Credit Transactions Full Text Cases Atty. Adviento!!!!

"
CREDIT TRANSACTIONS
ARTS. 1395-1940
G.R. No. L-17474 October 25, 1962
REPUBLIC OF THE PHILIPPINES, pIaintiff-appeIIee,
vs.
JOSE V. BAGTAS, defendant,
FELICIDAD M. BAGTAS, Administratrix of the Intestate Estate Ieft by
the Iate Jose V. Bagtas, petitioner- appeIIant.
PADILLA, J.:
The Court of Appeals certified this case to this Court because only
questions of law are raised.
On 8 May 1948 Jose V. Bagtas borrowed from the Republic of the
Philippines through the Bureau of Animal ndustry three bulls: a Red
Sindhi with a book value of P1,176.46, a Bhagnari, of P1,320.56 and a
Sahiniwal, of P744.46, for a period of one year from 8 May 1948 to 7 May
1949 for breeding purposes subject to a government charge of breeding
fee of 10% of the book value of the bulls. Upon the expiration on 7 May
1949 of the contract, the borrower asked for a renewal for another period
of one year. However, the Secretary of Agriculture and Natural Resources
approved a renewal thereof of only one bull for another year from 8 May
1949 to 7 May 1950 and requested the return of the other two. On 25
March 1950 Jose V. Bagtas wrote to the Director of Animal ndustry that he
would pay the value of the three bulls. On 17 October 1950 he reiterated
his desire to buy them at a value with a deduction of yearly depreciation to
be approved by the Auditor General. On 19 October 1950 the Director of
Animal ndustry advised him that the book value of the three bulls could
not be reduced and that they either be returned or their book value paid
not later than 31 October 1950. Jose V. Bagtas failed to pay the book
value of the three bulls or to return them. So, on 20 December 1950 in the
Court of First nstance of Manila the Republic of the Philippines
commenced an action against him praying that he be ordered to return the
three bulls loaned to him or to pay their book value in the total sum of
P3,241.45 and the unpaid breeding fee in the sum of P199.62, both with
interests, and costs; and that other just and equitable relief be granted in
(civil No. 12818).
On 5 July 1951 Jose V. Bagtas, through counsel Navarro, Rosete and
Manalo, answered that because of the bad peace and order situation in
Cagayan Valley, particularly in the barrio of Baggao, and of the pending
appeal he had taken to the Secretary of Agriculture and Natural Resources
and the President of the Philippines from the refusal by the Director of
Animal ndustry to deduct from the book value of the bulls corresponding
yearly depreciation of 8% from the date of acquisition, to which
depreciation the Auditor General did not object, he could not return the
animals nor pay their value and prayed for the dismissal of the complaint.
After hearing, on 30 July 1956 the trial court render judgment
. . . sentencing the latter (defendant) to pay the sum of P3,625.09 the total
value of the three bulls plus the breeding fees in the amount of P626.17
with interest on both sums of (at) the legal rate from the filing of this
complaint and costs.
On 9 October 1958 the plaintiff moved ex parte for a writ of execution
which the court granted on 18 October and issued on 11 November 1958.
On 2 December 1958 granted an ex-parte motion filed by the plaintiff on
November 1958 for the appointment of a special sheriff to serve the writ
outside Manila. Of this order appointing a special sheriff, on 6 December
1958, Felicidad M. Bagtas, the surviving spouse of the defendant Jose
Bagtas who died on 23 October 1951 and as administratrix of his estate,
was notified. On 7 January 1959 she file a motion alleging that on 26 June
1952 the two bull Sindhi and Bhagnari were returned to the Bureau Animal
of ndustry and that sometime in November 1958 the third bull, the
Sahiniwal, died from gunshot wound inflicted during a Huk raid on
Hacienda Felicidad ntal, and praying that the writ of execution be
quashed and that a writ of preliminary injunction be issued. On 31 January
1959 the plaintiff objected to her motion. On 6 February 1959 she filed a
reply thereto. On the same day, 6 February, the Court denied her motion.
Hence, this appeal certified by the Court of Appeals to this Court as stated
at the beginning of this opinion.
t is true that on 26 June 1952 Jose M. Bagtas, Jr., son of the appellant by
the late defendant, returned the Sindhi and Bhagnari bulls to Roman
Remorin, Superintendent of the NVB Station, Bureau of Animal ndustry,
Bayombong, Nueva Vizcaya, as evidenced by a memorandum receipt
signed by the latter (Exhibit 2). That is why in its objection of 31 January
1959 to the appellant's motion to quash the writ of execution the appellee
prays "that another writ of execution in the sum of P859.53 be issued
against the estate of defendant deceased Jose V. Bagtas." She cannot be
held liable for the two bulls which already had been returned to and
received by the appellee.
The appellant contends that the Sahiniwal bull was accidentally killed
during a raid by the Huk in November 1953 upon the surrounding barrios
of Hacienda Felicidad ntal, Baggao, Cagayan, where the animal was kept,
and that as such death was due to force majeure she is relieved from the
duty of returning the bull or paying its value to the appellee. The contention
is without merit. The loan by the appellee to the late defendant Jose V.
Bagtas of the three bulls for breeding purposes for a period of one year
from 8 May 1948 to 7 May 1949, later on renewed for another year as
regards one bull, was subject to the payment by the borrower of breeding
fee of 10% of the book value of the bulls. The appellant contends that the
contract was commodatum and that, for that reason, as the appellee
retained ownership or title to the bull it should suffer its loss due to force
majeure. A contract ofcommodatum is essentially gratuitous.1 f the
breeding fee be considered a compensation, then the contract would be a
lease of the bull. Under article 1671 of the Civil Code the lessee would be
subject to the responsibilities of a possessor in bad faith, because she had
continued possession of the bull after the expiry of the contract. And even
if the contract be commodatum, still the appellant is liable, because article
1942 of the Civil Code provides that a bailee in a contract
of commodatum
. . . is liable for loss of the things, even if it should be through a fortuitous
event:
(2) f he keeps it longer than the period stipulated . . .
(3) f the thing loaned has been delivered with appraisal of its value,
unless there is a stipulation exempting the bailee from responsibility in
case of a fortuitous event;
The original period of the loan was from 8 May 1948 to 7 May 1949. The
loan of one bull was renewed for another period of one year to end on 8
May 1950. But the appellant kept and used the bull until November 1953
when during a Huk raid it was killed by stray bullets. Furthermore, when
lent and delivered to the deceased husband of the appellant the bulls had
each an appraised book value, to with: the Sindhi, at P1,176.46, the
Bhagnari at P1,320.56 and the Sahiniwal at P744.46. t was not stipulated
that in case of loss of the bull due to fortuitous event the late husband of
the appellant would be exempt from liability.
The appellant's contention that the demand or prayer by the appellee for
the return of the bull or the payment of its value being a money claim
should be presented or filed in the intestate proceedings of the defendant
who died on 23 October 1951, is not altogether without merit. However,
the claim that his civil personality having ceased to exist the trial court lost
jurisdiction over the case against him, is untenable, because section 17 of
Rule 3 of the Rules of Court provides that
After a party dies and the claim is not thereby extinguished, the court shall
order, upon proper notice, the legal representative of the deceased to
appear and to be substituted for the deceased, within a period of thirty (30)
days, or within such time as may be granted. . . .
and after the defendant's death on 23 October 1951 his counsel failed to
comply with section 16 of Rule 3 which provides that
Whenever a party to a pending case dies . . . it shall be the duty of his
attorney to inform the court promptly of such death . . . and to give the
name and residence of the executory administrator, guardian, or other
legal representative of the deceased . . . .
The notice by the probate court and its publication in the Voz de
Manila that Felicidad M. Bagtas had been issue letters of administration of
the estate of the late Jose Bagtas and that "all persons having claims for
monopoly against the deceased Jose V. Bagtas, arising from contract
express or implied, whether the same be due, not due, or contingent, for
funeral expenses and expenses of the last sickness of the said decedent,
and judgment for monopoly against him, to file said claims with the Clerk
of this Court at the City Hall Bldg., Highway 54, Quezon City, within six (6)
months from the date of the first publication of this order, serving a copy
thereof upon the aforementioned Felicidad M. Bagtas, the appointed
administratrix of the estate of the said deceased," is not a notice to the
court and the appellee who were to be notified of the defendant's death in
accordance with the above-quoted rule, and there was no reason for such
Credit Transactions Full Text Cases Atty. Adviento!!!!#
failure to notify, because the attorney who appeared for the defendant was
the same who represented the administratrix in the special proceedings
instituted for the administration and settlement of his estate. The appellee
or its attorney or representative could not be expected to know of the
death of the defendant or of the administration proceedings of his estate
instituted in another court that if the attorney for the deceased defendant
did not notify the plaintiff or its attorney of such death as required by the
rule.
As the appellant already had returned the two bulls to the appellee, the
estate of the late defendant is only liable for the sum of P859.63, the value
of the bull which has not been returned to the appellee, because it was
killed while in the custody of the administratrix of his estate. This is the
amount prayed for by the appellee in its objection on 31 January 1959 to
the motion filed on 7 January 1959 by the appellant for the quashing of the
writ of execution.
Special proceedings for the administration and settlement of the estate of
the deceased Jose V. Bagtas having been instituted in the Court of First
nstance of Rizal (Q-200), the money judgment rendered in favor of the
appellee cannot be enforced by means of a writ of execution but must be
presented to the probate court for payment by the appellant, the
administratrix appointed by the court.
ACCORDNGLY, the writ of execution appealed from is set aside, without
pronouncement as to costs.
G.R. No. L-8321 October 14, 1913
ALEJANDRA MINA, ET AL., pIaintiffs-appeIIants,
vs.
RUPERTA PASCUAL, ET AL., defendants-appeIIees.
ARELLANO, C.J.:
Francisco Fontanilla and Andres Fontanilla were brothers. Francisco
Fontanilla acquired during his lifetime, on March 12, 1874, a lot in the
center of the town of Laoag, the capital of the Province of locos Norte, the
property having been awarded to him through its purchase at a public
auction held by the alcalde mayor of that province. The lot has a frontage
of 120 meters and a depth of 15.
Andres Fontanilla, with the consent of his brother Francisco, erected
a warehouse on a part of the said lot, embracing 14 meters of its frontage
by 11 meters of its depth.
Francisco Fontanilla, the former owner of the lot, being dead, the
herein plaintiffs, Alejandro Mina, et al., were recognized without discussion
as his heirs.
Andres Fontanilla, the former owner of the warehouse, also having
died, the children of Ruperta Pascual were recognized likes without
discussion, though it is not said how, and consequently are entitled to the
said building, or rather, as Ruperta Pascual herself stated, to only six-
sevenths of one-half of it, the other half belonging, as it appears, to the
plaintiffs themselves, and the remaining one-seventh of the first one-half to
the children of one of the plaintiffs, Elena de Villanueva. The fact is that
the plaintiffs and the defendants are virtually, to all appearance, the
owners of the warehouse; while the plaintiffs are undoubtedly, the owners
of the part of the lot occupied by that building, as well as of the remainder
thereof.
This was the state of affairs, when, on May 6, 1909, Ruperta
Pascual, as the guardian of her minor children, the herein defendants,
petitioned the Curt of First nstance of locos Norte for authorization to sell
"the six-sevenths of the one-half of the warehouse, of 14 by 11 meters,
together with its lot." The plaintiffs that is Alejandra Mina, et al.
opposed the petition of Ruperta Pascual for the reason that the latter had
included therein the lot occupied by the warehouse, which they claimed
was their exclusive property. All this action was taken in a special
proceeding in re guardianship.
The plaintiffs did more than oppose Pascual's petition; they
requested the court, through motion, to decide the question of the
ownership of the lot before it pass upon the petition for the sale of the
warehouse. But the court before determining the matter of the ownership
of the lot occupied by the warehouse, ordered the sale of this building,
saying:
While the trial continues with respect to the ownership of the lot, the
court orders the sale at public auction of the said warehouse and of the lot
on which it is built, with the present boundaries of the land and condition of
the building, at a price of not less than P2,890 Philippine currency . . . .
So, the warehouse, together with the lot on which it stands, was
sold to Cu Joco, the other defendant in this case, for the price mentioned.
The plaintiffs insisted upon a decision of the question of the
ownership of the lot, and the court decided it by holding that this land
belonged to the owner of the warehouse which had been built thereon
thirty years before.
The plaintiffs appealed and this court reversed the judgment of the
lower court and held that the appellants were the owners of the lot in
question. 1
When the judgment became final and executory, a writ of execution
issued and the plaintiffs were given possession of the lot; but soon
thereafter the trial court annulled this possession for the reason that it
affected Cu Joco, who had not been a party to the suit in which that writ
was served.
t was then that the plaintiffs commenced the present action for the
purpose of having the sale of the said lot declared null and void and of no
force and effect.
An agreement was had ad to the facts, the ninth paragraph of which
is as follows:
9. That the herein plaintiffs excepted to the judgment and appealed
therefrom to the Supreme Court which found for them by holding that they
are the owners of the lot in question, although there existed and still exists
a commodatum by virtue of which the guardianship (meaning
the defendants) had and has the use, and the plaintiffs the ownership, of
the property, with no finding concerning the decree of the lower court that
ordered the sale.
The obvious purport of the cause "although there existed and still
exists a commodatum," etc., appears to be that it is a part of the decision
of the Supreme Court and that, while finding the plaintiffs to be the owners
of the lot, we recognized in principle the existence of a commodatum
under which the defendants held the lot. Nothing could be more inexact.
Possibly, also, the meaning of that clause is that, notwithstanding the
finding made by the Supreme Court that the plaintiffs were the owners,
these former and the defendants agree that there existed, and still exists,
a commodatum, etc. But such an agreement would not affect the truth of
the contents of the decision of this court, and the opinions held by the
litigants in regard to this point could have no bearing whatever on the
present decision.
Nor did the decree of the lower court that ordered the sale have the
least influence in our previous decision to require our making any finding
in regard thereto, for, with or without that decree, the Supreme Court had
to decide the ownership of the lot consistently with its titles and not in
accordance with the judicial acts or proceedings had prior to the setting up
of the issue in respect to the ownership of the property that was the
subject of the judicial decree.
What is essentially pertinent to the case is the fact that the
defendant agree that the plaintiffs have the ownership, and they
themselves only the use, of the said lot.
On this premise, the nullity of the sale of the lot is in all respects
quite evident, whatsoever be the manner in which the sale was effected,
whether judicially or extrajudicially.
He who has only the use of a thing cannot validly sell the thing itself.
The effect of the sale being a transfer of the ownership of the thing, it is
evident that he who has only the mere use of the thing cannot transfer its
ownership. The sale of a thing effected by one who is not its owner is null
and void. The defendants never were the owners of the lot sold. The sale
of it by them is necessarily null and void. On cannot convey to another
what he has never had himself.
The returns of the auction contain the following statements:
, Ruperta Pascual, the guardian of the minors, etc., by virtue of the
authorization conferred upon me on the 31st of July, 1909, by the Court of
First nstance of locos Norte, proceeded with the sale at public auction of
the six-sevenths part of the one-half of the warehouse constructed of
rubble stone, etc.
Credit Transactions Full Text Cases Atty. Adviento!!!!$
Whereas , Ruperta Pascual, the guardian of the minors, etc., sold
at public auction all the land and all the rights title, interest, and ownership
in the said property to Cu Joco, who was the highest bidder, etc.
Therefore, . . . cede and deliver forever to the said purchaser, Cu
Joco, his heirs and assigns, all the interest, ownership and inheritance
rights and others that, as the guardian of the said minors, have and may
have in the said property, etc.
The purchaser could not acquire anything more than the interest
that might be held by a person to whom realty in possession of the vendor
might be sold, for at a judicial auction nothing else is disposed of. What
the minor children of Ruperta Pascual had in their possession was the
ownership of the six-sevenths part of one-half of the warehouse and the
use of the lot occupied by his building. This, and nothing more, could the
Chinaman Cu Joco acquire at that sale: not the ownership of the lot;
neither the other half, nor the remaining one-seventh of the said first half,
of the warehouse. Consequently, the sale made to him of this one-seventh
of one-half and the entire other half of the building was null and void, and
likewise with still more reason the sale of the lot the building occupies.
The purchaser could and should have known what it was that was
offered for sale and what it was that he purchased. There is nothing that
can justify the acquisition by the purchaser of the warehouse of the
ownership of the lot that this building occupies, since the minors
represented by Ruperta Pascual never were the owners of the said lot, nor
were they ever considered to be such.
The trial court, in the judgment rendered, held that there were no
grounds for the requested annulment of the sale, and that the plaintiffs
were entitled to the P600 deposited with the clerk of the court as the value
of the lot in question. The defendants, Ruperta Pascual and the Chinaman
Cu Joco, were absolved from the complaint, without express finding as to
costs.
The plaintiffs cannot be obliged to acquiesce in or allow the sale
made and be compelled to accept the price set on the lot by expert
appraisers, not even though the plaintiffs be considered as coowner of the
warehouse. t would be much indeed that, on the ground of coownership,
they should have to abide by and tolerate the sale of the said building,
which point this court does not decide as it is not a question submitted to
us for decision, but, as regards the sale of the lot, it is in all respects
impossible to hold that the plaintiffs must abide by it and tolerate, it, and
this conclusion is based on the fact that they did not give their consent
(art. 1261, Civil Code), and only the contracting parties who have given it
are obliged to comply (art. 1091, idem).
The sole purpose of the action in the beginning was to obtain an
annulment of the sale of the lot; but subsequently the plaintiffs, through
motion, asked for an amendment by their complaint in the sense that the
action should be deemed to be one for the recovery of possession of a lot
and for the annulment of its sale. The plaintiff's petition was opposed by
the defendant's attorney, but was allowed by the court; therefore the
complaint seeks, after the judicial annulment of the sale of the lot, to have
the defendants sentenced immediately to deliver the same to the plaintiffs.
Such a finding appears to be in harmony with the decision rendered
by the Supreme Court in previous suit, wherein it was held that the
ownership of the lot lay in the plaintiffs, and for this reason steps were
taken to give possession thereof to the defendants; but, as the purchaser
Cu Joco was not a party to that suit, the present action is strictly one for
recover against Cu Joco to compel him, once the sale has been annulled,
to deliver the lot to its lawful owners, the plaintiffs.
As respects this action for recovery, this Supreme Court finds:
1. That it is a fact admitted by the litigating parties, both in this and in the
previous suit, that Andres Fontanilla, the defendants' predecessor in
interest, erected the warehouse on the lot, some thirty years ago, with the
explicit consent of his brother Francisco Fontanilla, the plaintiff's
predecessor in interest.
2. That it also appears to be an admitted fact that the plaintiffs and the
defendants are the coowners of the warehouse.
3. That it is a fact explicitly admitted in the agreement, that neither Andres
Fontanilla nor his successors paid any consideration or price whatever for
the use of the lot occupied by the said building; whence it is, perhaps, that
both parties have denominated that use a commodatum.
Upon the premise of these facts, or even merely upon that of the
first of them, the sentencing of the defendants to deliver the lot to the
plaintiffs does not follow as a necessary corollary of the judicial declaration
of ownership made in the previous suit, nor of that of the nullity of the sale
of the lot, made in the present case.
The defendants do not hold lawful possession of the lot in
question.1awphil.net
But, although both litigating parties may have agreed in their idea of
the commodatum, on account of its not being, as indeed it is not, a
question of fact but of law, yet that denomination given by them to the use
of the lot granted by Francisco Fontanilla to his brother, Andres Fontanilla,
is not acceptable. Contracts are not to be interpreted in conformity with the
name that the parties thereto agree to give them, but must be construed,
duly considering their constitutive elements, as they are defined and
denominated by law.
By the contract of loan, one of the parties delivers to the other,
either anything not perishable, in order that the latter may use it during
the certain period and return it to the former, in which case it is
calledcommodatum . . . (art. 1740, Civil Code).
t is, therefore, an essential feature of the commodatum that the use
of the thing belonging to another shall for a certain period. Francisco
Fontanilla did not fix any definite period or time during which Andres
Fontanilla could have the use of the lot whereon the latter was to erect a
stone warehouse of considerable value, and so it is that for the past thirty
years of the lot has been used by both Andres and his successors in
interest. The present contention of the plaintiffs that Cu Joco, now in
possession of the lot, should pay rent for it at the rate of P5 a month,
would destroy the theory of the commodatum sustained by them, since,
according to the second paragraph of the aforecited article 1740,
"commodatum is essentially gratuitous," and, if what the plaintiffs
themselves aver on page 7 of their brief is to be believed, it never entered
Francisco's mind to limit the period during which his brother Andres was to
have the use of the lot, because he expected that the warehouse would
eventually fall into the hands of his son, Fructuoso Fontanilla, called the
adopted son of Andres, which did not come to pass for the reason that
Fructuoso died before his uncle Andres. With that expectation in view, it
appears more likely that Francisco intended to allow his brother Andres a
surface right; but this right supposes the payment of an annual rent, and
Andres had the gratuitous use of the lot.
Hence, as the facts aforestated only show that a building was
erected on another's ground, the question should be decided in
accordance with the statutes that, thirty years ago, governed accessions
to real estate, and which were Laws 41 and 42, title 28, of the
third Partida, nearly identical with the provisions of articles 361 and 362 of
the Civil Code. So, then, pursuant to article 361, the owner of the land on
which a building is erected in good faith has a right to appropriate such
edifice to himself, after payment of the indemnity prescribed in articles 453
and 454, or to oblige the builder to pay him the value of the land. Such,
and no other, is the right to which the plaintiff are entitled.
For the foregoing reasons, it is only necessary to annul the sale of
the said lot which was made by Ruperta Pascual, in representation of her
minor children, to Cu Joco, and to maintain the latter in the use of the lot
until the plaintiffs shall choose one or the other of the two rights granted
them by article 361 of the Civil Code.1awphil.net
The judgment appealed from is reversed and the sale of the lot in
question is held to be null and void and of no force or effect. No special
finding is made as to the costs of both instances.
G.R. No. 80294-95 September 21, 1988
CATHOLIC VICAR APOSTOLIC OF THE MOUNTAIN
PROVINCE, petitioner,
vs.
COURT OF APPEALS, HEIRS OF EGMIDIO OCTAVIANO AND JUAN
VALDEZ, respondents.
GANCAYCO, J.:
The principal issue in this case is whether or not a decision of the Court of
Appeals promulgated a long time ago can properly be considered res
judicata by respondent Court of Appeals in the present two cases between
petitioner and two private respondents.
Petitioner questions as allegedly erroneous the Decision dated August 31,
1987 of the Ninth Division of Respondent Court of Appeals 1 in CA-G.R.
No. 05148 [Civil Case No. 3607 (419)] and CA-G.R. No. 05149 [Civil Case
No. 3655 (429)], both for Recovery of Possession, which affirmed the
Credit Transactions Full Text Cases Atty. Adviento!!!!%
Decision of the Honorable Nicodemo T. Ferrer, Judge of the Regional Trial
Court of Baguio and Benguet in Civil Case No. 3607 (419) and Civil Case
No. 3655 (429), with the dispositive portion as follows:
WHEREFORE, Judgment is hereby rendered ordering the defendant,
Catholic Vicar Apostolic of the Mountain Province to return and surrender
Lot 2 of Plan Psu-194357 to the plaintiffs. Heirs of Juan Valdez, and Lot 3
of the same Plan to the other set of plaintiffs, the Heirs of Egmidio
Octaviano (Leonardo Valdez, et al.). For lack or insufficiency of evidence,
the plaintiffs' claim or damages is hereby denied. Said defendant is
ordered to pay costs. (p. 36, Rollo)
Respondent Court of Appeals, in affirming the trial court's decision,
sustained the trial court's conclusions that the Decision of the Court of
Appeals, dated May 4,1977 in CA-G.R. No. 38830-R, in the two cases
affirmed by the Supreme Court, touched on the ownership of lots 2 and 3
in question; that the two lots were possessed by the predecessors-in-
interest of private respondents under claim of ownership in good faith from
1906 to 1951; that petitioner had been in possession of the same lots as
bailee in commodatum up to 1951, when petitioner repudiated the trust
and when it applied for registration in 1962; that petitioner had just been in
possession as owner for eleven years, hence there is no possibility of
acquisitive prescription which requires 10 years possession with just title
and 30 years of possession without; that the principle of res judicata on
these findings by the Court of Appeals will bar a reopening of these
questions of facts; and that those facts may no longer be altered.
Petitioner's motion for reconsideation of the respondent appellate court's
Decision in the two aforementioned cases (CA G.R. No. CV-05418 and
05419) was denied.
The facts and background of these cases as narrated by the trail court are
as follows
... The documents and records presented reveal that the whole
controversy started when the defendant Catholic Vicar Apostolic of the
Mountain Province (VCAR for brevity) filed with the Court of First nstance
of Baguio Benguet on September 5, 1962 an application for registration of
title over Lots 1, 2, 3, and 4 in Psu-194357, situated at Poblacion Central,
La Trinidad, Benguet, docketed as LRC N-91, said Lots being the sites of
the Catholic Church building, convents, high school building, school
gymnasium, school dormitories, social hall, stonewalls, etc. On March 22,
1963 the Heirs of Juan Valdez and the Heirs of Egmidio Octaviano filed
their Answer/Opposition on Lots Nos. 2 and 3, respectively, asserting
ownership and title thereto. After trial on the merits, the land registration
court promulgated its Decision, dated November 17, 1965, confirming the
registrable title of VCAR to Lots 1, 2, 3, and 4.
The Heirs of Juan Valdez (plaintiffs in the herein Civil Case No. 3655) and
the Heirs of Egmidio Octaviano (plaintiffs in the herein Civil Case No.
3607) appealed the decision of the land registration court to the then Court
of Appeals, docketed as CA-G.R. No. 38830-R. The Court of Appeals
rendered its decision, dated May 9, 1977, reversing the decision of the
land registration court and dismissing the VCAR's application as to Lots 2
and 3, the lots claimed by the two sets of oppositors in the land
registration case (and two sets of plaintiffs in the two cases now at bar),
the first lot being presently occupied by the convent and the second by the
women's dormitory and the sister's convent.
On May 9, 1977, the Heirs of Octaviano filed a motion for reconsideration
praying the Court of Appeals to order the registration of Lot 3 in the names
of the Heirs of Egmidio Octaviano, and on May 17, 1977, the Heirs of Juan
Valdez and Pacita Valdez filed their motion for reconsideration praying that
both Lots 2 and 3 be ordered registered in the names of the Heirs of Juan
Valdez and Pacita Valdez. On August 12,1977, the Court of Appeals
denied the motion for reconsideration filed by the Heirs of Juan Valdez on
the ground that there was "no sufficient merit to justify reconsideration one
way or the other ...," and likewise denied that of the Heirs of Egmidio
Octaviano.
Thereupon, the VCAR filed with the Supreme Court a petition for review
on certiorari of the decision of the Court of Appeals dismissing his (its)
application for registration of Lots 2 and 3, docketed as G.R. No. L-46832,
entitled 'Catholic Vicar Apostolic of the Mountain Province vs. Court of
Appeals and Heirs of Egmidio Octaviano.'
From the denial by the Court of Appeals of their motion for reconsideration
the Heirs of Juan Valdez and Pacita Valdez, on September 8, 1977, filed
with the Supreme Court a petition for review, docketed as G.R. No. L-
46872, entitled, Heirs of Juan Valdez and Pacita Valdez vs. Court of
Appeals, Vicar, Heirs of Egmidio Octaviano and Annable O. Valdez.
On January 13, 1978, the Supreme Court denied in a minute resolution
both petitions (of VCAR on the one hand and the Heirs of Juan Valdez
and Pacita Valdez on the other) for lack of merit. Upon the finality of both
Supreme Court resolutions in G.R. No. L-46832 and G.R. No. L- 46872,
the Heirs of Octaviano filed with the then Court of First nstance of Baguio,
Branch , a Motion For Execution of Judgment praying that the Heirs of
Octaviano be placed in possession of Lot 3. The Court, presided over by
Hon. Salvador J. Valdez, on December 7, 1978, denied the motion on the
ground that the Court of Appeals decision in CA-G.R. No. 38870 did not
grant the Heirs of Octaviano any affirmative relief.
On February 7, 1979, the Heirs of Octaviano filed with the Court of
Appeals a petitioner for certiorari and mandamus, docketed as CA-G.R.
No. 08890-R, entitled Heirs of Egmidio Octaviano vs. Hon. Salvador J.
Valdez, Jr. and Vicar. n its decision dated May 16, 1979, the Court of
Appeals dismissed the petition.
t was at that stage that the instant cases were filed. The Heirs of Egmidio
Octaviano filed Civil Case No. 3607 (419) on July 24, 1979, for recovery of
possession of Lot 3; and the Heirs of Juan Valdez filed Civil Case No.
3655 (429) on September 24, 1979, likewise for recovery of possession of
Lot 2 (Decision, pp. 199-201, Orig. Rec.).
n Civil Case No. 3607 (419) trial was held. The plaintiffs Heirs of Egmidio
Octaviano presented one (1) witness, Fructuoso Valdez, who testified on
the alleged ownership of the land in question (Lot 3) by their predecessor-
in-interest, Egmidio Octaviano (Exh. C ); his written demand (Exh. BB-
4 ) to defendant Vicar for the return of the land to them; and the
reasonable rentals for the use of the land at P10,000.00 per month. On the
other hand, defendant Vicar presented the Register of Deeds for the
Province of Benguet, Atty. Nicanor Sison, who testified that the land in
question is not covered by any title in the name of Egmidio Octaviano or
any of the plaintiffs (Exh. 8). The defendant dispensed with the testimony
of Mons.William Brasseur when the plaintiffs admitted that the witness if
called to the witness stand, would testify that defendant Vicar has been in
possession of Lot 3, for seventy-five (75) years continuously and
peacefully and has constructed permanent structures thereon.
n Civil Case No. 3655, the parties admitting that the material facts are not
in dispute, submitted the case on the sole issue of whether or not the
decisions of the Court of Appeals and the Supreme Court touching on the
ownership of Lot 2, which in effect declared the plaintiffs the owners of the
land constitute res judicata.
n these two cases , the plaintiffs arque that the defendant Vicar is barred
from setting up the defense of ownership and/or long and continuous
possession of the two lots in question since this is barred by prior
judgment of the Court of Appeals in CA-G.R. No. 038830-R under the
principle of res judicata. Plaintiffs contend that the question of possession
and ownership have already been determined by the Court of Appeals
(Exh. C, Decision, CA-G.R. No. 038830-R) and affirmed by the Supreme
Court (Exh. 1, Minute Resolution of the Supreme Court). On his part,
defendant Vicar maintains that the principle of res judicata would not
prevent them from litigating the issues of long possession and ownership
because the dispositive portion of the prior judgment in CA-G.R. No.
038830-R merely dismissed their application for registration and titling of
lots 2 and 3. Defendant Vicar contends that only the dispositive portion of
the decision, and not its body, is the controlling pronouncement of the
Court of Appeals. 2
The alleged errors committed by respondent Court of Appeals according to
petitioner are as follows:
1. ERROR N APPLYNG LAW OF THE CASE AND RES JUDICATA;
2. ERROR N FNDNG THAT THE TRAL COURT RULED THAT LOTS 2
AND 3 WERE ACQURED BY PURCHASE BUT WTHOUT
DOCUMENTARY EVDENCE PRESENTED;
3. ERROR N FNDNG THAT PETTONERS' CLAM T PURCHASED
LOTS 2 AND 3 FROM VALDEZ AND OCTAVANO WAS AN MPLED
ADMSSON THAT THE FORMER OWNERS WERE VALDEZ AND
OCTAVANO;
4. ERROR N FNDNG THAT T WAS PREDECESSORS OF PRVATE
RESPONDENTS WHO WERE N POSSESSON OF LOTS 2 AND 3 AT
LEAST FROM 1906, AND NOT PETTONER;
5. ERROR N FNDNG THAT VALDEZ AND OCTAVANO HAD FREE
PATENT APPLCATONS AND THE PREDECESSORS OF PRVATE
RESPONDENTS ALREADY HAD FREE PATENT APPLCATONS SNCE
1906;
Credit Transactions Full Text Cases Atty. Adviento!!!!&
6. ERROR N FNDNG THAT PETTONER DECLARED LOTS 2 AND 3
ONLY N 1951 AND JUST TTLE S A PRME NECESSTY UNDER
ARTCLE 1134 N RELATON TO ART. 1129 OF THE CVL CODE FOR
ORDNARY ACQUSTVE PRESCRPTON OF 10 YEARS;
7. ERROR N FNDNG THAT THE DECSON OF THE COURT OF
APPEALS N CA G.R. NO. 038830 WAS AFFRMED BY THE SUPREME
COURT;
8. ERROR N FNDNG THAT THE DECSON N CA G.R. NO. 038830
TOUCHED ON OWNERSHP OF LOTS 2 AND 3 AND THAT PRVATE
RESPONDENTS AND THER PREDECESSORS WERE N
POSSESSON OF LOTS 2 AND 3 UNDER A CLAM OF OWNERSHP N
GOOD FATH FROM 1906 TO 1951;
9. ERROR N FNDNG THAT PETTONER HAD BEEN N POSSESSON
OF LOTS 2 AND 3 MERELY AS BALEE BOR ROWER) N
COMMODATUM, A GRATUTOUS LOAN FOR USE;
10. ERROR N FNDNG THAT PETTONER S A POSSESSOR AND
BULDER N GOOD FATH WTHOUT RGHTS OF RETENTON AND
REMBURSEMENT AND S BARRED BY THE FNALTY AND
CONCLUSVENESS OF THE DECSON N CA G.R. NO. 038830. 3
The petition is bereft of merit.
Petitioner questions the ruling of respondent Court of Appeals in CA-G.R.
Nos. 05148 and 05149, when it clearly held that it was in agreement with
the findings of the trial court that the Decision of the Court of Appeals
dated May 4,1977 in CA-G.R. No. 38830-R, on the question of ownership
of Lots 2 and 3, declared that the said Court of Appeals Decision CA-G.R.
No. 38830-R) did not positively declare private respondents as owners of
the land, neither was it declared that they were not owners of the land, but
it held that the predecessors of private respondents were possessors of
Lots 2 and 3, with claim of ownership in good faith from 1906 to 1951.
Petitioner was in possession as borrower in commodatum up to 1951,
when it repudiated the trust by declaring the properties in its name for
taxation purposes. When petitioner applied for registration of Lots 2 and 3
in 1962, it had been in possession in concept of owner only for eleven
years. Ordinary acquisitive prescription requires possession for ten years,
but always with just title. Extraordinary acquisitive prescription requires 30
years. 4
On the above findings of facts supported by evidence and evaluated by
the Court of Appeals in CA-G.R. No. 38830-R, affirmed by this Court, We
see no error in respondent appellate court's ruling that said findings
are res judicata between the parties. They can no longer be altered by
presentation of evidence because those issues were resolved with finality
a long time ago. To ignore the principle of res judicata would be to open
the door to endless litigations by continuous determination of issues
without end.
An examination of the Court of Appeals Decision dated May 4, 1977, First
Division 5 in CA-G.R. No. 38830-R, shows that it reversed the trial court's
Decision 6 finding petitioner to be entitled to register the lands in question
under its ownership, on its evaluation of evidence and conclusion of facts.
The Court of Appeals found that petitioner did not meet the requirement of
30 years possession for acquisitive prescription over Lots 2 and 3. Neither
did it satisfy the requirement of 10 years possession for ordinary
acquisitive prescription because of the absence of just title. The appellate
court did not believe the findings of the trial court that Lot 2 was acquired
from Juan Valdez by purchase and Lot 3 was acquired also by purchase
from Egmidio Octaviano by petitioner Vicar because there was absolutely
no documentary evidence to support the same and the alleged purchases
were never mentioned in the application for registration.
By the very admission of petitioner Vicar, Lots 2 and 3 were owned by
Valdez and Octaviano. Both Valdez and Octaviano had Free Patent
Application for those lots since 1906. The predecessors of private
respondents, not petitioner Vicar, were in possession of the questioned
lots since 1906.
There is evidence that petitioner Vicar occupied Lots 1 and 4, which are
not in question, but not Lots 2 and 3, because the buildings standing
thereon were only constructed after liberation in 1945. Petitioner Vicar only
declared Lots 2 and 3 for taxation purposes in 1951. The improvements oil
Lots 1, 2, 3, 4 were paid for by the Bishop but said Bishop was appointed
only in 1947, the church was constructed only in 1951 and the new
convent only 2 years before the trial in 1963.
When petitioner Vicar was notified of the oppositor's claims, the parish
priest offered to buy the lot from Fructuoso Valdez. Lots 2 and 3 were
surveyed by request of petitioner Vicar only in 1962.
Private respondents were able to prove that their predecessors' house
was borrowed by petitioner Vicar after the church and the convent were
destroyed. They never asked for the return of the house, but when they
allowed its free use, they became bailors in commodatum and the
petitioner the bailee. The bailees' failure to return the subject matter
of commodatum to the bailor did not mean adverse possession on the part
of the borrower. The bailee held in trust the property subject matter of
commodatum. The adverse claim of petitioner came only in 1951 when it
declared the lots for taxation purposes. The action of petitioner Vicar by
such adverse claim could not ripen into title by way of ordinary acquisitive
prescription because of the absence of just title.
The Court of Appeals found that the predecessors-in-interest and private
respondents were possessors under claim of ownership in good faith from
1906; that petitioner Vicar was only a bailee in commodatum; and that the
adverse claim and repudiation of trust came only in 1951.
We find no reason to disregard or reverse the ruling of the Court of
Appeals in CA-G.R. No. 38830-R. ts findings of fact have become
incontestible. This Court declined to review said decision, thereby in effect,
affirming it. t has become final and executory a long time ago.
Respondent appellate court did not commit any reversible error, much less
grave abuse of discretion, when it held that the Decision of the Court of
Appeals in CA-G.R. No. 38830-R is governing, under the principle of res
judicata, hence the rule, in the present cases CA-G.R. No. 05148 and CA-
G.R. No. 05149. The facts as supported by evidence established in that
decision may no longer be altered.
WHEREFORE AND BY REASON OF THE FOREGONG, this petition is
DENED for lack of merit, the Decision dated Aug. 31, 1987 in CA-G.R.
Nos. 05148 and 05149, by respondent Court of Appeals is AFFRMED,
with costs against petitioner.
SO ORDERED.
REPUBLIC VS. CA not found
ARTS. 1641- 1945
G.R. No. L-46240 November 3, 1939
MARGARITA QUINTOS and ANGEL A. ANSALDO, pIaintiffs-
appeIIants,
vs.
BECK, defendant-appeIIee.
IMPERIAL, J.:
The plaintiff brought this action to compel the defendant to return
her certain furniture which she lent him for his use. She appealed from the
judgment of the Court of First nstance of Manila which ordered that the
defendant return to her the three has heaters and the four electric lamps
found in the possession of the Sheriff of said city, that she call for the other
furniture from the said sheriff of Manila at her own expense, and that the
fees which the Sheriff may charge for the deposit of the furniture be
paid pro rata by both parties, without pronouncement as to the costs.
The defendant was a tenant of the plaintiff and as such occupied the
latter's house on M. H. del Pilar street, No. 1175. On January 14, 1936,
upon the novation of the contract of lease between the plaintiff and the
defendant, the former gratuitously granted to the latter the use of the
furniture described in the third paragraph of the stipulation of facts, subject
to the condition that the defendant would return them to the plaintiff upon
the latter's demand. The plaintiff sold the property to Maria Lopez and
Rosario Lopez and on September 14, 1936, these three notified the
defendant of the conveyance, giving him sixty days to vacate the premises
under one of the clauses of the contract of lease. There after the plaintiff
required the defendant to return all the furniture transferred to him for them
in the house where they were found. On November 5, 1936, the
defendant, through another person, wrote to the plaintiff reiterating that
she may call for the furniture in the ground floor of the house. On the 7th
of the same month, the defendant wrote another letter to the plaintiff
informing her that he could not give up the three gas heaters and the four
electric lamps because he would use them until the 15th of the same
month when the lease in due to expire. The plaintiff refused to get the
furniture in view of the fact that the defendant had declined to make
delivery of all of them. On November 15th, before vacating the
Credit Transactions Full Text Cases Atty. Adviento!!!!'
house, the defendant deposited with the Sheriff all the furniture belonging
to the plaintiff and they are now on deposit in the warehouse situated at
No. 1521, Rizal Avenue, in the custody of the said sheriff.
n their seven assigned errors the plaintiffs contend that the trial
court incorrectly applied the law: in holding that they violated the contract
by not calling for all the furniture on November 5, 1936, when the
defendant placed them at their disposal; in not ordering the defendant to
pay them the value of the furniture in case they are not delivered; in
holding that they should get all the furniture from the Sheriff at their
expenses; in ordering them to pay-half of the expenses claimed by the
Sheriff for the deposit of the furniture; in ruling that both parties should pay
their respective legal expenses or the costs; and in denying pay their
respective legal expenses or the costs; and in denying the motions for
reconsideration and new trial. To dispose of the case, it is only necessary
to decide whether the defendant complied with his obligation to return the
furniture upon the plaintiff's demand; whether the latter is bound to bear
the deposit fees thereof, and whether she is entitled to the costs of
litigation.lawphi1.net
The contract entered into between the parties is one
of commadatum, because under it the plaintiff gratuitously granted the use
of the furniture to the defendant, reserving for herself the ownership
thereof; by this contract the defendant bound himself to return the furniture
to the plaintiff, upon the latters demand (clause 7 of the contract, Exhibit A;
articles 1740, paragraph 1, and 1741 of the Civil Code). The obligation
voluntarily assumed by the defendant to return the furniture upon the
plaintiff's demand, means that he should return all of them to the plaintiff at
the latter's residence or house. The defendant did not comply with this
obligation when he merely placed them at the disposal of the plaintiff,
retaining for his benefit the three gas heaters and the four eletric lamps.
The provisions of article 1169 of the Civil Code cited by counsel for the
parties are not squarely applicable. The trial court, therefore, erred when it
came to the legal conclusion that the plaintiff failed to comply with her
obligation to get the furniture when they were offered to her.
As the defendant had voluntarily undertaken to return all the
furniture to the plaintiff, upon the latter's demand, the Court could not
legally compel her to bear the expenses occasioned by the deposit of the
furniture at the defendant's behest. The latter, as bailee, was not entitled to
place the furniture on deposit; nor was the plaintiff under a duty to accept
the offer to return the furniture, because the defendant wanted to retain the
three gas heaters and the four electric lamps.
As to the value of the furniture, we do not believe that the plaintiff is
entitled to the payment thereof by the defendant in case of his inability to
return some of the furniture because under paragraph 6 of the stipulation
of facts, the defendant has neither agreed to nor admitted the correctness
of the said value. Should the defendant fail to deliver some of the furniture,
the value thereof should be latter determined by the trial Court through
evidence which the parties may desire to present.
The costs in both instances should be borne by the defendant
because the plaintiff is the prevailing party (section 487 of the Code of Civil
Procedure). The defendant was the one who breached the contract
ofcommodatum, and without any reason he refused to return and deliver
all the furniture upon the plaintiff's demand. n these circumstances, it is
just and equitable that he pay the legal expenses and other judicial costs
which the plaintiff would not have otherwise defrayed.
The appealed judgment is modified and the defendant is ordered to
return and deliver to the plaintiff, in the residence to return and deliver to
the plaintiff, in the residence or house of the latter, all the furniture
described in paragraph 3 of the stipulation of facts Exhibit A. The
expenses which may be occasioned by the delivery to and deposit of the
furniture with the Sheriff shall be for the account of the defendant. the
defendant shall pay the costs in both instances. So ordered.
G.R. No. L-4150 February 10, 1910
FELIX DE LOS SANTOS, pIaintiff-appeIIe,
vs.
AGUSTINA JARRA, administratrix of the estate of MagdaIeno
Jimenea, deceased, defendant-appeIIant.
TORRES, J.:
On the 1st of September, 1906, Felix de los Santos brought suit against
Agustina Jarra, the administratrix of the estate of Magdaleno Jimenea,
alleging that in the latter part of 1901 Jimenea borrowed and obtained
from the plaintiff ten first-class carabaos, to be used at the animal-power
mill of his hacienda during the season of 1901-2, without recompense or
remuneration whatever for the use thereof, under the sole condition that
they should be returned to the owner as soon as the work at the mill was
terminated; that Magdaleno Jimenea, however, did not return the
carabaos, notwithstanding the fact that the plaintiff claimed their return
after the work at the mill was finished; that Magdaleno Jimenea died on
the 28th of October, 1904, and the defendant herein was appointed by the
Court of First nstance of Occidental Negros administratrix of his estate
and she took over the administration of the same and is still performing
her duties as such administratrix; that the plaintiff presented his claim to
the commissioners of the estate of Jimenea, within the legal term, for the
return of the said ten carabaos, but the said commissioners rejected his
claim as appears in their report; therefore, the plaintiff prayed that
judgment be entered against the defendant as administratrix of the estate
of the deceased, ordering her to return the ten first-class carabaos loaned
to the late Jimenea, or their present value, and to pay the costs.
The defendant was duly summoned, and on the 25th of September, 1906,
she demurred in writing to the complaint on the ground that it was vague;
but on the 2d of October of the same year, in answer to the complaint, she
said that it was true that the late Magdaleno Jimenea asked the plaintiff to
loan him ten carabaos, but that he only obtained three second-class
animals, which were afterwards transferred by sale by the plaintiff to the
said Jimenea; that she denied the allegations contained in paragraph 3 of
the complaint; for all of which she asked the court to absolve her of the
complaint with the cost against the plaintiff.
By a writing dated the 11th of December, 1906, Attorney Jose Felix
Martinez notified the defendant and her counsel, Matias Hilado, that he
had made an agreement with the plaintiff to the effect that the latter would
not compromise the controversy without his consent, and that as fees for
his professional services he was to receive one half of the amount allowed
in the judgment if the same were entered in favor of the plaintiff.
The case came up for trial, evidence was adduced by both parties, and
either exhibits were made of record. On the 10th of January, 1907, the
court below entered judgment sentencing Agustina Jarra, as administratrix
of the estate of Magdaleno Jimenea, to return to the plaintiff, Felix de los
Santos, the remaining six second and third class carabaos, or the value
thereof at the rate of P120 each, or a total of P720 with the costs.
Counsel for the defendant excepted to the foregoing judgment, and, by a
writing dated January 19, moved for anew trial on the ground that the
findings of fact were openly and manifestly contrary to the weight of the
evidence. The motion was overruled, the defendant duly excepted, and in
due course submitted the corresponding bill of exceptions, which was
approved and submitted to this court.
The defendant has admitted that Magdaleno Jimenea asked the plaintiff
for the loan of ten carabaos which are now claimed by the latter, as shown
by two letters addressed by the said Jimenea to Felix de los Santos; but in
her answer the said defendant alleged that the late Jimenea only obtained
three second-class carabaos, which were subsequently sold to him by the
owner, Santos; therefore, in order to decide this litigation it is
indispensable that proof be forthcoming that Jimenea only received three
carabaos from his son-in-law Santos, and that they were sold by the latter
to him.
The record discloses that it has been fully proven from the testimony of a
sufficient number of witnesses that the plaintiff, Santos, sent in charge of
various persons the ten carabaos requested by his father-in-law,
Magdaleno Jimenea, in the two letters produced at the trial by the plaintiff,
and that Jimenea received them in the presence of some of said persons,
one being a brother of said Jimenea, who saw the animals arrive at the
hacienda where it was proposed to employ them. Four died of rinderpest,
and it is for this reason that the judgment appealed from only deals with
six surviving carabaos.
The alleged purchase of three carabaos by Jimenea from his son-in-law
Santos is not evidenced by any trustworthy documents such as those of
transfer, nor were the declarations of the witnesses presented by the
defendant affirming it satisfactory; for said reason it can not be considered
that Jimenea only received three carabaos on loan from his son-in-law,
and that he afterwards kept them definitely by virtue of the purchase.
By the laws in force the transfer of large cattle was and is still made by
means of official documents issued by the local authorities; these
documents constitute the title of ownership of the carabao or horse so
acquired. Furthermore, not only should the purchaser be provided with a
new certificate or credential, a document which has not been produced in
evidence by the defendant, nor has the loss of the same been shown in
Credit Transactions Full Text Cases Atty. Adviento!!!!(
the case, but the old documents ought to be on file in the municipality, or
they should have been delivered to the new purchaser, and in the case at
bar neither did the defendant present the old credential on which should
be stated the name of the previous owner of each of the three carabaos
said to have been sold by the plaintiff.
From the foregoing it may be logically inferred that the carabaos loaned or
given on commodatum to the now deceased Magdaleno Jimenea were ten
in number; that they, or at any rate the six surviving ones, have not been
returned to the owner thereof, Felix de los Santos, and that it is not true
that the latter sold to the former three carabaos that the purchaser was
already using; therefore, as the said six carabaos were not the property of
the deceased nor of any of his descendants, it is the duty of the
administratrix of the estate to return them or indemnify the owner for their
value.
The Civil Code, in dealing with loans in general, from which generic
denomination the specific one of commodatum is derived, establishes
prescriptions in relation to the last-mentioned contract by the following
articles:
ART. 1740. By the contract of loan, one of the parties delivers to the other,
either anything not perishable, in order that the latter may use it during a
certain period and return it to the former, in which case it is called
commodatum, or money or any other perishable thing, under the condition
to return an equal amount of the same kind and quality, in which case it is
merely called a loan.
Commodatum is essentially gratuitous.
A simple loan may be gratuitous, or made under a stipulation to pay
interest.
ART. 1741. The bailee acquires retains the ownership of the thing loaned.
The bailee acquires the use thereof, but not its fruits; if any compensation
is involved, to be paid by the person requiring the use, the agreement
ceases to be a commodatum.
ART. 1742. The obligations and rights which arise from the commodatum
pass to the heirs of both contracting parties, unless the loan has been in
consideration for the person of the bailee, in which case his heirs shall not
have the right to continue using the thing loaned.
The carabaos delivered to be used not being returned by the defendant
upon demand, there is no doubt that she is under obligation to indemnify
the owner thereof by paying him their value.
Article 1101 of said code reads:
Those who in fulfilling their obligations are guilty of fraud, negligence, or
delay, and those who in any manner whatsoever act in contravention of
the stipulations of the same, shall be subjected to indemnify for the losses
and damages caused thereby.
The obligation of the bailee or of his successors to return either the thing
loaned or its value, is sustained by the supreme tribunal of Sapin. n its
decision of March 21, 1895, it sets out with precision the legal doctrine
touching commodatum as follows:
Although it is true that in a contract of commodatum the bailor retains the
ownership of the thing loaned, and at the expiration of the period, or after
the use for which it was loaned has been accomplished, it is the
imperative duty of the bailee to return the thing itself to its owner, or to pay
him damages if through the fault of the bailee the thing should have been
lost or injured, it is clear that where public securities are involved, the trial
court, in deferring to the claim of the bailor that the amount loaned be
returned him by the bailee in bonds of the same class as those which
constituted the contract, thereby properly applies law 9 of title 11
ofpartida 5.
With regard to the third assignment of error, based on the fact that the
plaintiff Santos had not appealed from the decision of the commissioners
rejecting his claim for the recovery of his carabaos, it is sufficient to estate
that we are not dealing with a claim for the payment of a certain sum, the
collection of a debt from the estate, or payment for losses and damages
(sec. 119, Code of Civil Procedure), but with the exclusion from the
inventory of the property of the late Jimenea, or from his capital, of six
carabaos which did not belong to him, and which formed no part of the
inheritance.
The demand for the exclusion of the said carabaos belonging to a third
party and which did not form part of the property of the deceased, must be
the subject of a direct decision of the court in an ordinary action, wherein
the right of the third party to the property which he seeks to have excluded
from the inheritance and the right of the deceased has been discussed,
and rendered in view of the result of the evidence adduced by the
administrator of the estate and of the claimant, since it is so provided by
the second part of section 699 and by section 703 of the Code of Civil
Procedure; the refusal of the commissioners before whom the plaintiff
unnecessarily appeared can not affect nor reduce the unquestionable right
of ownership of the latter, inasmuch as there is no law nor principle of
justice authorizing the successors of the late Jimenea to enrich
themselves at the cost and to the prejudice of Felix de los Santos.
For the reasons above set forth, by which the errors assigned to the
judgment appealed from have been refuted, and considering that the
same is in accordance with the law and the merits of the case, it is our
opinion that it should be affirmed and we do hereby affirm it with the costs
against the appellant. So ordered.
ARTS. 1946-1952
ARTS. 1953-1961
G.R. No. L-50550-52 October 31, 1979
CHEE KIONG YAM, AMPANG MAH, ANITA YAM JOSE Y.C. YAM AND
RICHARD YAM, petitioners,
vs.
HON. NABDAR J. MALIK, MunicipaI Judge of JoIo, SuIu (Branch I),
THE PEOPLE OF THE PHILIPPINES, ROSALINDA AMIN, TAN CHU
KAO and LT. COL. AGOSTO SAJOR respondents.
ABAD SANTOS, J.:
This is a petition for certiorari, prohibition, and mandamus with preliminary
injunction. Petitioners alleged that respondent Municipal Judge Nabdar J.
Malik of Jolo, Sulu, acted without jurisdiction, in excess of jurisdiction and
with grave abuse of discretion when:
(a) he held in the preliminary investigation of the charges of estafa filed by
respondents Rosalinda Amin, Tan Chu Kao and Augusto Sajor against
petitioners that there was a prima facie case against the latter;
(b) he issued warrants of arrest against petitioners after making the above
determination; and
(c) he undertook to conduct trial on the merits of the charges which were
docketed in his court as Criminal Cases No. M-111, M-183 and M-208.
Respondent judge is said to have acted without jurisdiction, in excess of
jurisdiction and with grave abuse of discretion because the facts recited in
the complaints did not constitute the crime of estafa, and assuming they
did, they were not within the jurisdiction of the respondent judge.
n a resolution dated May 23, 1979, we required respondents to comment
in the petition and issued a temporary restraining order against the
respondent judge from further proceeding with Criminal Cases Nos. M-
111, M-183 and M-208 or from enforcing the warrants of arrest he had
issued in connection with said cases.
Comments by the respondent judge and the private respondents pray for
the dismissal of the petition but the Solicitor General has manifested that
the People of the Philippines have no objection to the grant of the reliefs
prayed for, except the damages. We considered the comments as
answers and gave due course to the petition.
The position of the Solicitor General is well taken. We have to grant the
petition in order to prevent manifest injustice and the exercise of palpable
excess of authority.
n Criminal Case No. M-111, respondent Rosalinda M. Amin charges
petitioners Yam Chee Kiong and Yam Yap Kieng with estafa through
misappropriation of the amount of P50,000.00. But the complaint states on
its face that said petitioners received the amount from respondent
Rosalinda M. Amin "as a loan." Moreover, the complaint in Civil Case No.
N-5, an independent action for the collection of the same amount filed by
respondent Rosalinda M. Amin with the Court of First nstance of Sulu on
September 11, 1975, likewise states that the P50,000.00 was a "simple
business loan" which earned interest and was originally demandable six
(6) months from July 12, 1973. (Annex E of the petition.)
n Criminal Case No. M-183, respondent Tan Chu Kao charges petitioners
Yam Chee Kiong, Jose Y.C. Yam, Ampang Mah and Anita Yam, alias Yong
Tay, with estafa through misappropriation of the amount of P30,000.00.
Likewise, the complaint states on its face that the P30,000.00 was "a
simple loan." So does the complaint in Civil Case No. N-8 filed by
Credit Transactions Full Text Cases Atty. Adviento!!!!)
respondent Tan Chu Kao on April 6, 1976 with the Court of First nstance
of Sulu for the collection of the same amount. (Annex D of the petition.).
n Criminal Case No. M-208, respondent Augusto Sajor charges
petitioners Jose Y.C. Yam, Anita Yam alias Yong Tai Mah, Chee Kiong Yam
and Richard Yam, with estafa through misappropriation of the amount of
P20,000.00. Unlike the complaints in the other two cases, the complaint in
Criminal Case No. M-208 does not state that the amount was received as
loan. However, in a sworn statement dated September 29, 1976,
submitted to respondent judge to support the complaint, respondent
Augusto Sajor states that the amount was a "loan." (Annex G of the
petition.).
We agree with the petitioners that the facts alleged in the three criminal
complaints do not constitute estafa through misappropriation.
Estafa through misappropriation is committed according to Article 315,
paragraph 1, subparagraph (b), of the Revised Penal Code as follows:
Art. 315. Swindling (Estafa). Any person who shall defraud another by
any of the means mentioned herein below shall be punished by:
xxx xxx xxx
1. With unfaithfulness or abuse of confidence namely:
xxx xxx xxx
b) By misappropriating or converting, to the prejudice of another, money,
goods, or any other personal property received by the offender in trust or
on commission, or for administration, or under any other obligation
involving the duty to make delivery of or to return the same, even though
such obligation be totally or partially guaranteed by a bond; or by denying
having received such money, goods, or other property.
n order that a person can be convicted under the abovequoted provision,
it must be proven that he has the obligation to deliver or return the same
money, goods or personal property that he received. Petitioners had no
such obligation to return the same money, i.e., the bills or coins, which
they received from private respondents. This is so because as clearly
stated in criminal complaints, the related civil complaints and the
supporting sworn statements, the sums of money that petitioners received
were loans.
The nature of simple loan is defined in Articles 1933 and 1953 of the Civil
Code.
Art. 1933. By the contract of loan, one of the parties delivers to another,
either something not consumable so that the latter may use the same for a
certain time and return it, in which case the contract is called a
commodatum; or money or other consumable thing upon the condition that
the same amount of the same kind and quality shall be paid, in which case
the contract is simply called a loan or mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a stipulation to pay interest.
n commodatum the bailor retains the ownership of the thing loaned, while
in simple loam ownership passes to the borrower.
Art. 1953. A person who receives a loan of money or any other fungible
thing acquires the ownership thereof, and is bound to pay to the creditor
an equal amount of the same kind and quality.
t can be readily noted from the above-quoted provisions that in simple
loan (mutuum), as contrasted to commodatum, the borrower acquires
ownership of the money, goods or personal property borrowed. Being the
owner, the borrower can dispose of the thing borrowed (Article 248, Civil
Code) and his act will not be considered misappropriation thereof.
n U.S. vs. Ibaez, 19 Phil. 559, 560 (1911), this Court held that it is not
estafa for a person to refuse to nay his debt or to deny its existence.
We are of the opinion and so decide that when the relation is purely that of
debtor and creditor, the debtor can not be held liable for the crime of
estafa, under said article, by merely refusing to pay or by denying the
indebtedness.
t appears that respondent judge failed to appreciate the distinction
between the two types of loan, mutuum and commodatum, when he
performed the questioned acts, He mistook the transaction between
petitioners and respondents Rosalinda Amin, Tan Chu Kao and Augusto
Sajor to be commodatum wherein the borrower does not acquire
ownership over the thing borrowed and has the duty to return the same
thing to the lender.
Under Sec. 87 of the Judiciary Act, the municipal court of a provincial
capital, which the Municipal Court of Jolo is, has jurisdiction over criminal
cases where the penalty provided by law does not exceed prision
correccional or imprisonment for not more than six (6) years, or fine not
exceeding P6,000.00 or both, The amounts allegedly misappropriated by
petitioners range from P20,000.00 to P50,000.00. The penalty for
misappropriation of this magnitude exceeds prision correccional or 6 year
imprisonment. (Article 315, Revised Penal Code), Assuming then that the
acts recited in the complaints constitute the crime of estafa, the Municipal
Court of Jolo has no jurisdiction to try them on the merits. The alleged
offenses are under the jurisdiction of the Court of First nstance.
Respondents People of the Philippines being the sovereign authority can
not be sued for damages. They are immune from such type of suit.
With respect to the other respondents, this Court is not the proper forum
for the consideration of the claim for damages against them.
WHEREFORE, the petition is hereby granted; the temporary restraining
order previously issued is hereby made permanent; the criminal
complaints against petitioners are hereby declared null and void;
respondent judge is hereby ordered to dismiss said criminal cases and to
recall the warrants of arrest he had issued in connection therewith.
Moreover, respondent judge is hereby rebuked for manifest ignorance of
elementary law. Let a copy of this decision be included in his personal life.
Costs against private respondents.
SO ORDERED.
Tolentino vs. Gonzalez Sy Chiam 50 Phil 558
Tolentino purchased land from Luzon Rice Mills for Php25,000 payable in
three installments. Tolentino defaulted on the balance so the owner sent a
letter of demand to him. To pay, Tolentino applied for loan from Gonzalez
on condition that he would execute a pacto de retro sale on the property in
favor of Gonzalez. Upon maturation of loan, Tolentino defaulted so
Gonzalez is demanding recovery of the land. Tolentino contends that the
pacto de retro sale is a mortgage and not an absolute sale.
The Supreme Court held that upon its terms, the deed of pacto de retro
sale is an absolute sale with right of repurchase and not a mortgage. Thus,
Gonzalez is the owner of the land and Tolentino is only holding it as a
tenant by virtue of a contract of lease.
**LOAN: A contract of loan signifies the giving of a sum of money, goods
or credits to another, with a promise to repay, but not a promise to return
the same thing. t has been defined as an advancement of money, goods,
or credits upon a contract or stipulation to repay, not to return, the thing
loaned at some future day in accordance with the terms of the contract.
The moment the contract is completed, the money, goods or chattels given
cease to be the property of the former owner and become the property of
the obligor to be used according to his own will, unless the contract itself
expressly provides for a special or specific use of the same. At all events,
the money, goods or chattels, the moment the contract is executed, cease
to be the property of the former owner and become the sole property of
the obligor.
[G.R. No. 114398. October 24, 1997]
CARMEN LIWANAG, petitioner, vs. THE HON. COURT OF APPEALS
and THE PEOPLE OF THE PHILIPPINES, represented by the SoIicitor
GeneraI,respondents.
ROMERO, J.:
Petitioner was charged with the crime of estafa before the Regional
Trial Court (RTC), Branch 93, Quezon City, in an information which reads
as follows:
"That on or between the month of May 19, 1988 and August, 1988 in
Quezon City, Philippines and within the jurisdiction of this Honorable
Court, the said accused, with intent of gain, with unfaithfulness, and abuse
of confidence, did then and there, willfully, unlawfully and feloniously
defraud one SDORA ROSALES, in the following manner, to wit: on the
date and in the place aforementioned, said accused received in trust from
the offended party cash money amounting to P 536,650.00 , Philippine
Currency, with the express obligation involving the duty to act as
Credit Transactions Full Text Cases Atty. Adviento!!!!*
complainant's agent in purchasing local cigarettes (Philip Morris and
Marlboro cigarettes), to resell them to several stores, to give her
commission corresponding to 40% of the profits; and to return the
aforesaid amount of offended party, but said accused, far from complying
her aforesaid obligation, and once in possession thereof, misapplied,
misappropriated and converted the same to her personal use and benefit,
despite repeated demands made upon her, accused failed and refused
and still fails and refuses to deliver and/or return the same to the damage
and prejudice of the said SDORA ROSALES, in the aforementioned
amount and in such other amount as may be awarded under the provision
of the Civil Code.
CONTRARY TO LAW.
The antecedent facts are as follows:
Petitioner Carmen Liwanag (Liwanag) and a certain Thelma
Tabligan went to the house of complainant sidora Rosales (Rosales) and
asked her to join them in the business of buying and selling
cigarettes. Convinced of the feasibility of the venture, Rosales readily
agreed. Under their agreement, Rosales would give the money needed to
buy the cigarettes while Liwanag and Tabligan would act as her agents,
with a corresponding 40% commission to her if the goods are sold;
otherwise the money would be returned to Rosales. Consequently,
Rosales gave several cash advances to Liwanag and Tabligan amounting
to P633,650.00.
During the first two months, Liwanag and Tabligan made periodic
visits to Rosales to report on the progress of the transactions. The visits,
however, suddenly stopped, and all efforts by Rosales to obtain
information regarding their business proved futile.
Alarmed by this development and believing that the amounts she
advanced were being misappropriated, Rosales filed a case of estafa
against Liwanag.
After trial on the merits, the trial court rendered a decision dated
January 9, 1991, finding Liwanag guilty as charged. The dispositive
portion of the decision reads thus:
"WHEREFORE, the Court holds, that the prosecution has established the
guilt of the accused, beyond reasonable doubt, and therefore, imposes
upon the accused, Carmen Liwanag, an ndeterminate Penalty of SX (6)
YEARS, EGHT (8) MONTHS AND TWENTY ONE (21) DAYS OF
PRSON CORRECCONAL TO FOURTEEN (14) YEARS AND EGHT (8)
MONTHS OF PRSON MAYOR AS MAXMUM, AND TO PAY THE
COSTS.
The accused is likewise ordered to reimburse the private complainant the
sum of P526,650.00, without subsidiary imprisonment, in case of
insolvency.
SO ORDERED.
Said decision was affirmed with modification by the Court of Appeals
in a decision dated November 29, 1993, the decretal portion of which
reads:
"WHEREFORE, in view of the foregoing, the judgment appealed from is
hereby affirmed with the correction of the nomenclature of the penalty
which should be: SX (6) YEARS, EGHT (8) MONTHS and TWENTY ONE
(21) DAYS of prision mayor, as minimum, to FOURTEEN (14) YEARS and
EGHT (8) MONTHS of reclusion temporal, as maximum. n all other
respects, the decision is AFFRMED.
SO ORDERED.
Her motion for reconsideration having been denied in the resolution
of March 16, 1994, Liwanag filed the instant petition, submitting the
following assignment of errors:
"1. RESPONDENT APPELLATE COURT GRAVELY ERRED N
AFFRMNG THE CONVCTON OF THE ACCUSED-PETTONER FOR
THE CRME OF ESTAFA, WHEN CLEARLY THE CONTRACT THAT
EXST (sic) BETWEEN THE ACCUSED-PETTONER AND
COMPLANANT S ETHER THAT OF A SMPLE LOAN OR THAT OF A
PARTNERSHP OR JONT VENTURE HENCE THE NON RETURN OF
THE MONEY OF THE COMPLANANT S PURELY CVL N NATURE
AND NOT CRMNAL.
2. RESPONDENT APPELLATE COURT GRAVELY ERRED N NOT
ACQUTTNG THE ACCUSED-PETTONER ON GROUNDS OF
REASONABLE DOUBT BY APPLYNG THE 'EQUPOSE RULE'.
Liwanag advances the theory that the intention of the parties was to
enter into a contract of partnership, wherein Rosales would contribute the
funds while she would buy and sell the cigarettes, and later divide the
profits between them.[1] She also argues that the transaction can also be
interpreted as a simple loan, with Rosales lending to her the amount
stated on an installment basis.[2]
The Court of Appeals correctly rejected these pretenses.
While factual findings of the Court of Appeals are conclusive on the
parties and not reviewable by the Supreme Court, and carry more weight
when these affirm the factual findings of the trial court,[3] we deem it more
expedient to resolve the instant petition on its merits.
Estafa is a crime committed by a person who defrauds another
causing him to suffer damages, by means of unfaithfulness or abuse of
confidence, or of false pretenses of fraudulent acts.[4]
From the foregoing, the elements of estafa are present, as follows:
(1) that the accused defrauded another by abuse of confidence or deceit;
and (2) that damage or prejudice capable of pecuniary estimation is
caused to the offended party or third party,[5] and it is essential that there
be a fiduciary relation between them either in the form of a trust,
commission or administration.[6]
The receipt signed by Liwanag states thus:
"May 19, 1988 Quezon City
Received from Mrs. sidora P. Rosales the sum of FVE HUNDRED
TWENTY SX THOUSAND AND SX HUNDRED FFTY PESOS
(P526,650.00) Philippine Currency, to purchase cigarrets (sic) (Philip &
Marlboro) to be sold to customers. n the event the said cigarrets (sic) are
not sold, the proceeds of the sale or the said products (shall) be returned
to said Mrs. sidora P. Rosales the said amount of P526,650.00 or the said
items on or before August 30, 1988.
(SGD & Thumbedmarked) (sic)
CARMEN LWANAG
26 H. Kaliraya St.
Quezon City
Signed in the presence of:
(Sgd) llegible (Sgd) Doming Z. Baligad
The language of the receipt could not be any clearer. t indicates
that the money delivered to Liwanag was for a specific purpose, that is, for
the purchase of cigarettes, and in the event the cigarettes cannot be sold,
the money must be returned to Rosales.
Thus, even assuming that a contract of partnership was indeed
entered into by and between the parties, we have ruled that when money
or property have been received by a partner for a specific purpose (such
as that obtaining in the instant case) and he later misappropriated it, such
partner is guilty of estafa.[7]
Neither can the transaction be considered a loan, since in a contract
of loan once the money is received by the debtor, ownership over the
same is transferred.[8] Being the owner, the borrower can dispose of it for
whatever purpose he may deem proper.
n the instant petition, however, it is evident that Liwanag could not
dispose of the money as she pleased because it was only delivered to her
for a single purpose, namely, for the purchase of cigarettes, and if this was
not possible then to return the money to Rosales. Since in this case there
was no transfer of ownership of the money delivered, Liwanag is liable for
conversion under Art. 315, par. 1(b) of the Revised Penal Code.
WHEREFORE, in view of the foregoing, the appealed decision of
the Court of Appeals dated November 29, 1993, is AFFRMED. Costs
against petitioner.
SO ORDERED.
G.R. No. L-24968 ApriI 27, 1972
Credit Transactions Full Text Cases Atty. Adviento!!!!"+
SAURA IMPORT and EXPORT CO., INC., pIaintiff-appeIIee,
vs.
DEVELOPMENT BANK OF THE PHILIPPINES, defendant-appeIIant.
MAKALINTAL, J.:p
n Civil Case No. 55908 of the Court of First nstance of Manila, judgment
was rendered on June 28, 1965 sentencing defendant Development Bank
of the Philippines (DBP) to pay actual and consequential damages to
plaintiff Saura mport and Export Co., nc. in the amount of P383,343.68,
plus interest at the legal rate from the date the complaint was filed and
attorney's fees in the amount of P5,000.00. The present appeal is from
that judgment.
n July 1953 the plaintiff (hereinafter referred to as Saura, nc.) applied to
the Rehabilitation Finance Corporation (RFC), before its conversion into
DBP, for an industrial loan of P500,000.00, to be used as follows:
P250,000.00 for the construction of a factory building (for the manufacture
of jute sacks); P240,900.00 to pay the balance of the purchase price of the
jute mill machinery and equipment; and P9,100.00 as additional working
capital.
Parenthetically, it may be mentioned that the jute mill machinery had
already been purchased by Saura on the strength of a letter of credit
extended by the Prudential Bank and Trust Co., and arrived in Davao City
in July 1953; and that to secure its release without first paying the draft,
Saura, nc. executed a trust receipt in favor of the said bank.
On January 7, 1954 RFC passed Resolution No. 145 approving the loan
application for P500,000.00, to be secured by a first mortgage on the
factory building to be constructed, the land site thereof, and the machinery
and equipment to be installed. Among the other terms spelled out in the
resolution were the following:
1. That the proceeds of the loan shall be utilized exclusively for the
following purposes:
For construction of factory building P250,000.00
For payment of the balance of purchase
price of machinery and equipment 240,900.00
For working capital 9,100.00
T O T A L P500,000.00
4. That Mr. & Mrs. Ramon E. Saura, nocencia Arellano, Aniceto Caolboy
and Gregoria Estabillo and China Engineers, Ltd. shall sign the promissory
notes jointly with the borrower-corporation;
5. That release shall be made at the discretion of the Rehabilitation
Finance Corporation, subject to availability of funds, and as the
construction of the factory buildings progresses, to be certified to by an
appraiser of this Corporation;"
Saura, nc. was officially notified of the resolution on January 9, 1954. The
day before, however, evidently having otherwise been informed of its
approval, Saura, nc. wrote a letter to RFC, requesting a modification of
the terms laid down by it, namely: that in lieu of having China Engineers,
Ltd. (which was willing to assume liability only to the extent of its stock
subscription with Saura, nc.) sign as co-maker on the corresponding
promissory notes, Saura, nc. would put up a bond for P123,500.00, an
amount equivalent to such subscription; and that Maria S. Roca would be
substituted for nocencia Arellano as one of the other co-makers, having
acquired the latter's shares in Saura, nc.
n view of such request RFC approved Resolution No. 736 on February 4,
1954, designating of the members of its Board of Governors, for certain
reasons stated in the resolution, "to reexamine all the aspects of this
approved loan ... with special reference as to the advisability of financing
this particular project based on present conditions obtaining in the
operations of jute mills, and to submit his findings thereon at the next
meeting of the Board."
On March 24, 1954 Saura, nc. wrote RFC that China Engineers, Ltd. had
again agreed to act as co-signer for the loan, and asked that the
necessary documents be prepared in accordance with the terms and
conditions specified in Resolution No. 145. n connection with the
reexamination of the project to be financed with the loan applied for, as
stated in Resolution No. 736, the parties named their respective
committees of engineers and technical men to meet with each other and
undertake the necessary studies, although in appointing its own committee
Saura, nc. made the observation that the same "should not be taken as
an acquiescence on (its) part to novate, or accept new conditions to, the
agreement already) entered into," referring to its acceptance of the terms
and conditions mentioned in Resolution No. 145.
On April 13, 1954 the loan documents were executed: the promissory
note, with F.R. Halling, representing China Engineers, Ltd., as one of the
co-signers; and the corresponding deed of mortgage, which was duly
registered on the following April 17.
t appears, however, that despite the formal execution of the loan
agreement the reexamination contemplated in Resolution No. 736
proceeded. n a meeting of the RFC Board of Governors on June 10,
1954, at which Ramon Saura, President of Saura, nc., was present, it was
decided to reduce the loan from P500,000.00 to P300,000.00. Resolution
No. 3989 was approved as follows:
RESOLUTON No. 3989. Reducing the Loan Granted Saura mport &
Export Co., nc. under Resolution No. 145, C.S., from P500,000.00 to
P300,000.00. Pursuant to Bd. Res. No. 736, c.s., authorizing the re-
examination of all the various aspects of the loan granted the Saura mport
& Export Co. under Resolution No. 145, c.s., for the purpose of financing
the manufacture of jute sacks in Davao, with special reference as to the
advisability of financing this particular project based on present conditions
obtaining in the operation of jute mills, and after having heard Ramon E.
Saura and after extensive discussion on the subject the Board, upon
recommendation of the Chairman, RESOLVED that the loan granted the
Saura mport & Export Co. be REDUCED from P500,000 to P300,000 and
that releases up to P100,000 may be authorized as may be necessary
from time to time to place the factory in actual operation: PROVDED that
all terms and conditions of Resolution No. 145, c.s., not inconsistent
herewith, shall remain in full force and effect."
On June 19, 1954 another hitch developed. F.R. Halling, who had signed
the promissory note for China Engineers Ltd. jointly and severally with the
other RFC that his company no longer to of the loan and therefore
considered the same as cancelled as far as it was concerned. A follow-up
letter dated July 2 requested RFC that the registration of the mortgage be
withdrawn.
n the meantime Saura, nc. had written RFC requesting that the loan of
P500,000.00 be granted. The request was denied by RFC, which added in
its letter-reply that it was "constrained to consider as cancelled the loan of
P300,000.00 ... in view of a notification ... from the China Engineers Ltd.,
expressing their desire to consider the loan insofar as they are
concerned."
On July 24, 1954 Saura, nc. took exception to the cancellation of the loan
and informed RFC that China Engineers, Ltd. "will at any time reinstate
their signature as co-signer of the note if RFC releases to us the
P500,000.00 originally approved by you.".
On December 17, 1954 RFC passed Resolution No. 9083, restoring the
loan to the original amount of P500,000.00, "it appearing that China
Engineers, Ltd. is now willing to sign the promissory notes jointly with the
borrower-corporation," but with the following proviso:
That in view of observations made of the shortage and high cost of
imported raw materials, the Department of Agriculture and Natural
Resources shall certify to the following:
1. That the raw materials needed by the borrower-corporation to carry out
its operation are available in the immediate vicinity; and
2. That there is prospect of increased production thereof to provide
adequately for the requirements of the factory."
The action thus taken was communicated to Saura, nc. in a letter of RFC
dated December 22, 1954, wherein it was explained that the certification
by the Department of Agriculture and Natural Resources was required "as
the intention of the original approval (of the loan) is to develop the
manufacture of sacks on the basis of locally available raw materials." This
point is important, and sheds light on the subsequent actuations of the
parties. Saura, nc. does not deny that the factory he was building in
Davao was for the manufacture of bags from local raw materials. The
cover page of its brochure (Exh. M) describes the project as a "Joint
venture by and between the Mindanao ndustry Corporation and the Saura
mport and Export Co., nc. to finance, manage and operate a Kenafmill
plant, to manufacture copra and corn bags, runners, floor mattings,
carpets, draperies; out of 100% local raw materials, principal kenaf." The
explanatory note on page 1 of the same brochure states that, the venture
"is the first serious attempt in this country to use 100% locally grown raw
Credit Transactions Full Text Cases Atty. Adviento!!!!""
materials notably kenaf which is presently grown commercially in thesland
of Mindanao where the proposed jutemill is located ..."
This fact, according to defendant DBP, is what moved RFC to approve the
loan application in the first place, and to require, in its Resolution No.
9083, a certification from the Department of Agriculture and Natural
Resources as to the availability of local raw materials to provide
adequately for the requirements of the factory. Saura, nc. itself confirmed
the defendant's stand impliedly in its letter of January 21, 1955: (1) stating
that according to a special study made by the Bureau of Forestry
"kenaf will not be available in sufficient quantity this year or probably even
next year;" (2) requesting "assurances (from RFC) that my company and
associates will be able to bring in sufficient jute materials as may be
necessary for the full operation of the jute mill;" and (3) asking that
releases of the loan be made as follows:
a) For the payment of the receipt for jute mill
machineries with the Prudential Bank &
Trust Company P250,000.00
(For immediate release)
b) For the purchase of materials and equip-
ment per attached list to enable the jute
mill to operate 182,413.91
c) For raw materials and labor 67,586.09
1) P25,000.00 to be released on the open-
ing of the letter of credit for raw jute
for $25,000.00.
2) P25,000.00 to be released upon arrival
of raw jute.
3) P17,586.09 to be released as soon as the
mill is ready to operate.
On January 25, 1955 RFC sent to Saura, nc. the following reply:
Dear Sirs:
This is with reference to your letter of January 21, 1955, regarding the
release of your loan under consideration of P500,000. As stated in our
letter of December 22, 1954, the releases of the loan, if revived, are
proposed to be made from time to time, subject to availability of funds
towards the end that the sack factory shall be placed in actual operating
status. We shall be able to act on your request for revised purpose and
manner of releases upon re-appraisal of the securities offered for the loan.
With respect to our requirement that the Department of Agriculture and
Natural Resources certify that the raw materials needed are available in
the immediate vicinity and that there is prospect of increased production
thereof to provide adequately the requirements of the factory, we wish to
reiterate that the basis of the original approval is to develop the
manufacture of sacks on the basis of the locally available raw materials.
Your statement that you will have to rely on the importation of jute and
your request that we give you assurance that your company will be able to
bring in sufficient jute materials as may be necessary for the operation of
your factory, would not be in line with our principle in approving the loan.
With the foregoing letter the negotiations came to a standstill. Saura, nc.
did not pursue the matter further. nstead, it requested RFC to cancel the
mortgage, and so, on June 17, 1955 RFC executed the corresponding
deed of cancellation and delivered it to Ramon F. Saura himself as
president of Saura, nc.
t appears that the cancellation was requested to make way for the
registration of a mortgage contract, executed on August 6, 1954, over the
same property in favor of the Prudential Bank and Trust Co., under which
contract Saura, nc. had up to December 31 of the same year within which
to pay its obligation on the trust receipt heretofore mentioned. t appears
further that for failure to pay the said obligation the Prudential Bank and
Trust Co. sued Saura, nc. on May 15, 1955.
On January 9, 1964, ahnost 9 years after the mortgage in favor of RFC
was cancelled at the request of Saura, nc., the latter commenced the
present suit for damages, alleging failure of RFC (as predecessor of the
defendant DBP) to comply with its obligation to release the proceeds of
the loan applied for and approved, thereby preventing the plaintiff from
completing or paying contractual commitments it had entered into, in
connection with its jute mill project.
The trial court rendered judgment for the plaintiff, ruling that there was a
perfected contract between the parties and that the defendant was guilty
of breach thereof. The defendant pleaded below, and reiterates in this
appeal: (1) that the plaintiff's cause of action had prescribed, or that its
claim had been waived or abandoned; (2) that there was no perfected
contract; and (3) that assuming there was, the plaintiff itself did not comply
with the terms thereof.
We hold that there was indeed a perfected consensual contract, as
recognized in Article 1934 of the Civil Code, which provides:
ART. 1954. An accepted promise to deliver something, by way of
commodatum or simple loan is binding upon the parties, but the
commodatum or simple loan itself shall not be perferted until the delivery
of the object of the contract.
There was undoubtedly offer and acceptance in this case: the application
of Saura, nc. for a loan of P500,000.00 was approved by resolution of the
defendant, and the corresponding mortgage was executed and registered.
But this fact alone falls short of resolving the basic claim that the
defendant failed to fulfill its obligation and the plaintiff is therefore entitled
to recover damages.
t should be noted that RFC entertained the loan application of Saura, nc.
on the assumption that the factory to be constructed would utilize locally
grown raw materials, principally kenaf. There is no serious dispute about
this. t was in line with such assumption that when RFC, by Resolution No.
9083 approved on December 17, 1954, restored the loan to the original
amount of P500,000.00. it imposed two conditions, to wit: "(1) that the raw
materials needed by the borrower-corporation to carry out its operation are
available in the immediate vicinity; and (2) that there is prospect of
increased production thereof to provide adequately for the requirements of
the factory." The imposition of those conditions was by no means a
deviation from the terms of the agreement, but rather a step in its
implementation. There was nothing in said conditions that contradicted the
terms laid down in RFC Resolution No. 145, passed on January 7, 1954,
namely "that the proceeds of the loan shall be utilizedexclusively for the
following purposes: for construction of factory building P250,000.00; for
payment of the balance of purchase price of machinery and equipment
P240,900.00; for working capital P9,100.00." Evidently Saura, nc.
realized that it could not meet the conditions required by RFC, and so
wrote its letter of January 21, 1955, stating that local jute "will not be able
in sufficient quantity this year or probably next year," and asking that out of
the loan agreed upon the sum of P67,586.09 be released "for raw
materials and labor." This was a deviation from the terms laid down in
Resolution No. 145 and embodied in the mortgage contract, implying as it
did a diversion of part of the proceeds of the loan to purposes other than
those agreed upon.
When RFC turned down the request in its letter of January 25, 1955 the
negotiations which had been going on for the implementation of the
agreement reached an impasse. Saura, nc. obviously was in no position
to comply with RFC's conditions. So instead of doing so and insisting that
the loan be released as agreed upon, Saura, nc. asked that the mortgage
be cancelled, which was done on June 15, 1955. The action thus taken by
both parties was in the nature cf mutual desistance what Manresa
terms "mutuo disenso" 1 which is a mode of extinguishing obligations. t
is a concept that derives from the principle that since mutual agreement
can create a contract, mutual disagreement by the parties can cause its
extinguishment. 2
The subsequent conduct of Saura, nc. confirms this desistance. t did not
protest against any alleged breach of contract by RFC, or even point out
that the latter's stand was legally unjustified. ts request for cancellation of
the mortgage carried no reservation of whatever rights it believed it might
have against RFC for the latter's non-compliance. n 1962 it even applied
with DBP for another loan to finance a rice and corn project, which
application was disapproved. t was only in 1964, nine years after the loan
agreement had been cancelled at its own request, that Saura, nc. brought
this action for damages.All these circumstances demonstrate beyond
doubt that the said agreement had been extinguished by mutual
desistance and that on the initiative of the plaintiff-appellee itself.
With this view we take of the case, we find it unnecessary to consider and
resolve the other issues raised in the respective briefs of the parties.
WHEREFORE, the judgment appealed from is reversed and the complaint
dismissed, with costs against the plaintiff-appellee.
EN BANC
Credit Transactions Full Text Cases Atty. Adviento!!!!"#
G.R. No. L-1927 May 31, 1949
CRISTOBAL ROO, petitioner,
vs.
JOSE L. GOMEZ, ET AL., respondents.
Alfonso Farcon for petitioner.
Capistrano & Azores for respondents.
BENGZON, J.:
This petition to review a decision of the Court of Appeals was admitted
mainly because it involves one phase of the vital contemporary question:
the repayment of loans given in Japanese fiat currency during the last war
of the Pacific.
On October 5, 1944, Cristobal Roo received as a loan four thousand
pesos in Japanese fiat money from Jose L. Gomez. He informed the later
that he would use the money to purchase a jitney; and he agreed to pay
that debt one year after date in the currency then prevailing. He signed a
promissory note of the following tenor:
For value received, promise to pay one year after date the sum
of four thousand pesos (4,000) to Jose L. Gomez. t is agreed
that this will not earn any interest and the payment t is agreed
that this will not earn any interest and the payment prevailing by
the end of the stipulated period of one year.
n consideration of this generous loan, renounce any right that
may come to me by reason of any postwar arrangement, of
privilege that may come to me by legislation wherein this sum
may be devalued. renounce flatly and absolutely any condition,
term right or privilege which in any way will prejudice the right
engendered by this agreement wherein Atty. Jose L. Gomez will
receive by right his money in the amount of P4,000. affirm the
legal tender, currency or any medium of exchange, or money in
this sum of P4,000 will be paid by me to Jose L. Gomez one
year after this date, October 5, 1944.
On October 15, 1945, i.e., after the liberation, Roo was sued for payment
in the Laguna Court of First nstance. His main defense was his liability
should not exceed the equivalent of 4,000 pesos "mickey mouse" money
and could not be 4,000 pesos Philippine currency, because the contract
would be void as contrary to law, public order and good morals.
After the corresponding hearing, the Honorable Felix Bautista Angelo,
Judge, ordered the defendant Roo to pay four thousand pesos in
Philippine currency with legal interest from the presentation of the
complaint plus costs.
On appeal the Court of Appeals in a decision written by Mr. Justice Jugo,
affirmed the judgment with costs. t declared being a mechanic who knew
English was not deceived into signing the promissory note, and that the
contents of the same had not been misrepresented to him. t pronounced
the contract valid and enforceable according to its terms and conditions.
One basic principle of the law on contracts of the Civil Code is that "the
contracting parties may establish any pacts, clauses and conditions they
may deem advisable, provided they are not contrary to law, morals or
public order." (Article 1255.) Another principle is that "obligations arising
from contracts shall have the force of law between the contracting parties
and must be performed in accordance with their stipulations" (Article
1091).
nvoking the above proviso, Roo asserts this contract is contrary to the
Usury law, because on the basis of calculations by Government experts he
only received the equivalent of one hundred Philippine pesos and now he
is required to disgorge four thousand pesos or interest greatly in excess of
the lawful rates.
But he is not paying interest. Precisely the contract says that the money
received "will not earn any interest." Furthermore, he received four
thousand pesos; and he is required to pay four thousand pesos exactly.
The increased intrinsic value and purchasing power of the current money
is consequence of an event (change of currency) which at the time of the
contract neither party knew would certainly happen within the period of
one year. They both elected to subject their rights and obligations to that
contingency. f within one year another kind of currency became legal
tender, Gomez would probably get more for his money. f the same
Japanese currency continued, he would get less, the value of Japanese
money being then on the downgrade.
Our legislation has a word for these contracts: aleatory. The Civil Code
recognizes their validity (see art. 1790 and Manresa's comment thereon)
on a par with insurance policies and life annuities.
The eventual gain of Gomez in this transaction is not interest within the
meaning of Usury Laws. nterest is some additional money to be paid in
any event, which is not the case herein, because Gomez might have
gotten less if the Japanese occupation had extended to the end of 1945 or
if the liberation forces had chosen to permit the circulation of the Japanese
notes.
Moreover, Roo argues, the deal was immoral because taking advantage
of his superior knowledge of war developments Gomez imposed on him
this onerous obligation. n the first place, the Court of Appeals found that
he voluntary agreed to sign and signed the document without having been
misled as to its contents and "in so far as knowledge of war events was
concerned" both parties were on "equal footing". n the second place
although on October 5, 1944 it was possible to surmise the impending
American invasion, the date of victory or liberation was anybody's guess.
n the third place there was the possibility that upon-re-occupation the
Philippine Government would not invalidate the Japanese currency, which
after all had been forced upon the people in exchange for valuable goods
and property. The odds were about even when Roo and Gomez played
their bargaining game. There was no overreaching, nor unfair advantage.
Again Roo alleges it is immoral and against public order for a man to
obtain four thousand pesos in return for an investment of forty pesos (his
estimate of the value of the Japanese money he borrowed). According to
his line of reasoning it would be immoral for the homeowner to recover ten
thousand pesos (P10,000, when his house is burned, because he invested
only about one hundred pesos for the insurance policy. And when the
holder of a sweepstakes ticket who paid only four pesos luckily obtains the
first prize of one hundred thousand pesos or over, the whole business is
immoral or against public order.
n this connection we should explain that this decision does not cover
situations where borrowers of Japanese fiat currency promised to repay
"the same amount" or promised to return the same number of pesos "in
Philippines currency" or "in the currency prevailing after the war." There
may be room for argument when those litigations come up for
adjudication. All we say here and now is that the contract in question is
legal and obligatory.
A minor point concerns the personality of the plaintiff, the wife of Jose L.
Gomez. We opine with the Court of Appeals that the matter involve a
defect in procedure which does not amount to prejudicial error.
Wherefore, the appealed judgment will be affirmed with costs. So ordered.
Moran, C.J., Ozaeta, Tuason, Montemayor and Reyes, JJ., concur.
G.R. No. L-1328 September 9, 1949
MARIANO NEPOMUCENO and AGUEDA G. DE
NEPOMUCENO, pIaintiffs-appeIIants,
Credit Transactions Full Text Cases Atty. Adviento!!!!"$
vs.
EDILBERTO A. NARCISO and MAURA SUAREZ, defendants-
appeIIees.
OZAETA, J.:
On November 14, 1938, appellant Mariano Nepomuceno executed a
mortgage in favor of the appellees on a parcel of land situated in the
municipality of Angeles, Province of Pampanga, to secure the payment
within the period of seven years from the date of the mortgage of the sum
of P24,000 together with interest thereon at the rate of 8 per cent per
annum.
On September 30, 1943, that is to say, more than two years before the
maturity of said mortgage, the parties executed a notarial document
entitled "Partial Novation of Contract" whereby they modified the terms of
said mortgage as follows:
(1) From December 8, 1941, to January 1, 1944, the interest on the
mortgage shall be at 6 per cent per annum, unpaid interest also paying
interest also paying interest at the same rate.
(2) From January 1, 1944, up to the end of the war, the mortgage debt
shall likewise bear interest at 6 per cent. Unpaid interest during this period
shall however not bear any interest.
(3) At the end of the war the interest shall again become 8 per cent in
accordance with the original contract of mortgage.
(4) While the war goes on, the mortgagor, his administrators or assigns,
cannot redeem the property mortgaged.
(5) When the mortgage lapses on November 14, 1945, the mortgage may
continue for another ten years if the mortgagor so chooses, but during this
period he may pay only one half of the capital.
On July 21, 1944, the mortgagor Mariano Nepomuceno and his wife
Agueda G. de Nepomuceno filed their complaint in this case against the
mortgagees, which compplaint, as amended on September 7, 1944,
alleged the execution of the contract of mortgage and its principal novation
as above indicated, and
7. That as per Annex B, No. 4, it is provided that the mortgagor cannot
redeem the property mortgaged while the war goes on; and that
notwithstanding the said provision the herein plaintiffs-mortgagors are now
willing to pay the amount of the indebtedness together with the
corresponding interest due thereon;
8. That on July 19, 1944, the mortgagors-plaintiffs went to the house of the
mortgagees-defendants to tender payment of the balance of the mortgage
debt with their corresponding interest, but said spouses defendants refuse
and still refuse to accept payment;
9. That because of this refusal of the defendants to accept tender of
payment on the mortgage consideration, the plaintiffs suffered and still
suffer damages in the amount of P5,000;
10. That the plaintiffs are now and have deposited with the Clerk of Court
of First nstance of Pampanga the amount of P22,356 for the payment of
the mortgage debt and the interest due thereon;
Wherefore, it is more respectfully prayed that this Honorable Court will
issue an order in the following tenor:
(a) Ordering the defendants to accept tender of payment from the
plaintiffs;
(b) Ordering defendants to execute the corresponding deed of release of
mortgage;
(c) Ordering defendants to pay damages in the amount of P5,000; and
(d) Ordering defendants to pay the amount of P3,000 as attorney's fee and
the costs of suit and any other remedy just and equitable in the premises.
After the trial the court sustained the defense that the complaint had been
prematurely presented and dismissed it with costs.
Appellants contend that the stipulation in the contract of September 30,
1943, that "while the war goes on the mortgagor, his administrators or
assigns cannot redeem the property mortgaged," is against public policy
and therefore null and void. They cite and rely on article 1255 of the Civil
Code, which provides:
ART. 1255. The contracting parties may establish any pacts, clauses,
and conditions they may deem advisable, provided they are not contrary to
law, morals, or public order.
They argue that "it would certainly be against public policy and a restraint
on the freedom of commerce to compel a debtor not to release his
property from a lien even if he wanted to by the payment of the
indebtedness while the war goes on, which was undoubtedly of a very
uncertain duration."
The first two paragraphs of article 1125 of the Civil Code provide:
ART. 1125. Obligation for the performance of which a day certain has
been fixed shall be demandable only when the day arrives.
A day certain is understood to be one which must necessarily arrive, even
though its date be unknown.
Article 1127 says:
ART. 1127. Whenever a term for the performance of an obligation is fixed,
it is presumed to have been established for the benefit of the creditor and
that of the debtor, unless from its tenor or from other circumstances it
should appear that the term was established for the benefit of one or the
other.
t will be noted that the original contract of mortgage provided for interest
at 8 per cent per annum and that the principal together with the interest
was payable within the period of seven years from November 14, 1938.
But by mutual agreement of the parties that term was modified on
September 30, 1943, by reducing the interest to 6 per cent per annum
from December 8, 1941, until the end of the war and by stipulating that the
mortgagor shall not pay off the mortgage while the war went on.
We find nothing immoral or violative of public order in that stipulation. The
mortgagees apparently did not want to have their prewar credit paid with
Japanese military notes, and the mortgagor voluntarily agreed not to do so
in consideration of the reduction of the rate of interest.
t was a perfectly equitable and valid transaction, in conformity with the
provision of the Civil Code hereinabove quoted.
Appellants were bound by said contract and appellees were not obligated
to receive the payment before it was due. Hence the latter had reason not
to accept the tender of payment made to them by the former.
The judgment is affirmed, with costs against the appellants.
EQUITABLE PCI BANK,*G.R. No. 171545
AIMEE YU and BEJAN
LIONEL APAS,
Petitioners,Present:
PUNO, C.J., Chairperson,
- v e r s u s -craIawSANDOVAL-GUTERREZ,
CORONA,
AZCUNA and
LEONARDO-DE CASTRO, JJ.
NG SHEUNG NGOR** doing
business under the name
and styIe KEN MARKETING, craIawPromulgated:
KEN APPLIANCE DIVISION,
INC. and BENJAMIN E. GO,
Respondents.December 19, 2007

