manifestly, the Complaint by itself did not contain any prima facie showing that petitioner was the owner of the shares of stocks. Quite the contrary, it demonstrated that he was merely a pledgee, not an owner. Without Foreclosure and Purchase at Auction, Pledgor Is Not the Owner of Pledged Shares. Petitioner initially argued that ownership of the shares pledged had passed to him, upon Respondents Sy Guiok and Sy Lim's failure to pay their respective loans. But on appeal, petitioner claimed that ownership over the shares had passed to him, not via the contracts of pledge, but by virtue of prescription and by respondents' subsequent acts which amounted to a novation of the contracts of pledge. We do not agree. At the outset, it must be underscored that petitioner did not acquire ownership of the shares by virtue of the contracts of pledge. Article 2112 of the Civil Code states: The creditor to whom the credit has not been satisfied in due time, may proceed before a Notary Public to the sale of the thing pledged. This sale shall be made at a public auction, and with notification to the debtor and the owner of the thing pledged in a proper case, stating the amount for which the public sale is to be held. If at the first auction the

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thing is not sold, a second one with the same formalities shall be held; and if at the second auction there is no sale either, the creditor may appropriate the thing pledged. In this case he shall be obliged to give an acquittance for his entire claim. Furthermore, the contracts of pledge contained a common proviso, which we quote again for the sake of clarity: 3. In the event of the failure of the PLEDGOR to pay the amount within a period of six (6) months from the date hereof, the PLEDGEE is hereby authorized to foreclose the pledge upon the said shares of stock hereby created by selling the same at public or private sale with or without notice to the PLEDGOR, at which sale the PLEDGEE may be the purchaser at his option; and "the PLEDGEE is hereby authorized and empowered at his option to transfer the said shares of stock on the books of the corporation to his own name, and to hold the certificate issued in lieu thereof under the terms of this pledge, and to sell the said shares to issue to him and to apply the proceeds of the sale to the payment of the said sum and interest, in the manner hereinabove provided; There is no showing that petitioner made any attempt to foreclose or sell the shares through public or private auction, as stipulated in the contracts of pledge and as required by Article 2112 of the Civil Code. Therefore, ownership of the shares could not have passed to him. The pledgor remains the owner during the pendency of the pledge and prior to foreclosure and sale, as explicitly provided by Article 2103 of the same Code:

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Unless the thing pledged is expropriated, the debtor continues to be the owner thereof. Nevertheless, the creditor may bring the actions which pertain to the owner of the thing pledged in order to recover it from, or defend it against a third person. No Novation in Favor of Petitioner. Neither did petitioner acquire the shares by virtue of a novation of the contract of pledge. Novation is defined as "the extinguishment of an obligation by a subsequent one which terminates it, either by changing its object or principal conditions, by substituting a new debtor in place of the old one, or by subrogating a third person to the rights of the creditor." 26 Novation of a contract must not be presumed. "In the absence of an express agreement, novation takes place only when the old and the new obligations are incompatible on every point." In the present case, novation cannot be presumed by (a) respondents' indorsement and delivery of the certificates of stock covering the 600 shares, (b) petitioner's receipt of dividends from 1980 to 1983, and (c) the fact that respondents have not instituted any action to recover the shares since 1980. Respondents' indorsement and delivery of the certificates of stock were pursuant to paragraph 2 of the contract of pledge which reads: 2. The said certificates had been delivered by the PLEDGOR endorsed in blank to be held by the PLEDGEE under the pledge as security for the payment of the aforementioned sum and interest thereon accruing. This stipulation did not effect the transfer of ownership to petitioner. It was merely in

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compliance with Article 2093 of the Civil Code, which requires that the thing pledged be placed in the possession of the creditor or a third person of common agreement; and Article 2095, which states that if the thing pledged are shares of stock, then the "instrument proving the right pledged" must be delivered to the creditor. Moreover, the fact that respondents allowed the petitioner to receive dividends pertaining to the shares was not meant to relinquish ownership thereof. As stated by respondent corporation, the same was done pursuant to an agreement between the petitioner and Respondents Sy Guiok and Sy Lim, following Article 2102 of the civil Code which provides: It the pledge earns or produces fruits, income, dividends, or interests, the creditor shall compensate what he receives with those which are owing him; but if none are owing him, or insofar as the amount may exceed that which is due, he shall apply it to the principal. Unless there is a stipulation to the contrary, the pledge shall extend to the interest and the earnings of the right pledged. Novation cannot be inferred from the mere fact that petitioner has not, since 1980, instituted any action to recover the shares. Such action is in fact premature, as the loan is still outstanding. Besides, as already pointed out, novation is never presumed or inferred.

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INSULAR LIFE vs. ROBERT YOUNG FACTS: In December, 1987, respondent Robert Young, together with his associates and co-respondents, acquired by purchase Home Bankers Savings and Trust Co., now petitioner Insular Savings Bank ("the Bank," for brevity), from the Licaros family for P65,000,000.00. On December, 1990, Benito Araneta, a stockholder of the Bank, signified his intention to purchase 99.82% of its outstanding capital stock for P340,000,000.00, subject to the condition that the ownership of all the shares will be consolidated in Young's name. On February 5, 1991, Araneta paid Young P14,000,000.00 as part of the downpayment.

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Insular Life in the same amount with an interest rate of 26% per annum to mature 120 days from execution. The Credit Agreement further provides that Insular Life shall have the prior right to purchase the Schedule I Shares (owned by Young) and the Schedule II Shares (owned by the other stockholders of the Bank), as well as the 250,000 shares which will be issued after the additional capital of P25,000,000.00 (payable from the proceeds of the loan) shall have been infused. On October 1, 1991, Insular Life and Insular Life Pension Fund formally informed Young of their intention to acquire 30% and 12%, respectively, of the Bank's outstanding shares, subject to due diligence audit and proper documentation.

In order to carry out the intended sale to Araneta, Young bought from Jorge Go and his group their 45% equity in the Bank for P153,000,000.00. In order to pay this amount, Young obtained a short-term loan of P170,000,000.00 from International Corporate Bank ("Interbank") to finance the purchase.

On October 11, 1991, Insular Life, through a team of auditors led by Mr. Wilfrido Patawaran, conducted a due diligence audit on the Bank pursuant to the MOA. The audit revealed several check-kiting operations which amounted to P340,000,000.00, an anomaly in which Young took responsibility.

However, Araneta backed out from the intended sale and demanded the return of his downpayment.

On October 21, 1991, Young signed a letter prepared by Atty. Jacinto Jimenez, counsel of Insular Life, addressed to Mr. Vicente R. Ayllon, Chairman of the Bank's Board of Directors, stating that due to business reverses, he shall not be able to pay his obligations under the Credit Agreement between him and Insular Life. Consequently, Young "unconditionally and irrevocably waive(s) the benefit of the period" of the loan (up to December 26, 1991) and Insular "may consider (his) obligations thereunder as defaulted." He likewise interposes no objection to Insular Life's exercise of its rights under the said agreement.

Meanwhile, Young's loan from Interbank became due, causing his serious financial problem. On August 27, 1991, Young and Insular Life entered into a Credit Agreement. Under its provisions, Insular Life extended a loan to Young in the amount of P200,000,000.00. To secure the loan, Young, acting in his behalf and as attorney-in-fact of the other stockholders, executed on the same day a Deed of Pledge over 1,324,864 shares which represented 99.82% of the outstanding capital stock of the Bank. The next day, he also executed a promissory note in favor of

Forthwith, Insular Life instructed its counsel to foreclose the pledge constituted upon the shares. The latter then sent Young a

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notice informing him of the sale of the shares in a public auction scheduled on October 28, 1991, and in the event that the shares are not sold, a second auction sale shall be held the next day, October 29. On October 28, 1991, only Insular Life submitted a bid, hence, the shares were not sold on that day. The next day, a second auction was held. Again, Insular Life was the sole bidder. Since the shares were not sold at the two public auctions, Insular Life appropriated to itself, not only the original 1,324,864 shares, but also the 250,000 shares subsequently issued by the Bank and delivered to Insular Life by way of pledge. Thus, Insular Life gave Young an acquittance of his entire claim. Thereafter, title to the said shares was consolidated in the name of Insular Life. On November 12, 1991, the Bangko Sentral ng Pilipinas' Supervision and Examination Sector approved Insular Life's request to maintain its present ownership of 99.82% of the Bank. On January 7, 1992, Young and his associates filed a complaint against the Bank, Insular Life and its counsel, Atty. Jacinto Jimenez, petitioners, for annulment of notarial sale. The complaint alleges, that the notarial sale conducted by petitioner Atty. Jacinto Jimenez is void as it does not comply with the requirement of notice of the second auction sale. ISSUE: W/N the foreclosure of the pledge is void. NO HELD: It is as error to declare that the auction sale is void since petitioners failed to send a separate notice for the second auction. Article 2112 of the Civil Code provides: "The creditor to whom the credit has not been satisfied in due time, may proceed before a Notary Public for the sale of the thing pledged. The sale shall be made at a

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public auction, and with notification to the debtor and the owner of the thing pledged in a proper case, stating the amount for which the public sale is to be held. If at the first auction the thing is not sold, a second one with the same formalities shall be held; and if at the second auction there is no sale either, the creditor may appropriate the thing pledged. In this case he shall be obliged to give an acquittance for his entire claim." Clearly, there is no prohibition contained in the law against the sending of one notice for the first and second public auction as was done here by petitioner Insular Life. The purpose of the law in requiring notice is to sufficiently apprise the debtor and the pledgor that the thing pledged to secure payment of the loan will be sold in a public auction and the proceeds thereof shall be applied to satisfy the debt. When petitioner Insular Life sent a notice to Young informing him of the public auction scheduled on October 28, 1991, and a second auction on the next day, October 29, in the event that the shares are not sold on the first auction, the purpose of the law was achieved. We thus reject respondents' argument that the term "second one" refers to a separate notice which requires the same formalities as the first notice.

MANILA SURETY vs. VELAYO FACTS: In 1953, Manila Surety & Fidelity Co., upon request of Rodolfo Velayo, executed a bond for P2,800.00 for the dissolution of a writ of attachment obtained by one Jovita Granados in a suit against Rodolfo Velayo in the Court of First Instance of Manila. Velayo undertook to pay the surety company an annual premium of P112.00; to indemnify the Company for any damage and loss of whatsoever kind and nature that it shall or may suffer, as well as reimburse the same for all money it should pay or become

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liable to pay under the bond including costs and attorneys' fees. As "collateral security and by way of pledge" Velayo also delivered four pieces of jewelry to the Surety Company "for the latter's further protection", with power to sell the same in case the surety paid or become obligated to pay any amount of money in connection with said bond, applying the proceeds to the payment of any amounts it paid or will be liable to pay, and turning the balance, if any, to the persons entitled thereto, after deducting legal expenses and costs. Judgment having been rendered in favor of Jovita Granados and against Rodolfo Velayo, and execution having been returned unsatisfied, the surety company was forced to pay P2,800.00 that it later sought to recoup from Velayo; and upon the latter's failure to do so, the surety caused the pledged jewelry to be sold, realizing therefrom a net product of P235.00 only. Thereafter and upon Velayo's failure to pay the balance, the surety company brought suit in Court. Velayo countered with a claim that the sale of the pledged jewelry extinguished any further liability on his part under Article 2115 of the 1950 Civil Code, which recites: Art. 2115. The sale of the thing pledged shall extinguish the principal obligation, whether or not the proceeds of the sale are equal to the amount of the principal obligation, interest and expenses in a proper case. If the price of the sale is more than said amount, the debtor shall not be entitled to the excess, unless it is otherwise agreed. If the price of the sale is less, neither shall the creditor be entitled to recover the deficiency, notwithstanding any stipulation to the contrary.

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ISSUE: Whether or not the sale of the pledged jewelry extinguished Velayo’s liability HELD: The core of the appealed decision is the following portion thereof: It is thus crystal clear that the main agreement between the parties is the Indemnity Agreement and if the pieces of jewelry mentioned by the defendant were delivered to the plaintiff, it was merely as an added protection to the latter. There was no understanding that, should the same be sold at public auction and the value thereof should be short of the undertaking, the defendant would have no further liability to the plaintiff. On the contrary, the last portion of the said agreement specifies that in case the said collateral should diminish in value, the plaintiff may demand additional securities. This stipulation is incompatible with the idea of pledge as a principal agreement. In this case, the status of the pledge is nothing more nor less than that of a mortgage given as a collateral for the principal obligation in which the creditor is entitled to a deficiency judgment for the balance should the collateral not command the price equal to the undertaking. It appearing that the collateral given by the defendant in favor of the plaintiff to secure this obligation has already been sold for only the amount of P235.00, the liability of the defendant should be limited to the difference between the amounts of P2,800.00 and P235.00 or P2,565.00. The above quoted reasoning of the appealed decision is unsound. The accessory character is of the essence of pledge and mortgage. As stated in Article 2085 of the 1950 Civil Code, an essential

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requisite of these contracts is that they be constituted to secure the fulfillment of a principal obligation, which in the present case is Velayo's undertaking to indemnify the surety company for any disbursements made on account of its attachment counterbond. Hence, the fact that the pledge is not the principal agreement is of no significance nor is it an obstacle to the application of Article 2115 of the Civil Code. The reviewed decision further assumes that the extinctive effect of the sale of the pledged chattels must be derived from stipulation. This is incorrect, because Article 2115, in its last portion, clearly establishes that the extinction of the principal obligation supervenes by operation of imperative law that the parties cannot override: If the price of the sale is less, neither shall the creditor be entitled to recover the deficiency notwithstanding any stipulation to the contrary. The provision is clear and unmistakable, and its effect cannot be evaded. By electing to sell the articles pledged, instead of suing on the principal obligation, the creditor has waived any other remedy, and must abide by the results of the sale. No deficiency is recoverable.

DEVELOPMENT BANK OF THE PHILIPPINES VS. COURT OF APPEALS, CELEBRADA MANGUBAT AND ABNER MANGUBAT (G.R. No. 110053, October 16, 1995) FACTS: On April 27, 1965, Pacifico Chica mortgaged the land to DBP to secure a loan of P6,000.00. However, he defaulted in the payment of the loan, hence DBP caused the extrajudicial foreclosure of the mortgage. In the auction sale held on September 9, 1970, DBP acquired the property as the highest bidder and was

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issued a certificate of sale on September 17, 1970 by the sheriff. The certificate of sale was entered in the Book of Unregistered Property on September 23, 1970. Pacifico Chica failed to redeem the property, and DBP consolidated its ownership over the same. On October 14, 1980, respondent spouses offered to buy the property for P18,599.99. DBP made a counter-offer of P25,500.00 which was accepted by respondent spouses. The parties further agreed that payment was to be made within six months thereafter for it to be considered as cash payment. On July 20, 1981, the deed of absolute sale, which is now being assailed herein, was executed by DBP in favor of respondent spouses. Said document contained a waiver of the seller's warranty against eviction. Thereafter, respondent spouses applied for an industrial tree planting loan with DBP. The latter required the former to submit a certification from the Bureau of Forest Development that the land is alienable and disposable. However, on October 29, 1981, said office issued a certificate attesting to the fact that the said property was classified as timberland, hence not subject to disposition. The loan application of respondent spouses was nevertheless eventually approved by DBP in the sum of P140,000.00, despite the aforesaid certification of the bureau, on the understanding of the parties that DBP woul work for the release of the land by the former Ministry of Natural Resources. To secure payment of the loan, respondent spouses executed a real estate mortgage over the land on March 17, 1982, which document was registered in the Registry of Deeds pursuant to Act No. 3344. However, DBP did not release the entire amount of the loan ostensibly because the release of the land from the then Ministry of Natural Resources had not been obtained. On July

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7, 1983, respondent spouses, as plaintiffs, filed a complaint against DBP in the trial court seeking the annulment of the subject deed of absolute sale on the ground that it belongs to the lands of the public domain. DBP averred that the annulment of the sale and the return of the purchase price to respondent spouses would redound to their benefit but would result in petitioner's prejudice, since it had already released P118,540.00 to the former while it would be left without any security for theP140,000.00 loan and that in the remote possibility that the land is reverted to the public domain, respondent spouses should be made to immediately pay, jointly and severally, the total amount of P118,540.00 with interest. RTC rendered judgment in favor of respondent spouses, annulling the deed of absolute sale. CA affirmed. ISSUE: [Main issues in this case] (1) WON private respondent spouses Celebrada and Abner Mangubat should be ordered to pay petitioner DBP their loan obligation due under the mortgage contract executed between them and DBP. YES. (2) WON petitioner should reimburse respondent spouses the purchase price of the property and the amount of P11,980.00 for taxes and expenses for the relocation Survey. (must be qualified) DBP should reimburse the spouses for the purchase price but not for taxes and expenses for recolaction. HELD 1: Considering that neither party questioned the legality and correctness of the judgment of the court a quo, as affirmed by respondent court, ordering the annulment of the deed of absolute sale, such decreed nullification of the document has already achieved finality. Turning now to the issue of whether or not private respondents should be made to pay

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petitioner their loan obligation amounting to P118,540.00, we answer in the affirmative. In its legal context, the contract of loan executed between the parties is entirely different and discrete from the deed of sale they entered into. The annulment of the sale will not have an effect on the existence and demandability of the loan. One who has received money as a loan is bound to pay to the creditor an equal amount of the same kind and quality. The fact that the annulment of the sale will also result in the invalidity of the mortgage does not have an effect on the validity and efficacy of the principal obligation, for even an obligation that is unsupported by any security of the debtor may also be enforced by means of an ordinary action. Where a mortgage is not valid, as where it is executed by one who is not the owner of the property, or the consideration of the contract is simulated or false, the principal obligation which it guarantees is not thereby rendered null and void. That obligation matures and becomes demandable in accordance with the stipulations pertaining to it. Under the foregoing circumstances, what is lost is only the right to foreclose the mortgage as a special remedy for satisfying or settling the indebtedness which is the principal obligation. In case of nullity, the mortgage deed remains as evidence or proof of a personal obligation of the debtor, and the amount due to the creditor may be enforced in an ordinary personal action. HELD 2: A contract which the law denounces as void is necessarily no contract whatever, and the acts of the parties in an effort to create one can in no wise bring about a change of their legal status. The parties and the subject matter of the contract remain in all particulars just as they did

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before any act was performed in relation thereto. An action for money had and received lies to recover back money paid on a contract, the consideration of which has failed. As a general rule, if one buys the land of another, to which the latter is supposed to have a good title, and, in consequence of facts unknown alike to both parties, he has no title at all, equity will cancel the transaction and cause the purchase money to be restored to the buyer, putting both parties in status quo. Thus, on both local and foreign legal principles, the return by DBP to respondent spouses of the purchase price, plus corresponding interest thereon, is ineluctably called for. However, despite that admission of respondent spouses’ list of damages as evidence, the Court agrees with petitioner that the same cannot constitute sufficient legal basis for an award of P4,000.00 and P7,980.00 as reimbursement for land taxes and expenses for the relocation survey, respectively. The list of damages was prepared extrajudicially by respondent spouses by themselves without any supporting receipts as bases thereof or to substantiate the same. That list, per se, is necessarily self-serving and, on that account, should have been declared inadmissible in evidence as the factum probans. In order that damages may be recovered, the best evidence obtainable by the injured party must be presented. Actual or compensatory damages cannot be presumed, but must be duly proved, and so proved with a reasonable degree of certainty. [Other Possible questions:] (1) Was the deed of sale void? YES. Considering that neither party questioned the legality and correctness of the judgment of the court a quo, as

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affirmed by respondent court, ordering the annulment of the deed of absolute sale, such decreed nullification of the document has already achieved finality. (2) Was there a contract of mortgage? NO, the fact of annulment of the sale resulted in the invalidity of themortgage, the subject property being classified as timberland. Hence, DBP had no title to the property. (3) Will the invalidity of the contract of mortgage affect the principal loan obligation? NO, since it is an accessory contract.

MARCELO R. SORIANO vs. SPOUSES RICARDO and ROSALINA GALIT (G.R. No. 156295, September 23, 2003) FACTS: Respondent Ricardo Galit contracted a loan from petitioner Marcelo Soriano amounting to P480,000.00. This loan was secured by a REM over a parcel of land covered by OCT. No. 569. When respondent defaulted in his obligation, Soriano filed a complaint for sum of money against him with the RTC of Balanga City. Upon failure of the respondent spouses Galit to file their answer, the trial court declared the spouses in default and it thereafter rendered judgment in favor of petitioner Soriano ordering the respondents to pay. The judgment became final and executory. Accordingly, the trial court issued a writ of execution in due course, by virtue of which, Deputy Sheriff Renato E. Robles levied on the following real properties of the Galit spouses: (1) A parcel of land covered by OCT No. T-569 (Homestead Patent No. 14692) situated in the Bo. of Tapulac, Orani, Bataan; (2)STORE/HOUSE – CONSTRUCTED on Lot No. 1103 made of strong materials G.I. roofing situated at Centro I, Orani, Bataan; and (3)BODEGA – constructed on Lot 1103, made of strong materials, G.I. roofing, situated in Centro I, Orani, Bataan. On December 23, 1998, petitioner

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emerged as the highest and only bidder with a bid price of P483,000.00.

property even if dealt with separately and apart from the land.

Thus, on February 4, 1999, Deputy Sheriff Robles issued a Certificate of Sale of Execution of Real Property. On April 23, 1999, petitioner caused the registration of the “Certificate of Sale on Execution of Real Property” with the Registry of Deeds.

In this case, considering that what was sold by virtue of the writ of execution issued by the trial court was merely the storehouse and bodega constructed on the parcel of land covered by Transfer Certificate of Title No. T-40785, which by themselves are real properties of respondents spouses, the same should be regarded as separate and distinct from the conveyance of the lot on which they stand.

Ten months from the time the Certificate of Sale on Execution was registered with the Registry of Deeds, petitioner moved for the issuance of a writ of possession which was granted by the RTC. This was, however, subsequently nullified by the Court of Appeals because it included a parcel of land (OCT No. T-40785) which was not among those explicitly enumerated in the Certificate of Sale issued by the Deputy Sheriff, but on which stand the immovables (the BODEGA and STORE/HOUSE) covered by the said Certificate. Petitioner contends that the sale of these immovables necessarily encompasses the land on which they stand. ISSUES: (1) WON the land on which the buildings levied upon in execution is necessarily included. NO. (2) WON the cert. of sale on execution of real property and the writ of possession are null and void despite the fact that they enjoy the presumption of regularity being public documents. YES. HELD: (1) Art. 4151 of the Civil Code enumerates land and buildings separately. This can only mean that a building is, by itself, considered immovable. Thus, it has been held that while it is true that a mortgage of land necessarily includes, in the absence of stipulation of the improvements thereon, buildings, still a building by itself may be mortgaged apart from the land on which it has been built. Such mortgage would be still a real estate mortgage for the building would still be considered immovable

(2) True, public documents by themselves may be adequate to establish the presumption of their validity. However, their probative weight must be evaluated not in isolation but in conjunction with other evidence adduced by the parties in the controversy, much more so in this case where the contents of a copy thereof subsequently registered. ART. 415. The following are immovable property: (1) Land, buildings, roads and constructions of all kinds adhered to the soil. xxxxxx (3) Everything attached to an immovable in a fixed manner, in such a way that it cannot be separated therefrom without breaking them material or deterioration of the object; (4) Statues, reliefs, paintings or other objects for use or ornamentation, placed in buildings or on lands by the owner of the immovable in such a manner that it reveals the intention to attach them permanently to the tenements; (5) Machinery, receptacles, instruments or implements intended by the owner of the tenement for an industry or works which may be carried on in a building or on a piece of land, and which tend directly to meet the needs of the said industry or works; (6) Animal houses, pigeon houses, beehives, fish ponds or breeding places of

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similar nature, in case their owner has placed them or preserves them with the intention to have them permanently attached to the land, and forming a permanent part of it; the animals in these places are also included; xxxxxx (9) Docks and structures which, though floating, are intended by their nature and object to remain at a fixed place on a river, lake or for documentation purposes is being contested. No reason has been offered how and why the questioned entry was subsequently intercalated in the copy of the certificate of sale subsequently registered with the Registry of Deeds. Absent any satisfactory explanation as to why said entry was belatedly inserted, the surreptitiousness of its inclusion coupled with the furtive manner of its intercalation casts serious doubt on the authenticity of petitioner’s copy of the Certificate of Sale. Thus, it has been held that while a public document like a notarized deed of sale is vested with the presumption of regularity, this is not a guarantee of the validity of its contents. It must be pointed out in this regard that the issuance of a Certificate of Sale is an end result of judicial foreclosure where statutory requirements are strictly adhered to; where even the slightest deviations therefrom will invalidate the proceeding and the sale. Among these requirements is an explicit enumeration and correct description of what properties are to be sold stated in the notice. The stringence in the observance of these requirements is such that an incorrect title number together with a correct technical description of the property to be sold and vice versa is deemed a substantial and fatal error which results in the invalidation of the sale. The certificate of sale is an accurate record of what properties were actually sold to satisfy the debt. The strictness in the observance of accuracy and correctness in

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the description of the properties renders the enumeration in the certificate exclusive. Thus, subsequently including properties which have not been explicitly mentioned therein for registration purposes under suspicious circumstances smacks of fraud. The explanation that the land on which the properties sold is necessarily included and, hence, was belatedly typed on the dorsal portion of the copy of the certificate subsequently registered is at best a lame excuse unworthy of belief. The appellate court correctly observed that there was a marked difference in the appearance of the typewritten words appearing on the first page of the copy of the Certificate of Sale registered with the Registry of Deeds[38] and those appearing at the dorsal portion thereof. Underscoring the irregularity of the intercalation is the clearly devious attempt to let such an insertion pass unnoticed by typing the same at the back of the first page instead of on the second page which was merely half-filled and could accommodate the entry with room to spare. DANILO D. MENDOZA, also doing business under the name and style of ATLANTIC EXCHANGE PHILIPPINES, vs. COURT OF APPEALS, PHILIPPINE NATIONAL BANK, FERNANDO MARAMAG, JR., RICARDO G. DECEPIDA and BAYANI A. BAUTISTA (G.R. No. 116710, June 25, 2001) . FACTS: Petitioner Danilo D. Mendoza is engaged in the domestic and international trading of raw materials and chemicals. He operates under the business name Atlantic Exchange Philippines (Atlantic). Sometime in 1978 he was granted by respondent Philippine National Bank (PNB) a 500,000.00 credit line and a 1,000,000.00 Letter of Credit/Trust Receipt (LC/TR) line. As security for the credit accommodations and for those which may thereinafter be

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granted, petitioner mortgaged to respondent PNB the following: 1) three (3) parcels of land with improvements 2) his house and lot and 3) several pieces of machinery and equipment in his Pasig cocochemical plant. Petitioner executed in favor of respondent PNB three (3) promissory notes covering the Five Hundred Thousand Pesos (P500,000.00) credit line. Petitioner made use of his LC/TR line to purchase raw materials from foreign importers. On March 9, 1981, he wrote a letter to respondent PNB requesting for the restructuring of his past due accounts into a five-year term loan and for an additional LC/TR line of Two Million Pesos (P2,000,000.00). According to the letter, because of the shut-down of his end-user companies and the huge amount spent for the expansion of his business, petitioner failed to pay to respondent bank his LC/TR accounts as they became due and demandable. PNB Mandaluyong replied on behalf of the respondent bank and required petitioner to submit documents its: 1) Audited Financial Statements for 1979 and 1980; 2) Projected cash flow (cash in - cash out) for five (5) years detailed yearly; and 3) List of additional machinery and equipment and proof of ownership thereof. On September 25, 1981, petitioner sent another letter addressed to PNB VicePresident Jose Salvador, regarding his request for restructuring of his loans. He offered respondent PNB the following proposals: 1) the disposal his house and lot and a vacant lot in order to pay the overdue trust receipts; 2) capitalization and conversion of the balance into a 5-year term loan payable semi-annually or on annual installments; 3) a new Two Million Pesos (P2,000,000.00) LC/TR line in order to enable Atlantic Exchange Philippines to operate at full capacity.

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The petitioner testified that respondent PNB Mandaluyong Branch found his proposal favorable and recommended the implementation of the agreement. However, Fernando Maramag, PNB Executive Vice-President, disapproved the proposed release of the mortgaged properties and reduced the proposed new LC/TR line to One Million Pesos (P1,000,000.00). Petitioner claimed he was forced to agree to these changes and that he was required to submit a new formal proposal and to sign two (2) blank promissory notes. According to petitioner, respondent PNB approved his proposal. He further claimed that he and his wife were asked to sign two (2) blank promissory note forms. According to petitioner, they were made to believe that the blank promissory notes were to be filled out by respondent PNB to conform with the 5-year restructuring plan allegedly agreed upon. Petitioner testified that respondent PNB allegedly contravened their verbal agreement by 1) affixing dates on the two (2) subject promissory notes to make them mature in two (2) years instead of five (5) years as supposedly agreed upon. Upon their failure to make good of the said loans Respondent PNB extra-judicially foreclosed the real and chattel mortgages, and the mortgaged properties were sold at public auction to respondent PNB, as highest bidder, for a total of Three Million Seven Hundred Ninety Eight Thousand Seven Hundred Nineteen Pesos and Fifty Centavos (P3,798,719.50). ISSUE: WON the foreclosure sale was proper. HELD: (The court found out that PNB did not categorically agree to petitioner’s proposal to extend the credit line to five years.)To the substantive issue of mortgate. Petitioner prays for the release

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of some of his movables being withheld by respondent PNB, alleging that they were not included among the chattels he mortgaged to respondent bank. However, petitioner did not present any proof as to when he acquired the subject movables and hence it is not to be believe that the same were "after acquired" chattels not covered by the chattel and real estate mortgages. In asserting its rights over the subject movables, respondent PNB relies on a common provision in the two (2) subject Promissory Notes Nos. 127/82 and 128/82 which states: In the event that this note is not paid at maturity or when the same becomes due under any of the provisions hereof, we hereby authorized the BANK at its option and without notice, to apply to the payment of this note, any and all moneys, securities and things of value which may be in its hands on deposit or otherwise belonging to me/us and for this purpose. We hereby, jointly and severally, irrevocably constitute and appoint the BANK to be our true Attorney-inFact with full power and authority for us in our name and behalf and without prior notice to negotiate, sell and transfer any moneys securities and things of value which it may hold, by public or private sale and apply the proceeds thereof to the payment of this note. It is clear, however, from the above-quoted provision of the said promissory notes that respondent bank is authorized, in case of default, to sell "things of value" belonging to the mortgagor "which may be on its hands for deposit or otherwise belonging to me/us and for this purpose." Besides, the petitioner executed not only a chattel mortgage but also a real estate mortgage to secure his loan obligations to

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respondent bank. A stipulation in the mortgage, extending its scope and effect to after-acquired property is valid and binding where the afteracquired property is in renewal of, or in substitution for, goods on hand when the mortgage was executed, or is purchased with the proceeds of the sale of such goods. More importantly, respondent bank makes a valid argument for the retention of the subject movables. Respondent PNB asserts that those movables were in fact "immovables by destination" under Art. 415 (5) of the Civil Code. It is an established rule that a mortgage constituted on an immovable includes not only the land but also the buildings, machinery and accessories installed at the time the mortgage was constituted as well as the buildings, machinery and accessories belonging to the mortgagor, installed after the constitution thereof.

SPOUSES VIOLA vs EQUITABLE (2008) FACTS: March 31, 1997 Spouses Leopoldo and Mercedita Viola of Leo-Mers Commercial, Inc. obtained a loan through a credit line facility in the maximum amount of P 4,700,000.00 from the Philippine Commercial International Bank (PCI Bank), which was later merged with Equitable Bank and became known as Equitable PCI Bank, Inc. The Credit Line Agreement stipulated that the loan would bear interest at the "prevailing PCI Bank lending rate" per annum on the principal obligation and a "penalty fee of three percent (3%) per month on the outstanding amount." To secure the payment of the loan, a ―Real Estate Mortgage over their 2 parcels of land in favor of PCI Bank was executed. Spouses Viola made partial payments which totaled P 3,669,210.67; PCI Bank contends however, that Spouses

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Viola made no further payments since Nov. 24, 2000 despite demand they failed to pay their outstanding obligation which as of September 30, 2002, totaled P14,024,623.22, broken down as follows: Principal obligation Past due interest from 11/24/00 to 09/30/02 at 15% interest Penalty at 3% per month from 03/31/98 to 02/23/02

P4,783,254.6 9

P1,345,290.3 8

P7,896,078.1 5 P14,024,623. 22

Thus, PCI Bank extrajudicially foreclosed the mortgage before the Regional Trial Court (RTC) and that the mortgaged properties were sold at a public auction. More than five months later or on October 8, 2003, petitioners filed a complaint for annulment of foreclosure sale. Petitioners alleged, inter alia, that 1. they had made substantial payments of P3,669,210.67 receipts of which were issued without respondent specifying "whether the payment was for interest, penalty or the principal obligation;" that based on respondent’s statement of account, not a single centavo of their payments was applied to the principal obligation; 2. that every time respondent sent them a statement of account and demand letters, they requested for a proper accounting for the purpose of determining their actual obligation, but all their requests were unjustifiably ignored on account of which they were forced to discontinue payment; 3. that "the foreclosure proceedings and auction sale were not only irregularly and prematurely held but were null and void because the mortgage debt is only P2,224,073.31 on the principal

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obligation and P1,455,137.36 on the interest, or a total of only P3,679,210.67 as of April 15, 2003, but the mortgaged properties were sold to satisfy an inflated and erroneous principal obligation of P4,783,254.69, plus 3% penalty fee per month or 33% per year and 15% interest per year, which amounted to P14,024,623.22 as of September 30, 2002;" 4. that "the parties never agreed and stipulated in the real estate mortgage contract" that the 15% interest per annum on the principal loan and the 3% penalty fee per month on the outstanding amount would be covered or secured by the mortgage; 5. that assuming respondent could impose such interest and penalty fee, the same are "exorbitant, unreasonable, iniquitous and unconscionable, hence, must be reduced;" and that respondent is only allowed to impose the legal rate of interest of 12% per annum on the principal loan absent any stipulation thereon. Respondent denied petitioners’ assertions, contending, inter alia, that the absence of stipulation in the mortgage contract securing the payment of 15% interest per annum on the principal loan, as well as the 3% penalty fee per month on the outstanding amount, is immaterial since the mortgage contract is "a mere accessory contract which must take its bearings from the principal Credit Line Agreement." The RTC upheld the position of the PCI Bank but reduced the interest on the principal loan from 15% to 12% per annum and the penalty fee per month on the outstanding amount from 3% to 1.5% per month. Accordingly, the court nullified the foreclosure proceedings and the Certificate of Sale subsequently issued, "without prejudice" to the holding anew of foreclosure proceedings based on the "recomputed amount" of the indebtedness, "if the circumstances so warrant."

