Ocampo, Dizon & Domingo for petitioner. Angara, Concepcion, Regala & Cruz for private respondent

G.R. No. 72275 November 13, 1991 PACIFIC BANKING CORPORATION, petitioner, vs. HON INTERMEDIATE APPELLATE COURT AND ROBERTO REGALA, JR., respondents.

Ocampo, Dizon & Domingo for petitioner.  Angara, Concepcion, Concepcion, Regala & Cruz for private private respondent.

MEDIALDEA, J.:p

This is a petition for review on certiorari of the decision (pp 21-31, Rollo) of the Intermediate Appellate Court (now Court of Appeals) in AC-G.R. C.V. No. 02753, 1 which modified the decision of the trial court against herein private respondent Roberto Regala, Jr., one of the defendants in the case for sum of money filed by Pacific Banking Corporation. The facts of the case as adopted by the respondent appellant court from herein petitioner's brief before said court are as follows: On October 24, 1975, defendant Celia Syjuco Regala (hereinafter referred to as Celia Regala for brevity), applied for and obtained from the plaintiff the issuance and use of Pacificard credit card (Exhs. "A", "A-l",), under the Terms and Conditions Governing the Issuance and Use of Pacificard (Exh. "B" and hereinafter referred to as Terms and Conditions), a copy of which was issued to and received by the said defendant on the date of the application and expressly agreed that the use of the Pacificard is governed by said Terms and Conditions. On the same date, the defendant-appelant Robert Regala, Jr., spouse of defendant Celia Regala, executed a "Guarantor's Undertaking" Undertaking" (Exh. "A-1-a") 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 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. Plaintiff-appellee Pacific Banking Corporation has contracted with accredited business establishments to honor purchases of goods and/or services by

Pacificard holders and the cost thereof to be advanced by the plaintiffappellee for the account of the defendant cardholder, and the latter undertook to pay any statements of account rendered by the plaintiffappellee for the advances thus made within thirty (30) days from the date of  the statement, provided that any overdue account shall earn interest at the rate of 14% per annum from date of default. The defendant Celia Regala, as such Pacificard holder, had purchased goods and/or services on credit (Exh. "C", "C-l" to "C-112") 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 (Exh. "D") was sent to the latter and also to the defendant Roberto Regala, Jr. (Exh. " ") under his "Guarantor's Undertaking." A complaint was subsequently filed in Court for defendant's (sic ) repeated failure to settle their obligation. Defendant Celia Regala was declared in default for her failure to file her answer within the reglementary period. Defendant-appellant Roberto Regala, Jr., on the other hand, filed his Answer with Counterclaim admitting his execution of the "Guarantor's Understanding", "but with the understanding that his liability would be limited to P2,000.00 per month." In view of the solidary nature of the liability of the parties, the presentation of evidence ex-parte as against the defendant Celia Regala was jointly held with the trial of the case as against defendant Roberto Regala. After the presentation of plaintiff's testimonial and documentary evidence, fire struck the City Hall of Manila, including the court where the instant case was pending, as well as all its records. Upon plaintiff-appellee's petition for reconstitution, the records of the instant case were duly reconstituted. Thereafter, the case was set for pre-trial conference with respect to the defendant-appellant Roberto Regala on plaintiff-appellee's motion, after furnishing the latter a copy of the same. No opposition thereto having been interposed by defendant-appellant, defendant -appellant, the trial court set the case for pre-trial conference. Neither did said defendantappellant nor his counsel appear on the date scheduled by the trial court for said conference despite due notice. Consequently, plaintiff-appellee moved that the defendant-appellant Roberto Regala he declared as in default and that it be allowed to present its evidence ex-parte , which motion was granted. On July 21, 1983, plaintiff-appellee presented its evidence ex parte. (pp. 23-26, Rollo) After trial, the court a quo rendered judgment on December 5, 1983, the dispositive portion of which reads:

WHEREFORE, the Court renders judgment for the plaintiff and against the defendants condemning the latter, jointly and severally, to pay said plaintiff  the amount of P92,803.98, with interest thereon at 14% per annum, compounded annually, from the time of demand on November 17, 1978 until said principal amount is fully paid; plus 15% of the principal obligation as and for attorney's fees and expense of suit; and the costs. The counterclaim of defendant Roberto Regala, Jr. is dismissed for lack of  merit. SO ORDERED. (pp. 22-23, Rollo) The defendants appealed from the decision of the court a quo to the Intermediate Appellate Court. On August 12, 1985, respondent appellate court rendered judgment modifying the decision of the trial court. 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 Octob er 29, 1976. The dispositive portion of the decision states: WHEREFORE, the judgment of the trial court dated December 5, 1983 is modified only as to appellant Roberto Regala, Jr., so as to make him liable only for the purchases made by defendant Celia Aurora Syjuco Regala with the use of the Pacificard Pacific ard from October 29, 1975 up to October 29, 1976 up to the amount of P2,000.00 per month only, with interest from the filing of  the complaint up to the payment at the rate of 14% per annum without pronouncement as to costs. (p. 32, Rollo) A motion for reconsideration was filed by b y Pacific Banking Corporation which the respondent appellate court denied for lack of merit on September 19, 1985 (p. 33, Rollo). On November 8, 1985, Pacificard filed this petition. The petitioner contends that while the appellate court correctly recognized Celia Regala's obligation to Pacific Banking Corp. for the purchases of goods and services with the use of a Pacificard credit card in the total amount of P92,803.98 with 14% interest per annum, it erred in limiting private respondent Roberto Regala, Jr.'s liability only for purchases made by Celia Regala with the use of the card from October 29, 1975 up to October 29, 1976 up to the amount of  P2,000.00 per month with 14% interest from the filing of the complaint. There is merit in this petition. The pertinent portion of the "Guarantor's Undertaking" which private respondent Roberto Regala, Jr. signed in favor of Pacific Banking Corporation provides: I/We, the undersigned, hereby agree, jointly and severally with Celia Syjuco 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 the Pacificard or renewals thereof issued  in his favor by the Pacific Banking Corporation. 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,Rollo) The undertaking signed by Roberto Regala, Jr. although denominated "Guarantor's Undertaking," was in substance a contract of surety. As distinguished from a contract of  guaranty where the guarantor binds himself to the creditor to fulfill the obligation of the principal debtor only in case the latter should fail to do so, in a contract of suretyship, the surety binds himself solidarily with the principal debtor (Art. 2047, Civil Code of the Philippines). 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." This undertaking was also provided as a condition in the issuance of the Pacificard to Celia Regala, thus: 5. A Pacificard is issued to a Pacificard-holder against the joint and several signature of a third party and as such, the Pacificard holder and the guarantor assume joint and several liabilities for any and all amount arising out of the use of the Pacificard. (p. 14, Rollo) The respondent appellate court held that "all the other rights of the guarantor are not thereby lost by the guarantor becoming liable solidarily and therefore a surety." It further ruled that although the surety's liability is like that of a joint and several debtor, it does not make him the debtor but still the guarantor (or the surety), relying on the case of Government of the Philippines v. Tizon. G.R. No. L-22108, August 30, 1967, 20 SCRA 1182. Consequently, Article 2054 of the Civil Code providing for a limited liabili ty on the part of the guarantor or debtor still applies. 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 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 (see Article 2053, supra). 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. 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(see PCIB v. CA, L-34959, March 18, 1988, 159 SCRA 24). ACCORDINGLY, the petition is GRANTED. The questioned decision of respondent appellate court is SET ASIDE and the decision of the trial court is REINSTATED. SO ORDERED. G.R. No. 74231 April 10, 1987

CORAZON J. VIZCONDE, petitioner, vs. INTERMEDIATE APPELLATE COURT & PEOPLE OF THE PHILIPPINES, respondents.

NARVASA, J.:

Corazon J. Vizconde has appealed as contrary to law and the evidence, the Decision of  the Court of Appeals 1affirming her conviction of the crime of estafa by the Court of First Instance of Rizal Quezon City Branch, in Criminal Case No. Q- 5476. Vizconde and Pilar A. Pagulayan were charged in the Trial Court with misappropriation and conversion of an 8-carat diamond ring belonging to Dr. Marylon J. Perlas in an information which avers that they: * * * wilfully, unlawfully and feloniously, with intent of gain and with unfaithfulness and/or abuse of confidence, defraud(ed) DRA. MARYLOU J. PERLAS in the following manner, to wit: the said accused received from the offended party one (1) 8-karat solo diamond ring, white, double cut, brilliant cut with multiple bentitos, valued at P85,000.00, to be sold by them on commission basis, with the obligation to tum over the proceeds of the sale to the offended party, or to return the said ring if unsold, but the Id accused, once in possession thereof, contrary to their obligation, misapplied, misappropriated and converted the same to their own personal use and benefit, and in spite of repeated demands made upon them, both accused failed, omitted and refused, and still fait omit and refuse up to the present, to comply with their aforesaid obligation, to the damage and prejudice of the offended party, in the aforementioned amount of P85,000.00, Philippine currency. 2 After trial both accused were convicted and each sentenced to serve an indeterminate prison term of from eight (8) years, four (4) months and one (1) day to ten (10) years and two (2) months of  prision mayor , with the accessory penalties provided by law, and  jointly and severally to indemnify the offended party in the sum of P55,000.00 for the unaccounted balance of the value of the ring with legal interest from April 22, 1975, the further sum of P30,000.00 as and for moral damages and the sum of P10,000.00 for attorney's fees. 3 Both accused appealed to the Court of Appeals, but as Pilar A. Pagulayan had evaded promulgation of sentence in the Trial Court and had appealed only through counsel the Appellate Court vacated her appeal as ineffectual. 4On Vizconde's part, the Court of  Appeals affirmed the judgment of the Trial Court in all respects except the penalty of  imprisonment, which it increased to a term of from ten (10) years and one (1) day of  prision mayor to twelve (12) years ten (10) months and twenty-one (21) days of reclusion temporal. A motion for reconsideration was denied. Vizconde thereafter filed the present petition for review on certiorari. 5

Required to comment on the petition, the Solicitor General, despite having argued for affirmance of Vizconde's conviction in the Court of Appeals, now recommends that she be acquitted, but nonetheless held civilly liable to the complainant in the sum of  P55,000.00 (the unaccounted balance of the value of the ring as found by the Trial Court) " * * * or whatever portion thereof which remains unpaid. * * * 6 From the record and the findings of the courts below, it appears that sometime in the first week of April, 1975, the complainant, Dr. Marylon J. Perlas, called up the appellant Vizconde, a long-time friend and former high school classmate, asking her to sen Perlas' 8-carat diamond ring. Shortly afterwards, Perlas delivered the ring to Vizconde to be sold on commission for P 85,000.00. Vizconde signed a receipt for the ring. 7 About a week and a half later, Vizconde returned the ring to Perlas, who had asked for it because she needed to show it to a cousin However, Vizconde afterwards called on Perlas at the latter's home, with another lady, Pilar A. Pagulayan, who claimed to have a "sure buyer" for the ring. 8 Perlas was initially hesitant to do so, but she eventually parted with the ring so that it could be examined privately by Pagulayan's buyer when the latter' gave her a postdated check for the price (P 85,000.00) and, together with Vizconde, signed a receipt prepared by Perlas. This receipt-people's Exhibit "A"- reads as follows: RECEIPT Received from Dra. Marylon Javier-Perlas one (1) solo 8 karat diamond ring, white, double cut, brilliant cut with multiple brilliantitos, which I agree to sell for P85,000.00 (eighty-five thousand pesos) on commission basis and pay her in the following manner: P85,000.00 — postdated check PNB check 730297 dated April 26, 1975 for P85,000.00 It is understood that in the event the above postdated check is dishonored for any reason whatsoever on its due date, the total payment of the above item shall become immediately due and demandable without awaiting further demand. I guarantee that the above check will be sufficiently funded on the respective due date. Quezon City, Philippines 22 April 1975 (SGD.) PILAR A. PAGULAYAN

PILAR A. PAGULAYAN 16 Rd. 8 Project 6 I guarantee jointly and severally — (SGD.) CORAZON J. VIZCONDE CORAZON J. VIZCONDE 9 After Pagulayan's postdated check matured, Perlas deposited it to her account at Manila Bank. It was dishonored for the reason, "No arrangement," stated in the debit advice. Perlas then called up Vizconde to inform her about the dishonor of the check. The latter suggested that Perlas re-deposit the check while she (Vizconde) followed up the sale of  the ring. Perlas re-deposited the check, but again it was dishonored because drawn against insufficient funds. 10 So Perlas took the matter to counsel who sent separate letters of demand to Vizconde and Pagulayan for return of the ring or payment of  P85,000.00. 11 After nine days, Vizconde and Pagulayan called on Perlas. Pagulayan paid Perlas P5,000.00 against the value of the ring. She also gave into Perlas' keeping three certificates of title to real estate to guarantee delivery of the balance of such value. A receipt for the money and the titles was typed and signed by Perlas, which she also made the two sign. 12 The receipt — Exhibit "D" of the prosecution — reads: Received from Mrs. Pilar Pagulayan, the sum of FIVE THOUSAND PESOS ONLY (P5,000.00) representing part of the proceeds of the sale of one (1) solo 8 carat diamond ring, white, double cut, brilliant cut w/multiple brilliantitos, given to Mrs. Pilar Pagulayan and Mrs. Corazon de Jesus Vizconde on 22 April 1975, to be sold on commission basis for eighty- five thousand pesos (P85,000.00). Received also owner's duplicate copies of TCT Nos. 434907, 434909, 434910, which will be returned upon delivery of the remaining balance of the proceeds of the sale of said diamond ring for eighty five thousand pesos (P85,000.00). This receipt is being issued without prejudice to legal action. Quezon City, Philippines 7 May 1975 (Sgd.) Marylon J. Perlas

Dra. Marylon J. Perlas Conforme: (Sgd.) Pilar A. Pagulayan Pilar A. Pagulayan (Sgd.) Corazon J. Vizconde Corazon Vizconde 13 Vizconde and Pagulayan having allegedly reneged on a promise to complete payment for the ring on the very next day, Perlas filed with the Quezon City Fiscal's office a complaint against them for estafa This notwithstanding, Pagulayan stin paid Perlas various sums totalling P25,000.00 which, together with the P5,000.00 earlier paid, left a balance of P55,000.00 still owing. 14 Both the Trial Court and the Court of Appeals found istilln these facts suff icient showing that Vizconde and Pagulayan had assumed a joint agency in favor of Perlas for the sale of the latter's ring, which rendered them criminally liable, upon failure to return the ring or deliver its agreed value, under Art. 315, par. l(b), of the Revised Penal Code, for defraudation committed " * * * with unfaithfulness or abuse of confidence * * * by misappropriating or converting, to the prejudice of another, * * * personal property received in trust or on commission, or under any other obligation involving the duty to make delivery of or to return the same, * * * " The Solicitor General falling back, as already stated, from an earlier stance, disagrees and submits in his Comment that the appellant cannot be convicted of estafa under a correct interpretation of the two principal exhibits of the prosecution, the receipts Exhibits A" and "D". 15 He is correct. Nothing in the language of the receipt, Exhibit "A", or in the proven circumstances attending its execution can logically be considered as evidencing the creation of an agency between Perlas, as principal, and Vizconde, as agent, for the sale of the former's ring. True, reference to what may be taken for an agency agreement appears in the clause " * * * which I agree to sell * * * on commission basis" in the main text of that document. But it is clear that if any agency was established, it was one between Perlas and Pagulayan only, this being the only logical conclusion from the use of the singular "I" in said clause, in conjunction with the fact that the part of the receipt in which the clause appears bears only the signature of Pagulayan. To warrant anything more than a mere conjecture that the receipt also constituted Vizconde the agent of Perlas for the same purpose of selling the ring, the cited clause should at least have used the plural "we," or the text of the receipt containing that clause should also have carried Vizconde's signature. As the Solicitor General correctly puts it, the joint and several undertaking assumed by Vizconde in a separate writing below the main body of the receipt, Exhibit "A", merely guaranteed the civil obligation of Pagulayan to pay Perlas the value of the ring in the event of her (Pagulayan's) failure to return said article. It cannot, in any sense, be

construed as assuming any criminal responsibility consequent upon the failure of  Pagulayan to return the ring or deliver its value. It is fundamental that criminal responsibility is personal and that in the absence of conspiracy, one cannot be held criminally liable for the act or default of another. A person to be guilty of crime, must commit the crime himself or he must, in some manner, participate in its commission or in the fruits thereof. * * * 16 Thus, the theory that by standing as surety for Pagulayan, Vizconde assumed an obligation more than merely civil in character, and staked her very liberty on Pagulayan's fidelity to her trust is utterly unacceptable; it strikes at the very essence of  guaranty (or suretyship) as creating purely civil obligations on the part of the guarantor or surety. To render Vizconde criminally liable for the misappropriation of the ring, more than her mere guarantee written on Exhibit "A" is necessary. At the least, she must be shown to have acted in concert and conspiracy with Pagulayan, either in obtaining possession of the ring, or in undertaking to return the same or delivery its value, or in the misappropriation or conversion of the same. Now, the information charges conspiracy between Vizconde and Pagulayan, but no adequate proof thereof has been presented. It is of course true that direct proof of  conspiracy is not essential to convict an alleged conspirator, and that conspiracy may be established by evidence of acts done in pursuance of a common unlawful purpose. 17 Here, however, the circumstances from which a reasonable inference of  conspiracy might arise, such as the fact that Vizconde and the complainant were friends of long standing and former classmates, that it was Vizconde who introduced Pagulayan to Perlas, that Vizconde was present on the two occasions when the ring was entrusted to Pagulayan and when part payment of P5,000.00 was made, and that she sig ned the receipts, Exhibits "A" and "D," on those occasions are, at best, inconclusive. They are not inconsistent with what Vizconde has asserted to be an innocent desire to help her friend dispose of the ring; nor do they exclude every reasonable hypothesis other than complicity in a premeditated swindle. 18 The foregoing conclusion in nowise suffers from the fact that the second receipt, Exhibit "D", appears to confirm that the ring "* * * was given to Mrs. Pilar Pagulayan and Mrs. Corazon de Jesus Vizconde on 22 April 1975, to be sold on commission basis for eighty five thousand pesos (P85,000.00)." 19 The implications and probative value of this writing must be considered in the context of what had already transpired at the time of  its making. The ring had already been given to Pagulayan, and the check that she had issued in payment therefor (or to secure payment, as the complainant would have it) had already been dishonored twice. That the complainant then already entertained serious apprehensions about the fate of the ring is evident in her having had her lawyers send Vizconde and Pagulayan demands for restitution or payment, with threat of legal action. Given that situation, Exhibit "D", insofar as it purports to confirm that Vizconde had also received the ring in trust, cannot be considered as anything other than an attempt to "cure" the lack of mention of such an entrustment in the first receipt, Exhibit "A", and thereby bind Vizconde to a commitment far stronger and more compelling than a mere civil guarantee for the value of the ring. There is otherwise no explanation for requiring Vizconde and Pagulayan to sign the receipt, which needed only the signature of 