CORONA, J.:

This petition for review on certiorari[1] seeks to set aside the decision[2] of
the Court of Appeals (CA) in CA-G.R. SP No. 83112 and its
resolution[3] denying reconsideration.
On October 7, 2001, respondents Ng Sheung Ngor,[4] Ken Appliance
Division, nc. and Benjamin E. Go filed an action for annulment and/or
reformation of documents and contracts[5] against petitioner Equitable PC
Bank (Equitable) and its employees, Aimee Yu and Bejan Lionel Apas, in
the Regional Trial Court (RTC), Branch 16 of Cebu City.[6]They claimed
that Equitable induced them to avail of its peso and dollar credit facilities
by offering low interest rates[7] so they accepted Equitable's proposal and
signed the bank's pre-printed promissory notes on various dates beginning
1996. They, however, were unaware that the documents contained
identical escalation clauses granting Equitable authority to increase
interest rates without their consent.[8]chanroblesvirtuallawlibrary

Credit Transactions Full Text Cases Atty. Adviento!!!!"%
cralawEquitable, in its answer, asserted that respondents knowingly
accepted all the terms and conditions contained in the promissory notes.
[9] n fact, they continuously availed of and benefited from Equitable's
credit facilities for five years.[10]chanroblesvirtuallawlibrary

cralawAfter trial, the RTC upheld the validity of the promissory notes. t
found that, in 2001 alone, Equitable restructured respondents' loans
amounting to US$228,200 and P1,000,000.[11] The trial court, however,
invalidated the escalation clause contained therein because it violated the
principle of mutuality of contracts.[12] Nevertheless, it took judicial notice
of the steep depreciation of the peso during the intervening period[13] and
declared the existence of extraordinary deflation.[14] Consequently, the
RTC ordered the use of the 1996 dollar exchange rate in computing
respondents' dollar-denominated loans.[15] Lastly, because the business
reputation of respondents was (allegedly) severely damaged when
Equitable froze their accounts,[16] the trial court awarded moral and
exemplary damages to them.[17]chanroblesvirtuallawlibrary

cralawThe dispositive portion of the February 5, 2004 RTC
decision[18] provided:
WHEREFORE, premises considered, judgment is hereby rendered:

A) Ordering [Equitable] to reinstate and return the amount of
[respondents'] deposit placed on hold status;

B) Ordering [Equitable] to pay [respondents] the sum of P12 [m]illion
[p]esos as moral damages;

C) Ordering [Equitable] to pay [respondents] the sum of P10 [m]illion
[p]esos as exemplary damages;

D) Ordering defendants Aimee Yu and Bejan [Lionel] Apas to pay
[respondents], jointly and severally, the sum of [t]wo [m]illion [p]esos as
moral and exemplary damages;

E) Ordering [Equitable, Aimee Yu and Bejan Lionel Apas], jointly and
severally, to pay [respondents'] attorney's fees in the sum of P300,000;
litigation expenses in the sum of P50,000 and the cost of suit;

F) Directing plaintiffs Ng Sheung Ngor and Ken Marketing to pay
[Equitable] the unpaid principal obligation for the peso loan as well as the
unpaid obligation for the dollar denominated loan;
G) Directing plaintiff Ng Sheung Ngor and Ken Marketing to pay
[Equitable] interest as follows:

1) 12% per annum for the peso loans;

2) 8% per annum for the dollar loans. The basis for the payment of the
dollar obligation is the conversion rate of P26.50 per dollar availed of at
the time of incurring of the obligation in accordance with Article 1250 of the
Civil Code of the Philippines;

H) Dismissing [Equitable's] counterclaim except the payment of the
aforestated unpaid principal loan obligations and interest.

cralawSO ORDERED.[19]


Equitable and respondents filed their respective notices of appeal.
[20]chanroblesvirtuallawlibrary

n the March 1, 2004 order of the RTC, both notices were denied due
course because Equitable and respondents failed to submit proof that they
paid their respective appeal fees.[21]

WHEREFORE, premises considered, the appeal interposed by defendants
from the Decision in the above-entitled case is DENIED due course. As of
February 27, 2004, the Decision dated February 5, 2004, is considered
finaI and executory in so far as [EquitabIe, Aimee Yu and Bejan LioneI
Apas] are concerned.[22] (emphasis supplied)


Equitable moved for the reconsideration of the March 1, 2004 order of the
RTC[23] on the ground that it did in fact pay the appeal
fees. Respondents, on the other hand, prayed for the issuance of a writ of
execution.[24] cralaw

cralawOn March 24, 2004, the RTC issued an omnibus orderdenying
Equitable's motion for reconsideration for lack of merit[25]and ordered the
issuance of a writ of execution in favor of respondents.[26]According to the
RTC, because respondents did not move for the reconsideration of the
previous order (denying due course to the parties notices of appeal),
[27] the February 5, 2004 decision became final and executory as to both
parties and a writ of execution against Equitable was in order.
[28]chanroblesvirtuallawlibrary

cralawA writ of execution was thereafter issued[29] and three real
properties of Equitable were levied upon.[30]

cralawOn March 26, 2004, Equitable filed a petition for relief in the RTC
from the March 1, 2004 order.[31] t, however, withdrew that petition on
March 30, 2004[32] and instead filed a petition for certiorari with an
application for an injunction in the CA to enjoin the implementation and
execution of the March 24, 2004 omnibus order.[33]

cralawOn June 16, 2004, the CA granted Equitable's application for
injunction. A writ of preliminary injunction was correspondingly issued.
[34]chanroblesvirtuallawlibrary

cralawNotwithstanding the writ of injunction, the properties of Equitable
previously levied upon were sold in a public auction on July 1, 2004.
Respondents were the highest bidders and certificates of sale were issued
to them.[35]

cralawOn August 10, 2004, Equitable moved to annul the July 1, 2004
auction sale and to cite the sheriffs who conducted the sale in contempt for
proceeding with the auction despite the injunction order of the CA.[36]

cralawOn October 28, 2005, the CA dismissed the petition for certiorari.
[37] t found Equitable guilty of forum shopping because the bank filed its
petition for certiorari in the CA several hours before withdrawing its petition
for relief in the RTC.[38]Moreover, Equitable failed to disclose, both in the
statement of material dates and certificate of non-forum shopping
(attached to its petition for certiorari in the CA), that it had a pending
petition for relief in the RTC.[39]chanroblesvirtuallawlibrary
cralaw
Equitable moved for reconsideration[40] but it was denied.[41] Thus, this
petition.
cralawEquitable asserts that it was not guilty of forum shopping because
the petition for relief was withdrawn on the same daythe petition for
certiorari was filed.[42]t likewise avers that its petition for certiorari was
meritorious because the RTC committed grave abuse of discretion in
issuing the March 24, 2004 omnibus order which was based on an
erroneous assumption. The March 1, 2004 order denying its notice of
appeal for non payment of appeal fees was erroneous because it had in
fact paid the required fees.[43] Thus, the RTC, by issuing its March 24,
2004 omnibus order, effectively prevented Equitable from appealing the
patently wrong February 5, 2004 decision.[44]chanroblesvirtuallawlibrary

cralawThis petition is meritorious.

EQUITABLE WAS NOT GUILTY OF FORUM SHOPPING

Forum shopping exists when two or more actions involving the same
transactions, essential facts and circumstances are filed and those actions
raise identical issues, subject matter and causes of action.[45] The test is
whether, in two or more pending cases, there is identity of parties, rights or
causes of actions and reliefs.[46]

cralawEquitable's petition for relief in the RTC and its petition for certiorari
in the CA did not have identical causes of action. The petition for relief
from the denial of its notice of appeal was based on the RTCs judgment or
final order preventing it from taking an appeal by fraud, accident, mistake
or excusable negligence.[47] On the other hand, its petition for certiorari in
the CA, a special civil action, sought to correct the grave abuse of
discretion amounting to lack of jurisdiction committed by the RTC.
[48]chanroblesvirtuallawlibrary

n a petition for relief, the judgment or final order is rendered by a court
with competent jurisdiction. n a petition for certiorari, the order is rendered
by a court without or in excess of its jurisdiction.

cralawMoreover, Equitable substantially complied with the rule on non-
forum shopping when it moved to withdraw its petition for relief in the RTC
on the same day (in fact just four hours and forty minutes after) it filed the
Credit Transactions Full Text Cases Atty. Adviento!!!!"&
petition for certiorari in the CA. Even if Equitable failed to disclose that it
had a pending petition for relief in the RTC, it rectified what was
doubtlessly a careless oversight by withdrawing the petition for relief just a
few hours after it filed its petition for certiorari in the CA a clear
indication that it had no intention of maintaining the two actions at the
same time.

THE TRIAL COURT COMMITTED GRAVE ABUSE OF DISCRETION IN
ISSUING ITS MARCH 1, 2004 AND MARCH24,2004 ORDERS

cralaw
Section 1, Rule 65 of the Rules of Court provides:

Section 1. Petition for Certiorari. When any tribunaI, board or officer
exercising judiciaI or quasi-judiciaI function has acted without or in
excess of its or his jurisdiction, or with grave abuse of discretion
amounting to Iack or excess of jurisdiction, and there is no appeaI,
nor any pIain, speedy or adequate remedy in the ordinary course of
Iaw, a person aggrieved thereby may file a verified petition in the proper
court, alleging the facts with certainty and praying that judgment be
rendered annulling or modifying the proceedings of such tribunal, board or
officer, and granting such incidental reliefs as law and justice may require.

cralawThe petition shall be accompanied by a certified true copy of the
judgment, order or resolution subject thereof, copies of all pleadings and
documents relevant and pertinent thereto, and a sworn certificate of non-
forum shopping as provided in the third paragraph of Section 3, Rule 46.

There are two substantial requirements in a petition for certiorari. These
are:

1. that the tribunal, board or officer exercising judicial or quasi-judicial
functions acted without or in excess of his or its jurisdiction or with grave
abuse of discretion amounting to lack or excess of jurisdiction; and

2. that there is no appeal or any plain, speedy and adequate remedy in
the ordinary course of law.

cralawFor a petition for certiorari premised on grave abuse of discretion to
prosper, petitioner must show that the public respondent patently and
grossly abused his discretion and that abuse amounted to an evasion of
positive duty or a virtual refusal to perform a duty enjoined by law or to act
at all in contemplation of law, as where the power was exercised in an
arbitrary and despotic manner by reason of passion or hostility.[49]

cralawThe March 1, 2004 order denied due course to the notices of appeal
of both Equitable and respondents. However, it declared that the February
5, 2004 decision was finaI and executory onIy with respect to
EquitabIe.[50]As expected, the March 24, 2004 omnibus order denied
Equitable's motion for reconsideration and granted respondents' motion for
the issuance of a writ of execution.[51]

The March 1, 2004 and March 24, 2004 orders of the RTC were obviously
intended to prevent Equitable, et al. from appealing the February 5, 2004
decision. Not only that. The execution of the decision was undertaken with
indecent haste, effectively obviating or defeating Equitable's right to avail
of possible legal remedies. No matter how we look at it, the RTC
committed grave abuse of discretion in rendering those orders.

cralawWith regard to whether Equitable had a plain, speedy and adequate
remedy in the ordinary course of law, we hold that there was none. The
RTC denied due course to its notice of appeal in the March 1, 2004 order.
t affirmed that denial in the March 24, 2004 omnibus order. Hence, there
was no way Equitable could have possibly appealed the February 5, 2004
decision.[52]
cralawAlthough Equitable filed a petition for relief from the March 24, 2004
order, that petition was not a plain, speedy and adequate remedy in the
ordinary course of law.[53]A petition for relief under Rule 38 is an equitable
remedy allowed only in exceptional circumstances or where there is no
other available or adequate remedy.[54]chanroblesvirtuallawlibrary

cralawThus, we grant Equitable's petition for certiorari and consequently
give due course to its appeal.

EQUITABLE RAISED PURE QUESTIONS OF LAW IN ITS
PETITIONFORREVIEW

craIawThe jurisdiction of this Court in Rule 45 petitions is limited to
questions of law.[55] There is a question of law when the doubt or
controversy concerns the correct application of law or jurisprudence to a
certain set of facts; or when the issue does not call for the probative value
of the evidence presented, the truth or falsehood of facts being admitted.
[56]

cralawEquitable does not assail the factual findings of the trial court. ts
arguments essentially focus on the nullity of the RTCs February 5, 2004
decision. Equitable points out that that decision was patently
erroneous, speciaIIy the exorbitant award of damages, as it was
inconsistent with existing law and jurisprudence.[57]

THE PROMISSORY NOTES WEREVALID

cralaw
The RTC upheld the validity of the promissory notes despite respondents
assertion that those documents were contracts of adhesion.

cralawA contract of adhesion is a contract whereby almost all of its
provisions are drafted by one party.[58] The participation of the other party
is limited to affixing his signature or his adhesion to the contract.[59] For
this reason, contracts of adhesion are strictly construed against the party
who drafted it.[60]chanroblesvirtuallawlibrary

cralawt is erroneous, however, to conclude that contracts of adhesion are
invalid per se. They are, on the contrary, as binding as ordinary contracts.
A party is in reality free to accept or reject it. A contract of adhesion
becomes void only when the dominant party takes advantage of the
weakness of the other party, completely depriving the latter of the
opportunity to bargain on equal footing.[61]chanroblesvirtuallawlibrary

cralawThat was not the case here. As the trial court noted, if the terms and
conditions offered by Equitable had been truly prejudicial to respondents,
they would have walked out and negotiated with another bank at the first
available instance. But they did not. nstead, they continuously availed of
Equitable's credit facilities for five long years.

cralawWhile the RTC categorically found that respondents had
outstanding dollar- and peso-denominated loans with Equitable, it,
however, failed to ascertain the total amount due (principal, interest and
penalties, if any) as of July 9, 2001.The trial court did not explain how it
arrived at the amounts of US$228,200 and P1,000,000.[62] n Metro
Manila Transit Corporation v. D.M. Consunji,[63] we reiterated that this
Court is not a trier of facts and it shall pass upon them only for compelling
reasons which unfortunately are not present in this case.[64] Hence, we
ordered the partial remand of the case for the sole purpose of determining
the amount of actual damages.[65]

ESCALATION CLAUSE VIOLATED THE PRINCIPLE OF
MUTUALITYOFCONTRACTS

CRALAWEscalation clauses are not void per se. However, one which
grants the creditor an unbridled right to adjust the interest independently
and upwardly, completely depriving the debtor of the right to assent to an
important modification in the agreement is void. Clauses of that nature
violate the principle of mutuality of contracts.[66] Article 1308[67] of the
Civil Code holds that a contract must bind both contracting parties; its
validity or compliance cannot be left to the will of one of them.[68]

cralawFor this reason, we have consistently held that a valid escalation
clause provides:

1. that the rate of interest will only be increased if the applicable
maximum rate of interest is increased by law or by the Monetary Board;
and

2. that the stipulated rate of interest will be reduced if
theapplicable maximum rate of interest is reduced by law or by the
Monetary Board (de-escalation clause).[69]


cralawThe RTC found that Equitable's promissory notes uniformly stated:

f subject promissory note is extended, the interest for subsequent
extensions shall be at such rate as shall be determined by the bank.[70]

Credit Transactions Full Text Cases Atty. Adviento!!!!"'
Equitable dictated the interest rates if the term (or period for repayment) of
the loan was extended. Respondents had no choice but to accept them.
This was a violation of Article 1308 of the Civil Code. Furthermore, the
assailed escalation clause did not contain the necessary provisions for
validity, that is, it neither provided that the rate of interest would be
increased only if allowed by law or the Monetary Board, nor allowed de-
escalation. For these reasons, the escalation clause was void.

cralawWith regard to the proper rate of interest, in New Sampaguita
Builders v. Philippine National Bank[71] we held that, because the
escalation clause was annulled, the principal amount of the loan was
subject to the original or stipulated rate of interest. Upon maturity, the
amount due was subject to legal interest at the rate of 12% per annum.
[72]chanroblesvirtuallawlibrary
cralaw
cralawConsequently, respondents should pay Equitable the interest rates
of 12.66% p.a. for their dollar-denominated loans and 20% p.a. for their
peso-denominated loans from January 10, 2001 to July 9, 2001.
Thereafter, Equitable was entitled to legal interest of 12% p.a. on all
amounts due.

THERE WAS NO EXTRAORDINARYDEFLATION

Extraordinary inflation exists when there is an unusual decrease in the
purchasing power of currency (that is, beyond the common fluctuation in
the value of currency) and such decrease could not be reasonably
foreseen or was manifestly beyond the contemplation of the parties at the
time of the obligation. Extraordinary deflation, on the other hand, involves
an inverse situation.[73]
cralaw
cralawArticle 1250 of the Civil Code provides:


Article 1250. n case an extraordinary inflation or deflation of the currency
stipulated should intervene, the value of the currency at the time of the
establishment of the obligation shall be the basis of payment, unless there
is an agreement to the contrary.


For extraordinary inflation (or deflation) to affect an obligation, the
following requisites must be proven:
1. that there was an official declaration of extraordinary inflation or
deflation from the Bangko Sentral ng Pilipinas (BSP);[74]

2. that the obligation was contractual in nature;[75] and

3. that the parties expressly agreed to consider the effects of the
extraordinary inflation or deflation.[76]


Despite the devaluation of the peso, the BSP never declared a situation of
extraordinary inflation.Moreover, although the obligation in this instance
arose out of a contract, the parties did not agree to recognize the effects of
extraordinary inflation (or deflation).[77] The RTC never mentioned that
there was a such stipulation either in the promissory note or loan
agreement. Therefore, respondents should pay their dollar-denominated
loans at the exchange rate fixed by the BSP on the date of maturity.
[78]chanroblesvirtuallawlibrary

THE AWARD OF MORAL AND EXEMPLARY DAMAGES
LACKEDBASIS

cralawMoral damages are in the category of an award designed to
compensate the claimant for actual injury suffered, not to impose a penalty
to the wrongdoer.[79] To be entitled to moral damages, a claimant must
prove:


1. That he or she suffered besmirched reputation, or physical, mental
or psychological suffering sustained by the claimant;

2. That the defendant committed a wrongful act or omission;

3. That the wrongful act or omission was the proximate cause of the
damages the claimant sustained;

4. The case is predicated on any of the instances expressed or
envisioned by Article 2219[80] and 2220[81]. [82]


n culpa contractual or breach of contract, moral damages are recoverable
only if the defendant acted fraudulently or in bad faith or in wanton
disregard of his contractual obligations.[83] The breach must be wanton,
reckless, malicious or in bad faith, and oppressive or abusive.
[84]chanroblesvirtuallawlibrary
cralaw
cralawThe RTC found that respondents did not pay Equitable the interest
due on February 9, 2001 (or any month thereafter prior to the maturity of
the loan)[85] or the amount due (principal plus interest) due on July 9,
2001.[86] Consequently, Equitable applied respondents' deposits to their
loans upon maturity.

cralawThe relationship between a bank and its depositor is that of creditor
and debtor.[87] For this reason, a bank has the right to set-off the deposits
in its hands for the payment of a depositor's indebtedness.
[88]chanroblesvirtuallawlibrary

cralawRespondents indeed defaulted on their obligation. For this reason,
Equitable had the option to exercise its legal right to set-off or
compensation. However, the RTC mistakenly (or, as it now appears,
deliberately) concluded that Equitable acted fraudulently or in bad faith or
in wanton disregard of its contractual obligations despite the absence of
proof. The undeniable fact was that, whatever damage respondents
sustained was pureIy the consequence of their faiIure to pay their
Ioans. There was therefore absolutely no basis for the award of moral
damages to them.

cralawNeither was there reason to award exemplary damages. Since
respondents were not entitled to moral damages, neither should they be
awarded exemplary damages.[89] And if respondents were not entitled to
moral and exemplary damages, neither could they be awarded attorney's
fees and litigation expenses.[90]chanroblesvirtuallawlibrary

cralawACCORDINGLY, the petition is hereby GRANTED.

cralawThe October 28, 2005 decision and February 3, 2006 resolution of
the Court of Appeals in CA-G.R. SP No. 83112 are
hereby REVERSED and SET ASIDE.

cralawThe March 24, 2004 omnibus order of the Regional Trial Court,
Branch 16, Cebu City in Civil Case No. CEB-26983 is
hereby ANNULLED for being rendered with grave abuse of discretion
amounting to lack or excess of jurisdiction. All proceedings undertaken
pursuant thereto are likewise declared null and void.

cralawThe March 1, 2004 order of the Regional Trial Court, Branch 16 of
Cebu City in Civil Case No. CEB-26983 is hereby SET ASIDE. The appeal
of petitioners Equitable PC Bank, Aimee Yu and Bejan Lionel Apas is
therefore given due course.

cralawThe February 5, 2004 decision of the Regional Trial Court, Branch
16 of Cebu City in Civil Case No. CEB-26983 is accordingly SET
ASIDE. New judgment is hereby entered:

1. ordering respondents Ng Sheung Ngor, doing business under
the name and style of Ken Marketing, Ken Appliance Division, nc. and
Benjamin E. Go to pay petitioner Equitable PC Bank the principal amount
of their dollar- and peso-denominated loans;
2. ordering respondents Ng Sheung Ngor, doing business under
the name and style of Ken Marketing, Ken Appliance Division, nc. and
Benjamin E. Go to pay petitioner Equitable PC Bank interest at:
a) 12.66% p.a. with respect to their dollar-denominated loans
from January 10, 2001 to July 9, 2001;
b) 20% p.a.with respect to their peso-denominated loans from
January 10, 2001 to July 9, 2001;[91]
c) pursuant to our ruling in Eastern Shipping Lines v. Court of
Appeals,[92]the total amount due on July 9, 2001 shall earn legal interest
at 12% p.a. from the time petitioner Equitable PC Bank demanded
payment, whether judicially or extra-judicially; and
d) after this Decision becomes final and executory, the applicable
rate shall be 12% p.a.until full satisfaction;
3. all other claims and counterclaims are dismissed.
cralawAs a starting point, the Regional Trial Court, Branch 16 of Cebu City
shall compute the exact amounts due on the respective dollar-
denominated and peso-denominated loans, as of July 9, 2001, of
Credit Transactions Full Text Cases Atty. Adviento!!!!"(
respondents Ng Sheung Ngor, doing business under the name and style
of Ken Marketing, Ken Appliance Division and Benjamin E. Go.

SO ORDERED.
G.R. No. 169617 ApriI 4, 2007
HEIRS OF ZOILO ESPIRITU AND PRIMITIVA ESPIRITU, Petitioners,
vs.
SPOUSES MAXIMO LANDRITO AND PAZ LANDRITO, Represented by
ZOILO LANDRITO, as their Attorney-in-Fact, Respondents.
CHICO-NAZARIO, J.:
This is a petition for Review on Certiorari under Rule 45 of the Rules of
Court assailing the Decision of the Court of Appeals,1 dated 31 August
2005, reversing the Decision rendered by the trial court on 13 December
1995. The Court of Appeals, in its assailed Decision, fixed the interest rate
of the loan between the parties at 12% per annum, and ordered the
Spouses Zoilo and Primitiva Espiritu (Spouses Espiritu) to reconvey the
subject property to the Spouses Landrito conditioned upon the payment of
the loan.
Petitioners DULCE, BENLNDA, EDWN, CYNTHA, AND MRAM
ANDREA, all surnamed ESPRTU, are the only children and legal heirs of
the Spouses Zoilo and Primitiva Espiritu, who both died during the
pendency of the case before the Honorable Court of Appeals.2
Respondents Spouses Maximo and Paz Landrito (Spouses Landrito) are
herein represented by their son and attorney-in-fact, Zoilo Landrito.3
On 5 September 1986, Spouses Landrito loaned from the Spouses
Espiritu the amount of P350,000.00 payable in three months. To secure
the loan, the Spouses Landrito executed a real estate mortgage over a
five hundred forty (540) square meter lot located in Alabang, Muntinlupa,
covered by Transfer Certificate of Title No. S-48948, in favor of the
Spouses Espiritu. From the P350,000.00 that the Landritos were
supposed to receive, P17,500.00 was deducted as interest for the first
month which was equivalent to five percent of the principal debt,
andP7,500.00 was further deducted as service fee. Thus, they actually
received a net amount of P325,000.00. The agreement, however, provided
that the principal indebtedness earns "interest at the legal rate."4
After three months, when the debt became due and demandable, the
Spouses Landrito were unable to pay the principal, and had not been able
to make any interest payments other than the amount initially deducted
from the proceeds of the loan. On 29 December 1986, the loan agreement
was extended to 4 January 1987 through an Amendment of Real Estate
Mortgage. The loan was restructured in such a way that the unpaid
interest became part of the principal, thus increasing the principal
to P385,000. The new loan agreement adopted all other terms and
conditions contained in first agreement.5
Due to the continued inability of the Spouses Landritos to settle their
obligations with the Spouses Espiritu, the loan agreement was renewed
three more times. n all these subsequent renewals, the same terms and
conditions found in the first agreement were retained. On 29 July 1987,
the principal was increased to P507,000.00 inclusive of running interest.
On 11 March 1988, it was increased to P647,000.00. And on 21 October
1988, the principal was increased to P874,125.00.6 At the hearing before
the trial court, Zoilo Espiritu testified that the increase in the principal in
each amendment of the loan agreement did not correspond to the amount
delivered to the Spouses Landrito. Rather, the increase in the principal
had been due to unpaid interest and other charges.7
The debt remained unpaid. As a consequence, the Spouses Espiritu
foreclosed the mortgaged property on 31 October 1990. During the
auction sale, the property was sold to the Spouses Espiritu as the lone
bidder. On 9 January 1991, the Sheriff's Certificate of Sale was annotated
on the title of the mortgaged property, giving the Spouses Landrito until 8
January 1992 to redeem the property. 8
The Spouses Landrito failed to redeem the subject property although they
alleged that they negotiated for the redemption of the property as early as
30 October 1991. While the negotiated price for the land started
atP1,595,392.79, it was allegedly increased by the Spouses Espiritu from
time to time. Spouses Landrito allegedly tendered two manager's checks
and some cash, totaling P1,800,000.00 to the Spouses Espiritu on 13
January 1992, but the latter refused to accept the same. They also alleged
that the Spouses Espiritu increased the amount demanded to P2.5 Million
and gave them until July 1992 to pay the said amount. However, upon
inquiry, they found out that on 24 June 1992, the Spouses Espiritu had
already executed an Affidavit of Consolidation of Ownership and registered
the mortgaged property in their name, and that the Register of Deeds of
Makati had already issued Transfer Certificate of Title No. 179802 in the
name of the Spouses Espiritu. On 9 October 1992, the Spouses Landrito,
represented by their son Zoilo Landrito, filed an action for annulment or
reconveyance of title, with damages against the Spouses Espiritu before
Branch 146 of the Regional Trial Court of Makati.9 Among the allegations
in their Complaint, they stated that the Spouses Espiritu, as creditors and
mortgagees, "imposed interest rates that are shocking to one's moral
senses."10
The trial court dismissed the complaint and upheld the validity of the
foreclosure sale. The trial court ordered in its Decision, dated 13
December 1995:11
WHEREFORE, all the foregoing premises considered, the herein
complaint is hereby dismissed forthwith.
Without pronouncements to costs.
The Spouses Landrito appealed to the Court of Appeals pursuant to Rule
41 of the 1997 Rules of Court. n its Decision dated 31 August 2005, the
Court of Appeals reversed the trial court's decision, decreeing that the five
percent (5%) interest imposed by the Spouses Espiritu on the first month
and the varying interest rates imposed for the succeeding months
contravened the provisions of the Real Estate Mortgage contract which
provided that interest at the legal rate, i.e., 12% per annum, would be
imposed. t also ruled that although the Usury Law had been rendered
ineffective by Central Bank Circular No. 905, which, in effect, removed the
ceiling rates prescribed for interests, thus, allowing parties to freely
stipulate thereon, the courts may render void any stipulation of interest
rates which are found iniquitous or unconscionable. As a result, the Court
of Appeals set the interest rate of the loan at the legal rate, or 12% per
annum.12
Furthermore, the Court of Appeals held that the action for reconveyance,
filed by the Spouses Landrito, is still a proper remedy. Even if the Spouses
Landrito failed to redeem the property within the one-year redemption
period provided by law, the action for reconveyance remained as a remedy
available to a landowner whose property was wrongfully registered in
another's name since the subject property has not yet passed to an
innocent purchaser for value.13
n the decretal portion of its Decision, the Court of Appeals ruled14:
WHEREFORE, the instant appeal is hereby GRANTED. The assailed
Decision dated December 13, 1995 of the Regional Trial Court of Makati,
Branch 146 in Civil Case No. 92-2920 is hereby REVERSED and SET
ASDE, and a new one is hereby entered as follows: (1) The legal rate of
12% per annum is hereby FXED to be applied as the interest of the loan;
and (2) Conditioned upon the payment of the loan, defendants-appellees
spouses Zoilo and Primitiva Espiritu are hereby ordered to reconvey
Transfer Certificate of Title No. S-48948 to appellant spouses Maximo and
Paz Landrito.
The case is REMANDED to the Trial Court for the above determination.
Hence, the present petition. The following issues were raised:15

THE HONORABLE COURT OF APPEALS ERRED N REVERSNG AND

SETTNG ASDE THE DECSON OF THE TRAL COURT AND
ORDERNG HEREN PETTONERS TO RECONVEY TRANSFER
CERTFCATE OF TTLE NO. 18918 TO HEREN RESPONDENTS,
WTHOUT ANY FACTUAL OR LEGAL BASS THEREFOR.

THE HONORABLE COURT OF APPEALS ERRED N FNDNG THAT

HEREN PETTONERS UNLATERALLY MPOSED ON HEREN
RESPONDENTS THE ALLEGEDLY UNREASONABLE NTERESTS ON
THE MORTGAGE LOANS.