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Spouses Viola filed a Motion for Reconsideration but it was denied. On appeal, the Court of Appeals (CA) dismissed the petition for lack of merit. ISSUE: WON the mortgage contract also secured the penalty fee per month on the outstanding amount as stipulated in the Credit Line Agreement? NO HELD: A mortgage must "sufficiently describe the debt sought to be secured, which description must not be such as to mislead or deceive, and an obligation is not secured by a mortgage unless it comes fairly within the terms of the mortgage. In the case at bar, the parties executed two separate documents on March 31, 1997 – the Credit Line Agreement granting the Client a loan through a credit facility in the maximum amount of P4,700,000.00, and the Real Estate Mortgage contract securing the payment thereof. Undisputedly, both contracts were prepared by respondent and written in fine print, single space. The Real Estate Mortgage contract states its coverage, thus: That for and in consideration of certain loans, credit and other banking facilities obtained x x x from the Mortgagee, the principal amount of which is PESOS FOUR MILLION SEVEN HUNDERED THOUSAND ONLY (P4,700,000.00) Philippine Currency, and for the purpose of securing the payment thereof, including the interest and bank charges accruing thereon, xxx The immediately-quoted provision of the mortgage contract does not specifically mention that, aside from the principal loan obligation, it also secures the payment of "a penalty fee of three percent (3%) per month of the outstanding amount to be computed from the day deficiency is

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incurred up to the date of full payment thereon," which penalty as the abovequoted portion of the Credit Line Agreement expressly stipulates. Since an action to foreclose "must limited to the amount mentioned in mortgage" and the penalty fee of 3% month of the outstanding obligation is mentioned in the mortgage, it must excluded from the computation of amount secured by the mortgage.

be the per not be the

Regarding CA decision that the phrase "including the interest and bank charges" in the mortgage contract "refers to the penalty charges stipulated in the Credit Line Agreement" is unavailing. "Penalty fee" is entirely different from "bank charges." The phrase "bank charges" is normally understood to refer to compensation for services. A "penalty fee" is likened to a compensation for damages in case of breach of the obligation. Being penal in nature, such fee must be specific and fixed by the contracting parties, unlike in the present case which slaps a 3% penalty fee per month of the outstanding amount of the obligation. Moreover, the "penalty fee" does not belong to the species of obligation enumerated in the mortgage contract, namely: "loans, credit and other banking facilities obtained x x x from the Mortgagee, . . . including the interest and bank charges, . . . the costs of collecting the same and of taking possession of and keeping the mortgaged properties, and all other expenses to which the Mortgagee may be put in connection with or as an incident to this mortgage . . ." In Philippine Bank of Communications v. Court of Appeals which raised a similar issue, this Court held: The sole issue in this case is whether, in the foreclosure of a real estate

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mortgage, the penalties stipulated in two promissory notes secured by the mortgage may be charged against the mortgagors as part of the sums secured, although the mortgage contract does not mention the said penalties. The court held, Indeed, a mortgage must sufficiently describe the debt sought to be secured, which description must not be such as to mislead or deceive, and an obligation is not secured by a mortgage unless it comes fairly within the terms of the mortgage. Under the rule of ejusdem generis, where a description of things of a particular class or kind is "accompanied by words of a generic character, the generic words will usually be limited to things of a kindred nature with those particularly enumerated . . . " A penalty charge does not belong to the species of obligations enumerated in the mortgage, hence, the said contract cannot be understood to secure the penalty. Regarding Respondent’s contention that absence of stipulation for the penalty fee in the mortgage contract is of no consequence as the deed of mortgage is merely an “accessory contract” that "must take its bearings from the principal Credit Line Agreement,". Such absence is significant as it creates an ambiguity between the two contracts, which ambiguity must be resolved in favor of petitioners and against respondent who drafted the contracts. Again, as stressed by the Court in Philippine Bank of Communications: A mortgage and a note secured by it are deemed parts of one transaction and are construed together, thus, an ambiguity is created when the notes provide for the payment of a penalty but the mortgage contract does not.

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Construing the ambiguity against the petitioner, it follows that no penalty was intended to be covered by the mortgage. Plainly, the petitioner can be as specific as it wants to be, yet it simply did not specify nor even allude to, that the penalty in the promissory notes would be secured by the mortgage. This can then only be interpreted to mean that the petitioner had no design of including the penalty in the amount secured. RTC decision AFFIRMED with MODIFICATION in that the "penalty fee" per month of the outstanding obligation is excluded in the computation of the amount secured by the Real Estate Mortgage executed by petitioners in respondent’s favor. POLICY: A mortgage must sufficiently describe the debt sought to be secured, which description must not be such as to mislead or deceive. An obligation is not secured by a mortgage unless it comes fairly within the terms of the mortgage.

TAN vs VALDEHUEZA (1975) FACTS: The parcel of land described in the first cause of action was the subject matter of the public auction sale held on May 6, 1955 at the Capitol Building in Oroquieta, Misamis Occidental, wherein the plaintiff was the highest bidder and as such a Certificate of Sale was executed by MR. VICENTE D. ROA who was then the Ex-Officio Provincial Sheriff in favor of LUCIA TAN the herein plaintiff. Due to the failure of defendant Arador Valdehueza to redeem the said land within the period of one year as being provided by law, MR. VICENTE D. ROA who was then the ExOfficio Provincial Sheriff executed an ABSOLUTE DEED OF SALE in favor of the plaintiff LUCIA TAN. Defendants ARADOR VALDEHUEZA and

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REDICULO VALDEHUEZA have executed two documents of DEED OF PACTO DE RETRO SALE in favor of the plaintiff herein, LUCIA TAN of two portions of a parcel of land which is described in the second cause of action with the total amount of ONE THOUSAND FIVE HUNDRED PESOS (P1,500.00). That from the execution of the Deed of Sale with right to repurchase mentioned in the second cause of action, defendants Arador Valdehueza and Rediculo Valdehueza remained in the possession of the land; that land taxes to the said land were paid by the same said defendants. Tan filed a complaint forinjunction on July 24, 1957 against the Valdehuezas, to enjoin them "from entering the abovedescribed parcel of land and gathering the nuts therein ...." This complaint and the counterclaim were subsequently dismissed for failure of the parties "to seek for the immediate trial thereof, thus evincing lack of interest on their part to proceed with the case. The Deed of Pacto de Retro referred to in stipulation of fact no. 5 as "Annex D" (dated August 5, 1955) was not registered in the Registry of Deeds, while the Deed of Pacto de Retro referred to as "Annex E" (dated March 15, 1955) was registered. On the basis of the stipulation of facts and the annexes, the trial court rendered judgment, as follows: Declaring Lucia Tan the absolute owner of the property described in the first cause of action of the amended complaint; And as regards the land covered by deed of pacto de retro annex 'D', the herein defendants Arador Valdehueza and Rediculo Valdehueza are hereby ordered to pay the plaintiff the amount of P300 with legal interest of 6% from August 15, 1966, the said land serving as guaranty of the

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said amount of payment; ISSUE: Was there a valid mortgage? (YES) HELD: The trial court treated the registered deed of pacto de retro as an equitable mortgage but considered the unregistered deed of pacto de retro "as a mere case of simple loan, secured by the property thus sold under pacto de retro," on the ground that no suit lies to foreclose an unregistered mortgage. It would appear that the trial judge had not updated himself on law and jurisprudence; he cited, in support of his ruling, article 1875 of the old Civil Code and decisions of this Court circa 1910 and 1912. Under article 1875 of the Civil Code of 1889, registration was a necessary requisite for the validity of a mortgage even as between the parties, but under article 2125 of the new Civil Code (in effect since August 30,1950), this is no longer so. If the instrument is not recorded, the mortgage is nonetheless binding between the parties. (Article 2125, 2nd sentence). The Valdehuezas having remained in possession of the land and the realty taxes having been paid by them, the contracts which purported to be pacto de retro transactions are presumed to be equitable mortgages, 5 whether registered or not, there being no third parties involved. ISSUE ON THE PROCEEDS OF THE HARVEST The Valdehuezas claim that their answer to the complaint of the plaintiff affirmed that they remained in possession of the land and gave the proceeds of the harvest to the plaintiff; it is thus argued that they would suffer double prejudice if they are to pay legal interest on the amounts stated in the pacto de retro contracts, as the lower court has directed, and that therefore the court should have ordered evidence to be

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adduced on the harvest. The record does not support this claim. Nowhere in the original and the amended complaints is an allegation of delivery to the plaintiff of the harvest from the land involved in the second cause of action. Hence, the defendants' answer had none to affirm. In submitting their stipulation of facts, the parties prayed "for its approval and maybe made the basis of the decision of this Honorable Court. " (emphasis supplied) This, the court did. It cannot therefore be faulted for not receiving evidence on who profited from the harvest. ISSUE ON LEGAL INTEREST The imposition of legal interest on the amounts subject of the equitable mortgages, P1,200 and P300, respectively, is without legal basis, for, "No interest shall be due unless it has been expressly stipulated in writing." (Article 1956, new Civil Code) Furthermore, the plaintiff did not pray for such interest; her thesis was a consolidation of ownership, which was properly rejected, the contracts being equitable mortgages. With the definitive resolution of the rights of the parties as discussed above, we find it needless to pass upon the plaintiffs petition for receivership. Should the circumstances so warrant, she may address the said petition to the court a quo. ACCORDINGLY, the judgment a quo is hereby modified, as follows: (a) the amounts of P1,200 and P300 mentioned in Annexes E and D shall bear interest at six percent per annum from the finality of this decision; and (b) the parcel of land covered by Annex D shall be treated in the same manner as that covered by Annex E, should the defendants fail to pay to the plaintiff the sum of P300 within 90 days from the finality of this decision. In all other respects the judgment is affirmed. No

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costs.

STATE INVESTMENT vs CA (1996) FACTS: On October 15, 1969, a contract to sell was executed by Spouses Canuto and Ma. Aranzazu Oreta, and the Solid Homes, Inc. (SOLID), involving a parcel of land in Capitol Park Homes Subd., in Quezon City for a consideration of P 39,347.00. Upon signing of the contract, the spouses made payment amounting to P 7,869.40, with the agreement that the balance shall be payable in monthly installments of P 451.70, at 12% interest p.a. On November 4, 1976. SOLID executed several real estate mortgage contracts in favor of State Investment Homes, Inc. (STATE) over its subdivided parcels of land, one of which is the subject lot. For failure of SOLID to comply with its mortgage obligations contract, STATE extrajudicially foreclosed the mortgaged properties including the subject lot on April 6, 1983, with the corresponding certificate of sale issued therefore to STATE. On June 23, 1984; SOLID thru a MOA negotiated for the deferment of consolidation of ownership over the foreclosed properties by committing to redeem the properties from STATE.Thereafter, the spouses filed a complaint before the HLURB, against SOLID and STATE for failure on the part of SOLID to execute the necessary absolute deed of sale as well as to deliver the title to said property despite full payment of purchase price. In defense, SOLID alleged that the obligation under the contract to sell has become so difficult that they be released from the said obligation by substituting subject lot with another suitable residential lot from another subdivision, which they

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operate. STATE averred that unless SOLID pays the redemption price of P 125,195.00, it has a “right to hold on and not release the foreclosed properties.” The OAALA rendered a decision ordering STATE to execute a deed of conveyance in favor of the spouses, and SOLID to pay STATE the portion of its loan, which corresponds to the value of the lot as collateral. ISSUE: Who between the Spouses Oreta and STATE have better right over the subject lot? (SPOUSES ORETA) HELD: STATE's registered mortgage right over the property is inferior to that of respondents-spouses' unregistered right. The unrecorded sale between respondents-spouses and SOLID is preferred for the reason that if the original owner (SOLID, in this case) had parted with his ownership of the thing sold then he no longer had ownership and free disposal of that thing so as to be able to mortgage it again. Registration of the mortgage is of no moment since it is understood to be without prejudice to the better right of third parties. Petitioner asserts that a purchaser or mortgagee of land/s covered under the Torrens System "is not required to do more than rely upon the certificate of title for it is enough that the purchaser or mortgagee examines the pertinent certificate of title without need of looking beyond such title." As a general rule, where there is nothing in the certificate of title to indicate any cloud or vice in the ownership of the property, or any encumbrance thereon, the purchaser is not required to explore further than what the Torrens Title upon its face indicates in quest for any hidden defect or inchoate right that may subsequently defeat his right thereto. This rule, however, admits of an exception as where the purchaser or mortgagee, has knowledge of a defect or lack of title in his vendor, or that he was

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aware of sufficient facts to induce a reasonably prudent man to inquire into the status of the title of the property in litigation. In this case, petitioner was well aware that it was dealing with SOLID, a business entity engaged in the business of selling subdivision lots. In fact, the OAALA found that at the time the lot was mortgaged, respondent State Investment House Inc., [now petitioner] had been aware of the lot's location and that the said lot formed part of Capital Park/Homes Subdivision.” In Sunshine Finance and Investment Corp. v. Intermediate Appellate Court, the Court noting petitioner therein to be a financing corporation, deviated from the general rule that a purchaser or mortgagee of a land is not required to look further that what appears on the face of the Torrens Title. Thus: Nevertheless, we have to deviate from the general rule because of the failure of the petitioner in this case to take the necessary precautions to ascertain if there was any flaw in the title of the mortgage. The petitioner is an investment and financing corporation. We presume it is experienced in its business. Ascertainment of the status and condition of properties offerred to it as security for the loans it extends must be a standard and indispensable part of its operations. Surely, it cannot simply rely on an examination of a Torrens certificate to determine what the subject property looks like as its condition is not apparent in the document. The land might be in a depressed area. There might be squatters on it. It might be easily inundated. It might be an interior lot, without convenient access. These and other similar factors determine the value of the property and so should be of practical concern to the petitioner. xxx xxx xxx Our conclusion might have been different if the mortgagee were an ordinary individual

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or company without the expertise of the petitioner in the mortgage and sale of registered land or if the land mortgaged were some distance from the mortgagee and could not be conveniently inspected. But there were no such impediments in this case. The facilities of the petitioner were not so limited as to prevent it from making a more careful examination of the land to assure itself that there were no unauthorized persons in possession. The above-enunciated rule should apply in this case as petitioner admits of being a financing institution. 11We take judicial notice of the uniform practice of financing institutions to investigate, examine and assess the real property offered as security for any loan application especially where, as in this case, the subject property is a subdivision lot located at Quezon City, M.M. It is a settled rule that a purchaser or mortgagee cannot close its eyes to facts which should put a reasonable man upon his guard, and then claim that he acted in good faith under the belief that there was no defect in the title of the vendor or mortgagor. Petitioner's constructive knowledge of the defect in the title of the subject property, or lack of such knowledge due to its negligence, takes the place of registration of the rights of respondents-spouses. Respondent Court thus correctly ruled that petitioner was not a purchaser or mortgagee in good faith; hence petitioner can not solely rely on what merely appears on the face of the Torrens Title.

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PHILIPPINE NATIONAL BANK, AS THE ATTORNEY-IN-FACT OF OPAL PORTFOLIO INVESTMENTS (SPV-AMC), INC. vs. MERCEDES CORPUZ, REPRESENTED BY HER ATTORNEY-INFACT VALENTINA CORPUZ FACTS: On October 4, 1974 respondent Mercedes Corpuz delivered her owner’s duplicate copy of Transfer Certificate of Title (TCT) 32815 to Dagupan City Rural Bank as security against any liability she might incur as its cashier. She later left her job and went to the United States. On October 24, 1994 the rural bank where she worked cancelled its lien on Corpuz’s title, she having incurred no liability to her employer. Without Corpuz’s knowledge and consent, however, Natividad Alano, the rural bank’s manager, turned over Corpuz’s title to Julita Camacho and Amparo Callejo. Conniving with someone from the assessor’s office, Alano, Camacho, and Callejo prepared a falsified deed of sale, making it appear that on February 23, 1995 Corpuz sold her land to one "Mary Bondoc" for P50,000.00. They caused the registration of the deed of sale, resulting in the cancellation of TCT 32815 and the issuance of TCT 63262 in Bondoc’s name. About a month later or on March 27, 1995 the trio executed another fictitious deed of sale with "Mary Bondoc" selling the property to the spouses Rufo and Teresa Palaganas for only P15,000.00. This sale resulted in the issuance of TCT 63466 in favor of the Palaganases. Nine days later or on April 5, 1995 the Palaganases executed a deed of sale in favor of spouses Virgilio and Elena Songcuan for P50,000.00, resulting in the issuance of TCT 63528. Finally, four months later or on August 10, 1995 the Songcuans took out a loan of P1.1 million from petitioner Philippine National Bank (PNB) and, to secure payment, they

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executed a real estate mortgage on their title. Before granting the loan, the PNB had the title verified and the property inspected. On November 20, 1995 respondent Corpuz filed, through an attorney-in-fact, a complaint before the Dagupan Regional Trial Court (RTC) against Mary Bondoc, the Palaganases, the Songcuans, and petitioner PNB, asking for the annulment of the layers of deeds of sale covering the land, the cancellation of TCTs 63262, 63466, and 63528, and the reinstatement of TCT 32815 in her name. On June 29, 1998 the RTC rendered a decision granting respondent Corpuz’s prayers. This prompted petitioner PNB to appeal to the Court of Appeals (CA). On July 31, 2007 the CA affirmed the decision of the RTC and denied the motion for its reconsideration, prompting PNB to take recourse to this Court. ISSUE: The sole issue presented in this case is whether or not petitioner PNB is a mortgagee in good faith, entitling it to its lien on the title to the property in dispute. RULING: Petitioner PNB points out that, since it did a credit investigation, inspected the property, and verified the clean status of the title before giving out the loan to the Songcuans, it should be regarded as a mortgagee in good faith. PNB claims that the precautions it took constitute sufficient compliance with the due diligence required of banks when dealing with registered lands. As a rule, the Court would not expect a mortgagee to conduct an exhaustive investigation of the history of the mortgagor’s title before he extends a loan.1 But petitioner PNB is not an ordinary mortgagee; it is a bank.2 Banks are expected to be more cautious than ordinary individuals in dealing with lands, even registered ones, since the business of banks is imbued with public interest. It is

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of judicial notice that the standard practice for banks before approving a loan is to send a staff to the property offered as collateral and verify the genuineness of the title to determine the real owner or owners. One of the CA’s findings in this case is that in the course of its verification, petitioner PNB was informed of the previous TCTs covering the subject property. And the PNB has not categorically contested this finding. It is evident from the faces of those titles that the ownership of the land changed from Corpuz to Bondoc, from Bondoc to the Palaganases, and from the Palaganases to the Songcuans in less than three months and mortgaged to PNB within four months of the last transfer. The above information in turn should have driven the PNB to look at the deeds of sale involved. It would have then discovered that the property was sold for ridiculously low prices: Corpuz supposedly sold it to Bondoc for justP50,000.00; Bondoc to the Palaganases for just P15,000.00; and the Palaganases to the Songcuans also for justP50,000.00. Yet the PNB gave the property an appraised value of P781,760.00. Anyone who deliberately ignores a significant fact that would create suspicion in an otherwise reasonable person cannot be considered as an innocent mortgagee for value. The Court finds no reason to reverse the CA decision.

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CANLAS VS. CA FACTS: The private respondent own several parcels of land located in Quezon City for which he is the registered owner. He secured loans from L and R corporations and executed deeds of mortgage over the parcels of land for the security of the same. Upon the maturity of said loans, the firm initiated an extrajudicial foreclosure of the properties in question after private respondent failed to pay until maturity. The private respondent filed a complaint for injunction over the said foreclosure and for redemption of the parcels of land. Two years after the filing of the petition, private respondent and L and R corporation entered into a compromise agreement that renders the former to be insured another year for the said properties. Included in the stipulations were the attorney’s fees amounting to Php 100,000.00. The private respondent however, remained to be in turmoil when it came to finances and was apparently unable to pay and secure the attorney’s fees, more so the redemption liability. Relief was discussed by petitioner and private respondent executed a document to redeem the parcels of land and to register the same to his name. Allegations were made by the private respondent claiming the parcels of land to his name but without prior notice, the properties were already registered under the petitioner’s name. The private respondent calls for a review and for the court to act on the said adverse claim by petitioner on said certificates for the properties consolidated by the redemption price he paid for said properties. The private respondent filed a suit for the annulment of judgment in the Court of appeals which ruled over the same. ISSUE: whether the petitioner is on solid ground on the reacquisition over the said properties.

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RULING: By Atty. Canlas' own account, "due to lack of paying capacity of respondent Herrera, no financing entity was willing to extend him any loan with which to pay the redemption price of his mortgaged properties and petitioner's P100,000.00 attorney's fees awarded in the Compromise Judgment," a development that should have tempered his demand for his fees. For obvious reasons, he placed his interests over and above those of his client, in opposition to his oath to "conduct himself as a lawyer ... with all good fidelity ... to [his] clients." The Court finds the occasion fit to stress that lawyering is not a moneymaking venture and lawyers are not merchants, a fundamental standard that has, as a matter of judicial notice, eluded not a few law advocates. The petitioner's efforts partaking of a shakedown" of his own client are not becoming of a lawyer and certainly, do not speak well of his fealty to his oath to "delay no man for money." We are not, however, condoning the private respondent's own shortcomings. In condemning Atty. Canlas monetarily, we cannot overlook the fact that the private respondent has not settled his liability for payment of the properties. To hold Atty. Canlas alone liable for damages is to enrich said respondent at the expense of his lawyer. The parties must then set off their obligations against the other.

AGRICULTURAL CREDIT COOPERATIVE ASSOCIATION OF HINIGARAN vs. ESTANISLAO YULO YUSAY, ET AL. FACTS: July 20, 1952, Rafaela Yulo executed in favor of the movant a mortgage for P33,626.29, due from her, her mother, sisters, brothers, and others, which amount she assumed to pay to the movant. A motion was presented to the court by the movant demanding the surrender of the owner's duplicate

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certificate of title that he may annotate said mortgage at the back of the certificate. Estanislao Yusay, a part owner of the lot, opposed the petition on the ground that he is owner of a part of the property in question; that the granting of the motion would operate to his prejudice, as he has not participated in the mortgage cited in the motion; that Rafaela Yulo is dead; that the motion is not verified and movant's rights have lapsed by prescription. Finally it is argued that his opposition raises a controversial matter which the court has no jurisdiction to pass upon. Margarita, Maria, Elena and Pilar, all surnamed Yulo, joined the oppositor Estanislao Yusay, raising the same objections interposed by Yusay.

recorded only four months after the termination of said proceedings, so that the claim of movant has been reduced to the character of a mere money claim, not a mortgage, hence the mortgage may not be registered. In the first place, as the judge below correctly ruled, the proceeding to register the mortgage does not purport to determine the supposed invalidity of the mortgage or its effect. Registration is a mere ministerial act by which a deed, contract or instrument is sought to be inscribed in the records of the Office of the Register of Deeds and annotated at the back of the certificate of title covering the land subject of the deed, contract or instrument.

The existence of the mortgage is not disputed, and neither is the fact that the mortgagor Rafaela Yulo is part owner of Lot No. 855 of the Cadastral Survey of Pontevedra. The oppositors do not dispute that she is such a part owner, and their main objection to the petition is that as part owners of the property, the annotation of the mortgage on the common title will affect their rights.

The registration of a lease or mortgage, or the entry of a memorial of a lease or mortgage on the register, is not a declaration by the state that such an instrument is a valid and subsisting interest in land; it is merely a declaration that the record of the title appears to be burdened with the lease or mortgage described, according to the priority set forth in the certificate.

ISSUE: WON as part owners of the property, the annotation of the mortgage on the common title will affect their (Yusay) rights.

The mere fact that a lease or mortgage was registered does not stop any party to it from setting up that it now has no force or effect. (Niblack, pp. 134-135, quoted in Francisco Land Registration Act, l950 ed., p. 348.)

RULING: The court held that even if the ownership of the deceased Rafaela Yulo over the portion of the lot in question and the validity of the mortgage are disputed, such invalidity of the mortgage is no proof of the non-existence of the mortgage nor a ground for objecting to its registration, citing the case of Register of Deeds of Manila vs. Maxima Tinoco Vda. de Cruz, et, al., 95 Phil., 818; 53 Off. Gaz., 2804. In his Brief before this Court, counsel for appellants argue that the mortgage sought to be registered was not recorded before the closing of the intestate proceedings of the deceased mortgagor, but was so

The court below, in ordering the registration and annotation of the mortgage, did not pass on its invalidity or effect. As the mortgage is admittedly an act of the registered owner, all that the judge below did and could do, as a registration court, is to order its registration and annotation on the certificate of title covering the land mortgaged. By said order the court did not pass upon the effect or validity of the mortgage — these can only be determined in an ordinary case before the courts, not before a court acting merely as a registration court, which did not have

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the jurisdiction to pass upon the alleged effect or validity.

that the loan did not redound to the benefit of the family.

Wherefore, the order appealed from is hereby affirmed, with costs against oppositors-appellants. So ordered.

In its answer, PNB prays for the dismissal of the complaint for lack of cause of action, and insists that it was plaintiffs-appellees’ own acts of omission/connivance that bar them from recovering the subject property on the ground of estoppel, laches, abandonment and prescription.

JOE A. ROS and ESTRELLA AGUETE vs. PHILIPPINE NATIONAL BANK LAOAG BRANCH G.R. No. 170166 (April 6, 2011) FACTS: On January 13, 1983, spouses Jose A. Ros and Estrella Aguete filed a complaint for the annulment of the Real Estate Mortgage and all legal proceedings taken thereunder against PNB, Laoag Branch before the Court of First Instance, Ilocos Norte. The averments in the complaint disclosed that plaintiff-appellee Joe A. Ros obtained a loan of P115,000.00 from PNB Laoag Branch on October 14, 1974 and as security for the loan, plaintiff-appellee Ros executed a real estate mortgage involving a parcel of land – Lot No. 9161 of the Cadastral Survey of Laoag, with all the improvements thereon described under Transfer Certificate of Title No. T-9646. Upon maturity, the loan remained outstanding. As a result, PNB instituted extrajudicial foreclosure proceedings on the mortgaged property. After the lapse of one (1) year without the property being redeemed, the property was consolidated and registered in the name of PNB, Laoag Branch on August 10, 1978. Claiming that she has no knowledge of the loan obtained by her husband nor she consented to the mortgage instituted on the conjugal property – a complaint was filed by Estrella Aguete to annul the proceedings pertaining to the mortgage, sale and consolidation of the property – interposing the defense that her signatures affixed on the documents were forged and

On 29 June 2001, the trial court rendered its Decision in favor of petitioners. The trial court declared that Aguete did not sign the loan documents, did not appear before the Notary Public to acknowledge the execution of the loan documents, did not receive the loan proceeds from PNB, and was not aware of the loan until PNB notified her in 14 August 1978 that she and her family should vacate the mortgaged property because of the expiration of the redemption period. Under the Civil Code, the effective law at the time of the transaction, Ros could not encumber any real property of the conjugal partnership without Aguete’s consent. Aguete may, during their marriage and within ten years from the transaction questioned, ask the courts for the annulment of the contract her husband entered into without her consent, especially in the present case where her consent is required. On 17 October 2005, the appellate court rendered its Decision and granted PNB’s appeal. The appellate court reversed the trial court’s decision, and dismissed petitioners’ complaint. The appellate court stated that the trial court concluded forgery without adequate proof. The appellate court declared that Aguete affixed her signatures on the documents knowingly and with her full consent.

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Assuming arguendo that Aguete did not give her consent to Ros’ loan, the appellate court ruled that the conjugal partnership is still liable because the loan proceeds redounded to the benefit of the family. The records of the case reveal that the loan was used for the expansion of the family’s business. Therefore, the debt obtained is chargeable against the conjugal partnership. ISSUE: Whether or not the real estate mortgage was valid? YES HELD: The Civil Code was the applicable law at the time of the mortgage. The subject property is thus considered part of the conjugal partnership of gains, as provided under Articles 153, 160, 161, 166 and 173 of the Civil Code. There is no doubt that the subject property was acquired during Ros and Aguete’s marriage. There is also no doubt that Ros encumbered the subject property when he mortgaged it for P115,000.00. PNB Laoag does not doubt that Aguete, as evidenced by her signature, consented to Ros’ mortgage to PNB of the subject property. On the other hand, Aguete denies ever having consented to the loan and also denies affixing her signature to the mortgage and loan documents. The husband cannot alienate or encumber any conjugal real property without the consent, express or implied, of the wife. Should the husband do so, then the contract is voidable. Article 173 of the Civil Code allows Aguete to question Ros’ encumbrance of the subject property. Annulment will be declared only upon a finding that the wife did not give her consent. In the present case, we follow the conclusion of the appellate court and rule that Aguete gave her consent to Ros’ encumbrance of the subject property.

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The documents disavowed by Aguete are acknowledged before a notary public, hence they are public documents. Every instrument duly acknowledged and certified as provided by law may be presented in evidence without further proof, the certificate of acknowledgment being prima facie evidence of the execution of the instrument or document involved. The execution of a document that has been ratified before a notary public cannot be disproved by the mere denial of the alleged signer. PNB was correct when it stated that petitioners’ omission to present other positive evidence to substantiate their claim of forgery was fatal to petitioners’ cause. Petitioners did not present any corroborating witness, such as a handwriting expert, who could authoritatively declare that Aguete’s signatures were really forged. A notarized document carries the evidentiary weight conferred upon it with respect to its due execution, and it has in its favor the presumption of regularity which may only be rebutted by evidence so clear, strong and convincing as to exclude all controversy as to the falsity of the certificate. Absent such, the presumption must be upheld. Ros himself cannot bring action against PNB, for no one can come before the courts with unclean hands. In their memorandum before the trial court, petitioners themselves admitted that Ros forged Aguete’s signatures. The application for loan shows that the loan would be used exclusively "for additional working [capital] of buy & sell of garlic & virginia tobacco." In her testimony, Aguete confirmed that Ros engaged in such business, but claimed to be unaware whether it prospered. Aguete was also aware of loans contracted by Ros, but did not know where he "wasted the money."

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Debts contracted by the husband for and in the exercise of the industry or profession by which he contributes to the support of the family cannot be deemed to be his exclusive and private debts. If the husband himself is the principal obligor in the contract, i.e., he directly received the money and services to be used in or for his own business or his own profession, that contract falls within the term "x x x x obligations for the benefit of the conjugal partnership." Here, no actual benefit may be proved. It is enough that the benefit to the family is apparent at the signing of the contract. From the very nature of the contract of loan or services, the family stands to benefit from the loan facility or services to be rendered to the business or profession of the husband. It is immaterial, if in the end, his business or profession fails or does not succeed. Simply stated, where the husband contracts obligations on behalf of the family business, the law presumes, and rightly so, that such obligation will redound to the benefit of the conjugal partnership. Thus, Ros' loan redounded to the benefit of the family and thus, the debt is chargeable to the conjugal partnership.