Perlas as an acknowledgment of the P5,000.00 given in part payment, and the delivery of the land titles to secure the balance. The conflict in the recitals of the two receipts insofar as concerns Vizconde's p art in the transaction involving Perlas' ring is obvious and cannot be ignored. Neither, as the Court sees it, should these writings be read together in an attempt to reconcile what they contain, since, as already pointed out, the later receipt was made under circumstances which leave no little doubt of its truth and ;Integrity. What is clear from Exhibit "A" is that the ring was entrusted to Pilar A. Pagulayan to be sold on commission; there is no mention therein that it was simultaneously delivered to and received by Vizconde for the same purpose or, therefore, that Vizconde was constituted, or agreed to act as, agent  jointly with Pagulayan for the sale of the ring. What Vizconde solely undertook was to guarantee the obligation of Pagulayan to return the ring or deliver its value; and that guarantee created only a civil obligation, without more, upon default of the principal. Exhibit "D", on the other hand, would make out Vizconde an agent for the sale of the ring. The undisputed fact that Exhibit "A" was executed simultaneously with the delivery of the ring to Pagulayan compellingly argues for accepting it as a more trustworthy memorial of the real agreement and transaction of the parties than Exhibit "D" which was executed at a later date and after the supervention of events rendering it expedient or desirable to vary the terms of that agreement or transaction. In view of the conclusions already reached, consideration of the Solicitor General's argument — also quite persuasive — that Exhibit "D" in fact evidences a consummated sale of the ring for an agreed price not fully paid for, which yields the same result, is no longer necessary. It is, however, at least another factor reinforcing the hypothesis of  Vizconde's innocence. Upon the evidence, appellant Corazon J. Vizconde was a mere guarantor, a solidary one to be sure, of the obligation assumed by Pilar A. Pagulayan to complainant Marylon J. Perlas for the return of the latter's ring or the delivery of its value. Whatever liability was incured by Pagulayan for defaulting on such obligation — and this is not inquired into — that of Vizconde consequent upon such default was merely civil, not criminal. It was, therefore, error to convict her of  estafa. As already stated, the Solicitor General however maintains, on the authority of People vs. Padilla, 20 that the appellant should be held hable to pay the complainant the amount of P55,000.00, or whatever part of such amount remains unpaid, for the value of the ring. Again, this is a correct proposition, there being no question — as in fact admitted by her — that the appellant executed the guarantee already referred to. WHEREFORE, except insofar as it affirms the judgment of the Trial Court ordering appellant Corazon J. Vizconde, solidarity with Pilar A. Pagulayan, to indemnify the complainant Marylon J. Perlas in the amount of P55,000.00 for the unaccounted balance of the value of the latter's ring, the appellant pealed Decision of the Court of Appeals is reversed and set aside, and said appellant is acquitted, with costs de oficio. As the record indicates that levies on preliminary attachment and on execution pending appeal have been made on behalf of the complainant, 21 which may have resulted in further reducing the abovestated balance, the appellant may, upon remand of this case to the

Trial Court, prove any reductions, by the operation of said levies or otherwise, to which the amount of the indemnity adjudged may be justly subject. SO ORDERED.

G.R. No. 16482

February 1, 1922

SMITH, BELL & COMPANY, LTD., plaintiff-appellant, vs. THE PHILIPPINE NATIONAL BANK, defendant-appellee.

Ross & Lawrence and Ewald E. Selph for appellant. Roman J. Lacson for appellee. STREET, J.:

This action was brought by Messrs. Smith, Bell & Co., Ltd., to recover a sum of money of  the defendant, the Philippine National Bank, as damages for its failure to accept delivery of certain machinery which had been ordered from the plaintiff by one F.M. Harden, and for the purchase price of which the bank had obligated itself in the manner stated below. After the hearing the trial judge absolved the defendant, and the plaintiff appealed. It appears that in the month of April, 1918, one Fred M. Harden, being desirous of  obtaining eight expellers adopted to the extraction of coconut oil, applied to Smith, expellers through this house. By the contract signed for this purpose between said Harden and Smith, Bell & Co., on April 25, 1918, the latter "sold" to Harden eight (8) Anderson expellers, end-drive, latest model, for the price of P80,000, to be paid on delivery. It was understood that these expellers would be manufactured in the United States; and it was stipulated that shipment would be made from the United States in the month of February or March of the ensuing year. In order to assure the prompt payment of the price upon delivery, an arrangement was made between Harden and the Philippine National Bank whereby the latter bound itself  to Smith, Bell & Co. for the payment of the contract price, according to the terms of the following letter dated April 27, 1918, which was addressed by the bank to the latter firm: Messrs. SMITH, BELL & CO., Manila, P.I. GENTLEMEN: In connection with the 8 expellers purchased by Mr. F.M. Harden, amounting to P80,000 please be advised that this institution will pay the above amount upon delivery of the expellers to us, upon condition that these are new Anderson expellers and are laid down in Manila in first class working order.

Yours very truly, J. ELMER DELANEY,  Acting President. Shortly after the contract for the purchase of these expellers had been thus made, and on or about May 9, 1918, Harden appeared in the office of Smith, Bell & Co. and requested them to change the order for the expellers from "end-drive" to "side-drive;" and in obedience to this instruction, the house cabled to its agent in New York to change the order accordingly, which was done. This fact is in our opinion clearly established by the concurring testimony of J. H. Schmidt, plaintiff's sales manager, and one J. C. Cowper, who accompanied Harden on the mission to get the order changed. In addition to this it appears that the side-drive expeller represents an improvement over the enddrive and is of a newer type; and upon the occasion mentioned, Harden exhibited to the manager of Messrs. Smith, Bell & Co., a catalogue from the Anderson factory showing this fact, as explanatory of his change in the order. On July 2, 1919, Smith, Bell & Co. informed both Harden and the bank that the expellers had arrived. Shortly thereafter Harden, having examined the machinery in the plaintiff's bodega, advised the bank that the expellers were not as ordered. Upon this, the bank naturally refused to accept and pay for the machinery, and the plaintiff disposed of them to the best advantage in the Manila market at a price which was below the price at which Harden had agreed to take them. The ground upon which the defense is chiefly rested is that the expellers tendered by the plaintiff were "side-drive" instead of "end-drive" expellers, and in support of this contention Harden was produced by the defendant as a witness, and he denied that the order for expellers had been changed upon his instructions. As we have already stated, this contention is untenable; and we do not hesitate to find upon the proof before us that the order was changed at Harden's request. For the rest, it is shown that the expellers tendered by the plaintiff were new Anderson expellers, in all respect in first class working order. In the light of these facts the right of the plaintiff to recover is clear. The contract by which the bank obligated itself is both in form and effect an independent undertaking on the part of the bank directly to the plaintiff; and inasmuch as the plaintiff had compiled, or offered to comply, with the terms of said contract, the bank is bound by its promise to pay the purchase price. The consideration for this promise is to be found in the credit extended to Harden by the plaintiff and in the fact that the plaintiff, relying upon th e bank's promise, has gone to the expense of bringing to these Islands the expellers which Harden had ordered. It is undeniable that the contract sued on had its origin and explanation in the contract between Harden and the plaintiff, and the bank of course obligated itself solely for the purpose of assuring the payment of the purchase price of the expellers to the plaintiff. But this does not make the bank subsidiary liable as regards the contract which is the subject of this suit. Its obligation to the plaintiff is direct and independent. Moreover, the debt must be considered a liquidated debt, in the sense intended in article 1825 of the

Civil Code; and the action is now maintainable by the plaintiff directly against the bank without regard to the position of Harden. At this point the thought may possibly suggested itself that if the view above indicated is correct, and the bank is to be considered strictly in the light of an independent promisor, a consequence would be that Harden had no authority to change the order from enddrive to side-drive expellers; in other words, that the bank should be held to be obligated according to the terms of the order as it stood when the bank entered into the undertaking which is the subject of the suit. Having regard, however, to the situation as all parties understood it, we are of opinion that the act of Harden in changing the order could not affect the liability of the defendant bank, especially since the specification in the bank's letter calls for "new" Anderson expellers and the change made was rather in furtherance of this specification than prejudicial to it. The real purpose of the bank, as all parties were well aware, was to supply its credit to enable Harden to obtain the expellers ordered by himself, and for his purpose, and it would tend to frustrate the intention of  the parties to hold that Harden had no authority to change the order to the extent stated. We observe that in the second amended complaint of March 8, 1920, — which was the first complaint in which the plaintiff signified his election to claim damages for breach of  contract — the damages are alleged to have been in the sum of P26,339.55, upon which it is asked that interest be allowed at the legal rate from the date of this complaint. Upon examining the several items which go to compose the damages, as indicated in the statement, Exhibit D, prepared by the plaintiff's department of accounts, we consider the following to be legitimate charges, namely, first, the difference between the contract price and the amount realized from the sale of the expellers, — P22,400; secondly, various charges for storage, insurance, etc., while the machinery remained in the plaintiff's hands after it should have been delivered to the defendant, — P665.34; and, thirdly, expenses actually paid out by the plaintiff in moving the expellers, and for collie hire, — P640. In the itemized statement of damages submitted by the plaintiff, interest has been compounded monthly at 8 per cent, but in the absence of express stipulation this cannot be allowed; and we are the more disposed to eliminate this charge for interest, for the reason that the plaintiff's sales manager has effect admitted that the terms imposed by the plaintiff on Harden were severe. Judgment will be reversed, and the plaintiff will recover of the defendant the sum of  twenty-three thousand seven hundred five pesos and thirty-four centavos (P23,705.34), with legal interest from March 8, 1920. No special pronouncement will be made as to costs of either instances. So ordered. G.R. No. 80078 May 18, 1993 ATOK FINANCE CORPORATION, petitioner, vs. COURT OF APPEALS, SANYU CHEMICAL CORPORATION, DANILO E. ARRIETA, NENITA B. ARRIETA, PABLITO BERMUNDO and LEOPOLDO HALILI, respondents.

Syquia Law Offices for petitioner.

Batino, Angala, Allaga & Zara Law Offices for private respondents.

FELICIANO, J.:

Atok Finance Corporation ("Atok Finance") asks us to review and set aside the Decision of the Court of Appeals which reversed a decision of the trial court ordering private respondents to pay jointly and severally to petitioner Atok Finance certain sums of  money. On 27 July 1979, private respondents Sanyu Chemical corporation ("Sanyu Chemical") as principal and Sanyu Trading Corporation ("Sanyu Trading") along with individual private stockholders of Sanyu Chemical, namely, private respondent spouses Danilo E. Halili and Pablico Bermundo as sureties, executed in the continuing Suretyship Agreement in favor of Atok Finance as creditor. Under this Agreement, Sanyu Trading and the individual private respondents who were officers and stockholders of Sanyu Chemical did: (1) For valuable and/or other consideration . . . , jointly and severally  unconditionally guarantee to ATOK FINANCE CORPORATION (hereinafter called Creditor), the full, faithful and prompt payment and discharge of any  and all indebtedness of [Sanyu Chemical] . . . (hereinafter called Principal) to the Creditor . The word"indebtedness" is used herein in its most  comprehensive sense and includes any and all advances, debts, obligations and liabilities of Principal or any one or more of them, 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. 1 (Emphasis supplied) Other relevant provisions of the Continuing Suretyship Agreement follow: (2) This is a continuing suretyship relating to any indebtedness, including that arising under successive transactions which shall either continue the indebtedness from time to time or renew it after it has been satisfied . This suretyship is binding upon the heirs, successors, executors, administrators and assigns of the surety, and the benefits hereof shall extend to and include the successors and assigns of the Creditor. (3) The obligations hereunder are joint and several and independent of the obligations of the Principal . A separate action or actions may be prosecuted against the Principal and whether or not the Principal be joined in any such action or actions.

xxx xxx xxx. (6) In addition to liens upon, and rights of set-off against the moneys, securities or other property of the Surety given to the Creditor by law, the Creditor shall have the lien upon and a right of self-off against all moneys, securities, and other property of the Surety now and hereafter in the possession of the Creditor; and every such lien or right of self -off may be exercised without need of demands upon or notice to the Surety. No lien or right of set-off shall be deemed to have been waived by any act, omission or conduct on the part of the Creditor, or by any neglect to exercise such right of set-off or to enforce such lien, or by any delay in so doing, and every right of set-off or lien shall continue in full force and effect until such right of setoff of lien is specifically waived or released by an instrument in writing executed by the Creditor. (7) Any indebtedness of the Principal now or hereafter held by the Surety is hereby subordinated to the indebtedness of the Principal to the Creditor; and if the Creditor so requests, such indebtedness of the Principal of the Surety shall be collected, enforced and shall be paid over to the Creditor and shall be paid over to the Creditor and shall be paid over to the Creditor on account of the indebtedness of the Principal to the Creditor but without reducing or affecting in any manner the liability of the Surety under the provisions of this suretyship. xxx xxx xxx 2 (Emphases supplied) On 27 November 1981, Sanyu Chemical assigned its trade receivables outstanding as of  27 November 1981 with a total face value of P125,871.00, to Atok Finance in consideration of receipt from Atok Finance of the amount of P105,000.00. The assigned receivables carried a standard term of thirty (30) days; it appeared, however, that the standard commercial practice was to grant an extension up to one hundred twenty (120) days without penalties. The relevant portions of this Deed of Assignment read as follows: 1. FOR VALUE RECEIVED, the ASSIGNOR does hereby SELL, TRANSFER and ASSIGN all his/its rights, title and interest in the contracts, receivables, accounts, notes, leases, deeds of sale with reservation of title, invoices, mortgages, checks, negotiable instruments and evidences of indebtedness listed in the schedule forming part hereinafter called "Contract" or "Contracts." 2. To induce the ASSIGNEE to purchase the above Contracts, the ASSIGNOR does hereby certify,warrant and represent that : (a). He/It is the sole owner of the assigned Contracts free and clear of claims of any other party except the

herein ASSIGNEE and has the right to transfer absolute title thereto the ASSIGNEE; (b). Each assigned Contract is bonafide and the amount owing and to become due on each contract is correctly stated upon the schedule or other evidences of the Contract delivered pursuant thereto; (c). Each assigned Contract arises out of the sale of  merchandise/s which had been delivered and/or services which have been rendered and none of the Contract is now, nor will at any time become, contingent upon the fulfillment of any contract or condition whatsoever, or subject to any defense, offset or counterclaim; (d). No assigned Contract is represented by any note or other evidence of indebtness or other security document except such as may have been endorsed, assigned and delivered by the ASSIGNOR to the ASSIGNEE simultaneously with the assignment of  such Contract; (e). No agreement has been made, or will be made, with any debtor for any deduction discount or return of merchandise, except as may be specifically noted at the time of the assignment of the Contract; (f). None of the terms or provisions of the assigned Contracts have been amended, modified or waived; (g). The debtor/s under the assigned Contract/s are solvent and his/its/their failure to pay the assigned  Contracts and/or any installment thereon upon maturity thereof shall be conclusively considered as a violation of this warranty ; and (h). Each assigned Contract is a valid obligation of  the buyer of the merchandise and/or service rendered under the Contract And that no Contract is overdue. The foregoing warranties and representations are in addition to those provided for in the Negotiable Instruments Law and other applicable laws. Any violation thereof shall render the ASSIGNOR immediately and  unconditionally liable to pay the ASSIGNEE jointly and severally with the debtors under the assigned contracts, the amounts due thereon.

xxx xxx xxx 4. The ASSIGNOR shall without compensation or cost, collect and receive in trust for the ASSIGNEE all payments made upon the assigned contracts and shall remit to the ASSIGNEE all collections on the said Contracts as follows : P5,450.00 due on January 2, 1982 on every 15th day (semimonthly) until November 1, 1982. P110,550.00 balloon payment after 12 months. 3 (Emphasis supplied) Later, additional trade receivables were assigned by Sanyu Chemical to Atok Finance with a total face value of P100,378.45. On 13 January 1984, Atok Finance commenced action against Sanyu Chemical, the Arrieta spouses, Pablito Bermundo and Leopoldo Halili before the Regional Trial Court of  Manila to collect the sum of P120,240.00 plus penalty charges amounting to P0.03 for every peso due and payable for each month starting from 1 September 1983. Atok Finance alleged that Sanyu Chemical had failed to collect and remit the amount due under the trade receivables. Sanyu Chemical and the individual private respondents sought dismissal of Atok's claim upon the ground that such claim had prescribed under Article 1629 of the Civil Code and for lack of cause of action. The private respondents contended that the Continuing Suretyship Agreement, being an accessory contract, was null and void since, at the time of its execution, Sanyu Chemical had no pre-existing obligation due to Atok Finance. At the trial, Sanyu Chemical and the individual private respondents failed to present any evidence on their behalf, although the individual private respondents submitted a memorandum in support of their argument. After trial, on 1 April 1985, the trial court rendered a decision in favor of Atok Finance. The dispositive portion of this decision reads as follows: ACCORDINGLY, judgment is hereby rendered in favor of the plaintiff ATOK FINANCE CORPORATION; and against the defendants SANYU CHEMICAL CORPORATION, DANILO E. ARRIETA, NENITA B. ARRIETA, PABLITO BERMUNDO and LEOPOLDO HALILI, ordering the said defendants, jointly and severally, to pay the plaintiff: (1) P120,240.00 plus P0.03 for each peso for each month from September 1, 1983 until the whole amount is fully paid; (2) P50,000.00 as attorney's fees; and (3) To pay the costs. SO ORDERED. 4