THE HONORABLE COURT OF APPEALS ERRED N NOT

CONSDERNG THAT HEREN RESPONDENTS' ATTORNEY-N-FACT S
NOT ARMED WTH AUTHORTY TO FLE AND PROSECUTE THS
CASE.
Credit Transactions Full Text Cases Atty. Adviento!!!!")
The petition is without merit.
The Real Estate Mortgage executed between the parties specified that
"the principal indebtedness shall earn interest at the legal rate." The
agreement contained no other provision on interest or any fees or charges
incident to the debt. n at least three contracts, all designated as
Amendment of Real Estate Mortgage, the interest rate imposed was,
likewise, unspecified. During his testimony, Zoilo Espiritu admitted that the
increase in the principal in each of the Amendments of the Real Estate
Mortgage consists of interest and charges. The Spouses Espiritu alleged
that the parties had agreed on the interest and charges imposed in
connection with the loan, hereunder enumerated:
1. P17,500.00 was the interest charged for the first month and P7,500.00
was imposed as service fee.
2. P35,000.00 interest and charges, or the difference between
the P350,000.00 principal in the Real Estate Mortgage dated 5 September
1986 and the P385,000.00 principal in the Amendment of the Real Estate
Mortgage dated 29 December 1986.
3. P132,000.00 interest and charges, or the difference between
the P385,000.00 principal in the Amendment of the Real Estate Mortgage
dated 29 December 1986 and the P507,000.00 principal in the
Amendment of the Real Estate Mortgage dated 29 July 1987.
4. P140,000.00 interest and charges, or the difference between
the P507,000.00 principal in the Amendment of the Real Estate Mortgage
dated 29 July 1987 and the P647,000.00 principal in the Amendment of
the Real Estate Mortgage dated 11 March 1988.
5. P227,125.00 interest and charges, or the difference between
the P647,000.00 principal in the Amendment of the Real Estate Mortgage
dated 11 March 1988 and the P874,125 principal in the Amendment of the
Real Estate Mortgage dated 21 October 1988.
The total interest and charges amounting to P559,125.00 on the original
principal of P350,000 was accumulated over only two years and one
month. These charges are not found in any written agreement between the
parties. The records fail to show any computation on how much interest
was charged and what other fees were imposed. Not only did lack of
transparency characterize the aforementioned agreements, the interest
rates and the service charge imposed, at an average of 6.39% per month,
are excessive.
n enacting Republic Act No. 3765, known as the "Truth in Lending Act,"
the State seeks to protect its citizens from a lack of awareness of the true
cost of credit by assuring the full disclosure of such costs. Section 4, in
connection with Section 3(3)16 of the said law, gives a detailed
enumeration of the specific information required to be disclosed, among
which are the interest and other charges incident to the extension of credit.
Section 617 of the same law imposes on anyone who willfully violates
these provisions, sanctions which include civil liability, and a fine and/or
imprisonment.
Although any action seeking to impose either civil or criminal liability had
already prescribed, this Court frowns upon the underhanded manner in
which the Spouses Espiritu imposed interest and charges, in connection
with the loan. This is aggravated by the fact that one of the creditors, Zoilo
Espiritu, a lawyer, is hardly in a position to plead ignorance of the
requirements of the law in connection with the transparency of credit
transactions. n addition, the Civil Code clearly provides that:
Article 1956. No interest shall be due unless it has been stipulated in
writing.
The omission of the Spouses Espiritu in specifying in the contract the
interest rate which was actually imposed, in contravention of the law,
manifested bad faith.
n several cases, this Court has been known to declare null and void
stipulations on interest and charges that were found excessive, iniquitous,
and unconscionable. n the case of Medel v. Court of Appeals,18 the Court
declared an interest rate of 5.5% per month on a P500,000.00 loan to be
excessive, iniquitous, unconscionable and exorbitant. Even if the parties
themselves agreed on the interest rate and stipulated the same in a
written agreement, it nevertheless declared such stipulation as void and
ordered the imposition of a 12% yearly interest rate. n Spouses Solangon
v. Salazar,19 6% monthly interest on a P60,000.00 loan was likewise
equitably reduced to a 1% monthly interest or 12% per annum. n Ruiz v.
Court of Appeals,20 the Court found a 3% monthly interest imposed on
four separate loans with a total of P1,050,000.00 to be excessive and
reduced the interest to a 1% monthly interest or 12% per annum.
n declaring void the stipulations authorizing excessive interest and
charges, the Court declared that although the Usury Law was suspended
by Central Bank Circular No. 905, s. 1982, effective on 1 January 1983,
and consequently parties are given a wide latitude to agree on any interest
rate, nothing in the said Circular grants lenders carte blanche authority to
raise interest rates to levels which will either enslave their borrowers or
lead to a hemorrhaging of their assets.21
Stipulation authorizing iniquitous or unconscionable interests are contrary
to morals, if not against the law. Under Article 1409 of the Civil Code,
these contracts are inexistent and void from the beginning. They cannot be
ratified nor the right to set up their illegality as a defense be waived.22 The
nullity of the stipulation on the usurious interest does not, however, affect
the lender's right to recover the principal of the loan.23 Nor would it affect
the terms of the real estate mortgage. The right to foreclose the mortgage
remains with the creditors, and said right can be exercised upon the failure
of the debtors to pay the debt due. The debt due is to be considered
without the stipulation of the excessive interest. A legal interest of 12% per
annum will be added in place of the excessive interest formerly imposed.
While the terms of the Real Estate Mortgage remain effective, the
foreclosure proceedings held on 31 Ocotber 1990 cannot be given effect.
n the Notice of Sheriff's Sale24 dated 5 October 1990, and in the
Certificate of Sale25 dated 31 October 1990, the amount designated as
mortgage indebtedness amounted to P874,125.00. Likewise, in the
demand letter26 dated 12 December 1989, Zoilo Espiritu demanded from
the Spouses Landrito the amount of P874,125.00 for the unpaid loan.
Since the debt due is limited to the principal of P350,000.00 with 12% per
annum as legal interest, the previous demand for payment of the amount
of P874,125.00 cannot be considered as a valid demand for payment. For
an obligation to become due, there must be a valid demand.27 Nor can
the foreclosure proceedings be considered valid since the total amount of
the indebtedness during the foreclosure proceedings was pegged
at P874,125.00 which included interest and which this Court now nullifies
for being excessive, iniquitous and exorbitant. f the foreclosure
proceedings were considered valid, this would result in an inequitable
situation wherein the Spouses Landrito will have their land foreclosed for
failure to pay an over-inflated loan only a small part of which they were
obligated to pay.
Moreover, it is evident from the facts of the case that despite considerable
effort on their part, the Spouses Landrito failed to redeem the mortgaged
property because they were unable to raise the total amount, which was
grossly inflated by the excessive interest imposed. Their attempt to
redeem the mortgaged property at the inflated amount of P1,595,392.79,
as early as 30 October 1991, is reflected in a letter, which creditor-
mortgagee Zoilo Landrito acknowledged to have received by affixing his
signature herein.28 They also attached in their Complaint copies of two
checks in the amounts of P770,000.00 and P995,087.00, both dated 13
January 1992, which were allegedly refused by the Spouses
Espiritu.29 Lastly, the Spouses Espiritu even attached in their exhibits a
copy of a handwritten letter, dated 27 January 1994, written by Paz
Landrito, addressed to the Spouses Espiritu, wherein the former offered to
pay the latter the sum of P2,000,000.00.30 n all these instances, the
Spouses Landrito had tried, but failed, to pay an amount way over the
indebtedness they were supposed to pay i.e., P350,000.00 and 12%
interest per annum. Thus, it is only proper that the Spouses Landrito be
given the opportunity to repay the real amount of their indebtedness.
Since the Spouses Landrito, the debtors in this case, were not given an
opportunity to settle their debt, at the correct amount and without the
iniquitous interest imposed, no foreclosure proceedings may be instituted.
A judgment ordering a foreclosure sale is conditioned upon a finding on
the correct amount of the unpaid obligation and the failure of the debtor to
pay the said amount.31 n this case, it has not yet been shown that the
Spouses Landrito had already failed to pay the correct amount of the debt
and, therefore, a foreclosure sale cannot be conducted in order to answer
for the unpaid debt. The foreclosure sale conducted upon their failure to
payP874,125 in 1990 should be nullified since the amount demanded as
the outstanding loan was overstated; consequently it has not been shown
that the mortgagors the Spouses Landrito, have failed to pay their
outstanding obligation. Moreover, if the proceeds of the sale together with
its reasonable rates of interest were applied to the obligation, only a small
part of its original loans would actually remain outstanding, but because of
the unconscionable interest rates, the larger part corresponded to said
excessive and iniquitous interest.
Credit Transactions Full Text Cases Atty. Adviento!!!!"*
As a result, the subsequent registration of the foreclosure sale cannot
transfer any rights over the mortgaged property to the Spouses Espiritu.
The registration of the foreclosure sale, herein declared invalid, cannot
vest title over the mortgaged property. The Torrens system does not create
or vest title where one does not have a rightful claim over a real property. t
only confirms and records title already existing and vested. t does not
permit one to enrich oneself at the expense of another.32 Thus, the
decree of registration, even after the lapse of one (1) year, cannot attain
the status of indefeasibility.
Significantly, the records show that the property mortgaged was purchased
by the Spouses Espiritu and had not been transferred to an innocent
purchaser for value. This means that an action for reconveyance may still
be availed of in this case.33
Registration of property by one person in his or her name, whether by
mistake or fraud, the real owner being another person, impresses upon
the title so acquired the character of a constructive trust for the real owner,
which would justify an action for reconveyance.34 This is based on Article
1465 of the Civil Code which states that:
Art. 1465. f property acquired through mistakes or fraud, the person
obtaining it is, by force of law, considered a trustee of an implied trust for
benefit of the person from whom the property comes.
The action for reconveyance does not prescribe until after a period of ten
years from the date of the registration of the certificate of sale since the
action would be based on implied trust.35 Thus, the action for
reconveyance filed on 31 October 1992, more than one year after the
Sheriff's Certificate of Sale was registered on 9 January 1991, was filed
within the prescription period.
t should, however, be reiterated that the provisions of the Real Estate
Mortgage are not annulled and the principal obligation stands. n addition,
the interest is not completely removed; rather, it is set by this Court at 12%
per annum. Should the Spouses Landrito fail to pay the principal, with its
recomputed interest which runs from the time the loan agreement was
entered into on 5 September 1986 until the present, there is nothing in this
Decision which prevents the Spouses Espiritu from foreclosing the
mortgaged property.
The last issue raised by the petitioners is whether or not Zoilo Landrito
was authorized to file the action for reconveyance filed before the trial
court or even to file the appeal from the judgment of the trial court, by
virtue of the Special Power of Attorney dated 30 September 1992. They
further noted that the trial court and the Court of Appeals failed to rule on
this issue.36
The Special Power of Attorney37 dated 30 September 1992 was executed
by Maximo Landrito, Jr., with the conformity of Paz Landrito, in connection
with the mortgaged property. t authorized Zoilo Landrito:
2. To make, sign, execute and deliver corresponding pertinent contracts,
documents, agreements and other writings of whatever nature or kind and
to sue or file legal action in any court of the Philippines, to collect, ask
demands, encash checks, and recover any and all sum of monies,
proceeds, interest and other due accruing, owning, payable or belonging
to me as such owner of the afore-mentioned property. (Emphasis
provided.)
Zoilo Landrito's authority to file the case is clearly set forth in the Special
Power of Attorney. Furthermore, the records of the case unequivocally
show that Zoilo Landrito filed the reconveyance case with the full authority
of his mother, Paz Landrito, who attended the hearings of the case, filed in
her behalf, without making any protest.38She even testified in the same
case on 30 August 1995. From the acts of Paz Landrito, there is no doubt
that she had authorized her son to file the action for reconveyance, in her
behalf, before the trial court.
N VEW OF THE FOREGONG, the instant Petition is DENED. This
Court AFFRMS the assailed Decision of the Court of Appeals,
promulgated on 31 August 2005, fixing the interest rate of the loan
between the parties at 12% per annum, and ordering the Spouses Espiritu
to reconvey the subject property to the Spouses Landrito conditioned upon
the payment of the loan together with herein fixed rate of interest. Costs
against the petitioners.
SO ORDERED.
G.R. No. L-47878 JuIy 24, 1942
GIL JARDENIL, pIaintiff-appeIIant,
vs.
HEFTI SOLAS (aIias HEPTI SOLAS, JEPTI SOLAS), defendant-
appeIIee.
MORAN, J.:
This is an action for foreclosure of mortgage. The only question raised in
this appeal is: s defendant-appellee bound to pay the stipulated interest
only up to the date of maturity as fixed in the promissory note, or up to the
date payment is effected? This question is, in our opinion controlled by the
express stipulation of the parties.
Paragraph 4 of the mortgage deed recites:
Que en consideracion a dicha suma aun por pagar de DOS ML
CUATROCENTOS PESOS (P2,4000.00), moneda filipina, que el Sr. Hepti
Solas se compromete a pagar al Sr. Jardenil en o antes del dia treintaiuno
(31) de marzo de mil novecientos treintaicuarto (1934), con los intereses
de dicha suma al tipo de doce por ciento (12%) anual a partir desde fecha
hasta el dia de su vencimiento o sea treintaiuno (31) de marzo de mil
novecientos treintaicuatro (1934), por la presente, el Sr. Hepti Solas cede
y traspasa, por via de primera hipoteca, a favor del Sr. Jardenil, sus
herederos y causahabientes, la parcela de terreno descrita en el parrafo
primero (1.) de esta escritura.
Defendant-appellee has, therefore, clearly agreed to pay interest only up
to the date of maturity, or until March 31, 1934. As the contract is silent as
to whether after that date, in the event of non-payment, the debtor would
continue to pay interest, we cannot in law, indulge in any presumption as
to such interest; otherwise, we would be imposing upon the debtor an
obligation that the parties have not chosen to agree upon. Article 1755 of
the Civil Code provides that "interest shall be due only when it has
been expressly stipulated." (Emphasis supplied.)
A writing must be interpreted according to the legal meaning of its
language (section 286, Act No. 190, now section 58, Rule 123), and only
when the wording of the written instrument appears to be contrary to the
evident intention of the parties that such intention must prevail. (Article
1281, Civil Code.) There is nothing in the mortgage deed to show that the
terms employed by the parties thereto are at war with their evident intent.
On the contrary the act of the mortgage of granting to the mortgagor on
the same date of execution of the deed of mortgage, an extension of one
year from the date of maturity within which to make payment, without
making any mention of any interest which the mortgagor should pay during
the additional period (see Exhibit B attached to the complaint), indicates
that the true intention of the parties was that no interest should be paid
during the period of grace. What reason the parties may have therefor, we
need not here seek to explore.
Neither has either of the parties shown that, by mutual mistake, the deed
of mortgage fails to express their agreement, for if such mistake existed,
plaintiff would have undoubtedly adduced evidence to establish it and
asked that the deed be reformed accordingly, under the parcel-evidence
rule.
We hold therefore, that as the contract is clear and unmistakable and the
terms employed therein have not been shown to belie or otherwise fail to
express the true intention of the parties and that the deed has not been
assailed on the ground of mutual mistake which would require its
reformation, same should be given its full force and effect. When a party
sues on a written contract and no attempt is made to show any vice
therein, he cannot be allowed to lay any claim more than what its clear
stipulations accord. His omission, to which the law attaches a definite
warning as an in the instant case, cannot by the courts be arbitrarily
supplied by what their own notions of justice or equity may dictate.
Plaintiff is, therefore, entitled only to the stipulated interest of 12 per cent
on the loan of P2, 400 from November 8, 1932 to March 31, 1934. And it
being a fact that extra judicial demands have been made which we may
assume to have been so made on the expiration of the year of grace, he
shall be entitled to legal interest upon the principal and the accrued
interest from April 1, 1935, until full payment.
Thus modified judgment is affirmed, with costs against appellant.
G.R. No. L-52482 February 23, 1990
SENTINEL INSURANCE CO., INC., petitioner,
vs.
THE HONORABLE COURT OF APPEALS, HON. FLORELIANA
CASTRO-BARTOLOME, Presiding Judge, Court of First Instance of
RizaI, Seventh JudiciaI District, Branch XV, THE PROVINCIAL
SHERIFF OF RIZAL, and ROSE INDUSTRIES, INC., respondents.
Credit Transactions Full Text Cases Atty. Adviento!!!!#+
REGALADO, J.:
Before us is a petition seeking the amendment and modification of the
dispositive portion of respondent court's decision in CA-G.R. No. SP-
09331, 1 allegedly to make it conform with the findings, arguments and
observations embodied in said decision which relief was denied by
respondent court in its resolution, dated January 15, 1980, 2rejecting
petitioner's ex parte motion filed for that purpose. 3
While not involving the main issues in the case threshed out in the court a
quo, the judgment in which had already become final and executory, the
factual backdrop of the present petition is summarized by respondent
court as follows:
Petitioner Sentinel nsurance Co., nc., was the surety in a contract of
suretyship entered into on November 15, 1974 with Nemesio Azcueta, Sr.,
who is doing business under the name and style of 'Malayan Trading as
reflected in SCO Bond No. G(16)00278 where both of them bound
themselves, 'jointly and severally, to fully and religiously guarantee the
compliance with the terms and stipulations of the credit line granted by
private respondent Rose ndustries, nc., in favor of Nemesio Azcueta, Sr.,
in the amount of P180,00.00.' Between November 23 to December 23,
1974, Azcueta made various purchases of tires, batteries and tire tubes
from the private respondent but failed to pay therefor, prompting the latter
to demand payment but because Azcueta failed to settle his accounts, the
case was referred to the nsurance Commissioner who invited the
attention of the petitioner on the matter and the latter cancelled the
Suretyship Agreement on May 13, 1975 with due notice to the private
respondent. Meanwhile, private respondent filed with the respondent court
of Makati a complaint for collection of sum of money against herein
petitioner and Azcueta, docketed as Civil Case No. 21248 alleging the
foregoing antecedents and praying that said defendants be ordered to pay
jointly and severally unto the plaintiff.
a) The amount of P198,602.41 as its principal obligation, including interest
and damage dues as of April 29, 1975;
b) To pay interest at 14% per annum and damage dues at the rate of 2%
every 45 days commencing from April 30, 1975 up to the time the full
amount is fully paid:
xxx xxx xxx
After petitioner filed its answer with counterclaim, the case, upon
agreement of the parties, was submitted for summary judgment and on
December 29, 1975, respondent court rendered its decision with the
following dispositive portion:
xxx xxx xxx
a) To pay interest on the principal obligation at the rate of 14% per annum
at the rate of 2% every 45 days commencing from April 30, 1975 until the
amount is fully paid.
The decision having become final and executory, the prevailing party
moved for its execution which respondent judge granted and pursuant
thereto, a notice of attachment and levy was served by respondent
Provincial Sheriff upon the petitioner. On the same day, however, the latter
filed a motion for 'clarification of the judgment as to its real and true import
because on its face, it would appear that aside from the 14% interest
imposed on the principal obligation, an additional 2% every 45 days
corresponding to the additional penalty has been imposed against the
petitioner which imposition would be usurious and could not have been the
intention of respondent Judge.' But the move did nor prosper because oil
May 22, 1971, the judge denied the motion on the theory that the
judgment, having become final and executory, it can no longer be
amended or corrected. 4
Contending that the order was issued with grave abuse of discretion,
petitioner went to respondent court on a petition for certiorari and
mandamus to compel the court below to clarify its decision, particularly
Paragraph l(a) of the dispositive portion thereof.
Respondent court granted tile petition in its decision dated December 3,
1979, the disquisition and dispositive portion whereof read:
While it is an elementary rule of procedure that after a decision, order or
ruling has become final, the court loses its jurisdiction orderover the same
and can no longer be subjected to any modification or alteration, it is
likewise well-settled that courts are empowered even after such finality, to
correct clerical errors or mistakes in the decisions (Potenciano vs. CA, L-
11569, 55 O.G. 2895). A clerical error is one that is visible to the eyes or
obvious to the understanding (Black vs. Republic, 104 Phil. 849).
That there was a mistake in the dispositive portion of the decision cannot
be denied considering that in the complaint filed against the petitioner, the
prayer as specifically stated in paragraph (b) was to 'order the latter, to pay
interest at 14% per annum and damage dues at the rate of 2% every 45
days commencing from April 30, 1975 up to the time the amount is fully
paid.' But this notwithstanding the respondent court in its questioned
decision decreed the petitioner to pay the interest on the principal
obligation at the rate of 14% per annum and 2% every 45 days
commencing from April 30, 1975 until the amount is fully paid,' so that, as
petitioner correctly observes, it would appear that on top of the 14% per
annum on the principal obligation, another 2% interest every 45 days
commencing from April 30, 1975 until the amount is fully paid has been
imposed against him (petitioner). n other words, 365 days in one year
divided by 45 days equals 8-1/9 which, multiplied by 2% as ordered by
respondent-judge would amount to a little more than 16%. Adding 16% per
annum to the 14% interest imposed on the principal obligation would be
30% which is veritably usurious and this cannot be countenanced, much
less sanctioned by any court of justice.
We agree with this observation and what is more, it is likewise a settled
rule that although a court may grant any relief allowed by law, such
prerogative is delimited by the cardinal principle that it cannot grant
anything more than what is prayed for, for certainly, the relief to be
dispensed cannot rise above its source. (Potenciano vs. CA, supra.)
WHEREFORE, the writ of certiorari is hereby granted and the respondent
judge is ordered to clarify its judgment complained of in the following
manner:
xxx xxx xxx
a) to pay interest at 14% per annum on the principal obligation
and damage dues at the rate of 2% every 45 days commencing from April
30, 1975 up to the time the full amount is fully paid; 5
xxx xxx xxx
As earlier stated, petitioner filed an ex parte motion seeking to amend the
above-quoted decretal portion which respondent court denied, hence the
petition at bar.
The amendment sought, ostensibly in order that the dispositive portion of
said decision would conform with the body thereof, is the sole issue for
resolution by the Court. Petitioner itself cites authorities in support of its
contention that it is entitled to a correct and clear expression of a judgment
to avoid substantial injustice. 6 n amplification of its plaint, petitioner
further asseverates that respondent court should not have made an award
for "damage dues" at such late stage of the proceeding since said dues
were not the subject of the award made by the trial court. 7
We disagree with petitioner.
To clarify an ambiguity or correct a clerical error in the judgment, the court
may resort to the pleadings filed by the parties, the findings of fact and the
conclusions of law expressed in the text or body of the decision. 8
ndeed, this was what respondent court did in resolving the original
petition. t examined the complaint filed against the petitioner and noted
that the prayer as stated in Paragraph (b) thereof was to "order defendant
to pay interest at 14 per centum and damage dues at the rate of 2% every
45 days commencing from April 30, 1975 up to the time the full amount is
fully paid." 9
nsofar as the findings and the dispositive portion set forth in respondent
court's decision are concerned, there is really no inconsistency as wittingly
or unwittingly asserted by petitioner.
The findings made by respondent court did not actually nullify the
judgment of the trial court. More specifically, the statement that the
imposition of 2% interest every 45 days commencing from April 30, 1975
on top of the 14% per annum (as would be the impression from a
superficial reading of the dispositive portion of the trial court's decision)
would be usurious is a sound observation. t should, however, be stressed
that such observation was on the theoretical assumption that the rate of
2% is being imposed as interest, not as damage dues which was the
intendment of the trial court.
Certainly, the damage dues in this case do not include and are not
included in the computation of interest as the two are of different
categories and are distinct claims which may be demanded separately, in
Credit Transactions Full Text Cases Atty. Adviento!!!!#"
the same manner that commissions, fines and penalties are excluded in
the computation of interest where the loan or forbearance is not secured in
whole or in part by real estate or an interest therein. 10
While interest forms part of the consideration of the contract itself, damage
dues (penalties, and so forth) are usually made payable only in case of
default or non-performance of the contract. 11 Also, although interest is
subject to the provisions of the Usury Law, 12 there is no policy or
provision in such law preventing the enforcement of damage dues
although the effect may be to increase the sum payable beyond the
prescribed ceiling rates.
Petitioner's assertion that respondent court acted without authority in
appending the award of damage dues to the judgment of the trial court
should be rejected. As correctly pointed out by private respondent, the
opening sentence of Paragraph l(a) of the dispositive portion of the lower
court's decision explicitly ordered petitioner to pay private respondent the
amount of P198,602.41 as principal obligation including interest and
damage dues, which is a clear and unequivocal indication of the lower
court's intent to award both interest and damage dues. 13
Significantly, it bears mention that on several occasions before petitioner
moved for a clarificatory judgment, it offered to settle its account with
private respondent without assailing the imposition of the aforementioned
damage dues. 14 As ramified by private respondent:
2. ... the then counsel of record for the petitioner, Atty. Porfirio Bautista,
and Atty. Teodulfo L. Reyes, petitioner's Assistant Vice- President for
Operations, had a conference with the undersigned attorneys as to how
petitioner will settle its account to avoid execution. During the conference,
both parties arrived at almost the same computation and the amount due
from petitioner, which includes 2% damage dues every 45 days from 30
April 1975 until the amount is fully paid, under the judgment. No question
was ever raised as regards same.
xxx xxx xxx
5. The very face of Annex 'D' shows that the '2%' damage dues being
questioned by the present counsel of petitioner had been mentioned no
less than TEN (10) TMES and was clearly and distinctly defined by
petitioner and included in the computation of its obligation to herein
petitioner as '2% penalty for every 45 days.'
xxx xxx xxx
Petitioner's pretense that it was not the intent of the court to award the
damage dues of 2% every 45 days commencing 30 April 1975 is belied by
the fact (and this is admitted by petitioner) that upon agreement of the
parties, the case before the lower court was submitted for summary
judgment; in other words, the case was submitted upon the facts as
appear in the pleadings with no other evidence presented and a fact that
appears clearly in the pleadings is that the defendants in the case before
the lower court were under contract to pay private respondent, among
others, the damage dues of 2% every 45 days commencing on 30 April
1975 until the obligation is fully paid; .... 15
Respondent court demonstrably did not err in ordering the clarification of
the decision of the trial court by amending the questioned part of its
dispositive portion to include therein the phrase damage dues to modify
the stated rate of 2%, and thereby obviate any misconception that it is
being imposed as interest.
ACCORDNGLY, certiorari is hereby DENED and the decision of
respondent Court of Appeals is hereby AFFRMED.
SO ORDERED.
G.R. Nos. L-43697 and L-442200 March 31, 1938
In re Liquidation of the MercantiIe Bank of China,
GOPOCO GROCERY (GOPOCO), ET AL., cIaimants-appeIIants,
vs.
PACIFIC COAST BISCUIT CO., ET AL., oppositors-appeIIees.
DIAZ, J.:
On petition of the Bank Commissioner who alleged to have found, after an
investigation, that the Mercantile Bank of China could not continue
operating as such without running the risk of suffering losses and prejudice
its depositors and customers; and that with the requisite approval of the
corresponding authorities, he had taken charge of all the assets thereof;
the Court of First nstance of Manila declared the said bank in liquidation;
approved all the acts theretofore executed by the commissioner;
prohibited the officers and agents of the bank from interfering with said
commissioner in the possession of the assets thereof, its documents,
deed, vouchers, books of account, papers, memorandum, notes, bond,
bonds and accounts, obligations or securities and its real and personal
properties; required its creditors and all those who had any claim against
it, to present the same in writing before the commissioner within ninety
days; and ordered the publication, as was in fact done, of the order
containing all these provisions, for the two consecutive weeks in two
news-papers of general circulation in the City of Manila, at the expenses of
the aforesaid bank. After these publications, and within the period of ninety
days, the following creditors, among others, presented their presented
their claims:
Tiong Chui Gion, Gopoco Grocery, Tan Locko, Woo & Lo & Co., Sy Guan
Huat and La Bella Tondea.
. The claim of Tiong Chui Gion is for the sum of P10,285.27.
He alleged that he deposited said sum in the bank under
liquidation on current account.
. The claim of Gopoco Grocery (Gopoco) is for the sum of
P4,932.48 plus P460. t described its claim as follows:
Balance due on open account
subject to check
P4,927.95
nterest on c/a 4,53
4,932.48
Surety deposit 460.00
. The claim of Tan Locko is for the sum of P7,624.20, and he
describes it in turn as follows:
Balance due on open account
subject to check L-759
P7,610.44
Savings account No. 156 (foreign)
with Mercantile Bank of China L-
1611 Amoy $15,000,00 nterest
on said Savings Account No. 156 8.22
nterest on checking a/c 10.54
7,624.20
V. The claim of Woo & Lo & Co. is for the sum of P6,972.88
and is set out in its written claim appearing in the record on
appeal as follows:
Balance due on open subject to
check L-845
P6,961.01
nterest on checking a/c 11.37
6,972.83
V. The claim of Sy Guan Huat is for the sum of P6,232.88 and
the described it as follows:
Balance due on open account
subject to check L-718
P6,224.34
nterest on checking a/c 8.54
6,232.88
V. The claim of La Bella Tondea is for the sum of P1,912.79,
also described as follows:
Balance due on open account
subject to check
P1910.59
nterest on account 2.20
Credit Transactions Full Text Cases Atty. Adviento!!!!##
1,912.79
To better resolve not only these claims but also the many others which
were presented against the bank, the lower court, on July 15, 1932,
appointed Fulgencio Borromeo as commissioner and referee to receive
the evidence which the interested parties may desire to present; and the
commissioner and referee thus named, after qualifying for the office and
receiving the evidence presented to him, resolved the aforesaid six claims
by recommending that the same be considered as an ordinary credit only,
and not as a preferred credit as the interested parties wanted, because
they were at the same time debtors of the bank.
The evidence adduced and the very admissions of the said interested
parties in fact show that (a) the claimant Tiong Chui Gion, while he was a
creditor of the Mercantile Bank of China in the sum of P10,285.27 which
he deposited on current account, was also a debtor not only in the sum of
P633.76 but also in the sum of P664.77, the amount of a draft which he
accepted, plus interest thereon and the protest fees paid therefor; (b) the
claimant Gopoco Grocery (Gopoco) had a current account in the bank in
the sum of P5,392.48, but it is indebted to it, in Turn, in the sum of
$2,334.80, the amount of certain drafts which it had accepted; (c) the
claimant Tan Locko had a deposit of P7,624.20, but he owed $1,378.90,
the amount of a draft which he also accepted; (d) the claimant Woo & Lo &
Co. had a deposit of P6,972.88, but it was indebted in the sum of
$3,464.84, the amount also of certain drafts accepted by it; (e) the
claimants Sy Guan Huat and Sy Kia had a deposit of P6,232.88, but they
owed the sum of $3,107.37, for two drafts accepted by them and already
due; and (f) the claimant La Bella Tondea had, in turn, a deposit of
P1,912.79, but it was, in turn, indebted in the sum of $565.40 including
interest and other expenses, the amount of two drafts drawn upon and
accepted by it.
The lower court approved all the recommendations of The commissioner
and referee as to claims of the six appellants as follows; (1) To approve
the claim of Tiong Chui Gion (P10,285.27) but only as an ordinary credit,
minus the amount of the draft for P664.77; (2) to approve the claim of
Gopoco Grocery (Gopoco) but also as an ordinary credit only (P5,387.95
according to the referee), minus its obligation amounting to $2,334.80 or
P4,669.60; (3) to approve the claim of Tan Locko but as an ordinary credit
only (P7,610.44 according to the referee), deducting therefrom his
obligation amounting to $1,378.90 or P2,757.80; to approve the claim of
Woo & Lo & Co. but only as an ordinary credit (P6,961.01 according to the
referee). after deducting its obligation to the bank, amounting to $3,464.84
or P6,929.68; (5) to approve the claim of Sy Guan Huat but only as an
ordinary credit (P6,224.34 according to the referee), after deducting his
obligation amounting to $3,107.37) or P6,214.74; and, finally, (6) to
approve the claim of la Bella Tondea but also as an ordinary credit only
(1,917.50 according to the referee), after deducting it obligation amounting
to $565.40 or P1,130.80; but he expressly refused to authorize the
payment of the interest by reason of impossibility upon the ground set out
in the decision. Not agreeable to the decision of the lower court, each of
the interested parties appealed therefrom and thereafter filed their
respective briefs.
Tiong Chui Gion argues in his brief filed in case in G. R. No. 442200, that
the lower court erred:
1. n holding that his deposit of P10,285.27 in the Mercantile Bank of
China, constitutes an ordinary credit only and not a preferred credit.
2. n holding as preferred credits the drafts and checks issued by the bank
under liquidation in payment of the drafts remitted to it for collection from
merchants residing in the country, by foreign entities or banks; and in not
holding that the deposits on current account in said bank should enjoy
preference over said drafts and checks; and
3. n holding that the amount of P633.76 (which should be understood as
P664.77), which the claimant owes to the bank under liquidation, be
deducted from his current account deposit therein, amounting to
P10,285.27, upon the distribution of the assets of the bank among its
various creditors, instead of holding that, after deducting the aforesaid
sum of P633.76 (should be P664.77) from his aforesaid deposit, there be
turned over to him the balance together with the dividends or shares then
corresponding to him, on the basis of said amount.
The other five claimants, that is, Gopoco Grocery Tan Locko, Woo & Lo &
Co., Sy Guan Huat and La Bella Tondea, in turn argue in the brief they
jointly filed in case G. R. No. 43697, that the lower court erred:
1. n not first deducting from their respective deposits in the bank under
liquidation, whose payment they claim, their respective obligation thereto.
2. n not holding that their claims constitute a preferred credit.
3. n holding that the drafts and checks issued by the bank under
liquidation in payment of the drafts remitted to it by foreign entitles and
banks for collection from the certain merchant residing in the country, are
preferred credits; and in not holding that the deposits made by each of
them enjoy preference over said drafts and checks, and
4. n denying their motion for a new trial base on the proposition that the
appealed decision is not in accordance with law and is contrary to the
evidence adduced at the trial.
The questions raised by the appellant in case G. R. No. 44200 and by
appellants in case G.R. 43697 being identical in nature, we believe it
practical and proper to resolve said questions jointly in one decision.
Before proceeding, however, it is convenient to note that the commissioner
and referee, classifying the various claims presented against the bank,
placed under one group those partaking of the same nature, the
classification having resulted in six groups.
n the first group he included all the claims for current account, savings
and fixed deposits.
n the second group he included the claims for checks or drafts sold by the
bank under liquidation and not paid by the agents or banks in whose favor
they had been issued.
n the third group he included the claims checks or drafts issued by the
bank under liquidation in payment or reimbursement of the drafts or goods
remitted to it for collection, from resident merchants and entitles, by
foreign banks and entities.
n the fourth group he included the claims for drafts or securities to be
collected from resident merchants and entities to be collected from
resident merchants and entities which were pending collection on the date
payments were suspended.
n the fifth group he included the claims of certain depositors or creditors
of the bank who were at the same time debtors thereof; and he considered
of this class the claims of the appellants in these two cases, and
n the sixth group he included the other claims different in nature from the
of the aforesaid five claims.
. Now, then, should the appellants' deposits on current account in the
bank now under liquidation be considered preferred credits, and not
otherwise, or should they be considered ordinary credits only? The
appellants contend that they are preferred credits only? The appellants
contend that they are preferred credits because they are deposits in
contemplation of law, and as such should be returned with the
corresponding interest thereon. n support thereof they cite Manresa (11
Manresa, Civil Code, page 663), and what has been insinuated in the case
of Rogers vs. Smith, Bell & Co. (10 Phil., 319), citing the said commentator
who maintains that, notwithstanding the provisions of articles 1767 and
1768 and others of the aforesaid Code, from which it is inferred that the
so-called irregular deposits no longer exist, the fact is that said deposits
still exist. And they contend and argue that what they had in the bank
should be considered as of this character. But it happens that they
themselves admit that the bank owes them interest which should have
been paid to them before it was declared in a state of liquidation. This fact
undoubtedly destroys the character which they nullifies their contention
that the same be considered as irregular deposits, because the payment
of interest only takes place in the case of loans. On the other hand, as we
stated with respect to the claim of Tan Tiong Tick (In re Liquidation of
Mercantile Bank of China, G.R. No. 43682), the provisions of the Code of
Commerce, and not those of the Civil Code, are applicable to cases of the
nature of those at bar, which have to do with parties who are both
merchants. (Articles 303 and 309, Code of Commerce.) We there said,
and it is not amiss to repeat now, that the so-called current account and
savings deposits have lost their character of deposits, properly so-called
and are convertible into simple commercial loans because, in cases of
such deposits, the bank has made use thereof in the ordinary course of its
transactions as an institution engaged in the banking business, not
because it so wishes, but precisely because of the authority deemed to
have been granted to it by the appellants to enable them to collect the
interest which they had been and they are now collecting, and by virtue
further of the authority granted to it by section 125 of the Corporation Law
(Act No. 1459), as amended by Acts Nos. 2003 and 3610 and section 9 of
the Banking Law (Act No. 3154), without considering of course the
Credit Transactions Full Text Cases Atty. Adviento!!!!#$
provisions of article 1768 of the Civil Code. Wherefore, it is held that the
deposits on current account of the appellants in the bank under liquidation,
with the right on their right on their part to collect interest, have not created
and could not create a juridical relation between them except that of
creditors and debtor, they being the creditors and the bank the debtor.
What has so far been said resolves adversely the contention of the
appellants, the question raised in the first and second assigned errors
Tiong Chui Gion in case G. R. No. 44200, and the appellants' second and
third assigned errors in case G. R. No. 43697.
. As to the third and first errors attributed to lower court by Tiong Chui
Gion in his case, and by the other appellants in theirs, respectively, it
should be stated that the question of set-off raised by them cannot be
resolved a like question in the said case, G. R. No. 43682, entitled "In
re Liquidation of Mercantile Bank of China. Tan Tiong Tick, claimant." t is
proper that set-offs be made, inasmuch as the appellants and the bank
being reciprocally debtors and creditors, the same is only just and
according to law (art. 1195, Civil Code), particularly as none of the
appellants falls within the exceptions mentioned in section 58 of the
nsolvency Law (Act No. 1956), reading:
SEC. 58. n all cases of mutual debts and mutual credits between the
parties, the account between them shall be stated, and one debt set off
against the other, and the balance only shall be allowed and paid. But no
set-off or counterclaim shall be allowed of a claim in its nature not provable
against the estate: Provided, That no set-off on counterclaim shall be
allowed in favor of any debtor to the insolvent of a claim purchased by or
transferred to such debtor within thirty days immediately preceding the
filing, or after the filing of the petition by or against the insolvent.
t has been said with much basis by Morse, in his work on Bank and
Banking (6th ed., vol. 1, pages 776 and 784) that:
The rules of law as to the right of set-off between the bank and its
depositors are not different from those applicable to other parties. (Page
776.)
Where the bank itself stops payment and becomes insolvent, the customer
may avail himself in set-off against his indebtedness to the bank of any
indebtedness of the bank to himself, as, for example, the balance due him
on his deposit account. (Page 784.)
But if set-offs are proper in these cases, when and how should they be
made, considering that the appellants ask for the payment of interest? Are
they by any chance entitled to interest? f they are, when and until what
time should they be paid the same?
The question of whether they are entitled to interest should be resolved in
the same way that we resolved the case of the claimant Tan Tiong Tick in
the said case, G. R. No. 43682. The circumstances in these two cases are
certainly the same as those in the said case with reference to the said
question. The Mercantile Bank of China owes to each of the appellants the
interest claimed by them, corresponding to the year ending December 4,
1931, the date it was declared in a state of liquidation, but not which the
appellants claim should be earned by their deposits after said date and
until the full amounts thereof are paid to them. And with respect to the
question of set-off, this should be deemed made, of course, as of the date
when the Mercantile Bank of China was declared in a state of liquidation,
that is, on December 4, 1931, for then there was already a reciprocal
concurrence of debts, with respect to said bank and the appellants. (Arts.
1195 and 1196 of the Civil Code; 8 Manresa, 4th ed., p. 361.)
. With respect to the fourth assigned error of the appellants in case G. R.
No. 43697, we hold, in view of the considerations set out in resolving the
other assignments of errors, that the lower court properly denied the
motion for new trial of said appellants.
n view of the foregoing, we modify the appealed judgments by holding
that the deposits claimed by the appellants, and declared by the lower
court to be ordinary credits are for the following amounts: P10,285.27 of
Tiong Chui Gion; P5,387.95 of Gopoco Grocery (Gopoco); P7,610.44 of
Tan Locko; P6961.01 of Woo & Lo & Co.; P6,224.34 of Sy Guan Huat; and
P1,917.50 of La Bella Tondea, plus their corresponding interest up to
December 4, 1931; that their obligations to the bank under liquidation
which should be set off against said deposits, are respectively for the
following amounts: P664.77 of Tiong Chui Gion; P4,669.60 of Gopoco
Grocery (Gopoco); P2,757.80 of Tan Locko; P6,929.68 of Woo & Lo & Co.;
P6,214.74 of Sy Huat; and P1,130.80 of La Bella Todea; and we order
that the set-offs in question be made in the manner stated in this decision,
that is, as of the date already indicated, December 4, 1931. n all other
respects, we affirm the aforesaid judgments, without special
pronouncement as to costs. So ordered.
G.R. No. L-38427 March 12, 1975
CENTRAL BANK OF THE PHILIPPINES as Liquidator of the FIDELITY
SAVINGS BANK, petitioner,
vs.
HONORABLE JUDGE JESUS P. MORFE, as Presiding Judge of
Branch XIII, Court of First Instance of ManiIa, Spouses AUGUSTO and
ADELAIDA PADILLA and Spouses MARCELA and JOB
ELIZES,respondents.
AQUINO, J.:+.wph!1
This case involves the question of whether a final judgment for the
payment of a time deposit in a savings bank which judgment was obtained
after the bank was declared insolvent, is a preferred claim against the
bank. The question arises under the following facts:
On February 18,1969 the Monetary Board found the Fidelity Savings Bank
to be insolvent. The Board directed the Superintendent of Banks to take
charge of its assets, forbade it to do business and instructed the Central
Bank Legal Counsel to take legal actions (Resolution No. 350).
On December 9, 1969 the Board involved to seek the court's assistant and
supervision in the liquidation of the ban The resolution implemented only
on January 25, 1972, when his Central Bank of the Philippines filed the
corresponding petition for assistance and supervision in the Court of First
nstance of Manila (Civil Case No. 86005 assigned to Branch X).
Prior to the institution of the liquidation proceeding but after the declaration
of insolvency, or, specifically, sometime in March, 1971, the spouses Job
Elizes and Marcela P. Elizes filed a complaint in the Court of First nstance
of Manila against the Fidelity Savings Bank for the recovery of the sum of
P50, 584 as the balance of their time deposits (Civil Case No. 82520
assigned to Branch ).
n the judgment rendered in that case on December 13, 1972 the Fidelity
Savings Bank was ordered to pay the Elizes spouses the sum of P50,584
plus accumulated interest.
n another case, assigned to Branch XXX of the Court of First nstance of
Manila, the spouses Augusta A. Padilla and Adelaida Padilla secured on
April 14, 1972 a judgment against the Fidelity Savings Bank for the sums
of P80,000 as the balance of their time deposits, plus interests, P70,000
as moral and exemplary damages and P9,600 as attorney's fees (Civil
Case No. 84200 where the action was filed on September 6, 1971).
n its orders of August 20, 1973 and February 25, 1974, the lower court
(Branch X having cognizance of the liquidation proceeding), upon
motions of the Elizes and Padilla spouses and over the opposition of the
Central Bank, directed the latter as liquidator, to pay their time deposits
as preferred judgments, evidenced by final judgments, within the meaning
of article 2244(14)(b) of the Civil Code, if there are enough funds in the
liquidator's custody in excess of the credits more preferred under section
30 of the Central Bank Law in relation to articles 2244 and 2251 of the
Civil Code.
From the said order, the Central Bank appealed to this Court by certiorari.
t contends that the final judgments secured by the Elizes and Padilla
spouses do not enjoy any preference because (a) they were rendered
after the Fidelity Savings Bank was declared insolvent and (b) under the
charter of the Central Bank and the General Banking Law, no final
judgment can be validly obtained against an insolvent bank.
Republic Act No. 265 provides:t.hqw
SEC. 29. Proceeding upon insolvency.Whenever upon examination by
the Superintendent or his examiners or agents into the condition of any
banking institution, it shall be disclosed that the condition of the same is
one of insolvency, or that its continuance in business would involve
probable loss to its depositors or creditors, it shall be the duty of the
Superintendent forthwith, in writing to inform the Monetary Board of the
facts, and the Board, upon finding the statements of the Superintendent to
be true, shall forthwith forbid the institution to do business in the
Philippines and shall take charge of its assets and proceeds according to
law.
The Monetary Board shall thereupon determine within thirty days whether
the institution may be reorganized or otherwise placed in such a condition
so that it may be permitted to resume business with safety to its creditors
and shall prescribe the conditions under which such resumption of
Credit Transactions Full Text Cases Atty. Adviento!!!!#%
business shall take place. n such case the expenses and fees in the
administration of the institution shall be determined by the Board and shall
be paid to the Central Bank out of the assets of such banking institution.
At any time within ten days after the Monetary Board has taken charge of
the assets of any banking institution, such institution may apply to the
Court of First nstance for an order requiring the Monetary Board to show
cause why it should not be enjoined from continuing such charge of its
assets, and the court may direct the Board to refrain from further
proceedings and to surrender charge of its assets.
f the Monetary Board shall determine that the banking institution cannot
resume business with safety to its creditors, it shall, by the Office of the
Solicitor General, file a petition in the Court of First nstance reciting the
proceedings which have been taken and praying the assistance and
supervision of the court in the liquidation of the affairs of the same. The
Superintendent shall thereafter, upon order of the Monetary Board and
under the supervision of the court and with all convenient speed, convert
the assets of the banking institution to money.
SEC. 30. Distribution of assets.n case of liquidation of a banking
institution, after payment of the costs of the proceedings, including
reasonable expenses and fees of the Central Bank to be allowed by the
court, the Central Bank shall pay the debts of such institution, under the
order of the court, in accordance with their legal priority.
The General Banking Act, Republic Act No. 337, provides:t.hqw
SEC. 85. Any director or officer of any banking institution who receives or
permits or causes to be received in said bank any deposit, or who pays
out or permits or causes to be paid out any funds of said bank, or who
transfers or permits or causes to be transferred any securities or property
of said bank, after said bank becomes insolvent, shall be punished by fine
of not less than one thousand nor more than ten thousand pesos and by
imprisonment for not less than two nor more than ten years.
The Civil Code provides:t.hqw
ART. 2237. nsolvency shall be governed by special laws insofar as they
are not inconsistent with this Code. (n)
ART. 2244. With reference to other property, real and personal, of the
debtor, the following claims or credits shall be preferred in the order
named:
xxx xxx xxx
(14) Credits which, without special privilege, appear in (a) a public
instrument; or (b) in a final judgment, if they have been the subject of
litigation. These credits shall have preference among themselves in the
order of priority of the dates of the instruments and of the judgments,
respectively. (1924a)
ART. 2251. Those credits which do not enjoy any preference with respect
to specific property, and those which enjoy preference, as to the amount
not paid, shall be satisfied according to the following rules:
(1) n the order established in article 2244;
(2) Common credits referred to in article 2245 shall be paid pro
rata regardless of dates. (1929a)
The trial court or, to be exact, the liquidation court noted that there is no
provision in the charter of the Central Bank in the General Banking Law
(Republic Acts Nos. 265 and 337, respectively) which suspends or abates
civil actions against an insolvent bank pending in courts other than the
liquidation court. t reasoned out that, because such actions are not
suspended, judgments against insolvent banks could be considered as
preferred credits under article 2244(14)(b) of the Civil Code. t further
noted that, in contrast with the Central Act, section 18 of the nsolvency
Law provides that upon the issuance by the court of an order declaring a
person insolvent "all civil proceedings against the said insolvent shall be
stayed."
The liquidation court directed the Central Bank to honor the writs of
execution issued by Branches and XXX for the enforcement of the
judgments obtained by the Elizes and Padilla spouses. t suggested that,
after satisfaction of the judgment the Central Bank, as liquidator, should
include said judgments in the list of preferred credits contained in the
"Project of Distribution" "with the notation "already paid" "
On the other hand, the Central Bank argues that after the Monetary Board
has declared that a bank is insolvent and has ordered it to cease
operations, the Board becomes the trustee of its assets "for the equal
benefit of all the creditors, including the depositors". The Central Bank
cites the ruling that "the assets of an insolvent banking institution are held
in trust for the equal benefit of all creditors, and after its insolvency, one
cannot obtain an advantage or a preference over another by an
attachment, execution or otherwise" (Rohr vs. Stanton Trust & Savings
Bank, 76 Mont. 248, 245 Pac. 947).
The stand of the Central Bank is that all depositors and creditors of the
insolvent bank should file their actions with the liquidation court. n support
of that view it cites the provision that the nsolvency Law does not apply to
banks (last sentence, sec. 52 of Act No. 1956).
t also invokes the provision penalizing a director officer of a bank who
disburses, or allows disbursement, of the funds of the bank after it
becomes insolvent (Sec. 85, General Banking Act, Republic Act No. 337).
t cites the ruling that "a creditor of an insolvent state bank in the hands of
a liquidator who recovered a judgment against it is not entitled to a
preference for (by) the mere fact that he is a judgment creditor" (Thomas
H. Briggs & Sons, nc. vs. Allen, 207 N. Carolina 10, 175 S. E. 838, Braver
Liquidation of Financial nstitutions, p. 922).
t should be noted that fixed, savings, and current deposits of money in
banks and similar institutions are not true deposits. They are considered
simple loans and, as such, are not preferred credits (Art. 1980, Civil Code;
n re Liquidation of Mercantile Bank of China: Tan Tiong Tick vs. American
Apothecaries Co., 65 Phil. 414; Pacific Coast Biscuit Co. vs. Chinese
Grocers Association, 65 Phil. 375; Fletcher American National Bank vs.
Ang Cheng Lian, 65 Phil. 385; Pacific Commercial Co. vs. American
Apothecaries Co., 65 Phil. 429; Gopoco Grocery vs. Pacific Coast Biscuit
Co., 65 Phil. 443).
The aforequoted section 29 of the Central Bank's charter explicitly
provides that when a bank is found to be insolvent, the Monetary Board
shall forbid it to do business and shall take charge of its assets. The Board
in its Resolution No. 350 dated February 18,1969 banned the Fidelity
Savings Bank from doing business. t took charge of the bank's assets.
Evidently, one purpose in prohibiting the insolvent bank from doing
business is to prevent some depositors from having an undue or
fraudulent preference over other creditors and depositors.
That purpose would be nullified if, as in this case, after the bank is
declared insolvent, suits by some depositors could be maintained and
judgments would be rendered for the payment of their deposits and then
such judgments would be considered preferred credits under article 2244
(14) (b) of the Civil Code.
We are of the opinion that such judgments cannot be considered preferred
and that article 2244(14)(b) does not apply to judgments for the payment
of the deposits in an insolvent savings bank which were obtained after the
declaration of insolvency.
A contrary rule or practice would be productive of injustice, mischief and
confusion. To recognize such judgments as entitled to priority would mean
that depositors in insolvent banks, after learning that the bank is insolvent
as shown by the fact that it can no longer pay withdrawals or that it has
closed its doors or has been enjoined by the Monetary Board from doing
business, would rush to the courts to secure judgments for the payment of
their deposits.
n such an eventuality, the courts would be swamped with suits of that
character. Some of the judgments would be default judgments. Depositors
armed with such judgments would pester the liquidation court with claims
for preference on the basis of article 2244(14)(b). Less alert depositors
would be prejudiced. That inequitable situation could not have been
contemplated by the framers of section 29.
The Rohr case (supra) supplies some illumination on the disposition of the
instant case. t appears in that case that the Stanton Trust & Savings Bank
of Great Falls closed its doors to business on July 9, 1923. On November
7,1924 the bank (then already under liquidation) issued to William Rohr a
certificate stating that he was entitled to claim from the bank $1,191.72
and that he was entitled to dividends thereon. Later, Rohr sued the bank
for the payment of his claim. The bank demurred to the complaint. The trial
court sustained the demurrer. Rohr appealed. n affirming the order
sustaining the demurrer, the Supreme Court of Montana said:t.hqw
The general principle of equity that the assets of an insolvent are to he
distributed ratably among general creditors applies with full force to the
distribution of the assets of a bank. A general depositor of a bank is merely
Credit Transactions Full Text Cases Atty. Adviento!!!!#&
a general creditor, and, as such, is not entitled to any preference or priority
over other general creditors.
The assets of a bank in process of liquidation are held in trust for the equal
benefit of all creditors, and one cannot be permitted to obtain an
advantage or preference over another by an attachment, execution or
otherwise. A disputed claim of a creditor may be adjudicated, but those
whose claims are recognized and admitted may not successfully maintain
action thereon. So to permit would defeat the very purpose of the
liquidation of a bank whether being voluntarily accomplished or through
the intervention of a receiver.
xxx xxx xxx
The available assets of such a bank are held in trust, and so conserved
that each depositor or other creditor shall receive payment or dividend
according to the amount of his debt, and that none of equal class shall
receive any advantage or preference over another.
And with respect to a national bank under voluntary liquidation, the court
noted in the Rohr case that the assets of such a bank "become a trust
fund, to be administered for the benefit of all creditors pro rata and, while
the bank retains its corporate existence, and may be sued, the effect of a
judgment obtained against it by a creditor is only to fix the amount of debt.
He can acquire no lien which will give him any preference or advantage
over other general creditors. (245 Pac. 249). *
Considering that the deposits in question, in their inception, were not
preferred credits, it does not seem logical and just that they should be
raised to the category of preferred credits simply because the depositors,
taking advantage of the long interval between the declaration of insolvency
and the filing of the petition for judicial assistance and supervision, were
able to secure judgments for the payment of their time deposits.
The judicial declaration that the said deposits were payable to the
depositors, as indisputably they were due, could not have given the Elizes
and Padilla spouses a priority over the other depositors whose deposits
were likewise indisputably due and owing from the insolvent bank but who
did not want to incur litigation expenses in securing a judgment for the
payment of the deposits.
The circumstance that the Fidelity Savings Bank, having stopped
operations since February 19, 1969, was forbidden to do business (and
that ban would include the payment of time deposits) implies that suits for
the payment of such deposits were prohibited. What was directly
prohibited should not be encompassed indirectly. (See Maurello vs.
Broadway Bank & Trust Co. of Paterson 176 Atl. 391, 114 N.J.L. 167).
t is noteworthy that in the trial court's order of October 3, 1972, which
contains the Bank Liquidation Rules and Regulations, it indicated in step
the procedure for processing the claims against the insolvent bank. n
Step V, the court directed the Central Bank, as liquidator, to submit a
Project of Distribution which should include "a list of the preferred credits
to be paid in full in the order of priorities established in Articles 2241, 2242,
2243, 2246 and 2247" of the Civil Code (note that article 2244 was not
mentioned). There is no cogent reason why the Elizes and Padilla spouses
should not adhere to the procedure outlined in the said rules and
regulations.
WHEREFORE, the lower court's orders of August 20, 1973 and February
25, 1974 are reversed and set aside. No costs.
SO ORDERED.
G.R. No. L-30511 February 14, 1980
MANUEL M. SERRANO, petitioner,
vs.
CENTRAL BANK OF THE PHILIPPINES; OVERSEAS BANK OF
MANILA; EMERITO M. RAMOS, SUSANA B. RAMOS, EMERITO B.
RAMOS, JR., JOSEFA RAMOS DELA RAMA, HORACIO DELA RAMA,
ANTONIO B. RAMOS, FILOMENA RAMOS LEDESMA, RODOLFO
LEDESMA, VICTORIA RAMOS TANJUATCO, and TEOFILO
TANJUATCO, respondents.
CONCEPCION, JR., J.:
Petition for mandamus and prohibition, with preliminary injunction, that
seeks the establishment of joint and solidary liability to the amount of
Three Hundred Fifty Thousand Pesos, with interest, against respondent
Central Bank of the Philippines and Overseas Bank of Manila and its
stockholders, on the alleged failure of the Overseas Bank of Manila to
return the time deposits made by petitioner and assigned to him, on the
ground that respondent Central Bank failed in its duty to exercise strict
supervision over respondent Overseas Bank of Manila to protect
depositors and the general public. 1 Petitioner also prays that both
respondent banks be ordered to execute the proper and necessary
documents to constitute all properties fisted in Annex "7" of the Answer of
respondent Central Bank of the Philippines in G.R. No. L-29352,
entitled "Emerita M. Ramos, et al vs. Central Bank of the Philippines," into
a trust fund in favor of petitioner and all other depositors of respondent
Overseas Bank of Manila. t is also prayed that the respondents be
prohibited permanently from honoring, implementing, or doing any act
predicated upon the validity or efficacy of the deeds of mortgage,
assignment. and/or conveyance or transfer of whatever nature of the
properties listed in Annex "7" of the Answer of respondent Central Bank in
G.R. No. 29352. 2
A sought for ex-parte preliminary injunction against both respondent banks
was not given by this Court.
Undisputed pertinent facts are:
On October 13, 1966 and December 12, 1966, petitioner made a time
deposit, for one year with 6% interest, of One Hundred Fifty Thousand
Pesos (P150,000.00) with the respondent Overseas Bank of
Manila. 3 Concepcion Maneja also made a time deposit, for one year with
6-% interest, on March 6, 1967, of Two Hundred Thousand Pesos
(P200,000.00) with the same respondent Overseas Bank of Manila. 4
On August 31, 1968, Concepcion Maneja, married to Felixberto M.
Serrano, assigned and conveyed to petitioner Manuel M. Serrano, her
time deposit of P200,000.00 with respondent Overseas Bank of Manila. 5
Notwithstanding series of demands for encashment of the aforementioned
time deposits from the respondent Overseas Bank of Manila, dating from
December 6, 1967 up to March 4, 1968, not a single one of the time
deposit certificates was honored by respondent Overseas Bank of
Manila. 6
Respondent Central Bank admits that it is charged with the duty of
administering the banking system of the Republic and it exercises
supervision over all doing business in the Philippines, but denies the
petitioner's allegation that the Central Bank has the duty to exercise a
most rigid and stringent supervision of banks, implying that respondent
Central Bank has to watch every move or activity of all banks, including
respondent Overseas Bank of Manila. Respondent Central Bank claims
that as of March 12, 1965, the Overseas Bank of Manila, while operating,
was only on a limited degree of banking operations since the Monetary
Board decided in its Resolution No. 322, dated March 12, 1965, to prohibit
the Overseas Bank of Manila from making new loans and investments in
view of its chronic reserve deficiencies against its deposit liabilities. This
limited operation of respondent Overseas Bank of Manila continued up to
1968. 7
Respondent Central Bank also denied that it is guarantor of the permanent
solvency of any banking institution as claimed by petitioner. t claims that
neither the law nor sound banking supervision requires respondent Central
Bank to advertise or represent to the public any remedial measures it may
impose upon chronic delinquent banks as such action may inevitably
result to panic or bank "runs". n the years 1966-1967, there were no
findings to declare the respondent Overseas Bank of Manila as
insolvent. 8
Respondent Central Bank likewise denied that a constructive trust was
created in favor of petitioner and his predecessor in interest Concepcion
Maneja when their time deposits were made in 1966 and 1967 with the
respondent Overseas Bank of Manila as during that time the latter was not
an insolvent bank and its operation as a banking institution was being
salvaged by the respondent Central Bank. 9
Respondent Central Bank avers no knowledge of petitioner's claim that the
properties given by respondent Overseas Bank of Manila as additional
collaterals to respondent Central Bank of the Philippines for the former's
overdrafts and emergency loans were acquired through the use of
depositors' money, including that of the petitioner and Concepcion
Maneja. 10
n G.R. No. L-29362, entitled "Emerita M. Ramos, et al. vs. Central Bank
of the Philippines," a case was filed by the petitioner Ramos, wherein
respondent Overseas Bank of Manila sought to prevent respondent
Central Bank from closing, declaring the former insolvent, and liquidating
its assets. Petitioner Manuel Serrano in this case, filed on September 6,
1968, a motion to intervene in G.R. No. L-29352, on the ground that
Credit Transactions Full Text Cases Atty. Adviento!!!!#'
Serrano had a real and legal interest as depositor of the Overseas Bank of
Manila in the matter in litigation in that case. Respondent Central Bank in
G.R. No. L-29352 opposed petitioner Manuel Serrano's motion to
intervene in that case, on the ground that his claim as depositor of the
Overseas Bank of Manila should properly be ventilated in the Court of First
nstance, and if this Court were to allow Serrano to intervene as depositor
in G.R. No. L-29352, thousands of other depositors would follow and thus
cause an avalanche of cases in this Court. n the resolution dated October
4, 1968, this Court denied Serrano's, motion to intervene. The contents of
said motion to intervene are substantially the same as those of the present
petition. 11
This Court rendered decision in G.R. No. L-29352 on October 4, 1971,
which became final and executory on March 3, 1972, favorable to the
respondent Overseas Bank of Manila, with the dispositive portion to wit:
WHEREFORE, the writs prayed for in the petition are hereby granted and
respondent Central Bank's resolution Nos. 1263, 1290 and 1333 (that
prohibit the Overseas Bank of Manila to participate in clearing, direct the
suspension of its operation, and ordering the liquidation of said bank) are
hereby annulled and set aside; and said respondent Central Bank of the
Philippines is directed to comply with its obligations under the Voting Trust
Agreement, and to desist from taking action in violation therefor. Costs
against respondent Central Bank of the Philippines. 12
Because of the above decision, petitioner in this case filed a motion for
judgment in this case, praying for a decision on the merits, adjudging
respondent Central Bank jointly and severally liable with respondent
Overseas Bank of Manila to the petitioner for the P350,000 time deposit
made with the latter bank, with all interests due therein; and declaring all
assets assigned or mortgaged by the respondents Overseas Bank of
Manila and the Ramos groups in favor of the Central Bank as trust funds
for the benefit of petitioner and other depositors. 13
By the very nature of the claims and causes of action against respondents,
they in reality are recovery of time deposits plus interest from respondent
Overseas Bank of Manila, and recovery of damages against respondent
Central Bank for its alleged failure to strictly supervise the acts of the other
respondent Bank and protect the interests of its depositors by virtue of the
constructive trust created when respondent Central Bank required the
other respondent to increase its collaterals for its overdrafts said
emergency loans, said collaterals allegedly acquired through the use of
depositors money. These claims shoud be ventilated in the Court of First
nstance of proper jurisdiction as We already pointed out when this Court
denied petitioner's motion to intervene in G.R. No. L-29352. Claims of
these nature are not proper in actions for mandamus and prohibition as
there is no shown clear abuse of discretion by the Central Bank in its
exercise of supervision over the other respondent Overseas Bank of
Manila, and if there was, petitioner here is not the proper party to raise that
question, but rather the Overseas Bank of Manila, as it did in G.R. No. L-
29352. Neither is there anything to prohibit in this case, since the
questioned acts of the respondent Central Bank (the acts of dissolving and
liquidating the Overseas Bank of Manila), which petitioner here intends to
use as his basis for claims of damages against respondent Central Bank,
had been accomplished a long time ago.
Furthermore, both parties overlooked one fundamental principle in the
nature of bank deposits when the petitioner claimed that there should be
created a constructive trust in his favor when the respondent Overseas
Bank of Manila increased its collaterals in favor of respondent Central
Bank for the former's overdrafts and emergency loans, since these
collaterals were acquired by the use of depositors' money.
Bank deposits are in the nature of irregular deposits. They are really loans
because they earn interest. All kinds of bank deposits, whether fixed,
savings, or current are to be treated as loans and are to be covered by the
law on loans. 14 Current and savings deposit are loans to a bank because
it can use the same. The petitioner here in making time deposits that earn
interests with respondent Overseas Bank of Manila was in reality a
creditor of the respondent Bank and not a depositor. The respondent Bank
was in turn a debtor of petitioner. Failure of he respondent Bank to honor
the time deposit is failure to pay s obligation as a debtor and not a breach
of trust arising from depositary's failure to return the subject matter of the
deposit
WHEREFORE, the petition is dismissed for lack of merit, with costs
against petitioner.
SO ORDERED.
G.R. No. L-60033 ApriI 4, 1984
TEOFISTO GUINGONA, JR., ANTONIO I. MARTIN, and TERESITA
SANTOS, petitioners,
vs.
THE CITY FISCAL OF MANILA, HON. JOSE B. FLAMINIANO, ASST.
CITY FISCAL FELIZARDO N. LOTA and CLEMENT
DAVID, respondents.

MAKASIAR, Actg. C.J.:+.wph!1
This is a petition for prohibition and injunction with a prayer for the
immediate issuance of restraining order and/or writ of preliminary
injunction filed by petitioners on March 26, 1982.
On March 31, 1982, by virtue of a court resolution issued by this Court on
the same date, a temporary restraining order was duly issued ordering the
respondents, their officers, agents, representatives and/or person or
persons acting upon their (respondents') orders or in their place or stead
to refrain from proceeding with the preliminary investigation in Case No.
8131938 of the Office of the City Fiscal of Manila (pp. 47-48, rec.). On
January 24, 1983, private respondent Clement David filed a motion to lift
restraining order which was denied in the resolution of this Court dated
May 18, 1983.
As can be gleaned from the above, the instant petition seeks to prohibit
public respondents from proceeding with the preliminary investigation of
.S. No. 81-31938, in which petitioners were charged by private
respondent Clement David, with estafa and violation of Central Bank
Circular No. 364 and related regulations regarding foreign exchange
transactions principally, on the ground of lack of jurisdiction in that the
allegations of the charged, as well as the testimony of private respondent's
principal witness and the evidence through said witness, showed that
petitioners' obligation is civil in nature.
For purposes of brevity, We hereby adopt the antecedent facts narrated by
the Solicitor General in its Comment dated June 28,1982, as follows:t.
hqw
On December 23,1981, private respondent David filed .S. No. 81-31938
in the Office of the City Fiscal of Manila, which case was assigned to
respondent Lota for preliminary investigation (Petition, p. 8).
n .S. No. 81-31938, David charged petitioners (together with one Robert
Marshall and the following directors of the Nation Savings and Loan
Association, nc., namely Homero Gonzales, Juan Merino, Flavio
Macasaet, Victor Gomez, Jr., Perfecto Manalac, Jaime V. Paz, Paulino B.
Dionisio, and one John Doe) with estafa and violation of Central Bank
Circular No. 364 and related Central Bank regulations on foreign
exchange transactions, allegedly committed as follows (Petition, Annex
"A"):t.hqw
"From March 20, 1979 to March, 1981, David invested with the Nation
Savings and Loan Association, (hereinafter called NSLA) the sum of
P1,145,546.20 on nine deposits, P13,531.94 on savings account deposits
(jointly with his sister, Denise Kuhne), US$10,000.00 on time deposit,
US$15,000.00 under a receipt and guarantee of payment and
US$50,000.00 under a receipt dated June 8, 1980 (au jointly with Denise
Kuhne), that David was induced into making the aforestated investments
by Robert Marshall an Australian national who was allegedly a close
associate of petitioner Guingona Jr., then NSLA President, petitioner
Martin, then NSLA Executive Vice-President of NSLA and petitioner
Santos, then NSLA General Manager; that on March 21, 1981 N LA was
placed under receivership by the Central Bank, so that David filed claims
therewith for his investments and those of his sister; that on July 22, 1981
David received a report from the Central Bank that only P305,821.92 of
those investments were entered in the records of NSLA; that, therefore,
the respondents in .S. No. 81-31938 misappropriated the balance of the
investments, at the same time violating Central Bank Circular No. 364 and
related Central Bank regulations on foreign exchange transactions; that
after demands, petitioner Guingona Jr. paid only P200,000.00, thereby
reducing the amounts misappropriated to P959,078.14 and
US$75,000.00."
Petitioners, Martin and Santos, filed a joint counter-affidavit (Petition,
Annex' B') in which they stated the following.t.hqw
"That Martin became President of NSLA in March 1978 (after the
resignation of Guingona, Jr.) and served as such until October 30, 1980,
while Santos was General Manager up to November 1980; that because
NSLA was urgently in need of funds and at David's insistence, his
investments were treated as special- accounts with interest above the
Credit Transactions Full Text Cases Atty. Adviento!!!!#(
legal rate, an recorded in separate confidential documents only a portion
of which were to be reported because he did not want the Australian
government to tax his total earnings (nor) to know his total investments;
that all transactions with David were recorded except the sum of
US$15,000.00 which was a personal loan of Santos; that David's check for
US$50,000.00 was cleared through Guingona, Jr.'s dollar account
because NSLA did not have one, that a draft of US$30,000.00 was placed
in the name of one Paz Roces because of a pending transaction with her;
that the Philippine Deposit nsurance Corporation had already reimbursed
David within the legal limits; that majority of the stockholders of NSLA had
filed Special Proceedings No. 82-1695 in the Court of First nstance to
contest its (NSLA's) closure; that after NSLA was placed under
receivership, Martin executed a promissory note in David's favor and
caused the transfer to him of a nine and on behalf (9 1/2) carat diamond
ring with a net value of P510,000.00; and, that the liabilities of NSLA to
David were civil in nature."
Petitioner, Guingona, Jr., in his counter-affidavit (Petition, Annex' C') stated
the following:t.hqw
"That he had no hand whatsoever in the transactions between David and
NSLA since he (Guingona Jr.) had resigned as NSLA president in March
1978, or prior to those transactions; that he assumed a portion o; the
liabilities of NSLA to David because of the latter's insistence that he placed
his investments with NSLA because of his faith in Guingona, Jr.; that in a
Promissory Note dated June 17, 1981 (Petition, Annex "D") he (Guingona,
Jr.) bound himself to pay David the sums of P668.307.01 and
US$37,500.00 in stated installments; that he (Guingona, Jr.) secured
payment of those amounts with second mortgages over two (2) parcels of
land under a deed of Second Real Estate Mortgage (Petition, Annex "E")
in which it was provided that the mortgage over one (1) parcel shall be
cancelled upon payment of one-half of the obligation to David; that he
(Guingona, Jr.) paid P200,000.00 and tendered another P300,000.00
which David refused to accept, hence, he (Guingona, Jr.) filed Civil Case
No. Q-33865 in the Court of First nstance of Rizal at Quezon City, to
effect the release of the mortgage over one (1) of the two parcels of land
conveyed to David under second mortgages."
At the inception of the preliminary investigation before respondent Lota,
petitioners moved to dismiss the charges against them for lack of
jurisdiction because David's claims allegedly comprised a purely civil
obligation which was itself novated. Fiscal Lota denied the motion to
dismiss (Petition, p. 8).
But, after the presentation of David's principal witness, petitioners filed the
instant petition because: (a) the production of the Promisory Notes,
Banker's Acceptance, Certificates of Time Deposits and Savings Account
allegedly showed that the transactions between David and NSLA were
simple loans, i.e., civil obligations on the part of NSLA which were novated
when Guingona, Jr. and Martin assumed them; and (b) David's principal
witness allegedly testified that the duplicate originals of the aforesaid
instruments of indebtedness were all on file with NSLA, contrary to David's
claim that some of his investments were not record (Petition, pp. 8-9).
Petitioners alleged that they did not exhaust available administrative
remedies because to do so would be futile (Petition, p. 9) [pp. 153-157,
rec.].
As correctly pointed out by the Solicitor General, the sole issue for
resolution is whether public respondents acted without jurisdiction when
they investigated the charges (estafa and violation of CB Circular No. 364
and related regulations regarding foreign exchange transactions) subject
matter of .S. No. 81-31938.
There is merit in the contention of the petitioners that their liability is civil in
nature and therefore, public respondents have no jurisdiction over the
charge of estafa.
A casual perusal of the December 23, 1981 affidavit. complaint filed in the
Office of the City Fiscal of Manila by private respondent David against
petitioners Teopisto Guingona, Jr., Antonio . Martin and Teresita G.
Santos, together with one Robert Marshall and the other directors of the
Nation Savings and Loan Association, will show that from March 20, 1979
to March, 1981, private respondent David, together with his sister, Denise
Kuhne, invested with the Nation Savings and Loan Association the sum of
P1,145,546.20 on time deposits covered by Bankers Acceptances and
Certificates of Time Deposits and the sum of P13,531.94 on savings
account deposits covered by passbook nos. 6-632 and 29-742, or a total
of P1,159,078.14 (pp. 15-16, roc.). t appears further that private
respondent David, together with his sister, made investments in the
aforesaid bank in the amount of US$75,000.00 (p. 17, rec.).
Moreover, the records reveal that when the aforesaid bank was placed
under receivership on March 21, 1981, petitioners Guingona and Martin,
upon the request of private respondent David, assumed the obligation of
the bank to private respondent David by executing on June 17, 1981 a
joint promissory note in favor of private respondent acknowledging an
indebtedness of Pl,336,614.02 and US$75,000.00 (p. 80, rec.). This
promissory note was based on the statement of account as of June 30,
1981 prepared by the private respondent (p. 81, rec.). The amount of
indebtedness assumed appears to be bigger than the original claim
because of the added interest and the inclusion of other deposits of private
respondent's sister in the amount of P116,613.20.
Thereafter, or on July 17, 1981, petitioners Guingona and Martin agreed to
divide the said indebtedness, and petitioner Guingona executed another
promissory note antedated to June 17, 1981 whereby he personally
acknowledged an indebtedness of P668,307.01 (1/2 of P1,336,614.02)
and US$37,500.00 (1/2 of US$75,000.00) in favor of private respondent
(p. 25, rec.). The aforesaid promissory notes were executed as a result of
deposits made by Clement David and Denise Kuhne with the Nation
Savings and Loan Association.
Furthermore, the various pleadings and documents filed by private
respondent David, before this Court indisputably show that he has indeed
invested his money on time and savings deposits with the Nation Savings
and Loan Association.
t must be pointed out that when private respondent David invested his
money on nine. and savings deposits with the aforesaid bank, the contract
that was perfected was a contract of simple loan or mutuum and not a
contract of deposit. Thus, Article 1980 of the New Civil Code provides
that:t.hqw
Article 1980. Fixed, savings, and current deposits of-money in banks and
similar institutions shall be governed by the provisions concerning simple
loan.
n the case of Central Bank of the Philippines vs. Morfe (63 SCRA 114,119
[1975], We said:t.hqw
t should be noted that fixed, savings, and current deposits of money in
banks and similar institutions are hat true deposits. are considered simple
loans and, as such, are not preferred credits (Art. 1980 Civil Code; n re
Liquidation of Mercantile Batik of China Tan Tiong Tick vs. American
Apothecaries Co., 66 Phil 414; Pacific Coast Biscuit Co. vs. Chinese
Grocers Association 65 Phil. 375; Fletcher American National Bank vs.
Ang Chong UM 66 PWL 385; Pacific Commercial Co. vs. American
Apothecaries Co., 65 PhiL 429; Gopoco Grocery vs. Pacific Coast Biscuit
CO.,65 Phil. 443)."
This Court also declared in the recent case of Serrano vs. Central Bank of
the Philippines (96 SCRA 102 [1980]) that:t.hqw
Bank deposits are in the nature of irregular deposits. They are really 'loans
because they earn interest. All kinds of bank deposits, whether fixed,
savings, or current are to be treated as loans and are to be covered by the
law on loans (Art. 1980 Civil Code Gullas vs. Phil. National Bank, 62 Phil.
519). Current and saving deposits, are loans to a bank because it can use
the same. The petitioner here in making time deposits that earn interests
will respondent Overseas Bank of Manila was in reality a creditor of the
respondent Bank and not a depositor. The respondent Bank was in turn a
debtor of petitioner. Failure of the respondent Bank to honor the time
deposit is failure to pay its obligation as a debtor and not a breach of
trust arising from a depositary's failure to return the subject matter of the
deposit (Emphasis supplied).
Hence, the relationship between the private respondent and the Nation
Savings and Loan Association is that of creditor and debtor; consequently,
the ownership of the amount deposited was transmitted to the Bank upon
the perfection of the contract and it can make use of the amount deposited
for its banking operations, such as to pay interests on deposits and to pay
withdrawals. While the Bank has the obligation to return the amount
deposited, it has, however, no obligation to return or deliver the same
money that was deposited. And, the failure of the Bank to return the
amount deposited will not constitute estafa through misappropriation
punishable under Article 315, par. l(b) of the Revised Penal Code, but it
will only give rise to civil liability over which the public respondents have
no- jurisdiction.
WE have already laid down the rule that:t.hqw
n order that a person can be convicted under the above-quoted provision,
it must be proven that he has the obligation to deliver or return the some
Credit Transactions Full Text Cases Atty. Adviento!!!!#)
money, goods or personal property that he receivedPetitioners had no
such obligation to return the same money, i.e., the bills or coins, which
they received from private respondents. This is so because as clearly as
stated in criminal complaints, the related civil complaints and the
supporting sworn statements, the sums of money that petitioners received
were loans.
The nature of simple loan is defined in Articles 1933 and 1953 of the Civil
Code.t.hqw
"Art. 1933. By the contract of loan, one of the parties delivers to
another, either something not consumable so that the latter may use the
same for a certain time- and return it, in which case the contract is called a
commodatum; or money or other consumable thing, upon the condition
that the same amount of the same kind and quality shall he paid in which
case the contract is simply called a loan or mutuum.
"Commodatum is essentially gratuitous.
"Simple loan may be gratuitous or with a stipulation to pay interest.
"n commodatum the bailor retains the ownership of the thing loaned while
in simple loan, ownership passes to the borrower.
"Art. 1953. A person who receives a loan of money or any other fungible
thing acquires the ownership thereof, and is bound to pay to the creditor
an equal amount of the same kind and quality."
It can be readily noted from the above-quoted provisions that in simple
loan (mutuum), as contrasted to commodatum the borrower acquires
ownership of the money, goods or personal property borrowed Being the
owner, the borrower can dispose of the thing borrowed (Article 248, Civil
Code) and his act will not be considered misappropriation thereof' (Yam
vs. Malik, 94 SCRA 30, 34 [1979]; Emphasis supplied).
But even granting that the failure of the bank to pay the time and savings
deposits of private respondent David would constitute a violation of
paragraph 1(b) of Article 315 of the Revised Penal Code, nevertheless any
incipient criminal liability was deemed avoided, because when the
aforesaid bank was placed under receivership by the Central Bank,
petitioners Guingona and Martin assumed the obligation of the bank to
private respondent David, thereby resulting in the novation of the original
contractual obligation arising from deposit into a contract of loan and
converting the original trust relation between the bank and private
respondent David into an ordinary debtor-creditor relation between the
petitioners and private respondent. Consequently, the failure of the bank or
petitioners Guingona and Martin to pay the deposits of private respondent
would not constitute a breach of trust but would merely be a failure to pay
the obligation as a debtor.
Moreover, while it is true that novation does not extinguish criminal liability,
it may however, prevent the rise of criminal liability as long as it occurs
prior to the filing of the criminal information in court. Thus, in Gonzales vs.
Serrano ( 25 SCRA 64, 69 [1968]) We held that:t.hqw
As pointed out in People vs. Nery, novation prior to the filing of the criminal
information as in the case at bar may convert the relation between
the parties into an ordinary creditor-debtor relation, and place the
complainant in estoppel to insist on the original transaction or "cast doubt
on the true nature" thereof.
Again, in the latest case of Ong vs. Court of Appeals (L-58476, 124 SCRA
578, 580-581 [1983] ), this Court reiterated the ruling in People vs.
Nery ( 10 SCRA 244 [1964] ), declaring that:t.hqw
The novation theory may perhaps apply prior to the filling of the criminal
information in court by the state prosecutors because up to that time the
original trust relation may be converted by the parties into an ordinary
creditor-debtor situation, thereby placing the complainant in estoppel to
insist on the original trust. But after the justice authorities have taken
cognizance of the crime and instituted action in court, the offended party
may no longer divest the prosecution of its power to exact the criminal
liability, as distinguished from the civil. The crime being an offense against
the state, only the latter can renounce it (People vs. Gervacio, 54 Off. Gaz.
2898; People vs. Velasco, 42 Phil. 76; U.S. vs. Montanes, 8 Phil. 620).
t may be observed in this regard that novation is not one of the means
recognized by the Penal Code whereby criminal liability can be
extinguished; hence, the role of novation may only be to either prevent the
rise of criminal habihty or to cast doubt on the true nature of the original
basic transaction, whether or not it was such that its breach would not give
rise to penal responsibility, as when money loaned is made to appear as a
deposit, or other similar disguise is resorted to (cf. Abeto vs. People, 90
Phil. 581; U.S. vs. Villareal, 27 Phil. 481).
n the case at bar, there is no dispute that petitioners Guingona and Martin
executed a promissory note on June 17, 1981 assuming the obligation of
the bank to private respondent David; while the criminal complaint for
estafa was filed on December 23, 1981 with the Office of the City Fiscal.
Hence, it is clear that novation occurred long before the filing of the
criminal complaint with the Office of the City Fiscal.
Consequently, as aforestated, any incipient criminal liability would be
avoided but there will still be a civil liability on the part of petitioners
Guingona and Martin to pay the assumed obligation.
Petitioners herein were likewise charged with violation of Section 3 of
Central Bank Circular No. 364 and other related regulations regarding
foreign exchange transactions by accepting foreign currency deposit in the
amount of US$75,000.00 without authority from the Central Bank. They
contend however, that the US dollars intended by respondent David for
deposit were all converted into Philippine currency before acceptance and
deposit into Nation Savings and Loan Association.
Petitioners' contention is worthy of behelf for the following reasons:
1. t appears from the records that when respondent David was about to
make a deposit of bank draft issued in his name in the amount of
US$50,000.00 with the Nation Savings and Loan Association, the same
had to be cleared first and converted into Philippine currency. Accordingly,
the bank draft was endorsed by respondent David to petitioner Guingona,
who in turn deposited it to his dollar account with the Security Bank and
Trust Company. Petitioner Guingona merely accommodated the request of
the Nation Savings and loan Association in order to clear the bank draft
through his dollar account because the bank did not have a dollar account.
mmediately after the bank draft was cleared, petitioner Guingona
authorized Nation Savings and Loan Association to withdraw the same in
order to be utilized by the bank for its operations.
2. t is safe to assume that the U.S. dollars were converted first into
Philippine pesos before they were accepted and deposited in Nation
Savings and Loan Association, because the bank is presumed to have
followed the ordinary course of the business which is to accept deposits in
Philippine currency only, and that the transaction was regular and fair, in
the absence of a clear and convincing evidence to the contrary (see
paragraphs p and q,Sec. 5, Rule 131, Rules of Court).
3. Respondent David has not denied the aforesaid contention of herein
petitioners despite the fact that it was raised. in petitioners' reply filed on
May 7, 1982 to private respondent's comment and in the July 27, 1982
reply to public respondents' comment and reiterated in petitioners'
memorandum filed on October 30, 1982, thereby adding more support to
the conclusion that the US$75,000.00 were really converted into Philippine
currency before they were accepted and deposited into Nation Savings
and Loan Association. Considering that this might adversely affect his
case, respondent David should have promptly denied petitioners'
allegation.
n conclusion, considering that the liability of the petitioners is purely civil
in nature and that there is no clear showing that they engaged in foreign
exchange transactions, We hold that the public respondents acted without
jurisdiction when they investigated the charges against the petitioners.
Consequently, public respondents should be restrained from further
proceeding with the criminal case for to allow the case to continue, even if
the petitioners could have appealed to the Ministry of Justice, would work
great injustice to petitioners and would render meaningless the proper
administration of justice.
While as a rule, the prosecution in a criminal offense cannot be the subject
of prohibition and injunction, this court has recognized the resort to the
extraordinary writs of prohibition and injunction in extreme cases, thus:t.
hqw
On the issue of whether a writ of injunction can restrain the proceedings in
Criminal Case No. 3140, the general rule is that "ordinarily, criminal
prosecution may not be blocked by court prohibition or injunction."
Exceptions, however, are allowed in the following instances:t.hqw
"1. for the orderly administration of justice;
"2. to prevent the use of the strong arm of the law in an oppressive and
vindictive manner;
"3. to avoid multiplicity of actions;
Credit Transactions Full Text Cases Atty. Adviento!!!!#*
"4. to afford adequate protection to constitutional rights;
"5. in proper cases, because the statute relied upon is unconstitutional or
was held invalid" ( Primicias vs. Municipality of Urdaneta, Pangasinan, 93
SCRA 462, 469-470 [1979]; citing Ramos vs. Torres, 25 SCRA 557 [1968];
and Hernandez vs. Albano, 19 SCRA 95, 96 [1967]).
Likewise, in Lopez vs. The City Judge, et al. ( 18 SCRA 616, 621-622
[1966]), We held that:t.hqw
The writs of certiorari and prohibition, as extraordinary legal remedies, are
in the ultimate analysis, intended to annul void proceedings; to prevent the
unlawful and oppressive exercise of legal authority and to provide for a fair
and orderly administration of justice. Thus, in Yu Kong Eng vs. Trinidad, 47
Phil. 385, We took cognizance of a petition for certiorari and prohibition
although the accused in the case could have appealed in due time from
the order complained of, our action in the premises being based on the
public welfare policy the advancement of public policy. n Dimayuga vs.
Fajardo, 43 Phil. 304, We also admitted a petition to restrain the
prosecution of certain chiropractors although, if convicted, they could have
appealed. We gave due course to their petition for the orderly
administration of justice and to avoid possible oppression by the strong
arm of the law. And in Arevalo vs. Nepomuceno, 63 Phil. 627, the petition
for certiorari challenging the trial court's action admitting an amended
information was sustained despite the availability of appeal at the proper
time.
WHEREFORE, THE PETTON S HEREBY GRANTED; THE
TEMPORARY RESTRANNG ORDER PREVOUSLY SSUED S MADE
PERMANENT. COSTS AGANST THE PRVATE RESPONDENT.
SO ORDERED.1wph1.t
Credit Transactions Full Text Cases Atty. Adviento!!!!$+
EN BANC
G.R. No. L-7593 March 27, 1913
THE UNITED STATES, plaintiff-appellee,
vs.
JOSE M. IGPUARA, defendant-appellant.
W. A. Kincaid, Thos. L. Hartigan, and Jose Robles Lahesa for appellant.
Office of the Solicitor-General Harvey for appellee.
ARELLANO, C.J.:
The defendant therein is charged with the crime of estafa, for having
swindled Juana Montilla and Eugenio Veraguth out of P2,498 Philippine
currency, which he had take on deposit from the former to be at the latter's
disposal. The document setting forth the obligation reads:
We hold at the disposal of Eugenio Veraguth the sum of two thousand four
hundred and ninety-eight pesos (P2,498), the balance from Juana
Montilla's sugar. loilo, June 26, 1911, Jose gpuara, for Ramirez and
Co.
The Court of First nstance of loilo sentenced the defendant to two years
of presidio correccional, to pay Juana Montilla P2,498 Philippine currency,
and in case of insolvency to subsidiary imprisonment at P2.50 per day, not
to exceed one-third of the principal penalty, and the costs.
The defendant appealed, alleging as errors: (1) Holding that the document
executed by him was a certificate of deposit; (2) holding the existence of a
deposit, without precedent transfer or delivery of the P2,498; and (3)
classifying the facts in the case as the crime of estafa.
A deposit is constituted from the time a person receives a thing
belonging to another with the obligation of keeping and returning
it. (Art. 1758, Civil Code.)
That the defendant received P2,498 is a fact proven. The defendant drew
up a document declaring that they remained in his possession, which he
could not have said had he not received them. They remained in his
possession, surely in no other sense than to take care of them, for they
remained has no other purpose. They remained in the defendant's
possession at the disposal of Veraguth; but on August 23 of the same year
Veraguth demanded for him through a notarial instrument restitution of
them, and to date he has not restored them.
The appellant says: "Juana Montilla's agent voluntarily accepted the sum
of P2,498 in an instrument payable on demand, and as no attempt was
made to cash it until August 23, 1911, he could indorse and negotiate it
like any other commercial instrument. There is no doubt that if Veraguth
accepted the receipt for P2,498 it was because at that time he agreed with
the defendant to consider the operation of sale on commission closed,
leaving the collection of said sum until later, which sum remained as a loan
payable upon presentation of the receipt." (Brief, 3 and 4.)
Then, after averring the true facts: (1) that a sales commission was
precedent; (2) that this commission was settled with a balance of P2,498
in favor of the principal, Juana Montilla; and (3) that this balance remained
in the possession of the defendant, who drew up an instrument payable on
demand, he has drawn two conclusions, both erroneous: One, that the
instrument drawn up in the form of a deposit certificate could be indorsed
or negotiated like any other commercial instrument; and the other, that the
sum of P2,498 remained in defendant's possession as a loan.
t is erroneous to assert that the certificate of deposit in question is
negotiable like any other commercial instrument: First, because every
commercial instrument is not negotiable; and second, because only
instruments payable to order are negotiable. Hence, this instrument not
being to order but to bearer, it is not negotiable.
t is also erroneous to assert that sum of money set forth in said certificate
is, according to it, in the defendant's possession as a loan. n a loan the
lender transmits to the borrower the use of the thing lent, while in a deposit
the use of the thing is not transmitted, but merely possession for its
custody or safe-keeping.
n order that the depositary may use or dispose oft he things deposited,
the depositor's consent is required, and then:
The rights and obligations of the depositary and of the depositor
shall cease, and the rules and provisions applicable to
commercial loans, commission, or contract which took the place
of the deposit shall be observed. (Art. 309, Code of Commerce.)
The defendant has shown no authorization whatsoever or the consent of
the depositary for using or disposing of the P2,498, which the certificate
acknowledges, or any contract entered into with the depositor to convert
the deposit into a loan, commission, or other contract.
That demand was not made for restitution of the sum deposited, which
could have been claimed on the same or the next day after the certificate
was signed, does not operate against the depositor, or signify anything
except the intention not to press it. Failure to claim at once or delay for
sometime in demanding restitution of the things deposited, which was
immediately due, does not imply such permission to use the thing
deposited as would convert the deposit into a loan.
Article 408 of the Code of Commerce of 1829, previous to the one now in
force, provided:
The depositary of an amount of money cannot use the amount,
and if he makes use of it, he shall be responsible for all
damages that may accrue and shall respond to the depositor for
the legal interest on the amount.
Whereupon the commentators say:
n this case the deposit becomes in fact a loan, as a just
punishment imposed upon him who abuses the sacred nature of
a deposit and as a means of preventing the desire of gain from
leading him into speculations that may be disastrous to the
depositor, who is much better secured while the deposit exists
when he only has a personal action for recovery.
According to article 548, No. 5, of the Penal Code, those who to
the prejudice of another appropriate or abstract for their own use
money, goods, or other personal property which they may have
received as a deposit, on commission, or for administration, or
for any other purpose which produces the obligation of
delivering it or returning it, and deny having received it, shall
suffer the penalty of the preceding article," which punishes such
act as the crime of estafa. The corresponding article of the
Penal Code of the Philippines in 535, No. 5.
n a decision of an appeal, September 28, 1895, the principle was laid
down that: "Since he commits the crime of estafa under article 548 of the
Penal Code of Spain who to another's detriment appropriates to himself or
abstracts money or goods received on commission for delivery, the court
rightly applied this article to the appellant, who, to the manifest detriment
of the owner or owners of the securities, since he has not restored them,
willfully and wrongfully disposed of them by appropriating them to himself
or at least diverting them from the purpose to which he was charged to
devote them."
Credit Transactions Full Text Cases Atty. Adviento!!!!$"
t is unquestionable that in no sense did the P2,498 which he willfully and
wrongfully disposed of to the detriments of his principal, Juana Montilla,
and of the depositor, Eugenio Veraguth, belong to the defendant.
Likewise erroneous is the construction apparently at tempted to be given
to two decisions of this Supreme Court (U. S. vs. Dominguez, 2 Phil. Rep.,
580, and U. S. vs. Morales and Morco, 15 Phil. Rep., 236) as implying that
what constitutes estafa is not the disposal of money deposited, but denial
of having received same. n the first of said cases there was no evidence
that the defendant had appropriated the grain deposited in his possession.
On the contrary, it is entirely probable that, after the departure of
the defendant from Libmanan on September 20, 1898, two days
after the uprising of the civil guard in Nueva Caceres, the rice
was seized by the revolutionalists and appropriated to their own
uses.
n this connection it was held that failure to return the thing deposited was
not sufficient, but that it was necessary to prove that the depositary had
appropriated it to himself or diverted the deposit to his own or another's
benefit. He was accused or refusing to restore, and it was held that the
code does not penalize refusal to restore but denial of having received. So
much for the crime of omission; now with reference to the crime of
commission, it was not held in that decision that appropriation or diversion
of the thing deposited would not constitute the crime of estafa.
n the second of said decisions, the accused "kept none of the proceeds of
the sales. Those, such as they were, he turned over to the owner;" and
there being no proof of the appropriation, the agent could not be found
guilty of the crime of estafa.
Being in accord and the merits of the case, the judgment appealed from is
affirmed, with costs.
THRD DVSON
G.R. No. L-66826 August 19, 1988
BANK OF THE PHILIPPINE ISLANDS, petitioner,
vs.
THE INTERMEDIATE APPELLATE COURT and ZSHORNACK
respondents.
Pacis & Reyes Law Office for petitioner.
Ernesto T. Zshornack, Jr. for private respondent.