PRODUCERS BANK OF THE PHILIPPINES vs. EXCELSA INDUSTRIES, INC. G.R. No. 152071 (May 8, 2009) FACTS: Respondent Excelsa Industries, Inc. is a manufacturer and exporter of fuel products, particularly charcoal briquettes, as an alternative fuel source. Sometime in January 1987, respondent applied for a packing credit line or a credit export advance with petitioner Producers Bank of the Philippines, a banking institution duly organized and existing under Philippines laws. The application was supported by

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Letter of Credit No. M3411610NS2970 dated 14 October 1986. Kwang Ju Bank, Ltd. of Seoul, Korea issued the letter of credit through its correspondent bank, the Bank of the Philippine Islands, in the amount of US$23,000.00. T.L. World Development Corporation, who was the original beneficiary of the letter of credit, transferred to respondent all its rights and obligations under the said letter of credit. Petitioner approved respondent’s application for a packing credit line in the amount of P300,000.00, of which about P96,000.00 in principal remained outstanding. Respondent executed the corresponding promissory notes evidencing the indebtedness. Prior to the application for the packing credit line, respondent had obtained a loan from petitioner in the form of a bill discounted and secured credit accommodation in the amount of P200,000.00, of which P110,000.00 was outstanding at the time of the approval of the packing credit line. The loan was secured by a real estate mortgage dated 05 December 1986 over respondent’s properties. The real estate mortgage contained the following clause: For and in consideration of those certain loans, overdraft and/or other credit accommodations on this date obtained from the MORTGAGEE, and to secure the payment of the same, the principal of all of which is hereby fixed at P500,000, Philippine Currency, as well as those that the MORTGAGEE may hereafter extend to the MORTGAGOR, including interest and expenses or any other obligation owing to the MORTGAGEE, the MORTGAGOR does hereby transfer and convey by way of mortgage unto the MORTGAGEE, its successors or assigns, the parcels of land which are described in the list inserted on the back of this document, and/or appended hereto, together with all the

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buildings and improvements now existing or which may hereafter be erected or constructed thereon, of which the MORTGAGOR declares that he/it is the absolute owner, free from all liens and encumbrances. On 17 March 1987, respondent presented for negotiation to petitioner drafts drawn under the letter of credit and the corresponding export documents in consideration for its drawings in the amounts of US$5,739.76 and US$4,585.79. Petitioner purchased the drafts and export documents by paying respondent the peso equivalent of the drawings. The purchase was subject to the conditions laid down in two separate undertakings by respondent dated 17 March 1987 and 10 April 1987. On 24 April 1987, Kwang Ju Bank, Ltd. notified petitioner through cable that the Korean buyer refused to pay respondent’s export documents on account of typographical discrepancies. Kwang Ju Bank, Ltd. returned to petitioner the export documents. Upon learning about the Korean importer’s non-payment, respondent sent petitioner a letter dated 27 July 1987, informing the latter that respondent had brought the matter before the Korea Trade Court and that it was ready to liquidate its past due account with petitioner. Respondent sent another letter dated 08 September 1987, reiterating the same assurance. In a letter 05 October 1987, Kwang Ju Bank, Ltd. informed petitioner that it would be returning the export documents on account of the non-acceptance by the importer. Petitioner demanded from respondent the payment of the peso equivalent of the export documents, plus interest and other charges, and also of the other due and unpaid loans. Due to respondent’s failure to heed the demand, petitioner moved for the extrajudicial foreclosure on the real

estate mortgage properties.

over

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respondent’s

At the public auction held on 05 January 1988, the Sheriff of Antipolo, Rizal issued a Certificate of Sale in favor of petitioner as the highest bidder. The certificate of sale was registered on 24 March 1988. Subsequently, petitioner executed an affidavit of consolidation over the foreclosed properties after respondent failed to redeem the same. As a result, the Register of Deeds of Marikina issued new certificates of title in the name of petitioner. On 17 November 1989, respondent instituted an action for the annulment of the extrajudicial foreclosure with prayer for preliminary injunction and damages against petitioner and the Register of Deeds of Marikina. Docketed as Civil Case No. 1587-A, the complaint was raffled to Branch 73 of the RTC of Antipolo, Rizal. The complaint prayed, among others, that the defendants be enjoined from causing the transfer of ownership over the foreclosed properties from respondent to petitioner. On 18 December 1997, the RTC rendered a decision upholding the validity of the extrajudicial foreclosure and ordering the issuance of a writ of possession in favor of petitioner. The Court of Appeals then rendered the assailed decision reversing the decision of the RTC. ISSUE: 1) Whether or not Excelsa is liable for the dishonor of the draft and export - YES 2) Whether or not the real estate mortgage also served as security for respondent's drafts that were not accepted and paid by Kwang Ju Bank, Ltd. - YES 3) Whether or not extrajudicial foreclosure of the mortgage may be invalidated for lack of notice to respondent - NO 4) Whether or not respondent may still question the foreclosure sale - NO

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HELD: 1) Excelsa is liable. Much of the discussion has revolved around who should be liable for the dishonor of the draft and export documents. In the two undertakings executed by respondent as a condition for the negotiation of the drafts, respondent held itself liable if the drafts were not accepted. The two undertakings signed by respondent are similarly-worded and contained respondent’s express warranties, to wit: In consideration of your negotiating the above described draft(s), we hereby warrant that the said draft(s) and accompanying documents thereon are valid, genuine and accurately represent the facts stated therein, and that such draft(s) will be accepted and paid in accordance with its/their tenor. We further undertake and agree, jointly and severally, to defend and hold you free and harmless from any and all actions, claims and demands whatsoever, and to pay on demand all damages actual or compensatory including attorney’s fees, costs and other awards or be adjudged to pay, in case of suit, which you may suffer arising from, by reason, or on account of your negotiating the above draft(s) because of the following discrepancies or reasons or any other discrepancy or reason whatever. We hereby undertake to pay on demand the full amount of the above draft(s) or any unpaid balance thereof, the Philippine perso equivalent converted at the prevailing selling rate (or selling rate prevailing at the date you negotiate our draft, whichever is higher) allowed by the Central Bank with interest at the rate prevailing today from the date of negotiation, plus all charges and expenses whatsoever incurred in connection therewith. You shall neither be obliged to contest or dispute any refusal to accept or to pay the whole or any part of the above

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draft(s), nor proceed in any way against the drawee, the issuing bank or any endorser thereof, before making a demand on us for the payment of the whole or any unpaid balance of the draft(s). In Velasquez v. Solidbank Corporation, where the drawer therein also executed a separate letter of undertaking in consideration for the bank’s negotiation of its sight drafts, the Court held that the drawer can still be made liable under the letter of undertaking even if he is discharged due to the bank’s failure to protest the non-acceptance of the drafts. The Court explained, thus: Petitioner, however, can still be made liable under the letter of undertaking. It bears stressing that it is a separate contract from the sight draft. The liability of petitioner under the letter of undertaking is direct and primary. It is independent from his liability under the sight draft. Liability subsists on it even if the sight draft was dishonored for non-acceptance or non-payment. 2) The real estate mortgage served as security for respondent's drafts. Respondent executed a real estate mortgage containing a "blanket mortgage clause," also known as a "dragnet clause." It has been settled in a long line of decisions that mortgages given to secure future advancements are valid and legal contracts, and the amounts named as consideration in said contracts do not limit the amount for which the mortgage may stand as security if from the four corners of the instrument the intent to secure future and other indebtedness can be gathered. In Union Bank of the Philippines v. Court of Appeals, the nature of a dragnet clause was explained, thus: Is one which is specifically phrased to subsume all debts of past and future origins. Such clauses are "carefully scrutinized and strictly

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construed." Mortgages of this character enable the parties to provide continuous dealings, the nature or extent of which may not be known or anticipated at the time, and they avoid the expense and inconvenience of executing a new security on each new transaction. A "dragnet clause" operates as a convenience and accommodation to the borrowers as it makes 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, et cetera. Petitioner, therefore, was not precluded from seeking the foreclosure of the real estate mortgage based on the unpaid drafts drawn by respondent. 3) Extrajudicial foreclosure was valid. Under paragraph 12 of the real estate mortgage, personal notice of the foreclosure sale is not a requirement to the validity of the foreclosure sale. A perusal of the records of the case shows that a notice of sheriff’s sale was sent by registered mail to respondent and received in due course. Yet, respondent claims that it did not receive the notice but only learned about it from petitioner. In any event, paragraph 12 of the real estate mortgage requires petitioner merely to furnish respondent with the notice and does not oblige petitioner to ensure that respondent actually receives the notice. On this score, the Court holds that petitioner has performed its obligation under paragraph 12 of the real estate mortgage. 4) Respondent cannot question the foreclosure sale. Plaintiff is estopped from questioning the foreclosure. The plaintiff is guilty of laches and cannot at this point in time question the foreclosure of the subject properties. Defendant bank made

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demands against the plaintiff for the payment of plaintiff’s outstanding loans and advances with the defendant as early as July 1997. Plaintiff acknowledged such outstanding loans and advances to the defendant bank and committed to liquidate the same. For failure of the plaintiff to pay its obligations on maturity, defendant bank foreclosed the mortgage on subject properties on January 5, 1988 the certificate of sale was annotated on March 24, 1988 and there being no redemption made by the plaintiff, title to said properties were consolidated in the name of defendant in July 1989. Undeniably, subject foreclosure was done in accordance with the prescribed rule. PRUDENTIAL BANK vs. DON A. ALVIAR & GEORGIA B. ALVIAR G.R. No. 150197 (July 28, 2005) FACTS: Don A. Alviar and Georgia B. Alviar, are the registered owners of a parcel of land in San Juan, Metro Manila. On 10 July 1975, they executed a deed of real estate mortgage in favor of petitioner Prudential Bank to secure the payment of a loan worth P250,000.00. On 4 August 1975, respondents executed the corresponding promissory note, PN BD#75/C-252, covering the said loan, which provides that the loan matured on 4 August 1976 at an interest rate of 12% per annum with a 2% service charge, and that the note is secured by a real estate mortgage as aforementioned. The real estate mortgage contained the following clause: That for and in consideration of certain loans, overdraft and other credit accommodations obtained from the Mortgagee by the Mortgagor and/or hereinafter referred to, irrespective of number, as DEBTOR, and to secure the payment of the same and those that may hereafter be obtained, the principal or all of which is hereby fixed at Two Hundred Fifty

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Thousand (P250,000.00) Pesos, Philippine Currency, as well as those that the Mortgagee may extend to the Mortgagor and/or DEBTOR, including interest and expenses or any other obligation owing to the Mortgagee, whether direct or indirect, principal or secondary as appears in the accounts, books and records of the Mortgagee, the Mortgagor does hereby transfer and convey by way of mortgage unto the Mortgagee, its successors or assigns, the parcels of land which are described in the list inserted on the back of this document, and/or appended hereto, together with all the buildings and improvements now existing or which may hereafter be erected or constructed thereon, of which the Mortgagor declares that he/it is the absolute owner free from all liens and encumbrances. (this is a blanket mortgage clause or dragnet clause) On 22 October 1976, Don Alviar executed another promissory note, PN BD#76/C-345 for P2,640,000.00, secured by D/A SFDX #129, signifying that the loan was secured by a "hold-out" on the mortgagor’s foreign currency savings account with the bank under Account No. 129, and that the mortgagor’s passbook is to be surrendered to the bank until the amount secured by the "hold-out" is settled. On 27 December 1976, respondent spouses executed for Donalco Trading, Inc., of which the husband and wife were President and Chairman of the Board and Vice President, respectively, PN BD#76/C430 covering P545,000.000. As provided in the note, the loan is secured by "CleanPhase out TOD CA 3923," which means that the temporary overdraft incurred by Donalco Trading, Inc. with petitioner is to be converted into an ordinary loan. On 16 March Donalco Trading, of its approval P545,000.00, the

1977, petitioner wrote Inc., informing the latter of a straight loan of proceeds of which shall

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be used to liquidate the outstanding loan of P545,000.00 TOD. The letter likewise mentioned that the securities for the loan were the deed of assignment on two promissory notes executed by Bancom Realty Corporation with Deed of Guarantee in favor of A.U. Valencia and Co. and the chattel mortgage on various heavy and transportation equipment. On 06 March 1979, respondents paid petitioner P2,000,000.00, to be applied to the obligations of G.B. Alviar Realty and Development, Inc. and for the release of the real estate mortgage for the P450,000.00 loan covering the two lots located at Vam Buren and Madison Streets, North Greenhills, San Juan, Metro Manila. The payment was acknowledged by petitioner who accordingly released the mortgage over the two properties. On 15 January 1980, petitioner moved for the extrajudicial foreclosure of the mortgage on the property covered by TCT No. 438157. Per petitioner’s computation, respondents had the total obligation of P1,608,256.68, covering the three promissory notes plus assessed past due interests and penalty charges. The public auction sale of the mortgaged property was set on 15 January 1980. Respondents filed a complaint for damages with a prayer for the issuance of a writ of preliminary injunction with the RTC of Pasig, claiming that they have paid their principal loan secured by the mortgaged property, and thus the mortgage should not be foreclosed. For its part, petitioner averred that the payment of P2,000,000.00 made on 6 March 1979 was not a payment made by respondents, but by G.B. Alviar Realty and Development Inc., which has a separate loan with the bank secured by a separate mortgage. ISSUES: 1) Whether or not the blanket mortgage clause or dragnet clause is valid - VALID

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2) Whether or not the blanket mortgage clause applies even to subsequent advancements for which other securities were intended - NO 3) Whether or not the foreclosure of the property was proper - NO HELD: A "blanket mortgage clause," also known as a "dragnet clause" in American jurisprudence, is one which is specifically phrased to subsume all debts of past or future origins. Such clauses are "carefully scrutinized and strictly construed." Mortgages of this character enable the parties to provide continuous dealings, the nature or extent of which may not be known or anticipated at the time, and they avoid the expense and inconvenience of executing a new security on each new transaction. A "dragnet clause" operates as a convenience and accommodation to the borrowers as it makes 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, et cetera. Indeed, it has been settled in a long line of decisions that mortgages given to secure future advancements are valid and legal contracts, and the amounts named as consideration in said contracts do not limit the amount for which the mortgage may stand as security if from the four corners of the instrument the intent to secure future and other indebtedness can be gathered. On the basis of the blanket mortgage clause contained in the real estate mortgage, petitioner and respondents intended the real estate mortgage to secure not only the P250,000.00 loan from the petitioner, but also future credit facilities and advancements that may be obtained by the respondents.

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Under American jurisprudence, two schools of thought have emerged on this question. One school advocates that a "dragnet clause" so worded as to be broad enough to cover all other debts in addition to the one specifically secured will be construed to cover a different debt, although such other debt is secured by another mortgage. The contrary thinking maintains that a mortgage with such a clause will not secure a note that expresses on its face that it is otherwise secured as to its entirety, at least to anything other than a deficiency after exhausting the security specified therein, such deficiency being an indebtedness within the meaning of the mortgage, in the absence of a special contract excluding it from the arrangement. The latter school represents the better position. The parties having conformed to the "blanket mortgage clause" or "dragnet clause," it is reasonable to conclude that they also agreed to an implied understanding that subsequent loans need not be secured by other securities, as the subsequent loans will be secured by the first mortgage. In other words, the sufficiency of the first security is a corollary component of the "dragnet clause." But of course, there is no prohibition, as in the mortgage contract in issue, against contractually requiring other securities for the subsequent loans. Thus, when the mortgagor takes another loan for which another security was given it could not be inferred that such loan was made in reliance solely on the original security with the "dragnet clause," but rather, on the new security given. This is the "reliance on the security test." It was therefore improper for petitioner in this case to seek foreclosure of the mortgaged property because of nonpayment of all the three promissory notes. While the existence and validity of the "dragnet clause" cannot be denied,

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there is a need to respect the existence of the other security given for PN BD#76/C345. The foreclosure of the mortgaged property should only be for the P250,000.00 loan covered by PN BD#75/C-252, and for any amount not covered by the security for the second promissory note. While the "dragnet clause" subsists, the security specifically executed for subsequent loans must first be exhausted before the mortgaged property can be resorted to. It is important to note that the mortgage contract, as well as the promissory notes subject of this case, is a contract of adhesion, to which respondents’ only participation was the affixing of their signatures or "adhesion" thereto. A contract of adhesion is one in which a party imposes a ready-made form of contract which the other party may accept or reject, but which the latter cannot modify. The real estate mortgage in issue appears in a standard form, drafted and prepared solely by petitioner, and which, according to jurisprudence must be strictly construed against the party responsible for its preparation. If the parties intended that the "blanket mortgage clause" shall cover subsequent advancement secured by separate securities, then the same should have been indicated in the mortgage contract. Consequently, any ambiguity is to be taken contra proferentum, that is, construed against the party who caused the ambiguity which could have avoided it by the exercise of a little more care. To be more emphatic, any ambiguity in a contract whose terms are susceptible of different interpretations must be read against the party who drafted it, which is the petitioner in this case. Even the promissory notes in issue were made on standard forms prepared by petitioner, and as such are likewise

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contracts of adhesion. Being of such nature, the same should be interpreted strictly against petitioner and with even more reason since having been accomplished by respondents in the presence of petitioner’s personnel and approved by its manager, they could not have been unaware of the import and extent of such contracts. Petitioner, however, is not without recourse. Both the Court of Appeals and the trial court found that respondents have not yet paid the P250,000.00, and gave no credence to their claim that they paid the said amount when they paid petitioner P2,000,000.00. Thus, the mortgaged property could still be properly subjected to foreclosure proceedings for the unpaid P250,000.00 loan, and as mentioned earlier, for any deficiency after D/A SFDX#129, security for PN BD#76/C345, has been exhausted, subject of course to defenses which are available to respondents. N.B. In the absence of clear, supportive evidence of a contrary intention, a mortgage containing a "dragnet clause" will not be extended to cover future advances unless the document evidencing the subsequent advance refers to the mortgage as providing security therefor.

PHILIPPINE CHARITY SWEEPSTAKES OFFICE (PCSO) vs. NEW DAGUPAN METRO GAS CORPORATION, PURITA E. PERALTA and PATRICIA P. GALANG FACTS: Purita E. Peralta is the registered owner of a parcel of land located at Bonuan Blue Beach Subdivision, Dagupan City. In 1989, a real estate mortgage was constituted over such property in favor of PCSO to secure the payment of the sweepstakes tickets purchased Patricia P. Galang (provincial distributor).

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However on July 31, 1990, Peralta sold, under a conditional sale, the subject property to New Dagupan. The conveyance to be absolute (full payment of the price of P800,000.00), New Dagupan paid Peralta P200,000.00 upon the execution of the corresponding deed and the balance of P600,000.00 by monthly instalments of P70,000.00. Peralta showed to New Dagupan a photocopy of TCT, which bore no liens and encumbrances, and undertook to deliver the owner’s duplicate within three (3) months from the execution of the contract. In view of Peralta’s failure to deliver the owner’s duplicate of TCT and to execute a deed of absolute sale in its favor, New Dagupan withheld payment of the last instalment and through its President, Julian Ong Cuña, executed an affidavit of adverse claim, which was annotated on October 1, 1991. Due to Peralta’s continued failure to deliver a deed of absolute sale and the owner’s duplicate of the title, New Dagupan filed a complaint for specific performance her. On the other hand, on May 20, 1992, during the pendency of New Dagupan’s complaint against Peralta, PCSO caused the registration of the mortgage. PCSO filed an application for the extrajudicial foreclosure sale of the subject property in view of Galang’s failure to fully pay the sweepstakes she purchased in 1992. A public auction took place on June 15, 1993 where PCSO was the highest bidder. A certificate of sale was correspondingly issued to PCSO. New Dagupan obtained from the ROD of Dagupan City for its use in Civil Case a certified true copy of TCT that reflected PCSO’s mortgage lien, claiming that it is only then that it was informed of the subject mortgage, sent a letter to PCSO on

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October 28, 1993, notifying the latter of its complaint against Peralta and its claim over the subject property and suggesting that PCSO intervene and participate in the case. The RTC rendered a Decision (for the specific performance case), approving the compromise agreement between Peralta and New Dagupan. When the decision became final and executory, New Dagupan once again demanded Peralta’s delivery of the owner’s duplicate of TCT. In a letter dated March 29, 1994, New Dagupan made a similar demand from PCSO, who in response, stated that it had already foreclosed the mortgage on the subject property and it has in its name a certificate of sale for being the highest bidder in the public auction that took place on June 15, 1993. Thus, New Dagupan filed with the RTC a petition against PCSO for the annulment of TCT or surrender of the owner’s duplicate thereof. The RTC Branch 42 rendered a Decision in New Dagupan’s favor and ordered PCSO to deliver the owner’s duplicate copy of TCT in its possession to the Registry of Deeds of Dagupan City for the purpose of having the decision to be annotated at the back thereof. PCSO’s appeal from the foregoing adverse decision was dismissed. By way of its assailed decision, the CA did not agree with PCSO’s claim that the subject mortgage is in the nature of a continuing guaranty, holding that Peralta’s undertaking to secure Galang’s liability to PCSO is only for a period of one year and was extinguished when Peralta completed payment on the sweepstakes tickets she purchased in 1989. ISSUE: Who between New Dagupan and PCSO has a better right to the property in

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question – NEW DAGUPAN

fees, et cetera. x x x.29 (Citations omitted)

RULING: As a general rule, a mortgage liability is usually limited to the amount mentioned in the contract. However, the amounts named as consideration in a contract of mortgage do not limit the amount for which the mortgage may stand as security if from the four corners of the instrument the intent to secure future and other indebtedness can be gathered.

A mortgage that provides for a dragnet clause is in the nature of a continuing guaranty and constitutes an exception to the rule than an action to foreclose a mortgage must be limited to the amount mentioned in the mortgage contract. Its validity is anchored on Article 2053 of the Civil Code and is not limited to a single transaction, but contemplates a future course of dealing, covering a series of transactions, generally for an indefinite time or until revoked. It is prospective in its operation and is generally intended to provide security with respect to future transactions within certain limits, and contemplates a succession of liabilities, for which, as they accrue, the guarantor becomes liable. In other words, a continuing guaranty is one that covers all transactions, including those arising in the future, which are within the description or contemplation of the contract of guaranty, until the expiration or termination thereof.30

Alternatively, while a real estate mortgage may exceptionally secure future loans or advancements, these future debts must be specifically described in the mortgage contract. An obligation is not secured by a mortgage unless it comes fairly within the terms of the mortgage contract. The stipulation extending the coverage of a mortgage to advances or loans other than those already obtained or specified in the contract is valid and has been commonly referred to as a "blanket mortgage" or "dragnet" clause. In Prudential Bank v. Alviar,28 this Court elucidated on the nature and purpose of such a clause as follows: A "blanket mortgage clause," also known as a "dragnet clause" in American jurisprudence, is one which is specifically phrased to subsume all debts of past or future origins. Such clauses are "carefully scrutinized and strictly construed." Mortgages of this character enable the parties to provide continuous dealings, the nature or extent of which may not be known or anticipated at the time, and they avoid the expense and inconvenience of executing a new security on each new transaction. A "dragnet clause" operates as a convenience and accommodation to the borrowers as it makes available additional funds without their having to execute additional security documents, thereby saving time, travel, loan closing costs, costs of extra legal services, recording

In this case, PCSO claims the subject mortgage is a continuing guaranty. According to PCSO, the intent was to secure Galang’s ticket purchases other than those outstanding at the time of the execution of the Deed of Undertaking with First Real Estate Mortgage on March 8, 1989 such that it can foreclose the subject mortgage for Galang’s non-payment of her ticket purchases in 1992. PCSO does not deny and even admits that Galang had already settled the amount of P450,000.00. However, PCSO refuses to concede that the subject mortgage had already been discharged, claiming that Galang had unpaid ticket purchases in 1992 and these are likewise secured as evidenced by the following clause in the Deed of Undertaking with First Real Estate Mortgage. As the CA correctly observed, the use of

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the terms "outstanding" and "unpaid" militates against PCSO’s claim that future ticket purchases are likewise secured. That there is a seeming ambiguity between the provision relied upon by PCSO containing the phrase "after each draw" and the other provisions, which mention with particularity the amount of P450,000.00 as Galang’s unpaid and outstanding account and secured by the subject mortgage, should be construed against PCSO. The subject mortgage is a contract of adhesion as it was prepared solely by PCSO and the only participation of Galang and Peralta was the act of affixing their signatures thereto. Considering that the debt secured had already been fully paid, the subject mortgage had already been discharged and there is no necessity for any act or document to be executed for the purpose. As provided in the Deed of Undertaking with First Real Estate Mortgage: 15. Upon payment of the principal amount together with interest and other expenses legally incurred by the MORTGAGEE, the above-undertaking is considered terminated. Section 6234 of Presidential Decree (P.D.) No. 1529 appears to require the execution of an instrument in order for a mortgage to be cancelled or discharged. However, this rule presupposes that there has been a prior registration of the mortgage lien prior to its discharge. In this case, the subject mortgage had already been cancelled or terminated upon Galang’s full payment before PCSO availed of registration in 1992. As the subject mortgage was not annotated on TCT No. 52135 at the time it was terminated, there was no need for Peralta to secure a deed of cancellation in order for such discharge to be fully effective and duly reflected on the face of her title.

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Therefore, since the subject mortgage is not in the nature of a continuing guaranty and given the automatic termination thereof, PCSO cannot claim that Galang’s ticket purchases in 1992 are also secured. From the time the amount of P450,000.00 was fully settled, the subject mortgage had already been cancelled such that Galang’s subsequent ticket purchases are unsecured. Simply put, PCSO had nothing to register, much less, foreclose. Consequently, PCSO’s registration of its non-existent mortgage lien and subsequent foreclosure of a mortgage that was no longer extant cannot defeat New Dagupan’s title over the subject property.

ASIA TRUST DEVELOPMENT BANK vs. CARMELO H. TUBLE FACTS: Carmelo H. Tuble, who served as the vice-president of petitioner Asia trust Development Bank availed himself of the car incentive plan and loan privileges offered by the bank. He was also entitled to the Senior Managers Deferred Incentive Plan (DIP) Tuble acquired a Nissan Vanette through the company’s car incentive plan. The arrangement was made to appear as a lease agreement requiring only the payment of monthly rentals. Accordingly, the lease would be terminated in case of the employee’s resignation or retirement prior to full payment of the price. As regards the loan privileges, Tuble obtained three separate loans. a.) First, a real estate loan evidenced by the January 18 1993 Promissory note with maturity date of January 1, 1999 was secured by a mortgage over his property covered by transfer certificate. b.) Second was a consumption loan, evidenced by the January 10, 1994 c.) Third, a salary loan.

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He resigned on March 30, 1995 and was subsequently given the option to either return the vehicle without any further obligation or retain the unit or pay its remaining book value. Tuble had the following obligations to the bank after his retirement a.) The purchase or return of the Nissan b.) 100,000 as consumption loan c.) 421,800 as real estate loan d.) 16,250 as salary loan Moreover, the bank also owed Tuble his pro-rata share in the DIP which was to be issued after the bank had given the resigned employees clearance and 25,797 representing his final salary and corresponding 13th month pay. He claimed that since he and the bank were debtors and creditors of each other, the offsetting of loans could legally take place. He then asked the bank to simply compute his DIP and apply his receivables to his loans. The bank refused and sent him a demand letter and required him to return the Nissan Vanette. On August 14, 1995, Tuble wrote the bank again to follow up his request to offset the loans. This was not immediately acted upon, and it was only on October 13, 1995 that the bank finally allowed the offsetting of his various claims and liabilities. As a result, his liabilities were reduced to 970 thousand plus the unreturned value of the vehicle. The bank then filed a complaint for replevin against tuble. The judgement was favorable for the bank. To collect the liabilities of Tuble, it also filed a petition for extra-judicial foreclosure of real estate mortgage over his property. It was based on his real estate loan. He redeemed the property. With this

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payment, he was released from his accountabilities and had his clearance. The bank then issued the clearance necessary for the release of his DIP share. Tuble received a manager’s check in the amount of 166,049 representing his share in the DIP funds. Tuble paid the redemption price but disputed its costing. He filed a complaint for recovery of a sum of money and damages before the RTC. The RTC ruled in favor of Tuble. They held that the value of the car should not have been included given that it was already returned. The CA affirmed the RTC. ISSUES: ISSUE 1: Whether or not the bank is entitled to include these items in the redemption price: the 18% annual interest on the bid price of P421,800. RULING: The 18% Annual Interest on the Bid Price of P421,800 The Applicable Law The bank argues that instead of referring to the Rules of Court to compute the redemption price, the courts a quo should have applied the General Banking Law, considering that petitioner is a banking institution. The statute referred to requires that in the event of judicial or extrajudicial foreclosure of any mortgage on real estate that is used as security for an obligation to any bank, banking institution, or credit institution, the mortgagor can redeem the property by paying the amount fixed by the court in the order of execution, with interest thereon at the rate specified in the mortgage.18 Petitioner is correct. From the plethora of cases, the SC held that the General Banking Act – being a special and subsequent legislation – has the effect of amending Section 6 of Act No.

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3135, insofar as the redemption price is concerned, when the mortgagee is a bank. Thus, the amount to be paid in redeeming the property is determined by the General Banking Act, and not by the Rules of Court in Relation to Act 3135. The Remedy of Foreclosure Firstly, at the time respondent resigned, which was chronologically before the foreclosure proceedings, he had several liabilities to the bank. Secondly, when the bank later on instituted the foreclosure proceedings, it foreclosed only the mortgage secured by the real estate loan of P421,800.22 It did not seek to include, in the foreclosure, the consumption loan under Promissory Note No. 0143 or the other alleged obligations of respondent. Thirdly, on 28 February 1996, the bank availed itself of the remedy of foreclosure and, in doing so, effectively gained the property. As a result of these established facts, one evident conclusion surfaces: the Real Estate Mortgage Contract on the secured property is already extinguished. In foreclosures, the mortgaged property is subjected to the proceedings for the satisfaction of the obligation. As a result, payment is effected by abnormal means whereby the debtor is forced by a judicial proceeding to comply with the presentation or to pay indemnity. Once the proceeds from the sale of the property are applied to the payment of the obligation, the obligation is already extinguished. Thus, in Spouses Romero v. Court of Appeals, the SC held that the mortgage indebtedness was extinguished with the foreclosure and sale of the mortgaged property, and that what remained was the right of redemption granted by law.

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Consequently, since the Real Estate Mortgage Contract is already extinguished, petitioner can no longer rely on it or invoke its provisions, including the dragnet clause stipulated therein. It follows that the bank cannot refer to the 18% annual interest charged in Promissory Note No. 0143, an obligation allegedly covered by the terms of the Contract. Neither can the bank use the consummated contract to collect on the rest of the obligations, which were not included when it earlier instituted the foreclosure proceedings. It cannot be allowed to use the same security to collect on the other loans. To do so would be akin to foreclosing an already foreclosed property. Rather than relying on an expired contract, the bank should have collected on the excluded loans by instituting the proper actions for recovery of sums of money. Simply put, petitioner should have run after Tuble separately, instead of hostaging the same property to cover all of his liabilities. The Dragnet Clause In any event, assuming that the Real Estate Mortgage Contract subsists, the SC ruled that the dragnet clause therein does not justify the imposition of an 18% annual interest on the redemption price. The Court has recognized that, through a dragnet clause, a real estate mortgage contract may exceptionally secure future loans or advancements. But an obligation is not secured by a mortgage, unless, that mortgage comes fairly within the terms of the mortgage contract. Moreover, the mortgage agreement, being a contract of adhesion, is to be carefully scrutinized and strictly construed against the bank, the party that prepared the

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agreement. The Court finds that there is no specific mention of interest to be added in case of either default or redemption. The Real Estate Mortgage Contract itself is silent on the computation of the redemption price. Although it refers to the Promissory Notes as constitutive of Tuble’s secured obligations, the said contract does not state that the interest to be charged in case of redemption should be what is specified in the Promissory Notes. Thus, an ambiguity results as to which interest shall be applied, for to apply an 18% interest per annum based on Promissory Note No. 0143 will negate the existence of the 0% interest charged by Promissory Note No. 0142. Notably, it is this latter Promissory Note that refers to the principal agreement to which the security attaches. In resolving this ambiguity, the SC refer to a basic principle in the law of contracts: "Any ambiguity is to be taken contra proferentem, that is, construed against the party who caused the ambiguity which could have avoided it by the exercise of a little more care." Therefore, the ambiguity in the mortgage deed whose terms are susceptible of different interpretations must be read against the bank that drafted it. Furthermore, the Court refuses to be blindsided by the dragnet clause in the Real Estate Mortgage Contract to automatically include the consumption loan, and its corresponding interest, in computing the redemption price. In the absence of clear and supportive evidence of a contrary intention, a mortgage containing a dragnet clause will not be extended to cover future advances, unless the document evidencing the subsequent advance

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refers to the mortgage as providing security therefor. In this regard, the Court adopted the "reliance on the security test", the test as follows: A mortgage with a "dragnet clause" is an "offer" by the mortgagor to the bank to provide the security of the mortgage for advances of and when they were made. Thus, it was concluded that the "offer" was not accepted by the bank when a subsequent advance was made because (1) the second note was secured by a chattel mortgage on certain vehicles, and the clause therein stated that the note was secured by such chattel mortgage; (2) there was no reference in the second note or chattel mortgage indicating a connection between the real estate mortgage and the advance; (3) the mortgagor signed the real estate mortgage by her name alone, whereas the second note and chattel mortgage were signed by the mortgagor doing business under an assumed name; and (4) there was no allegation by the bank, and apparently no proof, that it relied on the security of the real estate mortgage in making the advance. (Emphasis supplied) The second loan agreement, or Promissory Note No. 0143, referring to the consumption loan makes no reference to the earlier loan with a real estate mortgage. Neither does the bank make any allegation that it relied on the security of the real estate mortgage in issuing the consumption loan to Tuble. Tuble was Asia Trust’s previous vicepresident, as one of the senior officers, the consumption loan was given to him not as an ordinary loan, but as a form of accommodation or privilege. The bank’s grant of the salary loan to Tuble was apparently not motivated by the creation of a security in favor of the bank, but by the

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fact the he was a top executive of petitioner. Thus, the bank cannot claim that it relied on the previous security in granting the consumption loan to Tuble. For this reason, the dragnet clause will not be extended to cover the consumption loan. It follows, therefore, that its corresponding interest – 18% per annum – is inapplicable. ISSUE 2: Whether or not the bank is entitled to interest charges on Promissory Note 0142 RULING: In addition to the 18% annual interest, the bank also claims a 12% per annum on the consumption loan. Notwithstanding that promissory note contains no stipulation on interest payments, the bank still claims that Tuble is liable to pay the legal interest pursuant to article 2209 of the family code: Article 2209 – If the obligation consists in the payment of a sum of money and the debtor incurs in delay, the indemnity for damages, there being no stipulation shall be the payment of the interest agreed upon and in the absence of stipulation, the legal interest, which is six per cent per annum. While Article 2209 allows the recovery of interest sans stipulation, this charge is provided not as a form of monetary interest but as one of compensatory interest. a.) Monetary interest refers to the compensation set by the parties for the use or forbearance of money. b.) Compensatory interest refers to the penalty or indemnity for damages imposed by law or courts. This is due only if the obligor is proven to have defaulted in paying the loan. A default must exist before the bank can collect the compensatory legal interest of 12% per annum. Tuble denies being in

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default since by way of legal compensation, he effectively paid his liabilities on time. The court held that there was no legal compensation. In order for legal compensation to take effect, article 1279 requires that the debts be liquidated and demandable. a. Requisites for legal compensation: i.) That each one of the obligors be bound physically, and that he be at the same time a principal creditor of the other. ii.) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated. iii.) That the two debts be due iv.) That they be liquidated and demandable v.) That over neither of them there be any retention, or controversy, commenced by third persons and communicated n due time to the debtor. Liquidated debts are those who exact amount has already been determined. In this case, the receivable of Tuble, including his DIP share was not yet determined. It was the bank’s policy to compute and issue the computation only after the retired employee had been cleared by the bank. Thus, Tuble incorrectly invoked legal compensation.

SPOUSES ANTONIO & LETICIA VEGA VS SSS & PILAR DEVELOPMENT CORPORATION FACTS: Magdalena Reyes owned a piece of titled land in Pilar Village, Las Piñas CIty. On August 17, 1979, she got a housing Loan from SSS for which she mortgaged her land. Late 1979, Reyes asked the Sps Vega to

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assume the loan and buy her house and lot since she was to emigrate.

Apex assigned Reyes' credit to PDC on December 29, 1992.

An employee at SSS said, however, that SSS did not approve of members transferring their mortgaged homes.

RTC: Reyes must pay the PDC the loan of P46,398 plus interest and penalties beginning April 11, 1979 as well as attorney's fees and costs. Unable to pay, RTC issued a writ of execution against Reyes and its Sheriff levied on the property in Pilar Village.

But the Spouses Vega (Vegas) could make a private arrangement with Reyes provided that they pay the monthly amortizations on time. Vegas agreed for Reyes to execute in their favor a deed of assignment of real property with assumption of mortgage and paid Reyes P20,000 after she undertook to update the amortizations before leaving the country. The Vegas took possession of the house in January 1981. Reyes did not execute the deed of assignment. She left the country and left her sister (Julieta Ofilada) a special power of attorney to convey ownership of property. Sometime between 1983 and 1984, Ofilada executed the deed of assignment in favor of the Vegas, kept the original and gave the Vegas two copies, one to be given to the Home Development Mortgage Fund and kept the other. A storm in 1984 resulted in flood and destroyed their personal copy. In 1992, the Vegas learned that Reyes did not update the amortizations because they received a notice to Reyes from the SSS. They told the SSS that they already gave the payment to Reyes but, since it appeared indifferent, on January 6, 1992, the Vegas updated the amortization and paid P115,738.48 to the SSS. They negotiated seven additional remittances and the SSS accepted P8,681 more from the Vegas. On April 16, 1993, PDC filed an action for sum of money against Reyes before the RTC of Manila, claiming that Reyes borrowed from Apex Mortgage and Loans Corporation (Apex) P46,500 to buy the lot and construct a house on it.

On Feb 16, 1994, the Vegas requested the SSS to acknowledge their status as subrogees and to give them an update of the account so they could settle it in full. SSS did not reply. RTC sheriff published a notice for the auction sale of the property on Feb 24, March 3 and 10, 1994. He also gave notice to the Vegas on March 20. The Vegas filed an affidavit of third party claimant and a motion to quash the levy on the property. However, RTC directed the sheriff to proceed with the execution. The Vegas got a telegram informing them that the SSS intended to foreclose on the property to satisfy the unpaid debt of P38,789.58. The Vegas requested from the SSS in writing for the exact amount of the indebtedness and for assurance that they would be entitled to the discharge of the mortgage and delivery of the proper subrogation documents upon payment. They also sent a P37,521.95 manager's check that SSS refused to accept. The Vegas filed an action for consignation, damages, and injunction with application for preliminary injunction and TRO against SSS, PDC, the RTC sheriff and the Register of Deeds before the RTC in Las Piñas. While the case was pending, SSS released the mortgage to PDC. A writ of possession evicted the Vegas from the property. RTC decided in favor of the Vegas. CA reversed. ISSUE :WON Reyes validly sold her SSSmortgaged property to the Vegas

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HELD: Reyes acquired the property in this case through a loan from the SSS in whose favor she executed a mortgage as collateral for the loan. Although the loan was still unpaid, she assigned the property to the Vegas without notice to or the consent of the SSS. The Vegas continued to pay the amortizations apparently in Reyes’ name. Meantime, Reyes apparently got a cash loan from Apex, which assigned the credit to PDC. This loan was not secured by a mortgage on the property but PDC succeeded in getting a money judgment against Reyes and had it executed on the property. Such property was still in Reyes’ name but, as pointed out above, the latter had disposed of it in favor of the Vegas more than 10 years before PDC executed on it. The question is: was Reyes’ disposal of the property in favor of the Vegas valid given a provision in the mortgage agreement that she could not do so without the written consent of the SSS? The CA ruled that, under Article 1237 of the Civil Code, the Vegas who paid the SSS amortizations except the last on behalf of Reyes, without the latter’s knowledge or against her consent, cannot compel the SSS to subrogate them in her rights arising from the mortgage. Further, said the CA, the Vegas’ claim of subrogation was invalid because it was done without the knowledge and consent of the SSS as required under the mortgage agreement. But Article 1237 cannot apply in this case since Reyes consented to the transfer of ownership of the mortgaged property to the Vegas. Reyes also agreed for the Vegas to assume the mortgage and pay the balance of her obligation to SSS. Of course, paragraph 4 of the mortgage contract covering the property required Reyes to secure SSS’ consent before selling the property. But, although such a stipulation is valid and binding, in the sense that the

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SSS cannot be compelled while the loan was unpaid to recognize the sale, it cannot be interpreted as absolutely forbidding her, as owner of the mortgaged property, from selling the same while her loan remained unpaid. Such stipulation contravenes public policy, being an undue impediment or interference on the transmission of property. Besides, when a mortgagor sells the mortgaged property to a third person, the creditor may demand from such third person the payment of the principal obligation. The reason for this is that the mortgage credit is a real right, which follows the property wherever it goes, even if its ownership changes. Article 2129 of the Civil Code gives the mortgagee, here the SSS, the option of collecting from the third person in possession of the mortgaged property in the concept of owner. More, the mortgagor-owner’s sale of the property does not affect the right of the registered mortgagee to foreclose on the same even if its ownership had been transferred to another person. The latter is bound by the registered mortgage on the title he acquired. After the mortgage debt to SSS had been paid, however, the latter had no further justification for withholding the release of the collateral and the registered title to the party to whom Reyes had transferred her right as owner. Under the circumstance, the Vegas had the right to sue for the conveyance to them of that title, having been validly subrogated to Reyes’ rights.