Private respondents went on appeal before the then Intermediate Appellate Court ("IAC"), and the appeal was there docketed as AC-G.R. No. 07005-CV. The case was raffled to the Third Civil Cases Division of the IAC. In a resolution dated 21 March 1986, that Division dismissed the appeal upon the ground of abandonment, since the private respondents had failed to file their appeal brief notwithstanding receipt of the notice to do so. On 4 June 1986, entry of judgment was made by the Clerk of Court of the IAC. Accordingly, Atok Finance went before the trial court and sought a writ of execution to enforce the decision of the trial court of 1 April 1985. The trial court issued a writ of  execution on 23 July 1986. 5 Petitioner alleged that the writ of execution was served on private respondents. 6 However, on 27 August 1986, private respondents filed a Petition for Relief from Judgment before the Court of Appeals. This Petition was raffled off to the 15th Division of the Court of Appeals. In that Petition, private respondents claimed that their failure to file their appeal brief was due to excusable negligence, that is, that their previous counsel had entrusted the preparation and filing of the brief to one of his associates, which associate, however, had unexpectedly resigned from the law firm without returning the records of cases he had been handling, including the appeal of private respondents. Atok Finance opposed the Petition for Relief arguing that no valid ground existed for setting aside the resolution of the Third Division of the then IAC. The 15th Division of the Court of Appeals nonetheless granted the Petition for Relief  from Judgment "in the paramount interest of justice," 7 set aside the resolution of the Third Civil Cases Division of the then IAC, and gave private respondents a nonextendible period of fifteen (15) days within which to file their appeal brief. Private respondents did file their appeal brief. The 15th Division, on 18 August 1987, rendered a Decision on the merits of the appeal, and reversed and set aside the decision of the trial court and entered a new judgment dismissing the complaint of Atok Finance, ordering it to pay private respondents P3,000.00 as attorney's fees and to pay the costs. Atok Finance moved to set aside the decision of the 15th Division of the Court of  Appeals, inviting attention to the resolution of the IAC's Third Civil Cases Division of 21 March 1986 originally dismissing private respondent's appeal for abandonment thereof. In a resolution dated 18 August 1987, the 15th Division denied Atok Finance's motion stating that it had granted the Petition for Relief from Judgment and given private respondents herein fifteen (15) days within which to file an appeal brief, while Atok Finance did not file an appellee's brief, and that its decision was arrived at "on the basis of appellant's brief and the original records of the appeal case." In the present Petition for Review, Atok Finance assigns the following as errors on the part of the Court of Appeals in rendering its decision of 18 August 1987: (1) that it had erred in ruling that a continuing suretyship agreement cannot be effected to secure future debts;

(2) that it had erred in ruling that the continuing suretyship agreement was null and void for lack of consideration without any evidence whatsoever  [being] adduced by private respondents ; (3) that it had erred in granting the Petition for Relief from Judgment while execution proceedings [were] on-going on the trial court. 8 (Emphasis in the original) As a preliminary matter, we note that a Division of the Court of Appeals is co-equal with any other Division of the same court. Accordingly, a Division of the Court of Appeals has no authority to consider and grant a petition for relief from a judgment rendered by another Division of the same court. In the case at bar, however, we must note that an intervening event had occurred between the resolution of 21 March 1986 of the Third Civil Cases Division of the IAC dismissing private respondents' appeal and the 30 September 1986 order of the 15th Division of the Court of Appeals granting the Petition for Relief from Judgment. On 28 July 1986, the old Intermediate Appellate Court went out of existence and a new court, the Court of Appeals, came into being, was organized and commenced functioning. 9 This event, and the probability that some confusion may have accompanied the period of transition from the IAC to the Court of Appeals, lead us to believe that the defect here involved should be disregarded as being of secondary importance. At the same time, nothing in this decision should be read as impliedly holding that a petition from relief judgment is available in respect of a decision rendered by the Court of Appeals; this issue is best reserved for determination in some future cases where it shall have been adequately argued by the parties. We turn, therefore, to a consideration of the first substantive issue addressed by the Court of Appeals in rendering its Decision on the merits of the appeal: whether the individual private respondents may be held solidarily liable with Sanyu Chemical under the provisions of the Continuing Suretyship Agreement, 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. The Court of Appeals held on this first issue as follows: It is the contention of private appellants that the suretyship agreement is null and void because it is not in consonance with the laws on guaranty and security. The said agreement was entered into by the parties two years before the Deed of Assignment was executed. Thus, allegedly, it ran counter to the provision that guaranty cannot exist independently because by nature it is merely an accessory contract. The law on guaranty is applicable to surety to some extent Manila Surety and Fidelity Co. v .Baxter Construction & Co. , 53 O.G. 8836; and, Arran v . Manila Fidelity & Surety Co., 53 O.G. 7247. We find merit in this contention. Although obligations arising from contracts have the force of law between the contracting parties, (Article 1159 of the Civil Code) this does not mean that the law is inferior to it; the terms of the contract could not be enforces if not valid. So, even if, as in this case, the agreement was for acontinuing

suretyship to include obligations enumerated in paragraph 2 of the agreement, the same could not be enforced . First, because this contract,  just like guaranty, cannot exist without a valid obligation (Art. 2052, Civil Code); and, second, although it may be given as security for future debt (Art. 2053, C.C.), the obligation contemplated in the case at bar cannot be considered "future debt" as envisioned by this law . There is no proof that when the suretyship agreement was entered into, there was a pre-existing obligation which served the principal obligation between the parties. Furthermore, the "future debts" alluded to in Article 2053 refer to debts already existing at the time of the constitution of the agreement but the amount thereof is unknown, unlike in the case at bar  where the obligation was acquired two years after the agreement . 10(Emphasis supplied). We consider that the Court of Appeals here was in serious error. 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. This is clear from Article 2052 of the Civil Code itself: 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." (Emphasis supplied). Moreover, Article 2053 of the Civil Code states: 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 . (Emphasis supplied) The Court of Appeals apparently overlooked our caselaw interpreting Articles 2 052 and 2053 of the Civil Code. InNational Rice and Corn Corporation (NARIC) v . Jose A. Fojas and Alto Surety Co. , Inc ., 11 the private respondents assailed the decision of the trial court holding them liable under certain surety bonds filed by private respondent Fojas and issued by private respondent Alto Surety Co. in favor of petitioner NARIC, upon the ground that those surety bonds were null and void "there being no principal obligation to be secured by said bonds." In affirming the decision of the trial court, this Court, speaking through Mr. Justice J.B.L. Reyes, made short shrift of the private respondents' doctrinaire argument: Under his third assignment of error, appellant Fojas questions the validity of  the additional bonds(Exhs. D and D-1) on the theory that when they were executed, the principal obligation referred to in said bonds had not yet bee n

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." (Emphasis supplied) In Rizal Commercial Banking Corporation v . Arro, 12 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 f uture ones. In holding private respondent surety (Residoro Chua) liable under the comprehensive surety agreement, the Court said: 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 thatthe surety agreement  was executed to guarantee future debts which Daicor may incur with  petitioner, as is legally allowable under the Civil Code. Thus — Article 2053. — A guarantee 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. 13 (Emphasis supplied) It is clear to us that the Rizal Commercial Banking Corporation and the NARIC cases rejected the distinction which the Court of Appeals in the case at bar sought to make with respect to Article 2053, that is, that the "future debts" referred to in that Article relate to "debts already existing at the time of the constitution of the agreement but the amount [of which] is unknown," and not to debts not yet incurred and existing at that time. Of course, a surety is not bound under any particular principal obligation until that principal obligation is born. But there is no theoretical or doctrinal difficult y 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.14

Comprehensive or continuing surety agreements are in fact quite commonm 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. We turn to the second substantive issue, that is, whether private respondents are liable under the Deed of Assignment which they, along with the principal debtor Sanyu Chemical, executed in favor of petitioner, on the receivables thereby assigned. The contention of Sanyu Chemical was that Atok Finance had no cause of action under the Deed of Assignment for the reason that Sanyu Chemical's warranty of the debtors' solvency had ceased. In submitting this contention, Sanyu Chemical relied on Article 1629 of the Civil Code which reads as follows: Art. 1629. In case the assignor in good faith should have made himself  responsible for the solvency of the debtor, and the contracting parties should not have agreed upon the duration of the liability, it shall last for one year only, from the time of the assignment if the period had already expired. If the credit should be payable within a term or period which has not yet expired, the liability shall cease one year after maturity. Once more, the Court of Appeals upheld the contention of private respondents and held that Sanyu Chemical was free from liability under the Deed of Assignment. The Court of  Appeals said: . . . Article 1629 provides for the duration of assignor's warranty of debtor's solvency depending on whether there was a period agreed upon for the existence of such warranty, analyzing the law thus: (1) if there is a period (or length of time) agreed upon, then for such period; (2) if no period (or length of time) was agreed upon, then: (a) one year from assignment — if debt was due at the time of  the assignment (b) one year from maturity — if debt was not yet due at the time of the assignment.. The debt referred to in this law is the debt under the assigned contract or the original debts in favor of the assignor which were later assigned to the assignee. The debt alluded to in the law, is not the debt incurred by the assignor to the assignee as contended by the appellant.

Applying the said law to the case at bar, the records disclose that none of  the assigned receivables had matured on November 27, 1981 when the Deed of Assignment was executed. The oldest debt then existing was that contracted on November 3, 1981 and the latest was contracted on December 4, 1981. Each of the invoices assigned to the assignee contained a term of 30 days (Exhibits B-3-A to 5 and extended by the notation which appeared in the "Schedule of Assigned Receivables" which states that the ". . . the terms stated on our invoices were normally extended up to a period of 120 days . . ." (Exhibit B-2). Considering the terms in the invoices plus the ordinary   practice of the company, thus, the assigned debts matured between April 3, 1982 to May 4, 1982 . The assignor's warranty for debtor's warranty, in this case, would then be from the maturity period up to April 3, 1983 or May 4, 1983 to cover all of the receivables in the invoices. The letter of demand executed by appellee was dated August 29, 1983 (Exhibit D) and the complaint was filed on January 13, 1984. Both dates were beyond the warranty period . In effect, therefore, company-appellant was right when it claimed that appellee had no cause of action against it or had lost its cause of  action. 15 (Emphasis supplied) Once again, however, we consider that the Court of Appeals was in reversible error in so concluding. The relevant provision of the Deed of Assignment may be quoted again in this connection: 2. To induce the ASSIGNEE [Atok Finance] to purchase the above contracts, the ASSIGNOR [Sanyu Chemical] does hereby certify, warrant and represent that . . . (g) the debtor/s under the assigned contract/s are solvent and his/its/their failure to pay the assigned contract/s and/or any  installment thereon upon maturity thereof shall be conclusively  considered as a violation of this warranty ; and . . . The foregoing warranties and representations are in addition to those provided for in the Negotiable Instruments Law and other applicable laws. Any violation thereof shall render the ASSIGNOR immediately and unconditionally liable to pay the ASSIGNEE   jointly and severally with the debtors under the assigned  contracts, the amounts due thereon. xxx xxx xxx (Emphasis supplied)

It may be stressed as a preliminary matter that the Deed of Assignment was valid and binding upon Sanyu Chemical. Assignment of receivables is a commonplace commercial transaction today. It is an activity or operation that permits the assignee to monetize or realize the value of the receivables before the maturity thereof. In other words, Sanyu Chemical received from Atok Finance the value of its trade receivables it had assigned; Sanyu Chemical obviously benefitted from the assignment. The payments due in the first instance from the trade debtors of Sanyu Chemical would represent the return of the investment which Atok Finance had made when it paid Sanyu Chemical the transfer value of such receivables. Article 1629 of the Civil Code invoked by private respondents and accepted by the Court of Appeals is not, in the case at bar, material. The liability of Sanyu Chemical to Atok Finance rests not on the breach of the warranty of solvency; the liability of Sanyu Chemical was not ex lege (ex Article 1629) but rather ex contractu. Under the Deed of   Assignment, the effect of non-payment by the original trade debtors was breach of  warranty of solvency by Sanyu Chemical, resulting in turn in the assumption of solidary  liability by the assignor under the receivables assigned . In other words, the assignor  Sanyu Chemical becomes a solidary debtor under the terms of the receivables covered and transferred by virtue of the Deed of Assignment. And because assignor Sanyu Chemical became, under the terms of the Deed of Assignment, solidary obligor under each of the assigned receivables, the other private respondents (the Arrieta spouses, Pablito Bermundo and Leopoldo Halili), became solidarily liable for that obligation of  Sanyu Chemical, by virtue of the operation of the Continuing Suretyship Agreement. Put a little differently, the obligations of individual private respondent officers and stockholders of Sanyu Chemical under the Continuing Suretyship Agreement, were activated by the resulting obligations of Sanyu Chemical as solidary obligor under each of the assigned receivables by virtue of the operation of the Deed of Assignment. That solidary liability of Sanyu Chemical is not subject to the limiting period set out in Article 1629 of the Civil Code. It follows that at the time the original complaint was filed by Atok Finance in the trial court, it had a valid and enforceable cause of action against Sanyu Chemical and the other private respondents. We also agree with the Court of Appeals that the original obligors under the receivables assigned to Atok Finance remain liable under the terms of  such receivables. WHEREFORE, for all the foregoing, the Petition for Review is hereby GRANTED DUE COURSE, and the Decision of the Court of Appeals dated 18 August 1987 and its Resolution dated 30 September 1987 are hereby REVERSED and SET ASIDE. A new  judgment is hereby entered REINSTATING the Decision of the trial court in Civil Case No. 84-22198 dated 1 April 1985, except only that, in the exercise of this Court's discretionary authority equitably to mitigate the penalty clause attached to the Deed of  Assignment, that penalty is hereby reduced to eighteen percent (18%) per  annum (instead of P0.03 for every peso monthly [or 36% per annum]). As so modified, the Decision of the trial court is hereby AFFIRMED. Costs against private respondents. SO ORDERED. G.R. No. L-53955 January 13, 1989

THE MANILA BANKING CORPORATION, plaintiff-appellee, vs. ANASTACIO TEODORO, JR. and GRACE ANNA TEODORO, defendants-appellants.

Formoso & Quimbo Law Office for plaintiff-appellee. Serafin P. Rivera for defendants-appellants.

BIDIN, J.:

This is an appeal from the decision* of the Court of First Instance of Manila, Branch XVII in Civil Case No. 78178 for collection of sum of money based on promissory notes executed by the defendants-appellants in favor of plaintiff-appellee bank. The dispositive portion of the appealed decision (Record on Appeal, p. 33) reads as follows: WHEREFORE judgment is hereby rendered (a) sentencing defendants, Anastacio Teodoro, Jr. and Grace Anna Teodoro jointly and severally, to pay plaintiff the sum of P15,037.11 plus 12% interest per annum from September 30, 1969 until fully paid, in payment of Promissory Notes No. 11487, plus the sum of P1,000.00 as attorney's fees; and (b) sentencing defendant Anastacio Teodoro, Jr. to pay plaintiff the sum of P8,934.74, plus interest at 12% per annum from September 30, 1969 until fully paid, in payment of Promissory Notes Nos. 11515 and 11699, plus the sum of  P500.00 an attorney's fees. With Costs against defendants. The facts of the case as found by the trial court are as follows: On April 25, 1966, defendants, together with Anastacio Teodoro, Sr., jointly and severally, executed in favor of plaintiff 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. Defendants 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. On May 3, 1966 and June 20, 1966, defendants Anastacio Teodoro, Sr. (Father) and Anastacio Teodoro, Jr. (Son) executed in favor of plaintiff two Promissory Notes (Nos. 11515 and 11699) for P8,000.00 and P1,000.00 respectively, payable in 120 days at 12% interest per annum. Father and Son 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. 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; and in case of collection through an attorney-at-law, the makers shall, jointly and severally, pay 10% of the amount over-due as attorney's fees, which in no case shall be leas than P200.00. 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 defendants as security for the payment of said sum and the interest thereon, and that defendants do hereby remise, release and quitclaim all its rights, title, and interest in and to the accounts receivables. Further. (1) The title and right of possession to said accounts receivable is to remain in the assignee, and it shall have the right to collect the same from the debtor, and whatsoever the Assignor does in connection with the collection of said accounts, it agrees to do as agent and representative of the Assignee and in trust for said Assignee ; xxx xxx xxx (6) The Assignor guarantees the existence and legality of said accounts receivable, and the due and punctual payment thereof  unto the assignee, ... on demand, ... and further, that Assignor warrants the solvency and credit worthiness of each and every account. (7) The Assignor does hereby guarantee the payment when due on all sums payable under the contracts giving rise to the accounts receivable ... including reasonable attorney's fees in enforcing any rights against the debtors of the assigned accounts receivable and will pay upon demand, the entire unpaid balance of said contract in the event of non-payment by the said debtors of any monthly sum at its due date or of any other default by said debtors; xxx xxx xxx (9) ... This Assignment shall also stand as a continuing guarantee for any and all whatsoever there is or in the future there will be justly owing from the Assignor to the Assignee ... In their stipulations of Fact, it is admitted by the parties that plaintiff  extended loans to defendants on the basis and by reason of certain contracts entered into by the defunct Emergency Employment Administration (EEA) with defendants 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 defendants after the latter had complied with their contractual obligations; and that the President of plaintiff Bank took steps to collect from the Commission, but no collection was effected. For failure of defendants to pay the sums due on the Promissory Note, this action was instituted on November 13, 1969, originally against the Father, Son, and the latter's wife. Because the Father died, however, during the pendency of the suit, the case as against him was dismiss under the provisions of Section 21, Rule 3 of the Rules of Court. The action, then is against defendants Son and his wife for the collection of the sum of P 15,037.11 on Promissory Note No. 14487; and against defendant 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. Neither of the parties presented any testimonial evidence and submitted the case for decision based on their Stipulations of Fact and on then, documentary evidence. The issues, as defined by the parties are: (1) whether or not plaintiff claim is already considered paid by the Deed of Assign. judgment of Receivables by the Son; and (2) whether or not it is plaintiff who should directly sue the Philippine Fisheries Commission for collection.' (Record on Appeal, p. 2932). On April 17, 1972, the trial court rendered its judgment adverse to defendants. On June 8, 1972, defendants filed a motion for reconsideration (Record on Appeal, p. 33) which was denied by the trial court in its order of June 14, 1972 (Record on Appeal, p. 37). On June 23, 1972, defendants filed with the lower court their notice of appeal together with the appeal bond (Record on Appeal, p. 38). The record of appeal was forwarded to the Court of Appeals on August 22, 1972 (Record on Appeal, p. 42). In their appeal (Brief for the Appellants, Rollo, p. 12), appellants raised a single assignment of error, that is — THAT THE DECISION IN QUESTION AMOUNTS TO A JUDICIAL REMAKING OF THE CONTRACT BETWEEN THE PARTIES, IN VIOLATION OF LAW; HENCE, TANTAMOUNT TO LACK OR EXCESS OF JURISDICTION. As the appeal involves a pure question of law, the Court of Appeals, in its resolution promulgated on March 6, 1980, certified the case to this Court (Rollo, p. 24). The record on Appeal was forwarded to this Court on March 31, 1980 (Rollo, p. 1). In the resolution of May 30, 1980, the First Division of this Court ordered that the case be docketed and declared submitted for decision (Rollo, p. 33). On March 7, 1988, considering the length of time that the case has been pending with the Court and to determine whether supervening events may have rendered the case