CORTES, J.:
The original parties to this case were Rizaldy T. Zshornack and the
Commercial Bank and Trust Company of the Philippines [hereafter
referred to as "COMTRUST."] n 1980, the Bank of the Philippine slands
(hereafter referred to as BP absorbed COMTRUST through a corporate
merger, and was substituted as party to the case.
Rizaldy Zshornack initiated proceedings on June 28,1976 by filing in the
Court of First nstance of Rizal Caloocan City a complaint against
COMTRUST alleging four causes of action. Except for the third cause of
action, the CF ruled in favor of Zshornack. The bank appealed to the
ntermediate Appellate Court which modified the CF decision absolving
the bank from liability on the fourth cause of action. The pertinent portions
of the judgment, as modified, read:
N VEW OF THE FOREGONG, the Court renders
judgment as follows:
1. Ordering the defendant COMTRUST to restore to
the dollar savings account of plaintiff (No. 25-4109)
the amount of U.S $1,000.00 as of October 27, 1975
to earn interest together with the remaining balance of
the said account at the rate fixed by the bank for
dollar deposits under Central Bank Circular 343;
2. Ordering defendant COMTRUST to return to the
plaintiff the amount of U.S. $3,000.00 immediately
upon the finality of this decision, without interest for
the reason that the said amount was merely held in
custody for safekeeping, but was not actually
deposited with the defendant COMTRUST because
being cash currency, it cannot by law be deposited
with plaintiffs dollar account and defendant's only
obligation is to return the same to plaintiff upon
demand;
xxx xxx xxx
5. Ordering defendant COMTRUST to pay plaintiff in
the amount of P8,000.00 as damages in the concept
of litigation expenses and attorney's fees suffered by
plaintiff as a result of the failure of the defendant bank
to restore to his (plaintiffs) account the amount of U.S.
$1,000.00 and to return to him (plaintiff) the U.S.
$3,000.00 cash left for safekeeping.
Costs against defendant COMTRUST.
SO ORDERED. [Rollo, pp. 47-48.]
Undaunted, the bank comes to this Court praying that it be totally absolved
from any liability to Zshornack. The latter not having appealed the Court of
Appeals decision, the issues facing this Court are limited to the bank's
liability with regard to the first and second causes of action and its liability
for damages.
1. We first consider the first cause of action, On the dates material to this
case, Rizaldy Zshornack and his wife, Shirley Gorospe, maintained in
COMTRUST, Quezon City Branch, a dollar savings account and a peso
current account.
On October 27, 1975, an application for a dollar draft was accomplished
by Virgilio V. Garcia, Assistant Branch Manager of COMTRUST Quezon
City, payable to a certain Leovigilda D. Dizon in the amount of $1,000.00.
n the application, Garcia indicated that the amount was to be charged to
Dollar Savings Acct. No. 25-4109, the savings account of the Zshornacks;
the charges for commission, documentary stamp tax and others totalling
P17.46 were to be charged to Current Acct. No. 210465-29, again, the
current account of the Zshornacks. There was no indication of the name of
the purchaser of the dollar draft.
On the same date, October 27,1975, COMTRUST, under the signature of
Virgilio V. Garcia, issued a check payable to the order of Leovigilda D.
Dizon in the sum of US $1,000 drawn on the Chase Manhattan Bank, New
York, with an indication that it was to be charged to Dollar Savings Acct.
No. 25-4109.
When Zshornack noticed the withdrawal of US$1,000.00 from his account,
he demanded an explanation from the bank. n answer, COMTRUST
claimed that the peso value of the withdrawal was given to Atty. Ernesto
Zshornack, Jr., brother of Rizaldy, on October 27, 1975 when he (Ernesto)
encashed with COMTRUST a cashier's check for P8,450.00 issued by the
Manila Banking Corporation payable to Ernesto.
Upon consideration of the foregoing facts, this Court finds no reason to
disturb the ruling of both the trial court and the Appellate Court on the first
cause of action. Petitioner must be held liable for the unauthorized
withdrawal of US$1,000.00 from private respondent's dollar account.
Credit Transactions Full Text Cases Atty. Adviento!!!!$#
n its desperate attempt to justify its act of withdrawing from its depositor's
savings account, the bank has adopted inconsistent theories. First, it still
maintains that the peso value of the amount withdrawn was given to Atty.
Ernesto Zshornack, Jr. when the latter encashed the Manilabank Cashier's
Check. At the same time, the bank claims that the withdrawal was made
pursuant to an agreement where Zshornack allegedly authorized the bank
to withdraw from his dollar savings account such amount which, when
converted to pesos, would be needed to fund his peso current account. f
indeed the peso equivalent of the amount withdrawn from the dollar
account was credited to the peso current account, why did the bank still
have to pay Ernesto?
At any rate, both explanations are unavailing. With regard to the first
explanation, petitioner bank has not shown how the transaction involving
the cashier's check is related to the transaction involving the dollar draft in
favor of Dizon financed by the withdrawal from Rizaldy's dollar account.
The two transactions appear entirely independent of each other. Moreover,
Ernesto Zshornack, Jr., possesses a personality distinct and separate from
Rizaldy Zshornack. Payment made to Ernesto cannot be considered
payment to Rizaldy.
As to the second explanation, even if we assume that there was such an
agreement, the evidence do not show that the withdrawal was made
pursuant to it. nstead, the record reveals that the amount withdrawn was
used to finance a dollar draft in favor of Leovigilda D. Dizon, and not to
fund the current account of the Zshornacks. There is no proof whatsoever
that peso Current Account No. 210-465-29 was ever credited with the
peso equivalent of the US$1,000.00 withdrawn on October 27, 1975 from
Dollar Savings Account No. 25-4109.
2. As for the second cause of action, the complaint filed with the trial court
alleged that on December 8, 1975, Zshornack entrusted to COMTRUST,
thru Garcia, US $3,000.00 cash (popularly known as greenbacks) for
safekeeping, and that the agreement was embodied in a document, a
copy of which was attached to and made part of the complaint. The
document reads:
Makati Cable Address:
Philippines "COMTRUST"
COMMERCAL BANK AND TRUST COMPANY
of the Philippines
Quezon City Branch
December 8, 1975
MR. RZALDY T. ZSHORNACK
&/OR MRS SHRLEY E. ZSHORNACK
Sir/Madam:
We acknowledged (sic) having
received from you today the sum
of US DOLLARS: THREE
THOUSAND ONLY
(US$3,000.00) for safekeeping.
Received by:
(Sgd.) VRGLO V. GARCA
t was also alleged in the complaint that despite demands, the bank
refused to return the money.
n its answer, COMTRUST averred that the US$3,000 was credited to
Zshornack's peso current account at prevailing conversion rates.
t must be emphasized that COMTRUST did not deny specifically under
oath the authenticity and due execution of the above instrument.
During trial, it was established that on December 8, 1975 Zshornack
indeed delivered to the bank US $3,000 for safekeeping. When he
requested the return of the money on May 10, 1976, COMTRUST
explained that the sum was disposed of in this manner: US$2,000.00 was
sold on December 29, 1975 and the peso proceeds amounting to
P14,920.00 were deposited to Zshornack's current account per deposit
slip accomplished by Garcia; the remaining US$1,000.00 was sold on
February 3, 1976 and the peso proceeds amounting to P8,350.00 were
deposited to his current account per deposit slip also accomplished by
Garcia.
Aside from asserting that the US$3,000.00 was properly credited to
Zshornack's current account at prevailing conversion rates, BP now posits
another ground to defeat private respondent's claim. t now argues that the
contract embodied in the document is the contract of depositum (as
defined in Article 1962, New Civil Code), which banks do not enter into.
The bank alleges that Garcia exceeded his powers when he entered into
the transaction. Hence, it is claimed, the bank cannot be liable under the
contract, and the obligation is purely personal to Garcia.
Before we go into the nature of the contract entered into, an important
point which arises on the pleadings, must be considered.
The second cause of action is based on a document purporting to be
signed by COMTRUST, a copy of which document was attached to the
complaint. n short, the second cause of action was based on an
actionable document. t was therefore incumbent upon the bank to
specifically deny under oath the due execution of the document, as
prescribed under Rule 8, Section 8, if it desired: (1) to question the
authority of Garcia to bind the corporation; and (2) to deny its capacity to
enter into such contract. [See, E.B. Merchant v. nternational Banking
Corporation, 6 Phil. 314 (1906).] No sworn answer denying the due
execution of the document in question, or questioning the authority of
Garcia to bind the bank, or denying the bank's capacity to enter into the
contract, was ever filed. Hence, the bank is deemed to have admitted not
only Garcia's authority, but also the bank's power, to enter into the contract
in question.
n the past, this Court had occasion to explain the reason behind this
procedural requirement.
The reason for the rule enunciated in the foregoing
authorities will, we think, be readily appreciated. n
dealing with corporations the public at large is bound
to rely to a large extent upon outward appearances. f
a man is found acting for a corporation with the
external indicia of authority, any person, not having
notice of want of authority, may usually rely upon
those appearances; and if it be found that the
directors had permitted the agent to exercise that
authority and thereby held him out as a person
competent to bind the corporation, or had acquiesced
in a contract and retained the benefit supposed to
have been conferred by it, the corporation will be
bound, notwithstanding the actual authority may never
have been granted
... Whether a particular officer actually possesses the
authority which he assumes to exercise is frequently
known to very few, and the proof of it usually is not
readily accessible to the stranger who deals with the
corporation on the faith of the ostensible authority
exercised by some of the corporate officers. t is
therefore reasonable, in a case where an officer of a
corporation has made a contract in its name, that the
corporation should be required, if it denies his
authority, to state such defense in its answer. By this
means the plaintiff is apprised of the fact that the
Credit Transactions Full Text Cases Atty. Adviento!!!!$$
agent's authority is contested; and he is given an
opportunity to adduce evidence showing either that
the authority existed or that the contract was ratified
and approved. [Ramirez v. Orientalist Co. and
Fernandez, 38 Phil. 634, 645- 646 (1918).]
Petitioner's argument must also be rejected for another reason. The
practical effect of absolving a corporation from liability every time an officer
enters into a contract which is beyond corporate powers, even without the
proper allegation or proof that the corporation has not authorized nor
ratified the officer's act, is to cast corporations in so perfect a mold that
transgressions and wrongs by such artificial beings become impossible
[Bissell v. Michigan Southern and N..R. Cos 22 N.Y 258 (1860).] "To say
that a corporation has no right to do unauthorized acts is only to put forth a
very plain truism but to say that such bodies have no power or capacity to
err is to impute to them an excellence which does not belong to any
created existence with which we are acquainted. The distinction between
power and right is no more to be lost sight of in respect to artificial than in
respect to natural persons." [Ibid.]
Having determined that Garcia's act of entering into the contract binds the
corporation, we now determine the correct nature of the contract, and its
legal consequences, including its enforceability.
The document which embodies the contract states that the US$3,000.00
was received by the bank for safekeeping. The subsequent acts of the
parties also show that the intent of the parties was really for the bank to
safely keep the dollars and to return it to Zshornack at a later time, Thus,
Zshornack demanded the return of the money on May 10, 1976, or over
five months later.
The above arrangement is that contract defined under Article 1962, New
Civil Code, which reads:
Art. 1962. A deposit is constituted from the moment a
person receives a thing belonging to another, with the
obligation of safely keeping it and of returning the
same. f the safekeeping of the thing delivered is not
the principal purpose of the contract, there is no
deposit but some other contract.
Note that the object of the contract between Zshornack and COMTRUST
was foreign exchange. Hence, the transaction was covered by Central
Bank Circular No. 20, Restrictions on Gold and Foreign Exchange
Transactions, promulgated on December 9, 1949, which was in force at
the time the parties entered into the transaction involved in this case. The
circular provides:
xxx xxx xxx
2. Transactions in the assets described below and all
dealings in them of whatever nature, including, where
applicable their exportation and importation, shall
NOT be effected, except with respect to deposit
accounts included in sub-paragraphs (b) and (c) of
this paragraph, when such deposit accounts are
owned by and in the name of, banks.
(a) Any and all assets, provided
they are held through, in, or with
banks or banking institutions
located in the Philippines,
including money, checks, drafts,
bullions bank drafts, deposit
accounts (demand, time and
savings), all debts, indebtedness
or obligations, financial brokers
and investment houses, notes,
debentures, stocks, bonds,
coupons, bank acceptances,
mortgages, pledges, liens or
other rights in the nature of
security, expressed in foreign
currencies, or if payable abroad,
irrespective of the currency in
which they are expressed, and
belonging to any person, firm,
partnership, association, branch
office, agency, company or other
unincorporated body or
corporation residing or located
within the Philippines;
(b) Any and all assets of the kinds
included and/or described in
subparagraph (a) above, whether
or not held through, in, or with
banks or banking institutions, and
existent within the Philippines,
which belong to any person, firm,
partnership, association, branch
office, agency, company or other
unincorporated body or
corporation not residing or
located within the Philippines;
(c) Any and all assets existent
within the Philippines including
money, checks, drafts, bullions,
bank drafts, all debts,
indebtedness or obligations,
financial securities commonly
dealt in by bankers, brokers and
investment houses, notes,
debentures, stock, bonds,
coupons, bank acceptances,
mortgages, pledges, liens or
other rights in the nature of
security expressed in foreign
currencies, or if payable abroad,
irrespective of the currency in
which they are expressed, and
belonging to any person, firm,
partnership, association, branch
office, agency, company or other
unincorporated body or
corporation residing or located
within the Philippines.
xxx xxx xxx
4. (a) All receipts of foreign exchange shall be sold
daily to the Central Bank by those authorized to deal
in foreign exchange. All receipts of foreign exchange
by any person, firm, partnership, association, branch
office, agency, company or other unincorporated body
or corporation shall be sold to the authorized agents
of the Central Bank by the recipients within one
business day following the receipt of such foreign
exchange. Any person, firm, partnership, association,
branch office, agency, company or other
unincorporated body or corporation, residing or
located within the Philippines, who acquires on and
after the date of this Circular foreign exchange shall
not, unless licensed by the Central Bank, dispose of
such foreign exchange in whole or in part, nor receive
less than its full value, nor delay taking ownership
thereof except as such delay is customary; Provided,
further, That within one day upon taking ownership, or
receiving payment, of foreign exchange the
aforementioned persons and entities shall sell such
foreign exchange to designated agents of the Central
Bank.
xxx xxx xxx
8. Strict observance of the provisions of this Circular is
enjoined; and any person, firm or corporation, foreign
Credit Transactions Full Text Cases Atty. Adviento!!!!$%
or domestic, who being bound to the observance
thereof, or of such other rules, regulations or
directives as may hereafter be issued in
implementation of this Circular, shall fail or refuse to
comply with, or abide by, or shall violate the same,
shall be subject to the penal sanctions provided in the
Central Bank Act.
xxx xxx xxx
Paragraph 4 (a) above was modified by Section 6 of Central Bank Circular
No. 281, Regulations on Foreign Exchange, promulgated on November
26, 1969 by limiting its coverage to Philippine residents only. Section 6
provides:
SEC. 6. All receipts of foreign exchange by any
resident person, firm, company or corporation shall be
sold to authorized agents of the Central Bank by the
recipients within one business day following the
receipt of such foreign exchange. Any resident
person, firm, company or corporation residing or
located within the Philippines, who acquires foreign
exchange shall not, unless authorized by the Central
Bank, dispose of such foreign exchange in whole or in
part, nor receive less than its full value, nor delay
taking ownership thereof except as such delay is
customary; Provided, That, within one business day
upon taking ownership or receiving payment of foreign
exchange the aforementioned persons and entities
shall sell such foreign exchange to the authorized
agents of the Central Bank.
As earlier stated, the document and the subsequent acts of the parties
show that they intended the bank to safekeep the foreign exchange, and
return it later to Zshornack, who alleged in his complaint that he is a
Philippine resident. The parties did not intended to sell the US dollars to
the Central Bank within one business day from receipt. Otherwise, the
contract of depositum would never have been entered into at all.
Since the mere safekeeping of the greenbacks, without selling them to the
Central Bank within one business day from receipt, is a transaction which
is not authorized by CB Circular No. 20, it must be considered as one
which falls under the general class of prohibited transactions. Hence,
pursuant to Article 5 of the Civil Code, it is void, having been executed
against the provisions of a mandatory/prohibitory law. More importantly, it
affords neither of the parties a cause of action against the other. "When
the nullity proceeds from the illegality of the cause or object of the
contract, and the act constitutes a criminal offense, both parties being in
pari delicto, they shall have no cause of action against each other. . ." [Art.
1411, New Civil Code.] The only remedy is one on behalf of the State to
prosecute the parties for violating the law.
We thus rule that Zshornack cannot recover under the second cause of
action.
3. Lastly, we find the P8,000.00 awarded by the courts a quo as damages
in the concept of litigation expenses and attorney's fees to be reasonable.
The award is sustained.
WHEREFORE, the decision appealed from is hereby MODFED.
Petitioner is ordered to restore to the dollar savings account of private
respondent the amount of US$1,000.00 as of October 27, 1975 to earn
interest at the rate fixed by the bank for dollar savings deposits. Petitioner
is further ordered to pay private respondent the amount of P8,000.00 as
damages. The other causes of action of private respondent are ordered
dismissed.
SO ORDERED.
THRD DVSON

G.R. No. 90027 March 3, 1993
CA AGRO-INDUSTRIAL DEVELOPMENT CORP., petitioner,
vs.
THE HONORABLE COURT OF APPEALS and SECURITY BANK AND
TRUST COMPANY, respondents.
Dolorfino & Dominguez Law Offices for petitioner.
Danilo B. Banares for private respondent.

DAVIDE, JR., J.:
s the contractual relation between a commercial bank and another party
in a contract of rent of a safety deposit box with respect to its contents
placed by the latter one of bailor and bailee or one of lessor and lessee?
This is the crux of the present controversy.
On 3 July 1979, petitioner (through its President, Sergio Aguirre) and the
spouses Ramon and Paula Pugao entered into an agreement whereby the
former purchased from the latter two (2) parcels of land for a consideration
of P350,625.00. Of this amount, P75,725.00 was paid as downpayment
while the balance was covered by three (3) postdated checks. Among the
terms and conditions of the agreement embodied in a Memorandum of
True and Actual Agreement of Sale of Land were that the titles to the lots
shall be transferred to the petitioner upon full payment of the purchase
price and that the owner's copies of the certificates of titles thereto,
Transfer Certificates of Title (TCT) Nos. 284655 and 292434, shall be
deposited in a safety deposit box of any bank. The same could be
withdrawn only upon the joint signatures of a representative of the
petitioner and the Pugaos upon full payment of the purchase price.
Petitioner, through Sergio Aguirre, and the Pugaos then rented Safety
Deposit Box No. 1448 of private respondent Security Bank and Trust
Company, a domestic banking corporation hereinafter referred to as the
respondent Bank. For this purpose, both signed a contract of lease
(Exhibit "2") which contains, inter alia, the following conditions:
13. The bank is not a depositary of the contents of the
safe and it has neither the possession nor control of
the same.
14. The bank has no interest whatsoever in said
contents, except herein expressly provided, and it
assumes absolutely no liability in connection
therewith.
1
After the execution of the contract, two (2) renter's keys were given to the
renters one to Aguirre (for the petitioner) and the other to the Pugaos. A
guard key remained in the possession of the respondent Bank. The safety
deposit box has two (2) keyholes, one for the guard key and the other for
the renter's key, and can be opened only with the use of both keys.
Petitioner claims that the certificates of title were placed inside the said
box.
Thereafter, a certain Mrs. Margarita Ramos offered to buy from the
petitioner the two (2) lots at a price of P225.00 per square meter which, as
petitioner alleged in its complaint, translates to a profit of P100.00 per
square meter or a total of P280,500.00 for the entire property. Mrs. Ramos
demanded the execution of a deed of sale which necessarily entailed the
production of the certificates of title. n view thereof, Aguirre, accompanied
by the Pugaos, then proceeded to the respondent Bank on 4 October
1979 to open the safety deposit box and get the certificates of title.
However, when opened in the presence of the Bank's representative, the
box yielded no such certificates. Because of the delay in the reconstitution
of the title, Mrs. Ramos withdrew her earlier offer to purchase the lots; as a
consequence thereof, the petitioner allegedly failed to realize the expected
profit of P280,500.00. Hence, the latter filed on 1 September 1980 a
complaint
2
for damages against the respondent Bank with the Court of
Credit Transactions Full Text Cases Atty. Adviento!!!!$&
First nstance (now Regional Trial Court) of Pasig, Metro Manila which
docketed the same as Civil Case No. 38382.
n its Answer with Counterclaim,
3
respondent Bank alleged that the
petitioner has no cause of action because of paragraphs 13 and 14 of the
contract of lease (Exhibit "2"); corollarily, loss of any of the items or articles
contained in the box could not give rise to an action against it. t then
interposed a counterclaim for exemplary damages as well as attorney's
fees in the amount of P20,000.00. Petitioner subsequently filed an answer
to the counterclaim.
4
n due course, the trial court, now designated as Branch 161 of the
Regional Trial Court (RTC) of Pasig, Metro Manila, rendered a decision
5
adverse to the petitioner on 8 December 1986, the dispositive portion of
which reads:
WHEREFORE, premises considered, judgment is
hereby rendered dismissing plaintiff's complaint.
On defendant's counterclaim, judgment is hereby
rendered ordering plaintiff to pay defendant the
amount of FVE THOUSAND (P5,000.00) PESOS as
attorney's fees.
With costs against plaintiff.
6
The unfavorable verdict is based on the trial court's conclusion that under
paragraphs 13 and 14 of the contract of lease, the Bank has no liability for
the loss of the certificates of title. The court declared that the said
provisions are binding on the parties.
ts motion for reconsideration
7
having been denied, petitioner appealed
from the adverse decision to the respondent Court of Appeals which
docketed the appeal as CA-G.R. CV No. 15150. Petitioner urged the
respondent Court to reverse the challenged decision because the trial
court erred in (a) absolving the respondent Bank from liability from the
loss, (b) not declaring as null and void, for being contrary to law, public
order and public policy, the provisions in the contract for lease of the safety
deposit box absolving the Bank from any liability for loss, (c) not
concluding that in this jurisdiction, as well as under American
jurisprudence, the liability of the Bank is settled and (d) awarding
attorney's fees to the Bank and denying the petitioner's prayer for nominal
and exemplary damages and attorney's fees.
8
n its Decision promulgated on 4 July 1989,
9
respondent Court affirmed
the appealed decision principally on the theory that the contract (Exhibit
"2") executed by the petitioner and respondent Bank is in the nature of a
contract of lease by virtue of which the petitioner and its co-renter were
given control over the safety deposit box and its contents while the Bank
retained no right to open the said box because it had neither the
possession nor control over it and its contents. As such, the contract is
governed by Article 1643 of the Civil Code
10
which provides:
Art. 1643. n the lease of things, one of the parties
binds himself to give to another the enjoyment or use
of a thing for a price certain, and for a period which
may be definite or indefinite. However, no lease for
more than ninety-nine years shall be valid.
t invoked Tolentino vs. Gonzales
11
which held that the owner
of the property loses his control over the property leased during
the period of the contract and Article 1975 of the Civil Code
which provides:
Art. 1975. The depositary holding certificates, bonds,
securities or instruments which earn interest shall be
bound to collect the latter when it becomes due, and
to take such steps as may be necessary in order that
the securities may preserve their value and the rights
corresponding to them according to law.
The above provision shall not apply to contracts for
the rent of safety deposit boxes.
and then concluded that "[c]learly, the defendant-appellee is not
under any duty to maintain the contents of the box. The
stipulation absolving the defendant-appellee from liability is in
accordance with the nature of the contract of lease and cannot
be regarded as contrary to law, public order and public policy."
12
The appellate court was quick to add, however, that under the
contract of lease of the safety deposit box, respondent Bank is
not completely free from liability as it may still be made
answerable in case unauthorized persons enter into the vault
area or when the rented box is forced open. Thus, as expressly
provided for in stipulation number 8 of the contract in question:
8. The Bank shall use due diligence that no
unauthorized person shall be admitted to any rented
safe and beyond this, the Bank will not be responsible
for the contents of any safe rented from it.
13
ts motion for reconsideration
14
having been denied in the respondent
Court's Resolution of 28 August 1989,
15
petitioner took this recourse
under Rule 45 of the Rules of Court and urges Us to review and set aside
the respondent Court's ruling. Petitioner avers that both the respondent
Court and the trial court (a) did not properly and legally apply the correct
law in this case, (b) acted with grave abuse of discretion or in excess of
jurisdiction amounting to lack thereof and (c) set a precedent that is
contrary to, or is a departure from precedents adhered to and affirmed by
decisions of this Court and precepts in American jurisprudence adopted in
the Philippines. t reiterates the arguments it had raised in its motion to
reconsider the trial court's decision, the brief submitted to the respondent
Court and the motion to reconsider the latter's decision. n a nutshell,
petitioner maintains that regardless of nomenclature, the contract for the
rent of the safety deposit box (Exhibit "2") is actually a contract of deposit
governed by Title X, Book V of the Civil Code of the
Philippines.
16
Accordingly, it is claimed that the respondent Bank is liable
for the loss of the certificates of title pursuant to Article 1972 of the said
Code which provides:
Art. 1972. The depositary is obliged to keep the thing
safely and to return it, when required, to the depositor,
or to his heirs and successors, or to the person who
may have been designated in the contract. His
responsibility, with regard to the safekeeping and the
loss of the thing, shall be governed by the provisions
of Title of this Book.
f the deposit is gratuitous, this fact shall be taken into
account in determining the degree of care that the
depositary must observe.
Petitioner then quotes a passage from American Jurisprudence
17
which is supposed to expound on the prevailing rule in the
United States, to wit:
The prevailing rule appears to be that where a safe-
deposit company leases a safe-deposit box or safe
and the lessee takes possession of the box or safe
and places therein his securities or other valuables,
the relation of bailee and bail or is created between
the parties to the transaction as to such securities or
other valuables; the fact that the
safe-deposit company does not know, and that it is
not expected that it shall know, the character or
description of the property which is deposited in such
safe-deposit box or safe does not change that
relation. That access to the contents of the safe-
deposit box can be had only by the use of a key
retained by the lessee ( whether it is the sole key or
one to be used in connection with one retained by the
lessor) does not operate to alter the foregoing rule.
The argument that there is not, in such a case, a
delivery of exclusive possession and control to the
deposit company, and that therefore the situation is
Credit Transactions Full Text Cases Atty. Adviento!!!!$'
entirely different from that of ordinary bailment, has
been generally rejected by the courts, usually on the
ground that as possession must be either in the
depositor or in the company, it should reasonably be
considered as in the latter rather than in the former,
since the company is, by the nature of the contract,
given absolute control of access to the property, and
the depositor cannot gain access thereto without the
consent and active participation of the company. . . .
(citations omitted).
and a segment from Words and Phrases
18
which states that a
contract for the rental of a bank safety deposit box in
consideration of a fixed amount at stated periods is a bailment
for hire.
Petitioner further argues that conditions 13 and 14 of the questioned
contract are contrary to law and public policy and should be declared null
and void. n support thereof, it cites Article 1306 of the Civil Code which
provides that parties to a contract may establish such stipulations,
clauses, terms and conditions as they may deem convenient, provided
they are not contrary to law, morals, good customs, public order or public
policy.
After the respondent Bank filed its comment, this Court gave due course to
the petition and required the parties to simultaneously submit their
respective Memoranda.
The petition is partly meritorious.
We agree with the petitioner's contention that the contract for the rent of
the safety deposit box is not an ordinary contract of lease as defined in
Article 1643 of the Civil Code. However, We do not fully subscribe to its
view that the same is a contract of deposit that is to be strictly governed by
the provisions in the Civil Code on deposit;
19
the contract in the case at
bar is a special kind of deposit. t cannot be characterized as an ordinary
contract of lease under Article 1643 because the full and absolute
possession and control of the safety deposit box was not given to the joint
renters the petitioner and the Pugaos. The guard key of the box
remained with the respondent Bank; without this key, neither of the renters
could open the box. On the other hand, the respondent Bank could not
likewise open the box without the renter's key. n this case, the said key
had a duplicate which was made so that both renters could have access to
the box.
Hence, the authorities cited by the respondent Court
20
on this point do not
apply. Neither could Article 1975, also relied upon by the respondent
Court, be invoked as an argument against the deposit theory. Obviously,
the first paragraph of such provision cannot apply to a depositary of
certificates, bonds, securities or instruments which earn interest if such
documents are kept in a rented safety deposit box. t is clear that the
depositary cannot open the box without the renter being present.
We observe, however, that the deposit theory itself does not altogether
find unanimous support even in American jurisprudence. We agree with
the petitioner that under the latter, the prevailing rule is that the relation
between a bank renting out safe-deposit boxes and its customer with
respect to the contents of the box is that of a bail or and bailee, the
bailment being for hire and mutual benefit.
21
This is just the prevailing
view because:
There is, however, some support for the view that the
relationship in question might be more properly
characterized as that of landlord and tenant, or lessor
and lessee. t has also been suggested that it should
be characterized as that of licensor and licensee. The
relation between a bank, safe-deposit company, or
storage company, and the renter of a safe-deposit box
therein, is often described as contractual, express or
implied, oral or written, in whole or in part. But there is
apparently no jurisdiction in which any rule other than
that applicable to bailments governs questions of the
liability and rights of the parties in respect of loss of
the contents of safe-deposit boxes.
22
(citations
omitted)
n the context of our laws which authorize banking institutions to rent out
safety deposit boxes, it is clear that in this jurisdiction, the prevailing rule in
the United States has been adopted. Section 72 of the General Banking
Act
23
pertinently provides:
Sec. 72. n addition to the operations specifically
authorized elsewhere in this Act, banking institutions
other than building and loan associations may perform
the following services:
(a) Receive in custody funds,
documents, and valuable objects,
and rent safety deposit boxes for
the safeguarding of such effects.
xxx xxx xxx
The banks shall perform the services permitted under
subsections (a), (b) and (c) of this section as
depositories or as agents. . . .
24
(emphasis supplied)
Note that the primary function is still found within the parameters of a
contract of deposit, i.e., the receiving in custody of funds, documents and
other valuable objects for safekeeping. The renting out of the safety
deposit boxes is not independent from, but related to or in conjunction
with, this principal function. A contract of deposit may be entered into orally
or in writing
25
and, pursuant to Article 1306 of the Civil Code, the parties
thereto may establish such stipulations, clauses, terms and conditions as
they may deem convenient, provided they are not contrary to law, morals,
good customs, public order or public policy. The depositary's responsibility
for the safekeeping of the objects deposited in the case at bar is governed
by Title , Book V of the Civil Code. Accordingly, the depositary would be
liable if, in performing its obligation, it is found guilty of fraud, negligence,
delay or contravention of the tenor of the agreement.
26
n the absence of
any stipulation prescribing the degree of diligence required, that of a good
father of a family is to be observed.
27
Hence, any stipulation exempting
the depositary from any liability arising from the loss of the thing deposited
on account of fraud, negligence or delay would be void for being contrary
to law and public policy. n the instant case, petitioner maintains that
conditions 13 and 14 of the questioned contract of lease of the safety
deposit box, which read:
13. The bank is not a depositary of the contents of the
safe and it has neither the possession nor control of
the same.
14. The bank has no interest whatsoever in said
contents, except herein expressly provided, and it
assumes absolutely no liability in connection
therewith.
28
are void as they are contrary to law and public policy. We find
Ourselves in agreement with this proposition for indeed, said
provisions are inconsistent with the respondent Bank's
responsibility as a depositary under Section 72(a) of the General
Banking Act. Both exempt the latter from any liability except as
contemplated in condition 8 thereof which limits its duty to
exercise reasonable diligence only with respect to who shall be
admitted to any rented safe, to wit:
8. The Bank shall use due diligence that no
unauthorized person shall be admitted to any rented
safe and beyond this, the Bank will not be responsible
for the contents of any safe rented from it.
29
Furthermore, condition 13 stands on a wrong premise and is
contrary to the actual practice of the Bank. t is not correct to
assert that the Bank has neither the possession nor control of
the contents of the box since in fact, the safety deposit box itself
Credit Transactions Full Text Cases Atty. Adviento!!!!$(
is located in its premises and is under its absolute control;
moreover, the respondent Bank keeps the guard key to the said
box. As stated earlier, renters cannot open their respective
boxes unless the Bank cooperates by presenting and using this
guard key. Clearly then, to the extent above stated, the
foregoing conditions in the contract in question are void and
ineffective. t has been said:
With respect to property deposited in a safe-deposit
box by a customer of a safe-deposit company, the
parties, since the relation is a contractual one, may by
special contract define their respective duties or
provide for increasing or limiting the liability of the
deposit company, provided such contract is not in
violation of law or public policy. t must clearly appear
that there actually was such a special contract,
however, in order to vary the ordinary obligations
implied by law from the relationship of the parties;
liability of the deposit company will not be enlarged or
restricted by words of doubtful meaning. The
company, in renting
safe-deposit boxes, cannot exempt itself from liability
for loss of the contents by its own fraud or negligence
or that of its agents or servants, and if a provision of
the contract may be construed as an attempt to do so,
it will be held ineffective for the purpose. Although it
has been held that the lessor of a safe-deposit box
cannot limit its liability for loss of the contents thereof
through its own negligence, the view has been taken
that such a lessor may limits its liability to some extent
by agreement or stipulation.
30
(citations omitted)
Thus, we reach the same conclusion which the Court of Appeals arrived
at, that is, that the petition should be dismissed, but on grounds quite
different from those relied upon by the Court of Appeals. n the instant
case, the respondent Bank's exoneration cannot, contrary to the holding of
the Court of Appeals, be based on or proceed from a characterization of
the impugned contract as a contract of lease, but rather on the fact that no
competent proof was presented to show that respondent Bank was aware
of the agreement between the petitioner and the Pugaos to the effect that
the certificates of title were withdrawable from the safety deposit box only
upon both parties' joint signatures, and that no evidence was submitted to
reveal that the loss of the certificates of title was due to the fraud or
negligence of the respondent Bank. This in turn flows from this Court's
determination that the contract involved was one of deposit. Since both the
petitioner and the Pugaos agreed that each should have one (1) renter's
key, it was obvious that either of them could ask the Bank for access to the
safety deposit box and, with the use of such key and the Bank's own guard
key, could open the said box, without the other renter being present.
Since, however, the petitioner cannot be blamed for the filing of the
complaint and no bad faith on its part had been established, the trial court
erred in condemning the petitioner to pay the respondent Bank attorney's
fees. To this extent, the Decision (dispositive portion) of public respondent
Court of Appeals must be modified.
WHEREFORE, the Petition for Review is partially GRANTED by deleting
the award for attorney's fees from the 4 July 1989 Decision of the
respondent Court of Appeals in CA-G.R. CV No. 15150. As modified, and
subject to the pronouncement We made above on the nature of the
relationship between the parties in a contract of lease of safety deposit
boxes, the dispositive portion of the said Decision is hereby AFFRMED
and the instant Petition for Review is otherwise DENED for lack of merit.
No pronouncement as to costs.
SO ORDERED.
EN BANC
G.R. No. 4015 August 24, 1908
ANGEL JAVELLANA, plaintiff-appellee,
vs.
JOSE LIM, ET AL., defendants-appellants.
R. Zaldarriaga for appellants.
B. Montinola for appellee.
TORRES, J.:
The attorney for the plaintiff, Angel Javellana, file a complaint on the 30th
of October, 1906, with the Court of First nstance of loilo, praying that the
defendants, Jose Lim and Ceferino Domingo Lim, he sentenced to jointly
and severally pay the sum of P2,686.58, with interest thereon at the rate of
15 per cent per annum from the 20th of January, 1898, until full payment
should be made, deducting from the amount of interest due the sum of
P1,102.16, and to pay the costs of the proceedings.
Authority from the court having been previously obtained, the complaint
was amended on the 10th of January, 1907; it was then alleged, on the
26th of May, 1897, the defendants executed and subscribed a document in
favor of the plaintiff reading as follows:
We have received from Angel Javellana, as a deposit without interest, the
sum of two thousand six hundred and eighty-six cents of pesos fuertes,
which we will return to the said gentleman, jointly and severally, on the
20th of January, 1898. Jaro, 26th of May, 1897. Signed Jose Lim.
Signed: Ceferino Domingo Lim.
That, when the obligation became due, the defendants begged the plaintiff
for an extension of time for the payment thereof, building themselves to
pay interest at the rate of 15 per cent on the amount of their indebtedness,
to which the plaintiff acceded; that on the 15th of May, 1902, the debtors
paid on account of interest due the sum of P1,000 pesos, with the
exception of either capital or interest, had thereby been subjected to loss
and damages.
A demurrer to the original complaint was overruled, and on the 4th of
January, 1907, the defendants answered the original complaint before its
amendment, setting forth that they acknowledged the facts stated in Nos.
1 and 2 of the complaint; that they admitted the statements of the plaintiff
relative to the payment of 1,102.16 pesos made on the 15th of November,
1902, not, however, as payment of interest on the amount stated in the
foregoing document, but on account of the principal, and denied that there
had been any agreement as to an extension of the time for payment and
the payment of interest at the rate of 15 per cent per annum as alleged in
paragraph 3 of the complaint, and also denied all the other statements
contained therein.
As a counterclaim, the defendants alleged that they had paid to the plaintiff
sums which, together with the P1,102.16 acknowledged in the complaint,
aggregated the total sum of P5,602.16, and that, deducting therefrom the
total sum of P2,686.58 stated in the document transcribed in the
complaint, the plaintiff still owed the defendants P2,915.58; therefore, they
asked that judgment be entered absolving them, and sentencing the
plaintiff to pay them the sum of P2,915.58 with the costs.
Evidence was adduced by both parties and, upon their exhibits, together
with an account book having been made of record, the court below
rendered judgment on the 15th of January, 1907, in favor of the plaintiff for
the recovery of the sum of P5,714.44 and costs.
The defendants excepted to the above decision and moved for a new trial.
This motion was overruled and was also excepted to by them; the bill of
exceptions presented by the appellants having been approved, the same
was in due course submitted to this court.
The document of indebtedness inserted in the complaint states that the
plaintiff left on deposit with the defendants a given sum of money which
they were jointly and severally obliged to return on a certain date fixed in
the document; but that, nevertheless, when the document appearing as
Exhibits 2, written in the Visayan dialect and followed by a translation into
Spanish was executed, it was acknowledged, at the date thereof, the 15th
Credit Transactions Full Text Cases Atty. Adviento!!!!$)
of November, 1902, that the amount deposited had not yet been returned
to the creditor, whereby he was subjected to losses and damages
amounting to 830 pesos since the 20th of January, 1898, when the return
was again stipulated with the further agreement that the amount deposited
should bear interest at the rate of 15 per cent per annum, from the
aforesaid date of January 20, and that the 1,000 pesos paid to the
depositor on the 15th of May, 1900, according to the receipt issued by him
to the debtors, would be included, and that the said rate of interest would
obtain until the debtors on the 20th of May, 1897, it is called a deposit
consisted, and they could have accomplished the return agreed upon by
the delivery of a sum equal to the one received by them. For this reason it
must be understood that the debtors were lawfully authorized to make use
of the amount deposited, which they have done, as subsequent shown
when asking for an extension of the time for the return thereof, inasmuch
as, acknowledging that they have subjected the letter, their creditor, to
losses and damages for not complying with what had been stipulated, and
being conscious that they had used, for their own profit and gain, the
money that they received apparently as a deposit, they engaged to pay
interest to the creditor from the date named until the time when the refund
should be made. Such conduct on the part of the debtors is
unquestionable evidence that the transaction entered into between the
interested parties was not a deposit, but a real contract of loan.
Article 1767 of the Civil Code provides that
The depository can not make use of the thing deposited without
the express permission of the depositor.
Otherwise he shall be liable for losses and damages.
Article 1768 also provides that
When the depository has permission to make use of the thing
deposited, the contract loses the character of a deposit and
becomes a loan or bailment.
The permission shall not be presumed, and its existence must
be proven.
When on one of the latter days of January, 1898, Jose Lim went to the
office of the creditor asking for an extension of one year, in view of the fact
the money was scare, and because neither himself nor the other
defendant were able to return the amount deposited, for which reason he
agreed to pay interest at the rate of 15 per cent per annum, it was
because, as a matter of fact, he did not have in his possession the amount
deposited, he having made use of the same in his business and for his
own profit; and the creditor, by granting them the extension, evidently
confirmed the express permission previously given to use and dispose of
the amount stated as having bee deposited, which, in accordance with the
loan, to all intents and purposes gratuitously, until the 20th of January,
1898, and from that dated with interest at 15 per cent per annum until its
full payment, deducting from the total amount of interest the sum of 1,000
pesos, in accordance with the provisions of article 1173 of the Civil Code.
Notwithstanding that it does not appear that Jose Lim signed the
document (Exhibit 2) executed in the presence of three witnesses on the
15th of November, 1902, by Ceferino Domingo Lim on behalf of himself
and the former, nevertheless, the said document has not been contested
as false, either by a criminal or by a civil proceeding, nor has any doubt
been cast upon the authenticity of the signatures of the witnesses who
attested the execution of the same; and from the evidence in the case one
is sufficiently convinced that the said Jose Lim was perfectly aware of and
authorized his joint codebtor to liquidate the interest, to pay the sum of
1,000 pesos, on account thereof, and to execute the aforesaid document
No. 2. A true ratification of the original document of deposit was thus
made, and not the least proof is shown in the record that Jose Lim had
ever paid the whole or any part of the capital stated in the original
document, Exhibit 1.
f the amount, together with interest claimed in the complaint, less 1,000
pesos appears as fully established, such is not the case with the
defendant's counterclaim for P5,602.16, because the existence and
certainty of said indebtedness imputed to the plaintiff has not been proven,
and the defendants, who call themselves creditors for the said amount
have not proven in a satisfactory manner that the plaintiff had received
partial payments on account of the same; the latter alleges with good
reason, that they should produce the receipts which he may have issued,
and which he did issue whenever they paid him any money on account.
The plaintiffs allegation that the two amounts of 400 and 1,200 pesos,
referred to in documents marked "C" and "D" offered in evidence by the
defendants, had been received from Ceferino Domingo Lim on account of
other debts of his, has not been contradicted, and the fact that in the
original complaint the sum of 1,102.16 pesos, was expressed in lieu of
1,000 pesos, the only payment made on account of interest on the amount
deposited according to documents No. 2 and letter "B" above referred to,
was due to a mistake.
Moreover, for the reason above set forth it may, as a matter of course, be
inferred that there was no renewal of the contract deposited converted into
a loan, because, as has already been stated, the defendants received said
amount by virtue of real loan contract under the name of a deposit, since
the so-called bailees were forthwith authorized to dispose of the amount
deposited. This they have done, as has been clearly shown.
The original joint obligation contracted by the defendant debtor still exists,
and it has not been shown or proven in the proceedings that the creditor
had released Joe Lim from complying with his obligation in order that he
should not be sued for or sentenced to pay the amount of capital and
interest together with his codebtor, Ceferino Domingo Lim, because the
record offers satisfactory evidence against the pretension of Jose Lim, and
it further appears that document No. 2 was executed by the other debtor,
Ceferino Domingo Lim, for himself and on behalf of Jose Lim; and it has
also been proven that Jose Lim, being fully aware that his debt had not yet
been settled, took steps to secure an extension of the time for payment,
and consented to pay interest in return for the concession requested from
the creditor.
n view of the foregoing, and adopting the findings in the judgment
appealed from, it is our opinion that the same should be and is hereby
affirmed with the costs of this instance against the appellant, provided that
the interest agreed upon shall be paid until the complete liquidation of the
debt. So ordered.
EN BANC
G.R. No. L-6913 November 21, 1913
THE ROMAN CATHOLIC BISHOP OF JARO, plaintiff-appellee,
vs.
GREGORIO DE LA PEA, administrator of the estate of Father
Agustin de Ia Pea, defendant-appellant.
J. Lopez Vito, for appellant.
Arroyo and Horrilleno, for appellee.

MORELAND, J.:
This is an appeal by the defendant from a judgment of the Court of
First nstance of loilo, awarding to the plaintiff the sum of P6,641, with
interest at the legal rate from the beginning of the action.
t is established in this case that the plaintiff is the trustee of a
charitable bequest made for the construction of a leper hospital and that
father Agustin de la Pea was the duly authorized representative of the
plaintiff to receive the legacy. The defendant is the administrator of the
estate of Father De la Pea.
n the year 1898 the books Father De la Pea, as trustee, showed
that he had on hand as such trustee the sum of P6,641, collected by him
for the charitable purposes aforesaid. n the same year he deposited in his
personal account P19,000 in the Hongkong and Shanghai Bank at loilo.
Shortly thereafter and during the war of the revolution, Father De la Pea
was arrested by the military authorities as a political prisoner, and while
Credit Transactions Full Text Cases Atty. Adviento!!!!$*
thus detained made an order on said bank in favor of the United States
Army officer under whose charge he then was for the sum thus deposited
in said bank. The arrest of Father De la Pea and the confiscation of the
funds in the bank were the result of the claim of the military authorities that
he was an insurgent and that the funds thus deposited had been collected
by him for revolutionary purposes. The money was taken from the bank by
the military authorities by virtue of such order, was confiscated and turned
over to the Government.
While there is considerable dispute in the case over the question
whether the P6,641 of trust funds was included in the P19,000 deposited
as aforesaid, nevertheless, a careful examination of the case leads us to
the conclusion that said trust funds were a part of the funds deposited and
which were removed and confiscated by the military authorities of the
United States.
That branch of the law known in England and America as the law of
trusts had no exact counterpart in the Roman law and has none under the
Spanish law. n this jurisdiction, therefore, Father De la Pea's liability is
determined by those portions of the Civil Code which relate to obligations.
(Book 4, Title 1.)
Although the Civil Code states that "a person obliged to give
something is also bound to preserve it with the diligence pertaining to a
good father of a family" (art. 1094), it also provides, following the principle
of the Roman law, major casus est, cui humana infirmitas resistere non
potest, that "no one shall be liable for events which could not be foreseen,
or which having been foreseen were inevitable, with the exception of the
cases expressly mentioned in the law or those in which the obligation so
declares." (Art. 1105.)
By placing the money in the bank and mixing it with his personal
funds De la Pea did not thereby assume an obligation different from that
under which he would have lain if such deposit had not been made, nor
did he thereby make himself liable to repay the money at all hazards. f the
had been forcibly taken from his pocket or from his house by the military
forces of one of the combatants during a state of war, it is clear that under
the provisions of the Civil Code he would have been exempt from
responsibility. The fact that he placed the trust fund in the bank in his
personal account does not add to his responsibility. Such deposit did not
make him a debtor who must respond at all hazards.
We do not enter into a discussion for the purpose of determining
whether he acted more or less negligently by depositing the money in the
bank than he would if he had left it in his home; or whether he was more or
less negligent by depositing the money in his personal account than he
would have been if he had deposited it in a separate account as trustee.
We regard such discussion as substantially fruitless, inasmuch as the
precise question is not one of negligence. There was no law prohibiting
him from depositing it as he did and there was no law which changed his
responsibility be reason of the deposit. While it may be true that one who
is under obligation to do or give a thing is in duty bound, when he sees
events approaching the results of which will be dangerous to his trust, to
take all reasonable means and measures to escape or, if unavoidable, to
temper the effects of those events, we do not feel constrained to hold that,
in choosing between two means equally legal, he is culpably negligent in
selecting one whereas he would not have been if he had selected the
other.
The court, therefore, finds and declares that the money which is the
subject matter of this action was deposited by Father De la Pea in the
Hongkong and Shanghai Banking Corporation of loilo; that said money
was forcibly taken from the bank by the armed forces of the United States
during the war of the insurrection; and that said Father De la Pea was not
responsible for its loss.
The judgment is therefore reversed, and it is decreed that the
plaintiff shall take nothing by his complaint.
Arellano, C.J., Torres and Carson, JJ., concur.


Separate Opinions
TRENT, J., dissenting:
dissent. Technically speaking, whether Father De la Pea was a
trustee or an agent of the plaintiff his books showed that in 1898 he had in
his possession as trustee or agent the sum of P6,641 belonging to the
plaintiff as the head of the church. This money was then clothed with all
the immunities and protection with which the law seeks to invest trust
funds. But when De la Pea mixed this trust fund with his own and
deposited the whole in the bank to his personal account or credit, he by
this act stamped on the said fund his own private marks and unclothed it
of all the protection it had. f this money had been deposited in the name
of De la Pea as trustee or agent of the plaintiff, think that it may be
presumed that the military authorities would not have confiscated it for the
reason that they were looking for insurgent funds only. Again, the plaintiff
had no reason to suppose that De la Pea would attempt to strip the fund
of its identity, nor had he said or done anything which tended to relieve De
la Pea from the legal reponsibility which pertains to the care and custody
of trust funds.
The Supreme Court of the United States in the United State vs.
Thomas (82 U. S., 337), at page 343, said: "Trustees are only bound to
exercise the same care and solicitude with regard to the trust property
which they would exercise with regard to their own. Equity will not exact
more of them. They are not liable for a loss by theft without their fault. But
this exemption ceases when they mix the trust-money with their own,
whereby it loses its identity, and they become mere debtors."
f this proposition is sound and is applicable to cases arising in this
jurisdiction, and entertain no doubt on this point, the liability of the estate
of De la Pea cannot be doubted. But this court in the majority opinion
says: "The fact that he (Agustin de la Pea) placed the trust fund in the
bank in his personal account does not add to his responsibility. Such
deposit did not make him a debtor who must respond at all hazards. . . .
There was no law prohibiting him from depositing it as he did, and there
was no law which changed his responsibility, by reason of the deposit."
assume that the court in using the language which appears in the
latter part of the above quotation meant to say that there was no statutory
law regulating the question. Questions of this character are not usually
governed by statutory law. The law is to be found in the very nature of the
trust itself, and, as a general rule, the courts say what facts are necessary
to hold the trustee as a debtor.
f De la Pea, after depositing the trust fund in his personal account,
had used this money for speculative purposes, such as the buying and
selling of sugar or other products of the country, thereby becoming a
debtor, there would have been no doubt as to the liability of his estate.
Whether he used this money for that purpose the record is silent, but it will
be noted that a considerable length of time intervened from the time of the
deposit until the funds were confiscated by the military authorities. n fact
the record shows that De la Pea deposited on June 27, 1898, P5,259, on
June 28 of that year P3,280, and on August 5 of the same year P6,000.
The record also shows that these funds were withdrawn and again
deposited all together on the 29th of May, 1900, this last deposit
amounting to P18,970. These facts strongly indicate that De la Pea had
as a matter of fact been using the money in violation of the trust imposed
in him. lawph!1.net
f the doctrine announced in the majority opinion be followed in
cases hereafter arising in this jurisdiction trust funds will be placed in
precarious condition. The position of the trustee will cease to be one of
trust.
EN BANC
G.R. No. L-43191 November 13, 1935
Credit Transactions Full Text Cases Atty. Adviento!!!!%+
PAULINO GULLAS, plaintiff-appellant,
vs.
THE PHILIPPINE NATIONAL BANK, defendant-appellant.
Gullas, Lopez, Tuao 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 nstance 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. The second named is a banking corporation with a
branch in the same city. Attorney Gullas has had a current account with
the bank.
t 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 nsular
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. n 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 nsular Treasurer.
"n 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. n the first place, as above
indicated, checks including one for his insurance were not paid because of
the lack of funds standing to his credit in the bank. n 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). n
his connection, it has been held that the relation existing between a
depositor and a bank is that of creditor and debtor. (Fulton ron Works Co.
vs. China Banking Corporation [1933], 59 Phil., 59.)
The Negotiable nstruments 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 nstruments Law,
sec. 66.) n 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.
n 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 Espaol, 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 for 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.
THIRD DIVISION
G.R. No. 156940 December 14, 2004
Credit Transactions Full Text Cases Atty. Adviento!!!!%"
ASSOCIATED BANK (Now WESTMONT BANK), petitioner,
vs.
VICENTE HENRY TAN, respondent.
D E C I S I O N
PANGANIBAN, J.:
While banks are granted by law the right to debit the value of a dishonored
check from a depositor's account, they must do so with the highest degree
of care, so as not to prejudice the depositor unduly.
The Case
Before us is a Petition for Review
1
under Rule 45 of the Rules of Court,
assailing the January 27, 2003 Decision
2
of the Court of Appeals (CA) in
CA-GR CV No. 56292. The CA disposed as follows:
"WHEREFORE, premises considered, the Decision dated
December 3, 1996, of the Regional Trial Court of Cabanatuan
City, Third Judicial Region, Branch 26, in Civil Case No. 892-AF
is hereby AFFRMED. Costs against the [petitioner]."
3
The Facts
The CA narrated the antecedents as follows:
"Vicente Henry Tan (hereafter TAN) is a businessman and a
regular depositor-creditor of the Associated Bank (hereinafter
referred to as the BANK). Sometime in September 1990, he
deposited a postdated UCPB check with the said BANK in the
amount of P101,000.00 issued to him by a certain Willy Cheng
from Tarlac. The check was duly entered in his bank record
thereby making his balance in the amount of P297,000.00, as of
October 1, 1990, from his original deposit of P196,000.00.
Allegedly, upon advice and instruction of the BANK that the
P101,000.00 check was already cleared and backed up by
sufficient funds, TAN, on the same date, withdrew the sum of
P240,000.00, leaving a balance of P57,793.45. A day after, TAN
deposited the amount of P50,000.00 making his existing
balance in the amount of P107,793.45, because he has issued
several checks to his business partners, to wit:
CHECK NUMBERS DATE AMOUNT
a. 138814 Sept. 29, 1990 P9,000.00
b. 138804 Oct. 8, 1990 9,350.00
c. 138787 Sept. 30, 1990 6,360.00
d. 138847 Sept. 29, 1990 21,850.00
e. 167054 Sept. 29, 1990 4,093.40
f. 138792 Sept. 29, 1990 3,546.00
g. 138774 Oct. 2, 1990 6,600.00
h. 167072 Oct. 10, 1990 9,908.00
i. 168802 Oct. 10, 1990 3,650.00
"However, his suppliers and business partners went back to him
alleging that the checks he issued bounced for insufficiency of
funds. Thereafter, TAN, thru his lawyer, informed the BANK to
take positive steps regarding the matter for he has adequate
and sufficient funds to pay the amount of the subject checks.
Nonetheless, the BANK did not bother nor offer any apology
regarding the incident. Consequently, TAN, as plaintiff, filed a
Complaint for Damages on December 19, 1990, with the
Regional Trial Court of Cabanatuan City, Third Judicial Region,
docketed as Civil Case No. 892-AF, against the BANK, as
defendant.
"n his [C]omplaint, [respondent] maintained that he ha[d]
sufficient funds to pay the subject checks and alleged that his
suppliers decreased in number for lack of trust. As he has been
in the business community for quite a time and has established
a good record of reputation and probity, plaintiff claimed that he
suffered embarrassment, humiliation, besmirched reputation,
mental anxieties and sleepless nights because of the said
unfortunate incident. [Respondent] further averred that he
continuously lost profits in the amount of P250,000.00.
[Respondent] therefore prayed for exemplary damages and that
[petitioner] be ordered to pay him the sum of P1,000,000.00 by
way of moral damages, P250,000.00 as lost profits, P50,000.00
as attorney's fees plus 25% of the amount claimed including
P1,000.00 per court appearance.
"Meanwhile, [petitioner] filed a Motion to Dismiss on February 7,
1991, but the same was denied for lack of merit in an Order
dated March 7, 1991. Thereafter, [petitioner] BANK on March
20, 1991 filed its Answer denying, among others, the allegations
of [respondent] and alleged that no banking institution would
give an assurance to any of its client/depositor that the check
deposited by him had already been cleared and backed up by
sufficient funds but it could only presume that the same has
been honored by the drawee bank in view of the lapse of time
that ordinarily takes for a check to be cleared. For its part,
[petitioner] alleged that on October 2, 1990, it gave notice to the
[respondent] as to the return of his UCPB check deposit in the
amount of P101,000.00, hence, on even date, [respondent]
deposited the amount of P50,000.00 to cover the returned
check.
"By way of affirmative defense, [petitioner] averred that
[respondent] had no cause of action against it and argued that it
has all the right to debit the account of the [respondent] by
reason of the dishonor of the check deposited by the
[respondent] which was withdrawn by him prior to its clearing.
[Petitioner] further averred that it has no liability with respect to
the clearing of deposited checks as the clearing is being
undertaken by the Central Bank and in accepting [the] check
deposit, it merely obligates itself as depositor's collecting agent
subject to actual payment by the drawee bank. [Petitioner]
therefore prayed that [respondent] be ordered to pay it the
amount of P1,000,000.00 by way of loss of goodwill, P7,000.00
as acceptance fee plus P500.00 per appearance and by way of
attorney's fees.
"Considering that Westmont Bank has taken over the
management of the affairs/properties of the BANK, [respondent]
on October 10, 1996, filed an Amended Complaint reiterating
substantially his allegations in the original complaint, except that
the name of the previous defendant ASSOCATED BANK is now
WESTMONT BANK.
"Trial ensured and thereafter, the court rendered its Decision dated
December 3, 1996 in favor of the [respondent] and against the [petitioner],
ordering the latter to pay the [respondent] the sum of P100,000.00 by way
of moral damages, P75,000.00 as exemplary damages, P25,000.00 as
attorney's fees, plus the costs of this suit. n making said ruling, it was
shown that [respondent] was not officially informed about the debiting of
the P101,000.00 [from] his existing balance and that the BANK merely
allowed the [respondent] to use the fund prior to clearing merely for
accommodation because the BANK considered him as one of its valued
clients. The trial court ruled that the bank manager was negligent in
handling the particular checking account of the [respondent] stating that
such lapses caused all the inconveniences to the [respondent]. The trial
court also took into consideration that [respondent's] mother was originally
maintaining with the x x x BANK [a] current account as well as [a] time
deposit, but [o]n one occasion, although his mother made a deposit, the
same was not credited in her favor but in the name of another."
4
Petitioner appealed to the CA on the issues of whether it was within its
rights, as collecting bank, to debit the account of its client for a dishonored
Credit Transactions Full Text Cases Atty. Adviento!!!!%#
check; and whether it had informed respondent about the dishonor prior to
debiting his account.
RuIing of the Court of AppeaIs
Affirming the trial court, the CA ruled that the bank should not have
authorized the withdrawal of the value of the deposited check prior to its
clearing. Having done so, contrary to its obligation to treat respondent's
account with meticulous care, the bank violated its own policy. t thereby
took upon itself the obligation to officially inform respondent of the status of
his account before unilaterally debiting the amount of P101,000. Without
such notice, it is estopped from blaming him for failing to fund his account.
The CA opined that, had the P101,000 not been debited, respondent
would have had sufficient funds for the postdated checks he had issued.
Thus, the supposed accommodation accorded by petitioner to him is the
proximate cause of his business woes and shame, for which it is liable for
damages.
Because of the bank's negligence, the CA awarded respondent moral
damages of P100,000. t also granted him exemplary damages of P75,000
and attorney's fees of P25,000.
Hence this Petition.
5

Issue
n its Memorandum, petitioner raises the sole issue of "whether or not the
petitioner, which is acting as a collecting bank, has the right to debit the
account of its client for a check deposit which was dishonored by the
drawee bank."
6
The Court's RuIing
The Petition has no merit.
SoIe Issue:
Debit of Depositor's Account
Petitioner-bank contends that its rights and obligations under the present
set of facts were misappreciated by the CA. t insists that its right to debit
the amount of the dishonored check from the account of respondent is
clear and unmistakable. Even assuming that it did not give him notice that
the check had been dishonored, such right remains immediately
enforceable.
n particular, petitioner argues that the check deposit slip accomplished by
respondent on September 17, 1990, expressly stipulated that the bank
was obligating itself merely as the depositor's collecting agent and -- until
such time as actual payment would be made to it -- it was reserving the
right to charge against the depositor's account any amount previously
credited. Respondent was allowed to withdraw the amount of the check
prior to clearing, merely as an act of accommodation, it added.
At the outset, we stress that the trial court's factual findings that were
affirmed by the CA are not subject to review by this Court.
7
As petitioner
itself takes no issue with those findings, we need only to determine the
legal consequence, based on the established facts.
Right of Setoff
A bank generally has a right of setoff over the deposits therein for the
payment of any withdrawals on the part of a depositor.
8
The right of a
collecting bank to debit a client's account for the value of a dishonored
check that has previously been credited has fairly been established by
jurisprudence. To begin with, Article 1980 of the Civil Code provides that
"[f]ixed, savings, and current deposits of money in banks and similar
institutions shall be governed by the provisions concerning simple loan."
Hence, the relationship between banks and depositors has been held to
be that of creditor and debtor.
9
Thus, legal compensation under Article
1278
10
of the Civil Code may take place "when all the requisites mentioned
in Article 1279 are present,"
11
as follows:
"(1) That each one of the obligors be bound principally, and that
he be at the same time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things
due are consumable, they be of the same kind, and also of the
same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or
controversy, commenced by third persons and communicated in
due time to the debtor."
12
Nonetheless, the real issue here is not so much the right of petitioner to
debit respondent's account but, rather, the manner in which it exercised
such right. The Court has held that even while the right of setoff is
conceded, separate is the question of whether that remedy has properly
been exercised.
13
The liability of petitioner in this case ultimately revolves around the issue
of whether it properly exercised its right of setoff. The determination
thereof hinges, in turn, on the bank's role and obligations, first, as
respondent's depositary bank; and second, as collecting agent for the
check in question.
Obligation as
Depositary Bank
n BPI v. Casa Montessori,
14
the Court has emphasized that the banking
business is impressed with public interest. "Consequently, the highest
degree of diligence is expected, and high standards of integrity and
performance are even required of it. By the nature of its functions, a bank
is under obligation to treat the accounts of its depositors with meticulous
care."
15
Also affirming this long standing doctrine, Philippine Bank of Commerce v.
Court of Appeals
16
has held that "the degree of diligence required of banks
is more than that of a good father of a family where the fiduciary nature of
their relationship with their depositors is concerned."
17
ndeed, the banking
business is vested with the trust and confidence of the public; hence the
"appropriate standard of diligence must be very high, if not the highest,
degree of diligence."
18
The standard applies, regardless of whether the
account consists of only a few hundred pesos or of millions.
19
The fiduciary nature of banking, previously imposed by case law,
20
is now
enshrined in Republic Act No. 8791 or the General Banking Law of 2000.
Section 2 of the law specifically says that the State recognizes the
"fiduciary nature of banking that requires high standards of integrity and
performance."
Did petitioner treat respondent's account with the highest degree of care?
From all indications, it did not.
t is undisputed -- nay, even admitted -- that purportedly as an act of
accommodation to a valued client, petitioner allowed the withdrawal of the
face value of the deposited check prior to its clearing. That act certainly
disregarded the clearance requirement of the banking system. Such a
practice is unusual, because a check is not legal tender or money;
21
and
its value can properly be transferred to a depositor's account only after the
check has been cleared by the drawee bank.
22
Under ordinary banking practice, after receiving a check deposit, a bank
either immediately credit the amount to a depositor's account; or infuse
Credit Transactions Full Text Cases Atty. Adviento!!!!%$
value to that account only after the drawee bank shall have paid such
amount.
23
Before the check shall have been cleared for deposit, the
collecting bank can only "assume" at its own risk -- as herein petitioner did
-- that the check would be cleared and paid out.
Reasonable business practice and prudence, moreover, dictated that
petitioner should not have authorized the withdrawal by respondent of
P240,000 on October 1, 1990, as this amount was over and above his
outstanding cleared balance of P196,793.45.
24
Hence, the lower courts
correctly appreciated the evidence in his favor.
Obligation as
Collecting Agent
ndeed, the bank deposit slip expressed this reservation:
"n receiving items on deposit, this Bank obligates itself only as
the Depositor's Collecting agent, assuming no responsibility
beyond carefulness in selecting correspondents, and until such
time as actual payments shall have come to its possession, this
Bank reserves the right to charge back to the Depositor's
account any amounts previously credited whether or not the
deposited item is returned. x x x."
25
However, this reservation is not enough to insulate the bank from any
liability. n the past, we have expressed doubt about the binding force of
such conditions unilaterally imposed by a bank without the consent of the
depositor.
26
t is indeed arguable that "in signing the deposit slip, the
depositor does so only to identify himself and not to agree to the
conditions set forth at the back of the deposit slip."
27
Further, by the express terms of the stipulation, petitioner took upon itself
certain obligations as respondent's agent, consonant with the well-settled
rule that the relationship between the payee or holder of a commercial
paper and the collecting bank is that of principal and agent.
28
Under Article
1909
29
of the Civil Code, such bank could be held liable not only for fraud,
but also for negligence.
As a general rule, a bank is liable for the wrongful or tortuous acts and
declarations of its officers or agents within the course and scope of their
employment.
30
Due to the very nature of their business, banks are
expected to exercise the highest degree of diligence in the selection and
supervision of their employees.
31
Jurisprudence has established that the
lack of diligence of a servant is imputed to the negligence of the employer,
when the negligent or wrongful act of the former proximately results in an
injury to a third person;
32
in this case, the depositor.
The manager of the bank's Cabanatuan branch, Consorcia Santiago,
categorically admitted that she and the employees under her control had
breached bank policies. They admittedly breached those policies when,
without clearance from the drawee bank in Baguio, they allowed
respondent to withdraw on October 1, 1990, the amount of the check
deposited. Santiago testified that respondent "was not officially informed
about the debiting of the P101,000 from his existing balance of P170,000
on October 2, 1990 x x x."
33
Being the branch manager, Santiago clearly acted within the scope of her
authority in authorizing the withdrawal and the subsequent debiting without
notice. Accordingly, what remains to be determined is whether her actions
proximately caused respondent's injury. Proximate cause is that which -- in
a natural and continuous sequence, unbroken by any efficient intervening
cause --produces the injury, and without which the result would not have
occurred.
34
Let us go back to the facts as they unfolded. t is undeniable that the
bank's premature authorization of the withdrawal by respondent on
October 1, 1990, triggered -- in rapid succession and in a natural
sequence -- the debiting of his account, the fall of his account balance to
insufficient levels, and the subsequent dishonor of his own checks for lack
of funds. The CA correctly noted thus:
"x x x [T]he depositor x x x withdrew his money upon the advice
by [petitioner] that his money was already cleared. Without such
advice, [respondent] would not have withdrawn the sum of
P240,000.00. Therefore, it cannot be denied that it was
[petitioner's] fault which allowed [respondent] to withdraw a
huge sum which he believed was already his.
"To emphasize, it is beyond cavil that [respondent] had sufficient
funds for the check. Had the P101,000.00 not [been] debited,
the subject checks would not have been dishonored. Hence, we
can say that [respondent's] injury arose from the dishonor of his
well-funded checks. x x x."
35
Aggravating matters, petitioner failed to show that it had immediately and
duly informed respondent of the debiting of his account. Nonetheless, it
argues that the giving of notice was discernible from his act of depositing
P50,000 on October 2, 1990, to augment his account and allow the
debiting. This argument deserves short shrift.
First, notice was proper and ought to be expected. By the bank manager's
account, respondent was considered a "valued client" whose checks had
always been sufficiently funded from 1987 to 1990,
36
until the October
imbroglio. Thus, he deserved nothing less than an official notice of the
precarious condition of his account.
Second, under the provisions of the Negotiable nstruments Law regarding
the liability of a general indorser
37
and the procedure for a notice of
dishonor,
38
it was incumbent on the bank to give proper notice to
respondent. n Gullas v. National Bank,
39
the Court emphasized:
"x x x [A] general indorser of a negotiable instrument engages
that if the instrument the check in this case is dishonored
and the necessary proceedings for its dishonor are duly taken,
he will pay the amount thereof to the holder (Sec. 66) t has
been held by a long line of authorities that notice of dishonor is
necessary to charge an indorser and that the right of action
against him does not accrue until the notice is given.
"x x x. 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 checks 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.) 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."
40
Third, regarding the deposit of P50,000 made by respondent on October
2, 1990, we fully subscribe to the CA's observations that it was not unusual
for a well-reputed businessman like him, who "ordinarily takes note of the
amount of money he takes and releases," to immediately deposit money in
his current account to answer for the postdated checks he had issued.
41

Damages
nasmuch as petitioner does not contest the basis for the award of
damages and attorney's fees, we will no longer address these matters.
WHEREFORE, the Petition is DENED and the assailed Decision
AFFRMED. Costs against petitioner.
SO ORDERED.
GUNGONA v. CTY FSCAL SUPRA
Credit Transactions Full Text Cases Atty. Adviento!!!!%%
FRST DVSON
G.R. No. L-50900 ApriI 9, 1985
COMPAIA MARITIMA, petitioner,
vs.
COURT OF APPEALS and PAN ORIENTAL SHIPPING CO.,
respondents.
G.R. No. L-51438 ApriI 9, 1985
REPUBLIC OF THE PHILIPPINES (BOARD OF LIQUIDATORS),
petitioner,
vs.
COURT OF APPEALS and PAN ORIENTAL SHIPPING CO.,
respondents.
G.R. No. L-51463 ApriI 9, 1985
PAN ORIENTAL SHIPPING CO., petitioner,
vs.
COURT OF APPEALS, COMPAIA MARITIMA and THE REPUBLIC OF
THE PHILIPPINES (BOARD OF LIQUIDATORS), respondents.
Quisumbing, Caparas, Tobias, Alcantara y Mosqueda for Pan Oriental
Shipping Co. Rafael Dinglasan for Compania Maritima.