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PINEDA VS. CA FACTS: Spouses Benitez mortgaged a house and lot in favor of Juanita P. Pineda (“Pineda”) and Leila P. Sayoc (“Sayoc”) which was not registered . With the consent of Pineda, spouses Benitez sold the house, which was part of the Property, to Olivia G. Mojica (“Mojica”). On the same date, Mojica filed a petition for the issuance of a second owner’s duplicate alleging that she “purchased a parcel of land” and the “owner’s duplicate copy was lost.” The same was granted. The lot was also subsequently sold to Mojica. Mojica executed a deed of mortgage over the same property in favor of Gonzales which deed was registered. Pineda and Sayoc filed a complaint against the Spouses Benitez and Mojica. The complaint prayed for the cancellation of the second owner’s duplicate. During the pendency of the case, Pineda caused the annotation of a notice of lis pendens. The Court ruled that the second owner’s duplicate was void. Meanwhile, Mojica defaulted in paying the obligation to Gonzales so the latter foreclosed the mortgaged and purchased it at the auction sale. A new TCT was issued in the name of Gonzales. Pineda and Sayoc filed a motion with the trial court for the issuance of an order requiring Gonzales to surrender the owner’s duplicate of TCT to the ROD. The Trial Court declared the title of Gonzales as void and ordered the reinstatement of the TC in the name of Spouses Benitez. The CA ruled in favor of Gonzales ISSUES: 1.WON the mortgage to Gonzales is valid. YES 2.WON Gonzales is an innocent purchaser/ mortgagee for value. YES

HELD: Mojica’s Title is Void Since the TCT of the property was not actually lost but was in the possession of Pineda, the reconstitution proceeding and the second TCT issue in favor of Mojica by virtue of the sale were void. However, 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. Since the Spouses Benitez were the undisputed owners of the Property, they could validly sell and deliver the Property to Mojica. The execution of the notarized deed of sale between the Spouses Benitez and Mojica had the legal effect of actual or physical delivery. Ownership of the Property passed from the Spouses Benitez to Mojica. The nullity of the second owner’s duplicate of TCT did not affect the validity of the sale as between the Spouses Benitez and Mojica. Gonzales is an Innocent Purchaser for Value The nullity of MOjica’s title does not automatically carry with it the nullity of the annotation of Gonzales’ mortgage. The rule is that a mortgage annotated on a void title is valid if the mortgagee registered the mortgage in good faith. Gonzales registered her mortgage in good faith. Gonzales had no actual notice of the prior unregistered mortgage in favor of Pineda and Sayoc. To bind third parties to an unregistered encumbrance, the law requires actual notice. The fact that Mojica,

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who sold the Property to Gonzales, had actual notice of the unregistered mortgage did not constitute actual notice to Gonzales, absent proof that Gonzales herself had actual notice of the prior mortgage. Thus, Gonzales acquired her rights as a mortgagee in good faith. When Mojica defaulted in paying her debt, Gonzales caused the extrajudicial foreclosure of the mortgaged Property. Gonzales purchased the mortgaged Property as the sole bidder at the public auction sale. For Mojica’s failure to redeem the foreclosed Property within the prescribed period, Gonzales consolidated her title to the Property. Absent anyevidence to the contrary, the sale at public auction of the Property to Gonzales was valid. Thus, the title or ownership of the Property passed from Mojica to Gonzales. At this point, therefore, Gonzales became the owner of the Property. When Gonzales purchased the Property at the auction sale, Pineda and Sayoc had already annotated the lis pendens on the original of TCT 8361, which remained valid. However, the mortgage of Gonzales was validly registered prior to the notation of the lis pendens. The subsequent annotation of the lis pendens could not defeat the rights of the mortgagee or the purchaser at the auction sale who derived their rights under a prior mortgage validly registered. The settled rule is that the auction sale retroacts to the date of the registration of the mortgage, putting the auction sale beyond the reach of any intervening lis pendens, sale or attachment. SPOUSES ROSALES VS. SPOUSES SUBA FACTS: On June 13, 1997, RTC rendered a decision in two Civil Cases, the dispositive portion of which reads: (1) Declaring the Deed of Sale of Exhibit D, G and I, affecting the property in

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question, as an equitable mortgage; (2) Declaring the parties Erlinda Sibug and Ricardo Rosales, within 90 days from finality of this Decision, to deposit with the Clerk of Court, for payment to the parties Felicisimo Macaspac and Elena Jiao, the sum of P65,000.00, with interest at nine (9) percent per annum from September 30, 1982 until payment is made, plus the sum of P219.76 as reimbursement for real estate taxes; (3) Directing the parties Felicisimo Macaspac and Elena Jiao, upon the deposit on their behalf of the amounts specified in the foregoing paragraph, to execute a deed of reconveyance of the property in question to Erlinda Sibug, married to Ricardo Rosales, and the Register of Deeds of Manila shall cancel Transfer Certificate of Title No. 150540 in the name of the Macaspacs (Exh. E) and issue new title in the name of Sibug; (4) For non-compliance by Sibug and Rosales of the directive in paragraph (2) of this dispositive portion, let the property be sold in accordance with the Rules of Court for the release of the mortgage debt and the issuance of title to the purchaser. The decision became final and executor. Spouses Rosales, judgment debtors and petitioners failed to comply with par 2 (deposit with Clerk of Court 65k). This prompted Macaspac, as judgment creditor, to file a motion for execution. On May 15, 1998, an auction sale of the property was held, wherein petitioners participated. The property was sold for 285k to spouses Suba (respondents), being the highest bidders. Respondents thereafter filed with the court a motion for writ of possession, contending that the confirmation of the sale “effectively cut of petitioners’ equity of redemption.” RTC ruled that petitioners have no right to redeem since the case is for judicial foreclosure of mortgage. Hence, respondents as purchasers are entitled to possession. CA affirmed: no right of

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redemption mortgage.

in

judicial

foreclosure

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of

ISSUE: WON petitioners have the right to redeem the subject property. NO HELD: The decision of the trial court, which is final and executory, declared the transaction between petitioners and Macaspac an equitable mortgage. The Court defined an equitable mortgage as “one which although lacking in some formality, or form or words, or other requisites demanded by a statute, nevertheless reveals the intention of the parties to charge real property as security for a debt, and contains nothing impossible or contrary to law.” An equitable mortgage is not different from a real estate mortgage, and the lien created thereby ought not to be defeated by requiring compliance with the formalities necessary to the validity of a voluntary real estate mortgage.[6] Since the parties’ transaction is an equitable mortgage and that the trial court ordered its foreclosure, execution of judgment is governed by Sections 2 and 3, Rule 68 of the 1997 Rules of Civil Procedure, as amended.

“Where the foreclosure is judicially effected, however, no equivalent right of redemption exists. The law declares that a judicial foreclosure sale, ‘when confirmed by an order of the court, x x x shall operate to divest the rights of all the parties to the action and to vest their rights in the purchaser, subject to such rights of redemption as may be allowed by law.’ Such rights exceptionally ‘allowed by law’ (i.e., even after the confirmation by an order of the court) are those granted by the charter of the Philippine National Bank (Act Nos. 2747 and 2938), and the General Banking Act (R.A.337). These laws confer on the mortgagor, his successors in interest or any judgment creditor of the mortgagor, the right to redeem the property sold on foreclosure–after confirmation by the court of the foreclosure sale–which right may be exercised within a period of one (1) year, counted from the date of registration of the certificate of sale in the Registry of Property.

In Huerta Alba Resort, Inc. vs. Court of Appeals,[7] we held that the right of redemption is not recognized in a judicial foreclosure, thus: “The right of redemption in relation to a mortgage– understood in the sense of a prerogative to re-acquire mortgaged property after registration of the foreclosure sale– exists only in the case of the extrajudicial foreclosure of the mortgage. No such right is recognized in a judicial foreclosure except only where the mortgagee is the Philippine National bank or a bank or a banking institution.

“But, to repeat, no such right of redemption exists in case of judicial foreclosure of a mortgage if the mortgagee is not the PNB or a bank or banking institution. In such a case, the foreclosure sale, ‘when confirmed by an order of the court, x x x shall operate to divest the rights of all the parties to the action and to vest their rights in the purchaser.’ There then exists only what is known as the equity of redemption. This is simply the right of the defendant mortgagor to extinguish the mortgage and retain ownership of the property by paying the secured debt within the 90-day period after the judgment becomes final, in accordance with Rule 68, or even after the foreclosure sale but prior to its confirmation.

“Where a mortgage is foreclosed extrajudicially, Act 3135 grants to the mortgagor the right of redemption within one (1) year from the registration of the sheriff’s certificate of foreclosure sale.

“This is the mortgagor’s equity (not right) of redemption which, as above stated, may be exercised by him even beyond the 90day period ‘from the date of service of the order,’ and even after the foreclosure sale

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itself, provided it be before the order of confirmation of the sale. After such order of confirmation, no redemption can be effected any longer.” Clearly, as a general rule, there is no right of redemption in a judicial foreclosure of mortgage. The only exemption is when the mortgagee is the Philippine National Bank or a bank or a banking institution. Since the mortgagee in this case is not one of those mentioned, no right of redemption exists in favor of petitioners. They merely have an equity of redemption, which, to reiterate, is simply their right, as mortgagor, to extinguish the mortgage and retain ownership of the property by paying the secured debt prior to the confirmation of the foreclosure sale. However, instead of exercising this equity of redemption, petitioners chose to delay the proceedings by filing several manifestations with the trial court. Thus, they only have themselves to blame for the consequent loss of their property.

SPOUSES LANDRITO VS. CA FACTS : In July 1990, spouses Landrito obtained a loan of P350,000.00 from respondent Carmencita San Diego. To secure payment thereof, petitioners executed on 02 August 1990 a deed of real estate mortgage over their parcel of land located at Bayanan, Muntinlupa, Rizal. After making substantial payments, petitioners again obtained and were granted by Carmencita San Diego an additional loan of One Million Pesos. To secure this additional loan, the parties executed on 13 September 1991 an "Amendment of Real Estate Mortgage", whereunder they stipulated that the loan shall be paid within six (6) months from 16 September 1991, and if not paid within said period, the mortgagee shall have the right to declare the mortgage due and may

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immediately foreclose the same judicially or extrajudicially, in accordance with law. On 30 June 1993, after her efforts to collect proved futile, respondent Carmencita San Diego filed a petition for the extrajudicial foreclosure of the mortgage. Property was sold in a public auction with Carmencita San Diego as the highest bidder for P2,000,000.00. With the petitioners having failed to redeem their property within the 1-year redemption period from the date of inscription of the sheriff’s certificate of sale, as provided for in Act No. 3135, as amended, the San Diegos caused the consolidation of title over the foreclosed property in their names. Then, on 09 November 1994, petitioners filed their complaint for annulment of the extrajudicial foreclosure and auction sale, with damages. Petitioners alleged that (1) said foreclosure and auction sale were null and void for failure to comply with the requirements of notice and publication, as mandated by Act 3135, as amended; (2) the mortgaged property was illegally foreclosed in the light of the settled rule that an action to foreclose a mortgage must be limited to the amount mentioned in the mortgage document, in this case, P1,000,000.00, which amount was allegedly bloated by respondent Carmencita San Diego to P1,950,000.00; and (3) the San Diegos’ application for consolidation of title was premature because the husband, Benjamin San Diego, allegedly granted them an extension of the period of redemption up to 11 November 1994. TC- the latter’s cause of action is already barred by laches on account of their failure or neglect for an unreasonable length of time to do that which, by exercising due diligence, could or should have been done earlier. Also that petitioners’ inaction constituted a waiver on their part.

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ISSUE: WON the extra-judicial foreclosure and public auction sale of the subject parcel of land are valid and lawful when the amount stated in letter-request or the petition for extrajudicial foreclosure and in the notice of sheriff sale doubled the amount stipulated in the Amendment of Real Estate Mortgage. NO HELD: At the time of the foreclosure sale on 11 August 1993, petitioners were already in default in their loan obligation. Much earlier, or on 27 April 1993, a final notice of demand for payment had been sent to them, despite which they still failed to pay. Hence, respondent Carmencita San Diego’s resort to extrajudicial foreclosure, provided no less in the parties’ "Amendment of Real Estate Mortgage". The rule has been, and still is, that in real estate mortgage, when the principal obligation is not paid when due, the mortgagee has the right to foreclose on the mortgage and to have the mortgaged property seized and sold with the view of applying the proceeds thereof to the payment of the obligation. Here, the validity of the extrajudicial foreclosure on 11 August 1993 was virtually confirmed by the trial court when it dismissed petitioners’ complaint, and rightly so, what with the fact that petitioners failed to exercise their right of redemption within the 1-year period therefore counted from the registration of the sheriff’s certificate of sale.

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despite due notice and publication of the same in a newspaper of general circulation, petitioners did not bother to attend the foreclosure sale nor raise any question regarding the propriety of the sale. It was only on November 9, 1994, or more than one year from the registration of the Sheriff’s Certificate of Sale, that [petitioners] filed the instant complaint. Clearly, [petitioners] had slept on their rights and are therefore guilty of laches, which is defined as the failure or neglect for an unreasonable or explained length of time to do that which, by exercising due diligence, could or should have been done earlier, failure of which gives rise to the presumption that the person possessed of the right or privilege has abandoned or has declined to assert the same. The law on redemption of mortgaged property is clear. Republic Act No. 3135 (An Act to Regulate the Sale of Property Under Special Powers Inserted In Or Annexed to Real Estate Mortgages), as amended by Republic Act No. 4118, provides in Section 6 thereof, thus: "Sec. 6. In all cases in which an extrajudicial sale is made under the special power hereinbefore referred to, the debtor, his successors in interest or any judicial creditor or judgment creditor of said debtor, or any person having a lien on the property subsequent to the mortgage or deed of trust under which the property is sold, may redeem the same at any time within the term of one year from and after the date of the sale; xxx"

We do not take issue with petitioners’ submission that a mortgage may be foreclosed only for the amount appearing in the mortgage document, more so where, as here, the mortgage contract entered into by the parties is evidently silent on the payment of interest.

In a long line of cases, this Court has consistently ruled that the one-year redemption period should be counted not from the date of foreclosure sale, but from the time the certificate of sale is registered with the Register of Deeds. Here, it is not disputed that the sheriff’s certificate of sale was registered on 29 October 1993.

It appears from the evidence on record that

From the foregoing, it is clear as day that

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even the complaint filed by the petitioners with the trial court on 09 November 1994 was instituted beyond the 1-year redemption period. In fact, petitioners no less acknowledged that their complaint for annulment of extrajudicial foreclosure and auction sale was filed about eleven (11) days after the redemption period had already expired on 29 October 19947. They merely harp on the alleged increase in the redemption price of the mortgaged property as the reason for their failure to redeem the same. However, and as already pointed out herein, they chose not, despite notice, to appear during the foreclosure proceedings. Of course, petitioners presently insist that they requested for and were granted an extension of time within which to redeem their property, relying on a handwritten note allegedly written by Mrs. San Diego’s husband on petitioners’ statement of account, indicating therein the date 11 November 1994 as the last day to pay their outstanding account in full. Even assuming, in gratia argumenti, that they were indeed granted such an extension, the hard reality, however, is that at no time at all did petitioners make a valid offer to redeem coupled with a tender of the redemption price. For, in Lazo v. Republic Surety & Insurance Co., Inc., this Court has made it clear that it is only where, by voluntary agreement of the parties, consisting of extensions of the redemption period, followed by commitment by the debtor to pay the redemption price at a fixed date, will the concept of legal redemption be converted into one of conventional redemption. POLICY: Period of redemption is not a prescriptive period but a condition precedent provided by law to restrict the right of the person exercising redemption. Correspondingly, if a person exercising the right of redemption has offered to redeem the property within the period fixed, he is considered to have complied with the

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condition precedent prescribed by law and may thereafter bring an action to enforce redemption. If the period is allowed to lapse before the right of redemption is exercised, then the action to enforce redemption will not prosper, even if the action is brought within the ordinary prescriptive period. Moreover, the period within which to redeem the property sold at a sheriff’s sale is not suspended by the institution of an action to annul the foreclosure sale.

GOLDENWAY MERCHANDISING CORPORATION vs. EQUITABLE PCI BANK

FACTS: Goldenway Merchandising Corporation (petitioner) executed a Real Estate Mortgage in favor of Equitable PCI Bank (respondent) over its real properties situated in Valenzuela, Bulacan (now Valenzuela City). The mortgage secured the P2,000,000.00 loan granted by respondent to petitioner and was duly registered. As Goldenway failed to settle its loan obligation, Equitable extrajudicially foreclosed the mortgage. During the public auction, the mortgaged properties were sold for P3,500,000.00 to Equitable and a Certificate of Sale was issued. Goldenway’s counsel offered to redeem the foreclosed properties by tendering a check in the amount of P3,500,000.00. It’s counsel met with Equitable’s counsel reiterating their intention to exercise the right of redemption. However, Goldenway was told that such redemption is no longer possible because the certificate of sale had already been registered. Goldenway filed a complaint for specific performance and damages against Equitable, asserting that it is the one-year period of redemption under Act No. 3135

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which should apply and not the shorter redemption period provided in R.A. No. 8791. Goldenway argued that applying Section 47 of R.A. 8791 to the real estate mortgage executed in 1985 would result in the impairment of obligation of contracts and violation of the equal protection clause under the Constitution. Additionally, Goldenway faulted Equitable for allegedly failing to furnish it and the Office of the Clerk of Court with a Statement of Account as directed in the Certificate of Sale, due to which Goldenway was not apprised of the assessment and fees incurred by Equitable, thus depriving Goldenway of the opportunity to exercise its right of redemption. Equitable pointed out that Goldenway cannot claim that it was unaware of the redemption price which is clearly provided in Section 47 of R.A. No. 8791, and that Goldenway had all the opportune time to redeem the foreclosed properties. As to the check payment tendered by Goldenway, Equitable said that even assuming arguendo such redemption was timely made, it was not for the amount as required by law. RTC rendered its decision dismissing the complaint. CA which affirmed RTC’s decision. In the present petition, Goldenway contended that Section 47 of R.A. No. 8791 is inapplicable considering that the contracting parties expressly and categorically agreed that the foreclosure of the real estate mortgage shall be in accordance with Act No. 3135. It contended that the right of redemption is part and parcel of the Deed of Real Estate Mortgage itself and attaches thereto upon its execution. It also argues that applying Section 47 of R.A. No. 8791 to the present case would

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be a substantial impairment of its vested right of redemption under the real estate mortgage contract. Such impairment would be violative of the constitutional proscription against impairment of obligations of contract. ISSUES: Whether or not the redemption period should be the 1-year period provided under Act 3135, and not the shorter period under RA 8791 as the parties expressly agreed that foreclosure would be in accordance with Act 3135. (The shorter period under RA 8791 should apply.) May the foregoing amendment be validly applied in this case when the real estate mortgage contract was executed in 1985 and the mortgage foreclosed when R.A. No. 8791 was already in effect? Yes

HELD: The law governing cases of extrajudicial foreclosure of mortgage is Act No. 3135,14 as amended by Act No. 4118. Section 6 thereof provides: SEC. 6. In all cases in which an extrajudicial sale is made under the special power hereinbefore referred to, the debtor, his successors-in-interest or any judicial creditor or judgment creditor of said debtor, or any person having a lien on the property subsequent to the mortgage or deed of trust under which the property is sold, may redeem the same at any time within the term of one year from and after the date of the sale; and such redemption shall be governed by the provisions of sections four hundred and sixty-four to four hundred and sixty-six, inclusive, of the Code of Civil Procedure, in so far as these are not inconsistent with the provisions of this Act. The one-year period of redemption is counted from the date of the registration of the certificate of sale. In this case, the parties provided in their real estate

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mortgage contract that upon petitioner’s default and the latter’s entire loan obligation becoming due, respondent may immediately foreclose the mortgage judicially in accordance with the Rules of Court, or extrajudicially in accordance with Act No. 3135, as amended. However, Section 47 of R.A. No. 8791 otherwise known as "The General Banking Law of 2000" which took effect on June 13, 2000, amended Act No. 3135. Said provision reads: SECTION 47. Foreclosure of Real Estate Mortgage. — In the event of foreclosure, whether judicially or extrajudicially, of any mortgage on real estate which is security for any loan or other credit accommodation granted, the mortgagor or debtor whose real property has been sold for the full or partial payment of his obligation shall have the right within one year after the sale of the real estate, to redeem the property by paying the amount due under the mortgage deed, with interest thereon at the rate specified in the mortgage, and all the costs and expenses incurred by the bank or institution from the sale and custody of said property less the income derived therefrom. However, the purchaser at the auction sale concerned whether in a judicial or extrajudicial foreclosure shall have the right to enter upon and take possession of such property immediately after the date of the confirmation of the auction sale and administer the same in accordance with law. Any petition in court to enjoin or restrain the conduct of foreclosure proceedings instituted pursuant to this provision shall be given due course only upon the filing by the petitioner of a bond in an amount fixed by the court conditioned that he will pay all the damages which the bank may suffer by the enjoining or the restraint of the foreclosure proceeding. Notwithstanding Act 3135, juridical persons whose property is being sold

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pursuant to an extrajudicial foreclosure, shall have the right to redeem the property in accordance with this provision until, but not after, the registration of the certificate of foreclosure sale with the applicable Register of Deeds which in no case shall be more than three (3) months after foreclosure, whichever is earlier. Owners of property that has been sold in a foreclosure sale prior to the effectivity of this Act shall retain their redemption rights until their expiration. Under the new law, an exception is thus made in the case of juridical persons which are allowed to exercise the right of redemption only "until, but not after, the registration of the certificate of foreclosure sale" and in no case more than 3 months after foreclosure, whichever comes first. Petitioner’s contention that Section 47 of R.A. 8791 violates the constitutional proscription against impairment of the obligation of contract has no basis. The purpose of the non-impairment clause of the Constitution is to safeguard the integrity of contracts against unwarranted interference by the State. There is an impairment if a subsequent law changes the terms of a contract between the parties, imposes new conditions, dispenses with those agreed upon or withdraws remedies for the enforcement of the rights of the parties. Section 47 did not divest juridical persons of the right to redeem their foreclosed properties but only modified the time for the exercise of such right by reducing the one-year period originally provided in Act No. 3135. The new redemption period commences from the date of foreclosure sale, and expires upon registration of the certificate of sale or three months after foreclosure, whichever is earlier. There is likewise no retroactive application of the new redemption period because Section 47 exempts from its operation those properties foreclosed prior to its effectivity

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and whose owners shall retain their redemption rights under Act No. 3135. We agree with the CA that the legislature clearly intended to shorten the period of redemption for juridical persons whose properties were foreclosed and sold in accordance with the provisions of Act No. 3135. The difference in the treatment of juridical persons and natural persons was based on the nature of the properties foreclosed – whether these are used as residence, for which the more liberal one-year redemption period is retained, or used for industrial or commercial purposes, in which case a shorter term is deemed necessary to reduce the period of uncertainty in the ownership of property and enable mortgagee-banks to dispose sooner of these acquired assets. It must be underscored that the General Banking Law of 2000 sought to reform the General Banking Act of 1949 to maintain a safe and sound banking system. The amendment introduced by Section 47 embodied one of such safe and sound practices aimed at ensuring the solvency and liquidity of our banks. The right of redemption must be exercised in the manner prescribed by the statute, and within the prescribed time limit, to make it effective. Furthermore, as with other individual rights to contract and to property, it has to give way to police power exercised for public welfare. Having ruled that the assailed Section 47 of R.A. No. 8791 is constitutional, we find no reversible error committed by the CA in holding that petitioner can no longer exercise the right of redemption over its foreclosed properties after the certificate of sale in favor of respondent had been registered.

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UNIONBANK OF THE PHILIPPINES VS. THE COURT OF APPEALS and FERMINA S. DARIO and REYNALDO S. DARIO FACTS: This case stemmed from a real estate mortgage executed by spouses Leopoldo and Jessica Dario (hereafter mortgagors) in favor of UNIONBANK to secure a P3 million loan, including interest and other charges. The mortgage covered a Quezon City property in Leopoldo Dario’s name and was annotated on the title on 18 December 1991. For non-payment of the principal obligation, UNIONBANK extrajudicially foreclosed the property mortgaged on 12 August 1993 and sold the same at public auction, with itself posting the highest bid. On 4 October 1994, one week before the one-year redemption period expired, the DARIOs filed a complaint with the RTC of Quezon City against the mortgagors, UNIONBANK, the Register of Deeds and the City Sheriff of Quezon City. The complaint was for annulment of sale and real estate mortgage with reconveyance and prayer for restraining order and prohibitory injunction. A notice of lis pendens was annotated on the title. On 10 October 1994, RTC issued a temporary restraining order (TRO) enjoining the redemption of property within the statutory period and its consolidation under UNIONBANK’s name. In the meantime, without notifying the DARIOs, UNIONBANK consolidated its title over the foreclosed property on 24 October 1994. TCT No. 41828 was cancelled and TCT No. 120929 in UNIONBANK’s name was issued in its stead. The DARIOs filed an amended complaint on 9 December 1994, alleging that they, not the mortgagors, are the true owners of the property mortgaged and insisting on the invalidity of both the mortgage and its

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subsequent extrajudicial foreclosure. They claimed that the original title, TCT No. 61571, was entrusted to a certain Atty. Reynaldo Singson preparatory to its administrative reconstitution after a fire gutted the Quezon City Hall building. Mortgagor Leopoldo, private respondent Fermina’s son, obtained the property from Atty. Singson, had the title reconstituted under his name without the DARIOs’ knowledge, executed an ante-dated deed of sale in his favor and mortgaged the property to UNIONBANK. The CA upheld Judge Capulong’s order admitting the amended complaint on 24 April 1995, UNIONBANK thereafter elevated its cause to this Court. Meanwhile, on 9 February 1995 UNIONBANK filed its answer ad cautelam asserting its status as an innocent mortgagee for value whose right or lien upon the property mortgaged must be respected even if the mortgagor obtained his title through fraud. It also averred that the action had become “moot and academic by the consolidation of the foreclosed property on 24 October 1994” in its name, resulting to the issuance of TCT No. 120929 by the Register of Deeds of Quezon City. In its 19 August 1995 Order, the RTC held the mortgagors and the City Sheriff of Quezon City in default and sustained UNIONBANK’s contention that the act sought to be enjoined had been enforced, negating the need of hearing the application for preliminary injunction. After considering the arguments presented by the parties, the CA ruled that despite its knowledge that the ownership of the property was being questioned, UNIONBANK took advantage of the DARIOs’ procedural error by consolidating title to the property, which “smacked of bad faith” and “evinced a reprobate disposition of the part of its counsel to advance his client’s cause by fair means or foul.” As a

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result thereof the transfer of title was vitiated by non-adherence to procedural due process. On 26 June 1997, CA nullified the consolidation of ownership, ordered the Register of Deeds to cancel the certificate of title in UNIONBANK’s name and to reinstate TCT No. 41828 with the notice of lis penden sannotated at the back. The CA also set aside the portion of the assailed RTC Orders that declared the DARIOs’ prayer for writ of preliminary injunction as moot and academic. UNIONBANK’s motion for reconsideration of the abovementioned decision was likewise rejected for lack of merit on 7 April 1998. UNIONBANK’s contention: came to this Court claiming to be a mortgagee in good faith and for value with a right to consolidate ownership over the foreclosed property with the redemption period having expired and there having been no redemptioners. UNIONBANK contends that the TRO which provisionally enjoined the tolling of the redemption period was automatically dissolved upon dismissal of the complaint on 17 October 1994. Conformably, consolidation of title in its name and the issuance of TCT No. 120929 rendered further proceedings on the application for injunction academic. Moreover, the alleged fraudulent mortgage was facilitated through the DARIOs’ negligence so they must bear the loss. It also contends that since the DARIOs had filed several pleadings, due process, being an opportunity to be heard either through pleadings or oral arguments, was observed. Dario’s contention: that UNIONBANK’s consolidation of the title in its name was in bad faith, vitiated a standing court order, is against the law, thus void ab initio. The application for preliminary injunction was not rendered moot and academic by consolidation, which took place during the lifetime of the TRO, and did not follow the

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proper legal procedure due to the surreptitious manner it was accomplished. By treating the application for preliminary injunction as moot and academic and denying the motion for indirect contempt without hearing, the RTC order ran afoul with the requirements of due process. ISSUE: Whether or not the consolidation of title in UNIONBANK’s name proper. YES HELD: UNIONBANK’s consolidation of title over the property on 24 October 1994 was proper, though precipitate. Contrary to the DARIOs’ allegation UNIONBANK violated no standing court order. The only bar to consolidation was the temporary restraining order issued by Justice LipanaReyes on 10 October 1994 which effectively halted the tolling of the redemption period 7 days short of its expiration. When the DARIOs’ original complaint was dismissed on 17 October 1994 for failure to append a certification of non-forum shopping, the TRO, as an ancillary order that cannot stand independent of the main proceeding, became functus officio. Thus the tolling of the 12-month redemption period, interrupted by the filing of the complaint and the TRO, recommenced and eventually expired 7 days thereafter or on 24 October 1994, the date of the disputed consolidation. The motion for reconsideration and to amend complaint filed by private respondent on 20 October 1994 was of no moment, this Court recognizing that “a dismissal, discontinuance or non-suit of an action in which a restraining order or temporary injunction has been granted operates as a dissolution of the restraining order or temporary injunction,” regardless of whether the period for filing a motion for reconsideration of the order dismissing the case or appeal therefrom has expired. The rationale therefor is that even in cases where an appeal is taken from a judgment

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dismissing an action on the merits, the appeal does not suspend the judgment, hence the general rule applies that a temporary injunction terminates automatically on the dismissal of the action. We disagree with the appellate court’s observation that consolidation deprived the DARIOs of their property without due process. It is settled that the buyer in a foreclosure sale becomes the absolute owner of the property purchased if it is not redeemed during the period of one year after the registration of the sale. Consolidation took place as a matter of right since there was no redemption of the foreclosed property and the TRO expired upon dismissal of the complaint. UNIONBANK need not have informed private respondent that it was consolidating its title over the property, upon the expiration of the redemption period, without the judgment debtor having made use of his right of redemption, the ownership of the property sold becomes consolidated in the purchaser. Notice to the mortgagors and with more reason, to the DARIOs who are not even parties to the mortgage contract nor to the extrajudicial sale is not necessary. In real estate mortgage, when the principal obligation is not paid when due, the mortgage has the right to foreclose the mortgage and to have the property seized and sold with a view to applying the proceeds to the payment of the principal obligation. Foreclosure may be effected either judicially or extrajudicially. In a public bidding during extra-judicial foreclosure, the creditor-mortgagee, trustee, or other person authorized to act for the creditor may participate and purchase the mortgaged property as any other bidder. Thereafter the mortgagor has one year within which to redeem the property from and after registration of sale with the Register of Deeds. In case of non-

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redemption, the purchaser at foreclosure sale shall file with the Register of Deeds, either a final deed of sale executed by the person authorized by virtue of the power of attorney embodied in the deed or mortgage, or his sworn statement attesting to the fact of non-redemption; whereupon, the Register of Deeds shall issue a new certificate of title in favor of the purchaser after the owner’s duplicate of the certificate has been previously delivered and cancelled. Thus, upon failure to redeem foreclosed realty, consolidation of title becomes a matter of right on the part of the auction buyer, and the issuance of a certificate of title in favor of the purchaser becomes ministerial upon the Register of Deeds. DOCTRINE: In real estate mortgage, when the principal obligation is not paid when due, the mortgages has the right to foreclose the mortgage and to have the property seized and sold with a view to applying the proceeds to the payment of the principal obligation. Foreclosure may be effected either judicially or extrajudicially. In a public bidding during extra-judicial foreclosure, the creditormortgagee, trustee, or other person authorized to act for the creditor may participate and purchase the mortgaged property as any other bidder. Thereafter the mortgagor has one year within which to redeem the property from and after registration of sale with the Register of Deeds. In case of non-redemption, the purchaser at foreclosure sale shall file with the Register of Deeds, either a final deed of sale executed by the person authorized by virtue of the power of attorney embodied in the deed or mortgage, or his sworn statement attesting to the fact of non-redemption; whereupon, the Register of Deeds shall issue a new certificate of title in favor of the purchaser after the owner’s duplicate of the certificate has been previously delivered and cancelled. Thus, upon failure to redeem foreclosed realty, consolidation of title becomes a

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matter of right on the part of the auction buyer, and the issuance of a certificate of title in favor of the purchaser becomes ministerial upon the Register of Deeds.

PHILBANCOR FINANCE, INC. AND VICENTE HIZON, JR. VS. COURT OF APPEALS FACTS: On July 14, 1992, private respondents Alfredo Pare, Pablo Galang and Amado Vie, filed with the Provincial Agrarian Reform Adjudication Board (PARAB) a complaint for maintenance of possession with redemption and tenancy right of pre-emption against petitioners Philbancor Finance, Inc. and Vicente Hizon, Jr. Hizon is the owner of the disputed agricultural lands located in San Fernando, Pampanga and that private respondents are the legitimate and bona fide tenants on the lots for more than fifty (50) years. In October 1983, Hizon, without their knowledge, mortgaged the disputed lots to Philbancor Finance, Inc. Hizon failed to pay his obligations to Philbancor, which eventually led to the sale of the mortgaged lots to the latter. The certificate of sale of the subject property, which was sold at public auction, was registered with the ROD of Pampanga on July 31, 1985. Private respondents came to know of the transaction only when they were notified by Philbancor to vacate the lots, and Philbancor threatened to take from them the actual or physical possession of the agricultural lots. Philbancor alleged, among others, that it has no tenancy or agricultural relationship with private respondents considering that it acquired ownership over the disputed lots by virtue of an extra-judicial foreclosure sale pursuant to Act 3135, as amended; that it is not an agricultural lessor as

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contemplated in Section 10 of R.A. No. 3844, as amended; that assuming private respondents have the right to redeem the lots in question, such right has already expired in accordance with Section 12 of R.A. 3844, which states that the right of redemption may be exercised within two (2) years from the registration of the sale. Decision was rendered in favor of private respondents. ISSUE: Whether or not the private respondents could still exercise their right of redemption of the parcels of land sold at public auction due to foreclosure of the mortgages thereon considering that they invoked their right to redeem only on July 14, 1992, seven years after the date of registration of the certificate of sale with the Register of Deeds. – NO HELD: Redemption period already elapsed R.A. No. 3844, Section 12, provides as follows: In case the landholding is sold to a third person without the knowledge of the agricultural lessee, the latter shall have the right to redeem the same at a reasonable price and consideration. Provided, that the entire landholding sold must be redeemed. Provided further, that where there are two or more agricultural lessees, each shall be entitled to said right of redemption only to the extent of the area actually cultivated by him. The right of redemption under this section may be exercised within two (2) years from the registration of the sale and shall have priority over any other right of legal redemption. In this case, the certificate of sale of the subject property, which was sold at public auction, was registered with the ROD of Pampanga on July 31, 1985. The 2-year redemption period thus expired on July 31, 1987. The complaint for redemption was filed by respondents only on July 14, 1992,

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five (5) years after expiration of the redemption period prescribed by law. Private respondents may still continue possession of the lots Nonetheless, private respondents may continue in possession and enjoyment of the land in question as legitimate tenants because the right of tenancy attaches to the landholding by operation of law. The leasehold relation is not extinguished by the alienation or transfer of the legal possession of the landholding. SC GRANTED petition.