moot and academic, the Court resolved (1) to require the parties to MOVE IN THE PREMISES within thirty days from notice, and in case they fail to make the proper manifestation within the required period, (2) to consider the case terminated and closed with the entry of judgment accordingly made thereon (Rollo, p. 40). On April 27, 1988, appellee moved for a resolution of the appeal review interposed by defendants-appellants (Rollo, p. 41). The major issues raised in this case are as follows: (1) whether or not the assignment of  receivables has the effect of payment of all the loans contracted by appellants from appellee bank; and (2) whether or not appellee bank 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. 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: (Tolentino, Commentaries and Jurisprudence on the Civil Code of the Philippines, Vol. 5, pp. 165-166). There is no question as to the validity of the assignment of receivables executed by appellants in favor of appellee bank. The issue is with regard to its legal effects. I 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 appellants, 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 following provisions of the deed of assignment: ... the Assignor do hereby remise, release and quit-claim unto said assignee all its rights, title and interest in the accounts receivable described hereunder. (Emphasis supplied by appellants, first par., Deed of  Assignment). ... that the title and right of possession to said account receivable is to remain in said assignee and it shall have the right to collect directly from the debtor , and whatever the Assignor does in connection with the collection of  said accounts, it agrees to do so as agent and representative of the Assignee and it trust for said Assignee ...(Ibid . par. 2 of Deed of Assignment).' (Record on Appeal, p. 27) The character of the transactions between the parties is not, however, determined by the language used in the document but by their intention. Thus, the Court, quoting from the American Jurisprudence (68 2d, Secured Transaction, Section 50) said: 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 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 non-existent 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 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 ri ghts and interests (Lopez v. Court of Appeals, supra). In one case, the assignments of rights, title and interest of the defendant in the contracts of lease of two buildings as well as her rights, title and interest in the land on which the buildings were constructed to secure an overdraft from a bank amounting to P110,000.00 which was increased to P150,000.00, then to P165,000.00 was considered by the Court to be documents of mortgage contracts inasmuch as they were executed to guarantee the principal obligations of the defendant consisting of the overdrafts or the indebtedness resulting therefrom. The Court ruled that an assignment to guarantee an obligation is in effect a mortgage and not an absolute conveyance of title which confers ownership on the assignee (People's Bank & Trust Co. v. Odom, 64 Phil. 126 [1937]). II As to whether or not appellee bank must have to exhaust all legal remedies against the Philippine Fisheries Commission before it can proceed against appellants for collection of  loans under their promissory notes, must also be answered in the negative. The obligation of appellants under the promissory notes not having been released by the assignment of receivables, appellants remain as the principal debtors of appellee bank 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, appellants are both the principal debtors and the pledgors or mortgagors. Resort to one is, therefore, resort to the other. Appellee bank 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 (Record on Appeal, p. 16). The receivable became virtually worthless leaving appellants' loans from appellee bank 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. WHEREFORE, the appeal is Dismissed for lack of merit and the appealed decision of the trial court is affirmed in toto. SO ORDERED.

G.R. No. L-43191

November 13, 1935

PAULINO GULLAS, plaintiff-appellant, vs. THE PHILIPPINE NATIONAL BANK, defendant-appellant.

Gullas, Lopez, Tuaño and Leuterio for plaintiff-appellant.  Jose Delgado for defendant-appellant.

MALCOLM, J.:

Both parties to this case appealed from a judgment of the Court of First Instance of Cebu, which sentenced the defendant to return to the account of the plaintiff the sum of P5098, with legal interest and costs, the plaintiff to secure damages in the amount of  P10,000 more or less, and the defendant to be absolved totally from the amended complaint. As it is conceded that the plaintiff has already received the sum represented by the United States treasury, warrant, which is in question, the appeal will thus determine the amount, if any, which should be paid to the plaintiff by the defendant. The parties to the case are Paulino Gullas and the Philippine National Bank. The first named is a member of the Philippine Bar, resident in the City of Cebu. T he second named is a banking corporation with a branch in the same city. Attorney Gullas has had a current account with the bank. It appears from the record that on August 2, 1933, the Treasurer of the United States for the United States Veterans Bureau issued a Warrant in the amount of $361, payable to the order of Francisco Sabectoria Bacos. Paulino Gullas and Pedro Lopez signed as endorsers of this check. Thereupon it was cashed by the Philippine National Bank. Subsequently the treasury warrant was dishonored by the Insular Treasurer. At that time the outstanding balance of Attorney Gullas on the books of the bank was P509. Against this balance he had issued certain cheeks which could not be paid when the money was sequestered by the On August 20, 1933, Attorney Gullas left his residence for Manila.

The bank on learning of the dishonor of the treasury warrant sent notices by mail to Mr. Gullas which could not be delivered to him at that time because he was in Manila. In the bank's letter of August 21, 1933, addressed to Messrs. Paulino Gulla and Pedro Lopez, they were informed that the United States Treasury warrant No. 20175 in the name of Francisco Sabectoria Bacos for $361 or P722, the payment for which had been received has been returned by our Manila office with the notation that the payment of  his check has been stopped by the Insular Treasurer. "In view of this therefore we have applied the outstanding balances of your current accounts with us to the part payment of the foregoing check", namely, Mr. Paulino Gullas P509. On the return of Attorney Gullas to Cebu on August 31, 1933, notice of dishonor was received and the unpaid balance of the United States Treasury warrant was immediately paid by him. As a consequence of these happenings, two occurrences transpired which inconvenienced Attorney Gullas. In the first place, as above indicated, checks including one for his insurance were not paid because of the lack of funds standing to h is credit in the bank. In the second place, periodicals in the vicinity gave prominence to the news to the great mortification of Gullas.lawphil.net  A variety of incidental questions have been suggested on the record which it can be taken for granted as having been adversely disposed of in this opinion. The main issues are two, namely, (1) as to the right of Philippine National Bank, and to apply a deposit to the debt of depositor to the bank and (2) as to the amount damages, if any, which should be awarded Gullas. The Civil Code contains provisions regarding compensation (set off) and deposit. (Articles 1195 et seq., 1758 et seq. The portions of Philippine law provide that compensation shall take place when two persons are reciprocally creditor and debtor of  each other (Civil Code, article 1195). In his connection, it has been held that the relation existing between a depositor and a bank is that of creditor and debtor. (Fulton Iron Works Co. vs. China Banking Corporation [1933], 59 Phil., 59.) The Negotiable Instruments Law contains provisions establishing the liability of a general indorser and giving the procedure for a notice of dishonor. The general indorser of negotiable instrument engages that if he be dishonored and the, necessary proceedings of dishonor be duly taken, he will pay the amount thereof to the holder. (Negotiable Instruments Law, sec. 66.) In this connection, it has been held a long line of  authorities that notice of dishonor is in order to charge all indorser and that the right of  action against him does not accrue until the notice is given. (Asia Banking Corporation vs. Javier [1923] 44 Phil., 777; 5 Uniform Laws Annotated.) As a general rule, a bank has a right of set off of the deposits in its hands for the payment of any indebtedness to it on the part of a depositor. In Louisiana, however, a civil law jurisdiction, the rule is denied, and it is held that a bank has no right, without an order from or special assent of the depositor to retain out of his deposit an amount sufficient to meet his indebtedness. The basis of the Louisiana doctrine is the theory of  confidential contracts arising from irregular deposits, e. g., the deposit of money with a banker. With freedom of selection and after full preference to the minority rule as more in harmony with modern banking practice. (1 Morse on Banks and Banking, 5th ed., sec. 324; Garrison vs. Union Trust Company [1905], 111 A.S.R., 407; Louisiana Civil Code

Annotated, arts. 2207 et seq.; Gordon & Gomila vs. Muchler [1882], 34 L. Ann., 604; 8 Manresa, Comentarios al Codigo Civil Español, 4th ed., 359 et seq., 11 Manresa pp. 694 et seq.) Starting, therefore, from the premise that the Philippine National Bank had with respect to the deposit of Gullas a right of set off, we next consider if that remedy was enforced properly. The fact we believe is undeniable that prior to the mailing of notice of  dishonor, and without waiting for any action by Gullas, the bank made use of the money standing in his account to make good for the treasury warrant. At this point recall that Gullas was merely an indorser and had issued in good faith. As to a depositor who has funds sufficient to meet payment of a check drawn by him in favor of a third party, it has been held that he has a right of action against the bank for its refusal to pay such a check in the absence of notice to him that the bank has applied the funds so deposited in extinguishment of past due claims held against him. (Callahan vs. Bank of Anderson [1904], 2 Ann. Cas., 203.) The decision cited represents the minority doctrine, for on principle it would seem that notice is not necessary to a maker because the right is based on the doctrine that the relationship is that of creditor and debtor. However this may be, as to an indorser the situation is different, and notice should actually have been given him in order that he might protect his interests. We accordingly are of the opinion that the action of the bank was prejudicial to Gullas. But to follow up that statement with others proving exact damages is not so easy. For instance, for alleged libelous articles the bank would not be primarily liable. The same remark could be made relative to the loss of business which Gullas claims but which could not be traced definitely to this occurrence. Also Gullas having eventually been reimbursed lost little through the actual levy by the bank on his funds. On the other hand, it was not agreeable for one to draw checks in all good faith, then, leave f or Manila, and on return find that those checks had not been cashed because of the action taken by the bank. That caused a disturbance in Gullas' finances, especially with reference to his insurance, which was injurious to him. All facts and circumstances considered, we are of the opinion that Gullas should be awarded nominal damages because of the premature action of the bank against which Gullas had no means of  protection, and have finally determined that the amount should be P250. Agreeable to the foregoing, the errors assigned by the parties will in the main be overruled, with the result that the judgment of the trial court will be modified by sentencing the defendant to pay the plaintiff the sum of P250, and the costs of both instances. G.R. No. L-19227

February 17, 1968

DIOSDADO YULIONGSIU, plaintiff-appellant, vs. PHILIPPINE NATIONAL BANK (Cebu Branch), defendant-appellee.

Vicente Jaime, Regino Hermosisima & E. Lumontad, Sr. for plaintiff-appellant. Tomas Besa, R. B. de los Reyes and C. E. Medina for defendant-appellee.

BENGZON, J.P., J.:

Plaintiff-appellant Diosdado Yuliongsiu 1 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. 2 On June 30, 1947, plaintiff obtained a loan of P50,000 from the defendant Philippine National Bank, Cebu Branch. To guarantee its payment, pla intiff pledged the M/S Surigao, M/S Don Dino and its equity in the FS-203 to the defendant bank, as evidenced by the pledge contract , Exhibit "A" & "1-Bank", executed on the same day and duly registered with the office of the Collector of Customs for the P ort of Cebu. 3 Subsequently, plaintiff effected partial payment of the loan in the sum of  P20,000. The remaining balance was renewed by the execution of two (2) promissory notes in the bank's favor. The first note, dated December 18, 1947, for P20,000, was due on April 16, 1948 while the second, dated February 26, 1948, for P10,000, was due on June 25, 1948. These two notes were never paid at all by plaintiff on their respective due dates. 4 On April 6, 1948, the bank filed criminal charges against plaintiff and two other accused for estafa thru falsification of commercial documents, because plaintiff had, as last indorsee, deposited with defendant bank, from March 11 to March 31, 1948, seven Bank of the Philippine Islands checks totalling P184,000. The drawer thereof — one of the co-accused — had no funds in the drawee bank. However, in connivance with one employee of defendant bank, plaintiff was able to withdraw the amount credited to him before the discovery of the defraudation on April 2, 1948. Plaintiff and his co-accused were convicted by the trial court and sentenced to indemnify  the defendant bank in the sum of P184,000. On appeal, the conviction was affirmed by the Court of Appeals on October 31, 1950. The corresponding writ of execution issued to implement the order for indemnification was returned unsatisfied as plaintiff was totally  insolvent . 5 Meanwhile, together with the institution of the criminal action, defendant bank took physical possession of three pledged vessels while they were at the Port of Cebu, and on April 29, 1948, after the first note fell due and was not paid, the Cebu Branch Manager of defendant bank, acting as attorney-in-fact of plaintiff pursuant to the terms of the pledge contract, executed a document of sale, Exhibit "4", transferring the two pledged vessels and plaintiff's equity in FS-203, to defendant bank for P30,042.72. 6 The FS-203 was subsequently surrendered by the defendant bank to the Philippine Shipping Commission which rescinded the sale to plaintiff on September 8, 1948, for failure to pay the remaining installments on the purchase price thereof. 7 The other two boats, the M/S Surigao and the M/S Don Dino were sold by defendant bank to third parties on March 15, 1951.

On July 19, 1948, plaintiff commenced action in the Court of First Instance of  Cebu to recover the three vessels or their value and damages from defendant bank. The latter filed its answer, with a counterclaim for P202,000 plus P5,000 damages. After issues were joined, a pretrial was held resulting in a partial stipulation of facts dated October 2, 1958, reciting most of the facts above-narrated. During the course of the trial, defendant amended its answer reducing its claim from P202,000 to P8,846.01, 8 but increasing its alleged damages to P35,000. The lower court rendered its decision on February 13, 1960 ruling: (a) that the bank's taking of physical possession of the vessels on April 6, 1948 was justified by the pledge contract, Exhibit "A" & "1-Bank" and the law; (b) that the private sale of the pledged vessels by defendant bank to itself without notice to the plaintiff-pledgor as stipulated in the pledge contract was likewise valid; and (c) that the defendant bank should pay to plaintiff the sums of P1,153.99 and P8,000, as his remaining account balance, or set-off these sums against the indemnity which plaintiff was ordered to pay to it in the criminal cases. When his motion for reconsideration and new trial was denied, plaintiff brought the appeal to Us, the amount involved being more than P200,000.00. In support of the first assignment of error, plaintiff-appellant would have this Court hold that Exhibit "A" & "1-Bank" is a chattel mortgage contract so that the creditor defendant could not take possession of the chattels object thereof until after there has been default. The submission is without merit. The parties stipulated as a fact that Exhibit "A" & "1-Bank" is a pledge contract — 3. That a credit line of P50,000.00 was extended to the plaintiff by the defendant Bank, and the plaintiff obtained and received from the said Bank the sum of P50,000.00, and in order to guarantee the payment of this loan, the pledge contract, Exhibit "A" & Exhibit "1-Bank", was executed and duly registered with the Office of the Collector of Customs for the Port of Cebu on the date appearing therein; (Emphasis supplied)1äwphï1.ñët  Necessarily, this judicial admission binds the plaintiff. Without any showing that this was made thru palpable mistake, no amount of rationalization can offset it. 9 The defendant bank as pledgee was therefore entitled to the actual possession of  the vessels. While it is true that plaintiff continued operating the vessels after the pledge contract was entered into, his possession was expressly made "subject to the order of  the pledgee." 10 The provision of Art. 2110 of the present Civil Code 11being 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 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 hold ing the pledged property merely as trustee for the pledgee. 12 Plaintiff-appellant would also urge Us to rule that constructive delivery is insufficient to make pledge effective. He points to Betita v. Ganzon, 49 Phil. 87 which ruled that there has to be actual delivery of the chattels pledged. But then there is

also Banco Español-Filipino v. Peterson, 7 Phil. 409 ruling that symbolic delivery would suffice. An examination of the peculiar nature of the things pledged in the two cases will readily dispel the apparent contradiction between the two rulings. In Betita v. Ganzon, the objects pledged — carabaos — were easily capable of actual, manual delivery unto the pledgee. In Banco Español-Filipino v. Peterson, the objects pledged — goods contained in a warehouse — were hardly capable of actual, manual delivery in the sense that it was impractical as a whole for the particular transaction and would have been an unreasonable requirement. Thus, for purposes of showing the transfer of control to the pledgee, delivery to him of the keys to the warehouse sufficed. In other words, the type of delivery will depend upon the nature and the peculiar circumstances of each case. The parties here agreed that the vessels be delivered by the "pledgor to the pledgor who shall hold said property subject to the order of the pledgee." Considering the circumstances of this case and the nature of the objects pledged, i.e., vessels used in maritime business, such delivery is sufficient. Since the defendant bank was, pursuant to the terms of pledge contract, in full control of the vessels thru the plaintiff, 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 on April 6, 1948, was not unlawful. Nor was it unjustified considering that plaintiff had just defrauded the defendant bank in the huge sum of P184,000. The stand We have taken is not without precedent. The Supreme Court of Spain, in a similar case involving Art. 1863 of the old Civil Code, 13 has ruled: 14 Que si bien la naturaleza del contrato de prenda consiste en pasar las cosas a poder del acreedor o de un tercero y no quedar en la del deudor, como ha sucedido en el caso de autos, es lo cierto que todas las partes interesadas, o sean acreedor, deudor y Sociedad, convinieron que continuaran los coches en poder del deudor para no suspender el trafico, y el derecho de no uso de la prenda pertenence al deudor, y el de dejar la cosa bajo su responsabilidad al acreedor, y ambos convinieron por creerlo util para las partes contratantes, y estas no reclaman perjuicios no se infringio, entre otros este articulo. In the second assignment of error imputed to the lower court plaintiff-appellant attacks the validity of the private sale of the pledged vessels in favor of the defendant bank itself. It is contended first , that the cases holding that the statutory requirements as to public sales with prior notice in connection with foreclosure proc eedings are waivable, are no longer authoritative in view of the passage of Act 3135, as amended; second , that the charter of defendant bank does not allow it to buy the property object of foreclosure in case of private sales; and third , that the price obtained at the sale is unconscionable. There is no merit in the claims. The rulings in Philippine National Bank v. De Poli , 44 Phil. 763 and El Hogar Filipino v. Paredes, 45 Phil. 178 are still authoritative despite the passage of Act 3135. This law refers only, and is limited, to foreclosure of real estate mortgages. 15 So, whatever formalities there are in Act 3135 do not apply to pledge. Regarding the bank's authority to be the purchaser in the foreclosure sale, Sec. 33 of  Act 2612, as amended by Acts 2747 and 2938 only states that if the sale is public, the bank could purchase the whole or part of the property sold " free from any right of 

redemption on the part of the mortgagor or pledgor ." This even argues against plaintiff's case since the import thereof is this if the sale were private and the bank became the purchaser, the mortgagor or pledgor could redeem the property. Hence, plaintiff could have recovered the vessels by exercising this right of redemption. He is the only one to blame for not doing so. Regarding the third contention, on the assumption that the purchase price was unconscionable, plaintiff's remedy was to have set aside the sale. He did not avail of  this. Moreover, as pointed out by the lower court, plaintiff had at the time an obligation to return the P184,000 fraudulently taken by him from defendant bank. The last assignment of error has to do with the damages allegedly suffered by plaintiff-appellant by virtue of the taking of the vessels. But in view of the resu lts reached above, there is no more need to discuss the same. On the whole, We cannot say the lower court erred in disposing of the case as it did. Plaintiff-appellant was not all-too-innocent as he would have Us believe. He did defraud the defendant bank first. If the latter countered with the seizure and sale of the pledged vessels pursuant to the pledge contract, it was only to protect its interests after plaintiff had defaulted in the payment of the first promissory note. Plaintiff-appellant did not come to court with clean hands. WHEREFORE, the appealed judgment is, as it is hereby, affirmed. Costs against plaintiff-appellant. So ordered.

Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Castro, Angeles and Fernando, JJ., concur.1äwphï1.ñët  G.R. No. L-68010 May 30, 1986 FILIPINAS MABLE CORPORATION, petitioner, vs. THE HONORABLE INTERMEDIATE APPELLATE COURT, THE HONORABLE CANDIDO VILLANUEVA, Presiding Judge of Br. 144, RTC, Makati, DEVELOPMENT BANK OF THE PHILIPPINES (DBP), BANCOM SYSTEMS CONTROL, INC. (Bancom), DON FERRY, CASIMERO TANEDO, EUGENIO PALILEO, ALVARO TORIO, JOSE T. PARDO, ROLANDO ATIENZA, SIMON A. MENDOZA, Sheriff  NORVELL R. LIM, respondents.

Vicente Millora for petitioner.  Jesus A. Avencena and Bonifacio M. Abad for respondents.

GUTIERREZ, JR., J.:

This petition for review seeks to annul the decision and resolution of the appellate court which upheld the trial court's decision denying the petitioner's prayer to enjoin the respondent from foreclosing on its properties. On January 19, 1983, petitioner Filipinas Marble Corporation filed an action for nullification of deeds and damages with prayer for a restraining order and a writ of  preliminary injunction against the private respondents. In its complaint, the petitioner alleged in substance that it applied for a loan in the amount of $5,000,000.00 with respondent Development Bank of the Philippines (DBP) in its desire to develop the fun potentials of its mining claims and deposits; that DBP granted the loan subject, however, to sixty onerous conditions, among which are: (a) petitioner shall have to enter into a management contract with respondent Bancom Systems Control, Inc. [Bancom]; (b) DBP shall be represented by no less than six (6) regular directors, three (3) to be nominated by Bancom and three (3) by DBP, in Filipinos Marble's board, one of  whom shall continue to be the chairman of the board; (c) the key officers/executives [the President and the officers for finance, marketing and purchasing] to be chosen by Bancom for the corporation shall be appointed only with DBP's prior approval and all these officers are to be made directly responsible to DBP; DBP shall immediately designate Mr. Alvaro Torio, Assistant Manager of DBP's Accounting Department as DBP's Comptroller in the firm whose compensation shall be borne by Filipinas Marble; and (d) the $5 Million loan shall be secured by: 1) a final mortgage on the following assets with a total approved value of P48,630,756.00 ... ; 2) the joint and several signatures with Filipinas Marble of Mr. Pelagio M. Villegas, Sr., Trinidad Villegas, and Jose E. Montelibano and 3) assignment to DBP of the borrower firm's right over its mining claims; that pursuant to these above- mentioned and other "take it or leave it" conditions, the petitioner entered into a management contract with Bancom whereby the latter agreed to manage the plaintiff company for a period of three years; that under the management agreement, the affairs of the petitioner were placed under the complete control of DBP and Bancom including the disposition and disbursement of the $5,000,000 or P37,600,000 loan; that the respondents and their directors/officers mismanaged and misspent the loan, after which Bancom resigned with the approval of  DBP even before the expiration date of the management contract, leaving petitioner desolate and devastated; that among the acts and omissions of the respondents are the following. (a) failure to purchase all the necessary machinery and equipment needed by the petitioner's project for which the approved loan was intended; (b) failure to construct a processing plant; (c) abandonment of imported machinery and equipment at the pier, (d) purchase of unsuitable lot for the processing plant at Binan; (e) failure to develop even a square meter of the quarries in Romblon or Cebu; and (f) nearly causing the loss of petitioner's rights over its Cebu claims; and that instead of helping petitioner get back on its feet, DBP completely abandoned the petitioner's project and proceeded to foreclose the properties mortgaged to it by petitioner without previous demand or notice. In essence, the petitioner in its complaint seeks the annulment of the deeds of mortgage and deed of assignment which it executed in favor of DBP in order to secure the $5,000,000.00 loan because it is petitioner's contention that there was no loan at all to secure since what DBP "lent" to petitioner with its right hand, it also got back with its left hand; and that, there was failure of consideration with regard to the execution of  said deeds as the loan was never delivered to the petitioner. The petitioner further

prayed that pending the trial on the merits of the case, the trial court immediately issue a restraining order and then a writ of preliminary injunction against the sheriffs to enjoin the latter from proceeding with the foreclosure and sale of the petitioner's properties in Metro Manila and in Romblon. Respondent DBP opposed the issuance of a writ of preliminary injunction stating that under Presidential Decree No. 385, DBP's right to foreclose is mandatory as the arrearages of petitioner had already amounted to P123,801,265.82 as against its total obligation of P151,957,641.72; that under the same decree, no court can issue any restraining order or injunction against it to stop the foreclosure since Filipinas Marble's arrearages had already reached at least twenty percent of its total obligations; that the alleged non-receipt of the loan proceeds by the petitioner could, at best, be accepted only in a technical sense because the money was received by the officers of the petitioner acting in such capacity and, therefore, irrespective of whoever is responsible for placing them in their positions, their receipt of the money was receipt by the petitioner corporation and that the complaint does not raise any substantial controversy as to the amount due under the mortgage as the issues raised therein refer to the propriety of the manner by which the proceeds of the loan were expended by the petitioner's management, the allegedly precipitate manner with which DBP proceeded with the foreclosure, and the capacity of the DBP to be an assignee of the mining lease rights. After a hearing on the preliminary injunction, the trial court issued an order stating: The Court has carefully gone over the evidence presented by both parties, and while it sympathizes with the plight of the plaintiff and of the pitiful condition it now has found itself, it cannot but adhere to the mandatory provisions of P.D. 385. While the evidence so far presented by the plaintiff  corporation appears to be persuasive, the same may be considered material and relevant to the case. Hence, despite the impressive testimony of the plaintiff's witnesses, the Court believes that it cannot enjoin the defendant Development Bank of the Philippines from complying with the mandatory provisions of the said Presidential Decree. It having been shown that plaintiff's outstanding obligation as of December 31, 1982 amounted to P151,957,641.72 and with arrearages reaching up to 81 % against said total obligation, the Court finds the provisions of P.D. 385 applicable to the instant case. It is a settled rule that when the statute is clear and unambiguous, there is no room for interpretation, and all that it has to do is to apply the same. On appeal, the Intermediate Appellate Court upheld the trial court's decision and held: While petitioner concedes 'that Presidential Decree No. 385 applies only where it is clear that there was a loan or where the loan is not denied' ( p. 14-petition), it disclaims receipt of the $5 million loan nor benefits derived therefrom and bewails the onerous conditions imposed by DBP Resolution No. 385 dated December 7, 1977, which allegedly placed the petitioner under the complete control of the private respondents DBP and Bancom Systems Control Inc. (Bancom, for short). The plausibility of petitioner's

statement that it did Dot receive the $5 million loan is more apparent than real. At the hearing for injunction before the counsel for DBP stressed that $2,625,316.83 of the $5 million loan was earmarked to finance the acquisition of machinery, equipment and spare parts for petitioner's Diamond gangsaw which machineries were actually imported by petitioner Filipinas Marble Corporation and arrived in the Philippines. Indeed, a summary of releases to petitioner covering the period June 1978 to October 1979 (Exh. 2, Injunction) showed disbursements amounting to millions of  pesos for working capital and opening of letter of credits for the acquisition of its machineries and equipment. Petitioner does not dispute that releases were made for the purchase of machineries and equipment but claims that such imported machineries were left to the mercy of the elements as they were never delivered to it. xxxxxxxxx Apart from the foregoing, petitioner is patently not entitled to a writ of  preliminary injunction for it has not demonstrated that at least 20% of its outstanding arrearages has been paid after the foreclosure proceedings were initiated. Nowhere in the record is it shown or alleged that petitioner has paid in order that it may fall within the exception prescribed on Section 2, Presidential Decree No. 385. Dissatisfied with the appellate court's decision, the petitioner filed this instant petition with the following assignments of errors: 1. There being 'persuasive' evidence that the $5 million proceeds of the loan were not received and did not benefit the petitioner per finding of the lower court which should not be disturbed unless there is grave abuse of  discretion, it must follow that PD 385 does not and cannot apply; 2. If there was no valid loan contract for failure of consideration, the mortgage cannot exist or stand by itself being a mere accessory contract. Additionally, the chattel mortgage has not been registered. Therefore, the same is null and void under Article 2125 of the New Civil Code; and 3. PD 385 is unconstitutional as a 'class legislation', and violative of the due process clause. With regard to the first assignment of error, the petitioner maintains that since the trial court found "persuasive evidence" that there might have been a failure of consideration on the contract of loan due to the manner in which the amount of $5 million was spent, said court committed grave abuse of discretion in holding that it had no recourse but to apply P.D. 385 because the application of this decree requires the existence of a valid loan which, however, is not present in petitioner's case. It likewise faults the appellate court for upholding the applicability of the said decree. Sections 1 and 2 of P.D. No. 385 respectively provide:

Section 1. It shall be mandatory for government financial institutions after the lapse of sixty (60) days from the issuance of this Decree, to foreclose the collaterals and/or securities for any loan, credit accommodation, and/or guarantees granted by them whenever the arrearages on such account, including accrued interest and other charges, amount to at least twenty (20%) of the total outstanding obligations, including interest and other charges, as appearing in the book of accounts and/or related records of the financial institution concerned. This shall be without prejudice to the exercise by the government financial institution of such rights and/or remedies available to them under their respective contracts with their debtors, including the right to foreclose on loans, credits, accommodations, and/or guarantees on which the arrearages are less than twenty percent (20%). Section 2. No restraining order, temporary or permanent injunction shall be issued by the court against any government financial institution in any action taken by such institution in compliance with the mandatory foreclosure provided in Section 1 hereof, whether such restraining order, temporary or permanent injunction is sought by the borrower(s) or any third party or parties, except after due hearing in which it is established by the borrower, and admitted by the government financial institution concerned that twenty percent (20%) of the outstanding arrearages has been paid after the filing of  foreclosure proceedings. Presidential Decree No. 385 was issued primarily to see to it that government financial institutions are not denied substantial cash inflows, which are necessary to finance development projects all over the country, by large borrowers who, when they become delinquent, resort to court actions in order to prevent or delay the government's collection of their debts and loans. The government, however, is bound by basic principles of fairness and decency under the due process clause of the Bill of Rights. P.D. 385 was never meant to protect officials of government lending institutions who take over the management of a borrower corporation, lead that corporation to bankruptcy through mismanagement or misappropriation of its funds, and who, after ruining it, use the mandatory provisions of  the decree to avoid the consequences of their misdeeds. The designated officers of the government financing institution cannot simply walk away and then state that since the loans were obtained in the corporation's name, then P.D. 385 must be peremptorily applied and that there is no way the borrower corporation can prevent the automatic foreclosure of the mortgage on its properties once the arrearages reach twenty percent (20%) of the total obligation no matter who was responsible. In the case at bar, the respondents try to impress upon this Court that the $5,000,000.00 loan was actually granted and released to the petitioner corporation and whatever the composition of the management which received the loan is of no moment because this management was acting in behalf of the corporation. The respondents also argue that since the loan was extended to the corporation, the releases had to be made to the then officers of that borrower corporation.

Precisely, what the petitioner is trying to point out is that the DBP and Bancom people who managed Filipinas Marble misspent the proceeds of the loan by taking advantage of  the positions that they were occupying in the corporation which resulted in the latter's devastation instead of its rehabilitation. The petitioner does not question the authority under which the loan was delivered but stresses that it is precisely this authority which enabled the DBP and Bancom people to misspend and misappropriate the proceeds of  the loan thereby defeating its very purpose, that is, to develop the projects of the corporation. Therefore, it is as if the loan was never delivered to it and thus, there was failure on the part of the respondent DBP to deliver the consideration for which the mortgage and the assignment of deed were executed. We cannot, at this point, conclude that respondent DBP together with the Bancom people actually misappropriated and misspent the $5 million loan in whole or in part although the trial court found that there is "persuasive" evidence that such acts were committed by the respondent. This matter should rightfully be litigated below in the main action. Pending the outcome of such litigation, P.D. 385 cannot automatically be applied for if it is really proven that respondent DBP is responsible for the misappropriation of the loan, even if only in part, then the foreclosure of the petitioner's properties under the provisions of P.D. 385 to satisfy the whole amount of the loan would be a gross mistake. It would unduly prejudice the petitioner, its employees and their families. Only after trial on the merits of the main case can the true amount of the loan which was applied wisely or not, for the benefit of the petitioner be determined. Consequently, the extent of the loan where there was no failure of consideration and which may be properly satisfied by foreclosure proceedings under P.D. 385 will have to await the presentation of evidence in a trial on the merits. As we have ruled in the case of Central  Bank of the Philippines vs. Court of Appeals, (1 39 SCRA 46, 5253; 56): When Island Savings Bank and Sulpicio M. Tolentino entered into an P80,000.00 loan agreement on April 28, 1965, they undertook reciprocal obligations, the obligation or promise of each party is the consideration for that of the othe. (Penacio vs. Ruaya, 110 SCRA 46 [1981]; ... xxxxxxxxx The fact that when Sulpicio M. Tolentino executed his real estate mortgage, no consideration was then in existence, as there was no debt yet because Island Savings Bank had not made any release on the loan, does not make the real estate mortgage void for lack of consideration. It is not necessary that any consideration should pass at the time of the execution of the contract of real mortgage (Bonnevie vs. Court of Appeals, 125 SCRA 122 [1983]. It may either be a prior or subsequent matter. But when the consideration is subsequent to the mortgage, the mortgage can take effect only when the debt secured by it is created as a binding contract to pay (Parks vs. Sherman, Vol. 2, pp. 5-6). And, when there is partial failure of  consideration, the mortgage becomes unenforceable to the extent of such failure (Dow, et al. vs. Poore Vol. 172 N.E. p. 82, cited in Vol. 59, 1974 ed. C.J.S. p. 138). ...

Under the admitted circumstances of this petition, we, therefore, hold that until the trial on the merits of the main case, P.D. 385 cannot be applied and thus, this Court can restrain the respondents from foreclosing on petitioner's properties pending such litigation. The respondents, in addition, assert that even if the $5 million loan were not existing, the mortgage on the properties sought to be foreclosed was made to secure previous loans of the petitioner with respondent and therefore, the foreclosure is still justified. This contention is untenable. Two of the conditions imposed by respondent DBP for the release of the $5 million loan embodied in its letter to petitioner dated December 21, 1977 state: A. The interim loan of $289,917.32 plus interest due thereon which was used for the importation of one Savage Diamond Gangsaw shall be liquidated out of the proceeds of this $5 million loan. In addition, FMC shall also pay DBP, out of the proceeds of above foreign currency loan, the past due amounts on obligation with DBP. xxxxxxxxx B. Conversion into preferred shares of P 2 million of FMCs total obligations with DBP as of the date the legal documents for this refinancing shall have been exempted or not later than 90 days from date of advice of approval of  this accommodation. The above conditions lend credence to the petitioner's contention that the "original loan had been converted into 'equity shares', or preferred shares; therefore, to all intents and purposes, the only 'loan' which is the subject of the foreclosure proceedings is the $5 million loan in 1978. " As regards the second assignment of error, we agree with the petitioner that a mortgage is a mere accessory contract and, thus, its validity would depend on the validity of the loan secured by it. We, however, reject the petitioner's argument that since the chattel mortgage involved was not registered, the same is null and void. Article 2125 of the Civil Code clearly provides that the non-registration of the mortgage does not affect the immediate parties. It states: Art. 2125. In addition to the requisites stated in article 2085, it is indispensable, in order that a mortgage may be validly constituted that the document in which it appears be recorded in the Registry of Property. If the instrument is not recorded, the mortgage is nevertheless binding between the parties. xxxxxxxxx The petitioner cannot invoke the above provision to nullify the chattel mortgage it executed in favor of respondent DBP.