MELENCIO-HERRERA, J.:
The above-entitled three (3) cases stemmed from the Decision of this
Court, dated October 31, 1964, entitled "Fernando A. Froilan vs. Pan-
Oriental Shipping Co., et al.
1
and our four (4) subsequent Resolutions of
August 27, 1965, November 23, 1966, December 16, 1966, and January
5, 1967, respectively.
The antecedental background is narrated in the aforestated Decision, the
pertinent portions of which read:

On March 7, 1947, Fernando A. Froilan purchased
from the Shipping Administration a boat described as
MV/FS-197 for the sum of P200,000.00, with a down
payment of P50,000.00. To secure payment of the
unpaid balance of the purchase price, a mortgage
was constituted on the vessel in favor of the Shipping
Administration ....
xxx xxx xxx
Th(e) contract was duly approved by the President of
the Philippines.
Froilan appeared to have defaulted in spite of
demands, not only in the payment of the first
installment on the unpaid balance of the purchase
price and the interest thereon when they fell due, but
also failed in his express undertaking to pay the
premiums on the insurance coverage of the vessel
obliging the Shipping Administration to advance such
payment to the insurance company. ...
Subsequently, FROLAN appeared to have still incurred a series of
defaults notwithstanding reconsiderations granted, so much so that:
On February 21, 1949, the General Manager (of the
Shipping Administration) directed its officers ... to take
immediate possession of the vessel and to suspend
the unloading of all cargoes on the same until the
owners thereof made the corresponding arrangement
with the Shipping Administration. Pursuant to these
instructions, the boat was, not only actually
repossessed, but the title thereto was registered
again in the name of the Shipping Administration,
thereby re-transferring the ownership thereof to the
government.
On February 22, 1949, Pan Oriental Shipping Co.,
hereinafter referred to as Pan Oriental, offered to
charter said vessel FS-197 for a monthly rent of
P3,000.00. Because the government was then
spending for the guarding of the boat and subsistence
of the crew members since repossession, the
Slopping Administration on April 1, 1949, accepted
Pan Oriental's offer "in principle" subject to the
condition that the latter shag cause the repair of the
vessel advancing the cost of labor and drydocking
thereof, and the Shipping Administration to furnish the
necessary spare parts. In accordance with this charter
contract, the vessel was delivered to the possession
of Pan Oriental.
n the meantime, or on February 22, 1949, Froilan
tried to explain his failure to comply with the
obligations he assumed and asked that he be given
another extension up to March 15, 1949 to file the
necessary bond. Then on March 8, Froilan offered to
pay all his overdue accounts. However, as he failed to
fulfill even these offers made by him in these two
communications, the Shipping Administration denied
his petition for reconsideration (of the rescission of the
contract) on March 22, 1949. t should be noted that
while his petition for reconsideration was denied on
March 22, it does not appear when he formally
formulated his appeal. n the meantime, as already
stated, the boat has been repossessed by the
Shipping Administration and the title thereto re-
registered in the name of the government, and
delivered to the Pan Oriental in virtue of the charter
agreement. On June 2, 1949, Froilan protested to the
President against the charter of the vessel.
xxx xxx xxx
On June 4, 1949, the Shipping Administration and the
Pan Oriental formalized the charter agreement and
signed a bareboat contract with option to purchase,
containing the following pertinent provisions:
. CHARTER HRE, TME OF PAYMENT. The
CHARTERER shall pay to the owner a monthly
charter hire of THREE THOUSAND (P3,000.00)
PESOS from date of delivery of the vessel, payable in
advance on or before the 5th of every current month
until the return of the vessel to OWNER or purchase
of the vessel by CHARTERER.
V. RGHT OF OPTON TO PURCHASE. The right
of option to purchase the vessel at the price of
P150,000.00 plus the amount expended for its
present repairs is hereby granted to the CHARTERER
within 120 days from the execution of this Contract,
unless otherwise extended by the OWNER. This right
shall be deemed exercised only if, before the
expiration of the said period, or its extension by the
OWNER, the CHARTERER completes the payment,
including any amount paid as Charter hire, of a total
sum of not less than twenty-five percentum (25%) of
said price of the vessel.
Credit Transactions Full Text Cases Atty. Adviento!!!!%&
The period of option may be extended by the OWNER
without in any way affecting the other provisions,
stipulations, and terms of this contract.
f, for any reason whatsoever, the CHARTERER fails
to exercise its option to purchase within the period
stipulated, or within the extension thereof by the
OWNER, its right of option to purchase shall be
deemed terminated, without prejudice to the
continuance of the Charter Party provisions of this
contract. The right to dispose of the vessel or
terminate the Charter Party at its discretion is
reserved to the OWNER.
X. TRANSFER OF OWNERSHP OF THE VESSEL.
After the CHARTERER has exercised his right of
option as provided in the preceding paragraph (X),
the vessel shall be deemed conditionally sold to the
purchaser, but the ownership thereof shag not be
deemed transferred unless and until all the price of
the vessel, together with the interest thereon, and any
other obligation due and payable to the OWNER
under this contract, have been fully paid by the
CHARTERER.
xxx xxx xxx
XX. APPROVAL OF THE PRESDENT. This
contract shall take effect only upon approval of His
Excellency, the President.
On September 6, 1949, the Cabinet revoked the
cancellation of Froilan's contract of sale and restored
to him all his rights thereunder, on condition that he
would give not less than P1,000.00 to settle partially
as overdue accounts and that reimbursement of the
expenses incurred for the repair and drydocking of the
vessel performed by Pan Oriental was to be made in
accordance with future adjustment between him and
the Shipping Administration (Exh. ). Later, pursuant to
this reservation, Froilan's request to the Executive
Secretary that the Administration advance the
payment of the expenses incurred by Pan Oriental in
the drydocking and repair of the vessel, was granted
on condition that Froilan assume to pay the same and
file a bond to cover said undertaking (EXH. ).
On September 7, 1949, the formal bareboat charter
with option to purchase filed on June 4, 1949, in favor
of the Pan Oriental was returned to the General
Manager of the Shipping Administration without action
(not disapproval), only because of the Cabinet
resolution of September 6, 1949 restoring Froilan to
his rights under the conditions set forth therein,
namely, the payment of P10,000.00 to settle partially
his overdue accounts and the filing of a bond to
guarantee the reimbursement of the expenses
incurred by the Pan Oriental in the drydocking and
repair of the vessel But Froilan again failed to comply
with these conditions. And so the Cabinet, considering
Froilan's consistent failure to comply with his
obligations, including those imposed in the resolution
of September 6, 1949, resolved to reconsider said
previous resolution restoring him to his previous
rights. And, in a letter dated December 3, 1949, the
Executive Secretary authorized the Administration to
continue its charter contract with Pan Oriental in
respect to FS-197 and enforce whatever rights it may
still have under the original contract with Froilan (Exh.
188).
xxx xxx xxx
On August 25, 1950, the Cabinet resolved once more
to restore Froilan to his rights under the original
contract of sale, on condition that he shall pay the
sum of P10,000.00 upon delivery of the vessel to him,
said amount to be credited to his outstanding
accounts; that he shall continue paying the remaining
installments due, and that he shall assume the
expenses incurred for the repair and drydocking of the
vessel (Exh. 134). Pan Oriental protested to this
restoration of Froilan's rights under the contract of
sale, for the reason that when the vessel was
delivered to it, the Shipping Administration had
authority to dispose of the said property, Froilan
having already relinquished whatever rights he may
have thereon. Froilan paid the required cash of
P10,000.00, and as Pan Oriental refused to surrender
possession of the vessel, he filed an action for
replevin in the Court of First nstance of Manila (Civil
Case No. 13196) to recover possession thereof and to
have him declared the rightful owner of said property.
Upon plaintiff's filing a bond of P400,000.00, the court
ordered the seizure of the vessel from Pan Oriental
and its delivery to the plaintiff. Pan Oriental tried to
question the validity of this order in a petition for
certiorari filed in this Court (G.R. No. L-4577), but the
same was dismissed for lack of merit by resolution of
February 22, 1951. Defendant accordingly filed an
answer, denying the averments of the complaint.
The Republic of the Philippines, having been allowed
to intervene in the proceeding, also prayed for the
possession of the vessel in order that the chattel
mortgage constituted thereon may be foreclosed.
Defendant Pari Oriental resisted said intervention,
claiming to have a better right to the possession of the
vessel by reason of a valid and subsisting contract in
its favor, and of its right of retention, in view of the
expenses it had incurred for the repair of the said
vessel. As counterclaim, defendant demanded of the
intervenor to comply with the latter's obligation to
deliver the vessel pursuant to the provisions of the
charter contract.
xxx xxx xxx
Subsequently, Compaia Maritima, as purchaser of
the vessel from Froilan, was allowed to intervene in
the proceedings (in the lower court), said intervenor
taking common cause with the plaintiff Froilan. n its
answer to the complaint in intervention, defendant set-
up a counterclaim for damages in the sum of
P50,000.00, alleging that plaintiff secured the Cabinet
resolutions and the writ of replevin, resulting in its
deprivation of possession of the vessel, at the
instigation and inducement of Compania Maritima.
This counterclaim was denied by both plaintiff and
intervenor Maritima.
On September 28, 1956, the lower court rendered a
decision upholding Froilan's (and Compaia
Maritima's) right to the ownership and possession of
the FS-197.
xxx xxx xxx
t is not disputed that appellant Pan Oriental took
possession of the vessel in question after it had been
repossessed by the Shipping Administration and title
thereto reacquired by the government, and operated
the same from June 2, 1949 after it had repaired the
vessel until it was dispossessed of the property on
February 3, 1951, in virtue of a bareboat charter
contract entered into between said company and the
Credit Transactions Full Text Cases Atty. Adviento!!!!%'
Shipping Administration. n the same agreement,
appellant as charterer, was given the option to
purchase the vessel, which may be exercised upon
payment of a certain amount within a specified period.
The President and Treasurer of the appellant
company, tendered the stipulated initial payment on
January 16, l950. Appellant now contends that having
exercised the option, the subsequent Cabinet
resolutions restoring Froilan's rights on the vessel,
violated its existing rights over the same property. To
the contention of plaintiff Froffan that the charter
contract never became effective because it never
received presidential approval as required therein,
Pan Oriental answers that the letter of the Executive
Secretary dated December 3, 1949 (Exh. 118),
authorizing the Shipping Administration to continue its
charter contract with appellant, satisfies such
requirement (of presidential approval). t is to be
noted, however, that said letter was signed by the
Executive Secretary only and not under authority of
the President. The same, therefore, cannot be
considered to have attached unto the charter contract
the required consent of the Chief Executive for its
validity.
xxx xxx xxx
(Emphasis supplied)
This Court then held:
n the circumstances of this case, therefore, the
resulting situation is that neither Froilan nor the Pan
Oriental holds a valid contract over the vessel.
However, since the intervenor Shipping
Administration, representing the government
practically ratified its proposed contract with Froilan by
receiving the full consideration of the sale to the latter,
for which reason the complaint in intervention was
dismissed as to Froilan, and since Pan Oriental has
no capacity to question this actuation of the Shipping
Administration because it had no valid contract in its
favor, the of the lower court adjudicating the vessel to
Froilan and its successor Maritima, must be sus
Nevertheless, under the already adverted to, Pan
Oriental cannot be considered as in bad faith until
after the institution of the case. However, since it is
not disputed that said made useful and necessary
expenses on the vessel, appellant is entitled to the
refund of such expenses with the light to retain the
vessel until he has been reimbursed therefor (Art.
546, Civil Code). As it is by the concerted acts of
defendants and intervenor Republic of the Philippines
that appellant was deprived of the possession of the
vessel over which appellant had a lien for his
expenses, appellees Froilan, Compaia Maritima, and
the Republic of the Philippines are declared liable for
the reimbursement to appellant of its legitimate
expenses, as allowed by law, with legal interest from
the time of disbursement.
Modified in this manner, the decision appealed from is
affirmed, without costs. Case is remanded to the
lower court for further proceedings in the matter of
expenses. So ordered. (Emphasis supplied).
On August 27, 1965, this Court, in resolving a Motion for Reconsideration
filed by FROLAN and MARTMA, ruled:
n G.R. No. L-11897 (Fernando A. Froilan vs. Pan
Oriental Shipping Co.); before us are (1) a motion,
filed by appellant Pan Oriental to reconsider the ruling
made in this case sustaining Froilan's right to
ownership and possession of the vessel FS-197, and
holding that there was never a perfected contract
between said movant and the intervenor Republic of
the Philippines; and (2) a motion by plaintiff-appellee
Fernando A. Froilan, and intervenor-appellee
Compaia Maritima, for reconsideration of the
decision insofar as it declared said movants, together
with intervenor Republic of the Philippines, liable for
reimbursement to appellant Pan Oriental of the latter's
legitimate necessary expenses made on the vessel in
question.
1. .Appellant Pan Oriental's Motion must be denied.
t may be remembered that in the instant case, the
alleged approval of the charter contract or permission
to proceed with said contract was given by the
Executive Secretary in his own name and not under
the authority of the President.
xxx xxx xxx
2. Anent, appellant's motion, considering that the writ
of replevin, by virtue of which appellant Pan Oriental
was divested of possession of the vessel FS-197, was
issued by the lower court on February 8, 1951 at the
instance of plaintiff Froilan and with the cooperation of
intervenor Republic of the Philippines, which accepted
the payment tendered by him (Froilan)
notwithstanding its previous dealings with Pan
Oriental; and whereas, the intervenor Compaia
Maritima acquired the same property only on
December 1, 1951, it is clear that only plaintiff Froilan
and the intervenor Republic of the Philippines may be
held responsible for the deprivation of defendant of its
right to the retention of the property until fully
reimbursed of the necessary expenditure made on the
vessel. For this reason, Froilan and the Republic of
the Philippines are declared jointly and severally
liable, not only for reimbursement to Pan Oriental of
the legitimate necessary expenses incurred on the
vessel but also for payment of legal interest thereon,
computed from the date of the defendant's
dispossession of the property. However, as defendant
was in actual possession of the vessel from April 1,
1949 to February 7, 1951, it must be required to pay
reasonable rental for the use thereof, at the rate of
P3,000.00 a month the same rate specified as
rental in the imperfected charter contract which
shall be deductible from whatever may be due and
owing the said party by way of reimbursable
necessary expenses and interest. This rental shall
commence from the time defendant Pan Oriental
actually operated the vessel, which date shall be
determined by the lower court.
Case is remanded to the court of origin for further
proceedings on the matter of necessary expenses,
interest and rental, as directed in our decision and this
resolution. (Emphasis supplied).
On November 23, 1966, acting on a second Motion for Reconsideration
filed by PAN ORENTAL, this Court resolved:
n case G.R. No. L-11817, Fernando A, Froilan, et al.,
appellees, vs. Pan Oriental Shipping Company,
appellant, the latter filed a .second motion for
reconsideration, alleging that the Resolution of this
Court of August 27, 1965 denying its motion for
reconsideration of December 16, 1964 is not in
accordance with law; and that the modification of the
judgment following the ex-parte motion for
reconsideration of appellee Froilan is contrary to due
process.
Credit Transactions Full Text Cases Atty. Adviento!!!!%(
Considering that foregoing motion as well as the
opposition thereto by plaintiff-appellee and intervenor-
appellee Compaia Maritima, the Court RESOLVED
to amend the ruling in this case by holding intervenor-
appellee Compaia Maritima, because of its actual
knowledge of the circumstances surrounding the
purchase by Froilan of the vessel in question from the
Shipping Administrator, jointly and severally liable with
the other appellees, for reimbursement to appellant of
the necessary expenses incurred and expended by
the latter on the said vessel, minus the amount of
rentals due from the appellant for the use thereof for
the period it was actually operated by Pan Oriental.
The period of actual operation shall not include the
time when the vessel was drydocked.
On December 16,1966, acting on PAN ORENTAL's Motion for
Reconsideration or Application for Damages on account of the wrongful
issuance of the Writ of Replevin, this Court issued a Resolution as follows:
Before us again in Case G.R. No. 11897 (Fernando A.
Froilan vs. Pan Oriental Shipping Co. et al) is a motion
for reconsideration or Application for damages filed by
respondent Pan Oriental Shipping Co., allegedly on
account of the wrongful issuance of the writ of
replevin, pursuant to Rule 60, Section 10, in relation
to Rule 57, Section 20 of the Revised Rules of Court.
Considering that by virtue of our resolution dated
August 27, 1965, this case has been ordered to be
remanded to the Court of origin for further
proceedings on the matter of necessary expenses,
interest and rentals, and since evidence would have
to be presented if the application for damages is
allowed, the Court resolved, first, to deny the present
motion for reconsideration and, second, to refer the
application to the trial court, there to be heard and
decided as prescribed by law and the Rules. (See last
sentence, Section 20, Rule 57).
Pursuant thereto, the case was remanded to the Court of First nstance of
Manila, Branch V (Civil Case No. 13196). After the evidence of the parties
was received and assessed by a Commissioner, said Court issued an
Order, dated June 4, 1975, the dispositive portion of which reads:
WHEREFORE, in view of the foregoing consideration,
the Court orders the intervenor Compaia (plaintiff
Fernando A. Froilan's successor-in-interest) and
intervenor Republic of the Philippines (Board of
Liquidators) jointly and severally to pay defendant Pan
Oriental Shipping Company the sum of P6,937.72 a
month from the time 'it was dispossessed on February
3, 1951' until it is paid its useful and necessary
expenses; the sum of P40,797.54 actual amount
expended for the repairs and improvements prior to
the operation of the vessel on June 1, 1949 with legal
interest from the time of disbursement of said
legitimate expenses. The Court also orders the
intervenor Republic of the Philippines to return the
sum of P15,000.00 tendered by defendant Pan
Oriental Shipping Company as provided in the option
with legal interest from January 16, 1950, the date it
was paid by the latter.
SO ORDERED.
2
The amount of P6,937.72 ordered to be paid monthly represented the
lower Court's computation of damages of PAN ORENTAL for deprivation
of the right to retain the vessel.
3

On appeal by REPUBLC and MARTMA to the then Court of Appeals,
judgment was promulgated decreeing.
WHEREFORE, in the light of the foregoing
pronouncements, the judgment appealed from is
hereby MODFED as follows:
Ordering intervenors-appellants Republic and
Compaia Maritima, jointly and severally, to pay
appellee Pan Oriental Shipping Company the sum of
P40,797.54 with legal interest from February 3, 1951
until fully paid but there shah be deducted therefrom
the amount of P59,500.00 representing the unpaid
rentals due the Republic of the Philippines; and
AFFRMED in all other respects.
n other words, (a) the date from which interest is to be paid on the amount
of P40,797.54 is from February 3, 1951, the date of dispossession, and
not from the time of disbursement and (b) the unpaid rentals due the
Republic are deductible from the amount of expenses payable to PAN-
ORENTAL. t should be recalled that the deduction of rentals from the
amount payable to PAN-ORENTAL by REPUBLC was pursuant to this
Court's Resolutions of August 27, 1965 and November 23, 1966, supra,
From the foregoing Decision, the parties filed their respective Petitions for
Review now before us.
For clarity, the sums ordered to be paid by MARTMA and the REPUBLC,
jointly and severally, to PAN-ORENTAL are: (a) the sum of P6,937.72 a
month from February 3, 1951, the date of PAN-ORENTAL's
dispossession, in the concept of damages for the deprivation of its right to
retain the vessel, it until it is paid its useful and necessary expenses";
4
(b)
the sum of P15,000.00, representing PAN-ORENTAL's deposit with
REPUBLC for the purchase of the vessel, "with legal interest from
January 16, 1950," the date PAN-ORENTAL had paid the same;
5
and (c)
the sum of P40,797.54 representing the expenses for repairs incurred by
PAN-ORENTAL, "with legal interest from February 3, 1951 until fully paid,"
minus the amount of P59,500.00 representing the unpaid rentals due the
REPUBLC
6
The legal rate of interest is made payable only on the last two
amounts (b) and (c).
REPUBLC attributes the following errors to the Appellate Court: (1) in not
holding that compensation by operation of law took place as between
REPUBLC and PAN-ORENTAL as of the date of dispossession; (2) in not
holding that the obligation of the REPUBLC to pay legal interest on the
amount of useful and necessary expenses from February 3, 1951 had
become stale and ineffective; (3) in affirming the Order of the Trial Court
that MARTMA and REPUBLC, jointly and severally, pay to PAN-
ORENTAL the sum of P6,937.72 a month from the time it was
dispossessed of the vessel on February 3, 1951 until it is paid its useful
and necessary expenses; and (4) in not holding that the Trial Court had no
jurisdiction to order the return of P15,000.00 to PAN-ORENTAL.
MARTMA, for its part, aside from assailing the sums it was ordered to
pay PAN-ORENTAL, jointly and severally, with REPUBLC, echoed the
theory of compensation and added that the question of damages on
account of alleged wrongful replevin was not a proper subject of inquiry by
the Trial Court when it determined the matter of necessary expenses,
interest and rentals.
REPUBLIC's Submissions
1) REPUBLC maintains that compensation or set-off took place between it
and PAN-ORENTAL as of February 3, 1951, the date the latter was
dispossessed of the vessel For compensation to take place, one of the
elements necessary is that the debts be liquidated.
7
n this case, all the
elements for Compensation to take place were not present on the date of
dispossession, or on February 3, 1951. The amount expended for repairs
and improvements had yet to be determined by the Trial Court pursuant to
the Decision of this Court promulgated on October 31, 1964. At the time of
dispossession also, PAN-ORENTAL was still insisting on its right to
purchase the vessel. The obligation of REPUBLC to reimburse PAN-
ORENTAL for expenses arose only after this Court had so ruled. Rentals
for the use of the vessel by PAN- ORENTAL were neither due and
demandable at the time of dispossession but only after this Court had
issued its Resolution of August 27, 1965.
Credit Transactions Full Text Cases Atty. Adviento!!!!%)
More, the legal interest payable from February 3, 1951 on the sum of
P40,797.54, representing useful expenses incurred by PAN-ORENTAL, is
also still unliquidated
8
since interest does not stop accruing "until the
expenses are fully paid."
9
Thus, we find without basis REPUBLC's
allegation that PAN- ORENTAL's claim in the amount of P40,797.54 was
extinguished by compensation since the rentals payable by PAN-
ORENTAL amount to P59,500.00 while the expenses reach only
P40,797.54. Deducting the latter amount from the former, REPUBLC
claims that P18,702.46 would still be owing by PAN-ORENTAL to
REPUBLC. That argument loses sight of the fact that to the sum of
P40,797.54 will still have to be added the legal rate of interest "from
February 3, 1951 until fully paid."
But although compensation by operation of law cannot take place as
between REPUBLC and PAN-ORENTAL, by specific pronouncement of
this Court in its Resolution of November 23, 1966, supra, the rentals
payable by PAN-ORENTAL in the amount of P59,500.00 should be
deducted from the sum of useful expenses plus legal interest due,
assuming that the latter amount would still be greater. Otherwise, the
corresponding adjustments can be made depending on the totality of the
respective amounts.
2) Since we are holding that the obligation of REPUBLC to pay
P40,797.54 to PAN-ORENTAL was not extinguished by compensation,
the obligation of REPUBLC to pay legal interest on said amount has
neither become stale as REPUBLC contends. Of special note is the fact
that payment of that interest was the specific ruling of this Court in its
Resolution of August 27, 1965, thus:
... For this reason, Froilan and the REPUBLC of the
Philippines are declared jointly and severally liable,
not only for reimbursement to Pan Oriental, of the
legitimate necessary expenses incurred on the vessel,
but also for payment of legal interest thereon,
computed from the date of the defendant's
dispossession of the property ... .
3) The amount of P6,937.72 a month ordered to be paid by REPUBLC
and MARTMA to PAN-ORENTAL until the latter is paid its useful and
necessary expenses is likewise in order. That amount represents the
damages for the wrongful issuance of the Writ of Replevin and was
computed as follows: P4,132.77 for loss of income by PAN-ORENTAL
plus P2,804.95 as monthly depreciation of the vessel in lieu of the charter
hire.
t should further be recalled that this Court, in acting on PAN- ORENTAL's
application for damages in its Resolution of December 16, 1966, supra,
did not deny the same but referred it instead to the Trial Court "there to be
heard and decided" since evidence would have to be presented.
Moreover, this Court found that PAN-ORENTAL was "deprived of the
possession of the vessel over which (it) had a lien for these expenses"
10
and that FROLAN and REPUBLC "may be held responsible for the
deprivation of defendant (PANORENTAL) of its right to retention of the
property until fully reimbursed on the necessary expenditures made on the
vessel. "
11
4) There return of Pl5,000.00 ordered by the Trial Court and affirmed by
the Appellate Court was but just and proper. As this Court found, that sum
was tendered to REPUBLC "which together with its (PAN-ORENTAL's)
alleged expenses already made on the vessel, cover 25% of the cost of
the vessel, as provided in the option granted in the bareboat contract
(Exhibit "C"). This amount was accepted by the Administration as
deposit ...." Since the purchase did not eventually materialize for reasons
attributable to REPUBLC, it is but just that the deposit be returned.
12
t is
futile to allege that PAN-ORENTAL did not plead for the return of that
amount since its prayer included other reliefs as may be just under the
premises. Courts may issue such orders of restitution as justice and equity
may warrant.
MARITIMA's Position
We find no merit in MARTMA's contention that the alleged damages on
account of wrongful replevin was barred by res judicata, and that the
application for damages before the lower Court was but a mere adoption
of a different method of presenting claims already litigated. For the records
show that an application for damages for wrongful replevin was filed both
before this Court and thereafter before the Trial Court after this Tribunal
specifically remanded the issue of those damages to the Trial Court there
to be heard and decided pursuant to Rule 60, Section 10 in relation to
Rule 57, Section 20.
13
The matter of legal compensation which MARTMA has also raised has
been previously discussed.
Parenthetically, PAN-ORENTAL can no longer raise the alleged error of
the Trial Court in computing the necessary and useful expenses at only
P40,797.54 when they should be P87,267.30, since it did not appeal from
that Court's Decision.
n a nutshell, we find that the appealed Decision of the Trial Court and of
the then Court of Appeals is in consonance with the Decision and
Resolutions of this Court.
ACCORDNGLY, the judgment appealed from is hereby affirmed. No
costs.
SO ORDERED.
SECOND DVSON
G.R. No. 126780 February 17, 2005
YHT REALTY CORPORATION, ERLINDA LAINEZ and ANICIA PAYAM,
petitioners,
vs.
THE COURT OF APPEALS and MAURICE McLOUGHLIN, respondents.
D E C S O N
TINGA, J.:
The primary question of interest before this Court is the only legal issue in
the case: t is whether a hotel may evade liability for the loss of items left
with it for safekeeping by its guests, by having these guests execute
written waivers holding the establishment or its employees free from
blame for such loss in light of Article 2003 of the Civil Code which voids
such waivers.
Before this Court is a Rule 45 petition for review of the Decision
1
dated 19
October 1995 of the Court of Appeals which affirmed the Decision
2
dated
16 December 1991 of the Regional Trial Court (RTC), Branch 13, of
Manila, finding YHT Realty Corporation, Brunhilda Mata-Tan (Tan), Erlinda
Lainez (Lainez) and Anicia Payam (Payam) jointly and solidarily liable for
damages in an action filed by Maurice McLoughlin (McLoughlin) for the
loss of his American and Australian dollars deposited in the safety deposit
box of Tropicana Copacabana Apartment Hotel, owned and operated by
YHT Realty Corporation.
The factual backdrop of the case follow.
Private respondent McLoughlin, an Australian businessman-philanthropist,
used to stay at Sheraton Hotel during his trips to the Philippines prior to
1984 when he met Tan. Tan befriended McLoughlin by showing him
around, introducing him to important people, accompanying him in visiting
impoverished street children and assisting him in buying gifts for the
children and in distributing the same to charitable institutions for poor
children. Tan convinced McLoughlin to transfer from Sheraton Hotel to
Tropicana where Lainez, Payam and Danilo Lopez were employed. Lopez
served as manager of the hotel while Lainez and Payam had custody of
the keys for the safety deposit boxes of Tropicana. Tan took care of
McLoughlin's booking at the Tropicana where he started staying during his
trips to the Philippines from December 1984 to September 1987.
3
Credit Transactions Full Text Cases Atty. Adviento!!!!%*
On 30 October 1987, McLoughlin arrived from Australia and registered
with Tropicana. He rented a safety deposit box as it was his practice to
rent a safety deposit box every time he registered at Tropicana in previous
trips. As a tourist, McLoughlin was aware of the procedure observed by
Tropicana relative to its safety deposit boxes. The safety deposit box could
only be opened through the use of two keys, one of which is given to the
registered guest, and the other remaining in the possession of the
management of the hotel. When a registered guest wished to open his
safety deposit box, he alone could personally request the management
who then would assign one of its employees to accompany the guest and
assist him in opening the safety deposit box with the two keys.
4
McLoughlin allegedly placed the following in his safety deposit box: Fifteen
Thousand US Dollars (US$15,000.00) which he placed in two envelopes,
one envelope containing Ten Thousand US Dollars (US$10,000.00) and
the other envelope Five Thousand US Dollars (US$5,000.00); Ten
Thousand Australian Dollars (AUS$10,000.00) which he also placed in
another envelope; two (2) other envelopes containing letters and credit
cards; two (2) bankbooks; and a checkbook, arranged side by side inside
the safety deposit box.
5
On 12 December 1987, before leaving for a brief trip to Hongkong,
McLoughlin opened his safety deposit box with his key and with the key of
the management and took therefrom the envelope containing Five
Thousand US Dollars (US$5,000.00), the envelope containing Ten
Thousand Australian Dollars (AUS$10,000.00), his passports and his
credit cards.
6
McLoughlin left the other items in the box as he did not
check out of his room at the Tropicana during his short visit to Hongkong.
When he arrived in Hongkong, he opened the envelope which contained
Five Thousand US Dollars (US$5,000.00) and discovered upon counting
that only Three Thousand US Dollars (US$3,000.00) were enclosed
therein.
7
Since he had no idea whether somebody else had tampered with
his safety deposit box, he thought that it was just a result of bad
accounting since he did not spend anything from that envelope.
8
After returning to Manila, he checked out of Tropicana on 18 December
1987 and left for Australia. When he arrived in Australia, he discovered
that the envelope with Ten Thousand US Dollars (US$10,000.00) was
short of Five Thousand US Dollars (US$5,000). He also noticed that the
jewelry which he bought in Hongkong and stored in the safety deposit box
upon his return to Tropicana was likewise missing, except for a diamond
bracelet.
9
When McLoughlin came back to the Philippines on 4 April 1988, he asked
Lainez if some money and/or jewelry which he had lost were found and
returned to her or to the management. However, Lainez told him that no
one in the hotel found such things and none were turned over to the
management. He again registered at Tropicana and rented a safety
deposit box. He placed therein one (1) envelope containing Fifteen
Thousand US Dollars (US$15,000.00), another envelope containing Ten
Thousand Australian Dollars (AUS$10,000.00) and other envelopes
containing his traveling papers/documents. On 16 April 1988, McLoughlin
requested Lainez and Payam to open his safety deposit box. He noticed
that in the envelope containing Fifteen Thousand US Dollars
(US$15,000.00), Two Thousand US Dollars (US$2,000.00) were missing
and in the envelope previously containing Ten Thousand Australian Dollars
(AUS$10,000.00), Four Thousand Five Hundred Australian Dollars
(AUS$4,500.00) were missing.
10
When McLoughlin discovered the loss, he immediately confronted Lainez
and Payam who admitted that Tan opened the safety deposit box with the
key assigned to him.
11
McLoughlin went up to his room where Tan was
staying and confronted her. Tan admitted that she had stolen McLoughlin's
key and was able to open the safety deposit box with the assistance of
Lopez, Payam and Lainez.
12
Lopez also told McLoughlin that Tan stole the
key assigned to McLoughlin while the latter was asleep.
13
McLoughlin requested the management for an investigation of the
incident. Lopez got in touch with Tan and arranged for a meeting with the
police and McLoughlin. When the police did not arrive, Lopez and Tan
went to the room of McLoughlin at Tropicana and thereat, Lopez wrote on
a piece of paper a promissory note dated 21 April 1988. The promissory
note reads as follows:
promise to pay Mr. Maurice McLoughlin the amount of AUS$4,000.00
and US$2,000.00 or its equivalent in Philippine currency on or before May
5, 1988.
14
Lopez requested Tan to sign the promissory note which the latter did and
Lopez also signed as a witness. Despite the execution of promissory note
by Tan, McLoughlin insisted that it must be the hotel who must assume
responsibility for the loss he suffered. However, Lopez refused to accept
the responsibility relying on the conditions for renting the safety deposit
box entitled "Undertaking For the Use Of Safety Deposit Box,"
15
specifically paragraphs (2) and (4) thereof, to wit:
2. To release and hold free and blameless TROPCANA APARTMENT
HOTEL from any liability arising from any loss in the contents and/or use
of the said deposit box for any cause whatsoever, including but not limited
to the presentation or use thereof by any other person should the key be
lost;
. . .
4. To return the key and execute the RELEASE in favor of TROPCANA
APARTMENT HOTEL upon giving up the use of the box.
16
On 17 May 1988, McLoughlin went back to Australia and he consulted his
lawyers as to the validity of the abovementioned stipulations. They opined
that the stipulations are void for being violative of universal hotel practices
and customs. His lawyers prepared a letter dated 30 May 1988 which was
signed by McLoughlin and sent to President Corazon Aquino.
17
The Office
of the President referred the letter to the Department of Justice (DOJ)
which forwarded the same to the Western Police District (WPD).
18
After receiving a copy of the indorsement in Australia, McLoughlin came to
the Philippines and registered again as a hotel guest of Tropicana.
McLoughlin went to Malacaang to follow up on his letter but he was
instructed to go to the DOJ. The DOJ directed him to proceed to the WPD
for documentation. But McLoughlin went back to Australia as he had an
urgent business matter to attend to.
For several times, McLoughlin left for Australia to attend to his business
and came back to the Philippines to follow up on his letter to the President
but he failed to obtain any concrete assistance.
19
McLoughlin left again for Australia and upon his return to the Philippines
on 25 August 1989 to pursue his claims against petitioners, the WPD
conducted an investigation which resulted in the preparation of an affidavit
which was forwarded to the Manila City Fiscal's Office. Said affidavit
became the basis of preliminary investigation. However, McLoughlin left
again for Australia without receiving the notice of the hearing on 24
November 1989. Thus, the case at the Fiscal's Office was dismissed for
failure to prosecute. Mcloughlin requested the reinstatement of the
criminal charge for theft. n the meantime, McLoughlin and his lawyers
wrote letters of demand to those having responsibility to pay the damage.
Then he left again for Australia.
Upon his return on 22 October 1990, he registered at the Echelon Towers
at Malate, Manila. Meetings were held between McLoughlin and his lawyer
which resulted to the filing of a complaint for damages on 3 December
1990 against YHT Realty Corporation, Lopez, Lainez, Payam and Tan
(defendants) for the loss of McLoughlin's money which was discovered on
16 April 1988. After filing the complaint, McLoughlin left again for Australia
to attend to an urgent business matter. Tan and Lopez, however, were not
served with summons, and trial proceeded with only Lainez, Payam and
YHT Realty Corporation as defendants.
After defendants had filed their Pre-Trial Brief admitting that they had
previously allowed and assisted Tan to open the safety deposit box,
McLoughlin filed an Amended/Supplemental Complaint
20
dated 10 June
1991 which included another incident of loss of money and jewelry in the
safety deposit box rented by McLoughlin in the same hotel which took
place prior to 16 April 1988.
21
The trial court admitted the
Amended/Supplemental Complaint.
Credit Transactions Full Text Cases Atty. Adviento!!!!&+
During the trial of the case, McLoughlin had been in and out of the country
to attend to urgent business in Australia, and while staying in the
Philippines to attend the hearing, he incurred expenses for hotel bills,
airfare and other transportation expenses, long distance calls to Australia,
Meralco power expenses, and expenses for food and maintenance,
among others.
22
After trial, the RTC of Manila rendered judgment in favor of McLoughlin,
the dispositive portion of which reads:
WHEREFORE, above premises considered, judgment is hereby rendered
by this Court in favor of plaintiff and against the defendants, to wit:
1. Ordering defendants, jointly and severally, to pay plaintiff the
sum of US$11,400.00 or its equivalent in Philippine Currency of
P342,000.00, more or less, and the sum of AUS$4,500.00 or its
equivalent in Philippine Currency of P99,000.00, or a total of
P441,000.00, more or less, with 12% interest from April 16 1988
until said amount has been paid to plaintiff (tem 1, Exhibit CC);
2. Ordering defendants, jointly and severally to pay plaintiff the
sum of P3,674,238.00 as actual and consequential damages
arising from the loss of his Australian and American dollars and
jewelries complained against and in prosecuting his claim and
rights administratively and judicially (tems , , V, V, V, V,
V, and X, Exh. "CC");
3. Ordering defendants, jointly and severally, to pay plaintiff the
sum of P500,000.00 as moral damages (tem X, Exh. "CC");
4. Ordering defendants, jointly and severally, to pay plaintiff the
sum of P350,000.00 as exemplary damages (tem X, Exh.
"CC");
5. And ordering defendants, jointly and severally, to pay litigation
expenses in the sum of P200,000.00 (tem X, Exh. "CC");
6. Ordering defendants, jointly and severally, to pay plaintiff the
sum of P200,000.00 as attorney's fees, and a fee of P3,000.00
for every appearance; and
7. Plus costs of suit.
SO ORDERED.
23
The trial court found that McLoughlin's allegations as to the fact of loss
and as to the amount of money he lost were sufficiently shown by his
direct and straightforward manner of testifying in court and found him to be
credible and worthy of belief as it was established that McLoughlin's
money, kept in Tropicana's safety deposit box, was taken by Tan without
McLoughlin's consent. The taking was effected through the use of the
master key which was in the possession of the management. Payam and
Lainez allowed Tan to use the master key without authority from
McLoughlin. The trial court added that if McLoughlin had not lost his
dollars, he would not have gone through the trouble and personal
inconvenience of seeking aid and assistance from the Office of the
President, DOJ, police authorities and the City Fiscal's Office in his desire
to recover his losses from the hotel management and Tan.
24
As regards the loss of Seven Thousand US Dollars (US$7,000.00) and
jewelry worth approximately One Thousand Two Hundred US Dollars
(US$1,200.00) which allegedly occurred during his stay at Tropicana
previous to 4 April 1988, no claim was made by McLoughlin for such
losses in his complaint dated 21 November 1990 because he was not sure
how they were lost and who the responsible persons were. But
considering the admission of the defendants in their pre-trial brief that on
three previous occasions they allowed Tan to open the box, the trial court
opined that it was logical and reasonable to presume that his personal
assets consisting of Seven Thousand US Dollars (US$7,000.00) and
jewelry were taken by Tan from the safety deposit box without
McLoughlin's consent through the cooperation of Payam and Lainez.
25
The trial court also found that defendants acted with gross negligence in
the performance and exercise of their duties and obligations as innkeepers
and were therefore liable to answer for the losses incurred by
McLoughlin.
26
Moreover, the trial court ruled that paragraphs (2) and (4) of the
"Undertaking For The Use Of Safety Deposit Box" are not valid for being
contrary to the express mandate of Article 2003 of the New Civil Code and
against public policy.
27
Thus, there being fraud or wanton conduct on the
part of defendants, they should be responsible for all damages which may
be attributed to the non-performance of their contractual obligations.
28
The Court of Appeals affirmed the disquisitions made by the lower court
except as to the amount of damages awarded. The decretal text of the
appellate court's decision reads:
THE FOREGONG CONSDERED, the appealed Decision is hereby
AFFRMED but modified as follows:
The appellants are directed jointly and severally to pay the
plaintiff/appellee the following amounts:
1) P153,200.00 representing the peso equivalent of
US$2,000.00 and AUS$4,500.00;
2) P308,880.80, representing the peso value for the air fares
from Sidney [sic] to Manila and back for a total of eleven (11)
trips;
3) One-half of P336,207.05 or P168,103.52 representing
payment to Tropicana Apartment Hotel;
4) One-half of P152,683.57 or P76,341.785 representing
payment to Echelon Tower;
5) One-half of P179,863.20 or P89,931.60 for the taxi xxx
transportation from the residence to Sidney [sic] Airport and
from MA to the hotel here in Manila, for the eleven (11) trips;
6) One-half of P7,801.94 or P3,900.97 representing Meralco
power expenses;
7) One-half of P356,400.00 or P178,000.00 representing
expenses for food and maintenance;
8) P50,000.00 for moral damages;
9) P10,000.00 as exemplary damages; and
10) P200,000 representing attorney's fees.
With costs.
SO ORDERED.
29
Unperturbed, YHT Realty Corporation, Lainez and Payam went to this
Court in this appeal by certiorari.
Petitioners submit for resolution by this Court the following issues: (a)
whether the appellate court's conclusion on the alleged prior existence and
subsequent loss of the subject money and jewelry is supported by the
evidence on record; (b) whether the finding of gross negligence on the part
of petitioners in the performance of their duties as innkeepers is supported
by the evidence on record; (c) whether the "Undertaking For The Use of
Safety Deposit Box" admittedly executed by private respondent is null and
void; and (d) whether the damages awarded to private respondent, as well
as the amounts thereof, are proper under the circumstances.
30
Credit Transactions Full Text Cases Atty. Adviento!!!!&"
The petition is devoid of merit.
t is worthy of note that the thrust of Rule 45 is the resolution only of
questions of law and any peripheral factual question addressed to this
Court is beyond the bounds of this mode of review.
Petitioners point out that the evidence on record is insufficient to prove the
fact of prior existence of the dollars and the jewelry which had been lost
while deposited in the safety deposit boxes of Tropicana, the basis of the
trial court and the appellate court being the sole testimony of McLoughlin
as to the contents thereof. Likewise, petitioners dispute the finding of
gross negligence on their part as not supported by the evidence on record.
We are not persuaded.l^vvphi1.net We adhere to the findings of the trial
court as affirmed by the appellate court that the fact of loss was
established by the credible testimony in open court by McLoughlin. Such
findings are factual and therefore beyond the ambit of the present
petition.1awphi1.nt
The trial court had the occasion to observe the demeanor of McLoughlin
while testifying which reflected the veracity of the facts testified to by him.
On this score, we give full credence to the appreciation of testimonial
evidence by the trial court especially if what is at issue is the credibility of
the witness. The oft-repeated principle is that where the credibility of a
witness is an issue, the established rule is that great respect is accorded
to the evaluation of the credibility of witnesses by the trial court.
31
The trial
court is in the best position to assess the credibility of witnesses and their
testimonies because of its unique opportunity to observe the witnesses
firsthand and note their demeanor, conduct and attitude under grilling
examination.
32
We are also not impressed by petitioners' argument that the finding of
gross negligence by the lower court as affirmed by the appellate court is
not supported by evidence. The evidence reveals that two keys are
required to open the safety deposit boxes of Tropicana. One key is
assigned to the guest while the other remains in the possession of the
management. f the guest desires to open his safety deposit box, he must
request the management for the other key to open the same. n other
words, the guest alone cannot open the safety deposit box without the
assistance of the management or its employees. With more reason that
access to the safety deposit box should be denied if the one requesting for
the opening of the safety deposit box is a stranger. Thus, in case of loss of
any item deposited in the safety deposit box, it is inevitable to conclude
that the management had at least a hand in the consummation of the
taking, unless the reason for the loss is force majeure.
Noteworthy is the fact that Payam and Lainez, who were employees of
Tropicana, had custody of the master key of the management when the
loss took place. n fact, they even admitted that they assisted Tan on three
separate occasions in opening McLoughlin's safety deposit box.
33
This
only proves that Tropicana had prior knowledge that a person aside from
the registered guest had access to the safety deposit box. Yet the
management failed to notify McLoughlin of the incident and waited for him
to discover the taking before it disclosed the matter to him. Therefore,
Tropicana should be held responsible for the damage suffered by
McLoughlin by reason of the negligence of its employees.
The management should have guarded against the occurrence of this
incident considering that Payam admitted in open court that she assisted
Tan three times in opening the safety deposit box of McLoughlin at around
6:30 A.M. to 7:30 A.M. while the latter was still asleep.
34
n light of the
circumstances surrounding this case, it is undeniable that without the
acquiescence of the employees of Tropicana to the opening of the safety
deposit box, the loss of McLoughlin's money could and should have been
avoided.
The management contends, however, that McLoughlin, by his act, made
its employees believe that Tan was his spouse for she was always with
him most of the time. The evidence on record, however, is bereft of any
showing that McLoughlin introduced Tan to the management as his wife.
Such an inference from the act of McLoughlin will not exculpate the
petitioners from liability in the absence of any showing that he made the
management believe that Tan was his wife or was duly authorized to have
access to the safety deposit box. Mere close companionship and intimacy
are not enough to warrant such conclusion considering that what is
involved in the instant case is the very safety of McLoughlin's deposit. f
only petitioners exercised due diligence in taking care of McLoughlin's
safety deposit box, they should have confronted him as to his relationship
with Tan considering that the latter had been observed opening
McLoughlin's safety deposit box a number of times at the early hours of
the morning. Tan's acts should have prompted the management to
investigate her relationship with McLoughlin. Then, petitioners would have
exercised due diligence required of them. Failure to do so warrants the
conclusion that the management had been remiss in complying with the
obligations imposed upon hotel-keepers under the law.
Under Article 1170 of the New Civil Code, those who, in the performance
of their obligations, are guilty of negligence, are liable for damages. As to
who shall bear the burden of paying damages, Article 2180, paragraph (4)
of the same Code provides that the owners and managers of an
establishment or enterprise are likewise responsible for damages caused
by their employees in the service of the branches in which the latter are
employed or on the occasion of their functions. Also, this Court has ruled
that if an employee is found negligent, it is presumed that the employer
was negligent in selecting and/or supervising him for it is hard for the
victim to prove the negligence of such employer.
35
Thus, given the fact that
the loss of McLoughlin's money was consummated through the negligence
of Tropicana's employees in allowing Tan to open the safety deposit box
without the guest's consent, both the assisting employees and YHT Realty
Corporation itself, as owner and operator of Tropicana, should be held
solidarily liable pursuant to Article 2193.
36
The issue of whether the "Undertaking For The Use of Safety Deposit Box"
executed by McLoughlin is tainted with nullity presents a legal question
appropriate for resolution in this petition. Notably, both the trial court and
the appellate court found the same to be null and void. We find no reason
to reverse their common conclusion. Article 2003 is controlling, thus:
Art. 2003. The hotel-keeper cannot free himself from responsibility by
posting notices to the effect that he is not liable for the articles brought by
the guest. Any stipulation between the hotel-keeper and the guest
whereby the responsibility of the former as set forth in Articles 1998 to
2001
37
is suppressed or diminished shall be void.
Article 2003 was incorporated in the New Civil Code as an expression of
public policy precisely to apply to situations such as that presented in this
case. The hotel business like the common carrier's business is imbued
with public interest. Catering to the public, hotelkeepers are bound to
provide not only lodging for hotel guests and security to their persons and
belongings. The twin duty constitutes the essence of the business. The
law in turn does not allow such duty to the public to be negated or diluted
by any contrary stipulation in so-called "undertakings" that ordinarily
appear in prepared forms imposed by hotel keepers on guests for their
signature.
n an early case,
38
the Court of Appeals through its then Presiding Justice
(later Associate Justice of the Court) Jose P. Bengzon, ruled that to hold
hotelkeepers or innkeeper liable for the effects of their guests, it is not
necessary that they be actually delivered to the innkeepers or their
employees. t is enough that such effects are within the hotel or inn.
39
With
greater reason should the liability of the hotelkeeper be enforced when the
missing items are taken without the guest's knowledge and consent from a
safety deposit box provided by the hotel itself, as in this case.
Paragraphs (2) and (4) of the "undertaking" manifestly contravene Article
2003 of the New Civil Code for they allow Tropicana to be released from
liability arising from any loss in the contents and/or use of the safety
deposit box for any cause whatsoever.
40
Evidently, the undertaking was
intended to bar any claim against Tropicana for any loss of the contents of
the safety deposit box whether or not negligence was incurred by
Tropicana or its employees. The New Civil Code is explicit that the
responsibility of the hotel-keeper shall extend to loss of, or injury to, the
personal property of the guests even if caused by servants or employees
of the keepers of hotels or inns as well as by strangers, except as it may
proceed from any force majeure.
41
t is the loss through force majeure that
may spare the hotel-keeper from liability. n the case at bar, there is no
showing that the act of the thief or robber was done with the use of arms
or through an irresistible force to qualify the same as force majeure.
42
Credit Transactions Full Text Cases Atty. Adviento!!!!&#
Petitioners likewise anchor their defense on Article 2002
43
which exempts
the hotel-keeper from liability if the loss is due to the acts of his guest, his
family, or visitors. Even a cursory reading of the provision would lead us to
reject petitioners' contention. The justification they raise would render
nugatory the public interest sought to be protected by the provision. What
if the negligence of the employer or its employees facilitated the
consummation of a crime committed by the registered guest's relatives or
visitor? Should the law exculpate the hotel from liability since the loss was
due to the act of the visitor of the registered guest of the hotel? Hence, this
provision presupposes that the hotel-keeper is not guilty of concurrent
negligence or has not contributed in any degree to the occurrence of the
loss. A depositary is not responsible for the loss of goods by theft, unless
his actionable negligence contributes to the loss.
44
n the case at bar, the responsibility of securing the safety deposit box was
shared not only by the guest himself but also by the management since
two keys are necessary to open the safety deposit box. Without the
assistance of hotel employees, the loss would not have occurred. Thus,
Tropicana was guilty of concurrent negligence in allowing Tan, who was
not the registered guest, to open the safety deposit box of McLoughlin,
even assuming that the latter was also guilty of negligence in allowing
another person to use his key. To rule otherwise would result in
undermining the safety of the safety deposit boxes in hotels for the
management will be given imprimatur to allow any person, under the
pretense of being a family member or a visitor of the guest, to have access
to the safety deposit box without fear of any liability that will attach
thereafter in case such person turns out to be a complete stranger. This
will allow the hotel to evade responsibility for any liability incurred by its
employees in conspiracy with the guest's relatives and visitors.
Petitioners contend that McLoughlin's case was mounted on the theory of
contract, but the trial court and the appellate court upheld the grant of the
claims of the latter on the basis of tort.
45
There is nothing anomalous in
how the lower courts decided the controversy for this Court has
pronounced a jurisprudential rule that tort liability can exist even if there
are already contractual relations. The act that breaks the contract may
also be tort.
46
As to damages awarded to McLoughlin, we see no reason to modify the
amounts awarded by the appellate court for the same were based on facts
and law. t is within the province of lower courts to settle factual issues
such as the proper amount of damages awarded and such finding is
binding upon this Court especially if sufficiently proven by evidence and
not unconscionable or excessive. Thus, the appellate court correctly
awarded McLoughlin Two Thousand US Dollars (US$2,000.00) and Four
Thousand Five Hundred Australian dollars (AUS$4,500.00) or their peso
equivalent at the time of payment,
47
being the amounts duly proven by
evidence.
48
The alleged loss that took place prior to 16 April 1988 was not
considered since the amounts alleged to have been taken were not
sufficiently established by evidence. The appellate court also correctly
awarded the sum of P308,880.80, representing the peso value for the air
fares from Sydney to Manila and back for a total of eleven (11) trips;
49
one-
half of P336,207.05 or P168,103.52 representing payment to Tropicana;
50
one-half of P152,683.57 or P76,341.785 representing payment to Echelon
Tower;
51
one-half of P179,863.20 or P89,931.60 for the taxi or
transportation expenses from McLoughlin's residence to Sydney Airport
and from MA to the hotel here in Manila, for the eleven (11) trips;
52
one-
half of P7,801.94 or P3,900.97 representing Meralco power expenses;
53
one-half of P356,400.00 or P178,000.00 representing expenses for food
and maintenance.
54
The amount of P50,000.00 for moral damages is reasonable. Although trial
courts are given discretion to determine the amount of moral damages, the
appellate court may modify or change the amount awarded when it is
palpably and scandalously excessive.l^vvphi1.net Moral damages are not
intended to enrich a complainant at the expense of a
defendant.l^vvphi1.net They are awarded only to enable the injured party
to obtain means, diversion or amusements that will serve to alleviate the
moral suffering he has undergone, by reason of defendants' culpable
action.
55
The awards of P10,000.00 as exemplary damages and P200,000.00
representing attorney's fees are likewise sustained.
WHEREFORE, foregoing premises considered, the Decision of the Court
of Appeals dated 19 October 1995 is hereby AFFRMED. Petitioners are
directed, jointly and severally, to pay private respondent the following
amounts:
(1) US$2,000.00 and AUS$4,500.00 or their peso equivalent at
the time of payment;
(2) P308,880.80, representing the peso value for the air fares
from Sydney to Manila and back for a total of eleven (11) trips;
(3) One-half of P336,207.05 or P168,103.52 representing
payment to Tropicana Copacabana Apartment Hotel;
(4) One-half of P152,683.57 or P76,341.785 representing
payment to Echelon Tower;
(5) One-half of P179,863.20 or P89,931.60 for the taxi or
transportation expense from McLoughlin's residence to Sydney
Airport and from MA to the hotel here in Manila, for the eleven
(11) trips;
(6) One-half of P7,801.94 or P3,900.97 representing Meralco
power expenses;
(7) One-half of P356,400.00 or P178,200.00 representing
expenses for food and maintenance;
(8) P50,000.00 for moral damages;
(9) P10,000.00 as exemplary damages; and
(10) P200,000 representing attorney's fees.
With costs.
SO ORDERED.
FRST DVSON

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, Regala & Cruz for private respondent.

MEDIALDEA, J.:p
This is a petition for review on certiorari of the decision (pp 21-31, Rollo) of
the ntermediate 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.
Credit Transactions Full Text Cases Atty. Adviento!!!!&$
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
ssuance 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" (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". t
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 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 plaintiff-appellee for the account of
the defendant cardholder, and the latter undertook to
pay any statements of account rendered by the
plaintiff-appellee 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.
n 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."
n 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, the
trial court set the case for pre-trial conference. Neither
did said defendant-appellant 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
ntermediate 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 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 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 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
Credit Transactions Full Text Cases Atty. Adviento!!!!&%
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:
/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." t 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 liability
on the part of the guarantor or debtor still applies.
t 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 t 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. t 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. t is in this sense that a surety, although solidarily liable with the
principal debtor, is different from the debtor. t 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 PCB v. CA, L-
34959, March 18, 1988, 159 SCRA 24).
ACCORDNGLY, the petition is GRANTED. The questioned decision of
respondent appellate court is SET ASDE and the decision of the trial court
is RENSTATED.
SO ORDERED.
SECOND DVSON

G.R. No. 113931 May 6, 1998
E. ZOBEL, INC., petitioner,
vs.
THE COURT OF APPEALS, CONSOLIDATED BANK AND TRUST
CORPORATION, and SPOUSES RAUL and ELEA R. CLAVERIA,
respondents.