CITY MAYOR, CITY TREASURER, CITY ASSESSOR, ALL OF QUEZON CITY, and ALVIN EMERSON S. YU vs RIZAL COMMERCIAL BANKING CORPORATION FACTS: The spouses Roberto and Monette Naval obtained a loan from respondent Rizal Commercial Banking Corporation, secured by a real estate mortgage of properties. In 1998, the real estate mortgage was later foreclosed and the properties were sold at public auction with respondent as the highest bidder. The corresponding Certificates of Sale were issued in favor of respondent on August 4, 1998. However, the certificates of sale were allegedly registered only on February 10, 2004. On May 30, 2003, an auction sale of tax delinquent properties was conducted by the City Treasurer of Quezon City. Included in the properties that were auctioned were two (2) townhouse units and the parcel of land. For these delinquent properties, Alvin Emerson S. Yu was adjudged as the highest bidder. Upon payment of the tax delinquencies, he was issued the corresponding Certificate of Sale of Delinquent Property. On February 10, 2004, the Certificate of Sale of Delinquent Property was registered with the Office of the Register of Deeds of Quezon City.

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On June 10, 2004, respondent tendered payment for all of the assessed tax delinquencies, interest, and other costs of the subject properties with the Office of the City Treasurer, Quezon City. However, the Office of the City Treasurer refused to accept said tender of payment. Undeterred, on June 15, 2004, respondent filed before the Office of the City Treasurer a Petition for the acceptance of its tender of payment and for the subsequent issuance of the certificate of redemption in its favor. Nevertheless, respondents subsequent tender of payment was also denied. Petitioners argue: that the RTC erred when it ruled that P.D. No. 464 was not repealed by R.A. No. 7160 and when it concluded that the phrase from the date of sale as appearing in Section 261 of R.A. No. 7160 means that the counting of the one (1) year redemption period of tax delinquent properties sold at public action shall commence from the date of registration of the certificate of sale. Respondent argues: the RTC did not rule that P.D. No. 464 was not repealed by R.A. No. 7160, it merely made reference to Section 78 of P.D. No. 464. ISSUES:  W/N section 78 of p.d. 464 was repealed by republic act no. 7160 known as the local government code of 1991.  Whether the period of redemption in a realty tax sale in Quezon City [h]as to be reckoned from the date of annotation of the certificate of sale pursuant to paragraph 7, section 14 of Quezon City tax ordinance no. Sp-9193 or from the date of sale pursuant to section 261 of r.a. 7160.  Whether or not the respondent is entitled to the protection of all the

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provisions of Quezon City tax ordinance number sp-91-93, otherwise known as Quezon City revenue code of 1993, including section 14 thereof, promulgated pursuant to r.a. 7160; HELD: 1. The issue of whether or not R.A No. 7160 or the Local Government Code, repealed P.D. No. 464 or the Real Property Tax Code has long been laid to rest by this Court. Jurisdiction thrives to the effect that R.A. No. 7160 repealed P.D. No. 464. From January 1, 1992 onwards, the proper basis for the computation of the real property tax payable, including penalties or interests, if applicable, must be R. A. No. 7160. As such, it is apparent that in case of sale of tax delinquent properties, R.A. No. 7160 is the general law applicable. Consequently, as regards redemption of tax delinquent properties sold at public auction, the pertinent provision is Section 261 of R.A. No. 7160, which provides: Section 261. Redemption of Property Sold. Within one (1) year from the date of sale, the owner of the delinquent real property or person having legal interest therein, or his representative, shall have the right to redeem the property upon payment to the local treasurer of the amount of delinquent tax, including the interest due thereon, and the expenses of sale from the date of delinquency to the date of sale, plus interest of not more than two percent (2%) per month on the purchase price from the date of sale to the date of redemption. Such payment shall invalidate the certificate of sale issued to the purchaser and the owner of the delinquent real property or person having legal interest therein shall be entitled to a certificate of redemption which shall be issued by the local treasurer or his deputy. From the date of sale until the expiration

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of the period of redemption, the delinquent real property shall remain in the possession of the owner or person having legal interest therein who shall remain in the possession of the owner or person having legal interest therein who shall be entitled to the income and other fruits thereof. The local treasurer or his deputy, upon receipt from the purchaser of the certificate of sale, shall forthwith return to the latter the entire amount paid by him plus interest of not more than two percent (2%) per month. Thereafter, the property shall be free from all lien of such delinquent tax, interest due thereon and expenses of sale. 2. From the foregoing, the owner of the delinquent real property or person having legal interest therein, or his representative, has the right to redeem the property within one (1) year from the date of sale upon payment of the delinquent tax and other fees. Verily, the period of redemption of tax delinquent properties should be counted not from the date of registration of the certificate of sale, as previously provided by Section 78 of P.D. No. 464, but rather on the date of sale of the tax delinquent property, as explicitly provided by Section 261 of R.A. No. 7160. Nonetheless the government of Quezon City, pursuant to the taxing power vested on local government units by Section 5, Article X of the 1987 Constitutions and R.A. No. 7160, enacted City Ordinance No. SP-91, S-93, otherwise known as the Quezon City Revenue Code of 1993, providing, among other things, the procedure in the collection of delinquent taxes on real properties within the territorial jurisdiction of Quezon City. Section 14 (a), Paragraph 7, the Code provides: Within one (1) year from the date of the annotation of the sale of the property

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at the proper registry, the owner of the delinquent real property or person having legal interest therein, or his representative, shall have the right to redeem the property by paying to the City Treasurer the amount of the delinquent tax, including interest due thereon, and the expenses of sale plus interest of two percent (2) per month on the purchase price from the date of sale to the date of redemption. Such payment shall invalidate the certificate of sale issued to the purchaser and the owner of the delinquent real property or person having legal interest therein shall be entitled to a certificate of redemption which shall be issued by the City Treasurer. xxxx Verily, the ordinance is explicit that the one-year redemption period should be counted from the date of the annotation of the sale of the property at the proper registry. At first glance, this provision runs counter to that of Section 261 of R.A. No. 7160 which provides that the one year redemption period shall be counted from the date of sale of the tax delinquent property. There is, therefore, a need to reconcile these seemingly conflicting provisions of a general law and a special law. To harmonize the provisions of the two laws and to maintain the policy of the law to aid rather than to defeat the owners right to redeem his property, Section 14 (a), Paragraph 7 of City Ordinance No. SP-91, S-93 should be construed as to define the phrase one (1) year from the date of sale as appearing in Section 261 of R.A. No. 7160, to mean one (1) year from the date of the annotation of the sale of the property at the proper registry. 3. Consequently, the counting of the one (1) year redemption period of property sold at public auction for its tax delinquency should be counted from the date of annotation of the certificate of sale in the proper Register of Deeds. Applying the foregoing to the case at bar, from the date

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of registration of the Certificate of Sale of Delinquent Property on February 10, 2004, respondent had until February 10, 2005 to redeem the subject properties. Hence, its tender of payment of the subject properties tax delinquencies and other fees on June 10, 2004, was well within the redemption period, and it was manifest error on the part of petitioners to have refused such tender of payment.

CUA LAI CHU, CLARO G. CASTRO, and JUANITA CASTRO vs. HON. HILARIO L. LAQUI “The right to possession of a purchaser at an extrajudicial foreclosure sale is not affected by a pending case questioning the validity of the foreclosure proceeding. The latter is not a bar to the former.” FACTS: November 1994: Philippine Bank of Communication (respondent) loaned P3,200,000 to the petitioners. To secure the loan, petitioners executed in favor of private respondent a Deed of Real Estate Mortgage. August 1997: the mortgage was amended, and the loan was increased by P1,800,000, making the amount P5,000,000. For failure of petitioners to pay the full amount of the outstanding loan upon demand, private respondent applied for the extrajudicial foreclosure of the real estate mortgage. TRIAL COURT: Granted respondent’s motion for a declaration of general default and allowed them to present evidence ex parte. COURT OF APPEALS: Petitioners appealed. However, it was dismissed since the counsel for petitioners failed to indicate the updated PTR Number in the said petition, which is a ground for outright dismissal under B.M 1132. The court held that a proceeding for the issuance of a writ of possession is ex parte in nature.

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ISSUE: Whether the writ of possession was properly issued despite the pendency of a case questioning the validity of the extrajudicial foreclosure sale even when petitioners were declared in default. HELD: The Supreme Court held that since the private respondent had purchased the property at the foreclosure sale, their right over the said property became absolute, vesting in it the corollary right of possession. Petitioners cannot oppose or appeal the court’s order granting the writ of possession in an ex parte proceeding. The remedy of petitioners is to have the sale set aside and the writ of possession cancelled in accordance with Section 8 of Act No. 3135, as amended: SEC. 8. The debtor may, in the proceedings in which possession was requested, but not later than thirty days after the purchaser was given possession, petition that the sale be set aside and the writ of possession cancelled, specifying the damages suffered by him, because the mortgage was not violated or the sale was not made in accordance with the provisions hereof.

MALLARI vs. GOVERNMENT SERVICE INSURANCE SYSTEM FACTS: In 1968, the petitioner obtained two loans totaling P34,000.00 from respondent GSIS. To secure the performance, he mortgaged two parcels of land registered under his and his wife Marcelina Mallari’s names. However, he paid GSIS about ten years after contracting the obligations only P10,000.00 and P20,000.00. Nearly three years later (1984), GSIS applied for the extrajudicial foreclosure of the mortgage by reason of his failure

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to settle his account. He requested an updated computation of his outstanding account. He persuaded the sheriff to hold the publication of the foreclosure to await action on his pending request for final accounting (that is, taking his payments of P30,000.00 made in 1978 into account). GSIS responded to his request. It finally commenced extrajudicial foreclosure proceedings against him because he had meanwhile made no further payments. The petitioner sued GSIS (prelim injunction). The RTC decided in his favor, nullifying the extrajudicial foreclosure and auction sale. GSIS appealed to the CA, which reversed the RTC. Petitioner elevated the CA decision to this Court via petition for review on certiorari. This Court denied his petition for review and motion for reconsideration. As a result, the CA decision became final and executory, rendering unassailable both the extrajudicial foreclosure and auction sale. Because of the petitioner’s request for an extension of time to vacate the properties, GSIS acceded to the request. Yet, the petitioner did not voluntarily vacate the properties, but instead filed a MR and/or to quash the writ of execution and motion to hold GSIS in contempt of court for painting the fence of the properties during the pendency of his said motion. ISSUE: W/N the petitioner, as defaulting mortgagor, was not entitled under Act 3135, as amended, and its pertinent jurisprudence to any prior notice of the application for the issuance of the writ of possession. HELD: No. The petitioner, as defaulting mortgagor, was not entitled under Act 3135, as amended, and its pertinent jurisprudence to any prior notice of the application for the issuance of the writ of

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possession. A writ of possession, which commands the sheriff to place a person in possession of real property, may be issued in: (1) Land registration proceedings under Section 17 of Act No. 496; (2) Judicial foreclosure, provided the debtor is in possession of the mortgaged property, and no third person, not a party to the foreclosure suit, had intervened; (3) Extrajudicial foreclosure of a real estate mortgage, pending redemption under Section 7 of Act No. 3135, as amended by Act No. 4118; and (4) Execution sales, pursuant to the last paragraph of Section 33, Rule 39 of the Rules of Court.31 Anent the redemption of property sold in an extrajudicial foreclosure sale made pursuant to the special power referred to in Section 132 of Act No. 3135,33 as amended, the debtor, his successor-in-interest, or any judicial creditor or judgment creditor of said debtor, or any person having a lien on the property subsequent to the mortgage or deed of trust under which the property is sold has the right to redeem the property at anytime within the term of one year from and after the date of the sale, such redemption to be governed by the provisions of Section 464 to Section 466 of the Code of Civil Procedure, to the extent that said provisions were not inconsistent with the provisions of Act 3135.34 In this regard, we clarify that the redemption period envisioned under Act 3135 is reckoned from the date of the registration of the sale, not from and after the date of the sale, as the text of Act 3135 shows. Although the original Rules of Court (effective on July 1, 1940) incorporated Section 464 to Section 466 of the Code of Civil Procedure as its Section 25 (Section 464); Section 26 (Section 465); and Section 27 (Section 466) of Rule 39, with Section 27 still expressly reckoning the

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redemption period to be "at any time within twelve months after the sale;" and although the Revised Rules of Court (effective on January 1, 1964) continued to provide in Section 30 of Rule 39 that the redemption be made from the purchaser "at any time within twelve (12) months after the sale,"35 the 12-month period of redemption came to be held as beginning "to run not from the date of the sale but from the time of registration of the sale in the Office of the Register of Deeds."36 This construction was due to the fact that the sheriff’s sale of registered (and unregistered) lands did not take effect as a conveyance, or did not bind the land, until the sale was registered in the Register of Deeds.37 Desiring to avoid any confusion arising from the conflict between the texts of the Rules of Court (1940 and 1964) and Act No. 3135, on one hand, and the jurisprudence clarifying the reckoning of the redemption period in judicial sales of real property, on the other hand, the Court has incorporated in Section 28 of Rule 39 of the current Rules of Court (effective on July 1, 1997) the foregoing judicial construction of reckoning the redemption period from the date of the registration of the certificate of sale, to wit: Sec. 28. Time and manner of, and amounts payable on, successive redemptions; notice to be given and filed. — The judgment obligor, or redemptioner, may redeem the property from the purchaser, at any time within one (1) year from the date of the registration of the certificate of sale, by paying the purchaser the amount of his purchase, with one per centum per month interest thereon in addition, up to the time of redemption, together with the amount of any assessments or taxes which the purchaser may have paid thereon after purchase, and interest on such last named amount at the same rate; and if the purchaser be also a creditor having a prior lien to that of the

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redemptioner, other than the judgment under which such purchase was made, the amount of such other lien, with interest. Property so redeemed may again be redeemed within sixty (60) days after the last redemption upon payment of the sum paid on the last redemption, with two per centum thereon in addition, and the amount of any assessments or taxes which the last redemptioner may have paid thereon after redemption by him, with interest on such last-named amount, and in addition, the amount of any liens held by said last redemptioner prior to his own, with interest. The property may be again, and as often as a redemptioner is so disposed, redeemed from any previous redemptioner within sixty (60) days after the last redemption, on paying the sum paid on the last previous redemption, with two per centum thereon in addition, and the amounts of any assessments or taxes which the last previous redemptioner paid after the redemption thereon, with interest thereon, and the amount of any liens held by the last redemptioner prior to his own, with interest. Written notice of any redemption must be given to the officer who made the sale and a duplicate filed with the registry of deeds of the place, and if any assessments or taxes are paid by the redemptioner or if he has or acquires any lien other than that upon which the redemption was made, notice thereof must in like manner be given to the officer and filed with the registry of deeds; if such notice be not filed, the property may be redeemed without paying such assessments, taxes, or liens. (30a) (Emphasis supplied). Accordingly, the mortgagor or his successor-in-interest must redeem the foreclosed property within one year from

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the registration of the sale with the Register of Deeds in order to avoid the title from consolidating in the purchaser. By failing to redeem thuswise, the mortgagor loses all interest over the foreclosed property.38 The purchaser, who has a right to possession that extends beyond the expiration of the redemption period, becomes the absolute owner of the property when no redemption is made,39 that it is no longer necessary for the purchaser to file the bond required under Section 7 of Act No. 3135, as amended, considering that the possession of the land becomes his absolute right as the land’s confirmed owner.40 The consolidation of ownership in the purchaser’s name and the issuance to him of a new TCT then entitles him to demand possession of the property at any time, and the issuance of a writ of possession to him becomes a matter of right upon the consolidation of title in his name. The court can neither halt nor hesitate to issue the writ of possession. It cannot exercise any discretion to determine whether or not to issue the writ, for the issuance of the writ to the purchaser in an extrajudicial foreclosure sale becomes a ministerial function.41 Verily, a marked distinction exists between a discretionary act and a ministerial one. A purely ministerial act or duty is one that an officer or tribunal performs in a given state of facts, in a prescribed manner, in obedience to the mandate of a legal authority, without regard to or the exercise of his own judgment upon the propriety or impropriety of the act done. If the law imposes a duty upon a public officer and gives him the right to decide how or when the duty shall be performed, such duty is discretionary, not ministerial. The duty is ministerial only when its discharge requires neither the exercise of official discretion nor the exercise of judgment.42 The proceeding upon an application for a writ of possession is ex parte and summary

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in nature, brought for the benefit of one party only and without notice being sent by the court to any person adverse in interest. The relief is granted even without giving an opportunity to be heard to the person against whom the relief is sought. 43 Its nature as an ex parte petition under Act No. 3135, as amended, renders the application for the issuance of a writ of possession a non-litigious proceeding.44 It is clear from the foregoing that a nonredeeming mortgagor like the petitioner had no more right to challenge the issuance of the writ of execution cum writ of possession upon the ex parte application of GSIS. He could not also impugn anymore the extrajudicial foreclosure, and could not undo the consolidation in GSIS of the ownership of the properties covered by TCT No. 284272-R and TCT No. 284273-R, which consolidation was already irreversible. Hence, his moves against the writ of execution cum writ of possession were tainted by bad faith, for he was only too aware, being his own lawyer, of the dire consequences of his non-redemption within the period provided by law for that purpose.

DEVELOPMENT BANK OF THE PHILIPPINES VS CA and EMERAL RESORT HOTEL CORP. (G.R. No. 125838, June 10, 2003) FACTS: Emerald Resort Hotel Corporation ("ERHC") obtained a loan from petitioner Development Bank of the Philippines ("DBP"). To secure the loan, ERHC mortgaged its personal and real properties to DBP. On 18 March 1981, DBP approved a restructuring of ERHC’s loan subject to certain conditions. On 5 June 1986, alleging that ERHC failed to pay its loan, DBP filed with the Office of the Sheriff, Regional Trial Court of Iriga City, an Application for Extra-judicial

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Foreclosure of Real Estate and Chattel Mortgages. Deputy Provincial Sheriffs Abel Ramos and Ruperto Galeon issued the required notices of public auction sale of the personal and real properties. However, Sheriffs Ramos and Galeon failed to execute the corresponding certificates of posting of the notices. On 10 July 1986, the auction sale of the personal properties proceeded. The Office of the Sheriff scheduled on 12 August 1986 the public auction sale of the real properties. The Bicol Tribune published on 18 July 1986, 25 July 1986 and 1 August 1986 the notice of auction sale of the real properties. However, the Office of the Sheriff postponed the auction sale on 12 August 1986 to 11 September 1986 at the request of ERHC. DBP did not republish the notice of the rescheduled auction sale because DBP and ERHC signed an agreement to postpone the 12 August 1986 auction sale. ERHC, however, disputes the authority of Jaime Nuevas who signed the agreement for ERHC. On 22 December 1986, ERHC filed with the Regional Trial Court of Iriga City a complaint for annulment of the foreclosure sale of the personal and real properties. ERHC alleged that the foreclosure was void mainly because (1) DBP failed to comply with the procedural requirements prescribed by law; and (2) the foreclosure was premature. DBP’s CONTENTION: DBP maintains that it complied with the mandatory posting requirement under applicable laws. DBP insists that the non-execution of the certificate of posting of the auction sale notices did not invalidate the foreclosure. DBP also maintains that when upon their (DBP and ERHC) agreement to postpone the auction sale, there was no more need to publish the notice for the September 11,

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1986 auction sale. ISSUE: W/N DBP complied with the posting and publication requirements under applicable laws for a valid foreclosure. HELD: POSTING REQUIREMENT: COMPLIED WITH This Court ruled in Cristobal v. Court of Appeals that a certificate of posting is not required, much less considered indispensable for the validity of an extrajudicial foreclosure sale of real property under Act No. 3135. In the present case, the foreclosing sheriffs failed to execute the certificate of posting of the auction sale notices. However, this fact alone does not prove that the sheriffs failed to post the required notices. As held before, "the fact alone that there is no certificate of posting attached to the sheriff's records is not sufficient to prove the lack of posting." Based on the records, DBP presented sufficient evidence to prove that the sheriffs posted the notices of the extrajudicial sale. A careful examination of these two documents clearly shows that the foreclosing sheriffs posted the required notices of sale. Deputy Sheriff Galeon also testified that he, together with Sheriff Ramos, actually posted the notices of sale. Indisputably, there is clear and convincing evidence of the posting of the notices of sale. What the law requires is the posting of the notice of sale, which is present in this case, and not the execution of the certificate of posting. Moreover, ERHC bore the burden of presenting evidence that the sheriffs failed to post the notices of sale. In the absence of contrary evidence, as in this case, the presumption prevails that the sheriffs performed their official duty of posting the notices of sale. Consequently, we hold that the non-execution of the certificate of posting cannot nullify the foreclosure of the

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chattel and real estate mortgages in the instant case. PUBLICATION REQUIREMENT: NOT COMPLIED The Court held recently in Ouano v. Court of Appeals that republication in the manner prescribed by Act No. 3135 is necessary for the validity of a postponed extrajudicial foreclosure sale. Another publication is required in case the auction sale is rescheduled, and the absence of such republication invalidates the foreclosure sale. The Court also ruled in Ouano that the parties have no right to waive the publication requirement in Act No. 3135. Publication, therefore, is required to give the foreclosure sale a reasonably wide publicity such that those interested might attend the public sale. To allow the parties to waive this jurisdictional requirement would result in converting into a private sale what ought to be a public auction. The Court also ruled on DBP’s argument that Sec. 24, Rule 39 of the Rules of Court does not apply in the present case. Act No. 3135, as amended by Act No. 4118 otherwise known as "An Act to Regulate the Sale of Property under Special Powers Inserted in or Annexed to Real Estate Mortgages" applies in cases of extrajudicial foreclosure sale. A different set of law applies to each class of sale mentioned. The cited provision in the Rules of Court hence does not apply to an extrajudicial foreclosure sale. As to DBP’s contention that ERHC’s act of requesting postponement of the 12 August 1986 auction sale estops ERHC from challenging the absence of publication of the notice of the rescheduled auction sale, the records are bereft of any evidence that ERHC requested the postponement without need of republication of the notice

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of sale. The form of the notice of extrajudicial sale is now prescribed in Circular No. 7-200226 issued by the Office of the Court Administrator on 22 January 2002. Section 4(a) of Circular No. 7-2002 provides that: XXX "In the event the public auction should not take place on the said date, it shall be held on ___________,______ without further notice." The last paragraph of the prescribed notice of sale allows the holding of a rescheduled auction sale without reposting or republication of the notice. However, the rescheduled auction sale will only be valid if the rescheduled date of auction is clearly specified in the prior notice of sale. The absence of this information in the prior notice of sale will render the rescheduled auction sale void for lack of reposting or republication. If the notice of auction sale contains this particular information, whether or not the parties agreed to such rescheduled date, there is no more need for the reposting or republication of the notice of the rescheduled auction sale. In the instant case, there is no information in the notice of auction sale of any date of a rescheduled auction sale. Even if such information were stated in the notice of sale, the reposting and republication of the notice of sale would still be necessary because Circular No. 7-2002 took effect only on 22 April 2002. There were no such guidelines in effect during the questioned foreclosure. Clearly, DBP failed to comply with the publication requirement under Act No. 3135. There was no publication of the notice of the rescheduled auction sale of the real properties. Therefore, the extrajudicial foreclosure of the real estate mortgage is void.

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JOSE RAMIREZ vs THE MANILA BANKING CORP. (G.R. No. 198800, December 11, 2013) FACTS: Jose T. Ramirez mortgaged two parcels of land located at Bayanbayanan, Marikina City in favor of The Manila Banking Corporation to secure his P265,000 loan. The real estate mortgage provides that all correspondence relative to the mortgage including notifications of extrajudicial actions shall be sent to petitioner Ramirez at his given address, to wit: N) All correspondence relative to this MORTGAGE, including demand letters, summons, subpoenas or notifications of any judicial or extrajudicial actions shall be sent to the MORTGAGOR at the address given above or at the address that may hereafter be given in writing by the MORTGAGOR to the MORTGAGEE, and the mere act of sending any correspondence by mail or by personal delivery to the said address shall be valid and effective notice to the MORTGAGOR for all legal purposes and the fact that any communication is not actually received by the MORTGAGOR, or that it has been returned unclaimed to the MORTGAGEE, or that no person was found at the address given, or that the address is fictitious or cannot be located, shall not excuse or relieve the MORTGAGOR from the effects of such notice.

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mortgage was violated for he was not notified of the foreclosure and auction sale. In its answer, respondent claimed that the foreclosure proceedings were valid. ISSUE: W/N Paragraph N of the Real Estate Mortgage was violated by Manila Bank and What is its effect? HELD: YES. Paragraph N was violated by Manila Bank. The Court ruled that when respondent failed to send the notice of extrajudicial foreclosure sale to Ramirez, it committed a contractual breach of said paragraph N sufficient to render the extrajudicial foreclosure sale on September 8, 1994 null and void.

Manila Bank filed a request for extrajudicial foreclosure of real estate mortgage on the ground that Ramirez failed to pay his loan despite demands. During the auction sale on September 8, 1994, respondent was the only bidder for the mortgaged properties.

In Carlos Lim, et al. v. Development Bank of the Philippines, we held that unless the parties stipulate, personal notice to the mortgagor in extrajudicial foreclosure proceedings is not necessary because Section 3 of Act No. 3135 only requires the posting of the notice of sale in three public places and the publication of that notice in a newspaper of general circulation. In this case, the parties stipulated in paragraph N of the real estate mortgage that all correspondence relative to the mortgage including notifications of extrajudicial actions shall be sent to mortgagor Ramirez at his given address. Respondent had no choice but to comply with this contractual provision it has entered into with Ramirez. The contract is the law between them. Hence, we cannot agree with the bank that paragraph N of the real estate mortgage does not impose an additional obligation upon it to provide personal notice of the extrajudicial foreclosure sale to the mortgagor Ramirez.

Ramirez sued respondent for annulment of sale and prayed that the certificate of sale be annulled on the ground, among others, that paragraph N of the real estate

As we explained in Metropolitan Bank v. Wong, the bank’s violation of paragraph N of the real estate mortgage is sufficient to invalidate the extrajudicial foreclosure sale.

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510.50. ALFREDO OUANO vs CA and HEIRS OF JULIETA OUANO (G.R. No. 129729, March 4, 2003) FACTS: On June 8, 1977, Julieta M. Ouano (Julieta), now deceased, obtained a loan from the PNB in the amount of P104,280.00. As security for said loan, she executed a real estate mortgage over two parcels of land located at Opao, Mandaue City. She defaulted on her obligation. On September 29, 1980, PNB filed a petition for extrajudicial foreclosure with the City Sheriff of Mandaue City. On November 4, 1980, the sheriff prepared a notice of sale setting the date of public auction of the two parcels of land on December 5, 1980 at 9:00 a.m. to 4:00 p.m. He caused the notice to be published in the Cebu Daily Times, a newspaper of general circulation in Mandaue City, in its issues of November 13, 20 and 27, 1980. He likewise posted copies thereof in public places in Mandaue City and in the place where the properties are located. However, the sale as scheduled and published did not take place as the parties, on four separate dates, executed Agreements to Postpone Sale (Agreements). These Agreements were addressed to the sheriff, requesting the latter to defer the auction sale to another date at the same time and place, "without any further republication of the Notice." There was however no sale that took place and was repeatedly postponed and in all these postponements, no new notice of sale was issued, nor was there any republication or reposting of notice for the rescheduled dates. Finally, on May 29, 1981, the sheriff conducted the auction sale, awarding the two parcels of land to PNB, the only bidder. He executed a Certificate of Sale certifying the sale for and in consideration of P195,

Julieta failed to redeem the properties within the one year period from registration of sale. PNB later conveyed the properties to Alfredo Ouano, the brother of Julieta. On March 28, 1983, Julieta sent demand letters to PNB and petitioner, pointing out irregularities in the foreclosure sale.On April 18, 1983, Julieta filed a complaint with the Regional Trial Court (RTC) of Cebu for the nullification of the May 29, 1981 foreclosure sale. ISSUE: W/N the requirements of Act No. 3135 were complied with in the May 29, 1981 foreclosure sale. HELD: The governing law for extrajudicial foreclosures is Act No. 3135 as amended by Act No. 4118. The provision relevant to this case is Section 3, which provides: SEC. 3. Notice shall be given by posting notices of the sale for not less than twenty (20) days in at least three public places of the municipality or city where the property is situated, and if such property is worth more than four hundred pesos, such notice shall also be published once a week for at least three consecutive weeks in a newspaper of general circulation in the municipality of city. In a number of cases, we have consistently held that failure to advertise a mortgage foreclosure sale in compliance with statutory requirements constitutes a jurisdictional defect invalidating the sale. Consequently, such defect renders the sale absolutely void and no title passes. Petitioner, however, insists that there was substantial compliance with the publication requirement, considering that prior publication and posting of the notice of the first date were made.

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In Tambunting v. Court of Appeals, we held that republication in the manner prescribed by Act No. 3135 is necessary for the validity of a postponed extrajudicial foreclosure sale. Publication, therefore, is required to give the foreclosure sale a reasonably wide publicity such that those interested might attend the public sale. To allow the parties to waive this jurisdictional requirement would result in converting into a private sale what ought to be a public auction.

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known as "An Act to Regulate the Sale of Property under Special Powers Inserted in or Annexed to Real Estate Mortgages" applies in cases of extrajudicial foreclosure sale. A different set of law applies to each class of sale mentioned. Next, petitioner maintains that Julieta's act of requesting the postponement and repeatedly signing the Agreements had placed her under estoppel, barring her from challenging the lack of publication of the auction sale.

Moreover, assuming arguendo that the written waivers are valid, we find noticeable flaws that would nevertheless invalidate the foreclosure proceedings. The Agreements are clearly defective for having been belatedly executed and filed with the sheriff. The party who may be said to be at fault for this failure, and who should bear the consequences, is no other than PNB, the mortgagee in the case at bar. It is the mortgagee who causes the mortgaged property to be sold, and the date of sale is fixed upon his instruction. We have held that the mortgagee's right to foreclose a mortgage must be exercised according to the clear mandate of the law. Every requirement of the law must be complied with, lest the valid exercise of the right would end. PNB's inaction on the scheduled date of sale and belated filing of requests to postpone may be deemed as an abandonment of the petition to foreclose it filed with the sheriff. Consequently, its right to foreclose the mortgage based on said petition lapsed.

We rule otherwise. Julieta did request for the postponement of the foreclosure sale to extend the period to settle her obligation. However, the records do not show that she requested the postponement without need of republication and reporting of notice of sale.

In a vain attempt to uphold the validity of the aforesaid waiver, petitioner asserts that the Court of Appeals should have applied Rule 39, Section 24 of the Rules of Court, which allows adjournment of execution sales by agreement of the parties. The cited provision in the Rules of Court hence does not apply to an extrajudicial foreclosure sale. Act No. 3135, as amended by Act No. 4118 otherwise

More importantly, the waiver being void for being contrary to the express mandate of Act No. 3135, such cannot be ratified by estoppel. Estoppel cannot give validity to an act that is prohibited by law or one that is against public policy. Neither can the defense of illegality be waived.

In addition, we observe herein that the Agreements prepared by the counsel of PNB were in standard forms of the bank, labeled as "Legal Form No. We therefore held that said agreement partakes of the nature of a contract of adhesion, i.e., one in which one of the contracting parties imposes a ready-made form of contract which the other party may accept or reject, but cannot modify. One party prepares the stipulation in the contract, while the other party merely affixes his signature or his "adhesion" thereto, giving no room for negotiation, and depriving the latter of the opportunity to bargain on equal footing. As such, their terms are construed strictly against the party who drafted it.