We find no need to pass upon the constitutional issue raised in the third assignment of  error. We follow the rule started in Alger Electric, Inc. vs. Court of Appeals, (135 SCRA 37, 45). We see no necessity of passing upon the constitutional issues raised by respondent Northern. This Court does not decide questions of a constitutional nature unless absolutely necessary to a decision of a case. If  there exists some other grounds of construction, we decide the case on a non- constitutional determination. (See Burton vs. United States, 196 U.S. 283; Siler vs. Luisville & Nashville R. Co., 123 U.S. 175; Berta College vs. Kentucky, 211 U.S. 45). WHEREFORE, IN VIEW OF THE FOREGOING, the petition is GRANTED. The orders of the Intermediate Appellate Court dated April 17, 1984 and July 3, 1984 are hereby ANNULLED and SET ASIDE. The trial court is ordered to proceed with the trial on the merits of the main case. In the meantime, the temporary restraining order issued by this Court on July 23, 1984 shall remain in force until the merits of the main case are resolved. SO ORDERED. July 25, 1960 G.R. No. L-13299 PERFECTO ADRID, ET AL., plaintiff-appellant, vs. ROSARIO MORGA, ETC., defendant-appellee.

and MAMERTO MORGA, ET AL., intervenors-appellees. Fortunato Jose for appellants. Montemayor, J.: On August 8, 1938, Perfecto Adrid and his wife Carmen Silangcruz, then owners of No. 550 of the San Francisco Malabon Estate Subdivision, situated in General Trias, Cavite, execution a document entitled “Sale with Right to Repurchase”, Exhibit A, purporting to sell the lot to Eugenio Morga for the sum of P2,000 with the right to repurchase the same within two yeas for the same sum of P2,000, plus 12% interest per annum. The vendors never repurchased said Lot No. 550. But in 1956, Perfecto Adrid and his son, (Carmen Silangcruz then being already dead) brought the present action against the administratrix of the deceased Eugenio Morga to recover the same Lot No. 550, offering to pay the sum of P2,000, and asking for accounting of all the produce of the lot since 1938, this on the theory that the original contract of sale with pacto de retro (Exhibit A) was by acts of the parties to the said contract, converted into one of antichresis. The parties plaintiff and defendant instead of presenting evidence, submitted a stipulation of  facts with the prayer that decision be rendered on the basis of such facts. For purposes of reference, we reproduce the pertinent portions of said stipulation of facts: 1. That on August 8, 1938, the spouses Perfecto Adrid and Carmen Silangcruz executed a deed of sale for P2,000.00 with 12% interest per annum with right to repurchase Lot

No. 550 of the Malabon Estate within the period of two (2) years from date and covered by Trans. Cert. of Title No. 10028, Exh. “A”; 3. That said deed of sale was registered in the office of the Register of Deed of Cavite and inscribed at the back of Trans. Cert. of Title No. 10028, covering lot 550, on August 11, 1939, a copy of which is hereto attached as Exh. “B”; 4. That on August 8, 1938, the date of the execution of said deed of sale with the right to repurchase, the vendee Eugenio Morga took possession of the land and benefited himself of the yearly produce of palay, and upon his death on August 25, 1952, said possession and yearly harvest of palay were transferred to his heirs, the herein defendant and intervenors; 5. That in par. 5 of the national document Exh. “A” there is stipulation which reads:  “Should we Perfecto Adrid and Carmen Silangcruz, fail to repurchase the abovementioned parcel of land under the stipulations above mentioned, then Eugenio Morga shall be the complete and absolute owner of the same without the necessity of  further executing a deed of conveyance or any other document”;

6. That this lot 550 appears assessed in the names of the spouses Perfecto Adrid and Carmen Silangcruz under Tax Declaration No. 47, Exh. “C’, and its yearly taxes amounting to P17.00 were being paid by Eugenio Morga; 11. That the yearly harvest of palay of this lot No. 550 (is) 30 cavanes net since its area is 35,844 square meter, as stated in Trans. Cert. of Title No. 10028, and that the price cavan is P10.00. The Court of First Instance of Cavite on July 15, 1957, rendered a decision, the disposition part of which reads as follows: In view of the foregoing considerations, this Court is of the opinion and so holds that the contract entered into between the spouses Perfecto Adrid and Carmen Silangcruz on one hand, and the spouses Eugenio Morga and Genoveva Vasquez on the other, is a contract of sale with the right to repurchase. The plaintiffs having failed to repurchase the land within the stipulated period of two years from the date of the execution of the contract, the title of the deceased vendee a retro, Eugenio Morga and Genoveva Vasquez, became consolidated by operation of law. . . . Wherefore judgment is hereby rendered against the plaintiffs, with costs. They are likewise ordered to pay the amount of P1,350.00 as attorney’s fees. We have carefully studied this case, examined the document entitled “Sale with Right to Repurchase” (Exhibit A) and the acts of the parties thereto subsequent to its execution and we have come to the conclusion that the intention of the parties was merely for Perfecto and his wife Carmen to borrow the sum of P2,000 from Eugenio Morga, Lot No. 550 being given as security. In other words, we have here a clear case of equitable mortgage. Otherwise, there would be no reason for the agreement made for the payment of 12% interest per annum. This interest must refer to the use of P2,000 by the alleged vendors until the same shall have been paid to Eugenio. The parties to the contract must have contemplated the lot remaining in the possession of the vendors

inasmuch as it was considered a mere security. However, after the execution of the contract, the creditor, Morga according to the contention of the plaintiff, decision to take possession of the land, pending payment of the loan , finding it financially advantageous to receive the products thereof, valued at P300.00 a year, in lieu of the payment of  interest at 12% a year, which would only be P240.00. But this did not convert, as contended by plaintiffs, the contract from a sale with pacto de retro to that of antichresis. Some of the the reasons behind our conclusion that the present case is one of equitable mortgage, are the following. Despite the expiration of the two year period for the alleged repurchase, which should have been done in 1940, neither Morga nor his heir have consolidated their title to the land. The certificate of title remained in the name of the alleged vendors. Not only this, but the tax declaration for the lot also remained in the name of said vendors, and all these years, Eugenio during his lifetime, and his heirs after his death, continued to pay the real estate tax in the name of the vendors.1 It is also a fact that the price of P2,000 would be rather inadequate for the supposed sale of  Lot No. 550 which has an area of about 3 1\2 hectares and has a yearly production of  thirty cavans of palay valued P10.00 a cavan, that is top say, P300.00 a year. A parcel of land with an annual production of P300.00 would or should command more than P2,000.00 for its sale. Besides, the contract provided for the payment of interest which is characteristic of a loan or equitable mortgage.2 The contention of plaintiffs that although the original contract was one of sale with right to repurchase, it was converted into one of antichresis just because the vendee took possession of the land, is clearly untenable. There is nothing in the document, Exhibit A, nor in the acts of the parties subsequent to its execution to show that the parties had entered into a contract of antichresis. In the case of Alojado vs. Lim Siongco, 51 Phil. 339 this Court said: What characterizes a contract of antichresis is that the creditor acquires the right to receive the fruits of the property of his debtor with the obligation to apply them to the payment of interest, if any is due, and then to the principal of his credit, and when such a covenant is not made in the contract which speaks unequivocally of a sale with right of  repurchase, the contract is a sale with the right to repurchase and not an antichresis. In view of the foregoing, the appealed decision is hereby reversed. The defendants are hereby ordered to give up the possession of the lot in question to the appellants upon the payment of P2,000. No interest will be paid inasmuch as Eugenio and his heir have received the products of the land in lieu of the payment of interest. No costs. Paras, C.J., Padilla, Bautista Angelo, Labrador, Concepcion, Endencia, Barrera and Gutierrez David, JJ., concur. G.R. No. 31057

September 7, 1929

ADRIANO ARBES, ET AL., plaintiffs-appellees, vs. VICENTE POLISTICO, ET AL., defendants-appellants.

Marcelino Lontok and Manuel dela Rosa for appellants. Sumulong & Lavides for appellees. VILLAMOR, J.:

This is an action to bring about liquidation of the funds and property of the association called "Turnuhan Polistico & Co." The plaintiffs were members or shareholders, and the defendants were designated as president-treasurer, directors and secretary of said association. It is well to remember that this case is now brought before the consideration of this court for the second time. The first one was when the same plaintiffs appeared from the order of the court below sustaining the defendant's demurrer, and requiring the former to amend their complaint within a period, so as to include all the members of "Turnuhan Polistico & Co.," either as plaintiffs or as a defendants. This court held then that in an action against the officers of a voluntary association to wind up its affairs and enforce an accounting for money and property in their possessions, it is not necessary that all members of the association be made parties to the action. (Borlasa vs. Polistico, 47 Phil., 345.) The case having been remanded to the court of origin, both parties amend, respectively, their complaint and their answer, and by agreement of the parties, the court appointed Amadeo R. Quintos, of the Insular Auditor's Office, commissioner to examine all the books, documents, and accounts of "Turnuhan Polistico & Co.," and to receive whatever evidence the parties might desire to present. The commissioner rendered his report, which is attached to the record, with the following resume: Income: Member's shares............................

97,263.70

Credits paid................................

6,196.55

Interest received...........................

4,569.45

Miscellaneous...............................

1,891.00 P109,620.70

Expenses: Premiums to members.......................

68,146.25

Loans on realestate.......................

9,827.00

Loans on promissory notes..............

4,258.55

Salaries....................................

1,095.00

Miscellaneous...............................

1,686.10 85,012.90

Cash on hand........................................

24,607.80

The defendants objected to the commissioner's report, but the trial court, having examined the reasons for the objection, found the same sufficiently explained in the report and the evidence, and accepting it, rendered judgment, holding that the association "Turnuhan Polistico & Co." is unlawful, and sentencing the defendants jointly and severally to return the amount of P24,607.80, as well as the documents showing the uncollected credits of the association, to the plaintiffs in this case, and to the rest of the members of the said association represented by said plaintiffs, with costs against the defendants. The defendants assigned several errors as grounds for their appeal, but we believe they can all be reduced to two points, to wit: (1) That not all persons having an interest in this association are included as plaintiffs or defendants; (2) that the objection to the commissioner's report should have been admitted by the court below. As to the first point, the decision on the case of Borlasa vs. Polistico, supra, must be followed. With regard to the second point, despite the praiseworthy efforts of the attorney of the defendants, we are of opinion that, the trial court having examined all the evidence touching the grounds for the objection and having found that they had been explained away in the commissioner's report, the conclusion reached by the court below, accepting and adopting the findings of fact contained in said report, and especially those referring to the disposition of the association's money, should not be disturbed. In Tan Dianseng Tan Siu Pic vs. Echauz Tan Siuco (5 Phil., 516), it was held that the findings of facts made by a referee appointed under the provisions of section 135 of the Code of Civil Procedure stand upon the same basis, when approved by the Court, as findings made by the judge himself. And in Kriedt vs. E. C. McCullogh & Co.(37 Phil., 474), the court held: "Under section 140 of the Code of Civil Procedure it is made the duty of the court to render judgment in accordance with the report of the referee unless the court shall unless for cause shown set aside the report or recommit it to the referee. This provision places upon the litigant parties of the duty of discovering and exhibiting to the court any error that may be contained therein." The appellants stated the grounds for their objection. The trial examined the evidence and the commissioner's report, and accepted the findings of fact made in the report. We find no convincing arguments on the appellant's brief to justify a reversal of the trial court's conclusion admitting the commissioner's findings. There is no question that "Turnuhan Polistico & Co." is an unlawful partnership (U.S. vs. Baguio, 39 Phil., 962), but the appellants allege that because it is so, some charitable

institution to whom the partnership funds may be ordered to be turned over, should be included, as a party defendant. The appellants refer to article 1666 of the Civil Code, which provides: A partnership must have a lawful object, and must be established for the common benefit of the partners. When the dissolution of an unlawful partnership is decreed, the profits shall be given to charitable institutions of the domicile of the partnership, or, in default of  such, to those of the province. Appellant's contention on this point is untenable. According to said article, no charitable institution is a necessary party in the present case of determination of the rights of the parties. The action which may arise from said article, in the case of unlawful partnership, is that for the recovery of the amounts paid by the member from those in charge of the administration of said partnership, and it is not necessary for the said parties to base their action to the existence of the partnership, but on the fact that of having contributed some money to the partnership capital. And hence, the charitable institution of the domicile of the partnership, and in the default thereof, those of the province are not necessary parties in this case. The article cited above permits no action for the purpose of obtaining the earnings made by the unlawful partnership, during its existence as result of the business in which it was engaged, because for the purpose, as Manresa remarks, the partner will have to base his action upon the partnership contract, which is to annul and without legal existence by reason of its unlawful object; and it is self  evident that what does not exist cannot be a cause of action. Hence, paragraph 2 of the same article provides that when the dissolution of the unlawful partnership is decreed, the profits cannot inure to the benefit of the partners, but must be given to some charitable institution. We deem in pertinent to quote Manresa's commentaries on article 1666 at length, as a clear explanation of the scope and spirit of the provision of the Civil Code which we ar e concerned. Commenting on said article Manresa, among other things says: When the subscriptions of the members have been paid to the management of the partnership, and employed by the latter in transactions consistent with the purposes of the partnership may the former demand the return of the reimbursement thereof from the manager or administrator withholding them? Apropos of this, it is asserted: If the partnership has no valid existence, if it is considered juridically non-existent, the contract entered into can have no legal effect; and in that case, how can it give rise to an action in favor of the partners to  judicially demand from the manager or the administrator of the partnership capital, each one's contribution? The authors discuss this point at great length, but Ricci decides the matter quite clearly, dispelling all doubts thereon. He holds that the partner who limits himself  to demanding only the amount contributed by him need not resort to the partnership contract on which to base his action. And he adds in explanation that the partner makes his contribution, which passes to the managing partner for the

purpose of carrying on the business or industry which is the object of the partnership; or in other words, to breathe the breath of life into a p artnership contract with an objection forbidden by law. And as said contrast does not exist in the eyes of the law, the purpose from which the contribution was made has not come into existence, and the administrator of the partnership holding said contribution retains what belongs to others, without any consideration; for which reason he is not bound to return it and he who has paid in his share is entitled to recover it. But this is not the case with regard to profits earned in the course of the partnership, because they do not constitute or represent the partner's contribution but are the result of the industry, business or speculation which is the object of  the partnership, and therefor, in order to demand the proportional part of the said profits, the partner would have to base his action on the contract which is null and void, since this partition or distribution of the profits is one of the juridical effects thereof. Wherefore considering this contract asnon-existent , by reason of its illicit object, it cannot give rise to the necessary action, which must be the basis of the  judicial complaint. Furthermore, it would be immoral and unjust for the law to permit a profit from an industry prohibited by it. Hence the distinction made in the second paragraph of this article of this Code, providing that the profits obtained by unlawful means shall not enrich the partners, but shall upon the dissolution of the partnership, be given to the charitable institutions of the domicile of the partnership, or, in default of such, to those of the province. This is a new rule, unprecedented by our law, introduced to supply an obvious deficiency of the former law, which did not describe the purpose to which those profits denied the partners were to be applied, nor state what to be done with them. The profits are so applied, and not the contributions, because this would be an excessive and unjust sanction for, as we have seen, there is no reason, in such a case, for depriving the partner of the portion of the capital that he co ntributed, the circumstances of the two cases being entirely different. Our Code does not state whether, upon the dissolution of the unlawful partnership, the amounts contributed are to be returned by the partners, because it only deals with the disposition of the profits; but the fact that said contributions are not included in the disposal prescribed profits, shows that in consequences of said exclusion, the general law must be followed, and hence the partners should reimburse the amount of their respective contributions. Any other solution is immoral, and the law will not consent to the latter remaining in the possession of  the manager or administrator who has refused to return them, by denying to the partners the action to demand them. (Manresa, Commentaries on the Spanish Civil Code, vol. XI, pp. 262-264) The judgment appealed from, being in accordance with law, should be, as it is hereby, affirmed with costs against the appellants; provided, however, the defendants shall pay

the legal interest on the sum of P24,607.80 from the date of the decision of the court, and provided, further, that the defendants shall deposit this sum of money and other documents evidencing uncollected credits in the office of the clerk of the trial court, in order that said court may distribute them among the members of said association, upon being duly identified in the manner that it may deem proper. So ordered. G.R. No. 70360 March 11, 1987 AREVALO GOMEZ CORPORATION, petitioner, vs. ANDERS LAO HIAN LIONG, doing business in the name and style of "TIONGSON BAZAAR" and The Honorable SALVADOR J. VALDEZ, JR., respondents.

Feria , Feria, Lugtu & Lao for petitioner. Deogracia Eufemio for respondents.

CRUZ, J.:

Some agreements deteriorate into misunderstandings, turning close friends into irreconcilable adversaries and sweet harmony into bitter discord. This is one of them. On December 1, 1964, the petitioner through its Vice-President, Renato Arevalo, and respondent Andres Lao HIAN Liong, executed a "Contract of Lease" covering the petitioner's property at Magsaysay Avenue, Baguio City, for a term of fifteen years, effective September 1, 1964. The monthly rental was fixed at P2,450.00 but in addition to this the respondent agreed to construct on the interior portion of the land leased a three-story building of strong materials without right to reimbursement from the petitioner. The cost of the building was to be not less than P150,000.00, of which the sum of P45,000.00 would be contributed by petitioner. 1 Prior to the expiration of the lease on August 31, 1979, and for some time thereafter, the parties entered into negotiations to fix a new rental but could not come to any agreement. In the end, on October 2, 1979, the petitioner served on the respondent a written notice to vacate the leased premises in view of the termination of their contract. 2 When the respondent refused to comply, the petitioner filed a complaint for ejectment against him in the City Court of Baguio City. Applying Article 1670 of Civil Code, the trial court held in favor of the defendant as follows: In the case on hand, it is admitted that the 15-year lease contract between the parties expired on August 31, 1979. However, the defendant has continued occupying the leased premises thereafter and even to this day. And it was only on October 2, 1979, or after more than 15 days after the expiration of the original contract of lease, that he was given the requisite notice to vacate. It is, therefore, abundantly clear that under the law, an

implied new lease had already set in when the plaintiff commenced its action for ejectment on November 19, 1979. ... 3 The trial court also extended the period of the lease by five years from October 1, 1979, pursuant to Article 1670 in relation to Article 1687 of the Civil Code, and fixed the new rentals at P10,406.00 a month. 4 Both parties appealed. The petitioner contended that the original lease had not been impliedly renewed but automatically expired on August 31, 1979. The respondent, for his part, prayed for a longer extension of fifteen years, considering the nature of his business (a bazaar) and his investment therein. He also claimed that, prior to the execution of the contract, the petitioner had assured him he could stay indefinitely in the disputed premises. 5 The Regional Trial Court of Baguio City affirmed the implied renewal of the lease but modified the appealed judgment by extending the lease for ten years from September 1, 1979, or until August 31, 1989. The respondent judge also increased the new rentals to P18,600.00 per month, effective September 1, 1979. 6 A motion for reconsideration and for new trial was filed by petitioner but the same was denied. The petition then came to us with the following assignment of errors: 1) Respondent Judge, as well as the trial judge, erred in deciding the case at bar in a way not in accordance with law or with the applicable decisions of  this Honorable Court, particularly its decision in Roxas vs. Alcantara, 113 SCRA 21. 2) Respondent judge, as well as the trial judge, erred in holding that there was implied renewal ortacita reconduccion despite the refusal of respondent Liong to agree to the increased rental demanded by petitioner prior to the expiration of the contract of lease. 3) Respondent judge, as well as the trial judge, erred in holding that there was implied renewal ortacita reconduccion despite the refusal of petitioner to accept payment of rentals from respondent Liong after the expiration of the Contract of Lease. 4) Assuming for the sake of argument that Article 1687 of the New Civil Code is applicable, the trial judge erred and gravely abused his discretion by extending the lease for five (5) years and respondent judge erred and compounded the grave abuse of discretion by extending the lease for ten (10) years. 5) Respondent judge, as well as the trial judge, erred in admitting parol evidence with respect to the term of the lease. 6) Respondent judge erred in not granting a new trial for the admission in evidence of the building permit of the new building of respondent Liong which was issued after the decision of the trial court.