Credit Transactions Full Text Cases Atty. Adviento!!!!&&
MARTINEZ, J.:
This petition for review on certiorari seeks the reversal of the decision
1
of
the Court of Appeals dated July 13, 1993 which affirmed the Order of the
Regional Trial Court of Manila, Branch 51, denying petitioner's Motion to
Dismiss the complaint, as well as the Resolution
2
dated February 15,
1994 denying the motion for reconsideration thereto.
The facts are as follows:
Respondent spouses Raul and Elea Claveria, doing business under the
name "Agro Brokers," applied for a loan with respondent Consolidated
Bank and Trust Corporation (now SOLDBANK) in the amount of Two
Million Eight Hundred Seventy Five Thousand Pesos (P2,875,000.00) to
finance the purchase of two (2) maritime barges and one tugboat
3
which
would be used in their molasses business. The loan was granted subject
to the condition that respondent spouses execute a chattel mortgage over
the three (3) vessels to be acquired and that a continuing guarantee be
executed by Ayala nternational Philippines, nc., now herein petitioner E.
Zobel, nc., in favor of SOLDBANK. The respondent spouses agreed to
the arrangement. Consequently, a chattel mortgage and a Continuing
Guaranty
4
were executed.
Respondent spouses defaulted in the payment of the entire obligation
upon maturity. Hence, on January 31, 1991, SOLDBANK filed a complaint
for sum of money with a prayer for a writ of preliminary attachment,
against respondents spouses and petitioner. The case was docketed as
Civil Case No. 91-55909 in the Regional Trial Court of Manila.
Petitioner moved to dismiss the complaint on the ground that its liability as
guarantor of the loan was extinguished pursuant to Article 2080 of the Civil
Code of the Philippines. t argued that it has lost its right to be subrogated
to the first chattel mortgage in view of SOLDBANK's failure to register the
chattel mortgage with the appropriate government agency.
SOLDBANK opposed the motion contending that Article 2080 is not
applicable because petitioner is not a guarantor but a surety.
On February 18, 1993, the trial court issued an Order, portions of which
reads:
After a careful consideration of the matter on hand,
the Court finds the ground of the motion to dismiss
without merit. The document referred to as
"Continuing Guaranty" dated August 21, 1985 (Exh. 7)
states as follows:
For and in consideration of any
existing indebtedness to you of
Agro Brokers, a single
proprietorship owned by Mr. Raul
Claveria for the payment of which
the undersigned is now obligated
to you as surety and in order to
induce you, in your discretion, at
any other manner, to, or at the
request or for the account of the
borrower, . . .
The provisions of the document are clear, plain and
explicit.
Clearly therefore, defendant E. Zobel, nc. signed as
surety. Even though the title of the document is
"Continuing Guaranty", the Court's interpretation is not
limited to the title alone but to the contents and
intention of the parties more specifically if the
language is clear and positive. The obligation of the
defendant Zobel being that of a surety, Art. 2080 New
Civil Code will not apply as it is only for those acting
as guarantor. n fact, in the letter of January 31, 1986
of the defendants (spouses and Zobel) to the plaintiff
it is requesting that the chattel mortgage on the
vessels and tugboat be waived and/or rescinded by
the bank inasmuch as the said loan is covered by the
Continuing Guaranty by Zobel in favor of the plaintiff
thus thwarting the claim of the defendant now that the
chattel mortgage is an essential condition of the
guaranty. n its letter, it said that because of the
Continuing Guaranty in favor of the plaintiff the chattel
mortgage is rendered unnecessary and redundant.
With regard to the claim that the failure of the plaintiff
to register the chattel mortgage with the proper
government agency, i.e. with the Office of the
Collector of Customs or with the Register of Deeds
makes the obligation a guaranty, the same merits a
scant consideration and could not be taken by this
Court as the basis of the extinguishment of the
obligation of the defendant corporation to the plaintiff
as surety. The chattel mortgage is an additional
security and should not be considered as payment of
the debt in case of failure of payment. The same is
true with the failure to register, extinction of the liability
would not lie.
WHEREFORE, the Motion to Dismiss is hereby
denied and defendant E. Zobel, nc., is ordered to file
its answer to the complaint within ten (10) days from
receipt of a copy of this Order. 5
Petitioner moved for reconsideration but was denied on April 26, 1993.
6

Thereafter, petitioner questioned said Orders before the respondent Court
of Appeals, through a petition for certiorari, alleging that the trial court
committed grave abuse of discretion in denying the motion to dismiss.
On July 13, 1993, the Court of Appeals rendered the assailed decision the
dispositive portion of which reads:
WHEREFORE, finding that respondent Judge has not
committed any grave abuse of discretion in issuing the
herein assailed orders, We hereby DSMSS the
petition.
A motion for reconsideration filed by petitioner was denied for lack of merit
on February 15, 1994.
Petitioner now comes to us via this petition arguing that the respondent
Court of Appeals erred in its finding: (1) that Article 2080 of the New Civil
Code which provides: "The guarantors, even though they be solidary, are
released from their obligation whenever by some act of the creditor they
cannot be subrogated to the rights, mortgages, and preferences of the
latter," is not applicable to petitioner; (2) that petitioner's obligation to
respondent SOLDBANK under the continuing guaranty is that of a surety;
and (3) that the failure of respondent SOLDBANK to register the chattel
mortgage did not extinguish petitioner's liability to respondent
SOLDBANK.
We shall first resolve the issue of whether or not petitioner under the
"Continuing Guaranty" obligated itself to SOLDBANK as a guarantor or a
surety.
A contract of surety is an accessory promise by which a person binds
himself for another already bound, and agrees with the creditor to satisfy
the obligation if the debtor does not.
7
A contract of guaranty, on the other
hand, is a collateral undertaking to pay the debt of another in case the
latter does not pay the debt.
8
Strictly speaking, guaranty and surety are nearly related, and many of the
principles are common to both. However, under our civil law, they may be
distinguished thus: A surety is usually bound with his principal by the same
instrument, executed at the same time, and on the same consideration. He
is an original promissor and debtor from the beginning, and is held,
Credit Transactions Full Text Cases Atty. Adviento!!!!&'
ordinarily, to know every default of his principal. Usually, he will not be
discharged, either by the mere indulgence of the creditor to the principal,
or by want of notice of the default of the principal, no matter how much he
may be injured thereby. On the other hand, the contract of guaranty is the
guarantor's own separate undertaking, in which the principal does not join.
t is usually entered into before or after that of the principal, and is often
supported on a separate consideration from that supporting the contract of
the principal. The original contract of his principal is not his contract, and
he is not bound to take notice of its non-performance. He is often
discharged by the mere indulgence of the creditor to the principal, and is
usually not liable unless notified of the default of the principal.
9
Simply put, a surety is distinguished from a guaranty in that a guarantor is
the insurer of the solvency of the debtor and thus binds himself to pay if
the principal is unable to pay while a surety is the insurer of the debt, and
he obligates himself to pay if the principal does not pay.
10
Based on the aforementioned definitions, it appears that the contract
executed by petitioner in favor of SOLDBANK, albeit denominated as a
"Continuing Guaranty," is a contract of surety. The terms of the contract
categorically obligates petitioner as "surety" to induce SOLDBANK to
extend credit to respondent spouses. This can be seen in the following
stipulations.
For and in consideration of any existing indebtedness
to you of AGRO BROKERS, a single proprietorship
owned by MR. RAUL P. CLAVERA, of legal age,
married and with business address . . . (hereinafter
called the Borrower), for the payment of which the
undersigned is now obligated to you as surety and in
order to induce you, in your discretion, at any time or
from time to time hereafter, to make loans or
advances or to extend credit in any other manner to,
or at the request or for the account of the Borrower,
either with or without purchase or discount, or to make
any loans or advances evidenced or secured by any
notes, bills receivable, drafts, acceptances, checks or
other instruments or evidences of indebtedness . . .
upon which the Borrower is or may become liable as
maker, endorser, acceptor, or otherwise, the
undersigned agrees to guarantee, and does hereby
guarantee, the punctual payment, at maturity or upon
demand, to you of any and all such instruments,
loans, advances, credits and/or other obligations
herein before referred to, and also any and all other
indebtedness of every kind which is now or may
hereafter become due or owing to you by the
Borrower, together with any and all expenses which
may be incurred by you in collecting all or any such
instruments or other indebtedness or obligations
hereinbefore referred to, and or in enforcing any rights
hereunder, and also to make or cause any and all
such payments to be made strictly in accordance with
the terms and provisions of any agreement (g),
express or implied, which has (have) been or may
hereafter be made or entered into by the Borrower in
reference thereto, regardless of any law, regulation or
decree, now or hereafter in effect which might in any
manner affect any of the terms or provisions of any
such agreements(s) or your right with respect thereto
as against the Borrower, or cause or permit to be
invoked any alteration in the time, amount or manner
of payment by the Borrower of any such instruments,
obligations or indebtedness; . . . (Emphasis Ours)
One need not look too deeply at the contract to determine the nature of
the undertaking and the intention of the parties. The contract clearly
disclose that petitioner assumed liability to SOLDBANK, as a regular party
to the undertaking and obligated itself as an original promissor. t bound
itself jointly and severally to the obligation with the respondent spouses. n
fact, SOLDBANK need not resort to all other legal remedies or exhaust
respondent spouses' properties before it can hold petitioner liable for the
obligation. This can be gleaned from a reading of the stipulations in the
contract, to wit:
. . . f default be made in the payment of any of the
instruments, indebtedness or other obligation hereby
guaranteed by the undersigned, or if the Borrower, or
the undersigned should die, dissolve, fail in business,
or become insolvent, . . ., or if any funds or other
property of the Borrower, or of the undersigned which
may be or come into your possession or control or
that of any third party acting in your behalf as
aforesaid should be attached of distrained, or should
be or become subject to any mandatory order of court
or other legal process, then, or any time after the
happening of any such event any or all of the
instruments of indebtedness or other obligations
hereby guaranteed shall, at your option become (for
the purpose of this guaranty) due and payable by the
undersigned forthwith without demand of notice, and
full power and authority are hereby given you, in your
discretion, to sell, assign and deliver all or any part of
the property upon which you may then have a lien
hereunder at any broker's board, or at public or
private sale at your option, either for cash or for credit
or for future delivery without assumption by you of
credit risk, and without either the demand,
advertisement or notice of any kind, all of which are
hereby expressly waived. At any sale hereunder, you
may, at your option, purchase the whole or any part of
the property so sold, free from any right of redemption
on the part of the undersigned, all such rights being
also hereby waived and released. n case of any sale
and other disposition of any of the property aforesaid,
after deducting all costs and expenses of every kind
for care, safekeeping, collection, sale, delivery or
otherwise, you may apply the residue of the proceeds
of the sale and other disposition thereof, to the
payment or reduction, either in whole or in part, of any
one or more of the obligations or liabilities hereunder
of the undersigned whether or not except for
disagreement such liabilities or obligations would then
be due, making proper allowance or interest on the
obligations and liabilities not otherwise then due, and
returning the overplus, if any, to the undersigned; all
without prejudice to your rights as against the
undersigned with respect to any and all amounts
which may be or remain unpaid on any of the
obligations or liabilities aforesaid at any time (s).
xxx xxx xxx
Should the Borrower at this or at any future time
furnish, or should be heretofore have furnished,
another surety or sureties to guarantee the payment
of his obligations to you, the undersigned hereby
expressly waives all benefits to which the
undersigned might be entitled under the provisions of
Article 1837 of the Civil Code (beneficio division), the
liability of the undersigned under any and all
circumstances being joint and several; (Emphasis
Ours)
The use of the term "guarantee" does not ipso facto mean that the
contract is one of guaranty. Authorities recognize that the word
"guarantee" is frequently employed in business transactions to describe
not the security of the debt but an intention to be bound by a primary or
independent obligation.
11
As aptly observed by the trial court, the
interpretation of a contract is not limited to the title alone but to the
contents and intention of the parties.
Having thus established that petitioner is a surety, Article 2080 of the Civil
Code, relied upon by petitioner, finds no application to the case at bar. n
Bicol Savings and Loan Association vs. Guinhawa,
12
we have ruled that
Article 2080 of the New Civil Code does not apply where the liability is as
a surety, not as a guarantor.
But even assuming that Article 2080 is applicable, SOLDBANK's failure to
register the chattel mortgage did not release petitioner from the obligation.
Credit Transactions Full Text Cases Atty. Adviento!!!!&(
n the Continuing Guaranty executed in favor of SOLDBANK, petitioner
bound itself to the contract irrespective of the existence of any collateral. t
even released SOLDBANK from any fault or negligence that may impair
the contract. The pertinent portions of the contract so provides:
. . . the undersigned (petitioner) who hereby agrees to
be and remain bound upon this guaranty, irrespective
of the existence, value or condition of any collateral,
and notwithstanding any such change, exchange,
settlement, compromise, surrender, release, sale,
application, renewal or extension, and notwithstanding
also that all obligations of the Borrower to you
outstanding and unpaid at any time(s) may exceed
the aggregate principal sum herein above prescribed.
This is a Continuing Guaranty and shall remain in full
force and effect until written notice shall have been
received by you that it has been revoked by the
undersigned, but any such notice shall not be
released the undersigned from any liability as to any
instruments, loans, advances or other obligations
hereby guaranteed, which may be held by you, or in
which you may have any interest, at the time of the
receipt of such notice. No act or omission of any kind
on your part in the premises shall in any event affect
or impair this guaranty, nor shall same be affected by
any change which may arise by reason of the death of
the undersigned, of any partner (s) of the
undersigned, or of the Borrower, or of the accession
to any such partnership of any one or more new
partners. (Emphasis supplied)
n fine, we find the petition to be without merit as no reversible error was
committed by respondent Court of Appeals in rendering the assailed
decision.
WHEREFORE, the decision of the respondent Court of Appeals is hereby
AFFRMED. Costs against the petitioner.
SO ORDERED.
EN BANC
G.R. No. L-16666 ApriI 10, 1922
ROMULO MACHETTI, plaintiff-appelle,
vs.
HOSPICIO DE SAN JOSE, defendant-appellee, and
FIDELITY & SURETY COMPANY OF THE PHILIPPINE ISLANDS,
defendant-appellant
Ross and Laurence and Wolfson & Scwarzkopf for appellant.
Gabriel La O for appellee Hospicio de San Jose.
No appearance for the other appellee.
OSTRAND, J.:
t appears from the evidence that on July 17, 1916, one Romulo Machetti,
by a written agreement undertook to construct a building on Calle Rosario
in the city of Manila for the Hospicio de San Jose, the contract price being
P64,000. One of the conditions of the agreement was that the contractor
should obtain the "guarantee" of the Fidelity and Surety Company of the
Philippine slands to the amount of P128,800 and the following
endorsement in the English language appears upon the contract:
MANLA, July 15, 1916.
For value received we hereby guarantee compliance with the
terms and conditions as outlined in the above contract.
FDELTY AND SURETY COMPANY OF THE PHLPPNE
SLANDS.
(Sgd) OTTO VORSTER,
Vice-President.
Machetti constructed the building under the supervision of architects
representing the Hospicio de San Jose and, as the work progressed,
payments were made to him from time to time upon the recommendation
of the architects, until the entire contract price, with the exception of the
sum of the P4,978.08, was paid. Subsequently it was found that the work
had not been carried out in accordance with the specifications which
formed part of the contract and that the workmanship was not of the
standard required, and the Hospicio de San Jose therefore answered the
complaint and presented a counterclaim for damages for the partial
noncompliance with the terms of the agreement abovementioned, in the
total sum of P71,350. After issue was thus joined, Machetti, on petition of
his creditors, was, on February 27, 1918, declared insolvent and on March
4, 1918, an order was entered suspending the proceeding in the present
case in accordance with section 60 of the nsolvency Law, Act No. 1956.
The Hospicio de San Jose on January 29, 1919, filed a motion asking that
the Fidelity and Surety Company be made cross-defendant to the
exclusion of Machetti and that the proceedings be continued as to said
company, but still remain suspended as to Machetti. This motion was
granted and on February 7, 1920, the Hospicio filed a complaint against
the Fidelity and Surety Company asking for a judgement for P12,800
against the company upon its guaranty. After trial, the Court of First
nstance rendered judgment against the Fidelity and Surety Company for
P12,800 in accordance with the complaint. The case is now before this
court upon appeal by the Fidelity and Surety Company form said
judgment.
As will be seen, the original action which Machetti was the plaintiff and the
Hospicio de San Jose defendant, has been converted into an action in
which the Hospicio de San Jose is plaintiff and the Fidelity and Surety
Company, the original plaintiff's guarantor, is the defendant, Machetti
having been practically eliminated from the case.
But in this instance the guarantor's case is even stronger than that of an
ordinary surety. The contract of guaranty is written in the English language
and the terms employed must of course be given the signification which
ordinarily attaches to them in that language. n English the term
"guarantor" implies an undertaking of guaranty, as distinguished from
suretyship. t is very true that notwithstanding the use of the words
"guarantee" or "guaranty" circumstances may be shown which convert the
contract into one of suretyship but such circumstances do not exist in the
present case; on the contrary it appear affirmatively that the contract is the
guarantor's separate undertaking in which the principal does not join, that
its rests on a separate consideration moving from the principal and that
although it is written in continuation of the contract for the construction of
the building, it is a collateral undertaking separate and distinct from the
latter. All of these circumstances are distinguishing features of contracts of
guaranty.
Now, while a surety undertakes to pay if the principal does not pay, the
guarantor only binds himself to pay if the principal cannot pay. The one is
the insurer of the debt, the other an insurer of the solvency of the debtor.
(Saint vs. Wheeler & Wilson Mfg. Co., 95 Ala., 362; Campbell, vs.
Sherman, 151 Pa. St., 70; Castellvi de Higgins and Higgins vs. Sellner, 41
Phil., 142; ;U.S. vs. Varadero de la Quinta, 40 Phil., 48.) This latter liability
is what the Fidelity and Surety Company assumed in the present case.
The undertaking is perhaps not exactly that of a fianza under the Civil
Code, but is a perfectly valid contract and must be given the legal effect if
ordinarily carries. The Fidelity and Surety Company having bound itself to
pay only the event its principal, Machetti, cannot pay it follows that it
cannot be compelled to pay until it is shown that Machetti is unable to pay.
Such ability may be proven by the return of a writ of execution unsatisfied
or by other means, but is not sufficiently established by the mere fact that
he has been declared insolvent in insolvency proceedings under our
statutes, in which the extent of the insolvent's inability to pay is not
determined until the final liquidation of his estate.
Credit Transactions Full Text Cases Atty. Adviento!!!!&)
The judgment appealed from is therefore reversed without costs and
without prejudice to such right of action as the cross-complainant, the
Hospicio de San Jose, may have after exhausting its remedy against the
plaintiff Machetti. So ordered.
EN BANC
G.R. No. L-158025 November 5, 1920
CARMEN CASTELLVI DE HIGGINS and HORACE L. HIGGINS,
plaintiffs-appellants,
vs.
GEORGE C. SELLNER, defendant-appellee.
Wolfson, Wolfson and Schwarzkopf for appellants.
William and Ferrier for appellee.

MALCOLM, J.:
This is an action brought by plaintiffs to recover from defendant the
sum of P10,000. The brief decision of the trial court held that the suit was
premature, and absolved the defendant from the complaint, with the costs
against the plaintiffs.
The basis of plaintiff's action is a letter written by defendant George
C. Sellner to John T. Macleod, agent for Mrs. Horace L. Higgins, on May
31, 1915, of the following tenor:lawph!l.net
DEAR SR: hereby obligate and bind myself, my heirs,
successors and assigns that if the promissory note executed the
29th day of May, 1915 by the Keystone Mining Co., W.H. Clarke,
and John Maye, jointly and severally, in your favor and due six
months after date for Pesos 10,000 is not fully paid at maturity
with interest, will, within fifteen days after notice of such
default, pay you in cash the sum of P10,000 and interest upon
your surrendering to me the three thousand shares of stock of
the Keystone Mining Co. held by you as security for the
payment of said note.
Respectfully,
(Sgd.) GEO. C. SELLNER.
Counsel for both parties agree that the only point at issue is the
determination of defendant's status in the transaction referred to. Plaintiffs
contend that he is a surety; defendant contends that he is a guarantor.
Plaintiffs also admit that if defendant is a guarantor, articles 1830, 1831,
and 1834 of the Civil Code govern.
n the original Spanish of the Civil Code now in force in the
Philippine slands, Title XV of Book V is entitled "De la Fianza." The
Spanish word "fianza" is translated in the Washington and Walton editions
of the Civil Code as "security." "Fianza" appears in the Fisher translation
as "suretyship." The Spanish world "fiador" is found in all of the English
translations of the Civil Code as "surety." The law of guaranty is not related
of by that name in the Civil Code, although indirect reference to the same
is made in the Code of Commerce. n terminology at least, no distinction is
made in the Civil Code between the obligation of a surety and that of a
guarantor.
As has been done in the State of Louisiana, where, like in the
Philippines, the substantive law has a civil law origin, we feel free to
supplement the statutory law by a reference to the precepts of the law
merchant.
The points of difference between a surety and a guarantor are
familiar to American authorities. A surety and a guarantor are alike in that
each promises to answer for the debt or default of another. A surety and a
guarantor are unlike in that the surety assumes liability as a regular party
to the undertaking, while the liability as a regular party to upon an
independent agreement to pay the obligation if the primary pay or fails to
do so. A surety is charged as an original promissory; the engagement of
the guarantor is a collateral undertaking. The obligation of the surety is
primary; the obligation of the guarantor is secondary. (See U.S. vs.
Varadero de la Quinta [1919], 40 Phil., 48; Lachman vs. Block [1894], 46
La. Ann., 649; Bedford vs. Kelley [1913], 173 Mich., 492; Brandt, on
Suretyship and Guaranty, sec. 1, cited approvingly by many authorities.)
Turning back again to our Civil Code, we first note that according to
article 1822 "By fianza (security or suretyship) one person binds himself to
pay or perform for a third person in case the latter should fail to do so." But
"f the surety binds himself in solidum with the principal debtor, the
provisions of Section fourth, Chapter third, Title first, shall be applicable."
What the first portion of the cited article provides is, consequently, seen to
be somewhat akin to the contract of guaranty, while what is last provided is
practically equivalent to the contract of suretyship. When in subsequent
articles found in section 1 of Chapter of the title concerning fianza, the
Code speaks of the effects of suretyship between surety and creditor, it
has, in comparison with the common law, the effect of guaranty between
guarantor and creditor. The civil law suretyship is, accordingly, nearly
synonymous with the common law guaranty; and the civil law relationship
existing between codebtors liable in solidum is similar to the common law
suretyship.
t is perfectly clear that the obligation assumed by defendant was
simply that of a guarantor, or, to be more precise, of the fiador whose
responsibility is fixed in the Civil Code. The letter of Mr. Sellner recites that
if the promissory note is not paid at maturity, then, within fifteen days after
notice of such default and upon surrender to him of the three thousand
shares of Keystone Mining Company stock, he will assume responsibility.
Sellner is not bound with the principals by the same instrument executed
at the same time and on the same consideration, but his responsibility is a
secondary one found in an independent collateral agreement, Neither is
Sellner jointly and severally liable with the principal debtors.
With particular reference, therefore, to appellants assignments of
error, we hold that defendant Sellner is a guarantor within the meaning of
the provisions of the Civil Code.
There is also an equitable aspect to the case which reenforces this
conclusion. The note executed by the Keystone Mining Company matured
on November 29, 1915. nterest on the note was not accepted by the
makers until September 30, 1916. When the note became due, it is
admitted that the shares of stock used as collateral security were selling at
par; that is, they were worth pesos 30,000. Notice that the note had not
been paid was not given to and when the Keyston Mining Company stock
was worthless. Defendant, consequently, through the laches of plaintiff,
has lost possible chance to recoup, through the sale of the stock, any
amount which he might be compelled to pay as a surety or guarantor. The
"indulgence," as this word is used in the law of guaranty, of the creditors of
the principal, as evidenced by the acceptance of interest, and by failure
promptly to notify the guarantor, may thus have served to discharge the
guarantor.
For quite different reasons, which, nevertheless, arrive at the same
result, judgment is affirmed, with costs of this instance against the
appellants. So ordered.
SECOND DVSON

G.R. No. L-29139 November 15, 1974
CONSUELO P. PICZON, RUBEN O. PICZON and AIDA P. ALCANTARA,
plaintiffs-appellants,
vs.
ESTEBAN PICZON and SOSING-LOBOS & CO., INC., defendants-
appellees.
Vicente C. Santos for plaintiffs-appellants.
Credit Transactions Full Text Cases Atty. Adviento!!!!&*
Jacinto R. Bohol for defendant-appellee Sosing-Lobos & Co., Inc.
Vicente M. Macabidang for defendant-appellee Esteban Piczon.

BARREDO, J.:p
Appeal from the decision of the Court of First nstance of Samar in its Civil
Case No. 5156, entitled Consuelo P. Piczon, et al. vs. Esteban Piczon, et
al., sentencing defendants-appellees, Sosing Lobos and Co., nc., as
principal, and Esteban Piczon, as guarantor, to pay plaintiffs-appellants
"the sum of P12,500.00 with 12% interest from August 6, 1964 until said
principal amount of P12,500.00 shall have been duly paid, and the costs."
After issues were joined and at the end of the pre-trial held on August 22,
1967, the trial court issued the following order:
"When this case was called for pre-trial, plaintiffs and
defendants through their lawyers, appeared and
entered into the following agreement:
1. That defendants admit the due execution of
Annexes "A" and "B" of the complaint;
2. That consequently defendant Sosing-Lobos and
Co., nc. binds itself to the plaintiffs for P12,500.00,
the same to be paid on or before October 31, 1967
together with the interest that this court may
determine.
That the issues in this case are legal ones namely:
(a) Will the payment of twelve per cent interest of
P12,500.00 commence to run from August 6, 1964
when plaintiffs made the first demand or from August
29, 1956 when the obligation becomes due and
demandable?
(b) s defendant Esteban Piczon liable as a guarantor
or a surety?
That the parties are hereby required to file their
respective memorandum if they so desire on or before
September 15, 1967 to discuss the legal issues and
therewith the case will be considered submitted for
decision.
WHEREFORE, the instant case is hereby considered
submitted based on the aforesaid facts agreed upon
and upon submission of the parties of their respective
memorandum on or before September 15, 1967.
SO ORDERED.
1
(Record on Appeal pp. 28-30.)
Annex "A", the actionable document of appellants reads thus:
AGREEMENT OF LOAN
KNOW YE ALL MEN BY THESE PRESENTS:
That , ESTEBAN PCZON, of legal age, married,
Filipino, and resident of and with postal address in the
municipality of Catbalogan, Province of Samar,
Philippines, in my capacity as the President of the
corporation known as the "SOSNG-LOBOS and CO.,
NC.," as controlling stockholder, and at the same time
as guarantor for the same, do by these presents
contract a loan of Twelve Thousand Five Hundred
Pesos (P12,500.00), Philippine Currency, the receipt
of which is hereby acknowledged, from the "Piczon
and Co., nc." another corporation, the main offices of
the two corporations being in Catbalogan, Samar, for
which undertake, bind and agree to use the loan as
surety cash deposit for registration with the Securities
and Exchange Commission of the incorporation
papers relative to the "Sosing-Lobos and Co., nc.,"
and to return or pay the same amount with Twelve Per
Cent (12%) interest per annum, commencing from the
date of execution hereof, to the "Piczon and Co., nc.,
as soon as the said incorporation papers are duly
registered and the Certificate of ncorporation issued
by the aforesaid Commission.
N WTNESS WHEREOF, hereunto signed my name
in Catbalogan, Samar, Philippines, this 28th day of
September, 1956.
(Sgd.) ESTEBAN PCZON
(Record on Appeal, pp. 6-7.)
The trial court having rendered judgment in the tenor aforequoted,
appellants assign the following alleged errors:

THE TRAL COURT ERRED N ORDERNG THE

PAYMENT OF 12% NTEREST ON THE PRNCPAL
OF P12,500.00 FROM AUGUST 6, 1964, ONLY,
NSTEAD OF FROM SEPTEMBER 28, 1956, WHEN
ANNEX "A" WAS DULY EXECUTED.

THE TRAL COURT ERRED N CONSDERNG

DEFENDANT ESTEBAN PCZON AS GUARANTOR
ONLY AND NOT AS SURETY.

THE TRAL COURT ERRED N NOT ADJUDCATNG

DAMAGES N FAVOR OF THE PLANTFFS-
APPELLANTS. (Appellants' Brief, pp. a to b.)
Appellants' first assignment of error is well taken. nstead of requiring
appellees to pay interest at 12% only from August 6, 1964, the trial court
should have adhered to the terms of the agreement which plainly provides
that Esteban Piczon had obligated Sosing-Lobos and Co., nc. and himself
to "return or pay (to Piczon and Co., nc.) the same amount (P12,500.00)
with Twelve Per Cent (12%) interest per annum commencing from the date
of the execution hereof", Annex A, which was on September 28, 1956.
Under Article 2209 of the Civil Code "(i)f the obligation consists in the
payment of a sum of money, and the debtor incurs in delay, the indemnity
for damages, there being no stipulation to the contrary, shall be the
payment of the interest agreed upon, and in the absence of stipulation, the
legal interest, which is six per cent per annum." n the case at bar, the
"interest agreed upon" by the parties in Annex A was to commence from
the execution of said document.
Appellees' contention that the reference in Article 2209 to delay incurred
by the debtor which can serve as the basis for liability for interest is to that
defined in Article 1169 of the Civil Code reading thus:
Those obliged to deliver or to do something incur in
delay from the time the obligee judicially or
extrajudicially demands from them the fulfillment of
their obligation.
Credit Transactions Full Text Cases Atty. Adviento!!!!'+
However, the demand by the creditor shall not be
necessary in order that delay may exist:
(1) When the obligation or the law expressly so
declares; or
(2) When from the nature and the circumstances of
the obligation it appears that the designation of the
time when the thing is to be delivered or the service is
to be rendered was a controlling motive for the
establishment of the contract; or
(3) When demand would be useless, as when the
obligor has rendered it beyond his power to perform.
n reciprocal obligations, neither party incurs in delay if
the other does not comply or is not ready to comply in
a proper manner with what is incumbent upon him.
From the moment one of the parties fulfills his
obligation, delay by the other begins.
is untenable. In Quiroz vs. Tan Guinlay, 5 Phil. 675, it was held that the
article cited by appellees (which was Article 1100 of the Old Civil Code
read in relation to Art. 1101) is applicable only when the obligation is to do
something other than the payment of money. And in Firestone Tire &
Rubber Co. (P.I.) vs. Delgado, 104 Phil. 920, the Court squarely ruled that
if the contract stipulates from what time interest will be counted, said
stipulated time controls, and, therefore interest is payable from such time,
and not from the date of the filing of the complaint (at p. 925). Were that
not the law, there would be no basis for the provision of Article 2212 of the
Civil Code providing that "()nterest due shall earn legal interest from the
time it is judicially demanded, although the obligation may be silent upon
this point." ncidentally, appellants would have been entitled to the benefit
of this article, had they not failed to plead the same in their complaint.
Their prayer for it in their brief is much too late. Appellees had no
opportunity to meet the issue squarely at the pre-trial.
As regards the other two assignments of error, appellants' pose cannot be
sustained. Under the terms of the contract, Annex A, Esteban Piczon
expressly bound himself only as guarantor, and there are no
circumstances in the record from which it can be deduced that his liability
could be that of a surety. A guaranty must be express, (Article 2055, Civil
Code) and it would be violative of the law to consider a party to be bound
as a surety when the very word used in the agreement is "guarantor."
Moreover, as well pointed out in appellees' brief, under the terms of the
pre-trial order, appellants accepted the express assumption of liability by
Sosing-Lobos & Co., nc. for the payment of the obligation in question,
thereby modifying their original posture that inasmuch as that corporation
did not exist yet at the time of the agreement, Piczon necessarily must
have bound himself as insurer.
As already explained earlier, appellants' prayer for payment of legal
interest upon interest due from the filing of the complaint can no longer be
entertained, the same not having been made an issue in the pleadings in
the court below. We do not believe that such a substantial matter can be
deemed included in a general prayer for "any other relief just and equitable
in the premises", especially when, as in this case, the pre-trial order does
not mention it in the enumeration of the issues to be resolved by the court.
PREMSES CONSDERED, the judgment of the trial court is modified so
as to make appellees liable for the stipulated interest of 12% per annum
from September 28, 1956, instead of August 6, 1964. n all other respects,
said judgment is affirmed. Costs against appellees.
SECOND DVSON

G.R. No. 126490 March 31, 1998
ESTRELLA PALMARES, petitioner,
vs.
COURT OF APPEALS and M.B. LENDING CORPORATION,
respondents.

REGALADO, J.:
Where a party signs a promissory note as a co-maker and binds herself to
be jointly and severally liable with the principal debtor in case the latter
defaults in the payment of the loan, is such undertaking of the former
deemed to be that of a surety as an insurer of the debt, or of a guarantor
who warrants the solvency of the debtor?
Pursuant to a promissory note dated March 13, 1990, private respondent
M.B. Lending Corporation extended a loan to the spouses Osmea and
Merlyn Azarraga, together with petitioner Estrella Palmares, in the amount
of P30,000.00 payable on or before May 12, 1990, with compounded
interest at the rate of 6% per annum to be computed every 30 days from
the date thereof.
1
On four occasions after the execution of the promissory
note and even after the loan matured, petitioner and the Azarraga spouses
were able to pay a total of P16,300.00, thereby leaving a balance of
P13,700.00. No payments were made after the last payment on
September 26, 1991.
2
Consequently, on the basis of petitioner's solidary liability under the
promissory note, respondent corporation filed a complaint
3
against
petitioner Palmares as the lone party-defendant, to the exclusion of the
principal debtors, allegedly by reason of the insolvency of the latter.
n her Amended Answer with Counterclaim,
4
petitioner alleged that
sometime in August 1990, immediately after the loan matured, she offered
to settle the obligation with respondent corporation but the latter informed
her that they would try to collect from the spouses Azarraga and that she
need not worry about it; that there has already been a partial payment in
the amount of P17,010.00; that the interest of 6% per month compounded
at the same rate per month, as well as the penalty charges of 3% per
month, are usurious and unconscionable; and that while she agrees to be
liable on the note but only upon default of the principal debtor, respondent
corporation acted in bad faith in suing her alone without including the
Azarragas when they were the only ones who benefited from the proceeds
of the loan.
During the pre-trial conference, the parties submitted the following issues
for the resolution of the trial court: (1) what the rate of interest, penalty and
damages should be; (2) whether the liability of the defendant (herein
petitioner) is primary or subsidiary; and (3) whether the defendant Estrella
Palmares is only a guarantor with a subsidiary liability and not a co-maker
with primary liability.
5
Thereafter, the parties agreed to submit the case for decision based on the
pleadings filed and the memoranda to be submitted by them. On
November 26, 1992, the Regional Trial Court of loilo City, Branch 23,
rendered judgment dismissing the complaint without prejudice to the filing
of a separate action for a sum of money against the spouses Osmea and
Merlyn Azarraga who are primarily liable on the instrument.
6
This was
based on the findings of the court a quo that the filing of the complaint
against herein petitioner Estrella Palmares, to the exclusion of the
Azarraga spouses, amounted to a discharge of a prior party; that the offer
made by petitioner to pay the obligation is considered a valid tender of
payment sufficient to discharge a person's secondary liability on the
instrument; as co-maker, is only secondarily liable on the instrument; and
that the promissory note is a contract of adhesion.
Respondent Court of Appeals, however, reversed the decision of the trial
court, and rendered judgment declaring herein petitioner Palmares liable
to pay respondent corporation:
1. The sum of P13,700.00 representing the outstanding balance
still due and owing with interest at six percent (6%) per month
computed from the date the loan was contracted until fully paid;
Credit Transactions Full Text Cases Atty. Adviento!!!!'"
2. The sum equivalent to the stipulated penalty of three percent
(3%) per month, of the outstanding balance;
3. Attorney's fees at 25% of the total amount due per
stipulations;
4. Plus costs of suit.
7
Contrary to the findings of the trial court, respondent appellate court
declared that petitioner Palmares is a surety since she bound herself to be
jointly and severally or solidarily liable with the principal debtors, the
Azarraga spouses, when she signed as a co-maker. As such, petitioner is
primarily liable on the note and hence may be sued by the creditor
corporation for the entire obligation. t also adverted to the fact that
petitioner admitted her liability in her Answer although she claims that the
Azarraga spouses should have been impleaded. Respondent court
ordered the imposition of the stipulated 6% interest and 3% penalty
charges on the ground that the Usury Law is no longer enforceable
pursuant to Central Bank Circular No. 905. Finally, it rationalized that even
if the promissory note were to be considered as a contract of adhesion,
the same is not entirely prohibited because the one who adheres to the
contract is free to reject it entirely; if he adheres, he gives his consent.
Hence this petition for review on certiorari wherein it is asserted that:
A. The Court of Appeals erred in ruling that Palmares acted as
surety and is therefore solidarily liable to pay the promissory
note.
1. The terms of the promissory note are vague. ts conflicting
provisions do not establish Palmares' solidary liability.
2. The promissory note contains provisions which establish the
co-maker's liability as that of a guarantor.
3. There is no sufficient basis for concluding that Palmares'
liability is solidary.
4. The promissory note is a contract of adhesion and should be
construed against M. B. Lending Corporation.
5. Palmares cannot be compelled to pay the loan at this point.
B. Assuming that Palmares' liability is solidary, the Court of
Appeals erred in strictly imposing the interests and penalty
charges on the outstanding balance of the promissory note.
The foregoing contentions of petitioner are denied and contradicted in their
material points by respondent corporation. They are further refuted by
accepted doctrines in the American jurisdiction after which we patterned
our statutory law on surety and guaranty. This case then affords us the
opportunity to make an extended exposition on the ramifications of these
two specialized contracts, for such guidance as may be taken therefrom in
similar local controversies in the future.
The basis of petitioner Palmares' liability under the promissory note is
expressed in this wise:
ATTENTION TO CO-MAKERS: PLEASE READ WELL
, Mrs. Estrella Palmares, as the Co-maker of the above-quoted
loan, have fully understood the contents of this Promissory Note
for Short-Term Loan:
That as Co-maker, am fully aware that shall be jointly and
severally or solidarily liable with the above principal maker of
this note;
That in fact, hereby agree that M.B. LENDNG
CORPORATON may demand payment of the above loan from
me in case the principal maker, Mrs. Merlyn Azarraga defaults in
the payment of the note subject to the same conditions above-
contained.
8
Petitioner contends that the provisions of the second and third paragraph
are conflicting in that while the second paragraph seems to define her
liability as that of a surety which is joint and solidary with the principal
maker, on the other hand, under the third paragraph her liability is actually
that of a mere guarantor because she bound herself to fulfill the obligation
only in case the principal debtor should fail to do so, which is the essence
of a contract of guaranty. More simply stated, although the second
paragraph says that she is liable as a surety, the third paragraph defines
the nature of her liability as that of a guarantor. According to petitioner,
these are two conflicting provisions in the promissory note and the rule is
that clauses in the contract should be interpreted in relation to one another
and not by parts. n other words, the second paragraph should not be
taken in isolation, but should be read in relation to the third paragraph.
n an attempt to reconcile the supposed conflict between the two
provisions, petitioner avers that she could be held liable only as a
guarantor for several reasons. First, the words "jointly and severally or
solidarily liable" used in the second paragraph are technical and legal
terms which are not fully appreciated by an ordinary layman like herein
petitioner, a 65-year old housewife who is likely to enter into such
transactions without fully realizing the nature and extent of her liability. On
the contrary, the wordings used in the third paragraph are easier to
comprehend. Second, the law looks upon the contract of suretyship with a
jealous eye and the rule is that the obligation of the surety cannot be
extended by implication beyond specified limits, taking into consideration
the peculiar nature of a surety agreement which holds the surety liable
despite the absence of any direct consideration received from either the
principal obligor or the creditor. Third, the promissory note is a contract of
adhesion since it was prepared by respondent M.B. Lending Corporation.
The note was brought to petitioner partially filled up, the contents thereof
were never explained to her, and her only participation was to sign
thereon. Thus, any apparent ambiguity in the contract should be strictly
construed against private respondent pursuant to Art. 1377 of the Civil
Code.
9
Petitioner accordingly concludes that her liability should be deemed
restricted by the clause in the third paragraph of the promissory note to be
that of a guarantor.
Moreover, petitioner submits that she cannot as yet be compelled to pay
the loan because the principal debtors cannot be considered in default in
the absence of a judicial or extrajudicial demand. t is true that the
complaint alleges the fact of demand, but the purported demand letters
were never attached to the pleadings filed by private respondent before
the trial court. And, while petitioner may have admitted in her Amended
Answer that she received a demand letter from respondent corporation
sometime in 1990, the same did not effectively put her or the principal
debtors in default for the simple reason that the latter subsequently made
a partial payment on the loan in September, 1991, a fact which was never
controverted by herein private respondent.
Finally, it is argued that the Court of Appeals gravely erred in awarding the
amount of P2,745,483.39 in favor of private respondent when, in truth and
in fact, the outstanding balance of the loan is only P13,700.00. Where the
interest charged on the loan is exorbitant, iniquitous or unconscionable,
and the obligation has been partially complied with, the court may
equitably reduce the penalty
10
on grounds of substantial justice. More
importantly, respondent corporation never refuted petitioner's allegation
that immediately after the loan matured, she informed said respondent of
her desire to settle the obligation. The court should, therefore, mitigate the
damages to be paid since petitioner has shown a sincere desire for a
compromise.
11
After a judicious evaluation of the arguments of the parties, we are
constrained to dismiss the petition for lack of merit, but to except therefrom
the issue anent the propriety of the monetary award adjudged to herein
respondent corporation.
Credit Transactions Full Text Cases Atty. Adviento!!!!'#
At the outset, let it here be stressed that even assuming arguendo that the
promissory note executed between the parties is a contract of adhesion, it
has been the consistent holding of the Court that contracts of adhesion are
not invalid per se and that on numerous occasions the binding effects
thereof have been upheld. The peculiar nature of such contracts
necessitate a close scrutiny of the factual milieu to which the provisions
are intended to apply. Hence, just as consistently and unhesitatingly, but
without categorically invalidating such contracts, the Court has construed
obscurities and ambiguities in the restrictive provisions of contracts of
adhesion strictly albeit not unreasonably against the drafter thereof when
justified in light of the operative facts and surrounding circumstances.
12
The factual scenario obtaining in the case before us warrants a liberal
application of the rule in favor of respondent corporation.
The Civil Code pertinently provides:
Art. 2047. By guaranty, a person called the guarantor binds
himself to the creditor to fulfill the obligation of the principal
debtor in case the latter should fail to do so.
f a person binds himself solidarily with the principal debtor, the
provisions of Section 4, Chapter 3, Title of this Book shall be
observed. n such case the contract is called a suretyship.
t is a cardinal rule in the interpretation of contracts that if the terms of a
contract are clear and leave no doubt upon the intention of the contracting
parties, the literal meaning of its stipulation shall control.
13
n the case at
bar, petitioner expressly bound herself to be jointly and severally or
solidarily liable with the principal maker of the note. The terms of the
contract are clear, explicit and unequivocal that petitioner's liability is that
of a surety.
Her pretension that the terms "jointly and severally or solidarily liable"
contained in the second paragraph of her contract are technical and legal
terms which could not be easily understood by an ordinary layman like her
is diametrically opposed to her manifestation in the contract that she "fully
understood the contents" of the promissory note and that she is "fully
aware" of her solidary liability with the principal maker. Petitioner admits
that she voluntarily affixed her signature thereto; ergo, she cannot now be
heard to claim otherwise. Any reference to the existence of fraud is
unavailing. Fraud must be established by clear and convincing evidence,
mere preponderance of evidence not even being adequate. Petitioner's
attempt to prove fraud must, therefore, fail as it was evidenced only by her
own uncorroborated and, expectedly, self-serving allegations.
14
Having entered into the contract with full knowledge of its terms and
conditions, petitioner is estopped to assert that she did so under a
misapprehension or in ignorance of their legal effect, or as to the legal
effect of the undertaking.
15
The rule that ignorance of the contents of an
instrument does not ordinarily affect the liability of one who signs it also
applies to contracts of suretyship. And the mistake of a surety as to the
legal effect of her obligation is ordinarily no reason for relieving her of
liability.
16
Petitioner would like to make capital of the fact that although she obligated
herself to be jointly and severally liable with the principal maker, her
liability is deemed restricted by the provisions of the third paragraph of her
contract wherein she agreed "that M.B. Lending Corporation may demand
payment of the above loan from me in case the principal maker, Mrs.
Merlyn Azarraga defaults in the payment of the note," which makes her
contract one of guaranty and not suretyship. The purported discordance is
more apparent than real.
A surety is an insurer of the debt, whereas a guarantor is an insurer of the
solvency of the debtor.
17
A suretyship is an undertaking that the debt shall
be paid; a guaranty, an undertaking that the debtor shall pay.
18
Stated
differently, a surety promises to pay the principal's debt if the principal will
not pay, while a guarantor agrees that the creditor, after proceeding
against the principal, may proceed against the guarantor if the principal is
unable to pay.
19
A surety binds himself to perform if the principal does not,
without regard to his ability to do so. A guarantor, on the other hand, does
not contract that the principal will pay, but simply that he is able to do so.
20
n other words, a surety undertakes directly for the payment and is so
responsible at once if the principal debtor makes default, while a guarantor
contracts to pay if, by the use of due diligence, the debt cannot be made
out of the principal debtor.
21
Quintessentially, the undertaking to pay upon default of the principal
debtor does not automatically remove it from the ambit of a contract of
suretyship. The second and third paragraphs of the aforequoted portion of
the promissory note do not contain any other condition for the enforcement
of respondent corporation's right against petitioner. t has not been shown,
either in the contract or the pleadings, that respondent corporation agreed
to proceed against herein petitioner only if and when the defaulting
principal has become insolvent. A contract of suretyship, to repeat, is that
wherein one lends his credit by joining in the principal debtor's obligation,
so as to render himself directly and primarily responsible with him, and
without reference to the solvency of the principal.
22
n a desperate effort to exonerate herself from liability, petitioner
erroneously invokes the rule on strictissimi juris, which holds that when the
meaning of a contract of indemnity or guaranty has once been judicially
determined under the rule of reasonable construction applicable to all
written contracts, then the liability of the surety, under his contract, as thus
interpreted and construed, is not to be extended beyond its strict meaning.
23
The rule, however, will apply only after it has been definitely ascertained
that the contract is one of suretyship and not a contract of guaranty. t
cannot be used as an aid in determining whether a party's undertaking is
that of a surety or a guarantor.
Prescinding from these jurisprudential authorities, there can be no doubt
that the stipulation contained in the third paragraph of the controverted
suretyship contract merely elucidated on and made more specific the
obligation of petitioner as generally defined in the second paragraph
thereof. Resultantly, the theory advanced by petitioner, that she is merely a
guarantor because her liability attaches only upon default of the principal
debtor, must necessarily fail for being incongruent with the judicial
pronouncements adverted to above.
t is a well-entrenched rule that in order to judge the intention of the
contracting parties, their contemporaneous and subsequent acts shall also
be principally considered.
24
Several attendant factors in that genre lend
support to our finding that petitioner is a surety. For one, when petitioner
was informed about the failure of the principal debtor to pay the loan, she
immediately offered to settle the account with respondent corporation.
Obviously, in her mind, she knew that she was directly and primarily liable
upon default of her principal. For another, and this is most revealing,
petitioner presented the receipts of the payments already made, from the
time of initial payment up to the last, which were all issued in her name
and of the Azarraga spouses.
25
This can only be construed to mean that
the payments made by the principal debtors were considered by
respondent corporation as creditable directly upon the account and inuring
to the benefit of petitioner. The concomitant and simultaneous compliance
of petitioner's obligation with that of her principals only goes to show that,
from the very start, petitioner considered herself equally bound by the
contract of the principal makers.
n this regard, we need only to reiterate the rule that a surety is bound
equally and absolutely with the principal,
26
and as such is deemed an
original promisor and debtor from the beginning.
27
This is because in
suretyship there is but one contract, and the surety is bound by the same
agreement which binds the principal.
28
n essence, the contract of a surety
starts with the agreement,
29
which is precisely the situation obtaining in
this case before the Court.
t will further be observed that petitioner's undertaking as co-maker
immediately follows the terms and conditions stipulated between
respondent corporation, as creditor, and the principal obligors. A surety is
usually bound with his principal by the same instrument, executed at the
same time and upon the same consideration; he is an original debtor, and
his liability is immediate and direct.
30
Thus, it has been held that where a
written agreement on the same sheet of paper with and immediately
following the principal contract between the buyer and seller is executed
simultaneously therewith, providing that the signers of the agreement
agreed to the terms of the principal contract, the signers were "sureties"
jointly liable with the buyer.
31
A surety usually enters into the same
obligation as that of his principal, and the signatures of both usually
appear upon the same instrument, and the same consideration usually
supports the obligation for both the principal and the surety.
32
Credit Transactions Full Text Cases Atty. Adviento!!!!'$
There is no merit in petitioner's contention that the complaint was
prematurely filed because the principal debtors cannot as yet be
considered in default, there having been no judicial or extrajudicial
demand made by respondent corporation. Petitioner has agreed that
respondent corporation may demand payment of the loan from her in case
the principal maker defaults, subject to the same conditions expressed in
the promissory note. Significantly, paragraph (G) of the note states that
"should fail to pay in accordance with the above schedule of payment,
hereby waive my right to notice and demand." Hence, demand by the
creditor is no longer necessary in order that delay may exist since the
contract itself already expressly so declares.
33
As a surety, petitioner is
equally bound by such waiver.
Even if it were otherwise, demand on the sureties is not necessary before
bringing suit against them, since the commencement of the suit is a
sufficient demand.
34
On this point, it may be worth mentioning that a
surety is not even entitled, as a matter of right, to be given notice of the
principal's default. nasmuch as the creditor owes no duty of active
diligence to take care of the interest of the surety, his mere failure to
voluntarily give information to the surety of the default of the principal
cannot have the effect of discharging the surety. The surety is bound to
take notice of the principal's default and to perform the obligation. He
cannot complain that the creditor has not notified
him in the absence of a special agreement to that effect in the contract of
suretyship.
35
The alleged failure of respondent corporation to prove the fact of demand
on the principal debtors, by not attaching copies thereof to its pleadings, is
likewise immaterial. n the absence of a statutory or contractual
requirement, it is not necessary that payment or performance of his
obligation be first demanded of the principal, especially where demand
would have been useless; nor is it a requisite, before proceeding against
the sureties, that the principal be called on to account.
36
The underlying
principle therefor is that a suretyship is a direct contract to pay the debt of
another. A surety is liable as much as his principal is liable, and absolutely
liable as soon as default is made, without any demand upon the principal
whatsoever or any notice of default.
37
As an original promisor and debtor
from the beginning, he is held ordinarily to know every default of his
principal.
38
Petitioner questions the propriety of the filing of a complaint solely against
her to the exclusion of the principal debtors who allegedly were the only
ones who benefited from the proceeds of the loan. What petitioner is trying
to imply is that the creditor, herein respondent corporation, should have
proceeded first against the principal before suing on her obligation as
surety. We disagree.
A creditor's right to proceed against the surety exists independently of his
right to proceed against the principal.
39
Under Article 1216 of the Civil
Code, the creditor may proceed against any one of the solidary debtors or
some or all of them simultaneously. The rule, therefore, is that if the
obligation is joint and several, the creditor has the right to proceed even
against the surety alone.
40
Since, generally, it is not necessary for the
creditor to proceed against a principal in order to hold the surety liable,
where, by the terms of the contract, the obligation of the surety is the
same that of the principal, then soon as the principal is in default, the
surety is likewise in default, and may be sued immediately and before any
proceedings are had against the principal.
41
Perforce, in accordance with
the rule that, in the absence of statute or agreement otherwise, a surety is
primarily liable, and with the rule that his proper remedy is to pay the debt
and pursue the principal for reimbursement, the surety cannot at law,
unless permitted by statute and in the absence of any agreement limiting
the application of the security, require the creditor or obligee, before
proceeding against the surety, to resort to and exhaust his remedies
against the principal, particularly where both principal and surety are
equally bound.
42
We agree with respondent corporation that its mere failure to immediately
sue petitioner on her obligation does not release her from liability. Where a
creditor refrains from proceeding against the principal, the surety is not
exonerated. n other words, mere want of diligence or forbearance does
not affect the creditor's rights vis-a-vis the surety, unless the surety
requires him by appropriate notice to sue on the obligation. Such
gratuitous indulgence of the principal does not discharge the surety
whether given at the principal's request or without it, and whether it is
yielded by the creditor through sympathy or from an inclination to favor the
principal, or is only the result of passiveness. The neglect of the creditor to
sue the principal at the time the debt falls due does not discharge the
surety, even if such delay continues until the principal becomes insolvent.
43
And, in the absence of proof of resultant injury, a surety is not
discharged by the creditor's mere statement that the creditor will not look
to the surety,
44
or that he need not trouble himself.
45
The consequences of
the delay, such as the subsequent insolvency of the principal,
46
or the fact
that the remedies against the principal may be lost by lapse of time, are
immaterial.
47
The raison d'tre for the rule is that there is nothing to prevent the creditor
from proceeding against the principal at any time.
48
At any rate, if the
surety is dissatisfied with the degree of activity displayed by the creditor in
the pursuit of his principal, he may pay the debt himself and become
subrogated to all the rights and remedies of the creditor.
49
t may not be amiss to add that leniency shown to a debtor in default, by
delay permitted by the creditor without change in the time when the debt
might be demanded, does not constitute an extension of the time of
payment, which would release the surety.
50
n order to constitute an
extension discharging the surety, it should appear that the extension was
for a definite period, pursuant to an enforceable agreement between the
principal and the creditor, and that it was made without the consent of the
surety or with a reservation of rights with respect to him. The contract must
be one which precludes the creditor from, or at least hinders him in,
enforcing the principal contract within the period during which he could
otherwise have enforced it, and which precludes the surety from paying
the debt.
51
None of these elements are present in the instant case. Verily, the mere
fact that respondent corporation gave the principal debtors an extended
period of time within which to comply with their obligation did not
effectively absolve here in petitioner from the consequences of her
undertaking. Besides, the burden is on the surety, herein petitioner, to
show that she has been discharged by some act of the creditor,
52
herein
respondent corporation, failing in which we cannot grant the relief prayed
for.
As a final issue, petitioner claims that assuming that her liability is solidary,
the interests and penalty charges on the outstanding balance of the loan
cannot be imposed for being illegal and unconscionable. Petitioner
additionally theorizes that respondent corporation intentionally delayed the
collection of the loan in order that the interests and penalty charges would
accumulate. The statement, likewise traversed by said respondent, is
misleading.
n an affidavit
53
executed by petitioner, which was attached to her petition,
she stated, among others, that:
8. During the latter part of 1990, was surprised to learn that
Merlyn Azarraga's loan has been released and that she has not
paid the same upon its maturity. received a telephone call from
Mr. Augusto Banusing of MB Lending informing me of this fact
and of my liability arising from the promissory note which
signed.
9. requested Mr. Banusing to try to collect first from Merlyn and
Osmea Azarraga. At the same time, offered to pay MB
Lending the outstanding balance of the principal obligation
should he fail to collect from Merlyn and Osmea Azarraga. Mr.
Banusing advised me not to worry because he will try to collect
first from Merlyn and Osmea Azarraga.
10. A year thereafter, received a telephone call from the
secretary of Mr. Banusing who reminded that the loan of Merlyn
and Osmea Azarraga, together with interest and penalties
thereon, has not been paid. Since had no available funds at
that time, offered to pay MB Lending by delivering to them a
parcel of land which own. Mr. Banusing's secretary, however,
refused my offer for the reason that they are not interested in
real estate.
Credit Transactions Full Text Cases Atty. Adviento!!!!'%
11. n March 1992, received a copy of the summons and of the
complaint filed against me by MB Lending before the RTC-loilo.
After learning that a complaint was filed against me, instructed
Sheila Gatia to go to MB Lending and reiterate my first offer to
pay the outstanding balance of the principal obligation of Merlyn
Azarraga in the amount of P30,000.00.
12. Ms. Gatia talked to the secretary of Mr. Banusing who
referred her to Atty. Venus, counsel of MB Lending.
13. Atty. Venus informed Ms. Gatia that he will consult Mr.
Banusing if my offer to pay the outstanding balance of the
principal obligation loan (sic) of Merlyn and Osmea Azarraga is
acceptable. Later, Atty. Venus informed Ms. Gatia that my offer
is not acceptable to Mr. Banusing.
The purported offer to pay made by petitioner can not be deemed
sufficient and substantial in order to effectively discharge her from liability.
There are a number of circumstances which conjointly inveigh against her
aforesaid theory.
1. Respondent corporation cannot be faulted for not immediately
demanding payment from petitioner. t was petitioner who initially
requested that the creditor try to collect from her principal first, and she
offered to pay only in case the creditor fails to collect. The delay, if any,
was occasioned by the fact that respondent corporation merely
acquiesced to the request of petitioner. At any rate, there was here no
actual offer of payment to speak of but only a commitment to pay if the
principal does not pay.
2. Petitioner made a second attempt to settle the obligation by offering a
parcel of land which she owned. Respondent corporation was acting well
within its rights when it refused to accept the offer. The debtor of a thing
cannot compel the creditor to receive a different one, although the latter
may be of the same value, or more valuable than that which is due.
54
The
obligee is entitled to demand fulfillment of the obligation or performance as
stipulated. A change of the object of the obligation would constitute
novation requiring the express consent of the parties.
55
3. After the complaint was filed against her, petitioner reiterated her offer to
pay the outstanding balance of the obligation in the amount of P30,000.00
but the same was likewise rejected. Again, respondent corporation cannot
be blamed for refusing the amount being offered because it fell way below
the amount it had computed, based on the stipulated interests and penalty
charges, as owing and due from herein petitioner. A debt shall not be
understood to have been paid unless the thing or service in which the
obligation consists has been completely delivered or rendered, as the
case may be.
56
n other words, the prestation must be fulfilled completely.
A person entering into a contract has a right to insist on its performance in
all particulars.
57
Petitioner cannot compel respondent corporation to accept the amount
she is willing to pay because the moment the latter accepts the
performance, knowing its incompleteness or irregularity, and without
expressing any protest or objection, then the obligation shall be deemed
fully complied with.
58
Precisely, this is what respondent corporation wanted
to avoid when it continually refused to settle with petitioner at less than
what was actually due under their contract.
This notwithstanding, however, we find and so hold that the penalty charge
of 3% per month and attorney's fees equivalent to 25% of the total amount
due are highly inequitable and unreasonable.
t must be remembered that from the principal loan of P30,000.00, the
amount of P16,300.00 had already been paid even before the filing of the
present case. Article 1229 of the Civil Code provides that the court shall
equitably reduce the penalty when the principal obligation has been partly
or irregularly complied with by the debtor. And, even if there has been no
performance, the penalty may also be reduced if it is iniquitous or leonine.
n a case previously decided by this Court which likewise involved private
respondent M.B. Lending Corporation, and which is substantially on all
fours with the one at bar, we decided to eliminate altogether the penalty
interest for being excessive and unwarranted under the following
rationalization:
Upon the matter of penalty interest, we agree with the Court of
Appeals that the economic impact of the penalty interest of three
percent (3 %) per month on total amount due but unpaid should
be equitably reduced. The purpose for which the penalty interest
is intended that is, to punish the obligor will have been
sufficiently served by the effects of compounded interest. Under
the exceptional circumstances in the case at bar, e.g., the
original amount loaned was only P15,000.00; partial payment of
P8,600.00 was made on due date; and the heavy (albeit still
lawful) regular compensatory interest, the penalty interest
stipulated in the parties' promissory note is iniquitous and
unconscionable and may be equitably reduced further by
eliminating such penalty interest altogether.
59
Accordingly, the penalty interest of 3% per month being imposed on
petitioner should similarly be eliminated.
Finally, with respect to the award of attorney's fees, this Court has
previously ruled that even with an agreement thereon between the parties,
the court may nevertheless reduce such attorney's fees fixed in the
contract when the amount thereof appears to be unconscionable or
unreasonable.
60
To that end, it is not even necessary to show, as in other
contracts, that it is contrary to morals or public policy.
61
The grant of
attorney's fees equivalent to 25% of the total amount due is, in our opinion,
unreasonable and immoderate, considering the minimal unpaid amount
involved and the extent of the work involved in this simple action for
collection of a sum of money. We, therefore, hold that the amount of
P10,000.00 as and for attorney's fee would be sufficient in this case.
62
WHEREFORE, the judgment appealed from is hereby AFFRMED, subject
to the MODFCATON that the penalty interest of 3% per month is hereby
deleted and the award of attorney's fees is reduced to P10,000.00.
SO ORDERED.
EN BANC
G.R. No. 34642 September 24, 1931
FABIOLA SEVERINO, accompanied by her husband RICARDO
VERGARA, plaintiffs-appellees,
vs.
GUILLERMO SEVERINO, ET AL., defendants.
ENRIQUE ECHAUS, appellant.
R. Nepomuceno for appellant.
Jacinto E. Evidente for appellees.
STREET, J.:
This action was instituted in the Court of First nstance of the Province of
loilo by Fabiola Severino, with whom is joined her husband Ricardo
Vergara, for the purpose of recovering the sum of P20,000 from Guillermo
Severino and Enrique Echaus, the latter in the character of guarantor for
the former. Upon hearing he cause the trial court gave judgment in favor of
the plaintiffs to recover the sum of P20,000 with lawful from November 15,
1929, the date of the filing of the complaint, with costs. But it was declared
that execution of this judgment should issue first against the property of
Guillermo Severino, and if no property should be found belonging to said
defendant sufficient to satisfy the judgment in whole or in part, execution
for the remainder should be issued against the property of Enrique Echaus
as guarantor. From this judgment the defendant Echaus appealed, but his
principal, Guillermo Severino, did not.
The plaintiff Fabiola Severino is the recognized natural daughter of
Melecio Severino, deceased, former resident of Occidental Negros. Upon
the death of Melecio Severino a number of years ago, he left considerable
property and litigation ensued between his widow, Felicitas Villanueva, and
Fabiola Severino, on the one part, and other heirs of the deceased on the
Credit Transactions Full Text Cases Atty. Adviento!!!!'&
other part. n order to make an end of this litigation a compromise was
effected by which Guillermo Severino, a son of Melecio Severino, took
over the property pertaining to the estate of his father at the same time
agreeing to pay P100,000 to Felicitas Villanueva and Fabiola Severino.
This sum of money was made payable, first, P40,000 in cash upon the
execution of the document of compromise, and the balance in three
several payments of P20,000 at the end of one year; two years, and three
years respectively. To this contract the appellant Enrique Echaus affixed
his name as guarantor. The first payment of P40,000 was made on July
11, 1924, the date when the contract of compromise was executed; and of
this amount the plaintiff Fabiola Severino received the sum of P10,000. Of
the remaining P60,000, all as yet unpaid, Fabiola Severino is entitled to
the sum of P20,000.
t appears that at the time of the compromise agreement above-mentioned
was executed Fabiola Severino had not yet been judicially recognized as
the natural daughter of Melecio Severino, and it was stipulated that the
last P20,000 corresponding to Fabiola and the last P5,000 corresponding
to Felicitas Villanueva should retained on deposit until the definite status of
Fabiola Severino as natural daughter of Melecio Severino should be
established. The judicial decree to this effect was entered in the Court of
First nstance of Occidental Negros on June 16, 1925, and as the money
which was contemplated to be held in suspense has never in fact been
paid to the parties entitled thereto, it results that the point respecting the
deposit referred to has ceased to be of moment.
The proof shows that the money claimed in this action has never been
paid and is still owing to the plaintiff; and the only defense worth noting in
this decision is the assertion on the part of Enrique Echaus that he
received nothing for affixing his signature as guarantor to the contract
which is the subject of suit and that in effect the contract was lacking in
consideration as to him.
The point is not well taken. A guarantor or surety is bound by the same
consideration that makes the contract effective between the principal
parties thereto. (Pyle vs. Johnson, 9 Phil., 249.) The compromise and
dismissal of a lawsuit is recognized in law as a valuable consideration; and
the dismissal of the action which Felicitas Villanueva and Fabiola Severino
had instituted against Guillermo Severino was an adequate consideration
to support the promise on the part of Guillermo Severino to pay the sum of
money stipulated in the contract which is the subject of this action. The
promise of the appellant Echaus as guarantor therefore binding. t is never
necessary that the guarantor or surety should receive any part of the
benefit, if such there be, accruing to his principal. But the true
consideration of this contract was the detriment suffered by the plaintiffs in
the former action in dismissing that proceeding, and it is immaterial that no
benefit may have accrued either to the principal or his guarantor.
The judgment appealed from is in all respects correct, and the same will
be affirmed, with costs against the appellant. So ordered.
EN BANC
G.R. No. L-45571 June 30, 1939
FLORENTINA DE GUZMAN, as administratrix of the intestate estate
of the deceased Santiago Lucero, plaintiff-appellee,
vs.
ANASTACIO R. SANTOS, defendant-appellant.
E.V. Filamor appellant.
Antonio G. Lucero for appellee.
IMPERIAL, J.:
This is an appeal taken by the defendant from the decision of the Court of
First nstance of Nueva Ecija which sentenced him to pay the plaintiff the
sum of P3,665.55, plus legal interest thereon from February 10, 1932, until
fully paid, and the costs.
On October 28, 1924, Jerry O. Toole, Antonio K. Abad and Anastacio R.
Santos, the defendant, formed a general mercantile partnership under the
style Philippine-American Construction Company, with a capital of
P14,000, P10,000 of which were taken by way of loan from Paulino
Candelaria. The partnership and the co-partners undertook and bound
themselves to pay, jointly and severally, the said indebtedness in or before
June, 1925. Having violated the conditions of the contract executed for the
purpose, Paulino Candelaria brought civil case No. 3838 of the Court of
First nstance of Nueva Ecija on May 15, 1925, against the Philippine-
American Construction Company and its co-partners, for the recovery of
the loan, plus interest thereon and stipulated attorney's fees. On January
25, 1926, the said court rendered judgment therein sentencing all the
defendants to pay the plaintiff, jointly and severally, the sum of P9,317,
with legal interest thereon from the filing of the complaint, plus P500 as
liquidated damages and P1,000 as attorney's fees. On appeal this
judgment was affirmed by this court on December 17, 1926 (G.R. No.
26131). A writ of execution of the affirmed judgment having been issued,
the herein plaintiff, in her capacity as judicial administratrix of the
deceased Santiago Lucero, on February 10, 1932, paid to be creditor
Paulino Candelaria the sum of P5,665.55 on account of the judgment.
Upon filing of the complaint in civil case No. 3838, Paulino Candeleria
obtained a writ of attachment against the then defendants by virtue of
which the sheriff attached properties of Jerry O. Toole valued at P50; of
Antonio K. Abad valued at P12,150; and of Anastacio R. Santos valued at
P2,733. No property of the partnership Philippine-American Construction
Company was attached. n view of these attachments, the Philippine-
American Construction Company moved for the discharge of the attached
properties and offered to post a bond for P10,000. The court granted the
motion and fixed the bond at the amount offered. On May 29, 1925, the
Philippine-American Construction Company, as principal, then represented
by the partner Antonio K. Abad, and Santiago Lucero and Meliton Carlos,
as guarantors, executed a bond for P10,000 in favor of Paulino Candelaria
for the lifting of the attachment under section 440 of the Code of Civil
Procedure. n the bond thus executed, the defendant Anastacio R. Santos
neither intervened nor signed individually, but Abad testified that the former
was the one who induced him to get the signature of Lucero by taking
advantage of his good relations with him. Upon the approval of the bond,
the attachment was discharged and the attached properties were returned
to their owners.
After the issuance of the writ for the execution of the judgment rendered in
civil case No. 3838, the sheriff returned the same with the statement that
the writ could not be executed as he found no property of the judgment
debtors. n view of this, Paulino Candelaria moved for the issuance of a
writ of execution against the guarantors of the defendants. The court
granted the motion and issued a writ of execution against the plaintiff, as
judicial administratrix of the deceased Santiago Lucero, and the other
guarantor Meliton Carlos. The plaintiff tenaciously refused to pay the
judgment obtained by Paulino Candelaria, but after all her efforts had
failed, she was eventually compelled to pay to said creditor the sum of
P5,565.55, the co-guarantor Meliton Carlos also paid upon the bond
signed by him the sum of P5,135. The plaintiff and Carlos later recovered
from Antonio K. Abad, one of the defendants in the said civil case, the sum
of P3,800 which they divided equally. t thus appears that the payment
made by the plaintiff to Candelaria was reduced to the sum of P3,665.55.
The plaintiff, in her said capacity, demanded of the defendant Anastacio R.
Santos the return of the aforesaid sum and, upon the latter's refusal, she
brought the action which culminated in the appealed judgment.
The four errors assigned by the appellant raise only one legal question,
namely, whether under the proven facts admitted by the parties, he is
bound to pay to the plaintiff what the latter had advanced to Paulino
Candelaria upon the bond which the deceased Santiago Lucero had
executed. The appellant vigorously insists that he is not so bound under
the law, because he neither applied for nor intervened in the bond in any
capacity. t is beyond question that the appellant neither intervened nor
signed the bond which was filed to discharge the attachment of the
properties of the judgment debtors, but it is clear, and this is admitted, that
the bond was filed to release the attached properties, it was approved by
the court and it resulted in the discharge of the attachment and the return
of the attached properties to their respective owners. When the sheriff
attempted to execute judgment and looked for the discharged properties,
he found that they had disappeared, for which reason the court
subsequently issued a writ of execution against the guarantors. As a result
of this last execution, the plaintiff was forced to pay and in fact paid the
said sum to the creditor Candelaria. Now, then, under article 1822 of the
Civil Code, by guaranty one person binds himself to pay or perform for a
Credit Transactions Full Text Cases Atty. Adviento!!!!''
third person in case the latter should fail to do so; and the article 1838
provides that any guarantor who pays for the debtor shall be indemnified
by the latter even should the guaranty have been undertaken without the
knowledge of the debtor. n the present case, the guarantor was the
deceased Santiago Lucero, now represented by the plaintiff in her capacity
as judicial administratrix, and the debtor is the defendant-appellant.
Applying the provision of the last cited article, it is obvious that the
appellant is legally bound to pay what the plaintiff had advanced to the
creditor upon the judgment, notwithstanding the fact that the bond had
given without his knowledge.
The obligation of the appellant to pay the plaintiff what the latter had
advanced is further sanctioned by the general provisions of the Civil Code
regarding obligations. Article 1158 provides that "payment may be made
by any person, whether he has an interest in the performance of the
obligation or not, and whether the payment is known and approved by the
debtor or whether he is unaware of it. Any person who makes a payment
for the account of another may recover from the debtor the amount of the
payment, unless it was made against the express will of the latter. n the
latter case he can only recover from the debtor in so far as the payment
has been beneficial to the latter." According to this legal provision, it is
evident that the plaintiff-appellant is bound to pay to the plaintiff what the
latter had advanced to the creditor upon the judgment, and this is the more
so because it appears that although Lucero executed the bond without his
knowledge, nevertheless he did not object thereto or repudiate the same
at any time. From the proven facts it cannot logically be deduced that the
appellant did not have knowledge of the bond, first, because his properties
were attached and the attachment could not have been levied without his
knowledge, and, secondly, because the said properties were returned to
him and in receiving them he was necessarily apprized of the fact that a
bond had been filed to discharge the attachment.
The appellant questions the application by the court of article 127 of the
Code of Commerce, overlooking article 128. This assignment of error is of
no consequence and does not affect the result of the case. As already
stated, the rights of the parties must be governed by the aforesaid articles
of the Civil Code. Assuming the inapplicability of article 127 of the Code of
Commerce, in view of the fact that the action is not addressed to the
appellant as general partner of the Philippine-American Construction
Company, it nevertheless appears that his liability to the plaintiff, as debtor
in solidum of Paulino Candelaria, is recognized and countenanced by
articles 1158 and 1838 of the Civil Code.
n view of the foregoing, the appealed judgment is affirmed, with costs of
this instance to the defendant appellant. So ordered.
G.R. No. L-29587 November 28, 1975
PHILIPPINE NATIONAL BANK, Petitioner, vs. LUZON SURETY CO.,
INC. and THE HONORABLE COURT OF APPEALS, Respondent.
ESGUERRA, J.:
Petitioner Philippine National Bank seeks a review and reversal of the
decision dated June 26, 1968, of the Court of Appeals in its case CA-G.R.
No. 30282-R, absolving Luzon Surety Co., nc. of its liability to said
petitioner and thus reversing the decision of the Court of First nstance of
Negros Occidental, the dispositive portion of which reads as follows:
N VEW THEREOF, judgment is hereby rendered
ordering defendant Augusto R. Villarosa to pay
plaintiff PHLPPNE NATONAL BANK the sum of
P81,200.00 plus accrued interest of 5% per annum on
P63,222.78 from August 31, 1959; to pay 10% of said
amount as attorney's fees and to pay the costs.
Defendant Luzon Surety Co., nc. is hereby ordered to
pay jointly and severally with defendant Villarosa to
the plaintiff the sum of P10,000.00; defendant Central
Surety and nsurance Company jointly and severally
with defendant Villarosa the sum of P20,000 to the
plaintiff, and Associated Surety And nsurance Co.
jointly and severally with defendant Villarosa the sum
of P15,000.00 to the plaintiff, with the understanding
that should said bonding companies pay the
aforementioned amounts of their respective bonds to
the plaintiff, said amounts should be deducted from
the total outstanding obligation of defendant Villarosa
in favor of the plaintiff.
Above-quoted decision was modified in an order of the Court of First
nstance dated June 5, 1961, granting petitioner Philippine National Bank
(PNB) the right to recover accrued interest at the rate of 5% per annum
from December 24, 1953, from the defendants bonding
companies.chanroblesvirtualawlibrary chanrobles virtual law library
The facts as found by the Court of Appeals are as follows:
... sometime prior to 27 November 1951, defendant
Augusto R. Villarosa, a sugar planter adhered to the
Lopez Sugar Central Milling Company, nc. applied for
a crop loan with the plaintiff, Philippine National Bank,
Exhibit A; this application was approved on 6 March,
1952 in the amount of P32,400, according to the
complaint; but the document of approval has not been
exhibited; at any rate, the planter Villarosa executed a
Chattel Mortgage on standing crops to guarantee the
crop loan, Exhibit B and as shown in Exhibits C to C-
30 on various dates from 28 January, 1952 to 9
January, 1953, in consideration of periodical sums of
money by him received from PNB, planter Villarosa
executed these promissory notes from which will be
seen that the credit line was that the original amount
of P32,400 and was thus maintained up to the
promissory note Exhibit C-9 dated 30 May, 1952 but
afterwards it was increased and promissory notes
Exhibits C-10 to C-30 were based on the increased
credit line; and as of 27 September, 1953 as shown in
the accounts, Exhibits D and D-1, there was a balance
of P63,222.78 but as of the date when the complaint
was filed on 8 June, 1960, because of the interest
accrued, it had reached a much higher sum; that was
why due to its non-payment, plaintiff filed this
complaint, as has been said, on 8 June, 1960; now
the complaint sought relief not only against the planter
but also against the three (3) bondsmen, Luzon
Surety, Central Surety and Associated Surety because
Luzon Surety had filed the bond Exhibit E dated 18
February, 1952 in the sum of P10,000; Central Surety
Exhibit F dated 24 February, 1952 in the sum of
P20,000 and Associated Surety the bond Exhibit G
dated 11 September, 1952 in the sum of P15,000; in
gist, the obligation of each of the bondsmen being to
guarantee the faithful performance of the obligation of
the planter with PNB; now each of the defendants in
their answers raised various defenses but as far as
principal defendant Augusto R. Villarosa and other
defendants Central Surety and Associated Surety are
concerned, their liability is no longer material because
they have not appealed; and in the trial of the case,
plaintiff submitted Exhibits A to J-1 and witness
Romanito Brillantes; but the defense of Luzon Surety
thru its witness Jose Arroyo and Exhibits 1 to 3 being
1st that the evidence of the plaintiff did not establish a
cause of action to make Luzon Surety liable and
2ndly, in any case that there had been material
alteration in the principal obligation, if any, guaranteed
by it; ... .
Unable to obtain reconsideration of the decision of the Appellate Court,
PNB came to this Court and alleged the following errors.
1. The Court of Appeals erred in the application of the
law involved by invoking Article 2055 of the New Civil
Code, which properly should have been the law on
suretyship which are covered by Section 4, Chapter 3,
Title 1, Book V of the New Civil Code; chanrobles
virtual law library
Credit Transactions Full Text Cases Atty. Adviento!!!!'(
2. Consequently, when the Court of Appeals released
the surety from liability, it committed a grave or gross
misappreciation of facts amounting to an error of law;
chanrobles virtual law library
3. The Court of Appeals erred when it held that there
must have been a principal crop loan contract,
guaranteed by the surety bonds; chanrobles virtual
law library
4. The Court of Appeals erred when it released the
surety from liability. The above assigned errors boil
down to the single question of whether or not the
Court of Appeals was justified in absolving Luzon
Surety Co., nc., from liability to petitioner Philippine
National Bank. We have examined the record
thoroughly and found the appealed decision to be
erroneous.
Excerpt of the Chattel Mortgage executed to guarantee the crop loan
clearly provided as follows:
xxx xxx xxx chanrobles virtual law library
1. That the Mortgagor does by these presents grant,
cede and convey unto the Mortgagee by way of First
Mortgage free from any encumbrances, all the crops
of the absolute property of the Mortgagor,
corresponding to the 1952-53 and subsequent yearly
sugar crops agricultural season at present growing in
the Hda. known as San Antonio, Washington (P) Audit
24-124 and 24-16 la and Hda. Aliwanay (non-quota
land); milling with LSMC and CAD Municipality of
Sagay, and Escalante, Province of Negros Occidental
covered by cadastral lots no. Various of the Cadastral
Survey at the Municipality of Sagay, Escalante
particularly bounded and described in Transfer
Certificate of Title No. Various issued by the Register
of Deeds of said province. The said mortgage crops
consist of all the Mortgagor's first available entire net
share of the 1952-53 and subsequent yearly sugar
crops thereafter conservatively estimated at but not
less than Three Thousand Four Hundred Twenty and
14/00 (3,420.14) piculs of export and domestic sugar,
including whatever addition thereto, and such aids,
subsidies, indemnity payments and other benefits as
maybe awarded to the Mortgagor, coming from any
source, governmental or
otherwise.chanroblesvirtualawlibrary chanrobles
virtual law library
xxx xxx xxx chanrobles virtual law library
4. This Mortgage is executed to secure payment by
the Mortgagor to the Mortgagee at the latter's office of
a loan herein granted to the Mortgagor in the sum of
Thirty Two Thousand Four Hundred (P32,400.00)
Pesos, Philippine Currency, with interest at the rate of
five per cent per annum, which loan shall be given to
the Mortgagor either in lump sum or in installments as
the mortgagee may determine. The Mortgagee may
increase or decrease the amount of the loan as well
as the installments as it may deem convenient and
the Mortgagor shall submit such periodical reports on
the crops mortgaged as the Mortgagee may require.
In the event that the loan is increased such increase
shall likewise be secured by Mortgage. This Mortgage
shall also secure any other loans or advances that the
Mortgagee may extend to the Mortgagor, including
interest and expenses or any other obligation owing to
the Mortgagee, whether direct or indirect, principal or
secondary as appears in the account books and
records of the Mortgagee.chanroblesvirtualawlibrary
chanrobles virtual law library
xxx xxx xxx
Likewise an extract from the Surety Bond executed by and between the
PNB on one hand and Augusto Villarosa and respondent Luzon Surety
Company, nc. on the other, is hereby reproduced, viz:
That we Augusto Villarosa of Bacolod City, as
principal and Luzon Surety Company, Inc. a
corporation duly organized and existing under and by
virtue of the laws of the Philippines, as surety, are
held firmly bound unto Philippine National Bank,
Bacolod City, Philippines, in the sum of Ten Thousand
Pesos (P10,000.00) Philippine Currency, for the
payment of which sum, well and truly to be made, we
bind ourselves, our heirs, executors, administrators,
successors, and assigns jointly and severally, firmly
by these presents:
The condition of the obligation are as follows:
WHEREAS, the above bounden principal, on the - day
of February, 1952, entered into a crop loan contract
with obligee Philippine National Bank, Bacolod Branch
of Bacolod City, Philippines to fully and faithfully -
Comply with all the terms and condition stipulated in
said crop loan contract which are hereby incorporated
as essential parts hereof, and principally to meet and
pay from the proceeds of the sugar produced from his
Hda. Antonio and Hda. Aliwanay, Escalante,
Occidental Negros credit advances made by the
Philippine National Bank Bacolod Branch not to
exceed P32,800 as stated in said contract. Provided
further that the liability under this bond shall not
exceed the amount of P10,000.00 chanrobles virtual
law library
WHEREAS, said Philippine National Bank Bacolod
Branch requires said principal to give a good and
sufficient bond in the above stated sum to secure the
full and faithful performance on his part of said crop
loan contract.chanroblesvirtualawlibrary chanrobles
virtual law library
NOW, THEREFORE, if the principal shall well and
truly perform and fulfill all the undertakings,
covenants, terms and conditions and agreement
stipulated in said crop loan contract then, this
obligation shall be null and void, otherwise it shall
remain in full force and
effect.chanroblesvirtualawlibrary chanrobles virtual
law library
xxx xxx xxx
The foregoing evidences clearly the liability of Luzon Surety to petitioner
Philippine National Bank not merely as a guarantor but as surety-liable as
a regular party to the undertaking (Castelvi de Higgins vs. Sellner 41 Phil.
142). The Court of Appeals, however, in absolving the bonding company
ratiocinates that the Surety Bond executed on February 18, 1952, made
specific references to a crop loan contract executed by Augusto Villarosa
sometime in February 1952. And, therefore, the Chattel Mortgage, Exhibit
B dated March 6, 1952, could not have been the obligations guaranteed
by the surety bond. Thus the Court of Appeals stated:
... one is really at a loss to impose any liability upon
Luzon Surety in the absence of the principal obligation
which was a crop loan contract executed in February,
1952, and to which there was made an express
reference in the surety bond, Exhibit E; let it not be
overlooked further that one can secure a crop loan
without executing a Chattel Mortgage on his crops
because the crop loan is the principal obligation while
Credit Transactions Full Text Cases Atty. Adviento!!!!')
the Chattel Mortgage is only an ancillary and
secondary contract to guarantee fulfillment of a crop
loan; stated otherwise and as Luzon Surety never
intervened in the execution of the Chattel Mortgage,
Exhibit B, there is no way under the evidence from
which it can be made to answer for liability to Augusto
Villarosa under Exhibit E; ... "
The Court of Appeals, to Our mind did not give credence to an otherwise
significant and unrebutted testimony of petitioner's witness, Romanito
Brillantes, that Exhibit B was the only chattel mortgage executed by
Augusto Villarosa evidencing the crop loan contract and upon which Luzon
Surety agreed to assume liability up to the amount of P10,000 by posting
the said surety bond. Moreover Article 1354 of our New Civil Code which
provides:
Art. 1354.- Although the cause is not stated in the
contract., it is presumed that it exist and is lawful,
unless the debtor proves the contrary.
bolster petitioner's stand. Considering too that Luzon Surety company is
engaged in the business of furnishing guarantees, for a consideration,
there is no reason that it should be entitled to a rule of strictissimi juris or a
strained and over-strict interpretation of its undertaking. The presumption
indulged in by the law in favor of guarantors was premised on the fact that
guarantees were originally gratuitous obligations, which is not true at
present, at least in the great majority of cases. (Aurelio Montinola vs. Alejo
Gatila, et al, G.R. No L-7558, October 31,
1955).chanroblesvirtualawlibrary chanrobles virtual law library
We have likewise gone over the answer of Luzon Surety Company dated
June 17, 1960 (p. 73 Record on Appeal) and noted the following:
xxx xxx xxx chanrobles virtual law library
3. Defendant LUZON admits the portion of paragraph
3 referring to the grant of P32,400 secured by a
Chattel Mortgage dated March 6, 1952, copy of which
is attached as Annex "A" of the
complaint.chanroblesvirtualawlibrary chanrobles
virtual law library
xxx xxx xxx
As special defenses:
8. The terms and conditions of the surety bond as well
as the contract it guaranteed was materially altered
and or novated without the knowledge and consent of
the surety thereby releasing the latter from
liability.chanroblesvirtualawlibrary chanrobles virtual
law library
11. The maximum liability, if any, of defendant LUZON
is P10.000.00.
The principal obligation, therefore, has never been put in issue by then
defendant now respondent Luzon Surety Co., nc. On the other hand it
raised as its defense the alleged material alteration of the terms and
conditions of the contract as the basis of its prayer for release. Even this
defense of respondent Luzon Surety Co., nc. is untenable under the facts
obtaining. As a surety, said bonding company is charged as an original
promissory and is an insurer of the debt. While it is an accepted rule in our
jurisdiction that an alteration of the contract is a ground for release, this
alteration, We stress must be material. A cursory examination of the record
shows that the alterations in the form of increases were made with the full
consent of Luzon Surety Co., nc. Paragraph 4 of the Chattel Mortgage
explicitly provided for this increase(s), viz:
... the Mortgagee may increase or decrease the
amount of the loan as well as the installment as it may
deem convenient ...
and this contract, Exhibit "B", was precisely referred to and mentioned in
the Surety Bond itself. n the case of Lim Julian vs. Tiburcio Lutero, et al
No. 25235, 49 Phil. 703, 717, 718, this Court held:
t has been decided in many cases that the
consideration named in a mortgage for future
advancements does not limit the amount for which
such contract may stand as security, if from the four
corners of the document, the intent to secure future
indebtedness is apparent. Where, by the plain terms
of the contract, such an intent is evident, it will control.
...
The next question to take up is the liability of Luzon Surety Co. for interest
which, it contends, would increase its liability to more than P10,000 which
is the maximum of its bond. We cannot agree to this reasoning. n the
cases of Tagawa vs. Aldanese, 43 Phil. 852, 859; Plaridel Surety
Insurance Co. vs. P. L. Galang Machinery Co., 100 Phil. 679, 682, cited in
Paras Civil Code of the Philippines, Vol. V, 7th Ed. 1972, p. 772, it was
held:
f a surety upon demand fails to pay, he can be held
liable for interest, even if in thus paying, the liability
becomes more than that in the principal obligation.
The increased liability is not because of the contract
but because of the default and the necessity of judicial
collection. t should be noted, however, that the
interest runs from the time the complaint is filed, not
from the time the debt becomes due and demandable.
PREMSES CONSDERED, the judgment appealed from is reversed and
set aside. n lieu thereof another is rendered reinstating the judgment of
the Court of First nstance of Negros Occidental, 12th Judicial District,
dated March 29, 1961, holding Luzon Surety liable for the amount of
P10,000.00 with the modification that interest thereon shall be computed
at the legal rate from June 8, 1960 when the complaint was
filed.chanroblesvirtualawlibrary chanrobles virtual law library
SO ORDERED.
SECOND DVSON
G.R. No. 160466 January 17, 2005
SPOUSES ALFREDO and SUSANA ONG, petitioners,
vs.
PHILIPPINE COMMERCIAL INTERNATIONAL BANK, respondent.
D E C S O N
PUNO, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of
Court to set aside the Decision of the Court of Appeals in CA-G.R. SP No.
39255, dated February 17, 2003, affirming the decision of the trial court
denying petitioners' motion to dismiss.
The facts: Baliwag Mahogany Corporation (BMC) is a domestic
corporation engaged in the manufacture and export of finished wood
products. Petitioners-spouses Alfredo and Susana Ong are its President
and Treasurer, respectively.
On April 20, 1992, respondent Philippine Commercial nternational Bank
(now Equitable-Philippine Commercial nternational Bank or E-PCB) filed
a case for collection of a sum of money
1
against petitioners-spouses.
Respondent bank sought to hold petitioners-spouses liable as sureties on
the three (3) promissory notes they issued to secure some of BMC's loans,
totalling five million pesos (P5,000,000.00).
Credit Transactions Full Text Cases Atty. Adviento!!!!'*
The complaint alleged that in 1991, BMC needed additional capital for its
business and applied for various loans, amounting to a total of five million
pesos, with the respondent bank. Petitioners-spouses acted as sureties for
these loans and issued three (3) promissory notes for the purpose. Under
the terms of the notes, it was stipulated that respondent bank may
consider debtor BMC in default and demand payment of the remaining
balance of the loan upon the levy, attachment or garnishment of any of its
properties, or upon BMC's insolvency, or if it is declared to be in a state of
suspension of payments. Respondent bank granted BMC's loan
applications.
On November 22, 1991, BMC filed a petition for rehabilitation and
suspension of payments with the Securities and Exchange Commission
(SEC) after its properties were attached by creditors. Respondent bank
considered debtor BMC in default of its obligations and sought to collect
payment thereof from petitioners-spouses as sureties. n due time,
petitioners-spouses filed their Answer.1awphi1.nt
On October 13, 1992, a Memorandum of Agreement (MOA)
2
was executed
by debtor BMC, the petitioners-spouses as President and Treasurer of
BMC, and the consortium of creditor banks of BMC (of which respondent
bank is included). The MOA took effect upon its approval by the SEC on
November 27, 1992.
3