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VR Enterprise. DARCEN V. V.R. GONZALES CREDIT ENTERPRISES, INC. G.R. No. 199747; April 03, 2013 FACTS: Spouses MamertoDarcen and Flora De Guzman begot 7 children, namely: Teodoro, Mamerto, Jr., Nestor, Benilda, and Elenita (petitioners), and their brothers Arturo and Manuel. Mamerto died in 1986, leaving behind 3 titled parcels of land located in Bulacan, all under the name “Mamerto Darcen married to Flora de Guzman.” According to the petitioners, sometime in 1990, their brother Manuel borrowed money from Veronica Gonzales (Gonzales), president of V.R. Gonzales Credit Enterprises. Manuel sought their consent in constituting a mortgage over the above properties of their father, but the petitioners refused. Manuel then caused the execution of an Extra-Judicial Settlement of Estate with Waiver (ESEW) by forging the signatures of the petitioners and their mother Flora. In the said instrument, the petitioners were said to have waived their shares in their father’s estate in favor of their mother, thus making Flora the sole owner of the 3 lots. Meanwhile, fire had razed part of the ROD of Bulacan and destroyed the titles to the lots. After reconstitution of the titles, new titles were issued in the name of “Flora de Guzman, Filipino, of legal age, widow.” Petitioners further claim that on the day that the new titles were issued, they caused the annotation thereon of their hereditary claim in their father’s estate. In 2000, Flora died. In 2007, Gonzales demanded payment from the petitioners of several loans allegedly taken out by Flora, claiming that the latter had mortgaged the properties to

Petitioners say that they “immediately noted that the purported signatures of their mother on the 3 mortgage contracts were actually forgeries, and that the mortgage contracts did not state when the supposed loan obligations would become due and demandable.” They maintain that their mother did not contract the loans, and they point to their brothers Manuel and Arturo, whose signatures appear as witnesses on the mortgage documents, as guilty of forging her signatures and of receiving the proceeds of the loans. The petitioners also disclaim any knowledge of the loans, or of their consent thereto, either before or after. VR Enterprise extrajudicially foreclosed the mortgage over the lots, but meanwhile, petitioners filed for “Annulment of Mortgage, Extra-Judicial Foreclosure, Auction Sale, Certificate of Sale, and Damages,” seeking to void the real estate mortgages, the extrajudicial foreclosure and the auction sale of the lots. The three properties were sold, with the VR Enterprise as the highest bidder. The one-year period to redeem lapsed. VR Enterprise executed an affidavit of consolidation of ownership, and a writ of possession was issued against petitioners. Contention of Petitioners: They are adverse claimants who are third parties and strangers to the real estate mortgages executed by their mother. The issuance of a writ of possession in favor of the purchaser in an extrajudicial foreclosure sale ceases to be ministerial where the property is in the possession of a third party who holds the property under a claim adverse to that of the debtor/mortgagor. The petitioners maintain that they knew nothing about the mortgage contracts,

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whose validity is now the subject of their appeal. They further claim that their signatures in the ESEW were forged. As co-heirs and co-owners with their mother of the subject lots, they have a claim directly adverse to hers, and therefore, also directly adverse to her successor-ininterest, VR Enterprise. Thus they should be entitled to retain possession of the properties until the claim for ownership is resolved. ISSUE: WON the petitioners are adverse claimants entitled to retain possession of the properties. NO HELD: The long-settled rule in extrajudicial foreclosure of real estate mortgage is that after consolidation of ownership of the foreclosed property, it is the ministerial duty of the court to issue, as a matter of right, an ex parte writ of possession to the buyer. The established rule is that the purchaser in an extrajudicial foreclosure sale becomes the absolute owner of the property if no redemption is made within 1 year from the registration of the certificate of sale. Possession, being a recognized essential attribute of ownership after consolidation of title, the purchaser may demand possession as a matter of right. The possession may be granted to the buyer either (a) within the one-year redemption period, upon the filing by the purchaser of a bond, or (b) after the lapse of the redemption period, without need of a bond. It is a time-honored legal precept that after the consolidation of titles in the buyer’s name, for failure of the mortgagor to redeem, entitlement to a writ of possession becomes a matter of right. As the confirmed owner, the purchaser’s right to

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possession becomes absolute. The basis of this right to possession is the purchaser’s ownership of the property.There is even no need for him to post a bond, and it is the ministerial duty of the courts to issue the same upon proper application and proof of title. The nature of an ex parte petition for issuance of the possessory writ is a nonlitigious proceeding and summary in nature. As an ex parte proceeding, it is brought for the benefit of one party only, and without notice to or consent by any person adversely interested. Furthermore, it is settled that a pending action for annulment of mortgage or foreclosure sale does not stay the issuance of the writ of possession. Nonetheless, the ministerial duty of the court to issue an ex parte writ of possession ceases once it appears that there is a third party in possession of the property, who is a stranger to the mortgage and who claims a right adverse to that of the debtor/ mortgagor. Section 33, Rule 39 of the Rules of Court provides that in an execution sale, the possession of the property shall be given to the purchaser or last redemptioner, unless a third party is actually holding the property adversely to the judgment obligor. The application of the above Section has been extended to extrajudicial foreclosure sales pursuant to Section 6 of Act No. 3135. The petitioners have persisted in making the point that they are strangers to the mortgage contracts executed by their mother over their father’s lots, which they claim to co-own with her, an interest adverse to that of the VR Enterprise. Thus, as an exception, the possession of the mortgaged property may be awarded to

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a purchaser in the extrajudicial foreclosure unless a third party is actually holding the property adversely to the judgment debtor. The purchaser’s right of possession is recognized only as against the judgment debtor and his successor-in-interest but not against persons whose right of possession is adverse to the latter. However, the SC finds no proof that the petitioners are adverse third-party claimants entitled to be retained in possession. The chief consideration for granting to VR Enterprise a writ of possession was that the assailed mortgages executed by Flora in 1995 were constituted on properties covered by titles issued solely in her name. It will be noted that it was only in June 2007, after VR Enterprise had threatened them with extrajudicial foreclosure and eviction, or after 12 years had passed, that the petitioners brought an action to annul the real estate mortgages, and meanwhile, Flora had obtained several loans totaling P7.5 million fromVR Enterprise. It took petitioners even longer, 15 years, to assail the validity of the ESEW, which gave Flora sole title to the subject lots under the new reconstituted titles issued to her. Realizing that their claim of forgery of their mother’s signature in the mortgage contracts was tenuous, the petitioners now claim that an earlier instrument, the ESEW, was falsified by their brothers Manuel and Arturo who forged their signatures. Yet the petitioners did not explain why the said instrument named neither Manuel nor Arturo but their mother Flora as the sole beneficiary of the heirs’ waiver. Considering that the petitioners are now asserting that their signatures in the ESEW had been forged, it is inexplicable why they failed to attach a copy thereof to

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their Opposition to the ex parte petition for writ of possession. All that they could say about this “oversight” is that they “were never able to insist on the presentation of the said document because they were never parties in the case for writ of possession. Besides, the case for writ of possession is summary and nonadversarial.” But this is a lie and an obvious subterfuge, for the fact is that they appeared with their lawyer, and had an opportunity to lay out the complete facts and present whatever pertinent documents were in their possession. They did no such thing. Not only did petitioners not sue to annul the extrajudicial settlement, but on the very day that the new titles were issued to Flora, an inscription appears in the said titles announcing that one-half (½) of the lots would be bound for the next two years to possible claims by other heirs or unknown creditors against the estate of Mamerto. All three titles bear this same inscription, which the petitioners admit that they themselves had caused to be annotated on their mother’s titles. All the above leave little doubt that the petitioners had always known about, and had consented to, the extrajudicial settlement of the estate of their father Mamerto, as well as waiver by them of their shares therein in favor of their mother Flora. For this very reason, they cannot now be permitted to interpose an adverse claim in the subject mortgaged lots and defeat the writ of possession issued to VR Enterprise. Note: Any question regarding the validity of the mortgage or its foreclosure cannot be a legal ground for the refusal to issue a writ of possession. Regardless of whether or not there is a pending suit for the annulment of the mortgage or the foreclosure itself, the purchaser is entitled to a writ of possession without prejudice, of

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course, to the eventual outcome of the pending annulment case.

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BARRETTO VS. BARRETTO G.R. No. L-11933; December 1, 1917 FACTS: Juan Antonio Barretto, Sr.  succeeded by his children  Juan Antonio, Jr. (debtor), Leonardo (Atty. of debtor) and other heirs  Juan Antonio Jr. borrowed money from  Antonio Vicente Barretto (creditor)  mortgaged the hacienda  failed to pay  Antonio took possession of the hacienda  Antonio succeeded by Alberto (son, plaintiff)  Alberto in present possession  Leonardo usurped the hacienda Alberto’s case  Alberto Barretto alleges that he is the owner of the whole hacienda called Balintagac.  He was in possession of the said hacienda quietly, peacefully, and continuously, as were his predecessors since the year 1884 until 1912.  Leonardo Barretto, alleging himself to be the owner of a certain part of said hacienda, illegally and unduly usurped a portion thereof.  Leonardo refused to return that portion of land usurped together with the fruits received, or their value, in spite of the fact that he has been required to do so in writing by the Alberto. Leonardo’s case  The hacienda of Balintagac was owned and possessed by Juan Antonio Barretto, Sr., who died in 1881 and left 7 children: Juan Antonio, Angelica Maria, Leonardo, Francisca, Bartolome, Jose and Leopoldo.  The 7 children of Juan Antonio, Sr. succeeded him in all his rights and actions and became owners with the right of possession of hacienda Balintagac.

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Juan Antonio Jr., then executor of his deceased father Juan Antonio Sr., declaring himself to be the absolute owner of all the hacienda of Balintagac, borrowed money in the sum of P11,000 from Antonio Vicente Barretto for the expenses of the hacienda with the obligation to pay P1,000 for delinquency, and interests at 8% per annum, payable quarterly in advance As guaranty for said loan, he mortgaged the cultivated half of the hacienda and other properties. For the failure of the debtor to pay his debt, the creditor Antonio Vicente brought an action to foreclose the mortgage in order to recover the money loaned, against Juan Antonio Jr. in his own behalf and as executor of his father. Half of the mortgaged hacienda was levied upon and a judgment to sell the property was rendered, but it could not be sold in spite of the fact that it was placed at auction three times. Antonio Vicente prayed for the adjudication of all the property attached to the payment of his credit of P7,648, to which Leonardo voluntarily agreed and consented as attorney in fact of Juan Antonio Jr. Juan Antonio Jr. and his brothers, not being able to pay the debt, interests, and costs, delivered and conveyed all the hacienda of Balintagac to the creditor. From then, the brothers of Juan Antonio Jr. administered, by the appointment and exclusive account of Antonio Vicente, the entire hacienda, acknowledging him as the owner of all of it and delivering to him all its products till April 1896.

ISSUES: 1. WON there was a contract of antichresis. YES 2. WON the creditor acquires through possession the ownership of the real property in antichresis when debtor fails

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to pay debt within the stipulated time. NO. HELD: Antonio Vicente Barretto as creditor — not being able to collect his credit of P11,000 and interest at 8%, nor obtain the adjudication in his favor of half of hacienda of Balintagac which was mortgaged for the security of the debt, and there having been no bidders on the three occasions in which it was offered for public auction — took possession of all the hacienda, and from that time on received through his administrators the products of the same for the purpose of collecting his credit interests. It may be established that he took possession of said hacienda by virtue of voluntary assignment with the express consent of heirs of Juan Antonio Sr., owner of one-half of the hacienda and of Juan Antonio Jr., owner of the other half. It does not fully appear which contract has been entered into between the creditor and the heirs of Juan Antonio, Sr., and his son Juan Antonio Jr; but from the facts that have been fully established it is inferred that once the foreclosure proceedings were suspended, because the creditor had not been able to obtain the adjudication of the hacienda in his favor, the creditor took possession of the hacienda of Balintagac, and held it in usufruct with the knowledge and express consent of its legitimate owners; there has not been any opposition or protest against the possession, which by usufruct the creditor and his successors enjoyed. Considering that from the facts proved, which refer to the possession and usufruct enjoyed by Antonio Vicente and then his successors, one of whom is Alberto Barretto, it is logically deduced that such facts were accomplished by virtue of a verbal contract, and not by written one, entered into between the owners of the hacienda and the creditor Antonio Vicente.

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Since it is not shown that the debtors have delivered the whole hacienda to the creditor by assignment of the property, it is to be presumed that the debtors delivered not only one half, but the whole hacienda with a view that the creditor might collect by usufruct his credit with the accrued interests. In spite of the fact that the agreement between the creditor and the debtors was not set down in any document, due to the relationship which exists between them, it may safely be asserted that the debtors have limited themselves to give to the creditor the right to collect his credit from the fruits of the hacienda of Balintagac, conferring upon him the possession of the property, but not transferring to him the dominion of the same, since such transfer was not proved in the present action. The agreement or verbal stipulation is an antichresis as defined by Article 1881 of the Civil Code, which says: By the antichresis a creditor acquires a right to receive the fruits of real property of his debtor, with the obligation to apply them to the payment of the interest, if due, and afterwards to the principal of his credit. The perusal of articles 1882-1886 shows that the possession of the hacienda enjoyed by the creditor Antonio Vicente and his successors up to the present time was conferred to them by virtue of the stated contract or agreement in antichresis. One of the administrators of the hacienda presented the sworn declaration of ownership for the purposes of tax assessment and paid the land tax in the name of the creditor who possessed and held the hacienda in usufruct. Although article 1884 states that the

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creditor does not acquire through possession the ownership of the real property delivered by virtue of an antichresis for failure to pay the debt within the stipulated time, nevertheless, the debtor cannot recover the use of the real property given in antichresis to the creditor, without previously fully paying the creditor. In case of insolvency, the creditor may ask for the sale of the real property which he possesses in antichresis, unless the pending debt is paid. It appears that defendant Leonardo, without the consent of Alberto, took over and usurped a portion of land of the hacienda, withholding and refusing to deliver them to the creditor in antichresis on the pretext that he is the owner of the whole hacienda. Although it appears that the debt has been paid, Leonardo still acted without just reason and in contravention of article 1883 when he effected the usurpation. It is known that the action to recover a thing, where a legitimate possessor has been deprived of his possession, takes place in accordance with the law even against the owner himself, who can never be protected by the law even on his right of ownership, without first restoring what he acquired through an illegal act of dispossession. Though Alberto Barretto has no title of ownership over the hacienda of Balintagac, and therefore, he cannot be declared owner of the same, nevertheless, his claim that a judgment be rendered ordering the return to him of the portion usurped by Leonardo is in conformity with the law. Alberto being in the legitimate possession and use of all the hacienda of Balintagac which was voluntarily delivered to him by Juan Antonio, Jr. and his co-heirs, with the object that the creditor Antonio Vicente might collect the capital and interests which they owed and still owe him — a

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lawful contractual act called by law a covenant in antichresis — the debtors cannot, while the debt exists and is not fully paid, recover or reacquire the possession and use of the real property delivered to the creditor, without the latter giving his consent; Consequently, Leonardo, without the knowledge or consent Alberto Barretto, who succeeded in the possession and use of the hacienda, could not have recovered, by usurpation, the possession and use of a portion of the hacienda.

MACAPINLAC VS. REPIDE G.R. No. 18574; September 20, 1922 FACTS: On and prior to August 22, 1916, Jose Macapinlac was the owner of the Hacienda Dolores, a property located in Pampanga. This property had been registered and a Torrens certificate of title had been issued. On the date above stated, Macapinlac was indebted to Bachrach Motor Company for the price of an automobile and its accessories, purchased upon credit; and as evidence of this indebtedness he executed 14 promissory notes (PNs) payable to Bachrach amounting to the sum of P12,960. Contemporaneously with the delivery of the PNs, Macapinlac executed what purports to be a deed of sale, with privilege of repurchase, to be exercised on or before October 2, 1917 (due date of the debt). This transfer covered the Hacienda Dolores. In this conveyance E. M. Bachrach is named as transferee. On November 8, 1917, Francisco Repide acquired, for the sum of P5,000, all the rights of E. M. Bachrach in the property which had been conveyed to the latter. Repide was well aware that the transfer of the property to Bachrach had been made

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by the Macapinlac for the purpose of securing a debt owing to Bachrach Company, and he was furthermore aware that part of the debt has been paid and there was only balance of less than onehalf of the sum of P12,960. After Repide had acquired the interest in the hacienda in question, he processed the certificate of title to be transferred to his own name. To accomplish this, it was necessary to make it appear that the contract of sale with pacto de retro noted in the original Torrens certificate was really and truly what it appeared to be, that is, a contract of sale, not a mere mortgage, and that the ownership had consolidated in the purchaser by reason of the failure of the seller to repurchase the property before the expiration of the time allowed for redemption. Inasmuch as it appeared that the ownership had then consolidated in the purchaser, he directed the ROD of Pampanga to register the property in the name of Francisco Gutierrez Repide and to issue to him a new certificate of transfer, which was accordingly done. At the time of the filing of this complaint, Repide was in actual possession of the property in question, and that he had in effect been enjoying possession since August 1917. ISSUES: 1. WON the contract executed between Macapinlac and Bachrach Motor, the sale with pacto de retro, was a deed of sale or an equitable mortgage. Equitable Mortgage(EM) 2. What contract govern between Macapinlac and Repide (as successor in interest of Bachrach) if the original contract executed by plaintiff with Bachrach was an EM. Contract of Antichresis. HELD: 1. In taking up these problems we begin with the situation created by the

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execution of the contract of sale with pacto de retro between Macapinlac and Bachrach Company. In this connection the first and most obvious proposition to be laid down is that since the conveyance is alleged to have been executed as security for a debt owing by Macapinlac to Bachrach, it follows that in equity, said conveyance must be treated as a mere security or substantially as a mortgage, as creating a mere equitable charge in favor of the creditor or person named as the purchaser therein. In this connection the cardinal rule is that a party who acquires any interest in property with notice of an existing equity takes subject to that equity. In other words, having acquired the interest of Bachrach in the Hacienda Dolores, with knowledge that the contract has been executed as security for a debt, Francisco Repide must be understood to stand in exactly the same position occupied by Bachrach, if the transfer to Repide had never been effected. Repide’s contention: Repide insisted that his title has become indefeasible and the action of Macapinlac already prescribed, owing to the fact that the conveyance of the land to him has been followed by the issuance of a TCT in his name, and the original certificate in the name of Macapinlac has been cancelled — all of which had been accomplished more than one year before the present action was begun. In the first place, it must be borne in mind that the equitable doctrine, to the effect that any conveyance intended as security for a debt will be held in effect to be amortgage, whether so actually expressed in the instrument or not, operates regardless of the form of the agreement chosen by the contracting parties as the repository of their will. Equity looks through the form and considers the substance; and no kind of

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engagement can be adopted which will enable the parties to escape from the equitable doctrine to which reference is made. In other words, a conveyance of land, accompanied by registration in the name of the transferee and the issuance of a new certificate, is no more secured from the operation of this equitable doctrine than the most informal conveyance that could be devised. In the second place, the circumstance that the land has been registered under the Torrens system does not change or affect civil rights and liabilities with respect thereto. An ordinary transfer of land, effected in any of the ways allowed by law, even when followed by registration and that issuance of a new certificate of the Land Registration Act, has a different character. Applying said provision to the facts of the present case, it must follow that the cause of action of the plaintiff to annul the registration of this property in the name of Francisco Repide did not prescribe at one year, and the plaintiff's cause of action upon this branch of the case had not in fact been barred at all when the present action was begun. 2. Discussion on antichresis: The preceding discussion conducts us to the conclusion that the estate of Francisco Repide occupies substantially the position of a mortgagee in possession. The question then arises as to what are the legal rights of the plaintiff as against the Repide estate. The solution of this problem is to be found in the application of the doctrine formulated in Barretto vs. Barretto. In that case the heirs of a mortgagee of an estate were found in possession of mortgaged property more than thirty years after the mortgage had been executed; and it was shown that the mortgage had never been foreclosed. Upon this state of facts it was in effect held that the rights of the parties, heirs of the

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mortgagor and mortgagee, were essentially the same as under the contract of antichresis. By reference to the appropriate provisions of theCivil Code (arts. 1881-1884), in the chapter dealing with antichresis, it will be at once seen that while non-payment of the debt does not vest the ownership of the property in the creditor, nevertheless the debtor cannot recover the enjoyment of the property without first paying in full what he owes to his creditor. At the same time, however, the creditor is under obligation to apply the fruits derived from the estate in satisfaction, first, of the interest on the debt, and secondly, to the payment of the principal. From this is necessarily deduced the obligation of the creditor to account to the debtor for said fruits and the corresponding right of the debtor to have the same applied in satisfaction of the mortgage debt. The respective rights and obligations of the parties to a contract of antichresis may be taken to be established, namely:  that if the mortgagee acquires possession in any lawful manner, he is entitled to retain such possession until the indebtedness is satisfied and the property redeemed;  that the non-payment of the debt within the term agreed does not vest the ownership of the property in the creditor;  that the general duty of the mortgagee in possession towards the premises is that of the ordinary prudent owner;  that the mortgagee must account for the rents and profits of the land, or its value for purposes of use and occupation, any amount thus realized going towards the discharge of the mortgage debt;  that if the mortgagee remains in possession after the mortgage debt has been satisfied, he becomes a trustee for the mortgagor as to the

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excess of the rents and profits over such debt; and that the mortgagor can only enforce his rights to the land by an equitable action for an account and to redeem.

ALOJADO VS SIONCO FACTS: Juana Mabaquiao sold the landin-dispute described in the complaint to Nicolas Alegata . Alegata died. Settlement proceedings of his estate was instituted, his property, which included the land-indispute was adjudicated to Lim Kang Sang and Lim Eng Teeng, his only heirs. Lim Kang and Lim Eng sold the land to Lim Ponso & Co., with the right to repurchase for the period of one year Period expired without this right having exercised. Lim Ponso & Co. transferred this land unconditionally to Lim Siongco and Lim Kingko. Juana Mabaquiao dies. Intestate proceedings took place and Ambrosio T. Alojado was appointed administrator. Ambrosio, as administration, brought this action against Lim Sionco, Lim Kingko and Lim Ponso & Co. prays that he be declared the absolute owner of this land with the improvements thereon, and that the defendants be ordered to restore and respect his right of ownership, possession and usufruct of the property; RTC: in favor of Lim Sionco, Lim Kingko, Lim Ponso &Co. Ambrosio contends that the contract executed by Juana Mabaquiao with Nicolas Alegata was not a contract of sale with the right to repurchase, but a contract or antichrises ISSUE: WON the contract was a contract of antichresis or contract of sale with right to redemption? Contract of sale with right to remdemption

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HELD: The terms of the contract it is clearly a sale with the right to repurchase. It speaks in unequivocal terms of a sale and the conveyance of land with the right to repurchase, and the character of the contract is that of a sale with the right to repurchase. The contract is very defective in its wording, especially so where it refers to the period within which to exercise the right to repurchase. But examining it as a whole, it clearly appears that it was the parties' intention that the vendor could repurchase the land without delay when he had the means to pay the purchase price. What characterizes a contract or antichresis is that the creditor acquires the right to receive the fruits of the property of his debtor with the obligation to apply them to the payment of interests, if any is due, and then to the principal of his credit. Nowhere in the contract in question does this character of a contract of antichresis appear. The only substantial thing agreed upon between the parties was that Juana Mabaquiao could repurchase the land when she had the means. ISSUE: Whether or not the title to the land conveyed by Juana Mabaquiao has been consolidated.? YES HELD: This action was brought in January, 1922, fifteen years after the contract was entered into. The contract, as been noted, fixes the period for the exercise of the right of redemption until Juana Mabaquiao, or her heirs has the means. Whether or not this is considered a period, it is clear that the title transmitted to Nicolas Alegata has been consolidated. According to article 1508 of the Civil Code, when no period of redemption is fixed it shall last four years, and it is fixed, it shall not exceed ten years. The right of redemption not having been exercised the

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period of ten years, the title of Nicolas Alegata, or his heirs, has by this fact alone been consolidated any events.

RAMIREZ v. CA G.R. No. L-38185. September 24, 1986 FACTS: On September 15, 1959, petitioners-spouses Hilario Ramirez and Valentina Bonifacio filed an application for registration of a parcel of riceland in Pamplona, Las Pinas, Rizal. After notice and publication, nobody appeared to oppose the application. An order of general default was issued and the court allowed the petitioners to present evidence in support of their claim. Thereafter, the petitioners presented parole evidence that they acquired the land in question by purchase from Gregoria Pascual during the early part of the American regime but the corresponding contract of sale was lost and no copy or record of the same was available. On January 30, 1960, the court ordered the issuance of the decree of registration and consequently, Original Certificate of Title No. 2273 of the Registry of Deeds of Rizal was issued in the petitioners’ names. On March 30, 1960, private respondents filed a petition to review the decree of registration on the ground of fraud. The respondents alleged among others that they obtained a loan of P400.00 from the petitioners in which they secured with a mortgage on the land in question by way of antichresis and that there were several attempts to redeem the land but were refused by the petitioners. The trial court ordered the cancellation of the original certificate of title. The Court of Appeals affirmed the decision. ISSUE: Can an antichretic creditor acquire land of debtor by prescription? NO. HELD: An antichretic creditor cannot acquire the land of a debtor by prescription. An antichretic creditor is not a

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possessor in the concept of owner but a mere holder placed in possession of the land by its owners. Thus, possession of an antichretic creditor cannot serve as a title for acquiring dominion. The court, from other cases like Trillana v. Manansala, Valencia v. Acala and Barretto v. Barretto, held that the antichretic creditor cannot ordinarily acquire by prescription the land surrendered to him by the debtor. Holding: The decision appealed from is affirmed with a modification that the respondents are ordered to pay the petitioners the amount of P400.00 as principal for the contract of antichresis, the fruits obtained from the possession of the land having been applied to the interests on the loan.

ANCIETO BANGIS V HEIRS OF SERAFIN AND SALUD ADOLFO GR 190875 June 13 2012 FACTS: Spouses Serafin, Sr. and Saludada Adolfo were the original registered owners of a lot which was mortgaged to the DBP. Upon default in the payment of the loan obligation, it was foreclosed and ownership was consolidated in DBP’s name under a TCT. Serafin Adolfo, Sr. repurchased the same and was issued a TCT a year after his wife died. He allegedly mortgaged the subject property to Ancieto Bangis who took possession of the land but their transaction was not reduced into writing. When Adolfo died, his heirs executed a deed of extrajudicial partition covering the subject property and TCT issued to them. The said property was subdivided and separate titles were issued in names of the heirs of Adolfo. The heirs of Adolfo filed a complaint for annulment of the deed of sale and declaration of the purported contract of sale as antichresis, accounting and redemption of property and damages against Bangis. The RTC rendered a decision in favor of the heirs of Adolfo declaring that the contract as an antichresis, ordering the defendant to

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deliver the possession of the property in question to the plaintiffs and the TCT under Bangis as null and void. Thus, the heirs of Bangis appealed before the CA. CA affirmed the RTC finding that the contract between the parties was a mortgage, not a sale. It noted that while Bangis was given possession of the subject property, the certificate of title remained in the custody of Adolfo and was never cancelled. ISSUE: WON the transaction between the parties was one of sale and not a mortgage or antichresis. NEITHER HELD: There was neither an antichresis nor sale. For the contract of antichresis to be valid, Article 2134 of the Civil Code requires that “the amount of the principal and of the interest shall be specified in writing; otherwise the contract of antichresis shall be void.” In this case, the Heirs of Adolfo were indisputably unable to produce any document in support of their claim that the contract between Adolfo and Bangis was an antichresis, hence, the CA properly held that no such relationship existed between the parties. The bare testimony of one of the Heirs of Bangis, Rodolfo Bangis, that the subject document was only handed to him by his father, Aniceto, with the information that the original thereof “could not be found” was insufficient to justify its admissibility. The identification made by Notary Public Atty. Valentin Murillo that he notarized such document cannot be given credence as his conclusion was not verified against his own notarial records. In sum, the Heirs of Bangis failed to establish the existence and due execution of the subject deed on which their claim of ownership was founded.

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OLAF N. BORLOUGH vs. FORTUNE ENTERPRISES, INC. FACTS: Fortune Enterprises, Inc. sold to Salvador Aguinaldo a Chevrolet sedan, which it from United Car Exchange, and for not having paid it in full, the latter executed on the same date a promissory note in the amount of P2,400 payable in 20 installments. To secure the payment of this note, Aguinaldo executed a deed of chattel mortgage over said car. The deed was duly registered in the office of the Register of Deeds of Manila. As the buyer-mortgagor defaulted in the payment of the installments due, counsel for Fortune Enterprises Inc. addressed a letter on May 16, 1952, requesting him to make the necessary payment and to keep his account up to date, so that no court action would be resorted to. The above-described car found its way again into the United Car Exchange which sold the same in cash for P4,000 to one O. N. Borlough. Accordingly, he registered it on the following day with the Motor Vehicles Office. 0. N. Borlough took possession of the vehicle from the time he purchased it, On July 10, 1952, Fortune Enterprises, Inc. brought action against Salvador Aguinaldo to recover the balance of the purchase price. Borlough filed a third-party complaint, claiming the vehicle. Thereupon, Fortune Enterprises, Inc. amended its complaint, including Borlough as a defendant and alleging that he was in connivance with Salvador Aguinaldo and was unlawfully hiding and concealing the vehicle in order to evade seizure by judicial process. Borlough answered alleging that he was in legal possession thereof, having purchased it in good faith and for the full

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price of P4,000, and that he had a certificate of registration of the vehicle issued by the Motor Vehicles Office, and he prayed for the dismissal of the complaint, the return of the vehicle and for damages against the plaintiff. ISSUE: Whether or not the mortgage binds Borlough who is a purchaser in good faith. NO. HELD: Two recording laws are here being invoked, one by each contending party — the Chattel Mortgage Law (Act No. 1508), by the mortgagor and the Revised Motor Vehicles Law (Act No. 3992), by a purchaser in possession. The Revised Motor Vehicles Law is a special legislation enacted to "amend and compile the laws relative to motor vehicles," whereas the Chattel Mortgage Law is a general law covering mortgages of all kinds of personal property. The former is the latest attempt to assemble and compile the motor vehicle laws of the Philippines, all the earlier laws on the subject having been found to be very deficient in form as well as in substance; it had been designed primarily to control the registration and operation of motor vehicles. Counsel for petitioner contends that the passage of the Revised Motor Vehicles Law had the effect of repealing the Chattel Mortgage Law, as regards registration of motor vehicles and of the recording of transaction affecting the same. We do not believe that it could have been the intention of the legislature to bring about such a repeal. In the first place, the provisions of the Revised Motor Vehicles Law on registration are not inconsistent with does of the Chattel Mortgage Law. In the second place, implied repeals are not favored; implied repeals are permitted only in cases of clear and positive inconsistency. The first paragraph of section 5 indicates that the provisions of the Revised Motor Vehicles Law regarding

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registration and recording of mortgage are not incompatible with a mortgage under the Chattel Mortgage Law. The section merely requires report to the Motor Vehicles Office of a mortgage; it does not state that the registration of the mortgage under the Chattel Mortgage Law is to be dispensed with. We have, therefore, an additional requirements in the Revised Motor Vehicles Law, aside from the registration of a chattel mortgage, which is to report a mortgage to the Motor Vehicles Office, if the subject of the mortgage is a motor vehicle; the report merely supplements or complements the registration. The recording provisions of the Revised Motor Vehicles Law, therefore, are merely complementary to those of the Chattel Mortgage Law. A mortgage in order to affect third persons should not only be registered in the Chattel Mortgage Registry, but the same should also be recorded in the motor Vehicles Office as required by section 5 (e) of the Revised Motor Vehicles Law [Whenever any owner hypothecates or mortgage any motor vehicle as surety for a debt or other obligation, the creditor or person in whose favor the mortgage is made shall, within seven days, notify the Chief of the Motor Vehicles Office in writing]. And the failure of the respondent mortgage to report the mortgage executed in its favor had the effect of making said mortgage ineffective against Borlough, who had his purchase registered in the said Motor Vehicles Office. One holding a lien on a motor vehicle, in so far as he can reasonably do so, must protect himself and others thereafter dealing in good faith by complying and requiring compliance with the provisions of the laws concerning certificates of title to motor vehicles, such as statutes providing for the notation of liens or claims against the motor vehicle certificate of title or manufacturer's certificate, or for the issuance to the mortgagee of a new

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certificate of ownership. The holder of a lien who is derelict in his duty to comply and require compliance with the statutory provisions acts at his own peril, and must suffer the consequence of his own negligence; and accordingly, he is not entitled to the lien as against a subsequent innocent purchaser filed as provided by other chattel mortgage statutes. The above authorities leave no room for doubt that purchaser O. N. Borlough's right to the vehicle should be upheld as against the previous and prior mortgage Fortune Enterprises, Inc., which failed to record its lien in accordance with the Revised Motor Vehicles Law.

STANDARD OIL COMPANY vs. JARAMILLO FACTS: Gervasia de la Rosa, Vda. de Vera, was the lessee of a parcel of land situated in the City of Manila and owner of the house of strong materials built thereon, upon which date she executed a document in the form of a chattel mortgage, purporting to convey to the petitioner by way of mortgage both the leasehold interest in said lot and the building which stands thereon. The clauses in said document describing the property intended to be thus mortgage are expressed in the following words: Now, therefore, the mortgagor hereby conveys and transfer to the mortgage, by way of mortgage, the following described personal property, situated in the City of Manila, and now in possession of the mortgagor, to wit: (1) All of the right, title, and interest of the mortgagor in and to the contract of lease hereinabove referred to, and in and to the

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premises the subject of the said lease; (2) The building, property of the mortgagor, situated on the aforesaid leased premises. After said document had been duly acknowledge and delivered, the petitioner caused the same to be presented to the respondent, Joaquin Jaramillo, as register of deeds of the City of Manila, for the purpose of having the same recorded in the book of record of chattel mortgages. Upon examination of the instrument, the respondent was of the opinion that it was not a chattel mortgage, for the reason that the interest therein mortgaged did not appear to be personal property, within the meaning of the Chattel Mortgage Law, and registration was refused on this ground only. ISSUE: Whether or not the RoD may refuse registration of the mortgage. NO HELD: The duties of a register of deeds in respect to the registration of chattel mortgage are of a purely ministerial character; and no provision of law can be cited which confers upon him any judicial or quasi-judicial power to determine the nature of any document of which registration is sought as a chattel mortgage. His duties in respect to such instruments are ministerial only. The efficacy of the act of recording a chattel mortgage consists in the fact that it operates as constructive notice of the existence of the contract, and the legal effects of the contract must be discovered in the instrument itself in relation with the fact of notice. Registration adds nothing to the instrument, considered as a source of title, and affects nobody's rights except as a specifies of notice. Articles 334 and 335 of the Civil Code supply no absolute criterion for discriminating between real property and

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personal property for purpose of the application of the Chattel Mortgage Law. Those articles state rules which, considered as a general doctrine, are law in this jurisdiction; but it must not be forgotten that under given conditions property may have character different from that imputed to it in said articles. It is undeniable that the parties to a contract may by agreement treat as personal property that which by nature would be real property; and it is a familiar phenomenon to see things classed as real property for purposes of taxation which on general principle might be considered personal property. Other situations are constantly arising, and from time to time are presented to this court, in which the proper classification of one thing or another as real or personal property may be said to be doubtful.

SALDANA vs. PHILIPPINE GUARANTY FACTS: in order to secure an indebtedness of P15,000.00, Josefina Vda. de Aleazar executed in favor of the plaintiff-appellant Buenaventura Saldana a chattel mortgage covering properties described as follows: A building of strong materials, used for restaurant business, located in front of the San Juan de Dios Hospital at Dewey Boulevard, Pasay City, and the following personal properties therein contained: 1 Radio, Zenith, cabinet type. 1 Cooler. 1 Electric range, stateside, 4 burners. 1 Frigidaire, 8 cubic feet. 1 G.E. Deepfreezer. 8 Tables, stateside. 32 Chromium chairs, stateside. 1 Sala set upholstered, 6 pieces. 1 Bedroom set, 6 pieces. And all other furniture's, fixtures or equipment found in the said premises. Subsequent to the execution of the mortgage, a writ of execution was duly

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issued as a result of a civil case instituted by Hospital de San Juan de Dios against Josefina Eleazar; whereupon the following properties of Josefina Eleazar were levied upon: 8 Tables with 4 (upholstered) chairs each. 1 Table with 4 (wooden) chairs. 1 Table (large) with 5 chairs. 1 Radio-phono (Zenith, 8 tubes). 2 Showcases (big, with mirrors). 1 Rattan sala set with 4 chairs, 1 table and 3 sidetables . 1 Wooden drawer. 1 Tocador (brown with mirror). 1 Aparador . 2 Beds (single type). 1 Freezer (deep freeze). 1 Gas range (magic chef, with 4 burners). 1 Freezer (G.E.). On January 31, 1957, the plaintiff-appellant Saldana filed a third-party claim asserting that the above-described properties levied are subject to his chattel mortgage of May 8, 1953. In virtue thereof, the sheriff released only some of the property originally included in the levy of January 28, 1957, to wit: 1 Radio, Zenith, cabinet type. 8 Tables, stateside. 32 Chromiun chairs, stateside. 1 G.E. Deep freezer. Appellants claims that the phrase in the chattel mortgage contract — "and all other furnitures, fixtures and equipment found in the said premises", validly and sufficiently covered within its terms the personal properties disposed of in the auction sale, ISSUE: Whether or not the properties levied are covered by the mortgage. YES. HELD: Section 7 of Act No. 1508, commonly and better known as the Chattel Mortgage Law, does not demand a minute and specific description of every chattel mortgaged in the deal of mortgage but only

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requires that the description of the properties be such "as to enable the parties in the mortgage, or any other person, after reasonable inquiry and investigation to identify the same". Gauged by this standard, general description have been held by this Court.