7) Respondent judge erred in not admitting in evidence or taking judicial notice of the Central Bank Certification dated August 21, 1984 showing the three successive devaluations or depreciation of the Philippine peso after the decision of the trial court. 7 We address ourselves first to the submission of the respondent that the factual findings of the court a quo cannot be reviewed in these proceedings which have been filed under Rule 65 of the Rules of Court. That is not exactly correct. We note that, as the caption of  the petition indicates, it was filed not only under the said rule r ule but also as an appeal by certiorari under Rule 45, which, while generally limited to questions of law, nevertheless allows review of the judgment a quo when it is based on a misapprehension of  facts. 8 We shall apply this exception and treat this petition as solely filed under the latter rule. 9 It is not disputed that the original lease contract between the parties was only for fifteen years expiring on August 31, 1979. The private respondent nonetheless continued occupying the leased premises beyond that date and it was only on October 2, 1979, that he was formally served with notice to vacate. What is in issue then is whether such continued occupancy was with or without the implied acquiescence of the petitioner. The applicable provisions of Civil Code are the following: Article 1669. If the lease was made for a determinate time, it ceases upon the day fixed, without the need of a demand. Article 1670. If at the end of the contract the lessee should continue enjoying the thing leased for fifteen days with the acquiescence of the lessor, and unless a notice to the contrary by either party has previously been given, it is understood that there is an implied new lease, not for the period of the original contract, but for the time established in Article 1682 and 1687. The other terms of the original contract shall be revived. Under the second article, an implied new lease or tacita reconduccion will set in if it is shown that: (a) the term of the original contract of lease has expired; (b) the lessor has not given the lessee a notice to vacate; and (c) the lessee continued enjoying the thing leased for fifteen days with the acquiescence of the lessor. 10 This acquiescence may be inferred from his failure to serve a notice to quit. 11 The petitioner contends that the service of an express notice to quit is not the only way to prevent the implied renewal of the lease. Demanding a higher rental is also a manifestation of non-acquiescence if the lessee does not accept the rate demanded. In other words, failure of agreement on the new conditions of the lease results in an automatic notice to vacate upon the expiration of the original lease. In support of this position, the petitioner relies on the case of Roxas vs.  Alcantara, 12 where this Court declared: ... Petitioner's letter of August 11, 1977 was a reminder to private respondent of the impending expiration of the lease contract. Exh. "A", with

a statement that was in effect an offer or proposal to renew the contract on the terms and conditions, namely: (1) that the rental would be P4,000.00 a month; (2) that three years advance rental should be paid by private respondent; and (3) that a 15% yearly increase in rental would be imposed. In other words, petitioner laid down the foregoing stipulations as conditions sine qua non for any subsequent contract that might be negotiated with private respondent. Thus clear from the letter, Exh. "C", is that if private respondent were not agreeable to any or all of the new stipulations, there would be no renewal of the lease. Private respondent was to communicate his reply within fifteen days from receipt of Exh. "C", absent which petitioner would take it to mean that his conditions were acceptable to private respondent and their contract renewed on the specified terms. However, private respondent's letter, Exh. "F", evidently posted before the expiration of the period allowed within which to decide, did not give a categorical affirmative or negative answer to petitioner's proposition, and merely manifested the said lessee's desire to study the matter until end of  the following month of September, 1977, or up to the termination of the then existing contract of lease, Exh. "A". Petitioner's failure to reply to the letter, Exh. "F", can only be taken to mean that he acceded to the request for additional time. For the obvious reason that the lease contract (Exh. "A") was expiring, it became more imperative for private respondent to make a final decision within and not later than the extended period which he asked for. Thus, when petitioner did not hear from private respondent at the end of  the aforesaid month of September, private respondent ceased to have any legal right to possess and occupy the premises in question commencing the first day of the following month of October. As we see it, Article 1670 applies only where, before the expiration of the lease, no negotiations are held between the lessor and the lessee resulting in its renewal. Where no such talks take place and the lessee is not asked to vacate before the lapse of fifteen days from the end of the lease, the implication is that the lessor is amenable to its renewal. Where the lessor is unwilling in any event to renew the lease for whatever reason, it will be necessary for him to serve on the lessee a formal notice to vacate. As no talks have been held between the lessor and the lessee concerning the renewal of the lease, there can be no inference that the former, by his inaction, intends to discontinue it. I n such a case, no less than an express notice to vacate must be made within the statutory 15day period. Applying these principles, the Court holds that the lease was not impliedly renewed in the instant case. It is a matter of record that weeks before the deadline for the notice to vacate, the petitioner had already communicated to the respondent its intention to increase the rental. This increase had to be accepted by the respondent if he wanted the lease to be renewed. Significantly, in its letter to the respondent on September 18, 1979, 13 the petitioner once again rejected the latter's counter-proposal and categorically declared that the increased rental of P35,000.00 was "no longer negotiable." Since this was a

reply to the respondent's letter of September 14, 1979, 14 it is obvious that the increase in rental was notified to the respondent on an earlier date,and before the expiration of the original lease. As of that date, the respondent was already being informed that he would have to vacate the leased premises on August 31, 1979, unless he was willing to pay the increased rental demanded by the lessor. Stated otherwise, the respondent was on that date — which was clearly before the statutory deadline — being served a conditional notice to vacate. The formal notice to vacate sent by the petitioner to the respondent on October 2, 1984, was thus merely areiteration of the implied demand made to him in its previous communications. The demand was that he vacate the leased premises if he could not accept the non-negotiable increased rental of P35,000.00 a month. If the petitioner saw fit to write that letter on the said date, which admitt edly was beyond the 15-day statutory period, it was merely to repeat its insistence on the new rate as an indispensable condition to the renewal of the lease. The legal consequence of its rejection by the respondent was its obligation ob ligation to vacate the leased premises because of  the expiration of the lease. Even if, as urged by the respondent, we should disregard the petitioner's letter of  August 31, 1979, because it was not submitted at the trial, there nevertheless are the other letters which were formally offered in evidence by the respondent himself. These are Exhibit "5" and "Exhibit "6", dated September 5 and 14, 1979, respectively, in which he rejected the petitioner's demand for the increased rental of P35,000.00. This could mean only that the demand was made earlier as the said letters were merely a reaction to such demand. These demands, as conditional notices to vacate if the petitioner's new rental was rejected, satisfied the requirement of Article 1670. It should be noted that, after August 1979, the petitioner refused to accept the respondent's payments of the old rentals, demanding, as it had the right to do, the increased rate of P35,000.00. Such a stance negates the conclusion that it was willing to renew the lease under the original conditions and had, by its silence, impliedly agreed to the retention of all its provisions. In fact, far from being silent, sil ent, the petitioner repeatedly insisted on the new rentals, and, to suit its actions to its words, flatly refused the tender of the old rentals by the respondent. 15 No less worthy of attention is the circumstance that in its letter of September 18, 1979, the respondent counter-proposed a monthly rental of P27,000.00 P27,000.00,, which the petitioner rejected. 16 It could be illogical to suppose suppos e that, having done this, the petitioner would later agree to the implied renewal of the lease for the original rental of only P2,450.00, thereby forfeiting the amount of P24,550.00 every month As the original lease contract expired on August 31, 1979, and was not legally renewed, it follows that the respondent has since then been in illegal possession of the leased premises. That unlawful detainer, which has lasted more than seven years now, during which he has retained all the rights he originally enjoyed as if the lease had been validly renewed, must be terminated t erminated immediately.

Coming finally to the monthly rentals to be paid by the respondent, it appears that between the rate of P35,000.00 demanded by the petitioner and the respondent's counter-proposal of P27,000.00, there is a difference of only P8,000.00. It is unfortunate that the disagreement could not be ironed out in the spirit of friendship that used to characterize the relations of the parties. 17 The respondent judge, for his part, using as basis a fair monthly rental value of P50.00 for every square meter of the 372 square meter floor area of the property leased, fixed the monthly rental at P18,600.00. 18 Considering all the above circumstances, and by way of effecting a reasonable compromise between the parties, we hereby rule that the rentals to be paid for the use and occupancy of the leased premises beginning September 1, 1979, and until it is vacated by the respondent, shall be P30,000.00 per month, with interest at the legal rate. From the total amount due shall be deducted the sums judicially deposited by the respondent. We shall also fix the attorney's fee in the sum of P30,000.00, taking into account the efforts exerted by counsel in prosecuting this case, from the city court of  Baguio and up to this Court. It is hoped that, being an experienced businessman, and with this pending litigation and its possible consequences in mind, he has taken the necessary measures to minimize the other expenses of his relocation if, as it is now, ordered by this Court. WHEREFORE, the decision of the respondent judge dated August 8, 1984, is set aside and a new decision is hereby rendered ordering respondent Andres Lao Hian Liong to: a) vacate the leased premises immediately; b) pay the petitioner monthly rentals in the amount of P30,000.00 plus legal interest, from September 1, 1979, until the leased premises are surrendered to the petitioner; and c) pay an attorney's fee in the sum of  P30,000.00 and the costs of this suit. The deposits made by the respondent in court shall be deducted from the total amount due from him. This decision shall be immediately executory and no motion for reconsideration shall stay its execution. SO ORDERED. G.R. No. L-23399 May 31, 1974 BERNARDO DIZON, substituted by his heirs, DOMININA ALVENDIA VDA. DE DIZON, BUENAVENTURANZA DIZON-AMIO, Sister MARIA FLORENCIA (MARIA DIZON), MARIANO DIZON, VICTOR DIZON, ARACELI DIZON-GOMEZ, ESTELA DIZON-LACSAMANA, MARITA DIZON, JOSEFA DIZON-ASIDO, EUGENIA DIZONDEL BARRIO and GLORIA DIZON, petitioners, vs. AMBROSIO MAGSAYSAY and NICANOR PADILLA, respondents.

Pompeyo Diaz for petitioners. Oben & Oben for respondents.

MAKALINTAL, C.J.: p

On April 1, 1949 Ambrosio Magsaysay, registered owner of a 1,171.70 sq. m. of land located in Sampaloc, Manila, and the late Bernardo M. Dizon 1 executed a written contract of lease over a portion of the above-mentioned parcel of land which the latter had been occupying as lessee since 1937 and on which he had constructed a residential house as well as a six-lane bowling alley. The pertinent provisions of the lease contract 2 read: xxx xxx xxx Que el DUENO cede en arrendamiento al INQUILINO una puerta commercial No. 143 Maria Clara, Manila una portion del terreno adjacente a dicha puerta, y en cuyo esta levantada una edificacion No. 137 Bowling Alley. Y se convien mutualmente por y entre las partes siguiente: . 1. EL INQUILINO se compromete a pagar al DUENO un alquiler mensual de cien pesos (P100.00), moneda filipina, y que se pagarapor anticipado en o antes del dia 15 de cada mes an la direccion del DUENO. 2. Este arrendamiento sera por dos (2) anos desde Abril 1, 1949 y renovable por igual periodo en condiciones expresas y specificadas que seran convenidas entre las parties. xxx xxx xxx 9. En el caso de que el DUENO vendiera el terreno, se le dara preferencia de comprar el INQUILINO sobre cualquier otro comprador en igualdad de precio y condiciones. xxx xxx xxx The two-year term of the lease contract expired on April 1, 1951 without the parties' having expressly renewed their agreement. Bernardo Dizon, however, continued to occupy the leased premises, paying the same monthly rental of P100.00, which Ambrosio Magsaysay accepted. Two years later, on March 3, 1953, the counsel of Ambrosio Magsaysay formally advised Bernardo Dizon of the termination of the existing lease at the end of that month. On March 24 Dizon learned that as early as February 19, 1953 there were negotiations for the sale of the entire 1,171.70 sq. m. lot to Nicanor Padilla, which negotiations were concluded on March 7, 1953 with the execution of an absolute deed of sale in his favor by Ambrosio Magsaysay and of a supplementary agreement embodying the seller's acceptance of the condition that should he fail to completely eject all the tenants on the land within, a stated period, so much of the agreed purchase price of P48,000.00 would be forfeited. On March 11, 1953 a new certificate of title was issued to Nicanor Padilla pursuant to the sale. When Dizon learned of the sale he communicated with Magsaysay and Padilla, inviting their attention to paragraph 9 of the original written lease contract which gave him the

preferential right to purchase the land under the same conditions as those offered by other buyers. On March 25, 1953 he actually commenced suit against Magsaysay and Padilla in the Court of First Instance of Manila (Civil Case No. 19172), praying that the deed of sale between them be declared null and void; that they be ordered to sell the land to him and to pay him damages and attorney's fees; or in the alternative, that defendant Magsaysay be sentenced to pay the plaintiff the sum of P20,000.00 as actual damages, P10,000.00 for alleged losses in his business, reasonable moral damages, and attorney's fees. The new buyer, Nicanor Padilla, was included as party-defendant in this case on the allegation that he "7. .. knew the plaintiff had his residential building and bowling alleys on this land, and before he purchased the land, he saw said building and alleys and under the circumstances, he was aware and/or should be aware of the consideration value thereof as well as of the preferred right of said plaintiff to buy the land." The trial court rendered judgment on August 18, 1955, dismissing the complaint as well as defendant Nicanor Padilla's counterclaim. On appeal to the Court of Appeals (CA-G.R. No. 16174) the decision was affirmed on June 8, 1964. Hence this petition for review, presenting the crucial issue, as the Court of Appeals put it, as to "whether or not at the time of the sale of the disputed property to Nicanor Padilla on March 7, 1953 appellant Dizon had a preferential right to purchase it at the same price and terms." Because Dizon continued to occupy the leased premises with Magsaysay's acquiescence even after the two-year term of the private written lease contract between them expired on April 1, 1951, petitioners contend that the implied new lease created, although admittedly not for the period of the original contract, revived the other terms thereof, including the lessee's preferential right of purchase, citing Article 1670 of the new Civil Code, which provides: Art. 1670. If at the end of the contract the lessee should continue enjoying the thing leased for fifteen days with the acquiescence of the lessor and unless a notice to the contrary by either party has previously been given, it is understood that there is an implied new lease, not for the period of the original contract, but for the time established in articles 1682 and 1687. The other terms of the original contract shall be revived . (Emphasis supplied) The Court of Appeals held that "the other terms of the original contract" which are revived in the implied new lease under Article 1670 are only those terms which are germane to the lessee's right of continued enjoyment of the property leased. This is a reasonable construction of the provision, which is based on the presumption that when the lessor allows the lessee to continue enjoying possession of the property for fifteen days after the expiration of the contract he is willing that such enjoyment shall be for the entire period corresponding to the rent which is customarily paid — in this case up to the end of the month because the rent was paid monthly. Necessarily, if the presumed will of the parties refers to the enjoyment of possession the presumption covers the other terms of the contract related to such possession, such as the amount of rental, the date when it must be paid, the care of the property, the responsibility for repairs, etc. But no such presumption may be indulged in with respect to special agreements which

by nature are foreign to the right of occupancy or enjoyment inherent in a contract of  lease. But whatever doubt there may be on this point is dispelled by paragraph (2) of the contract of lease, which states that it was renewable for the same period of two years (upon its expiration on April 1, 1951), "con condiciones expresas y specificadas que seran convenidas entre las partes." This stipulation embodied the agreement of the parties with respect to renewal of the original contract, and while there was nothing in it which was incompatible with the existence of an implied new lease from month to month under the conditions laid down in Article 1670 of the Civil Code, such incompatibility existed with respect to any implied revival of the lessee's preferential right to purchase, which expired with the termination of the original contract. On this point the express agreement of the parties should govern, not the legal provision relied upon by the petitioner. The judgment of the Court of Appeals is affirmed, with costs. G.R. No. 87047 October 31, 1990 FRANCISCO LAO LIM, petitioner, vs. COURT OF APPEALS and BENITO VILLAVICENCIO DY, respondents.

Gener E. Asuncion for petitioner. Natividad T. Perez for private respondent.