Thereafter, petitioners-spouses moved to dismiss
4
the compIaint.
They argued that as the SEC declared the principal debtor BMC in a state
of suspension of payments and, under the MOA, the creditor banks,
including respondent bank, agreed to temporarily suspend any pending
civil action against the debtor BMC, the benefits of the MOA should be
extended to petitioners-spouses who acted as BMC's sureties in their
contracts of loan with respondent bank. Petitioners-spouses averred that
respondent bank is barred from pursuing its collection case filed against
them.
The triaI court denied the motion to dismiss. Petitioners-spouses
appealed to the Court of Appeals which affirmed the trial court's ruling that
a creditor can proceed against petitioners-spouses as surety
independently of its right to proceed against the principal debtor BMC.
Hence this appeal.
Petitioners-spouses claim that the collection case filed against them by
respondent bank should be dismissed for three (3) reasons: First, the
MOA provided that during its effectivity, there shall be a suspension of
filing or pursuing of collection cases against the BMC and this provision
should benefit petitioners as sureties. Second, principal debtor BMC has
been placed under suspension of payment of debts by the SEC;
petitioners contend that it would prejudice them if the principal debtor BMC
would enjoy the suspension of payment of its debts while petitioners, who
acted only as sureties for some of BMC's debts, would be compelled to
make the payment; petitioners add that compelling them to pay is contrary
to ArticIe 2063 of the Civil Code which provides that a compromise
between the creditor and principal debtor benefits the guarantor and
should not prejudice the latter. Lastly, petitioners rely on ArticIe 2081 of
the Civil Code which provides that: "the guarantor may set up against the
creditor all the defenses which pertain to the principal debtor and are
inherent in the debt; but not those which are purely personal to the debtor."
Petitioners aver that if the principal debtor BMC can set up the defense of
suspension of payment of debts and filing of collection suits against
respondent bank, petitioners as sureties should likewise be allowed to
avail of these defenses.
We find no merit in petitioners' contentions.
ReIiance of petitioners-spouses on ArticIes 2063 and 2081 of the CiviI
Code is mispIaced as these provisions refer to contracts of guaranty.
They do not appIy to suretyship contracts. Petitioners-spouses are not
guarantors but sureties of BMC's debts. There is a sea of difference in the
rights and liabilities of a guarantor and a surety. A guarantor insures the
soIvency of the debtor whiIe a surety is an insurer of the debt itseIf. A
contract of guaranty gives rise to a subsidiary obIigation on the part of
the guarantor. t is only after the creditor has proceeded against the
properties of the principal debtor and the debt remains unsatisfied that a
guarantor can be held liable to answer for any unpaid amount. This is the
principle of excussion. n a suretyship contract, however, the benefit of
excussion is not avaiIabIe to the surety as he is principaIIy IiabIe for
the payment of the debt. As the surety insures the debt itself, he
obligates himself to pay the debt if the principal debtor will not pay,
regardless of whether or not the latter is financially capable to fulfill his
obligation. Thus, a creditor can go directly against the surety although the
principal debtor is solvent and is able to pay or no prior demand is made
on the principal debtor. A surety is directIy, equaIIy and absoIuteIy
bound with the principaI debtor for the payment of the debt and is
deemed as an originaI promissor and debtor from the beginning.
5

Under the suretyship contract entered into by petitioners-spouses with
respondent bank, the former obligated themselves to be solidarily bound
with the principal debtor BMC for the payment of its debts to respondent
bank amounting to five million pesos (P5,000,000.00). Under ArticIe 1216
of the CiviI Code,
6
respondent bank as creditor may proceed against
petitioners-spouses as sureties despite the execution of the MOA which
provided for the suspension of payment and filing of collection suits
against BMC. Respondent bank's right to collect payment from the surety
exists independently of its right to proceed directly against the principal
debtor. n fact, the creditor bank may go against the surety alone without
prior demand for payment on the principal debtor.
7

The provisions of the MOA regarding the suspension of payments by
BMC and the non-fiIing of coIIection suits by the creditor banks
pertain onIy to the property of the principaI debtor BMC. Firstly, in the
rehabilitation receivership filed by BMC, only the properties of BMC were
mentioned in the petition with the SEC.
8
Secondly, there is nothing in the
MOA that involves the liabilities of the sureties whose properties are
separate and distinct from that of the debtor BMC. Lastly, it bears to stress
that the MOA executed by BMC and signed by the creditor-banks was
approved by the SEC whose jurisdiction is limited only to corporations and
corporate assets. t has no jurisdiction over the properties of BMC's
officers or sureties.1awphi1.nt
Clearly, the collection suit filed by respondent bank against petitioners-
spouses as sureties can prosper. The trial court's denial of petitioners'
motion to dismiss was proper.
IN VIEW WHEREOF, the petition is DSMSSED for lack of merit. No
pronouncement as to costs.
SO ORDERED.
THRD DVSON


NTERNATONAL FNANCE G.R. No. 160324
CORPORATON,
Petitioner, Present:
Panganiban, J.,
Chairman,
- versus - Sandoval-Gutierrez,
Corona,
Carpio Morales, and
Garcia, JJ
MPERAL TEXTLE MLLS, Promulgated:
NC.,
Respondent. ' November 15, 2005
x -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- x
Credit Transactions Full Text Cases Atty. Adviento!!!!(+

DECSON

PANGANBAN, J.:
The terms of a contract govern the rights and obligations of the contracting
parties. When the obligor undertakes to be 'jointly and severally liable, it
means that the obligation is solidary.
f solidary liability was instituted to 'guarantee a principal obligation, the
law deems the contract to be one of suretyship.
The creditor in the present Petition was able to show convincingly that,
although denominated as a 'Guarantee Agreement, the Contract was
actually a surety. Notwithstanding the use of the words 'guarantee and
'guarantor, the subject Contract was indeed a surety, because its terms
were clear and left no doubt as to the intention of the parties.

The Case

Before us is a Petition for Review[1] under Rule 45 of the Rules of Court,
assailing the February 28, 2002 Decision[2] and September 30, 2003
Resolution[3] of the Court of Appeals (CA) in CA-GR CV No. 58471. The
challenged Decision disposed as follows:
WHEREFORE, the appeal is PARTALLY GRANTED. The decision of the
trial court is MODFED to read as follows:

1. Philippine Polyamide ndustrial Corporation is ORDERED to pay
[Petitioner] nternational Finance Corporation, the following amounts:
(a) US$2,833,967.00 with accrued interests as provided in the Loan
Agreement;
(b) nterest of 12% per annum on accrued interest, which shall be counted
from the date of filing of the instant action up to the actual payment;
(c) P73,340.00 as attorney's fees;
(d) Costs of suit.
2. The guarantor mperial Textile Mills, nc. together with Grandtex is
HELD secondarily liable to pay the amount herein adjudged to [Petitioner]
nternational Finance Corporation.[4]
The assailed Resolution denied both parties' respective Motions for
Reconsideration.
The Facts

The facts are narrated by the appellate court as follows:
On December 17, 1974, [Petitioner] nternational Finance Corporation
(FC) and [Respondent] Philippine Polyamide ndustrial Corporation
(PPC) entered into a loan agreement wherein FC extended to PPC a
loan of US$7,000,000.00, payable in sixteen (16) semi-annual installments
of US$437,500.00 each, beginning June 1, 1977 to December 1, 1984,
with interest at the rate of 10% per annum on the principal amount of the
loan advanced and outstanding from time to time. The interest shall be
paid in US dollars semi-annually on June 1 and December 1 in each year
and interest for any period less than a year shall accrue and be pro-rated
on the basis of a 360-day year of twelve 30-day months.
On December 17, 1974, a 'Guarantee Agreement was executed with x x x
mperial Textile Mills, nc. (TM), Grand Textile Manufacturing Corporation
(Grandtex) and FC as parties thereto. TM and Grandtex agreed to
guarantee PPC's obligations under the loan agreement.
PPC paid the installments due on June 1, 1977, December 1, 1977 and
June 1, 1978. The payments due on December 1, 1978, June 1, 1979 and
December 1, 1979 were rescheduled as requested by PPC. Despite the
rescheduling of the installment payments, however, PPC defaulted.
Hence, on April 1, 1985, FC served a written notice of default to PPC
demanding the latter to pay the outstanding principal loan and all its
accrued interests. Despite such notice, PPC failed to pay the loan and its
interests.
By virtue of PPC's failure to pay, FC, together with DBP, applied for the
extrajudicial foreclosure of mortgages on the real estate, buildings,
machinery, equipment plant and all improvements owned by PPC, located
at Calamba, Laguna, with the regional sheriff of Calamba, Laguna. On July
30, 1985, the deputy sheriff of Calamba, Laguna issued a notice of
extrajudicial sale. FC and DBP were the only bidders during the auction
sale. FC's bid was for P99,269,100.00 which was equivalent to
US$5,250,000.00 (at the prevailing exchange rate of P18.9084
US$1.00). The outstanding loan, however, amounted to US$8,083,967.00
thus leaving a balance of US$2,833,967.00. PPC failed to pay the
remaining balance.

Consequently, FC demanded TM and Grandtex, as guarantors of PPC,
to pay the outstanding balance. However, despite the demand made by
FC, the outstanding balance remained unpaid.
Thereafter, on May 20, 1988, FC filed a complaint with the RTC of Manila
against PPC and TM for the payment of the outstanding balance plus
interests and attorney's fees.
The trial court held PPC liable for the payment of the outstanding loan
plus interests. t also ordered PPC to pay FC its claimed attorney's fees.
However, the trial court relieved TM of its obligation as guarantor. Hence,
the trial court dismissed FC's complaint against TM.
x x x x x x x x x
Thus, apropos the decision dismissing the complaint against TM, FC
appealed [to the CA].[5]
Ruling of the Court of Appeals
The CA reversed the Decision of the trial court, insofar as the latter
exonerated TM from any obligation to FC. According to the appellate
court, TM bound itself under the 'Guarantee Agreement to pay PPC's
obligation upon default.[6] TM was not discharged from its obligation as
guarantor when PPC mortgaged the latter's properties to FC.[7] The CA,
however, held that TM's liability as a guarantor would arise only if and
when PPC could not pay. Since PPC's inability to comply with its
obligation was not sufficiently established, TM could not immediately be
made to assume the liability.[8]
The September 30, 2003 Resolution of the CA denied reconsideration.[9]
Hence, this Petition.[10]
The ssues
Petitioner states the issues in this wise:
. Whether or not TM and Grandtex[11] are sureties and therefore, jointly
and severally liable with PPC, for the payment of the loan.
. Whether or not the Petition raises a question of law.
. Whether or not the Petition raises a theory not raised in the lower
court.[12]
The main issue is whether TM is a surety, and thus solidarily liable with
PPC for the payment of the loan.

The Court's Ruling
The Petition is meritorious.
Main ssue:
Liability of Respondent Under
the Guarantee Agreement
Credit Transactions Full Text Cases Atty. Adviento!!!!("
The present controversy arose from the following Contracts: (1) the Loan
Agreement dated December 17, 1974, between FC and PPC;[13] and (2)
the Guarantee Agreement dated December 17, 1974, between TM and
Grandtex, on the one hand, and FC on the other.[14]
FC claims that, under the Guarantee Agreement, TM bound itself as a
surety to PPC's obligations proceeding from the Loan Agreement.[15] For
its part, TM asserts that, by the terms of the Guarantee Agreement, it was
merely a guarantor[16] and not a surety. Moreover, any ambiguity in the
Agreement should be construed against FC -- the party that drafted it.[17]
Language of the
Contract
The premise of the Guarantee Agreement is found in its preambular
clause, which reads:
Whereas,

(A) By an Agreement of even date herewith between FC and PHLPPNE
POLYAMDE NDUSTRAL CORPORATON (herein called the Company),
which agreement is herein called the Loan Agreement, FC agrees to
extend to the Company a loan (herein called the Loan) of seven million
dollars ($7,000,000) on the terms therein set forth, including a provision
that all or part of the Loan may be disbursed in a currency other than
dollars, but only on condition that the Guarantors agree to guarantee the
obligations of the Company in respect of the Loan as hereinafter provided.
(B) The Guarantors, in order to induce FC to enter into the Loan
Agreement, and in consideration of FC entering into said Agreement,
have agreed so to guarantee such obligations of the Company.[18]
The obligations of the guarantors are meticulously expressed in the
following provision:
Section 2.01. The Guarantors jointly and severally, irrevocably, absolutely
and unconditionally guarantee, as primary obligors and not as sureties
merely, the due and punctual payment of the principal of, and interest and
commitment charge on, the Loan, and the principal of, and interest on, the
Notes, whether at stated maturity or upon prematuring, all as set forth in
the Loan Agreement and in the Notes.[19]
The Agreement uses 'guarantee and guarantors, prompting TM to base its
argument on those words.[20] This Court is not convinced that the use of
the two words limits the Contract to a mere guaranty. The specific
stipulations in the Contract show otherwise.
Solidary Liability
Agreed to by TM
While referring to TM as a guarantor, the Agreement specifically stated
that the corporation was 'jointly and severally liable. To put emphasis on
the nature of that liability, the Contract further stated that TM was a
primary obligor, not a mere surety. Those stipulations meant only one
thing: that at bottom, and to all legal intents and purposes, it was a surety.
ndubitably therefore, TM bound itself to be solidarily[21] liable with PPC
for the latter's obligations under the Loan Agreement with FC. TM thereby
brought itself to the level of PPC and could not be deemed merely
secondarily liable.
nitially, TM was a stranger to the Loan Agreement between PPC and
FC. TM's liability commenced only when it guaranteed PPC's obligation.
t became a surety when it bound itself solidarily with the principal obligor.
Thus, the applicable law is as follows:
Article 2047. By guaranty, a person, called the guarantor binds himself to
the creditor to fulfill the obligation of the principal in case the latter should
fail to do so.
f a person binds himself solidarily with the principal debtor, the provisions
of Section 4, Chapter 3, Title of this Book shall be observed. n such case
the contract shall be called suretyship.[22]
The aforementioned provisions refer to Articles 1207 to 1222 of the Civil
Code on 'Joint and Solidary Obligations. Relevant to this case is Article
1216, which states:
The creditor may proceed against any one of the solidary debtors or some
or all of them simultaneously. The demand made against one of them shall
not be an obstacle to those which may subsequently be directed against
the others, so long as the debt has not been fully collected.
Pursuant to this provision, petitioner (as creditor) was justified in taking
action directly against respondent.
No Ambiguity in the
Undertaking
The Court does not find any ambiguity in the provisions of the Guarantee
Agreement. When qualified by the term jointly and severally, the use of the
word 'guarantor to refer to a 'surety does not violate the law.[23] As Article
2047 provides, a suretyship is created when a guarantor binds itself
solidarily with the principal obligor. Likewise, the phrase in the Agreement
-- 'as primary obligor and not merely as surety -- stresses that TM is being
placed on the same level as PPC. Those words emphasize the nature of
their liability, which the law characterizes as a suretyship.
The use of the word guarantee does not ipso facto make the contract one
of guaranty.[24] This Court has recognized that the word is frequently
employed in business transactions to describe the intention to be bound
by a primary or an independent obligation.[25] The very terms of a contract
govern the obligations of the parties or the extent of the obligor's liability.
Thus, this Court has ruled in favor of suretyship, even though contracts
were denominated as a 'Guarantor's Undertaking [26] or a 'Continuing
Guaranty.[27]
Contracts have the force of law between the parties,[28] who are free to
stipulate any matter not contrary to law, morals, good customs, public
order or public policy.[29] None of these circumstances are present, much
less alleged by respondent. Hence, this Court cannot give a different
meaning to the plain language of the Guarantee Agreement.
ndeed, the finding of solidary liability is in line with the premise provided in
the 'Whereas' clause of the Guarantee Agreement. The execution of the
Agreement was a condition precedent for the approval of PPC's loan from
FC. Consistent with the position of FC as creditor was its requirement of
a higher degree of liability from TM in case PPC committed a breach.
TM agreed with the stipulation in Section 2.01 and is now estopped from
feigning ignorance of its solidary liability. The literal meaning of the
stipulations control when the terms of the contract are clear and there is
no doubt as to the intention of the parties.[30]
We note that the CA denied solidary liability, on the theory that the parties
would not have executed a Guarantee Agreement if they had intended to
name TM as a primary obligor.[31] The appellate court opined that TM's
undertaking was collateral to and distinct from the Loan Agreement. On
this point, the Court stresses that a suretyship is merely an accessory or a
collateral to a principal obligation.[32] Although a surety contract is
secondary to the principal obligation, the liability of the surety is direct,
primary and absolute; or equivalent to that of a regular party to the
undertaking.[33] A surety becomes liable to the debt and duty of the
principal obligor even without possessing a direct or personal interest in
the obligations constituted by the latter.[34]
TM's Liability as Surety
With the present finding that TM is a surety, it is clear that the CA erred in
declaring the former secondarily liable.[35] A surety is considered in law to
be on the same footing as the principal debtor in relation to whatever is
adjudged against the latter.[36] Evidently, the dispositive portion of the
assailed Decision should be modified to require TM to pay the amount
adjudged in favor of FC.
Peripheral ssues
n addition to the main issue, TM raised procedural infirmities allegedly
justifying the denial of the present Petition. Before the trial court and the
CA, FC had allegedly instituted different arguments that effectively
changed the corporation's theory on appeal, in violation of this Court's
previous pronouncements.[37] TM further
Credit Transactions Full Text Cases Atty. Adviento!!!!(#
claims that the main issue in the present case is a question of fact that is
not cognizable by this Court.[38]
These contentions deserve little consideration.
Alleged Change of
Theory on Appeal
Petitioner's arguments before the trial court (that TM was a 'primary
obligor') and before the CA (that TM was a 'surety') were related and
intertwined in the action to enforce the solidary liability of TM under the
Guarantee Agreement. We emphasize that the terms primary obligor and
'surety were premised on the same stipulations in Section 2.01 of the
Agreement. Besides, both terms had the same legal consequences. There
was therefore effectively no change of theory on appeal. At any rate, TM
failed to show to this Court a disparity between FC's allegations in the trial
court and those in the CA. Bare allegations without proof deserve no
credence.
Review of Factual
Findings Necessary
As to the issue that only questions of law may be raised in a Petition for
Review,[39] the Court has recognized exceptions,[40] one of which applies
to the present case. The assailed Decision was based on a
misapprehension of facts,[41] which particularly related to certain
stipulations in the Guarantee Agreement -- stipulations that had not been
disputed by the parties. This circumstance compelled the Court to review
the Contract firsthand and to make its own findings and conclusions
accordingly.
WHEREFORE, the Petition is hereby GRANTED, and the assailed
Decision and Resolution MODFED in the sense that mperial Textile Mills,
nc. is declared a surety to Philippine Polyamide ndustrial Corporation.
TM is ORDERED to pay nternational Finance Corporation the same
amounts adjudged against PPC in the assailed Decision. No costs.

SO ORDERED.
G.R. No. L-47495 August 14, 1941
THE TEXAS COMPANY (PHIL.), INC., petitioner,
vs.
TOMAS ALONSO, respondent.
C. D. Johnston & A. P. Deen for petitioner.
Tomas Alonso in his own behalf.
LAUREL, J.:
On November 5, 1935 Leonor S. Bantug and Tomas Alonso were sued by
the Texas Company (P..), nc. in the Court of First nstance of Cebu for the
recovery of the sum of P629, unpaid balance of the account of Leonora S.
Bantug in connection with the agency contract with the Texas Company for
the faithful performance of which Tomas Alonso signed the following:
For value received, we jointly and severally do hereby bind
ourselves and each of us, in solidum, with Leonor S. Bantug the
agent named in the within and foregoing agreement, for full and
complete performance of same hereby waiving notice of non-
performance by or demand upon said agent, and the consent to
any and all extensions of time for performance. Liability under
this undertaking, however, shall not exceed the sum of P2,000,
Philippine currency.
Witness the hand and seal of the undersigned affixed in the
presence of two witness, this 12th day of August, 1929.
Leonor S. Bantug was declared in default as a result of her failure to
appear or answer, but Tomas Alonso filed an answer setting up a general
denial and the special defenses that Leonor S. Bantug made him believe
that he was merely a co-security of one Vicente Palanca and he was never
notified of the acceptance of his bond by the Texas Company. After trial,
the Court of First nstance of Cebu rendered judgment on July 10, 1973,
which was amended on February 1, 1938, sentencing Leonor S. Bantug
and Tomas Alonso to pay jointly and severally to the Texas Company the
sum of P629, with interest at the rate of six per cent (6%) from the date of
filing of the complaint, and with proportional costs. Upon appeal by Tomas
Alonso, the Court of Appeals modified the judgment of the Court of First
nstance of Cebu in the sense that Leonor S. Bantug was held solely liable
for the payment of the aforesaid sum of P629 to the Texas Company, with
the consequent absolution of Tomas Alonso. This case is now before us on
petition for review by certiorari of the decision of the Court of Appeals. t is
contended by the petitioner that the Court of Appeals erred in holding that
there was merely an offer of guaranty on the part of the respondent,
Tomas Alonso, and that the latter cannot be held liable thereunder
because he was never notified by the Texas Company of its acceptance.
The Court of Appeals has placed reliance upon our decision in National
Bank vs. Garcia (47 Phil., 662), while the petitioner invokes the case of
National Bank vs. Escueta, (50 Phil., 991). n the first case, it was held that
there was merely an offer to give bond and, as there was no acceptance of
the offer, this court refused to give effect to the bond. n the second case,
the sureties were held liable under their surety agreement which was
found to have been accepted by the creditor, and it was therein ruled that
an acceptance need not always be express or in writing. For the purpose
of this decision, it is not indispensable for us to invoke one or the other
case above cited. The Court of Appeals found as a fact, and this is
conclusive in this instance, that the bond in question was executed at the
request of the petitioner by virtue of the following clause of the agency
contract:
Additional Security. The Agent shall whenever requested by
the Company in addition to the guaranty herewith provided,
furnish further guaranty or bond, conditioned upon the Agent's
faithful performance of this contract, in such individuals of firms
as joint and several sureties as shall be satisfactory to the
Company.
n view of the foregoing clause which should be the law between the
parties, it is obvious that, before a bond is accepted by the petitioner, it
has to be in such form and amount and with such sureties as shall be
satisfactory hereto; in other words, the bond is subject to petitioner's
approval. The logical implication arising from this requirement is that, if the
petitioner is satisfied with any such bond, notice of its acceptance or
approval should necessarily be given to the property party in interest,
namely, the surety or guarantor. n this connection, we are likewise bound
by the finding of the Court of Appeals that there is no evidence in this case
tending to show that the respondent, Tomas Alonso, ever had knowledge
of any act on the part of petitioner amounting to an implied acceptance, so
as to justify the application of our decision in National Bank vs. Escueta
(50 Phil., 991).
While unnecessary to this decision, we choose to add a few words
explanatory of the rule regarding the necessity of acceptance in case of
bonds. Where there is merely an offer of, or proposition for, a guaranty, or
merely a conditional guaranty in the sense that it requires action by the
creditor before the obligation becomes fixed, it does not become a binding
obligation until it is accepted and, unless there is a waiver of notice of such
acceptance is given to, or acquired by, the guarantor, or until he has notice
or knowledge that the creditor has performed the conditions and intends to
act upon the guaranty. (National Bank vs. Garcia, 47 Phil., 662; C. J., sec.
21, p. 901; 24 Am. Jur., sec. 37, p. 899.) The acceptance need not
necessarily be express or in writing, but may be indicated by acts
amounting to acceptance. (National Bank vs. Escueta, 50 Phil., 991.)
Where, upon the other hand, the transaction is not merely an offer of
guaranty but amounts to direct or unconditional promise of guaranty,
unless notice of acceptance is made a condition of the guaranty, all that is
necessary to make the promise binding is that the promise should act
upon it, and notice of acceptance is not necessary (28 C. J., sec. 25, p.
904; 24 Am. Jur., sec 37, p. 899), the reason being that the contract of
guaranty is unilateral (Visayan Surety and nsurance Corporation vs.
Laperal, G.R. No. 46515, promulgated June 14, 1940).
Credit Transactions Full Text Cases Atty. Adviento!!!!($
The decision appealed from will be, as the same is hereby, affirmed, with
costs of this instance against the petitioner. So ordered.
SECOND DVSON

G.R. No. 107062 February 21, 1994
PHILIPPINE PRYCE ASSURANCE CORPORATION, petitioner,
vs.
THE COURT OF APPEALS, (Fourteenth Division) and GEGROCO,
INC., respondents.
Ocampo, Dizon & Domingo and Rey Nathaniel C. Ifurung for petitioner.
A.M. Sison, Jr. & Associates for private respondent.

NOCON, J.:
Two purely technical, yet mandatory, rules of procedure frustrated
petitioner's bid to get a favorable decision from the Regional Trial Court
and then again in the Court of Appeals.
1
These are non-appearance
during the pre-trial despite due notice, and non-payment of docket fees
upon filing of its third-party complaint. Just how strict should these rules be
applied is a crucial issue in this present dispute.
Petitioner, nterworld Assurance Corporation (the company now carries the
corporate name Philippine Pryce Assurance Corporation), was the butt of
the complaint for collection of sum of money, filed on May 13, 1988 by
respondent, Gegroco, nc. before the Makati Regional Trial Court, Branch
138. The complaint alleged that petitioner issued two surety bonds (No.
0029, dated July 24, 1987 and No. 0037, dated October 7, 1987) in behalf
of its principal Sagum General Merchandise for FVE HUNDRED
THOUSAND (P500,000.00) PESOS and ONE MLLON (1,000,000.00)
PESOS, respectively.
On June 16, 1988, summons, together with the copy of the complaint, was
served on petitioner. Within the reglementary period, two successive
motions were filed by petitioner praying for a total of thirty (30) days
extention within which to file a responsible pleading.
n its Answer, dated July 29, 1988, but filed only on August 4, 1988,
petitioner admitted having executed the said bonds, but denied liability
because allegedly 1) the checks which were to pay for the premiums
bounced and were dishonored hence there is no contract to speak of
between petitioner and its supposed principal; and 2) that the bonds were
merely to guarantee payment of its principal's obligation, thus, excussion
is necessary. After the issues had been joined, the case was set for pre-
trial conference on September 29, 1988. the petitioner received its notice
on September 9, 1988, while the notice addressed to its counsel was
returned to the trial court with the notation "Return to Sender, Unclaimed."
2
On the scheduled date for pre-trial conference, only the counsel for
petitioner appeared while both the representative of respondent and its
counsel were present. The counsel for petitioner manifested that he was
unable to contract the Vice-President for operations of petitioner, although
his client intended to file a third party complaint against its principal.
Hence, the pre-trial was re-set to October 14, 1988.
3
On October 14, 1988, petitioner filed a "Motion with Leave to Admit Third-
Party Complaint" with the Third-Party Complaint attached. On this same
day, in the presence of the representative for both petitioner and
respondent and their counsel, the pre-trial conference was re-set to
December 1, 1988. Meanwhile on November 29, 1988, the court admitted
the Third Party Complaint and ordered service of summons on third party
defendants.
4
On scheduled conference in December, petitioner and its counsel did not
appear notwithstanding their notice in open court.
5
The pre-trial was
nevertheless re-set to February 1, 1989. However, when the case was
called for pre-trial conference on February 1, 1989, petitioner was again
nor presented by its officer or its counsel, despite being duly notified.
Hence, upon motion of respondent, petitioner was considered as in default
and respondent was allowed to present evidence ex-parte, which was
calendared on February 24, 1989.
6
Petitioner received a copy of the Order
of Default and a copy of the Order setting the reception of respondent's
evidence ex-parte, both dated February 1, 1989, on February 16, 1989.
7
On March 6, 1989, a decision was rendered by the trial court, the
dispositive portion reads:
WHEREFORE, judgment is hereby rendered in favor
of the plaintiff and against the defendant nterworld
Assurance Corporation to pay the amount of
P1,500,000.00 representing the principal of the
amount due, plus legal interest thereon from April 7,
1988, until date of payment; and P20,000.00 as and
for attorney's fees.
8
Petitioner's "Motion for Reconsideration and New Trial" dated April 17,
1989, having been denied it elevated its case to the Court of Appeals
which however, affirmed the decision of the trial court as well as the latter's
order denying petitioner's motion for reconsideration.
Before us, petitioner assigns as errors the following:
. The respondent Court of Appeals gravely erred in
declaring that the case was already ripe for pre-trial
conference when the trial court set it for the holding
thereof.
. The respondent Court of Appeals gravely erred in
affirming the decision of the trial court by relying on
the ruling laid down by this Honorable Court in the
case of Manchester Development Corporation v.
Court of Appeals, 149 SCRA 562, and disregarding
the doctrine laid down in the case of Sun nsurance
Office, Ltd. (SOL) v. Asuncion, 170 SCRA 274.
. The respondent Court of Appeals gravely erred in
declaring that it would be useless and a waste of time
to remand the case for further proceedings as
defendant-appellant has no meritorious defense.
We do not find any reversible error in the conclusion reached by the court
a quo.
Relying on Section 1, Rule 20 of the Rules of court, petitioner argues that
since the last pleading, which was supposed to be the third-party
defendant's answer has not been filed, the case is not yet ripe for pre-trial.
This argument must fail on three points. First, the trial court asserted, and
we agree, that no answer to the third party complaint is forthcoming as
petitioner never initiated the service of summons on the third party
defendant. The court further said:
. . . Defendant's claim that it was not aware of the
Order admitting the third-party complaint is
preposterous. Sec. 8, Rule 13 of the Rules, provides:
Completeness of service . . .
Service by registered mail is
complete upon actual receipt by
the addressee, but if he fails to
claim his mail from the post office
within five (5) days from the date
of first notice of the postmaster,
service shall take effect at the
expiration of such time.
9
Credit Transactions Full Text Cases Atty. Adviento!!!!(%
Moreover, we observed that all copies of notices and orders issued by the
court for petitioner's counsel were returned with the notation "Return to
Sender, Unclaimed." Yet when he chose to, he would appear in court
despite supposed lack of notice.
Second, in the regular course of events, the third-party defendant's answer
would have been regarded as the last pleading referred to in Sec. 1, Rule
20. However, petitioner cannot just disregard the court's order to be
present during the pre-trial and give a flimsy excuse, such as that the
answer has yet to be filed.
The pre-trial is mandatory in any action, the main objective being to
simplify, abbreviate and expedite trial, if not to fully dispense with it.
Hence, consistent with its mandatory character the Rules oblige not only
the lawyers but the parties as well to appear for this purpose before the
Court
10
and when a party fails to appear at a pre-trial conference he may
be non-suited or considered as in default.
11
Records show that even at the very start, petitioner could have been
declared as in default since it was not properly presented during the first
scheduled pre-trial on September 29, 1988. Nothing in the record is
attached which would show that petitioner's counsel had a special
authority to act in behalf of his client other than as its lawyer.
We have said that in those instances where a party may not himself be
present at the pre-trial, and another person substitutes for him, or his
lawyer undertakes to appear not only as an attorney but in substitution of
the client's person, it is imperative for that representative or the lawyer to
have "special authority" to enter into agreements which otherwise only the
client has the capacity to make.
12
Third, the court of Appeals properly considered the third-party complaint
as a mere scrap of paper due to petitioner's failure to pay the requisite
docket fees. Said the court a quo:
A third-party complaint is one of the pleadings for
which Clerks of court of Regional Trial Courts are
mandated to collect docket fees pursuant to Section
5, Rule 141 of the Rules of Court. The record is bereft
of any showing tha(t) the appellant paid the
corresponding docket fees on its third-party complaint.
Unless and until the corresponding docket fees are
paid, the trial court would not acquire jurisdiction over
the third-party complaint (Manchester Development
Corporation vs. Court of Appeals, 149 SCRA 562).
The third-party complaint was thus reduced to a mere
scrap of paper not worthy of the trial court's attention.
Hence, the trial court can and correctly set the case
for pre-trial on the basis of the complaint, the answer
and the answer to the counterclaim.
13
t is really irrelevant in the instant case whether the ruling in Sun nsurance
Office, Ltd. (SOL) v. Asuncion
14
or that in Manchester Development Corp.
v. C.A.
15
was applied. Sun nsurance and Manchester are mere reiteration
of old jurisprudential pronouncements on the effect of non-payment of
docket fees.
16
n previous cases, we have consistently ruled that the court
cannot acquire jurisdiction over the subject matter of a case, unless the
docket fees are paid.
Moreover, the principle laid down in Manchester could have very well been
applied in Sun nsurance. We then said:
The principle in Manchester [Manchester
Development Corp. v. C.A., 149 SCRA 562 (1987)]
could very well be applied in the present case. The
pattern and the intent to defraud the government of
the docket fee due it is obvious not only in the filing of
the original complaint but also in the filing of the
second amended complaint.
xxx xxx xxx
n the present case, a more liberal interpretation of the
rules is called for considering that, unlike Manchester,
private respondent demonstrated his willingness to
abide by the rules by paying the additional docket
fees as required. The promulgation of the decision in
Manchester must have had that sobering influence on
private respondent who thus paid the additional
docket fee as ordered by the respondent court. t
triggered his change of stance by manifesting his
willingness to pay such additional docket fees as may
be ordered.
17
Thus, we laid down the rules as follows:
1. t is not simply the filing of the complaint or
appropriate initiatory pleading, but the payment of the
prescribed docket fee, that vests a trial court with
jurisdiction over the subject-matter or nature of the
action. Where the filing of the initiatory pleading is not
accompanied by payment of the docket fee, the court
may allow payment of the fee within a reasonable
time, but in no case beyond the applicable
prescriptive or reglamentary period.
2. The same rule applies to permissive counterclaims,
third-party claims and similar pleadings, which shall
not be considered filed until and unless the filing fee
prescribed therefor is paid. The court may also allow
payment of said fee within a prescriptive or
reglementary period.
3. Where the trial court acquires jurisdiction over a
claim by the filing of the appropriate pleading and
payment of the prescribed filing fee, but subsequently,
the judgment awards a claim nor specified in the
pleading, or if specified the same has not been left for
determination by the court, the additional filing fee
therefor shall constitute a lien on the judgment. t shall
be the responsibility of the clerk of court or his duly
authorized deputy to enforce said lien and assess and
collect the additional
fee.
18
t should be remembered that both in Manchester and Sun nsurance
plaintiffs therein paid docket fees upon filing of their respective pleadings,
although the amount tendered were found to be insufficient considering
the amounts of the reliefs sought in their complaints. n the present case,
petitioner did not and never attempted to pay the requisite docket fee.
Neither is there any showing that petitioner even manifested to be given
time to pay the requisite docket fee, as in fact it was not present during the
scheduled pre-trial on December 1, 1988 and then again on February 1,
1989. Perforce, it is as if the third-party complaint was never filed.
Finally, there is reason to believe that partitioner does not really have a
good defense. Petitioner hinges its defense on two arguments, namely: a)
that the checks issued by its principal which were supposed to pay for the
premiums, bounced, hence there is no contract of surety to speak of; and
2) that as early as 1986 and covering the time of the Surety Bond,
nterworld Assurance Company (now Phil. Pryce) was not yet authorized
by the insurance Commission to issue such bonds.
The nsurance Code states that:
Sec. 177. The surety is entitled to payment of the
premium as soon as the contract of suretyship or
bond is perfected and delivered to the obligor. No
contract of suretyship or bonding shall be valid and
binding unless and until the premium therefor has
been paid, except where the obligee has accepted the
bond, in which case the bond becomes valid and
enforceable irrespective of whether or not the
premium has been paid by the obligor to the surety. . .
. (emphasis added)
Credit Transactions Full Text Cases Atty. Adviento!!!!(&
The above provision outrightly negates petitioner's first defense. n a
desperate attempt to escape liability, petitioner further asserts that the
above provision is not applicable because the respondent allegedly had
not accepted the surety bond, hence could not have delivered the goods
to Sagum Enterprises. This statement clearly intends to muddle the facts
as found by the trial court and which are on record.
n the first place, petitioner, in its answer, admitted to have issued the
bonds subject matter of the original action.
19
Secondly, the testimony of
Mr. Leonardo T. Guzman, witness for the respondent, reveals the
following:
Q. What are the conditions and
terms of sales you extended to
Sagum General Merchandise?
A. First, we required him to
submit to us Surety Bond to
guaranty payment of the spare
parts to be purchased. Then we
sell to them on 90 days credit.
Also, we required them to issue
post-dated checks.
Q. Did Sagum General
merchandise comply with your
surety bond requirement?
A. Yes. They submitted to us and
which we have accepted two
surety bonds.
Q Will you please present to us
the aforesaid surety bonds?
A. nterworld Assurance Corp.
Surety Bond No. 0029 for
P500,000 dated July 24, 1987
and nterworld Assurance Corp.
Surety Bond No. 0037 for
P1,000.000 dated October 7,
1987.
20
Likewise attached to the record are exhibits C to C-18
21
consisting of
delivery invoices addressed to Sagum General Merchandise proving that
parts were purchased, delivered and received.
On the other hand, petitioner's defense that it did not have authority to
issue a Surety Bond when it did is an admission of fraud committed
against respondent. No person can claim benefit from the wrong he
himself committed. A representation made is rendered conclusive upon the
person making it and cannot be denied or disproved as against the person
relying thereon.
22
WHEREFORE, in view of the foregoing, the decision of the Court of
Appeals dismissing the petition before them and affirming the decision of
the trial court and its order denying petitioner's Motion for Reconsideration
are hereby AFFRMED. The present petition is DSMSSED for lack of
merit.
SO ORDERED.
EN BANC
G.R. No. 43486 September 30, 1936
THE MUNICIPALITY OF GASAN, plaintiff-appellee,
vs.
MIGUEL MARASIGAN, ANGEL R. SEVILLA and GONZALO L. LUNA,
defendants-appellants.
Luis Atienza Bijis for appellants.
Provincial Fiscal Noel of Marinduque for appellee.
DIAZ, J.:
This is an action brought by the municipality of Gasan of the Province of
Marinduque, against Miguel Marasigan, Angel R. Sevilla and Gonzalo L.
Luna, to recover from them the sum of P3,780, alleging that it forms a part
of the license fees which Miguel Marasigan failed to pay for the privilege
granted him of gathering whitefish spawn (semillas de bagus) in the
jurisdictional waters of the plaintiff municipality during the period from
January 1, 1931, to December 31 of said year.
The Court of First nstance of Marinduque, which tried the case, rendered
a decision adverse to the defendants, sentencing them to pay jointly to the
plaintiff said sum of P3,780 with legal interest thereon from August 19,
1932, until fully paid, plus the costs of the suit. From said judgment, the
defendants appealed to this court, attributing to the lower court the five
alleged errors relied upon in their brief, as follows:
. The court a quo erred in holding and maintaining that,
notwithstanding the fact that resolution No. 161 of the municipal
council of Gasan which gave rise to the contract and bond,
Exhibits A and B, respectively, of the complaint, has been
declared null and void by the provincial board and by the
Executive Bureau, the contract and bond in question are valid
and, consequently, enforceable on the ground that said
resolution No. 161 is within or had been adopted within the
powers of the council.
. The court a quo erred in holding that even granting that the
contract Exhibit A is not valid de jure, it is a de facto contract as
to the defendants, particularly the defendant-grantee Miguel
Marasigan.
. The court a quo erred in not absolving the defendants Angel
R. Sevilla and Gonzalo L. Luna, sureties of the defendant
Miguel Marasigan, notwithstanding the fact that resolution No.
161, by virtue of which said defendant subscribed the bond
Exhibit B of the complaint, had been declared null and void by
the provincial board and by the Executive Bureau.
V. The court a quo erred in holding that the herein defendant
Miguel Marasigan had taken advantage of the privilege to catch
or gather whitefish spawn in the jurisdictional waters of the
municipality of Gasan, during the period from January 1, to
December 31, 1931, notwithstanding the fact that counsel for
the plaintiff municipality failed to present evidence, either
documentary or oral, to justify said fact.
V. The court a quo erred in not absolving each and every one of
the herein defendants from the complaint, and in not ordering
the plaintiff municipality to return to the defendant Miguel
Marasigan the sums of four hundred twenty pesos (P420) and
eight hundred forty pesos (P840) deposited with said plaintiff,
with interest thereon from the respective dates of their deposit,
until their return.
The case was tried by the lower court with no other evidence than the
admissions made by the parties in the stipulation of facts mentioned in the
body of the decision, the pertinent parts of which will be discussed later.
Said stipulation and the attached papers forming a part thereof enables
this court to narrate the material facts of the case, as follows:
The plaintiff-appellee municipality, on December 9, 1930, put up at auction
the privilege of gathering whitefish spawn in its jurisdictional waters for the
period of one year from January 1, 1931. Two bidders, Graciano Napa and
Miguel Marasigan, appeared at the auction. Both attached to their
respective bids the certificate of not being behind in the payment of any
tax, issued by the municipal treasurer of Gasan, Marinduque, as required
by the provisions of resolution No. 42, series of 1930, of the council of said
municipality. Graciano Napa proposed to accept the privilege by paying
Credit Transactions Full Text Cases Atty. Adviento!!!!('
P5,000 therefor, Miguel Marasigan proposed to do likewise, but by paying
only P4,200.
The council of the plaintiff-appellee municipality, in its resolution No. 161
(Exhibit 1) of December 11, 1930 rejected Graciano Napa's bid and
accepted that of the appellant Miguel Marasigan, granting and selling to
the latter the privilege put up at auction for the sum of P4,200, payable
quarterly in advance at the rate of P1,050 a quarter (Exhibit A). To secure
his compliance with the terms of the contract which was immediately
formalized by him and the plaintiff, and pursuant to the provisions of
section 8 of resolution No. 128, series of 1925, of the council of said
plaintiff, Miguel Marasigan filed the bond, Exhibit B, subscribed on
December 15, 1930, by the defendants-appellants Angel R. Sevilla and
Gonzalo L. Luna, who bound themselves in said document to pay to the
plaintiff the sum of P8,400, if Miguel Marasigan failed to deposit one-fourth
of P4,200 quarterly in advance in the municipal treasury of Gasan, in
violation of the terms of the contract executed and entered into by him and
the plaintiff on December 11, 1930 (Exhibit A), for the compliance with
which they became sureties.
Before the plaintiff municipality and Miguel Marasigan entered into their
contract, and also before the latter's sureties executed the above-stated
bond, Graciano Napa, whose bid was rejected for the reason that he had
not attached thereto the certificate that he is not behind in the payment of
any tax which he should have obtained from the municipal treasurer of
Lemery, his native town, forwarded a protest (Exhibit 4) to the provincial
board, which protest was later indorsed by said provincial board to the
Chief of the Executive Bureau, alleging that the plaintiff municipality
violated the provisions of section 2323 of the Administrative Code in
rejecting his bid.
The provincial board, passing upon Graciano Napa's protest and acting
under the authority which, in its opinion, was granted to it by section 2233
of the Administrative Code, held that resolution No. 161, series of 1930, by
virtue of which the municipal council of Gasan rejected Graciano Napa's
bid and accepted that of Miguel Marasigan, notwithstanding the fact that
the latter offered to pay less, was invalid, and suggested that the privilege
should be, awarded to Graciano Napa who, in its opinion, appeared to be
the highest bidder in accordance with the provisions of sections 2323 and
2319 of the Administrative Code (Exhibit 9). The Executive Bureau,
concurring with the provincial board's points of view, declared, in turn, that
the concession made to Marasigan was illegal in view of the fact that
Graciano Napa was the highest bidder (Exhibit 13).
The plaintiff municipality, through its municipal council, exerted efforts to
obtain the reconsideration of the decisions of the provincial board of
Marinduque and of the Executive Bureau but, as these two entities
maintained their decisions (Exhibits 14, 15, 16, 17 and 18), it decided, in
its resolution No. 11, series of 1931 (Exhibit 19), to award the privilege of
gathering whitefish spawn within its waters to Graciano Napa, giving him a
period of six days, which was later extended to seven days, from January
8, 1931 (Exhibit 19-A), to deposit the sum of P500, equivalent to 10 per
cent of his bid of P5,000, with the municipal treasurer of Gasan, so as to
comply with the provisions of section 8 of the conditions of the public
auction at which he was a bidder, warning him that if he failed to do so, the
contract entered into by the plaintiff, through its president, and the
appellant Miguel Marasigan (Exhibit A), would automatically take effect.
Graciano Napa not only failed to make the deposit required by the plaintiff
in its two above-stated resolutions Nos. 11 and 12, series of 1931 (Exhibits
19 and 19-A), but he formally declared, through his duly authorized
representative, that he yielded the privilege granted him to Miguel
Marasigan or to any other person selected by the municipal authorities
(Exhibit 20).
One day later, or on January 15, 1931, the president of the plaintiff-
appellee municipality sent the letter Exhibit 21 to Miguel Marasigan, which
reads:
SR:
By virtue of Res. No. 11, c. s., as amended by Res. No. 12,
same series, and communication of Mr. J. Zaguirre dated
January 14, 1931 copy of which is hereto attached, you are
hereby advised that the contract entered into between you and
the municipality of Gasan for the lease of the bagus fishery
privilege for the year 1931 becomes effective on January 14,
1931, to run until December 31, 1931.
You are hereby requested to appear before the session of the
Municipal Council to be held at the office of the undersigned
tomorrow, January 16, 1931, bringing with yourself the contract
and bond executed in your favor for ratification.
You are further informed that you are given 10 days from the
date hereof, within which time you are to pay the amount of
P1,050, as per tax corresponding to the first quarter, 1931.
Prior to this, but after the adoption by the municipal council of Gazan of its
resolution No. 163 (Exhibit 7) on December 16, 1930, and two days before
the provincial board declared said council's resolutions Nos. 161 and 163
invalid, the president of the plaintiff-appellee municipality notified the
appellant Miguel Marasigan that the contract whereby he was granted the
privilege of gathering whitefish spawn during the year 1931, upon his offer
to pay P4,200 a year therefor, was suspended and that he should consider
it ineffective in the meantime in view of the fact that the question whether
he (Miguel Marasigan) or Graciano Napa was the highest bidder still
remained undecided by the provincial board of Marinduque and by the
Executive Bureau. The English translation of the letter sent by the
municipal president to Miguel Marasigan, which was written in Tagalog
(Exhibit 8), reads:
SR:
n view of the fact that the whitefish (bagus) case has not been
decided or determined by the provincial board and is still
pending action to date, and in view of the instructions given me
by the representative of the Executive Bureau, Mr. Jose
Zaguirre, beg to inform you, with due respect, that you should
refrain from carrying out and giving efficacy to the contract
signed by me in the name of the municipality, relative to the
privilege of gathering whitefish in your favor, from this date until
further notice, because this case is still pending action.
Knowing the above-stated facts, let us now turn to the consideration of the
alleged errors attributed to the lower court by the appellants.
The first and third errors should be considered jointly on account of the
close relation existing between them. The determination of one depends
upon that of the other.
This court believes that there is no necessity of even discussing the first
error because the plaintiff itself accepted the conclusions and decision of
the provincial board and of the Executive Bureau, so much so that in its
resolution No. 11, series of 1931, it thereafter considered Graciano Napa
as the highest bidder, going to the extent of requiring him, as it in fact
required him, to make the deposit of P500 prescribed by the conditions of
the auction sale in which he had intervened, and granting him a period of
seven days to comply with said requirement (Exhibits 19 and 19-A).
Furthermore, when the plaintiff received Graciano Napa's notice informing
it that he ceded the privilege just granted him to appellant Miguel
Marasigan or to any other person that it might choose, said plaintiff,
through its municipal president, required Miguel Marasigan to appear
before its municipal council to present his formerly prepared contract as
well as his bond in order that both documents might be ratified (Exhibit
21). t should be added to the foregoing that on December 18, 1930, the
plaintiff, also through its municipal president notified appellant Marasigan
that his contract should, in the meantime, be considered ineffectual and
that he should do nothing to put it in execution because the case was still
undecided by the provincial board and by the Executive Bureau (Exhibit
8). t is clear that it may be logically inferred from these facts that the
contract regarding fishing privilege entered into between the plaintiff and
appellant Marasigan on December 11, 1930 (Exhibit A), not only was not
consummated but was cancelled. Consequently, it now appears useless
and futile to discuss whether or not resolution No. 161 (Exhibit 1) is valid
and legal. n either case, it is a fact that, said contract ceased to have life
or force to bind each of the contracting parties. t ceased to be valid from
the time it was cancelled and this being so, neither the appellant
Marasigan nor his sureties or the appellants were bound to comply with
Credit Transactions Full Text Cases Atty. Adviento!!!!((
the terms of their respective contracts of fishing privilege and suretyship.
This is so, particularly with respect to the sureties-appellants, because
suretyship cannot exist without a valid obligation (art. 1824 of the Civil
Code). The obligation whose compliance by the appellant Marasigan was
guaranteed by the sureties-appellants, was exclusively that appearing in
Exhibit A, which should begin on January 1, 1931, not on the 14th of said
month and year, and end on December 31st next. They intervened in no
other subsequent contract which the plaintiff and Miguel Marasigan might
have entered into on or after January 14, 1931. Guaranty is not, presume;
it must be expressed and cannot be extended beyond its specified limits
(art. 1827 of the Civil Code). Therefore, after eliminating the obligation for
which said sureties-appellants desired to answer with their bond, the bond
necessarily ceased and it ceases to have effects. Consequently, said
errors and are true and well founded.
As to the second error it must be known that among the stipulations
contained in the stipulation of facts submitted to the court are the
following:
21. That on July 20, 1931, Miguel Marasigan paid the sum of
P16.20 to the municipal treasurer of Gasan, as internal revenue
tax on sales of whitefish (bagus) spawn amounting to P1,080
during the months of April, May and June, 1931; and that on
August 22, 1931, said Miguel Marasigan presented his sales
book to the municipal treasurer of Gasan, Mr. Gregorio D.
Chavez, it appearing therein that said Miguel Marasigan, in the
month of July, 1931, sold whitefish spawn amounting to P85; in
the month of August, 1931, none, and in the month of
September, 1931, none.
22. That Miguel Marasigan is he concessionaire of the privilege
to gather whitefish spawn in the jurisdictional waters of the
municipality of Boac, Marinduque, during the period from
January 1, 1931, to December 31 of said year, and that during
said period of time he had paid the sales tax on the whitefish
spawn in question only in the municipality of Gasan, without
having made any payment in the municipality of Boac.
23. That defendant Miguel Marasigan, as bidder at the auction
of December 9, 1930, deposited in the municipal treasury of
Gasan the sum of P420, equivalent to 10 per cent of his bid at
said auction, and that said sum has not yet been returned to him
to date.
24. That on June 29, 1931, said Miguel Marasigan delivered
another sum of P840 to the municipal treasurer of Gasan,
making the total amount delivered by him to said municipal
treasurer P1,260, the corresponding receipt having been issued
to Miguel Marasigan to that effect.
The facts resulting from the stipulations in question warrant and justify the
inference that the appellant Miguel Marasigan practically enjoyed the
privilege of gathering whitefish spawn in the jurisdictional waters of the
municipality of Gasan, under the terms of the contract executed by him on
December 11, 1930, but which was cancelled later by virtue of Graciano
Napa's protest, at least from the month of April to the month of July, 1931,
inclusive. f this were not true, he would not have paid, as he
spontaneously paid to the municipal treasurer of Gasan, the following
sums: P840 on June 29, 1931, and P16.20 on July 20 of said year, nor
presented, as he in fact presented to said official for inspection, his sales
book wherein it appears that his sales of whitefish spawn during the month
of July of said year amounted to P85. The stipulation of facts, however, is
silent as to whether or not he enjoyed the privilege in question during the
rest of the year. On the contrary, it states he sold no whitefish spawn in
August or September.
The excuse now offered by appellant Marasigan in his brief that the above-
stated amounts were on account of license fees or taxes on the privilege
of gathering whitefish spawn in the jurisdictional waters of Boac, obtained
by him from said municipality, is not supported by the evidence. f the
payments made by him as he claims them to be, he would have so stated
in the stipulations of facts. Not having done so and, furthermore, the
practice generally observed being to pay an obligation in the municipality
where the payment is due, the only conclusion possible is that said
appellant made all such payments on account of the-tacit contract entered
into by him and the plaintiff after he had received the letter of January 15,
1931 (Exhibit 21), sent to him by said plaintiff through its municipal
president. This conclusion is all the more logical because appellant
Marasigan insisted in his answer, and still continues to insist in his brief,
that the plaintiff is obliged to refund to him the amount of P1,260 which he
claims to have paid to it, and which is no other than the amount of the two
sums of P420 and P840 stated in the last two paragraphs of the
abovestated stipulation of facts. f it were really true, as said appellant
contends, that the sum of P840 was paid by him on account of his contract
for privilege of gathering whitefish spawn, executed in his favor by the
municipality of Boac, he would not have insisted in his answer, nor would
he now insist in his brief, that said sum be refunded to him, because in the
absence of evidence to the contrary, it must be presumed that it was
transmitted by the municipal treasurer of Gasan to that of Boac, inasmuch
as accepting his contention, he was obliged to pay something to the latter
municipality by virtue of his alleged contract with it.
For the foregoing reasons, the conclusion of this court with respect to the
second error attributed to the lower court by appellant Marasigan is that
said error is without merit. The truth is that between him and the plaintiff,
there was a tacit contract for the privilege of gathering whitefish spawn in
he jurisdictional waters of the municipality of Gasan, based upon Exhibit A
but without the intervention of the sureties-appellants, for the above-stated
period, or from April to July, 1931, inclusive, which is equivalent to one and
one-third quarter. Said contract was one which, by its nature, need not be
in writing (sec. 335 of Act No. 190); but it is binding because it has all the
essential requisites of a valid contract (art. 1278 of the Civil Code).
The fourth error is practically disposed of by the same reasons stated in
passing upon the second error.
As to the fifth error, it must be stated that appellant Marasigan really
deposited in the municipal treasury of Gasan, as stated in paragraph 23 of
the stipulation of facts, the sum of P420 on account of his cancelled
original contract (Exhibit A), and that said deposit has not yet been
returned to him. Therefore, he is entitled to be credited with said sum.
Summarizing all that has been stated heretofore, this court holds that
appellant Miguel Marasigan owes and is bound to pay to the plaintiff
municipality the proceeds of one and one-third quarter, for the privilege of
gathering whitefish spawn enjoyed by him in 1931, at the rate of P4,200 a
year or P1,400 (P1,050 for one quarter and P350 for one-third of a
quarter); but he is, in turn, entitled to be credited with the sum of P420
deposited by him on December 9, 1930, and P840 paid by him on June
29, 1931, or the total amount of P1,260. n other words, appellant
Marasigan is bound to pay the sum of P140 to the plaintiff.
n view of the foregoing considerations, this court absolves the
defendants-appellants Angel R. Sevilla and Gonzalo L. Luna from the
complaint and orders the defendant-appellant Miguel Marasigan to pay the
sum of P140 to the plaintiff municipality.
t is considered unnecessary to expressly mention appellant Miguel
Marasigan's counterclaim because, as may be seen, he is credited in this
judgment with the sum of P1,260 which is all that he claims therein,
without special pronouncement as to costs. So ordered.
FRST DVSON
G.R. No. 165662 May 3, 2006
SELEGNA MANAGEMENT AND DEVELOPMENT CORPORATION; and
Spouses EDGARDO and ZENAIDA ANGELES, Petitioners,
vs.
UNITED COCONUT PLANTERS BANK,* Respondent.
D E C S O N
PANGANIBAN, CJ:
Credit Transactions Full Text Cases Atty. Adviento!!!!()
A writ of preliminary injunction is issued to prevent an extrajudicial
foreclosure, only upon a clear showing of a violation of the mortgagor's
unmistakable right. Unsubstantiated allegations of denial of due process
and prematurity of a loan are not sufficient to defeat the mortgagee's
unmistakable right to an extrajudicial foreclosure.
The Case
Before us is a Petition for Review
1
under Rule 45 of the Rules of Court,
assailing the May 4, 2004 Amended Decision
2
and the October 12, 2004
Resolution
3
of the Court of Appeals (CA) in CA-GR SP No. 70966. The
challenged Amended Decision disposed thus:
"WHEREFORE, the Motion for Reconsideration is GRANTED. The July
18, 2003 Decision is hereby REVERSED and SET ASDE and another one
entered GRANTNG the petition and REVERSNG and SETTNG ASDE
the March 15, 2002 Order of the Regional Trial Court, Branch 58, Makati
City in Civil Case No. 99-1061."
4
The assailed Resolution denied reconsideration.
The Facts
On September 19, 1995, Petitioners Selegna Management and
Development Corporation and Spouses Edgardo and Zenaida Angeles
were granted a credit facility in the amount of P70 million by Respondent
United Coconut Planters Bank (UCPB). As security for this credit facility,
petitioners executed real estate mortgages over several parcels of land
located in the cities of Muntinlupa, Las Pias, Antipolo and Quezon; and
over several condominium units in Makati. Petitioners were likewise
required to execute a promissory note in favor of respondent every time
they availed of the credit facility. As required in these notes, they paid the
interest in monthly amortizations.
The parties stipulated in their Credit Agreement dated September 19,
1995,
5
that failure to pay "any availment of the accommodation or interest,
or any sum due" shall constitute an event of default,
6
which shall
consequently allow respondent bank to "declare [as immediately due and
payable] all outstanding availments
of the accommodation together with accrued interest and any other sum
payable."
7

n need of further business capital, petitioners obtained from UCPB an
increase in their credit facility.
8
For this purpose, they executed a
Promissory Note for P103,909,710.82, which was to mature on March 26,
1999.
9
n the same note, they agreed to an interest rate of 21.75 percent
per annum, payable by monthly amortizations.
On December 21, 1998, respondent sent petitioners a demand letter,
worded as follows:
"Gentlemen:
"With reference to your loan with principal outstanding balance of
[P103,909,710.82], it appears from the records of United Coconut Planters
Bank that you failed to pay interest amortizations amounting to
[P14,959,525.10] on the Promissory Note on its due date, 30 May 1998.
"x x x x x x x x x
"Accordingly, formal demand is hereby made upon you to pay your
outstanding obligations in the total amount of P14,959,525.10, which
includes unpaid interest and penalties as of 21 December 1998 due on the
promissory note, eight (8) days from date hereof."
10
Respondent decided to invoke the acceleration provision in their Credit
Agreement. Accordingly, through counsel, it relayed its move to petitioners
on January 25, 1999 in a letter, which we quote:
"Gentlemen:
"x x x x x x x x x
"t appears from the record of [UCPB] that you failed to pay the monthly
interest due on said obligation since May 30, 1998 as well as the penalty
charges due thereon. Despite repeated demands, you refused and
continue to refuse to pay the same. Under the Credit Agreements/Letter
Agreements you executed, failure to pay when due any installments of the
loan or interest or any sum due thereunder, is an event of default.
"Consequently, we hereby inform you that our client has declared your
principal obligation in the amount of [P103,909,710.82], interest and sums
payable under the Credit Agreement/Letter Agreement/Promissory Note to
be immediately due and payable.
"Accordingly, formal demand is hereby made upon you to please pay
within five (5) days from date hereof or up to January 29, 1999 the
principal amount of [P103,909,710.82], with the interest, penalty and other
charges due thereon, which as of January 25, 1999 amounts to
[P17,351,478.55]."
11
Respondent sent another letter of demand on March 4, 1999. t contained
a final demand on petitioners "to settle in full [petitioners'] said past due
obligation to [UCPB] within five (5) days from [petitioners'] receipt of [the]
letter."
12

n response, petitioners paid respondent the amount of P10,199,473.96 as
partial payment of the accrued interests.
13
Apparently unsatisfied, UCPB
applied for extrajudicial foreclosure of petitioners' mortgaged properties.
When petitioners received the Notice of Extra Judicial Foreclosure Sale on
May 18, 1999, they requested UCPB to give them a period of sixty (60)
days to update their accrued interest charges; and to restructure or, in the
alternative, to negotiate for a takeout of their account.
14
On May 25, 1999, the Bank denied petitioners' request in these words:
"This is to reply to your letter dated May 20, 1999, which confirms the
request you made the previous day when you paid us a visit.
"As earlier advised, your account has been referred to external counsel for
appropriate legal action. Demand has also been made for the full
settlement of your account.
"We regret that the Bank is unable to grant your request unless a definite
offer is made for settlement."
15
n order to forestall the extrajudicial foreclosure scheduled for May 31,
1999, petitioners filed a Complaint
16
(docketed as Civil Case No. 99-1061)
for "Damages, Annulment of nterest, Penalty ncrease and Accounting
with Prayer for Temporary Restraining Order/Preliminary njunction." All
subsequent proceedings in the trial court and in the CA involved only the
propriety of issuing a TRO and a writ of preliminary injunction.
Judge Josefina G. Salonga,
17
then executive judge of the Regional Trial
Court (RTC) of Makati City, denied the Urgent Ex-parte Motion for
mmediate ssuance of a Temporary Restraining Order (TRO), filed by
petitioners. Judge Salonga denied their motion on the ground that no great
or irreparable injury would be inflicted on them if the parties would first be
heard.
18
Unsatisfied, petitioners filed an Ex-Parte Motion for
Reconsideration, by reason of which the case was eventually raffled to
Branch 148, presided by Judge Oscar B. Pimentel.
19
After due hearing, Judge Pimentel issued an Order dated May 31, 1999,
granting a 20-day TRO on the scheduled foreclosure of the Antipolo
properties, on the ground that the Notice of Foreclosure had indicated an
inexistent auction venue.
20
To resolve that issue, respondent filed a
Manifestation
21
that it would withdraw all its notices relative to the
foreclosure of the mortgaged properties, and that it would re-post or re-
Credit Transactions Full Text Cases Atty. Adviento!!!!(*
publish a new set of notices. Accordingly, in an Order dated September 6,
1999,
22
Judge Pimentel denied petitioners' application for a TRO for having
been rendered moot by respondent's Manifestation.
23