Company’s train. They sustained lifethreatening wounds, fractures and other injuries, which left them permanently disfigured. The Supreme Court ruled in favor of Aleko Lilius, et al, awarding them in the amount of P33,525.03 as damages, including interest and costs.

the description in the mortgage must point out its subject matter so that such person may identify the chattels observed, but it is not essential that the description be so specific that the property may be identified by it alone, if such description or means of identification which, if pursued will disclose the property conveyed.

In G.R. No. 42551, herein case, Laura Lindley Shuman, the Manila Wine Merchants, Ltd., the Bank of the Philippine Islands and the Manila Motor Co., Inc(creditors of the spouses Lilius)., have appealed from an order of the Court of First Instance of Manila fixing the degree of preference of the claimants and distributing the proceeds of the judgment of this court in the case of Lilius vs. Manila Railroad Co.

The specifications in the chattel mortgage contract in the instant case, we believe, in substantial compliance with the "reasonable description rule" fixed by the chattel Mortgage Act. We may notice in the agreement, moreover, that the phrase in question is found after an enumeration of other specific articles. It can thus be reasonably inferred therefrom that the "furnitures, fixture and equipment" referred to are properties of like nature, similarly situated or similarly used in the restaurant of the mortgagor located in front of the San Juan de Dos Hospital at Dewey Boulevard, Pasay City, which articles can be definitely pointed out or ascertain by simple inquiry at or about the premises. A contrary view would unduly impose a more rigid condition than what the law prescribes, which is that the description be only such as to enable identification after a reasonable inquiry and investigation.

ALEKO E. LILIUS vs. MANILA RAILROAD COMPANY (G.R. No. 42551, September 4, 1935) FACTS: In G.R. No. L-39587, Aleko E. Lilius, and his wife Sonja Maria Lilius, and Brita Marianne Lilius, met an accident, wherein their Studebaker car, collided with locomotive No. 713, Manila Railroad

APPEAL OF LAURA LINDLEY SHUMAN :The lower court erred in holding that Dr. W.H. Waterous and Dr. M. Marfori had a claim against the plaintiff, Aleko E. Lilius superior to the claim of the appellant, Laura Lindley Shuman, against him." One of the contentions of this appellant under this assignment of error is that her claim, having been made the basis of the plaintiffs' action and of the award for damages, as shown in the original decision herein, should constitute, and does constitute a superior lien against the funds awarded said plaintiffs, to those of any other claimants, except the two doctors, the hospital and the other nurse, and that as to the claims of the two doctors, the hospital and the other nurse the claim of this appellant has equal preference with their claims. APPEAL OF THE MANILA WINE MERCHANTS, LTD., AND THE BANK OF THE PHILIPPINE ISLANDS. :The appellants, the Manila Wine Merchants. Ltd., and the Bank of the Philippine islands also contend that the sum separately awarded Sonja Maria Lilius is conjugal property and therefore liable for the payment of the private debts of her

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husband, Aleko E. Lilius, contracted during her marriage. APPEAL OF THE THE MANILA MOTOR CO., INC.: For its part, Manila Motor Co., Inc. claims that the lower court erred in not holding their claims, evidenced by public instruments and final judgment, as preferred over all other claims against Aleko E. Lilius. In support of its claim of preference against the fund of Aleko E. Lilius was a certified copy of its judgment against him in civil case No. 41159 of the Court of First Instance of Manila, together with a certified copy of the writ of execution and the garnishment issued by virtue of said judgment. The alleged public document evidencing its claim was not offered in evidence but, in their brief in this court, counsel for the Motor Co., Inc., merely assume that its credit is evidenced by a public document dated may 10, 1931, because the court, in its judgment in said civil case No. 41159, refers to a mortgage appearing in the evidence as Exhibit A, as the basis of its judgment, without mentioning the date of the execution of the exhibit. ISSUE: WON the reference to a mortgage appearing in a public document in a judgment, entitled to preference under article 1924 of the Civil Code. NO HELD: This reference in said judgment to a mortgage is not competent or satisfactory evidence as against third persons upon which to base a finding that the Manila Motor Company's credit evidenced by a public document within the meaning of article 1924 of the Civil Code. If the Manila motor Co., Inc., desired to rely upon a public document in the form of a mortgage as establishing its preference in this case, it should have offered that document in evidence, so that the court might satisfy itself as to its nature and unquestionably fix the date of its execution. Under section 5 of Act No. 1507 as amended by Act No. 2496, a chattel does

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not have to be acknowledged before a notary public. As against creditors and subsequent encumbrances, the law does require an affidavit of good faith appended to the mortgage and recorded with it. A chattel mortgage may, however, be valid as between the parties without such an affidavit of good faith. In 11 Corpus Juris, 482, the rule is expressly stated that as between the parties and as to third persons who have no rights against the mortgagor, no affidavit of good faith is necessary. It will thus be seen that under the law, a valid mortgage may exist between the parties without its being evidenced by a public document. This court would not be justified, merely from the reference by the lower court in that case to a mortgage, in assuming that its date appears in a public document. if the Manila motor Co., Inc., desired to rely upon a public document in the form of a mortgagor as establishing its preference in this case, it should have offered that document in evidence, so that the court might satisfy itself as to its nature and unquestionably fix the date of its execution. There is nothing either in the judgment relied upon or in the evidence to show the date of said mortgage. The burden was upon the claimant to prove that it actually had a public Code. It is essential that the nature and the date of the document be established by competent evidence before the court can allow a preference as against the other parties to this proceeding. Inasmuch as the claimant failed to establish its preference, based on a public document, the lower court properly held that its claim against the said Aleko E. Lilius was based on the final judgment in civil case No. 41159 of the Court of First Instance of Manila of May 3, 1932. The court, therefore, committed no error in holding that the claim of the Manila Motor Co., Inc., was inferior in preference to those of the appellees in this case.

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CEBU INTERNATIONAL FINANCE CORPORATION, petitioner,vs. COURT OF APPEALS, ROBERTO ONG AND ANGTAY, respondents (268 SCRA 178, G.R. No. 107554, February 13, 1997) FACTS: On 4 March 1987, Jacinto Dy executed a Special Power of Attorney in favor of private respondent Ang Tay, authorizing the latter to sell the cargo vessel Owned by Dy and christened LCT “Asiatic.” On 28 April 1987, through a Deed of Absolute Sale, Ang Tay sold the subject vessel to private respondent Robert Ong (Ong) for P900,000.00. Ong paid the purchase price by issuing three (3) checks in the following amounts: P150,000.000, P600,000.00 and P150,000.00. However, since the payment was not made in cash, it was specifically stipulated in the deed of sale that the “LCT Asiatic shall not be registered or transferred to Robert Ong until complete payment.” Thereafter, Ong obtained possession of the subject vessel so he could begin deriving economic benefits therefrom. He, likewise, obtained copies of the unnotarized deed of sale allegedly to be shown to the banks to enable him to acquire a loan to replenish his (Ong’s) capital. The aforequoted condition, however, which was handwritten on the original deed of sale, does not appear on Ong’s copies. Contrary to the aforementioned agreements and without the knowledge of Ang Tay, Ong had his copies of the deed of sale (on which the aforementioned prohibition does not appear) notarized on 18 May 1987. Ong presented the notarized deed to the Philippine Coast Guard which subsequently issued him a Certificate of Ownership and a Certificate of Philippine

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Register over the subject vessel on 27 May 1987. Ong also succeeded in having the name of the vessel changed to LCT “Orient Hope.” On 29 October 1987, Ong acquired a loan from petitioner in the amount of P496,008.00 to be paid in instalments as evidenced by a promissory note of even date. As security for the loan, Ong executed a chattel mortgage over the subject vessel, which mortgage was registered with the Philippine Coast Guard and annotated on the Certificate of Ownership. In paragraph 3 of the Deed of Chattel Mortgage, it was stated that: 3. The said sum of 496,008.00 represents the balance due on of MORTGAGOR(S) from the MORTGAGEE and is payable in the office of the MORTGAGEE at Cebu City or in the office of the latter’s assignee, in case the rights and interests of the MORTGAGEE in the foregoing mortgage are assigned to a third person, under the terms of said promissory note, as follows: (a)(P20,667.00 on or before…...and (b) the balance in Twenty Four (24) equal successive monthly instalments on the . . . . . . day of each and every succeeding month thereafter until the amount is fully paid. The interest on the foregoing instalments shall be paid on the same date that the instalments become payable and additional interest at the rate of fourteen (14%) per cent per annum will be charged on all amounts, principal and interest, not paid on due date. Ong defaulted in the payment of the monthly instalments. Consequently, on 11 May 1988, petitioner sent him a letter demanding delivery of the mortgaged vessel for foreclosure or in the alternative to pay the balance of P437,802.00 pursuant to paragraph 11 of the deed of chattel mortgage.

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Meanwhile, the two checks (worth P600,000.00 and P150,000.00) paid by Ong to Ang Tay for the purchase of the subject vessel bounced. Ang Tay’s search for the elusive Ong and all attempts to confer with him proved to be futile. A subsequent investigation and inquiry with the Office of the Coast Guard revealed that the subject vessel was already in the name of Ong, in violation of the express undertaking contained in the original deed of sale. As a result thereof, on 13 January 1988, Ang Tay and Jacinto Dy filed a civil case for rescission and replevin with damages against Ong and his wife. ISSUES: 1. WON the chattel mortgage contract between petitioner and Ong is valid. 2. WON petitioner is a mortgagee in good faith whose lien over the mortgaged vessel should be respected. HELD: 1. As to validity of the mortgage contract between Cebu International and Ong: The key lies in the certificate of ownership issued in Ong's name (which, along with the deed of sale, he submitted to petitioner as proof that he is the owner of the ship he gave as security for his loan). It was plainly stated therein that the ship LCT "Orient Hope" ex "Asiatic," by means of a Deed of Absolute Sale dated 28 April 1987, was "sold and transferred by Jacinto Dy to Robert Ong." There can be no dispute then that it was Dy who was the seller and Ong the buyer of the subject vessel. Coupled with the fact that there is no evidence euphony transaction between Jacinto Dy or Ang Tay and petitioner, it follows, therefore, that petitioner's role in the picture is properly and logically that of a creditor-mortgagee

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and not owner-seller. It is paragraph 2 of the mortgage contract which accurately expresses the true nature of the transaction between petitioner and Ong--that it is a simple loan with chattel mortgage. The amount petitioner loaned to Ong does not represent the balance of any purchase price since the aforementioned documents state that Ong is already the absolute owner of the subject vessel. Obviously, therefore, paragraph 3 of the said contract was filled up by mistake. Considering that petitioner used a form contract, it is not improbable that such an oversight may have been committed-negligently but unintentionally and without malice. Accordingly, the chattel mortgage contract between petitioner and Ong is valid and subsisting. 2. As to the good faith of Cebu International as mortgagee whose lien over the mortgaged vessel should be respected: The prevailing jurisprudence is that “a mortgagee has a right to rely in good faith on the certificate of title of the mortgagor to the property given as security and in the absence of any sign that might arouse suspicion, has no obligation to undertake further investigation. Hence, even if the mortgagor is not the rightful owner of or does not have a valid title to the mortgaged property, the mortgagee or transferee in good faith is nonetheless entitled to protection.” Although this rule generally pertains to real property, particularly registered land, it may also be applied by analogy to personal property, in this case specifically, since ship owners are, likewise, required by law to register their vessels with the Philippine Coast Guard. ANG TAY’S CONTENTIONS:

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That the above rule is not applicable in the case at bar in the face of the numerous "badges of bad faith" on the part of petitioner. Ang Tay's contentions are unmeritorious. As previously discussed, paragraph 3 of the chattel mortgage contract was erroneously but unintentionally filled up. The failure of petitioner to exercise due care in filling up the necessary provisions in the chattel mortgage contract does not, however, amount to bad faith. It was a mere oversight and not a deliberate and malicious act. ISSUE ON AFFIDAVIT OF GOOD FAITH That petitioner's bad faith is further demonstrated by its failure to comply with the special affidavit of good faith as required in Sec. 4 of P.D. No. 1521. The special affidavit of good faith, on the other hand, is required only for the purpose of transforming an already valid mortgage into a "preferred mortgage." Thus, the abovementioned affidavit is not necessary for the validity of the chattel mortgage itself but only to give it a preferred status. *** Petitioner had every right to rely on the Certificate of Ownership and Certificate of Philippine Register duly issued by the Philippine Coast Guard in Ong's name. Petitioner had no reason to doubt Ong's ownership over the subject vessel. The documents presented by Ong, upon petitioner's insistence before accepting the said vessel as loan security, were all in order and properly issued by the duly constituted authorities. There was no circumstance that might have aroused petitioner's suspicion or alerted it to any infirmity committed by Ong. It had no participation in and was not privy to the sale transaction between Jacinto Dy (through Ang Tay) and Ong. Petitioner, thus, had no obligation to undertake further

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investigation since it had the necessary documents to prove Ong's ownership. In addition petitioner even took pains to inspect the subject vessel which was in Ong's possession. Although Ang Tay may also be an innocent person, a similar victim of Ong's fraudulent machinations, it was his act of confidence which led to the present fiasco. Ang Tay readily agreed to execute a deed of absolute sale in Ong's favor even though Ong had yet to make a complete payment of the purchase price. It is true that in the copy of the said deed submitted by Ang Tay there was an undertaking that ownership will not vest in Ong until full payment. However, Ong was able to obtain several copies of the deed with Ang Tay's signature and had these notarized without the aforementioned undertaking as evidenced by the copy of the deed of sale presented by petitioner. The Deed of Absolute Sale consisted of two (2) pages. The signatures of Ang Tay and Ong appeared only on the first page of the deed. The Second page contained the continuation of the acknowledgment and the undertaking. Ong could have easily reproduced the second page without the undertaking since this page was not signed by the contracting parties. To complete the deception, Ang Tay unwittingly allowed Ong to have possession of the ship. Hence, in consonance with our ruling that: ... as between two innocent persons, the mortgagee and the owner of the mortgaged property, one of whom must suffer the consequence of a breach of trust, the one who made it possible by his act of confidence must bear the loss, it is Ang Tay and his principal Jacinto Dy who must, unfortunately, suffer the consequences thereof. They are considered bound by the chattel mortgage on the subject vessel.

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PAMECA WOOD TREATMENT PLANT, INC., HERMINIO G. TEVES, VICTORIA V. TEVES and HIRAM DIDAY R. PULIDO vs HON. COURT OF APPEALS and DEVELOPMENT BANK OF THE PHILIPPINES (310 SCRA 281, G.R. No. 106435, July 14, 1999) FACTS: On April 17, 1980, petitioner PAMECA obtained 2Mworth loan from respondent Bank. By virtue of this loan, petitioner PAMECA, through its President, petitioner Teves, executed a promissory note for the said amount, promising to pay the loan by installment. As security for the said loan, a chattel mortgage was also executed over PAMECA's properties in Dumaguete City, consisting of inventories, furniture and equipment, to cover the whole value of the loan. On January 18, 1984, and upon petitioner PAMECA's failure to pay, respondent bank extrajudicially foreclosed the chattel mortgage, and, as sole bidder in the public auction, purchased the foreclosed properties. On June 29, 1984, respondent bank filed a complaint for the collection of the balance against petitioner PAMECA and private petitioners herein, as solidary debtors with PAMECA under the promissory note. RTC ruled in favor of respondent Bank. CA affirmed RTC’s decision. Petitioners now claim that respondent appellate court gravely erred in not holding that the public auction sale of petitioner PAMECA's chattels were tainted with fraud, as the chattels of the said petitioner were bought by private respondent as sole bidder in only 1/6 of the market value of the property, hence unconscionable and inequitable (P322,350.00 from 2M), and therefore null and void. Petitioners contend that the amount of

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P322,350.00 at which respondent bank bid for and purchased the mortgaged properties was unconscionable and inequitable considering that, at the time of the public sale, the mortgaged properties had a total value of more than P2,000,000.00. According to petitioners, this is evident from an inventory which valued the properties at P2,518,621.00, in accordance with the terms of the chattel mortgage contract between the parties that required that the inventories "be maintained at a level no less than P2 million". Petitioners argue that respondent bank's act of bidding and purchasing the mortgaged properties for P322,350.00 or only about 1/6 of their actual value in a public sale in which it was the sole bidder was fraudulent, unconscionable and inequitable, and constitutes sufficient ground for the annulment of the auction sale. ISSUE: WON the auction sale is null and void on grounds of fraud and inadequacy of price. – NO HELD: There is no merit in petitioners' submission that the public auction sale is void on grounds of fraud and inadequacy of price. Petitioners never assailed the validity of the sale in the RTC, and only in the Court of Appeals did they attempt to prove inadequacy of price. Having nonetheless examined the inventory and chattel mortgage document as part of the records, We are not convinced that they effectively prove that the mortgaged properties had a market value of at least P2,000,000.00 on January 18, 1984, the date of the foreclosure sale. At best, the chattel mortgage contract only indicates the obligation of the mortgagor to

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maintain the inventory at a value of at least P2,000,000.00, but does not evidence compliance therewith. Furthermore, the mere fact that respondent bank was the sole bidder for the mortgaged properties in the public sale does not warrant the conclusion that the transaction was attended with fraud. Fraud is a serious allegation that requires full and convincing evidence, and may not be inferred from the lone circumstance that it was only respondent bank that bid in the sale of the foreclosed properties. NOTE: The mere fact that the mortgagee was the sole bidder for the mortgaged property in the public sale does not warrant the conclusion that the transaction was attended with fraud.

CABRAL vs EVANGELISTA FACTS: On 12 Dec 1959, George had executed in favor of Cabral Spouses a chattel mortgage covering a Morrison English piano and a Frigidaire GM Electric Stove as security for payment to the latter of a promissory note in the sum of P1k executed on the same date in the Chattel Mortgage Register of Rizal on 14 Dec 1959. Meanwhile, the Evangelista spouses obtained a final money judgment against Tanuya in a Civil Case. They caused the levy in execution on Tanuya’s personal properties, including the piano and the stove mortgaged to Cabral spouses. The said mortgage chattels, together with other personal properties of the judgment debtor, were sold at public auction to Evangelista spouses as the highest bidders. The judgment credit of Evangelista spouses, as creditors in the said Civil Case, was considered paid up and the Sheriff issued the corresponding certificate of sale in their favor. Subsequently, 8 months after the maturity

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of Tanuya’s promissory note and his having defaulted in the payment thereof, Cabral spouses filed their complaint against Tanuya and the Evangelista spouses, alleging that the Evangelista spouses had refused their demands to pay the amount due to Tanuya’s promissory note or to exercises their right of redemption and praying for judgment, ordering Tanuya and Evangelista spouses, jointly and solidarily, to pay them the amounts stipulated on the note, and in case of the failure to make such payment, to order them to deliver to the Sheriff the mortgaged chattels for sale at public auction to satisfy their mortgage credit. The trial court rendered a decision in favor of the Cabral spouses. Upon appeal, the CA ordered Tanuya and the Evengelista spouses to pay the Cabral spouses jointly and severally the amount plus interest as provided in the promissory note. Evangelista spouses now claim that their right over the mortgaged chattels as purchasers at the public sale in execution of their judgment against their debtor, defendant Tunaya, should not be held subordinate to the mortgage lien of plaintiffs-appellees as mortgagees, by virtue of prescription and laches on the part of said mortgagees as well as of their having purchased the chattels at a public sheriffs sale. ISSUES: (1) Has the right of the Cabral spouses to recover the properties prescribed? NO. (2) Did the certificate of sale give the Evangelista spouses superior right against the Cabral spouses? NO. (3) Are the Evangelista spouses jointly and severally liable with Tunaya to the Cabral spouses? YES HELD: (1) This thirty-day period is the minimum period after violation of the

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mortgage condition for the mortgage creditor to cause the sale at public auction of the mortgaged chattels, with at least ten days notice to the mortgagor and posting of public notice of the time, place and purpose of such sale, and is a period of grace for the mortgagor, who has no right of redemption after the sale is held, to discharge the mortgage obligation. 5 The prescription period for recovery of movables for foreclosure purposes such as in the present case is eight years as provided in Article 1140 of the Civil Code, 6 and here plaintiffs had timely filed their action within 8 months from the mortgage debtor's default. By the same token, neither could laches properly be imputed against plaintiffs, who filed their action promptly after they had been advised by their debtor, defendant Tunaya, of the public auction sale on June 24, 1960 of the chattels at the instance of defendants-appellants as his judgment creditors. (2) Defendants-appellants' purchase of the mortgaged chattels at the public sheriff's sale and the delivery of the chattels to them with a certificate of sale did not give them a superior right to the chattels as against plaintiffs-mortgagees. Rule 39, section 22 of the old Rules of Court (now Rule 39, section 25 of the Revised Rules), cited by appellants precisely provides that "the sale conveys to the purchaser all the right which the debtor had in such property on the day the execution or attachment was levied." It has long been settled by this Court that "The right of those who so acquire said properties should not and cannot be superior to that of the creditor who has in his favor an instrument of mortgage executed with the formalities of the law, in good faith, and without the least indication of fraud.

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This is all the more true in the present case, because, when the plaintiff purchased the automobile in question on August 22, 1933, he knew, or at least, it is presumed that he knew, by the mere fact that the instrument of mortgage, Exhibit 2, was registered in the office of the register of deeds of Manila, that said automobile was subject to a mortgage lien. In purchasing it, with full knowledge that such circumstances existed, it should be presumed that he did so, very much willing to respect the lien existing thereon, since he should not have expected that with the purchase, he would acquire a better right than that which the vendor then had." In another case between two mortgagees, we held that "As between the first and second mortgagees, therefore, the second mortgagee has at most only he right to redeem, and even when the second mortgagee goes through the formality of an extrajudicial foreclosure, the purchaser acquires no more than the right of redemption from the first mortgagee." 9 The superiority of the mortgagee's lien over that of a subsequent judgment creditor is now expressly provided in Rule 39, section 16 of the Revised Rules of Court, which states with regard to the effect of levy on execution as to third persons that "The levy on execution shall create a lien in favor of the judgment creditor over the right, title and interest of the judgment debtor in such property at the time of the levy, subject to liens or incumbrances then existing." (3) Article 559 of the Civil Code providing that "If the possessor of a movable lost or of which the owner has been unlawfully deprived, has acquired it in good faith at a public sale, the owner cannot obtain its return without reimbursing the price paid therefor..." cited by appellants has no application in the present case, for as pointed above, they

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acquired the chattels subject to the existing mortgage lien of plaintiffs thereon. Appellants state in their brief that they paid for the chattels the amount of P2,373.00. 10 As pointed out by appellees, the record shows that defendants-appellants had disposed of the mortgaged chattels "to other persons at a discounted rate" 11 and had, therefore, appropriated the same as if the chattels were of their absolute ownership, in complete derogation of plaintiffs' superior mortgage lien and in disregard of plaintiffs' demands to them prior to the filing of their complaint on October 11, 1960, to pay or exercise their right of redemption. Appellants by their act of disposition of the mortgaged chattels, whose value were admittedly more than adequate to secure Tunaya's mortgage obligation, have thus practically nullified plaintiffs' superior right to foreclose the mortgage and collect the amount due them. Considering the long period that has elapsed since October 11, 1960 when plaintiffs tried to enforce their claim and defendants-appellants' adamant resistance thereof and unjust refusal to recognize plaintiffs' clearly superior right to the chattels, which appellants admittedly disposed of without lawful right to other unknown persons obviously to defeat plaintiffs' right over the same, we are satisfied that justice and equity justify the lower court's judgment holding the defendants-appellants solidarily liable for the amount due plaintiffs-appellees

NORTHERN MOTORS vs COQUIA FACTS: ***Manila Yellow Taxicab, executed a chattel mortgage over several taxicabs in favor of Northern Motors. TROPICAL is a judgment creditor of Yellow Taxicab which assigned the credit to ONG.

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MYT failed to pay its loan so On December 12 1974, Sheriff then levied upon 20 taxicabs in favor of Tropical, 8 of which are security for the chattel mortgage. Northern Motors filed an intervention on December 18, 1974; however, the levied taxicabs were sold the same day at 2pm although agreement shows that it should have happened at 4pm. Indemnity bond was posted by TROPICAL, but the bond was cancelled after the sale without notice to Northern Motors. A second levy was made upon 35 taxicabs, 7 of which are mortgaged to Northern Motors. The taxies were levied and sold at an auction sale. The auction sale proceeded and the purchasers were of unknown addresses, hence the 8 taxicabs cannot be recovered. The proceeds of the auction were contested by Northern Motors. Moreover the sheriff deducted the expenses of the execution sale from the proceeds.*** Honesto Ong and City Sheriff of Manila filed a motion for the reconsideration of this Court's resolution which held that the lien of Northern Motors, Inc., as chattel mortgagee, over certain taxicabs is superior to the levy made on the said cabs by Honesto Ong, the assignee of the unsecured judgment creditor of the chattel mortgagor, MYT. On the other hand, Northern Motors, Inc. in its motion for the partial reconsideration prayed for the reversal of the lower court's orders cancelling the bond filed by Filwriters Guaranty Assurance Corporation. It further prayed that the sheriff should be required to deliver to it the proceeds of the execution sale of the mortgaged taxicabs without deducting the expenses of execution. ISSUES: 1. WON the expenses for the execution sale should be deducted from the proceeds thereof. NO

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2. WON the purchaser has a better right than the creditor/mortgagee. NO HELD: The motion for reconsideration of Ong and the sheriff should be denied. Those cabs cannot be sold at an execution sale because the levy thereon was wrongful. Ong had no right to levy upon the mortgaged taxicabs and that he could have levied only upon the mortgagor's equity of redemption. The essence of the chattel mortgage is that the mortgaged chattels should answer for the mortgage credit and not for the judgment credit of the mortgagor's unsecured creditor. The mortgagee is not obligated to file an "independent action" for the enforcement of his credit. To require him to do so would be a nullification of his lien and would defeat the purpose of the chattel mortgage which is to give him preference over the mortgaged chattels for the satisfaction of his credit. (See art. 2087, Civil Code). Intervenor Filinvest Credit Corporation, the assignee of a portion of the chattel mortgage credit, realized that to vindicate its claim by independent action would be illusory. Thus, it was constrained to enter into a compromise with Honesto Ong by agreeing to pay him P145,000. That amount was characterized by Northern Motors, Inc. as the "ransom" for the taxicabs levied upon by the sheriff at the behest of Honesto Ong. Ong's theory that Manila Yellow Taxicab's breach of the chattel mortgage should not affect him because he is not privy of such contract is untenable. The registration of the chattel mortgage is an effective and binding notice to him of its existence or a lien which, being recorded, follows the chattel wherever it goes. His contention that Northern Motors, Inc., was negligent because it did not sue the sheriff within the 120-day period provided

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for in section 17, Rule 39 of the Rules of Court is not correct. Such action was filed on April 14, 1975 in the Court of First Instance of Rizal, Pasig Branch XIII, in Civil Case No. 21065 entitled "Northern Motors, Inc. vs. Filwriters Guaranty Assurance Corporation, et al.". However, instead of Honesto Ong, his assignor, Tropical Commercial Corporation, was impleaded as a defendant therein. That might explain his unawareness of the pendency of such action. Ong admits "that the mortgagee's right to the mortgaged property is superior to that of the judgment creditor". But he contends that the rights of the purchasers of the cars at the execution sale should be respected. He reasons out they were not parties to the mortgage and that they acquired the cars prior to the mortgagee's assertion of its rights thereto. The third-party claim filed by Northern Motors, Inc. should have alerted the purchasers to the risk which they were taking when they took part in the auction sale. Moreover, at an execution sale the buyers acquire only the right of the judgment debtor which in this case was a mere right or equity of redemption. The sale did not extinguish the pre-existing mortgage lien. As to Petitioners motion for partial reconsideration. — The lower court in its order of January 3, 1975 cancelled the indemnity bonds for P480,000 filed by Filwriters Guaranty Assurance Corporation for Tropical Commercial Co., Inc. The bonds were cancelled without notice to Northern Motors, Inc. as third-party claimant. Bond should be reinstated. Purpose of surety-that the surety be ordered to pay damages in the event that the eight taxicabs could not be surrendered to the mortgagee. We already held that the execution was not justified and that Northern Motors,

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Inc., as mortgagee, was entitled to the possession of the eight taxicabs. Those cabs should not have been levied upon and sold at public auction to satisfy the judgment credit which was inferior to the chattel mortgage. Since the cabs could no longer be recovered because they had been transferred to persons whose addresses are unknown, the proceeds of the execution sale may be regarded as a partial substitute for the unrecoverable cabs . Northern Motors, Inc. is entitled to the entire proceeds without deduction of the expenses of execution.

against private respondents in the receivership proceedings with the SEC for the return of the shares.

POLICY: The mortgagee has a better right over the thing mortgaged than the judgment creditors of the mortgagor. It is improper to deduct the expenses of an illegal auction from the proceeds of thereof. Proceeds of the must be delivered to the mortgagee in full.

Therefore, it ordered private respondents to pay Cordova the amount of P5,062,500, representing the 15% of monetary value of his CSPI shares plus interest at the legal rate from the time of their unauthorized sale.

CORDOVA vs REYES FACTS: Sometime in 1977 and 1978, petitioner Jose Cordova bought from Philfinance certificates of stock of Celebrity Sports Plaza Inc (CSPI) and shares of stock of other corporations. He was issued a confirmation of sale. CSPI shares were delivered to former Filmanbank and Philtrust Banks (as custodian banks to hold the shares in behalf of Cordova). In 1981, Philfinance was placed under receivership by SEC. Thereafter, private respondents Reyes and Atty Wendell Coronel were appointed as liquidators. In 1991, without the knowledge and consent of Cordova and without authority from SEC, private respondents withdrew the CSPI shares from the custodian banks. They subsequently sold the shares to Northeast Corporation and included the proceeds thereof in the funds of Philfinance. Cordova learned about the sale only in 1996. He filed a complaint

In 1998, SEC dismissed the petition, but granted it upon reconsideration. It held that Cordova was the owner of the CSPI shares by virtue of a confirmation sale (which was considered as a deed of assignment) issued to him by Philfinance. But since the shares had already been sold and proceeds commingled with other assets of Philfinance, Cordova’s status was converted into that of an ordinary creditor for the value of such shares.

ISSUES: 1. WON petitioner should be considered as preferred (and secured) creditor of Philfinance NO 2. WON petitioner can recover the full value of his CSPI shares or merely 15% thereof like all other ordinary creditors of Philfinance only 15% 3. WON petitioner is entitled to legal interest NO HELD: To resolve the issues, we have to determine if petitioner was indeed a creditor of Philfinance. – SC held that petitioner had become an ORDINARY creditor of Philfinance. Certainly, petitioner had the right to demand the return of the shares. He filed a complaint in the liquidation proceedings. He sought instead to recover their monetary value. The CSPI shares were specific or determinate movable properties. But after they were sold, the money raised from the sale became generic and were commingled with other assets of

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Philfinance. Unlike shares of stock, money is generic. This means that once a certain amount is added to the cash balance, one can no longer pinpoint the specific amount included which then becomes part of a whole mass of money. It thus became impossible to identify the exact proceeds of the sale of the CSPI shares. Petitioner’s only remedy was to file a claim on the whole mass of these assets, to which unfortunately all other creditors of Philfinance also had a claim. Petitioner’s right of action against Philfinance was a “claim” properly to be litigated in the liquidation proceedings. He had a right to the payment of the value of his shares. His demand was of a pecuniary nature since he was claiming the monetary value of his shares. It was in this sense that he was a creditor of Philfinance. Petitioner argues that he was a preferred creditor because private respondents illegally withdrew his CSPI shares from the custodian banks and sold them without his knowledge and consent and without authority from the SEC. He quotes Article 2241 (2) of the Civil Code: With reference to specific movable property of the debtor, the following claims or liens shall be preferred: (2) Claims arising from misappropriation, breach of trust, or malfeasance by public officials committed in the performance of their duties, on the movables, money or securities obtained by them; He asserts that, as a preferred creditor, he was entitled to the entire monetary value of his shares. Petitioner’s argument is incorrect. Article 2241 refers only to specific movable property. His claim was for the payment of money, which, as already discussed, is generic property and

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not specific or determinate. Considering that petitioner did not fall under any of the provisions applicable to preferred creditors, he was deemed an ordinary creditor under Article 2245: Credits of any other kind or class, or by any other right or title not comprised in the four preceding articles, shall enjoy no preference. This being so, Article 2251 (2) states that: Common credits referred to in Article 2245 shall be paid pro rata regardless of dates. Like all the other ordinary creditors or claimants against Philfinance, he was entitled to a rate of recovery of only 15% of his money claim. Was petitioner entitled to interest? Petitioner is not entitled to legal interest of 12% per annum because the amount owing to him was not a loan or forbearance of money. Neither was he entitled to legal interest of 6% per annum under Art 2209 of the Civil Code since it applies only when there is a delay in the payment of a sum of money.

DE BARRETO vs VILLANUEVA FACTS: Rosario Cruzado sold all her right, title, and interest and that of her children in the house and lot herein involved to Villanueva for P19K. The purchaser paid P1,500 in advance, and executed a promissory note for the balance. However, the buyer could only pay P5,500 On account of the note, for which reason the vendor obtained judgment for the unpaid balance. In the meantime, the buyer Villanueva was able to secure a clean certificate of title and mortgaged the property to appellant Barretto to secure a loan of P30K, said mortgage having been duly recorded.