REGALADO, J.:

Respondent Court of Appeals having affirmed in toto on June 30, 1988 in CA-G.R. SP No. 13925, 1 the decision of the Regional Trial Court of Manila, Branch XLVI in Civil Case No. 87-42719, entitled "Francisco Lao Lim vs. Benito Villavicencio Dy," petitioner seeks the reversal of such affirmance in the instant petition. The records show that private respondent entered into a contract of lease with petitioner for a period of three (3) years, that is, from 1976 to 1979. After the stipulated term expired, private respondent refused to vacate the premises, hence, petitioner filed an ejectment suit against the former in the City Court of Manila, docketed therein as Civil Case No. 051063-CV. The case was terminated by a judicially approved compromise agreement of the parties providing in part: 3. That the term of the lease shall be renewed every three years retroacting from October 1979 to October 1982; after which the abovenamed rental shall be raised automatically by 20% every three years for as long as defendant needed the premises and can meet and pay the said increases, the defendant to give notice of his intent to renew sixty (60) days before the expiration of the term; 2

By reason of said compromise agreement the lease continued from 1979 to 1982, then from 1982 to 1985. On April 17, 1985, petitioner advised private respondent that he would no longer renew the contract effective October, 1985. 3 However, on August 5, 1985, private respondent informed petitioner in writing of his intention to renew the contract of lease for another term, commencing November, 1985 to October, 1988. 4 In reply to said letter, petitioner advised private respondent that he did not agree to a renewal of the lease contract upon its expiration in October, 1985. 5 On January 15, 1986, because of private respondent's refusal to vacate the premises, petitioner filed another ejectment suit, this time with the Metropolitan Trial Court of  Manila in Civil Case No. 114659-CV. In its decision of September 24, 1987, said court dismissed the complaint on the grounds that (1) the lease contract has not expired, being a continuous one the period whereof depended upon the lessee's need for the premises and his ability to pay the rents; and (2) the compromise agreement entered into in the aforesaid Civil Case No. 051063-CV constitutes res judicata to the case before it. 6 Petitioner appealed to the Regional Trial Court of Manila which, in its decision of January 28, 1988 in Civil Case No. 87-42719, affirmed the decision of the lower court. 7 As stated at the outset, respondent Court of Appeals affirmed in full said decision of the Regional Trial Court and held that (1) the stipulation in the compromise agreement which, in its formulation, allows the lessee to stay on the premises as long as he needs it and can pay rents is valid, being a resolutory condition and, therefore, beyond the ambit of Article 1308 of the Civil Code; and (2) that a compromise has the effect of res  judicata. 8 Petitioner's motion for reconsideration having been denied by respondent Court of  Appeals, this present petition is now before us. We find the same to be meritorious. Contrary to the ruling of respondent court, the disputed stipulation "for as long as the defendant needed the premises and can meet and pay said increases" is a purely potestative condition because it leaves the effectivity and enjoyment of leasehold rights to the sole and exclusive will of the lessee. It is likewise a suspensive condition because the renewal of the lease, which gives rise to a new lease, depends upon said condition. It should be noted that a renewal constitutes a new contract of lease although with the same terms and conditions as those in the expired lease. It should also not be overlooked that said condition is not resolutory in nature because it is not a condition that terminates the lease contract. The lease contract is for a definite period of three (3) years upon the expiration of which the lease automatically terminates. The invalidity of a condition in a lease contract similar to the one at bar has been resolved in Encarnacion vs. Baldomar, et al. 9 where we ruled that in an action for ejectment, the defense interposed by the lessees that the contract of lease authorized them to continue occupying the premises as long as they paid the rents is untenable, because it would leave to the lessees the sole power to determine whether the lease should continue or not. As stated therein, "(i)f this defense were to be allowed, so long as defendants elected to continue the lease by continuing the payment of the rentals, the owner would never be able to discontinue it; conversely, although the owner should

desire the lease to continue, the lessees could effectively thwart his purpose if they should prefer to terminate the contract by the simple expedient of stopping payment of  the rentals. This, of course, is prohibited by the aforesaid article of the Civil Code. (8 Manresa, 3rd ed., pp. 626, 627; Cuyugan vs. Santos, 34 Phil. 100.) The continuance, effectivity and fulfillment of a contract of lease cannot be made to depend exclusively upon the free and uncontrolled choice of the lessee between continuing the payment of the rentals or not, completely depriving the owner of any say in the matter. Mutuality does not obtain in such a contract of lease and no equality exists between the lessor and the lessee since the life of the contract is dictated solely by the lessee. The interpretation made by respondent court cannot, therefore, be upheld. Paragraph 3 of the compromise agreement, read and interpreted in its entirety, is actually to the effect that the last portion thereof, which gives the private respondent sixty (60) days before the expiration of the term the right to give notice of his intent to renew, is subject to the first portion of said paragraph that "the term of the lease shall be renewed every three (3) years," thereby requiring the mutual agreement of the parties. The use of the word "renew" and the designation of the period of three (3) years clearly confirm that the contract of lease is limited to a specific period and that it is not a continuing lease. The stipulation provides for a renewal of the lease every three (3) years; there could not be a renewal if said lease did not expire, otherwise there is nothing to renew. Resultantly, the contract of lease should be and is hereby construed as providing for a definite period of three (3) years and that the automatic increase of the rentals by twenty percent (20%) will take effect only if the parties decide to renew the lease. A contrary interpretation will result in a situation where the continuation and effectivity of  the contract will depend only upon the will of the lessee, in violation of Article 1308 of  the Civil Code and the aforesaid doctrine in Encarnacion. The compromise agreement should be understood as bearing that import which is most adequate to render it effectual. 10 Where the instrument is susceptible of two interpretations, one which will make it invalid and illegal and another which will make it valid and legal, the latter interpretation should be adopted. 11 Moreover, perpetual leases are not favored in law, nor are covenants for continued renewals tending to create a perpetuity, and the rule of construction is well settled that a covenant for renewal or for an additional term should not be held to create a right to repeated grants in perpetuity, unless by plain and unambiguous terms the parties have expressed such intention. 12 A lease will not be construed to create a right to perpetual renewals unless the language employed indicates dearly and unambiguously that it was the intention and purpose of the parties to do so. 13 A portion in a lease giving the lessee and his assignee the right to perpetual renewals is not favored by the courts, and a lease will be construed as not making such a provision unless it does so clearly. 14 As we have further emphasized: It is also important to bear in mind that in a reciprocal contract like a lease, the period of the lease must be deemed to have been agreed upon for the

benefit of both parties, absent language showing that the term was deliberately set for the benefit of the lessee or lessor alone. We are not aware of any presumption in law that the term of a lease is designed for the benefit of the lessee alone. Koh and Cruz in effect rested upon such a presumption. But that presumption cannot reasonably be indulged in casually in an era of rapid economic change, marked by, among other things, volatile costs of living and fluctuations in the value of the domestic currency. The longer the period the more clearly unreasonable such a presumption would be. In an age like that we live in, very specific language is necessary to show an intent to grant a unilateral faculty to extend or renew a contract of lease to the lessee alone, or to the lessor alone for that matter. We hold that the above-quoted rulings in Koh v. Ongsiaco and Cruz  v. Alberto should be and are overruled. 15 In addition, even assuming that the clause "for as long as the defendant needed the premises and can meet and pay, said increases" gives private respondent an option to renew the lease, the same will be construed as providing for but one renewal or extension and, therefore, was satisfied when the lease was renewed in 1982 for another three (3) years. A general covenant to renew is satisfied by one renewal and will not be construed to confer the right to more than one renewal unless provision is clearly and expressly made for further renewals. 16Leases which may have been intended to be renewable in perpetuity will nevertheless be construed as importing but one renewal if  there is any uncertainty in that regard. 17 The case of Buccat vs. Dispo et al., 18 relied upon by responddent court, to support its holding that respondent lessee can legally stay on the premises for as long as he needs it and can pay the rents, is not in point. In said case, the lease contract provides for an indefinite period since it merely stipulates "(t)hat the lease contract shall remain in full force and effect as long as the land will serve the purpose for which it is intended as a school site of the National Business Institute, but the rentals now stipulated shall be subject to review every after ten (10) years by mutual agreement of the parties." This is in clear contrast to the case at bar wherein, to repeat, the lease is fixed at a period of  three (3) years although subject to renewal upon agreement of the parties, and the clause "for as long as defendant needs the premises and can meet and pay the rents" is not an independent stipulation but is controlled by said fixed term and the option for renewal upon agreement of both parties. On the second issue, we agree with petitioner that respondent court erred in holding that the action for ejectment is barred by res judicata. While it is true that a compromise agreement has the effect of res judicata this doctrine does not apply in the present case. It is elementary that for a judgment to be a bar to a subsequent case, (1) it must be a final judgment, (2) the court which rendered it had jurisdiction over the subject matter and the parties, (3) it must be a judgment on the merits, and (4) there must be identity between the two cases as to parties, subject matter and cause of action. 19 In the case at bar, the fourth requisite is lacking. Although there is identity of parties, there is no identity of subject matter and cause of action. The subject matter in the first ejectment case is the original lease contract while the subject matter in the case at bar is the lease created under the terms provided in the subsequent compromise

agreement. The lease executed in 1978 is one thing; the lease constituted in 1982 by the compromise agreement is another. There is also no identity, in the causes of action. The test generally applied to determine the identity of causes of action is to consider the identity of facts essential to their maintenance, or whether the same evidence would sustain both causes of action. 20 In the case at bar, the delict or the wrong in the first case is different from that in the second, and the evidence that will support and establish the cause of action in th e former will not suffice to support and establish that in the latter. In the first ejectment case, the cause of action was private respondent's refusal to comply with the lease contract which expired on December 31, 1978. In the present case, the cause of action is a similar refusal but with respect to the lease which expired in October, 1985 under the compromise agreement. While the compromise agreement may be res judicata as far as the cause of action and issues in the first ejectment case is concerned, any cause of action that arises from the application or violation of the compromise agreement cannot be said to have been settled in said first case. The compromise agreement was meant to settle, as it did only settle, the first case. It did not, as it could not, cover any cause of action that might arise thereafter, like the present case which was founded on the expiration of the lease in 1985, which necessarily requires a different set of evidence. The fact that the compromise agreement was judicially approved does not foreclose any cause of action arising from a violation of  the terms thereof. WHEREFORE, the decision of respondent Court of Appeals is REVERSED and SET ASIDE. Private respondent is hereby ordered to immediately vacate and return the possession of  the leased premises subject of the present action to petitioner and to pay the monthly rentals due thereon in accordance with the compromise agreement until he shall have actually vacated the same. This judgment is immediately executory. SO ORDERED. G.R. No. L-18456

November 30, 1963

CONRADO P. NAVARRO, plaintiff-appellee, vs. RUFINO G. PINEDA, RAMONA REYES, ET AL., defendants-appellants.

Deogracias Tañedo, Jr. for plaintiff-appellee. Renato A. Santos for defendants-appellants. PAREDES, J.:

On December 14, 1959, defendants Rufino G. Pineda and his mother Juana Gonzales (married to Gregorio Pineda), borrowed from plaintiff Conrado P. Navarro, the sum of  P2,500.00, payable 6 months after said date or on June 14, 1959. To secure the indebtedness, Rufino executed a document captioned "DEED OF REAL ESTATE and CHATTEL MORTGAGES", whereby Juana Gonzales, by way of  Real Estate Mortgage hypothecated a parcel of land, belonging to her, registered with the Register of 

Deeds of Tarlac, under Transfer Certificate of Title No. 25776, and Rufino G. Pineda, by  way of Chattel Mortgage, mortgaged his two-story residential house, having a floor area of 912 square meters, erected on a lot belonging to Atty. Vicente Castro, located at Bo. San Roque, Tarlac, Tarlac; and one motor truck, registered in his name, under Motor Vehicle Registration Certificate No. A-171806. Both mortgages were contained in one instrument, which was registered in both the Office of the Register of Deeds and the Motor Vehicles Office of Tarlac. When the mortgage debt became due and payable, the defendants, after demands made on them, failed to pay. They, however, asked and were granted extension up to June 30, 1960, within which to pay. Came June 30, defendants again failed to pay and, for the second time, asked for another extension, which was given, up to July 30, 1960. In the second extension, defendant Pineda in a document entitled "Promise", categorically stated that in the remote event he should fail to make good the obligation on such date (July 30, 1960), the defendant would no longer ask for further extension and there would be no need for any formal demand, and plaintiff could proceed to take whatever action he might desire to enforce his rights, under the said mortgage contract. In spite of said promise, defendants, failed and refused to pay the obligation. On August 10, 1960, plaintiff filed a complaint for foreclosure of the mortgage and for damages, which consisted of liquidated damages in the sum of P500.00 and 12% per annum interest on the principal, effective on the date of maturity, until fully paid. Defendants, answering the complaint, among others, stated — Defendants admit that the loan is overdue but deny that portion of paragraph 4 of  the First Cause of Action which states that the defendants unreasonably failed and refuse to pay their obligation to the plaintiff the truth being the defendants are hard up these days and pleaded to the plaintiff to grant them more time within which to pay their obligation and the plaintiff refused; WHEREFORE, in view of the foregoing it is most respectfully prayed that this Honorable Court render judgment granting the defendants until January 31, 1961, within which to pay their obligation to the plaintiff. On September 30, 1960, plaintiff presented a Motion for summary Judgment, claiming that the Answer failed to tender any genuine and material issue. The motion was set for hearing, but the record is not clear what ruling the lower court made on the said motion. On November 11, 1960, however, the parties submitted a Stipulation of F acts, wherein the defendants admitted the indebtedness, the authenticity and due execution of the Real Estate and Chattel Mortgages; that the indebtedness has been due and unpaid since June 14, 1960; that a liability of 12% per annum as interest was agreed, upon failure to pay the principal when due and P500.00 as liquidated damages; that the instrument had been registered in the Registry of Property and Motor Vehicles Office, both of the province of Tarlac; that the only issue in the case is whether or not the residential house, subject of the mortgage therein, can be considered a Chattel and the propriety of the attorney's fees. On February 24, 1961, the lower court held —

... WHEREFORE, this Court renders decision in this Case: (a) Dismissing the complaint with regard to defendant Gregorio Pineda; (b) Ordering defendants Juana Gonzales and the spouses Rufino Pineda and Ramon Reyes, to pay jointly and severally and within ninety (90) days from the receipt of the copy of this decision to the plaintiff Conrado P. Navarro the principal sum of P2,550.00 with 12% compounded interest per annum from June 14, 1960, until said principal sum and interests are fully paid, plus P500.00 as liquidated damages and the costs of this suit, with the warning that in default of said payment of the properties mentioned in the deed of real estate mortgage and chattel mortgage (Annex "A" to the complaint) be sold to realize said mortgage debt, interests, liquidated damages and costs, in accordance with the pertinent provisions of Act 3135, as amended by Act 4118, and Art. 14 of the Chattel Mortgage Law, Act 1508; and (c) Ordering the defendants Rufino Pineda and Ramona Reyes, to deliver immediately to the Provincial Sheriff of Tarlac the personal properties mentioned in said Annex "A", immediately after the lapse of the ninety (90) days abovementioned, in default of such payment. The above judgment was directly appealed to this Court, the defendants therein assigning only a single error, allegedly committed by the lower court, to wit — In holding that the deed of real estate and chattel mortgages appended to the complaint is valid, notwithstanding the fact that the house of the defendant Rufino G. Pineda was made the subject of the chattel mortgage, for the reason that it is erected on a land that belongs to a third person. Appellants contend that article 415 of the New Civil Code, in classifying a house as immovable property, makes no distinction whether the owner of the land is or not the owner of the building; the fact that the land belongs to another is immaterial, it is enough that the house adheres to the land; that in case of immovables by incorporation, such as houses, trees, plants, etc; the Code does not require that the attachment or incorporation be made by the owner of the land, the only criterion being the union or incorporation with the soil. In other words, it is claimed that "a building is an immovable property, irrespective of whether or not said structure and the land on which it is adhered to, belong to the same owner" (Lopez v. Orosa, G.R. Nos. L-10817-8, Feb. 28, 1958). (See also the case of Leung Yee v. Strong Machinery Co., 37 Phil. 644). Appellants argue that since only movables can be the subject of a chattel mortgage (sec. 1, Act No. 3952) then the mortgage in question which is the basis of the present action, cannot give rise to an action for foreclosure, because it is nullity. (Citing Associated Ins. Co., et al. v. Isabel Iya v. Adriano Valino, et al., L-10838, May 30, 1958.) The trial court did not predicate its decision declaring the deed of chattel mortgage valid solely on the ground that the house mortgaged was erected on the land which belonged to a third person, but also and principally on the doctrine of estoppel, in that "the parties have so expressly agreed " in the mortgage to consider the house as chattel "for its smallness and mixed materials of sawali and wood". In construing arts. 334 and 335 of 

the Spanish Civil Code (corresponding to arts. 415 and 416, N.C.C.), for purposes of the application of the Chattel Mortgage Law, it was held that under certain conditions, "a property may have a 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 whichby nature would be real property" (Standard Oil Co. of N.Y. v. Jaranillo, 44 Phil. 632-633)."There can not be any question that a building of mixed materials may be the subject of a chattel mortgage, in which case, it is considered as between the parties as personal property. ... The matter depends on the circumstances and the intention of  the parties". "Personal property may retain its character as such where it is so agreed by the parties interested even though annexed to the realty ...". (42 Am. Jur. 209-210, cited in Manarang, et al. v. Ofilada, et al., G.R. No. L-8133, May 18, 1956; 52 O.G. No. 8, p. 3954.) The view that parties to a deed of chattel mortgagee may agree to consider a house as personal property for the purposes of said contract, "is good only insofar as the contracting parties are concerned. It is based partly, upon the principles of estoppel ..." (Evangelista v. Alto Surety, No. L-11139, Apr. 23, 1958). In a case, a mortgage house built on a rented land , was held to be a personal property, not only because the deed of mortgage considered it as such, but also because it did not form part of the land (Evangelista v. Abad [CA];36 O.G. 2913), for it is now well settled that an object placed on land by one who has only a temporary right to the same, such as a lessee or usufructuary, does not become immobilized by attachment (Valdez v. Central Altagracia, 222 U.S. 58, cited in Davao Sawmill Co., Inc. v. Castillo, et al., 61 Phil. 709). Hence, if a house belonging to a person stands on a rented land belonging to another person, it may be mortgaged as a personal property is so stipulated in the document of mortgage. (Evangelista v. Abad, supra.) It should be noted, however, that the principle is predicated on statements by the owner declaring his house to be a chattel, a conduct that may conceivably estop him from subsequently claiming otherwise (Ladera, et al.. v. C. N. Hodges, et al., [CA]; 48 O.G. 5374). The doctrine, therefore, gathered from these cases is that although in some instances, a house of mixed materials has been considered as a chattel between them, has been recognized, it has been a constant criterion nevertheless that, with respect to third persons, who are not parties to the contract, and specially in execution proceedings, the house is considered as an immovable property (Art. 1431, New Civil Code). In the case at bar, the house in question was treated as personal or movable property, by the parties to the contract themselves. In the deed of chattel mortgage, appellant Rufino G. Pineda conveyed by way of "Chattel Mortgage" "my personal properties", a residential house and a truck. The mortgagor himself grouped the house with the truck, which is, inherently a movable property. The house which was not even declared for taxation purposes was small and made of light construction materials: G.I. sheets roofing, sawali and wooden walls and wooden posts; built on land belonging to another. The cases cited by appellants are not applicable to the present case. The Iya cases (L10837-38, supra), refer to a building or a house of strong materials, permanently adhered to the land, belonging to the owner of the house himself. In the case of Lopez  v. Orosa, (L-10817-18), the subject building was a theatre, built of materials worth more than P62,000, attached permanently to the soil. In these cases and in the Leung Yee case, supra, third persons assailed the validity of the deed of chattel mortgages; in the present case, it was one of the parties to the contract of mortgages who assailed its validity.