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foreclosure sale. Villanueva defaulted on the mortgage loan in favor of Barretto. The latter foreclosed the mortgage in her favor, obtained judgment, and upon its becoming final asked for execution. Cruzado filed a motion for recognition for her "vendor's lien" invoking Articles 2242, 2243, and 2249 of the new Civil Code. After hearing, the court below ordered the "lien" annotated on the back of the title, with the proviso that in case of sale under the foreclosure decree the vendor's lien and the mortgage credit of appellant Barretto should be paid pro rata from the proceeds. Appellants insist that: 1. The vendor's lien, under Articles 2242 and 2243 of the new, Civil Code of the Philippines, can only become effective in the event of insolvency of the vendee, which has not been proved to exist in the instant case; and . 2. That the Cruzado is not a true vendor of the foreclosed property. Article 2242 of the new Civil Code enumerates the claims, mortgage and liens that constitute an encumbrance on specific immovable property, and among them are: . (2) For the unpaid price of real property sold, upon the immovable sold; and (5) Mortgage credits recorded in the Registry of Property." Article 2249 of the same Code provides that "if there are two or more credits with respect to the same specific real property or real rights, they shall be satisfied prorata after the payment of the taxes and assessment upon the immovable property or real rights. HELD: Application of the above-quoted provisions to the case at bar would mean that the herein appellee Rosario Cruzado as an unpaid vendor of the property in question has the right to share pro-rata with the appellants the proceeds of the

ISSUE: Appellant’s argument: inasmuch as the unpaid vendor's lien in this case was not registered, it should not prejudice the said appellants' registered rights over the property. HELD: There is nothing to this argument. Note must be taken of the fact that article 2242 of the new Civil Code enumerating the preferred claims, mortgages and liens on immovables, specifically requires that. Unlike the unpaid price of real property sold. mortgage credits, in order to be given preference, should be recorded in the Registry of Property. If the legislative intent was to impose the same requirement in the case of the vendor's lien, or the unpaid price of real property sold, the lawmakers could have easily inserted the same qualification which now modifies the mortgage credits. The law, however, does not make any distinction between registered and unregistered vendor's lien, which only goes to show that any lien of that kind enjoys the preferred credit status. As to the point made that the articles of the Civil Code on concurrence and preference of credits are applicable only to the insolvent debtor, suffice it to say that nothing in the law shows any such limitation. If we are to interpret this portion of the Code as intended only for insolvency cases, then other creditor-debtor relationships where there are concurrence of credits would be left without any rules to govern them, and it would render purposeless the special laws on insolvency. Resolution on Motion to Consider (1962) Appellants, spouses Barretto, have filed a motion vigorously urging that our decision be reconsidered and set aside, and a new one entered declaring that their right as mortgagees remain superior to the unrecorded claim of herein appellee for the

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balance of the purchase price of her rights, title, and interests in the mortgaged property. We have reached the conclusion that our original decision must be reconsidered and set aside: Under the system of the Civil Code of the Philippines, only taxes enjoy a similar absolute preference. All the remaining thirteen classes of preferred creditors under Article 2242 enjoy no priority among themselves, but must be paid pro-rata i.e., in proportion to the amount of the respective credits. Thus, Article 2249 provides: If there are two or more credits with respect to the same specific real property or real rights, they, shall be satisfied prorata after the payment of the taxes and assessments upon the immovable property or real rights." The full application of Articles 2249 and 2242 demands that there must be first some proceedings where the claims of all the preferred creditors may be bindingly adjudicated, such as: 1. insolvency, 2. the settlement of decedents estate under Rule 87 of the Rules of Court, or 3. other liquidation proceedings of similar import. This explains the rule of Article 2243 of the new Civil Code that — The claims or credits enumerated in the two preceding articles" shall be considered as mortgages or pledges of real or personal property, or liens within the purview of legal provisions governing insolvency. And the rule is further clarified in the Report of the Code Commission, as follows: The question as to whether the Civil Code and the insolvency Law can be harmonized

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is settled by Article 2243. The preferences named in Articles 2261 and 2262 (now 2241 and 2242) are to be enforced in accordance with the Insolvency Law." RULE: Thus, it becomes evident that one preferred creditor's third-party claim to the proceeds of a foreclosure sale (as in the case now before us) is not the proceeding contemplated by law for the enforcement of preferences under Article 2242, unless the claimant were enforcing a credit for taxes that enjoy absolute priority. If none of the claims is for taxes, a dispute between two creditors will not enable the Court to ascertain the pro-rata dividend corresponding to each, because the rights of the other creditors likewise" enjoying preference under Article 2242 can not be ascertained. HELD: There being no insolvency or liquidation, the claim of the appellee, as unpaid vendor, did not require the character and rank of a statutory lien coequal to the mortgagee's recorded encumbrance, and must remain subordinate to the latter.

PHILIPPINE SAVINGS vs LANTIN FACTS: Involved in this case is a duplexapartment house on a lot covered by TCT No. 86195 situated at San Diego Street, Sampaloc, Manila, and owned by the spouses Filomeno and Socorro Tabligan. The duplex-apartment house was built for the spouses by private respondent Candido Ramos, a duly licensed architect and building contractor, at a total cost of P32,927.00. The spouses paid private respondent the sum of P7,139.00 only. Hence, the latter used his own money, P25,788.50 in all, to finish the construction of the duplex-apartment. Meanwhile,

on

December

16,

1966,

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February 1, 1967, and February 28, 1967, the spouses Tabligan obtained from petitioner Philippine Savings Bank three (3) loans in the total amount of P35,000.00, the purpose of which was to complete the construction of the duplex-apartment. To secure payment of the l2oans, the spouses executed in favor of the petitioner three (3) promissory notes and three (3) deeds of real estate mortgages over the property subject matter of this litigation. On December 19, 1966, the petitioner registered the December 16, 1966 deed of real estate mortgage with the Register of Deeds of Manila. The subsequent mortgages of February 1, 1967, and February 28, 1967, were registered with the Register of Deeds of Manila on February 2, 1967 and March 1, 1967, respectively. At the time of the registration of these mortgages, Transfer Certificate of Title No. 86195 was free from all liens and encumbrances. The spouses failed to pay their monthly amortizations. As a result thereof, the petitioner bank foreclosed the mortgages, and at the public auction held on July 23, 1969, was the highest bidder. On August 5, 1969, the petitioner bank registered the certificate of sale issued in its favor. On August 9, 1970, the bank consolidated its ownership over the property in question, and Transfer Certificate of Title No. 101864 was issued by the Register of Deeds of Manila in the name of the petitioner bank. Upon the other hand, the private respondent filed an action against the spouses to collect the unpaid cost of the construction of the duplex-apartment before the Court of First Instance of Manila, Branch I, which case was docketed therein as Civil Case No. 69228. During its pendency, the private respondent succeeded in obtaining the issuance of a writ of preliminary attachment, and

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pursuant thereto, had the property in question attached. Consequently, a notice of adverse claim was annotated at the back of Transfer Certificate of Title No. 86195. On August 26, 1968, a decision was rendered in Civil Case No. 69228 in favor of the private respondent and against the spouses. A writ of execution was accordingly issued but was returned unsatisfied. As the spouses did not have any properties to satisfy the judgment in Civil Case No. 69228, the private respondent addressed a letter to the petitioner for the delivery to him (private respondent) of his pro-rata share in the value of the duplex-apartment in accordance with Article 2242 of the Civil Code. The petitioner refused to pay the pro-rata value prompting the private respondent to file the instant action. A decision was rendered in favor of the private Respondent. ISSUE: whether or not the private respondent is entitled to claim a pro-rata share in the value of the property in question. RULING: NO. The conclusions of the lower court are not supported by the law and the facts. Concurrence of credits occurs when the same specific property of the debtor or all of his property is subjected to the claims of several creditors. The concurrence of credits raises no questions of consequence were the value of the property or the value of all assets of the debtor is sufficient to pay in fall all the creditors. However, it becomes material when said assets are insufficient for then some creditors of necessity will not be paid or some creditors will not obtain the full satisfaction of their claims. In this situation, the question of preference will then arise, that is to say who of the creditors will be paid the all of

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the others. The proceedings in the court below do not partake of the nature of the insolvency proceedings or settlement of a decedent’s estate. The action filed by Ramos was only to collect the unpaid cost of the construction of the duplex apartment. It is far from being a general liquidation of the estate of the Tabligan spouses. Insolvency proceedings and settlement of a decedent’s estate are both proceedings in rem which are binding against the whole world. All persons having interest in the subject matter involved, whether they were notified or not, are equally bound. Consequently, a liquidation of similar import or "other equivalent general liquidation’ must also necessarily be a proceeding in rem so that all interested persons whether known to the parties or not may be bound by such proceeding. In the case at bar, although the lower court found that "there were no known creditors other than the plaintiff and the defendant herein", this can not be conclusive. It will not bar other creditors in the event they show up and present their claims against the petitioner bank, claiming that they also have preferred liens against the property involved. Consequently, Transfer Certificate of Title No. 101864 issued in favor of the bank which is supposed to be indefeasible would remain constantly unstable and questionable. Such could not have been the intention of Article 2243 of the Civil Code although it considers claims and credits under Article 2242 as statutory liens. Neither does the De Barretto case sanction such instability. J.L. BERNARDO VS CA FACTS: Sometime in 1990, the municipal government of San Antonio, Nueva Ecija approved the construction of the San Antonio Public Market. The construction of

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the market was to be funded by the Economic Support Fund Secretariat (ESFS), a government agency working with the USAID. Under ESFS "grant-loanequity" financing program, the funding for the market would be composed of a (a) grant from ESFS, (b) loan extended by ESFS to the Municipality of San Antonio, and (c) equity or counterpart funds from the Municipality. It is claimed by petitioners Santiago R. Sugay, Edwin A. Sugay, Fernando S.A. Erana and J.L. Bernardo Construction, a single proprietorship owned by Juanito L. Bernardo, that they entered into a business venture for the purpose of participating in the bidding for the public market. It was agreed by petitioners that Santiago Sugay would take the lead role and be responsible for the preparation and submission of the bid documents, financing the entire project, providing and utilizing his own equipment, providing the necessary labor, supplies and materials and making the necessary representations and doing the liaison work with the concerned government agencies. On April 20, 1990, J.L. Bernardo Construction, thru petitioner Santiago Sugay, submitted its bid together with other qualified bidders. After evaluating the bids, the municipal pre-qualification bids and awards committee, headed by respondent Jose L. Salonga (then incumbent municipal mayor of San Antonio) as Chairman, awarded the contract to petitioners. On June 8, 1990, a Construction Agreement was entered into by the Municipality of San Antonio thru respondent Salonga and petitioner J.L. Bernardo Construction. It is claimed by petitioners that under this Construction Agreement, the Municipality agreed to assume the expenses for the demolition, clearing and site filling of the construction site in the amount of P1,150,000 and, in addition, to provide cash equity of P767,305.99 to be remitted

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directly to petitioners. Petitioners allege that, although the whole amount of the cash equity became due, the Municipality refused to pay the same, despite repeated demands and notwithstanding that the public market was more than ninety-eight percent (98%) complete as of July 20, 1991. Furthermore, petitioners maintain that Salonga induced them to advance the expenses for the demolition, clearing and site filling work by making representations that the Municipality had the financial capability to reimburse them later on. However, petitioners claim that they have not been reimbursed for their expenses. On July 31, 1991, J.L. Bernardo Construction, Santiago Sugay, Edwin Sugay and Fernando Erana, with the latter three bringing the case in their own personal capacities and also in representation of J.L. Bernardo Construction, filed a complaint for breach of contract, specific performance, and collection of a sum of money, with prayer for preliminary attachment and enforcement of contractors lien against the Municipality of San Antonio, Nueva Ecija and Salonga, in his personal and official capacity as municipal mayor. After defendants filed their answer, the Regional Trial Court held hearings on the ancillary remedies prayed for by plaintiffs. On September 5, 1991, the Regional Trial Court issued the writ of preliminary attachment prayed for by plaintiffs. It also granted J.L. Bernardo Construction the right to maintain possession of the public market and to operate the same. ISSUE: Whether or not the grant of writ of attachment and the contractor’s lien proper? HELD: There is no contractor’s lien in favor of petitioners.

Articles 2241 and 2242 of the Civil Code enumerates certain credits which enjoy preference with respect to specific personal or real property of the debtor. Specifically, the contractor’s lien claimed by petitioners is granted under the third paragraph of Article 2242 which provides that the claims of contractors engaged in the construction, reconstruction or repair of buildings or other works shall be preferred with respect to the specific building or other immovable property constructed. However, Article 2242 only finds application when there is a concurrence of credits, i.e. when the same specific property of the debtor is subjected to the claims of several creditors and the value of such property of the debtor is insufficient to pay in full all the creditors. In such a situation, the question of preference will arise, that is, there will be a need to determine which of the creditors will be paid ahead of the others. Fundamental tenets of due process will dictate that this statutory lien should then only be enforced in the context of some kind of a proceeding where the claims of all the preferred creditors may be bindingly adjudicated, such as insolvency proceedings. This is made explicit by Article 2243 which states that the claims and liens enumerated in articles 2241 and 2242 shall be considered as mortgages or pledges of real or personal property, or liens within the purview of legal provisions governing insolvency. The action filed by petitioners in the trial court does not partake of the nature of an insolvency proceeding. It is basically for specific performance and damages. Thus, even if it is finally adjudicated that petitioners herein actually stand in the position of unpaid contractors and are entitled to invoke the contractor’s lien granted under Article 2242, such lien cannot be enforced in the present action

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for there is no way of determining whether or not there exist other preferred creditors with claims over the San Antonio Public Market. The records do not contain any allegation that petitioners are the only creditors with respect to such property. The fact that no third party claims have been filed in the trial court will not bar other creditors from subsequently bringing actions and claiming that they also have preferred liens against the property involved.

ATLANTIC ERECTORS, INC. vs. HERBAL COVE REALTY CORPORATION G.R. No. 148568 (March 20, 2003) FACTS: On June 20, 1996, Herbal Cove Realty Corporation and Atlantic Erectors, Inc. entered into a Construction Contract whereby the former agreed to construct four (4) units of townhouses designated and one (1) single detached unit for an original contract price of P15,726,745.19 which was later adjusted to P16,726,745.19 as a result of additional works. Respondent was not able to finish the construction in time and as a consequence petitioner filed a complaint for sum of money with damages. Petitioner won the suit and the RTC ordered respondent to pay around 24 million in damages and fees. (The cause of action in this case is a money claim by one creditor) On November 21, 1997, petitioner filed a notice of lis pendens for annotation of the pendency of Civil Case No. 97-707 on titles TCTs nos. T-30228, 30229, 30230, 30231 and 30232. When the lots covered by said titles were subsequently subdivided into 50 lots, the notices of lis pendens were carried over to the titles of the subdivided lots, i.e., Transfer Certificate of Title Nos. T-36179 to T-36226 and T-36245 to T-36246 of the Register of Deeds of Tagaytay City. (The case does not explain the existence of these TCT's. It was not mentioned if these

were securities execution.)

or

properties

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under

On January 30, 1998, respondent and a certain Ernest L. Escaler, filed a Motion to Dismiss petitioner's Complaint for lack of jurisdiction and for failure to state a cause of action. They claimed that the Makati RTC has no jurisdiction over the subject matter of the case because the parties' Construction Contract contained a clause requiring them to submit their dispute to arbitration. The case against respondent was dismissed because of failure to comply with the arbitration clause. Under the law, a prior resort to arbitration is a condition precedent for filing a court action. Thus, in effect, the court admitted it had no jurisdiction to hear and decide the case. On April 24, 1998, respondent filed a Motion to Cancel Notice of Lis Pendens. It argued that the notices of lis pendens are without basis because petitioner's action is a purely personal action to collect a sum of money and recover damages and does not directly affect title to, use or possession of real property. This motion was granted. However, the notices of lis pendens were subsequently reinstated after judge Ranada claimed that a notice of lis pendens serves only as a precautionary measure or warning to prospective buyers of a property that there is a pending litigation involving the case. Respondent then made an appeal to the CA which rendered a decision in favor of the former. Claims of each party: petitioner- the money claim constitutes a lien that can be enforced to secure payment for the said obligations. The lien on respondent's property was necessary to preserve the alleged improvement it had made on the subject land. respondent- the annotation is bereft of any factual or legal basis because the action does not directly affect the title to the

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property, or the use or possession thereof. The annotation is baseless and cannot be made through the enforcement of a contractor's lien under Art. 2242 as said provision applies only to cases in which there are several creditors carrying on a legal action against an insolvent debtor. ISSUE: 1. Whether or not money claims representing cost of materials and labor on the houses constructed on a property are a proper lien for annotation of lis pendens on the property title 2. Whether or not the trial court, after having declared itself without jurisdiction to try the case, may still decide on thesubstantial issue of the case\

HELD: 1.NO, the lis pendens annotations were improper. 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. 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. Petitioner's money claim is not a contractor's lien 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

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2242 of the Civil Code. This provision describes a contractor's lien over an immovable property as follows: Art. 2242. With reference to specific immovable property and real rights of the debtor, the following claims, mortgages and liens shall be preferred, and shall constitute an encumbrance on the immovable or real right: xxx xxx xxx (3) Claims of laborers, masons, mechanics and other workmen, as well as of architects, engineers and contractors, engaged in the construction, reconstruction or repair of buildings, canals or other works, upon said buildings, canals or other works; (4) Claims of furnishers of materials used in the construction, reconstruction, or repair of buildings, canals or other works, upon said buildings, canals or other works. However, a careful examination of petitioner's Complaint, as well as the reliefs it seeks, reveals that no such lien or interest over the property was ever alleged. 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. Even if a party initially avails itself of a notice of lis pendens upon the filing of a case in court, such notice is rendered nugatory if the case turns out to be a purely personal action. As it is, petitioner's 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 Pendens. Indeed, the nature of an action is determined by the allegations of the complaint.

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Even assuming that petitioner had sufficiently alleged such lien or encumbrance in its Complaint, the annotation of the Notice of Lis Pendens would still be unjustified, because a complaint for collection and damages is not the proper mode for the enforcement of a contractor's lien. Contractor's lien and the proper methods of enforcing it In J.L. Bernardo Construction v. Court of Appeals, the Court explained the concept of a contractor's lien under Article 2242 of the Civil Code and the proper mode for its enforcement as follows: Articles 2241 and 2242 of the Civil Code enumerates certain credits which enjoy preference with respect to specific personal or real property of the debtor. Specifically, the contractor's lien claimed by the petitioners is granted under the third paragraph of Article 2242 which provides that the claims of contractors engaged in the construction, reconstruction or repair of buildings or other works shall be preferred with respect to the specific building or other immovable property constructed. However, Article 2242 finds application when there is a concurrence of credits, i.e., when the same specific property of the debtor is subjected to the claims of several creditors and the value of such property of the debtor is insufficient to pay in full all the creditors. In such a situation, the question of preference will arise, that is, there will be a need to determine which of the creditors will be paid ahead of the others. Fundamental tenets of due process will dictate that this statutory lien should then only be enforced in the context of some kind of a proceeding where the claims of all the preferred creditors may be bindingly adjudicated, such as insolvency proceedings.

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Clearly then, neither Article 2242 of the Civil Code nor the enforcement of the lien thereunder is applicable here, because petitioner's Complaint failed to satisfy the foregoing requirements. Nowhere does it show that respondent's property was subject to the claims of other creditors or was insufficient to pay for all concurring debts. Moreover, the Complaint did not pertain to insolvency proceedings or to any other action in which the adjudication of claims of preferred creditors could be ascertained. 2.The trial court still had jurisdiction to decide on the substantial issue of the case The trial court lost jurisdiction over the case only on August 31, 1998, when petitioner filed its Notice of Appeal. Thus, any order issued by the RTC prior to that date should be considered valid, because the court still had jurisdiction over the case. Accordingly, it still had the authority or jurisdiction to issue the July 30, 1998 Order canceling the Notice of Lis Pendens. On the other hand, the November 4, 1998Order that set aside the July 30, 1998 Order and reinstated that Notice should be considered without force and effect, because it was issued by the trial court after it had already lost jurisdiction. Finally, petitioner vehemently insists that the trial court had no jurisdiction to cancel the Notice. Yet, the former filed before the CA an appeal, docketed as CA-GR CV No. 65647, questioning the RTC's dismissal of the Complaint for lack of jurisdiction. Moreover, it must be remembered that it was petitioner which had initially invoked the jurisdiction of the trial court when the former sought a judgment for the recovery of money and damages against respondent. Yet again, it was also petitioner which assailed that same jurisdiction for issuing an order unfavorable to the former's cause. Indeed, parties cannot invoke the jurisdiction of a court to

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secure affirmative relief, then repudiate or question that same jurisdiction after obtaining or failing to obtain such relief.

DEVELOPMENT BANK OF THE PHILIPPINES vs. HONORABLE COURT OF APPEALS & REMINGTON INDUSTRIAL SALES CORPORATION G.R. No. 126200 (August 16, 2001) FACTS: Marinduque Mining-Industrial Corporation (MMIC) obtained from the Philippine National Bank (PNB) various loan accommodations. To secure the loans, Marinduque Mining executed on October 9, 1978 a Deed of Real Estate Mortgage and Chattel Mortgage in favor of PNB. The mortgage covered all of Marinduque Mining's real properties, located at Surigao del Norte, Sipalay, Negros Occidental, and at Antipolo, Rizal, including the improvements thereon. As of November 20, 1980, the loans extended by PNB amounted to P4 Billion, exclusive of interest and charges. On July 13, 1981, Marinduque Mining executed in favor of PNB and the Development Bank of the Philippines (DBP) a second Mortgage Trust Agreement. In said agreement, Marinduque Mining mortgaged to PNB and DBP all its real properties located at Surigao del Norte, Sipalay, Negros Occidental, and Antipolo, Rizal, including the improvements thereon. The mortgage also covered all of Marinduque Mining's chattels, as well as assets of whatever kind, nature and description which Marinduque Mining may subsequently acquire in substitution or replenishment or in addition to the properties covered by the previous Deed of Real and Chattel Mortgage dated October 7, 1978. Apparently, Marinduque Mining had also obtained loans totaling P2 Billion from DBP, exclusive of interest and charges.

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On April 27, 1984, Marinduque Mining executed in favor of PNB and DBP an Amendment to Mortgage Trust Agreement by virtue of which Marinduque Mining mortgaged in favor of PNB and DBP all other real and personal properties and other real rights subsequently acquired by Marinduque Mining. For failure of Marinduque Mining to settle its loan obligations, PNB and DBP instituted sometime on July and August 1984 extrajudicial foreclosure proceedings over the mortgaged properties. In the ensuing public auction sale conducted on August 31, 1984, PNB and DBP emerged and were declared the highest bidders over the foreclosed real properties, buildings, mining claims, leasehold rights together with the improvements thereon as well as machineries and equipments of MMIC. PNB and DBP thereafter thru a Deed of Transfer dated August 31, 1984 and June 6 1994, purposely, in order to ensure the continued operation of the Nickel refinery plant and to prevent the deterioration of the assets foreclosed, assigned and transferred to Nonoc Mining and Industrial Corporation amd Maricalum Mining Corp. respectively, all their rights, interest and participation over the foreclosed properties of MMIC. On February 27, 1987, PNB and DBP, pursuant to Proclamation No. 50 as amended, again assigned, transferred and conveyed to the National Government thru the Asset Privatization Trust (APT) all its existing rights and interest over the assets of MMIC, earlier assigned to Nonoc Mining and Industrial Corporation, Maricalum Mining Corporation and Island Cement Corporation. In the meantime, between July 16, 1982 to October 4, 1983, Marinduque Mining purchased and caused to be delivered

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construction materials and other merchandise from Remington Industrial Sales Corporation (Remington) worth P921,755.95. The purchases remained unpaid as of August 1, 1984 when Remington filed a complaint for a sum of money and damages against Marinduque Mining for the value of the unpaid construction materials and other merchandise purchased by Marinduque Mining, as well as interest, attorney's fees and the costs of suit. Remington's original complaint was later amended to implead additional defendants and in the end, the co-defendants were MMIC, PNB, DBP, Nonoc Mining, Maricalum Mining, Island Cement and Asset Privatization Trust. The RTC ruled in favor of Remington, whose decision was later affirmed by the CA. The CA held that there exists in Remington's favor a lien on the unpaid purchases of MMIC and as transferee, DBP must be held liable for the value thereof. ISSUE: Whether or not Remington can enforce its claim for unpaid purchases made by MMIC against DBP HELD: No, in the absence of liquidation proceedings, Remington's claim cannot be enforced against DBP. ARTICLE 2241. With reference to specific movable property of the debtor, the following claims or liens shall be preferred: xxx xxx xxx (3) Claims for the unpaid price of movables sold, on said movables, so long as they are in the possession of the debtor, up to the value of the same; and if the movable has been resold by the debtor and the price is still unpaid, the lien may be enforced on the price; this right is not lost by the immobilization of the thing by destination, provided it has not lost its form, substance and identity, neither is the right lost by the

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sale of the thing together with other property for a lump sum, when the price thereof can be determined proportionally; (4) Credits guaranteed with a pledge so long as the things pledged are in the hands of the creditor, or those guaranteed by a chattel mortgage, upon the things pledged or mortgaged, up to the value thereof; In Barretto vs. Villanueva, the Court had occasion to construe Article 2242, governing claims or liens over specific immovable property. In its decision upholding the order of the lower court, the Court ratiocinated thus: Article 2242 of the new Civil Code enumerates the claims, mortgages and liens that constitute an encumbrance on specific immovable property, and among them are: "(2) For the unpaid price of real property sold, upon the immovable sold"; and "(5) Mortgage credits recorded in the Registry of Property." Article 2249 of the same Code provides that "if there are two or more credits with respect to the same specific real property or real rights, they shall be satisfied prorata, after the payment of the taxes and assessments upon the immovable property or real rights." Application of the above-quoted provisions to the case at bar would mean that the herein appellee Rosario Cruzado as an unpaid vendor of the property in question has the right to share pro-rata with the appellants the proceeds of the foreclosure sale. xxx xxx xxx As to the point made that the articles of the Civil Code on concurrence and preference of credits are applicable only to the insolvent debtor, suffice it to say that nothing in the law shows any such limitation. If we are to interpret this portion of the Code as intended only for insolvency

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cases, then other creditor-debtor relationships where there are concurrence of credits would be left without any rules to govern them, and it would render purposeless the special laws on insolvency. Upon motion by appellants, however, the Court reconsidered its decision. Justice J.B.L. Reyes, speaking for the Court, explained the reasons for the reversal: The previous decision failed to take fully into account the radical changes introduced by the Civil Code of the Philippines into the system of priorities among creditors ordained by the Civil Code of 1889.

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(or such of them as have credits outstanding) must necessarily be convened, and the import of their claims ascertained. It is thus apparent that the full application of Articles 2249 and 2242 demands that there must be first some proceeding where the claims of all the preferred creditors may be bindingly adjudicated, such as insolvency, the settlement of decedent's estate under Rule 87 of the Rules of Court, or other liquidation proceedings of similar import.

Pursuant to the former Code, conflicts among creditors entitled to preference as to specific real property under Article 1923 were to be resolved according to an order of priorities established by Article 1927, whereby one class of creditors could exclude the creditors of lower order until the claims of the former were fully satisfied out of the proceeds of the sale of the real property subject of the preference, and could even exhaust proceeds if necessary.

This explains the rule of Article 2243 of the new Civil Code that — "The claims or credits enumerated in the two preceding articles shall be considered as mortgages or pledges of real or personal property, or liens within the purview of legal provisions governing insolvency. And the rule is further clarified in the Report of the Code Commission, as follows "The question as to whether the Civil Code and the Insolvency Law can be harmonized is settled by this Article (2243). The preferences named in Articles 2261 and 2262 (now 2241 and 2242) are to be enforced in accordance with the Insolvency Law."

Under the system of the Civil Code of the Philippines, however, only taxes enjoy a similar absolute preference. All the remaining thirteen classes of preferred creditors under Article 2242 enjoy no priority among themselves, but must be paid pro rata, i.e., in proportion to the amount of the respective credits. Thus, Article 2249 provides: "If there are two or more credits with respect to the same specific real property or real rights, they shall be satisfied pro rata, after the payment of the taxes and assessments upon the immovable property or real rights."

Thus, it becomes evident that one preferred creditor's third-party claim to the proceeds of a foreclosure sale (as in the case now before us) is not the proceeding contemplated by law for the enforcement of preferences under Article 2242, unless the claimant were enforcing a credit for taxes that enjoy absolute priority. If none of the claims is for taxes, a dispute between two creditors will not enable the Court to ascertain the pro rata dividend corresponding to each, because the rights of the other creditors likewise enjoying preference under Article 2242 cannot be ascertained.

But in order to make this prorating fully effective, the preferred creditors enumerated in Nos. 2 to 14 of Article 2242

Although Barretto involved specific immovable property, the ruling therein should apply equally in this case where

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specific movable property is involved. As the extrajudicial foreclosure instituted by PNB and DBP is not the liquidation proceeding contemplated by the Civil Code, Remington cannot claim its pro rata share from DBP. Thus, Remington cannot enforce its lien against DBP because there was no liquidation proceeding. The liquidation proceeding contemplated by the Civil Code is not the extrajudicial foreclosure done by DBP. The proceeding contemplated is where the claims of all the preferred creditors may be bindingly adjudicated such as insolvency, settlement of decedent's estate or other similar proceedings.

REPUBLIC VS. PERALTA [150 SCRA 37(1987)] FACTS: The Republic of the Philippines seeks the review on certiorari of the Order of the CFI of Manila in its Civil Case No. 108395 entitled "In the Matter of Voluntary Insolvency of Quality Tobacco Corporation, Quality Tobacco.” In its questioned Order, the trial court held that the above enumerated claims of USTC and FOITAF (hereafter collectively referred to as the "Unions") for separation pay of their respective members embodied in final awards of the NLRC were to be preferred over the claims of the Bureau of Customs and the BIR. The trial court, in so ruling, relied primarily upon Article 110 of the Labor Code. The Solicitor General, in seeking the reversal of the questioned Orders, argues that Article 110 of the Labor Code is not applicable as it speaks of "wages," a term which he asserts does not include the separation pay claimed by the Unions. "Separation pay," the Solicitor General contends: is given to a laborer for a

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separation from employment computed on the basis of the number of years the laborer was employed by the SEC. 1. Requirements for Issuance of License. Every applicant for license to operate a private employment agency or manning agency shall submit a written application together with the following requirements: xxx xxx f. A verified undertaking stating that the applicant: xxx xxx xxx(3) Shall assume joint and solidary liability with the employer for all claims and liabilities which may arise in connection with the implementation of the contract; including but not limited to payment of wages, health and disability compensation and reparation. employer; it is a form of penalty or damage against the employer in favor of the employee for the latter's dismissal or separation from service ISSUE: WON separation pay of their respective members embodied in final awards of the NLRC were to be preferred over the claims of the Bureau of Customs and the BIR (WON separation pay is included in the term “wages”) HELD: YES. For the specific purposes of Article 1109 and in the context of insolvency termination or separation pay is reasonably regarded as forming part of the remuneration or other money benefits accruing to employees or workers by reason of their having previously rendered services to their employer; as such, they fall within the scope of "remuneration or earnings — for services rendered or to be rendered — ." Liability for separation pay might indeed have the effect of a penalty, so far as the employer is concerned. So far as concerns the employees, however, separation pay is

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additional remuneration to which they become entitled because, having previously rendered services, they are separated from the employer's service. Reasoning We note, in this connection, that in Philippine Commercial and Industrial Bank (PCIB) us. National Mines and Allied Workers Union, the Solicitor General took a different view and there urged that the term "wages" under Article 110 of the Labor Code may be regarded as embracing within its scope severance pay or termination or separation pay. In PCIB, this Court agreed with the position advanced by the Solicitor General. We see no reason for overturning this particular position. The resolution of the issue of priority among the several claims filed in the insolvency proceedings instituted by the Insolvent cannot, however, rest on a reading of Article 110 of the labor Code alone. Article 110 of the Labor Code, in determining the reach of its terms, cannot be viewed in isolation. Rather, Article 110 must be read in relation to the provisions of the Civil Code concerning the classification, concurrence and preference of credits, which provisions find particular application in insolvency proceedings where the claims of all creditors, preferred or non-preferred, may be adjudicated in a binding manner. Disposition MODIFIED and REMANDED to the trial court for further proceedings in insolvency. Article 97 (f) of the Labor Code defines "wages" in the following terms: Wage' paid to any employee shall mean the remuneration or earnings, however designated, capable of being expressed in terms of money, whether fixed or ascertained on a time, task, piece, or

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commission basis, or other method of calculating the same, which is payable by an employer to an employee under a written or unwritten contract of employment for work done or to be done, or for services rendered or to be rendered, and includes the fair and reasonable value, as determined by the Secretary of Labor, of board, lodging, or other facilities customarily furnished by the employer to the employee. 'Fair and reasonable value' shall not include any profit to the employer or to any person affiliated with the employer.(emphasis supplied) Article 110. Worker preference in case of bankruptcy — In the event of bankruptcy or liquidation of an employer's business, his workers shall enjoy first preference as regards wages due them for services rendered during the period prior to the bankruptcy or liquidation, any provision of law to the contrary notwithstanding. Union paid wages shall be paid in full before other creditors may establish any claim to a share in the assets of the employer. (emphasis supplied).

DEVELOPMENT BANK OF THE PHILIPPINES VS. NLRC [242 SCRA 59 (1995)] FACTS: PSC obtained a loan in 1983 from the DBP to finance its iron smelting and steel manufacturing business. To secure said loan, PSC mortgaged to DBP real properties with all the buildings and improvements thereon and chattels. By virtue of the said loan agreement, DBP became the majority stockholder of PSC, with stockholdings. Subsequently, it took over the management of PSC. When PSC failed to pay its obligation with DBP, DBP foreclosed and acquired the mortgaged real estate and chattels of PSC in the auction sales in 1987. Petitioners filed a Petition for Involuntary Insolvency in the RTC against PSC and DBP, impleading as

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co-respondents therein Olecram Mining Corporation and Jose Panganiban Ice Plant and Cold Storage, with said petitioners representing themselves as unpaid employees of said private respondents. Herein private respondents filed a complaint with the Department of Labor against PSC, including later on DBP, for non-payment of salaries, 13th month pay, incentive leave pay and separation pay. DBP submits that when it foreclosed the assets of PSC, it did so as a foreclosing creditor.

in which credits should be paid in the final distribution of the proceeds of the insolvent's assets. The DBP anchors its claim on a mortgage credit, which directly and immediately subjects the property upon which it is imposed, whoever the possessor may be, to the fulfillment of the obligation for whose security it was constituted (Art. 2176, CC). It creates a real right which is enforceable against the whole world. It is a lien on an identified immovable property, which a preference is not.

ISSUE: Whether DBP, as foreclosing creditor, could be held liable for the unpaid wages, 13th month pay, incentive leave pay and separation pay of the employees of PSC

Even if Article 110 and its Implementing Rule, as amended, should be interpreted to mean `absolute preference,' the same should be given only prospective effect in line with the cardinal rule that laws shall have no retroactive effect, unless the contrary is provided (Art. 4, CC). Thereby, any infringement on the constitutional guarantee on non-impairment of obligation of contracts (Sec. 10, Art. III, 1987 Consti.) is also avoided. In point of fact, DBP's mortgage credit antedated by several years the amendatory law, RA 6715. To give Article 110 retroactive effect would be to wipe out the mortgage in DBP's favor and expose it to a risk which it sought to protect itself against by requiring a collateral in the form of real property.

The terms 'declaration' of bankruptcy or 'judicial' liquidation in Article 110 of the Labor Code have been eliminated by RA 6715, which took effect on March 21, 1989. Does this mean then that liquidation proceedings have been done away with? RULING: We opine in the negative. Because of its impact on the entire system of credit, Article 110 of the Labor Code cannot be viewed in isolation but must be read in relation to the Civil Code scheme on classification and preference of credits. In the event of insolvency, a principal objective should be to effect an equitable distribution of the insolvent's property among his creditors. To accomplish this there must first be some proceeding where notice to all of the insolvent's creditors may be given and where the claims of preferred creditors may be bindingly adjudicated. The right of first preference as regards unpaid wages recognized by Article 110 does not constitute a lien on the property of the insolvent debtor in favor or 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 fine, the right to preference given to workers under Article 110 of the Labor Code cannot exist in any effective way prior to the time of its presentation in distribution proceedings. It will find application when, in proceedings such as insolvency, such unpaid wages shall be paid in full before the `claims of the Government and other creditors' may be paid. But, for an orderly settlement of a debtor's assets, all creditors must be convened, their claims ascertained and inventoried, and thereafter the preference determined in the course of judicial proceedings which have for their object the subjection of the property of the debtor to the payment of his debts or other lawful

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obligations. Thereby, an orderly determination of preference of creditors' claims is assured; the adjudication made will be binding on all parties-in-interest, since those proceedings are proceedings in rem; and the legal scheme of classification, concurrence and preference of credits in the Civil Code, the Insolvency Law, and the Labor Code is preserved in harmony.

Isaiah 41:10 “So do not fear, for I am with you; do not be dismayed, for I am your God. I will strengthen you and help you; I will uphold you with my righteous right hand.”

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