Subsequently, respondent filed new applications for foreclosure in the
cities where the mortgaged properties were located. Undaunted,
petitioners filed another Motion for the ssuance of a TRO/njunction and a
Supplementary Motion for the ssuance of TRO/njunction with Motion to
Clarify Order of September 6, 1999.
24
On October 27, 1999, Judge Pimentel issued an Order
25
granting a 20-day
TRO in favor of petitioners. After several hearings, he issued his
November 26, 1999 Order,
26
granting their prayer for a writ of preliminary
injunction on the foreclosures, but only for a period of twenty (20) days.
The Order states:
"Admitted by defendant witness is the fact that in all the notices of
foreclosure sale of the properties of the plaintiffs x x x it is stated in each
notice that the property will be sold at public auction to satisfy the
mortgage indebtedness of plaintiffs which as of August 31, 1999 amounts
to P131,854,773.98.
"x x x x x x x x x
"As the court sees it, this is the problem that should be addressed by the
defendant in this case and in the meantime, the notice of foreclosure sale
should be held in abeyance until such time as these matters are clarified
and cleared by the defendants x x x Should the defendant be able to
remedy the situation this court will have no more alternative but to allow
the defendant to proceed to its intended action.
"x x x x x x x x x
"WHEREFORE, premises considered, and finding compelling reason at
this point in time to grant the application for preliminary injunction, the
same is hereby granted upon posting of a preliminary injunction bond in
the amount of P3,500,000.00 duly approved by the court, let a writ of
preliminary injunction be issued."
27
The corresponding Writ of Preliminary njunction
28
was issued on
November 29, 1999.
Respondent moved for reconsideration. On the other hand, petitioners
filed a Motion to Clarify Order of November 26, 1999. Conceding that the
November 26 Order had granted an injunction during the pendency of the
case, respondent contended that the injunctive writ merely restrained it for
a period of 20 (twenty) days.
On December 29, 2000, Judge Pimentel issued an Order
29
granting
respondent's Motion for Reconsideration and clarifying his November 26,
1999 Order in this manner:
"There may have been an error in the Writ of Preliminary njunction issued
dated November 29, 1999 as the same [appeared to be actually] an
extension of the TRO issued by this Court dated 27 October 1999 for
another 20 days period. Plaintiff's seeks to enjoin defendants for an
indefinite period pending trial of the case.
"Be that as it may, the Court actually did not have any intention of
restraining the defendants from foreclosing plaintiff[s'] property for an
indefinite period and during the entire proceeding of the case x x x.
"x x x x x x x x x
"What the [c]ourt wanted the defendants to do was to merely modify the
notice of [the] auction sale in order that the amount of P131,854,773.98 x
x x would not appear to be the value of each property being sold on
auction. x x x.
30
"WHEREFORE, premises considered and after finding merit on the
arguments raised by herein defendants to be impressed with merit, and
having stated in the Order dated 26 November 1999 that no other
alternative recourse is available than to allow the defendants to proceed
with their intended action, the Court hereby rules:
"1.] To give due course to defendant[']s motion for reconsideration, as the
same is hereby GRANTED, however, with reservation that this Order shall
take effect upon after its[] finality[.]"
31

Consequently, respondent proceeded with the foreclosure sale of some of
the mortgaged properties. On the other hand, petitioners filed an
"[O]mnibus [M]otion [for Reconsideration] and to [S]pecify the [A]pplication
of the P92 [M]illion [R]ealized from the [F]oreclosure [S]ale x x x."
32
Before
this Omnibus Motion could be resolved, Judge Pimentel inhibited himself
from hearing the case.
33

The case was then re-raffled to Branch 58 of the RTC of Makati City,
presided by Judge Escolastico U. Cruz.
34
The proceedings before him
were, however, all nullified by the Supreme Court in its En Banc
Resolution dated September 18, 2001.
35
He was eventually dismissed
from service.
36

The case was re-raffled to the pairing judge of Branch 58, Winlove M.
Dumayas. On March 15, 2002, Judge Dumayas granted petitioners'
Omnibus Motion for Reconsideration and Specification of the Foreclosure
Proceeds, as follows:
"WHEREFORE, premises considered, the Motion to Reconsider the Order
dated December 29, 2000 is hereby granted and the Order of November
26, 1999 granting the preliminary injunction is reinstated subject however
to the condition that all properties of plaintiffs which were extrajudicially
foreclosed though public bidding are subject to an accounting. [A]nd for
this purpose defendant bank is hereby given fifteen (15) days from notice
hereof to render an accounting on the proceeds realized from the
foreclosure of plaintiffs' mortgaged properties located in Antipolo, Makati,
Muntinlupa and Las Pias."
37
The aggrieved respondent filed before the Court of Appeals a Petition for
Certiorari, seeking the nullification of the RTC Order dated March 15,
2002, on the ground that it was issued with grave abuse of discretion.
38

The Special Fifteenth Division, speaking through Justice Rebecca de
Guia-Salvador, affirmed the ruling of Judge Dumayas. t held that
petitioners had a clear right to an injunction, based on the fact that
respondent had kept them in the dark as to how and why their principal
obligation had ballooned to almost P132 million. The CA held that
respondent's refusal to give them a detailed accounting had prevented the
determination of the maturity of the obligation and precluded the possibility
of a foreclosure of the mortgaged properties. Moreover, their payment of
P10 million had the effect of updating, and thereby averting the maturity of,
the outstanding obligation.
39
Respondent filed a Motion for Reconsideration, which was granted by a
Special Division of Five of the Former Special Fifteenth Division.
Ruling of the Court of Appeals
Citing China Banking Corporation v. Court of Appeals,
40
the appellate court
held in its Amended Decision
41
that the foreclosure proceedings should not
be enjoined in the light of the clear failure of petitioners to meet their
obligations upon maturity.
42

Also citing Zulueta v. Reyes,
43
the CA, through Justice Jose Catral
Mendoza, went on to say that a pending question on accounting did not
warrant an injunction on the foreclosure.
Parenthetically, the CA added that petitioners were not without recourse or
protection. Further, it noted their pending action for annulment of interest,
damages and accounting. t likewise said that they could protect
themselves by causing the annotation of lis pendens on the titles of the
mortgaged or foreclosed properties.
Credit Transactions Full Text Cases Atty. Adviento!!!!)+
n his Separate Concurring Opinion,
44
Justice Magdangal M. de Leon
added that a prior accounting was not essential to extrajudicial
foreclosure. He cited Abaca Corporation v. Garcia,
45
which had ruled that
Act No. 3135 did not require mortgaged properties to be sold by lot or by
only as much as would cover just the obligation. Thus, he concluded that a
request for accounting -- for the purpose of determining whether the
proceeds of the auction would suffice to cover the indebtedness -- would
not justify an injunction on the foreclosure.
Petitioners filed a Motion for Reconsideration dated May 31, 2004, which
the appellate court denied.
46
Hence, this Petition.
47

ssues
Petitioners raise the following issues for our consideration:
p align"center""
"Whether or not the Honorable Court of Appeals denied the petitioners of
due process.
"
"Whether or not the Honorable Court of Appeals supported its Amended
Decision by invoking jurisprudence not applicable and completely identical
with the instant case.
"
"Whether or not the Honorable Court of Appeals failed to establish its
finding that RTC Judge Winlove Dumayas has acted with grave abuse of
discretion."
48
The resolution of this case hinges on two issues: 1) whether petitioners
are in default; and 2) whether there is basis for preliminarily enjoining the
extrajudicial foreclosure. The other issues raised will be dealt with in the
resolution of these two main questions.
The Court's Ruling
The Petition has no merit.
First ssue:
Default
The resolution of the present controversy necessarily begins with a
determination of respondent's right to foreclose the mortgaged properties
extrajudicially.
t is a settled rule of law that foreclosure is proper when the debtors are in
default of the payment of their obligation. n fact, the parties stipulated in
their credit agreements, mortgage contracts and promissory notes that
respondent was authorized to foreclose on the mortgages, in case of a
default by petitioners. That this authority was granted is not disputed.
Mora solvendi, or debtor's default, is defined as a delay
49
in the fulfillment
of an obligation, by reason of a cause imputable to the debtor.
50
There are
three requisites necessary for a finding of default. First, the obligation is
demandable and liquidated; second, the debtor delays performance; third,
the creditor judicially or extrajudicially requires the debtor's performance.
51

Mortgagors' Default of Monthly nterest Amortizations
n the present case, the Promissory Note executed on March 29, 1998,
expressly states that petitioners had an obligation to pay monthly interest
on the principal obligation. From respondent's demand letter,
52
it is clear
and undisputed by petitioners that they failed to meet those monthly
payments since May 30, 1998. Their nonpayment is defined as an "event
of default" in the parties' Credit Agreement, which we quote:
"Section 8.01. Events of Default. Each of the following events and
occurrences shall constitute an Event of Default of this AGREEMENT:
"1. The CLENT shall fail to pay, when due, any availment of the
Accommodation or interest, or any other sum due thereunder in
accordance with the terms thereof;1avvphil.net
"x x x x x x x x x"
"Section 8.02. Consequences of Default. (a) f an Event of Default shall
occur and be continuing, the Bank may:
"1. By written notice to the CLENT, declare all outstanding availments of
the Accommodation together with accrued interest and any other sum
payable hereunder to be immediately due and payable without
presentment, demand or notice of any kind, other than the notice
specifically required by this Section, all of which are expressly waived by
the CLENT[.]"
53
Considering that the contract is the law between the parties,
54
respondent
is justified in invoking the acceleration clause declaring the entire
obligation immediately due and payable.
55
That clause obliged petitioners
to pay the entire loan on January 29, 1999, the date fixed by respondent.
56
Petitioners' failure to pay on that date set into effect Article X of the Real
Estate Mortgage,
57
worded thus:
"f, at any time, an event of default as defined in the credit agreements,
promissory notes and other related loan documents referred to in
paragraph 5 of ARTCLE hereof (sic), or the MORTGAGOR and/or
DEBTOR shall fail or refuse to pay the SECURED OBLGATONS, or any
of the amortization of such indebtedness when due, or to comply any (sic)
of the conditions and stipulations herein agreed, x x x then all the
obligations of the MORTGAGOR secured by this MORTGAGE and all the
amortizations thereof shall immediately become due, payable and
defaulted and the MORTGAGEE may immediately foreclose this
MORTGAGE judicially in accordance with the Rules of Court, or
extrajudicially in accordance with Act No. 3135, as amended, and
Presidential Decree No. 385. For the purpose of extrajudicial foreclosure,
the MORTGAGOR hereby appoints the MORTGAGEE his/her/its attorney-
in-fact to sell the property mortgaged under Act No. 3135, as amended, to
sign all documents and perform any act requisite and necessary to
accomplish said purpose and to appoint its substitutes as such attorney-in-
fact with the same powers as above specified. x x x[.]"
58

The foregoing discussion satisfactorily shows that UCPB had every right to
apply for extrajudicial foreclosure on the basis of petitioners' undisputed
and continuing default.
Petitioners' Debt Considered Liquidated Despite the Alleged
Lack of Accounting
Petitioners do not even attempt to deny the aforementioned matters. They
assert, though, that they have a right to a detailed accounting before they
can be declared in default. As regards the three requisites of default, they
say that the first requisite -- liquidated debt -- is absent. Continuing with
foreclosure on the basis of an unliquidated obligation allegedly violates
their right to due process. They also maintain that their partial payment of
P10 million averted the maturity of their obligation.
59

On the other hand, respondent asserts that questions regarding the
running balance of the obligation of petitioners are not valid reasons for
Credit Transactions Full Text Cases Atty. Adviento!!!!)"
restraining the foreclosure. Nevertheless, it maintains that it has furnished
them a detailed monthly statement of account.
A debt is liquidated when the amount is known or is determinable by
inspection of the terms and conditions of the relevant promissory notes
and related documentation.
60
Failure to furnish a debtor a detailed
statement of account does not ipso facto result in an unliquidated
obligation.
Petitioners executed a Promissory Note, in which they stated that their
principal obligation was in the amount of P103,909,710.82, subject to an
interest rate of 21.75 percent per annum.
61
Pursuant to the parties' Credit
Agreement, petitioners likewise know that any delay in the payment of the
principal obligation will subject them to a penalty charge of one percent
per month, computed from the due date until the obligation is paid in full.
62
t is in fact clear from the agreement of the parties that when the payment
is accelerated due to an event of default, the penalty charge shall be
based on the total principal amount outstanding, to be computed from the
date of acceleration until the obligation is paid in full.
63
Their Credit
Agreement even provides for the application of payments.
64
t appears
from the agreements that the amount of total obligation is known or, at the
very least, determinable.
Moreover, when they made their partial payment, petitioners did not
question the principal, interest or penalties demanded from them. They
only sought additional time to update their interest payments or to
negotiate a possible restructuring of their account.
65
Hence, there is no
basis for their allegation that a statement of account was necessary for
them to know their obligation. We cannot impair respondent's right to
foreclose the properties on the basis of their unsubstantiated allegation of
a violation of due process.
n Spouses Estares v. CA,
66
we did not find any justification to grant a
preliminary injunction, even when the mortgagors were disputing the
amount being sought from them. We held in that case that "[u]pon the
nonpayment of the loan, which was secured by the mortgage, the
mortgaged property is properly subject to a foreclosure sale."
67

Compared with Estares, the denial of injunctive relief in this case is even
more imperative, because the present petitioners do not even assail the
amounts due from them. Neither do they contend that a detailed
accounting would show that they are not in default. A pending question
regarding the due amount was not a sufficient reason to enjoin the
foreclosure in Estares. Hence, with more reason should injunction be
denied in the instant case, in which there is no dispute as to the
outstanding obligation of petitioners.
At any rate, whether respondent furnished them a detailed statement of
account is a question of fact that this Court need not and will not resolve in
this instance. As held in Zulueta v. Reyes,
68
in which there was no genuine
controversy as to the amounts due and demandable, the foreclosure
should not be restrained by the unnecessary question of accounting.
Maturity of the Loan Not Averted by Partial Compliance with Respondent's
Demand
Petitioners allege that their partial payment of P10 million on March 25,
1999, had the effect of forestalling the maturity of the loan;
69
hence the
foreclosure proceedings are premature.
70
We disagree.
To be sure, their partial payment did not extinguish the obligation. The Civil
Code states that a debt is not paid "unless the thing x x x in which the
obligation consists has been completely delivered x x x."
71
Besides, a late
partial payment could not have possibly forestalled a long-expired maturity
date.
The only possible legal relevance of the partial payment was to evidence
the mortgagee's amenability to granting the mortgagor a grace period.
Because the partial payment would constitute a waiver of the mortgagee's
vested right to foreclose, the grant of a grace period cannot be casually
assumed;
72
the bank's agreement must be clearly shown. Without a doubt,
no express agreement was entered into by the parties. Petitioners only
assumed that their partial payment had satisfied respondent's demand and
obtained for them more time to update their account.
73

Petitioners are mistaken. When creditors receive partial payment, they are
not ipso facto deemed to have abandoned their prior demand for full
payment. Article 1235 of the Civil Code provides:
"When the obligee accepts the performance, knowing its incompleteness
or irregularity, and without expressing any protest or objection, the
obligation is deemed fully complied with."
Thus, to imply that creditors accept partial payment as complete
performance of their obligation, their acceptance must be made under
circumstances that indicate their intention to consider the performance
complete and to renounce their claim arising from the defect.
74

There are no circumstances that would indicate a renunciation of the right
of respondent to foreclose the mortgaged properties extrajudicially, on the
basis of petitioners' continuing default. On the contrary, it asserted its right
by filing an application for extrajudicial foreclosure after receiving the
partial payment. Clearly, it did not intend to give petitioners more time to
meet their obligation.
Parenthetically, respondent cannot be reproved for accepting their partial
payment. While Article 1248 of the Civil Code states that creditors cannot
be compelled to accept partial payments, it does not prohibit them from
accepting such payments.
Second ssue:
Enjoining the Extrajudicial Foreclosure
A writ of preliminary injunction is a provisional remedy that may be
resorted to by litigants, only to protect or preserve their rights or interests
during the pendency of the principal action. To authorize a temporary
injunction, the plaintiff must show, at least prima facie, a right to the final
relief.
75
Moreover, it must show that the invasion of the right sought to be
protected is material and substantial, and that there is an urgent and
paramount necessity for the writ to prevent serious damage.
76
n the absence of a clear legal right, the issuance of the injunctive writ
constitutes grave abuse of discretion. njunction is not designed to protect
contingent or future rights. t is not proper when the complainant's right is
doubtful or disputed.
77

As a general rule, courts should avoid issuing this writ, which in effect
disposes of the main case without trial.
78
n Manila nternational Airport
Authority v. CA,
79
we urged courts to exercise caution in issuing the writ,
as follows:
"x x x. We remind trial courts that while generally the grant of a writ of
preliminary injunction rests on the sound discretion of the court taking
cognizance of the case, extreme caution must be observed in the exercise
of such discretion. The discretion of the court a quo to grant an injunctive
writ must be exercised based on the grounds and in the manner provided
by law. Thus, the Court declared in Garcia v. Burgos:
't has been consistently held that there is no power the exercise of which
is more delicate, which requires greater caution, deliberation and sound
discretion, or more dangerous in a doubtful case, than the issuance of an
injunction. t is the strong arm of equity that should never be extended
unless to cases of great injury, where courts of law cannot afford an
adequate or commensurate remedy in damages.
'Every court should remember that an injunction is a limitation upon the
freedom of action of the defendant and should not be granted lightly or
precipitately. t should be granted only when the court is fully satisfied that
the law permits it and the emergency demands it.'"
80
(Citations omitted)
Credit Transactions Full Text Cases Atty. Adviento!!!!)#
Petitioners do not have any clear right to be protected. As shown in our
earlier findings, they failed to substantiate their allegations that their right
to due process had been violated and the maturity of their obligation
forestalled. Since they indisputably failed to meet their obligations in spite
of repeated demands, we hold that there is no legal justification to enjoin
respondent from enforcing its undeniable right to foreclose the mortgaged
properties.
n any case, petitioners will not be deprived outrightly of their property.
Pursuant to Section 47 of the General Banking Law of 2000,
81
mortgagors
who have judicially or extrajudicially sold their real property for the full or
partial payment of their obligation have the right to redeem the property
within one year after the sale. They can redeem their real estate by paying
the amount due, with interest rate specified, under the mortgage deed; as
well as all the costs and expenses incurred by the bank.
82

Moreover, in extrajudicial foreclosures, petitioners have the right to receive
any surplus in the selling price. This right was recognized in Sulit v. CA,
83
in which the Court held that "if the mortgagee is retaining more of the
proceeds of the sale than he is entitled to, this fact alone will not affect the
validity of the sale but simply gives the mortgagor a cause of action to
recover such surplus."
84
Petitioners failed to demonstrate the prejudice they would probably suffer
by reason of the foreclosure. Also, it is clear that they would be adequately
protected by law. Hence, we find no legal basis to reverse the assailed
Amended Decision of the CA dated May 4, 2004.
WHEREFORE, the Petition is DENED and the assailed Amended
Decision and Resolution AFFRMED. Costs against petitioners.
SO ORDERED.
SECOND DVSON
G.R. No. L-49401 JuIy 30, 1982
RIZAL COMMERCIAL BANKING CORPORATION, petitioner,
vs.
HON. JOSE P. ARRO, Judge of the Court of First instance of Davao,
and RESIDORO CHUA, respondents.
Laurente C. Ilagan for petitioner.
Victor A. Clapano for respondents.

DE CASTRO, J.:
Petition for certiorari to annul the orders of respondent judge dated
October 6, 1978 and November 7, 1978 in Civil Case No. 11-154 of the
Court of First nstance of Davao, which granted the motion filed by private
respondent to dismiss the complaint of petitioner for a sum of money, on
the ground that the complaint states no cause of action as against private
respondent.
After the petition had been filed, petitioner, on December 14, 1978 mailed
a manifestation and motion requesting the special civil action for certiorari
be treated as a petition for review.
1
Said manifestation and motion was
noted in the resolution of January 10, 1979.
2

t appears that on October 19, 1976 Residoro Chua and Enrique Go, Sr.
executed a comprehensive surety agreements
3
to guaranty among others,
any existing indebtedness of Davao Agricultural ndustries Corporation
(referred to therein as Borrower, and as Daicor in this decision), and/or
induce the bank at any time or from time to time thereafter, to make loans
or advances or to extend credit in other manner to, or at the request, or for
the account of the Borrower, either with or without security, and/or to
purchase on discount, or to make any loans or advances evidenced or
secured by any notes, bills, receivables, drafts, acceptances, checks or
other evidences of indebtedness (all hereinafter called "instruments") upon
which the Borrower is or may become liable, provided that the liability shall
not exceed at any one time the aggregate principal sum of P100,000.00.
On April 29, 1977 a promissory note
4
in the amount of P100,000.00 was
issued in favor of petitioner payable on June 13, 1977. Said note was
signed by Enrique Go, Sr. in his personal capacity and in behalf of Daicor.
The promissory note was not fully paid despite repeated demands; hence,
on June 30, 1978, petitioner filed a complaint for a sum of money against
Daicor, Enrique Go, Sr. and Residoro Chua. A motion to dismiss dated
September 23, 1978 was filed by respondent Residoro Chua on the
ground that the complaint states no cause of action as against him.
5
t
was alleged in the motion that he can not be held liable under the
promissory note because it was only Enrique Go, Sr. who signed the same
in behalf of Daicor and in his own personal capacity.
n an opposition dated September 26, 1978
6
petitioner alleged that by
virtue of the execution of the comprehensive surety agreement, private
respondent is liable because said agreement covers not merely the
promissory note subject of the complaint, but is continuing; and it
encompasses every other indebtedness the Borrower may, from time to
time incur with petitioner bank.
On October 6, 1978 respondent court rendered a decision granting private
respondent's motion to dismiss the complaint.
7
Petitioner filed a motion for
reconsideration dated October 12, 1978 and on November 7, 1978
respondent court issued an order denying the said motion.
8

The sole issue resolved by respondent court was the interpretation of the
comprehensive surety agreement, particularly in reference to the
indebtedness evidenced by the promissory note involved in the instant
case, said comprehensive surety agreement having been signed by
Enrique Go, Sr. and private respondent, binding themselves as solidary
debtors of said corporation not only to existing obligations but to future
ones. Respondent court said that corollary to that agreement must be
another instrument evidencing the obligation in a form of a promissory
note or any other evidence of indebtedness without which the said
agreement serves no purpose; that since the promissory notes, which is
primarily the basis of the cause of action of petitioner, is not signed by
private respondent, the latter can not be liable thereon.
Contesting the aforecited decision and order of respondent judge, the
present petition was filed before this Court assigning the following as
errors committed by respondent court:
1. That the respondent court erred in dismissing the
complaint against Chua simply on the reasons that
'Chua is not a signatory to the promissory note" of
April 29, 1977, or that Chua could not be held liable
on the note under the provisions of the
comprehensive surety agreement of October 29,
1976; and/or
2. That the respondent court erred in interpreting the
provisions of the Comprehensive Surety Agreement
towards the conclusion that respondent Chua is not
liable on the promissory note because said note is not
conformable to the Comprehensive Surety
Agreement; and/or
3. That the respondent court erred in ordering that
there is no cause of action against respondent Chua
in the petitioner's complaint.
The main issue involved in this case is whether private respondent is liable
to pay the obligation evidence by the promissory note dated April 29,1977
which he did not sign, in the light of the provisions of the comprehensive
surety agreement which petitioner and private respondent had earlier
executed on October 19, 1976.
We find for the petitioner. The comprehensive surety agreement was
jointly executed by Residoro Chua and Enrique Go, Sr., President and
Credit Transactions Full Text Cases Atty. Adviento!!!!)$
General Manager, respectively of Daicor, on October 19, 1976 to cover
existing as well as future obligations which Daicor may incur with the
petitioner bank, subject only to the proviso that their liability shall not
exceed at any one time the aggregate principal sum of P100,000.00. Thus,
paragraph of the agreement provides:
For and in consideration of any existing indebtedness
to you of Davao Agricultural ndustries Corporation
with principal place of business and postal address at
530 J. P. Cabaguio Ave., Davao City (hereinafter
called the "Borrower), and/or in order to induce, you in
your discretion, at any time or from time to time
hereafter, to make loans or advances or to extend
credit in any other manner to, or at he request or for
the account of the Borrower, either with or without
security, and/or to purchase or discount or to make
any loans or advances evidenced or secured by any
notes, bills, receivables, drafts, acceptances, checks
or other instruments or evidences of indebtedness (all
hereinafter called "instruments") upon which the
Borrower is or may become liable as maker, endorser,
acceptor, or otherwise) the undersigned agrees to
guarantee, and does hereby guarantee in joint and
several capacity, the punctual payment at maturity to
you of any and all such instruments, loans, advances,
credits and/or other obligations herein before referred
to, and also any and all other indebtedness of every
kind which is now or may hereafter become due or
owing to you by the Borrower, together with any and
all expenses which may be incurred by you in
collecting an such instruments or other indebtedness
or obligations hereinbefore referred to ..., provided,
however, that the liability of the undersigned shag not
exceed at any one time the aggregate principal sum
of P100,000.00 ...
The agreement was executed obviously to induce petitioner to grant any
application for a loan Daicor may desire to obtain from petitioner bank. The
guaranty is a continuing one which shall remain in full force and effect until
the bank is notified of its termination.
This is a continuing guaranty and shall remain in fun
force and effect until written notice shall have been
received by you that it has been revoked by the
undersigned, ...
9

At the time the loan of P100,000.00 was obtained from petitioner by
Daicor, for the purpose of having an additional capital for buying and
selling coco-shell charcoal and importation of activated carbon,
10
the
comprehensive surety agreement was admittedly in full force and effect.
The loan was, therefore, covered by the said agreement, and private
respondent, even if he did not sign the promisory note, is liable by virtue of
the surety agreement. The only condition that would make him liable
thereunder is that the Borrower "is or may become liable as maker,
endorser, acceptor or otherwise". There is no doubt that Daicor is liable on
the promissory note evidencing the indebtedness.
The surety agreement which was earlier signed by Enrique Go, Sr. and
private respondent, is an accessory obligation, it being dependent upon a
principal one which, in this case is the loan obtained by Daicor as
evidenced by a promissory note. What obviously induced petitioner bank
to grant the loan was the surety agreement whereby Go and Chua bound
themselves solidarily to guaranty the punctual payment of the loan at
maturity. By terms that are unequivocal, it can be clearly seen that the
surety agreement was executed to guarantee future debts which Daicor
may incur with petitioner, as is legally allowable under the Civil Code. Thus

Article 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.
n view of the foregoing, the decision (which should have been a mere
"order"), dismissing the complaint is reversed and set side. The case is
remanded to the court of origin with instructions to set aside the motion to
dismiss, and to require defendant Residoro Chua to answer the complaint
after which the case shall proceed as provided by the Rules of Court. No
costs.
SO ORDERED.
THRD DVSON

G.R. No. 89775 November 26, 1992
JACINTO UY DIO and NORBERTO UY, petitioners,
vs.
HON. COURT OF APPEALS and METROPOLITAN BANK AND TRUST
COMPANY, respondents.

DAVIDE, JR., J.:
Continuing Suretyship Agreements signed by the petitioners set off this
present controversy.
Petitioners assail the 22 June 1989 Decision of the Court in CA-G.R. CV
No. 17724
1
which reversed the 2 December 1987 Decision of Branch 45
of the Regional Trial Court (RTC) of Manila in a collection suit entitled
"Metropolitan Bank and Trust Company vs. Uy Tiam, doing business
under the name of "UY TIAM ENTERPRISES & FREIGHT SERVICES,"
Jacinto Uy Dio and Norberto Uy" and docketed as Civil Case No. 82-
9303. They likewise challenge public respondent's Resolution of 21 August
1989
2
denying their motion for the reconsideration of the former.
The impugned Decision of the Court summarizes the antecedent facts as
follows:
t appears that in 1977, Uy Tiam Enterprises and
Freight Services (hereinafter referred to as UTEFS),
thru its representative Uy Tiam, applied for and
obtained credit accommodations (letter of credit and
trust receipt accommodations) from the Metropolitan
Bank and Trust Company (hereinafter referred to as
METROBANK) in the sum of P700,000.00 (Original
Records, p. 333). To secure the aforementioned credit
accommodations Norberto Uy and Jacinto Uy Dio
executed separate Continuing Suretyships (Exhibits
"E" and "F" respectively), dated 25 February 1977, in
favor of the latter. Under the aforesaid agreements,
Norberto Uy agreed to pay METROBANK any
indebtedness of UTEFS up to the aggregate sum of
P300,000.00 while Jacinto Uy Dio agreed to be
bound up to the aggregate sum of P800,000.00.
Having paid the obligation under the above letter of
credit in 1977, UTEFS, through Uy Tiam, obtained
another credit accommodation from METROBANK in
1978, which credit accommodation was fully settled
before an irrevocable letter of credit was applied for
and obtained by the abovementioned business entity
in 1979 (September 8, 1987, tsn, pp. 14-15).
The rrevocable Letter of Credit No. SN-Loc-309,
dated March 30, 1979, in the sum of P815, 600.00,
covered UTEFS' purchase of "8,000 Bags Planters
Urea and 4,000 Bags Planters 21-0-0." t was applied
for and obtain by UTEFS without the participation of
Norberto Uy and Jacinto Uy Dio as they did not sign
the document denominated as "Commercial Letter of
Credit Transactions Full Text Cases Atty. Adviento!!!!)%
Credit and Application." Also, they were not asked to
execute any suretyship to guarantee its payment.
Neither did METROBANK nor UTEFS inform them
that the 1979 Letter of Credit has been opened and
the Continuing Suretyships separately executed in
February, 1977 shall guarantee its payment
(Appellees brief, pp. 2-3; rollo, p. 28).
The 1979 letter of credit (Exhibit "B") was negotiated.
METROBANK paid Planters Products the amount of
P815,600.00 which payment was covered by a Bill of
Exchange (Exhibit "C"), dated 4 June 1979, in favor of
(Original Records, p. 331).
Pursuant to the above commercial transaction,
UTEFS executed and delivered to METROBANK and
Trust Receipt (Exh. "D"), dated 4 June 1979, whereby
the former acknowledged receipt in trust from the
latter of the aforementioned goods from Planters
Products which amounted to P815, 600.00. Being the
entrusted, the former agreed to deliver to
METROBANK the entrusted goods in the event of
non-sale or, if sold, the proceeds of the sale thereof,
on or before September 2, 1979.
However, UTEFS did not acquiesce to the obligatory
stipulations in the trust receipt. As a consequence,
METROBANK sent letters to the said principal obligor
and its sureties, Norberto Uy and Jacinto Uy Dio,
demanding payment of the amount due. nformed of
the amount due, UTEFS made partial payments to the
Bank which were accepted by the latter.
Answering one of the demand letters, Dio, thru
counsel, denied his liability for the amount demanded
and requested METROBANK to send him copies of
documents showing the source of his liability. n its
reply, the bank informed him that the source of his
liability is the Continuing Suretyship which he
executed on February 25, 1977.
As a rejoinder, Dio maintained that he cannot be
held liable for the 1979 credit accommodation
because it is a new obligation contracted without his
participation. Besides, the 1977 credit accommodation
which he guaranteed has been fully paid.
Having sent the last demand letter to UTEFS, Dio
and Uy and finding resort to extrajudicial remedies to
be futile, METROBANK filed a complaint for collection
of a sum of money (P613,339.32, as of January 31,
1982, inclusive of interest, commission penalty and
bank charges) with a prayer for the issuance of a writ
of preliminary attachment, against Uy Tiam,
representative of UTEFS and impleaded Dio and Uy
as parties-defendants.
The court issued an order, dated 29 July 1983,
granting the attachment writ, which writ was returned
unserved and unsatisfied as defendant Uy Tiam was
nowhere to be found at his given address and his
commercial enterprise was already non-operational
(Original Records, p. 37).
On April 11, 1984, Norberto Uy and Jacinto Uy Dio
(sureties-defendant herein) filed a motion to dismiss
the complaint on the ground of lack of cause of action.
They maintained that the obligation which they
guaranteed in 1977 has been extinguished since it
has already been paid in the same year. Accordingly,
the Continuing Suretyships executed in 1977 cannot
be availed of to secure Uy Tiam's Letter of Credit
obtained in 1979 because a guaranty cannot exist
without a valid obligation. t was further argued that
they can not be held liable for the obligation
contracted in 1979 because they are not privies
thereto as it was contracted without their participation
(Records, pp. 42-46).
On April 24, 1984, METROBANK filed its opposition to
the motion to dismiss. nvoking the terms and
conditions embodied in the comprehensive
suretyships separately executed by sureties-
defendants, the bank argued that sureties-movants
bound themselves as solidary obligors of defendant
Uy Tiam to both existing obligations and future ones.
t relied on Article 2053 of the new Civil Code which
provides: "A guaranty may also be given as security
for future debts, the amount of which is not yet known;
. . . ." t was further asserted that the agreement was
in full force and effect at the time the letter of credit
was obtained in 1979 as sureties-defendants did not
exercise their right to revoke it by giving notice to the
bank. (Ibid., pp. 51-54).
Meanwhile, the resolution of the aforecited motion to
dismiss was held in abeyance pending the
introduction of evidence by the parties as per order
dated February 21, 1986 (Ibid., p. 71).
Having been granted a period of fifteen (15) days from
receipt of the order dated March 7, 1986 within which
to file the answer, sureties-defendants filed their
responsive pleading which merely rehashed the
arguments in their motion to dismiss and maintained
that they are entitled to the benefit of excussion
(Original Records, pp. 88-93).
On February 23, 1987, plaintiff filed a motion to
dismiss the complaint against defendant Uy Tiam on
the ground that it has no information as to the heirs or
legal representatives of the latter who died sometime
in December, 1986, which motion was granted on the
following day (Ibid., pp. 180-182).
After trial, . . . the court a quo, on December 2, 198, rendered its judgment,
a portion of which reads:
The evidence and the pleadings, thus, pose the
querry (sic):
Are the defendants Jacinto Uy
Dioand Norberto Uy liable for
the obligation contracted by Uy
Tiam under the Letter of Credit
(Exh. B) issued on March 30,
1987 by virtue of the Continuing
Suretyships they executed on
February 25, 1977?
Under the admitted proven facts,
the Court finds that they are not.
a) When Uy and Dio executed
the continuing suretyships,
exhibits E and F, on February 25,
1977, Uy Tiam was obligated to
the plaintiff in the amount of
P700,000.00 and this was the
obligation which both obligation
which both defendants
guaranteed to pay. Uy Tiam paid
this 1977 obligation and such
payment extinguished the
obligation they assumed as
guarantors/sureties.
Credit Transactions Full Text Cases Atty. Adviento!!!!)&
b) The 1979 Letter of Credit (Exh.
B) is different from the 1977
Letter of Credit which covered the
1977 account of Uy Tiam. Thus,
the obligation under either is
apart and distinct from the
obligation created in the other
as evidenced by the fact that Uy
Tiam had to apply anew for the
1979 transaction (Exh. A). And
Dio and Uy, being strangers
thereto, cannot be answerable
thereunder.
c) The plaintiff did not serve
notice to the defendants Dio and
Uy when it extended to Credit
at least to inform them that the
continuing suretyships they
executed on February 25, 1977
will be considered by the plaintiff
to secure the 1979 transaction of
Uy Tiam.
d) There is no sufficient and
credible showing that Dio and
Uy were fully informed of the
import of the Continuing
Suretyships when they affixed
their signatures thereon that
they are thereby securing all
future obligations which Uy Tiam
may contract the plaintiff. On the
contrary, Dio and Uy
categorically testified that they
signed the blank forms in the
office of Uy Tiam at 623 Asuncion
Street, Binondo, Manila, in
obedience to the instruction of Uy
Tiam, their former employer. They
denied having gone to the office
of the plaintiff to subscribe to the
documents (October 1, 1987, tsn,
pp. 5-7, 14; October 15, 1987,
tsn, pp. 3-8, 13-16). (Records, pp.
333-334).
3
xxx xxx xxx
n its Decision, the trial court decreed as follows:
PREMSES CONSDERED, judgment is hereby
rendered:
a) dismissing the COMPLANT against JACNTO UY
DO and NORBERTO UY;
b) ordering the plaintiff to pay to Dio and Uy the
amount of P6,000.00 as attorney's fees and expenses
of litigation; and
c) denying all other claims of the parties for want of
legal and/or factual basis.
SO ORDERED. (Records, p. 336)
4
From the said Decision, the private respondent appealed to the Court of
Appeals. The case was docketed as CA-G.R. CV No. 17724. n support
thereof, it made the following assignment of errors in its Brief:
. THE LOWER COURT SEROUSLY ERRED N NOT
FNDNG AND HOLDNG THAT DEFENDANTS-
APPELLEES JACNTO UY DO AND NORBERTO
UY ARE SOLDARLY LABLE TO PLANTFF-
APPELLANT FOR THE OBLGATON OF
DEFENDANT UY TAM UNDER THE LETTER OF
CREDT SSUED ON MARCH 30, 1979 BY VRTUE
OF THE CONTNUNG SURETYSHPS THEY
EXECUTED ON FEBRUARY 25, 1977.
. THE LOWER COURT ERRED N HOLDNG THAT
PLANTFF-APPELLANT S ANSWERABLE TO
DEFENDANTS-APPELLEES JACNTO UY DO
AND NORBERTO UY FOR ATTORNEY'S FEES AND
EXPENSES OF LTGATON.
5
On 22 June 1989, public respondent promulgated the assailed Decision
the dispositive portion of which reads:
WHEREFORE, premises considered, the judgment
appealed from is hereby REVERSED AND SET,
ASDE. n lieu thereof, another one is rendered:
1) Ordering sureties-appellees
Jacinto Uy Dio and Norberto Uy
to pay, jointly and severally, to
appellant METROBANK the
amount of P2,397,883.68 which
represents the amount due as of
July 17, 1987 inclusive of
principal, interest and charges;
2) Ordering sureties-appellees
Jacinto Uy Dio and Norberto Uy
to pay, jointly and severally,
appellant METROBANK the
accruing interest, fees and
charges thereon from July 18,
1987 until the whole monetary
obligation is paid; and
3) Ordering sureties-appellees
Jacinto Uy Dio and Norberto Uy
to pay, jointly and severally, to
plaintiff P20,000.00 as attorney's
fees.
With costs against appellees.
SO ORDERED.
6
n ruling for the herein private respondent (hereinafter METROBANK),
public respondent held that the Continuing Suretyship Agreements
separately executed by the petitioners in 1977 were intended to guarantee
payment of Uy Tiam's outstanding as well as future obligations; each
suretyship arrangement was intended to remain in full force and effect until
METROBANK would have been notified of its revocation. Since no such
notice was given by the petitioners, the suretyships are deemed
outstanding and hence, cover even the 1979 letter of credit issued by
METROBANK in favor of Uy Tiam.
Petitioners filed a motion to reconsider the foregoing Decision. They
questioned the public respondent's construction of the suretyship
agreements and its ruling with respect to the extent of their liability
thereunder. They argued the even if the agreements were in full force and
effect when METROBANK granted Uy Tiam's application for a letter of
credit in 1979, the public respondent nonetheless seriously erred in
holding them liable for an amount over and above their respective face
values.
n its Resolution of 21 August 1989, public respondent denied the motion:
. . . considering that the issues raised were
substantially the same grounds utilized by the lower
Credit Transactions Full Text Cases Atty. Adviento!!!!)'
court in rendering judgment for defendants-appellees
which We upon appeal found and resolved to be
untenable, thereby reversing and setting aside said
judgment and rendering another in favor of plaintiff,
and no new or fresh issues have been posited to
justify reversal of Our decision herein, . . . .
7
Hence, the instant petition which hinges on the issue of whether or not the
petitioners may be held liable as sureties for the obligation contracted by
Uy Tiam with METROBANK on 30 May 1979 under and by virtue of the
Continuing Suretyship Agreements signed on 25 February 1977.
Petitioners vehemently deny such liability on the ground that the
Continuing Suretyship Agreements were automatically extinguished upon
payment of the principal obligation secured thereby, i.e., the letter of credit
obtained by Uy Tiam in 1977. They further claim that they were not
advised by either METROBANK or Uy Tiam that the Continuing Suretyship
Agreements would stand as security for the 1979 obligation. Moreover, it is
posited that to extend the application of such agreements to the 1979
obligation would amount to a violation of Article 2052 of the Civil Code
which expressly provides that a guaranty cannot exist without a valid
obligation. Petitioners further argue that even granting, for the sake of
argument, that the Continuing Suretyship Agreements still subsisted and
thereby also secured the 1979 obligations incurred by Uy Tiam, they
cannot be held liable for more than what they guaranteed to pay because
it s axiomatic that the obligations of a surety cannot extend beyond what is
stipulated in the agreement.
On 12 February 1990, this Court resolved to give due course to the
petition after considering the allegations, issues and arguments adduced
therein, the Comment thereon by the private respondent and the Reply
thereto by the petitioners; the parties were required to submit their
respective Memoranda.
The issues presented for determination are quite simple:
1. Whether petitioners are liable as sureties for the
1979 obligations of Uy Tiam to METROBANK by
virtue of the Continuing Suretyship Agreements they
separately signed in 1977; and
2. On the assumption that they are, what is the extent
of their liabilities for said 1979 obligations.
Under the Civil Code, a guaranty may be given to secure even future
debts, the amount of which may not known at the time the guaranty is
executed. 8 This is the basis for contracts denominated as continuing
guaranty or suretyship. A continuing guaranty is one which is not limited to
a single transaction, but which contemplates a future course of dealing,
covering a series of transactions, generally for an indefinite time or until
revoked. t is prospective in its operation and is generally intended to
provide security with respect to future transactions within certain limits,
and contemplates a succession of liabilities, for which, as they accrue, the
guarantor becomes liable.
9
Otherwise stated, a continuing guaranty is one
which covers all transactions, including those arising in the future, which
are within the description or contemplation of the contract, of guaranty,
until the expiration or termination thereof.
10
A guaranty shall be construed
as continuing when by the terms thereof it is evident that the object is to
give a standing credit to the principal debtor to be used from time to time
either indefinitely or until a certain period, especially if the right to recall the
guaranty is expressly reserved. Hence, where the contract of guaranty
states that the same is to secure advances to be made "from time to time"
the guaranty will be construed to be a continuing one.
11
n other jurisdictions, it has been held that the use of particular words and
expressions such as payment of "any debt," "any indebtedness," "any
deficiency," or "any sum," or the guaranty of "any transaction" or money to
be furnished the principal debtor "at any time," or "on such time" that the
principal debtor may require, have been construed to indicate a continuing
guaranty.
12
n the case at bar, the pertinent portion of paragraph of the suretyship
agreement executed by petitioner Uy provides thus:
. For and in consideration of any existing
indebtedness to the BANK of UY TAM (hereinafter
called the "Borrower"), for the payment of which the
SURETY is now obligated to the BANK, either as
guarantor or otherwise, and/or in order to induce the
BANK, in its discretion, at any time or from time to
time hereafter, to make loans or advances or to
extend credit in any other manner to, or at the
request, or for the account of the Borrower, either with
or without security, and/or to purchase or discount, or
to make any loans or advances evidence or secured
by any notes, bills, receivables, drafts, acceptances,
checks, or other instruments or evidences of
indebtedness (all hereinafter called "instruments")
upon which the Borrower is or may become liable as
maker, endorser, acceptor, or otherwise, the SURETY
agrees to guarantee, and does hereby guarantee, the
punctual payment at maturity to the loans, advances
credits and/or other obligations hereinbefore referred
to, and also any and all other indebtedness of every
kind which is now or may hereafter become due or
owing to the BANK by the Borrower, together with any
and all expenses which may be incurred by the BANK
in collecting all or any such instruments or other
indebtedness or obligations herein before referred to,
and/or in enforcing any rights hereunder, and the
SURETY also agrees that the BANK may make or
cause any and all such payments to be made strictly
in accordance with the terms and provisions of any
agreement(s) express or implied, which has (have)
been or may hereafter be made or entered into by the
Borrow in reference thereto, regardless of any law,
regulation or decree, unless the same is mandatory
and non-waivable in character, nor or hereafter in
effect, which might in any manner affect any of the
terms or provisions of any such agreement(s) or the
Bank's rights with respect thereto as against the
Borrower, or cause or permit to be invoked any
alteration in the time, amount or manner of payment
by the Borrower of any such instruments, obligations
or indebtedness; provided, however, that the liability
of the SURETY hereunder shall not exceed at any
one time the aggregate principal sum of PESOS:
THREE HUNDRED THOUSAND ONLY (P300,000.00)
(irrespective of the currenc(ies) in which the
obligations hereby guaranteed are payable), and such
interest as may accrue thereon either before or after
any maturity(ies) thereof and such expenses as may
be incurred by the BANK as referred to above.
13
Paragraph of the Continuing Suretyship Agreement executed by
petitioner Dio contains identical provisions except with respect to the
guaranteed aggregate principal amount which is EGHT THOUSAND
PESOS (P800,000.00).
14
Paragraph V of both agreements stipulate that:
V. This is a continuing guaranty and shall remain in
full force and effect until written notice shall have
been received by the BANK that it has been revoked
by the SURETY, but any such notice shall not release
the SURETY, from any liability as to any instruments,
loans, advances or other obligations hereby
guaranteed, which may be held by the BANK, or in
which the BANK may have any interest at the time of
the receipt (sic) of such notice. No act or omission of
any kind on the BANK'S part in the premises shall in
any event affect or impair this guaranty, nor shall
same (sic) be affected by any change which may arise
by reason of the death of the SURETY, or of any
partner(s) of the SURETY, or of the Borrower, or of the
accession to any such partnership of any one or more
new partners.
15
The foregoing stipulations unequivocally reveal that the suretyship
agreement in the case at bar are continuing in nature. Petitioners do not
Credit Transactions Full Text Cases Atty. Adviento!!!!)(
deny this; in fact, they candidly admitted it. Neither have they denied the
fact that they had not revoked the suretyship agreements. Accordingly, as
correctly held by the public respondent:
Undoubtedly, the purpose of the execution of the
Continuing Suretyships was to induce appellant to
grant any application for credit accommodation (letter
of credit/trust receipt) UTEFS may desire to obtain
from appellant bank. By its terms, each suretyship is a
continuing one which shall remain in full force and
effect until the bank is notified of its revocation.
xxx xxx xxx
When the rrevocable Letter of Credit No. SN-Loc-309
was obtained from appellant bank, for the purpose of
obtaining goods (covered by a trust receipt) from
Planters Products, the continuing suretyships were in
full force and effect. Hence, even if sureties-appellees
did not sign the "Commercial Letter of Credit and
Application, they are still liable as the credit
accommodation (letter of credit/trust receipt) was
covered by the said suretyships. What makes them
liable thereunder is the condition which provides that
the Borrower "is or may become liable as maker,
endorser, acceptor or otherwise." And since UTEFS
which (sic) was liable as principal obligor for having
failed to fulfill the obligatory stipulations in the trust
receipt, they as insurers of its obligation, are liable
thereunder.
16
Petitioners maintain, however, that their Continuing Suretyship
Agreements cannot be made applicable to the 1979 obligation because
the latter was not yet in existence when the agreements were executed in
1977; under Article 2052 of the Civil Code, a guaranty "cannot exist
without a valid obligation." We cannot agree. First of all, the succeeding
article provides that "[a] guaranty may also be given as security for future
debts, the amount of which is not yet known." Secondly, Article 2052
speaks about a valid obligation, as distinguished from a void obligation,
and not an existing or current obligation. This distinction is made clearer in
the second paragraph of Article 2052 which reads:
Nevertheless, a guaranty may be constituted to
guarantee the performance of a voidable or an
unenforceable contract. t may also guarantee a
natural obligation.
As to the amount of their liability under the Continuing Suretyship
Agreements, petitioners contend that the public respondent gravely erred
in finding them liable for more than the amount specified in their respective
agreements, to wit: (a) P800,000.00 for petitioner Dio and (b)
P300,000.00 for petitioner Uy.
The limit of the petitioners respective liabilities must be determined from
the suretyship agreement each had signed. t is undoubtedly true that the
law looks upon the contract of suretyship with a jealous eye, and the rule
is settled that the obligation of the surety cannot be extended by
implication beyond its specified limits. To the extent, and in the manner,
and under the circumstances pointed out in his obligation, he is bound,
and no farther.
17
ndeed, the Continuing Suretyship Agreements signed by petitioner Dio
and petitioner Uy fix the aggregate amount of their liability, at any given
time, at P800,000.00 and P300,000.00, respectively. The law is clear that
a guarantor may bond himself for less, but not for more than the principal
debtor, both as regards the amount and the onerous nature of the
conditions.
18
n the case at bar, both agreements provide for liability for
interest and expenses, to wit:
. . . and such interest as may accrue thereon either
before or after any maturity(ies) thereof and such
expenses as may be incurred by the BANK referred to
above.
19
They further provide that:
n the event of judicial proceedings being instituted by
the BANK against the SURETY to enforce any of the
terms and conditions of this undertaking, the SURETY
further agrees to pay the BANK a reasonable
compensation for and as attorney's fees and costs of
collection, which shall not in any event be less than
ten per cent (10%) of the amount due (the same to be
due and payable irrespective of whether the case is
settled judicially or extrajudicially).
20
Thus, by express mandate of the Continuing Suretyship
Agreements which they had signed, petitioners separately
bound themselves to pay interest, expenses, attorney's fees and
costs. The last two items are pegged at not less than ten
percent (10%) of the amount due.
Even without such stipulations, the petitioners would, nevertheless, be
liable for the interest and judicial costs. Article 2055 of the Civil Code
provides:
21
Art. 2055. A guaranty is not presumed; it must be
express and cannot extend to more than what is
stipulated therein.
f it be simple or indefinite, it shall comprise not only
the principal obligation, but also all its accessories,
including the judicial costs, provided with respect to
the latter, that the guarantor shall only be liable for
those costs incurred after he has been judicially
required to pay.
nterest and damages are included in the term accessories.
However, such interest should run only from the date when the
complaint was filed in court. Even attorney's fees may be
imposed whenever appropriate, pursuant to Article 2208 of the
Civil Code. Thus, in Plaridel Surety & Insurance Co., Inc. vs.
P.L. Galang Machinery Co., Inc.,
22
this Court held:
Petitioner objects to the payment of interest and
attorney's fees because: (1) they were not mentioned
in the bond; and (2) the surety would become liable
for more than the amount stated in the contract of
suretyship.
xxx xxx xxx
The objection has to be overruled, because as far
back as the year 1922 this Court held in Tagawa vs.
Aldanese, 43 Phil. 852, that creditors suing on a
suretyship bond may recover from the surety as part
of their damages, interest at the legal rate even if the
surety would thereby become liable to pay more than
the total amount stipulated in the bond. The theory is
that interest is allowed only by way of damages for
delay upon the part of the sureties in making payment
after they should have done so. n some states, the
interest has been charged from the date of the
interest has been charged from the date of the
judgment of the appellate court. n this jurisdiction, we
rather prefer to follow the general practice, which is to
order that interest begin to run from the date when the
complaint was filed in court, . . .
Such theory aligned with sec. 510 of the Code of Civil
Procedure which was subsequently recognized in the
Rules of Court (Rule 53, section 6) and with Article
1108 of the Civil Code (now Art. 2209 of the New Civil
Code).
Credit Transactions Full Text Cases Atty. Adviento!!!!))
n other words the surety is made to pay interest, not
by reason of the contract, but by reason of its failure
to pay when demanded and for having compelled the
plaintiff to resort to the courts to obtain payment. t
should be observed that interest does not run from the
time the obligation became due, but from the filing of
the complaint.
As to attorney's fees. Before the enactment of the
New Civil Code, successful litigants could not recover
attorney's fees as part of the damages they suffered
by reason of the litigation. Even if the party paid
thousands of pesos to his lawyers, he could not
charge the amount to his opponent (Tan Ti vs. Alvear,
26 Phil. 566).
However the New Civil Code permits recovery of
attorney's fees in eleven cases enumerated in Article
2208, among them, "where the court deems it just and
equitable that attorney's (sic) fees and expenses of
litigation should be recovered" or "when the defendant
acted in gross and evident bad faith in refusing to
satisfy the plaintiff's plainly valid, just and demandable
claim." This gives the courts discretion in apportioning
attorney's fees.
The records do not reveal the exact amount of the unpaid portion of the
principal obligation of Uy Tiam to MERTOBANK under rrevocable Letter of
Credit No. SN-Loc-309 dated 30 March 1979. n referring to the last
demand letter to Mr. Uy Tiam and the complaint filed in Civil Case No. 82-
9303, the public respondent mentions the amount of "P613,339.32, as of
January 31, 1982, inclusive of interest commission penalty and bank
charges."
23
This is the same amount stated by METROBANK in its
Memorandum.
24
However, in summarizing Uy Tiam's outstanding
obligation as of 17 July 1987, public respondent states:
Hence, they are jointly and severally liable to
appellant METROBANK of UTEFS' outstanding
obligation in the sum of P2,397,883.68 (as of July 17,
1987) P651,092.82 representing the principal
amount, P825,133.54, for past due interest (5-31-82
to 7-17-87) and P921,657.32, for penalty charges at
12% per annum (5-31-82 to 7-17-87) as shown in the
Statement of Account (Exhibit ).
25
Since the complaint was filed on 18 May 1982, it is obvious that
on that date, the outstanding principal obligation of Uy Tiam,
secured by the petitioners' Continuing Suretyship Agreements,
was less than P613,339.32. Such amount may be fully covered
by the Continuing Suretyship Agreement executed by petitioner
Dio which stipulates an aggregate principal sum of not
exceeding P800,000.00, and partly covered by that of petitioner
Uy which pegs his maximum liability at P300,000.00.
Consequently, the judgment of the public respondent shall have to be
modified to conform to the foregoing exposition, to which extent the instant
petition is impressed with partial merit.
WHEREFORE, the petition is partly GRANTED, but only insofar as the
challenged decision has to be modified with respect to the extend of
petitioners' liability. As modified, petitioners JACNTO UY DO and
NORBERTO UY are hereby declared liable for and are ordered to pay, up
to the maximum limit only of their respective Continuing Suretyship
Agreement, the remaining unpaid balance of the principal obligation of UY
TAM or UY TAM ENTERPRSES & FREGHT SERVCES under
rrevocable Letter of Credit No. SN-Loc-309, dated 30 March 1979,
together with the interest due thereon at the legal rate commencing from
the date of the filing of the complaint in Civil Case No. 82-9303 with
Branch 45 of the Regional Trial Court of Manila, as well as the adjudged
attorney's fees and costs.
All other dispositions in the dispositive portion of the challenged decision
not inconsistent with the above are affirmed.
SO ORDERED.
SECOND DVSON

G.R. No. 103066 ApriI 25, 1996
WILLEX PLASTIC INDUSTRIES, CORPORATION, petitioner,
vs.
HON. COURT OF APPEALS and INTERNATIONAL CORPORATE
BANK, respondents.

MENDOZA, J.:p
This is a petition for review on certiorari of the decision
1
of the Court of
Appeals in C.A.-G.R. CV No. 19094, affirming the decision of the Regional
Trial Court of the National Capital Judicial Region, Branch XLV, Manila,
which ordered petitioner Willex Plastic ndustries Corporation and the
nter-Resin ndustrial Corporation, jointly and severally, to pay private
respondent nternational Corporate Bank certain sums of money, and the
appellate court's resolution of October 17, 1989 denying petitioner's
motion for reconsideration.
The facts are as follows:
Sometime in 1978, nter-Resin ndustrial Corporation opened a letter of
credit with the Manila Banking Corporation. To secure payment of the
credit accomodation, nter-Resin ndustrial and the nvestment and
Underwriting Corporation of the Philippines (UCP) executed two
documents, both entitled "Continuing Surety Agreement" and dated
December 1, 1978, whereby they bound themselves solidarily to pay
Manilabank "obligations of every kind, on which the [nter-Resin ndustrial]
may now be indebted or hereafter become indebted to the [Manilabank]."
The two agreements (Exhs. J and K) are the same in all respects, except
as to the limit of liability of the surety, the first surety agreement being
limited to US$333,830.00, while the second one is limited to
US$334,087.00.
On April 2, 1979, nter-Resin ndustrial, together with Willex Plastic
ndustries Corp., executed a "Continuing Guaranty" in favor of UCP
whereby "For and in consideration of the sum or sums obtained and/or to
be obtained by nter-Resin ndustrial Corporation" from UCP, nter-Resin
ndustrial and Willex Plastic jointly and severally guaranteed "the prompt
and punctual payment at maturity of the NOTE/S issued by the
DEBTOR/S . . . to the extent of the aggregate principal sum of FVE
MLLON PESOS (P5,000,000.00) Philippine Currency and such interests,
charges and penalties as hereafter may be specified."
On January 7, 1981, following demand upon it, UCP paid to Manilabank
the sum of P4,334,280.61 representing nter-Resin ndustrial's outstanding
obligation. (Exh. M-1) On February 23 and 24, 1981, Atrium Capital Corp.,
which in the meantime had succeeded UCP, demanded from nter-Resin
ndustrial and Willex Plastic the payment of what it (UCP) had paid to
Manilabank. As neither one of the sureties paid, Atrium filed this case in
the court below against nter-Resin ndustrial and Willex Plastic.
On August 11, 1982, nter-Resin ndustrial paid nterbank, which had in
turn succeeded Atrium, the sum of P687,600.00 representing the proceeds
of its fire insurance policy for the destruction of its properties.
n its answer, nter-Resin ndustrial admitted that the "Continuing
Guaranty" was intended to secure payment to Atrium of the amount of
P4,334,280.61 which the latter had paid to Manilabank. t claimed,
however, that it had already fully paid its obligation to Atrium Capital.
On the other hand, Willex Plastic denied the material allegations of the
complaint and interposed the following Special Affirmative Defenses:
Credit Transactions Full Text Cases Atty. Adviento!!!!)*
(a) Assuming arguendo that main defendant is
indebted to plaintiff, the former's liability is
extinguished due to the accidental fire that destroyed
its premises, which liability is covered by sufficient
insurance assigned to plaintiff;
(b) Again, assuming arguendo, that the main
defendant is indebted to plaintiff, its account is now
very much lesser than those stated in the complaint
because of some payments made by the former;
(c) The complaint states no cause of action against
WLLEX;
(d) WLLLEX is only a guarantor of the principal
obliger, and thus, its liability is only secondary to that
of the principal;
(e) Plaintiff failed to exhaust the ultimate remedy in
pursuing its claim against the principal obliger;
(f) Plaintiff has no personality to sue.
On April 29, 1986, nterbank was substituted as plaintiff in the action. The
case then proceeded to trial.
On March 4, 1988, the trial court declared nter-Resin ndustrial to have
waived the right to present evidence for its failure to appear at the hearing
despite due notice. On the other hand, Willex Plastic rested its case
without presenting any evidence. Thereafter nterbank and Willex Plastic
submitted their respective memoranda.
On April 5, 1988, the trial court rendered judgment, ordering nter-Resin
ndustrial and Willex Plastic jointly and severally to pay to nterbank the
following amounts:
(a) P3, 646,780.61, representing their indebtedness to
the plaintiff, with interest of 17% per annum from
August 11, 1982, when nter-Resin ndustrial paid
P687,500.00 to the plaintiff, until full payment of the
said amount;
(b) Liquidated damages equivalent to 178 of the
amount due; and
(c) Attorney's fees and expenses of litigation
equivalent to 208 of the total amount due.
nter-Resin ndustrial and Willex Plastic appealed to the Court of Appeals.
Willex Plastic filed its brief, while nter-Resin ndustrial presented a "Motion
to Conduct Hearing and to Receive Evidence to Resolve Factual ssues
and to Defer Filing of the Appellant's Brief." After its motion was denied,
nter-Resin ndustrial did not file its brief anymore.
On February 22, 1991, the Court of Appeals rendered a decision affirming
the ruling of the trial court.
Willex Plastic filed a motion for reconsideration praying that it be allowed
to present evidence to show that nter-Resin ndustrial had already paid its
obligation to nterbank, but its motion was denied on December 6, 1991:
The motion is denied for lack of merit. We denied
defendant-appellant nter-Resin ndustrial's motion for
reception of evidence because the situation or
situations in which we could exercise the power under
BP 129 did not exist. Movant here has not presented
any argument which would show otherwise.
Hence, this petition by Willex Plastic for the review of the decision of
February 22, 1991 and the resolution of December 6, 1991 of the Court of
Appeals.
Petitioner raises a number of issues.
[1] The main issue raised is whether under the "Continuing Guaranty"
signed on April 2, 1979 petitioner Willex Plastic may be held jointly and
severally liable with nter-Resin ndustrial for the amount paid by nterbank
to Manilabank.
As already stated, the amount had been paid by nterbank's predecessor-
in-interest, Atrium Capital, to Manilabank pursuant to the "Continuing
Surety Agreements" made on December 1, 1978. n denying liability to
nterbank for the amount, Willex Plastic argues that under the "Continuing
Guaranty," its liability is for sums obtained by nter-Resin ndustrial from
nterbank, not for sums paid by the latter to Manilabank for the account of
nter-Resin ndustrial. n support of this contention Willex Plastic cites the
following portion of the "Continuing Guaranty":
For and in consideration of the sums obtained and/or
to be obtained by INTER-RESIN INDUSTRIAL
CORPORATION, hereinafter referred to as the
DEBTOR/S, from you and/or your principal/s as may
be evidenced by promissory note/s, checks, bills
receivable/s and/or other evidence/s of indebtedness
(hereinafter referred to as the NOTE/S), /We hereby
jointly and severally and unconditionally guarantee
unto you and/or your principal/s, successor/s and
assigns the prompt and punctual payment at maturity
of the NOTE/S issued by the DEBTOR/S in your
and/or your principal/s, successor/s and assigns favor
to the extent of the aggregate principal sum of FVE
MLLON PESOS (P5,000,000.00), Philippine
Currency, and such interests, charges and penalties
as may hereinafter be specified.
The contention is untenable. What Willex Plastic has overlooked is the fact
that evidence aliunde was introduced in the trial court to explain that it was
actually to secure payment to nterbank (formerly UCP) of amounts paid
by the latter to Manilabank that the "Continuing Guaranty" was executed.
n its complaint below, nterbank's predecessor-in-interest, Atrium Capital,
alleged:
5. to secure the guarantee made by plaintiff of the
credit accommodation granted to defendant RC
[nter-Resin ndustrial] by Manilabank, the plaintiff
required defendant RC [nter-Resin ndustrial] to
execute a chattel mortgage in its favor and a
Continuing Guaranty which was signed by the other
defendant WPC [Willex Plastic].
n its answer, nter-Resin ndustrial admitted this allegation although it
claimed that it had already paid its obligation in its entirety. On the other
hand, Willex Plastic, while denying the allegation in question, merely did
so "for lack of knowledge or information of the same." But, at the hearing
of the case on September 16, 1986, when asked by the trial judge whether
Willex Plastic had not filed a crossclaim against nter-Resin ndustrial,
Willex Plastic's counsel replied in the negative and manifested that "the
plaintiff in this case [nterbank] is the guarantor and my client [Willex
Plastic] only signed as a guarantor to the guarantee."
2
For its part nterbank adduced evidence to show that the "Continuing
Guaranty" had been made to guarantee payment of amounts made by it to
Manilabank and not of any sums given by it as loan to nter-Resin
ndustrial. nterbank's witness testified under cross examination by counsel
for Willex Plastic that Willex "guaranteed the exposure/of whatever
exposure of ACP [Atrium Capital] will later be made because of the
guarantee to Manila Banking Corporation."
3
t has been held that explanatory evidence may be received to show the
circumstances under which a document has been made and to what debt
it relates.
4
At all events, Willex Plastic cannot now claim that its liability is
Credit Transactions Full Text Cases Atty. Adviento!!!!*+
limited to any amount which nterbank, as creditor, might give directly to
nter-Resin ndustrial as debtor because, by failing to object to the parol
evidence presented, Willex Plastic waived the protection of the parol
evidence rule.
5
Accordingly, the trial court found that it was "to secure the guarantee made
by plaintiff of the credit accommodation granted to defendant RC [nter-
Resin ndustrial] by Manilabank, [that] the plaintiff required defendant RC
to execute a chattel mortgage in its favor and a Continuing Guaranty
which was signed by the defendant Willex Plastic ndustries Corporation."
6
Similarly, the Court of Appeals found it to be an undisputed fact that "to
secure the guarantee undertaken by plaintiff-appellee [nterbank] of the
credit accommodation granted to nter-Resin ndustrial by Manilabank,
plaintiff-appellee required defendant-appellants to sign a Continuing
Guaranty." These factual findings of the trial court and of the Court of
Appeals are binding on us not only because of the rule that on appeal to
the Supreme Court such findings are entitled to great weight and respect
but also because our own examination of the record of the trial court
confirms these findings of the two courts.
7
Nor does the record show any other transaction under which nter-Resin
ndustrial may have obtained sums of money from nterbank. t can
reasonably be assumed that nter-Resin ndustrial and Willex Plastic
intended to indemnify nterbank for amounts which it may have paid
Manilabank on behalf of nter-Resin ndustrial.
ndeed, in its Petition for Review in this Court, Willex Plastic admitted that
it was "to secure the aforesaid guarantee, that NTERBANK required
principal debtor RC [nter-Resin ndustrial] to execute a chattel mortgage
in its favor, and so a "Continuing Guaranty" was executed on April 2, 1979
by WLLEX PLASTC NDUSTRES CORPORATON (WLLEX for brevity)
in favor of NTERBANK for and in consideration of the loan obtained by
RC [nter-Resin ndustrial]."
[2] Willex Plastic argues that the "Continuing Guaranty," being an
accessory contract, cannot legally exist because of the absence of a valid
principal obligation.
8
ts contention is based on the fact that it is not a party
either to the "Continuing Surety Agreement" or to the loan agreement
between Manilabank and nterbank ndustrial.
Put in another way the consideration necessary to support a surety
obligation need not pass directly to the surety, a consideration moving to
the principal alone being sufficient. For a "guarantor or surety is bound by
the same consideration that makes the contract effective between the
principal parties thereto. t is never necessary that a guarantor or surety
should receive any part or benefit, if such there be, accruing to his
principal."
9
n an analogous case,
10
this Court held:
At the time the loan of P100,000.00 was obtained
from petitioner by Daicor, for the purpose of having an
additional capital for buying and selling coco-shell
charcoal and importation of activated carbon, the
comprehensive surety agreement was admittedly in
full force and effect. The loan was, therefore, covered
by the said agreement, and private respondent, even
if he did not sign the promissory note, is liable by
virtue of the surety agreement. The only condition that
would make him liable thereunder is that the Borrower
"is or may become liable as maker, endorser, acceptor
or otherwise." There is no doubt that Daicor is liable
on the promissory note evidencing the indebtedness.
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.
[3] Willex Plastic contends that the "Continuing Guaranty" cannot be
retroactivelt applied so as to secure payments made by nterbank under
the two "Continuing Surety Agreements." Willex Plastic invokes the ruling
in El Vencedor v. Canlas
11
and Dio v. Court of Appeals
12
in support of its
contention that a contract of suretyship or guaranty should be applied
prospectively.
The cases cited are, however, distinguishable from the present case. n El
Vencedor v. Canlas we held that a contract of suretyship "is not
retrospective and no liability attaches for defaults occurring before it is
entered into unless an intent to be so liable is indicated." There we found
nothing in the contract to show that the paries intended the surety bonds
to answer for the debts contracted previous to the execution of the bonds.
n contrast, in this case, the parties to the "Continuing Guaranty" clearly
provided that the guaranty would cover "sums obtained and/or to be
obtained" by nter-Resin ndustrial from nterbank.
On the other hand, in Dio v. Court of Appeals the issue was whether the
sureties could be held liable for an obligation contracted after the
execution of the continuing surety agreement. t was held that by its very
nature a continuing suretyship contemplates a future course of dealing. "t
is prospective in its operation and is generally intended to provide security
with respect to future transactions." By no means, however, was it meant
in that case that in all instances a contrast of guaranty or suretyship
should be prospective in application.
ndeed, as we also held in Bank of the Philippine Islands v. Foerster,
13
although a contract of suretyship is ordinarily not to be construed as
retrospective, in the end the intention of the parties as revealed by the
evidence is controlling. What was said there
14
applies mutatis mutandis to
the case at bar:
n our opinion, the appealed judgment is erroneous. t
is very true that bonds or other contracts of suretyship
are ordinarily not to be construed as retrospective, but
that rule must yield to the intention of the contracting
parties as revealed by the evidence, and does not
interfere with the use of the ordinary tests and canons
of interpretation which apply in regard to other
contracts.
n the present case the circumstances so clearly
indicate that the bond given by Echevarria was
intended to cover all of the indebtedness of the
Arrocera upon its current account with the plaintiff
Bank that we cannot possibly adopt the view of the
court below in regard to the effect of the bond.
[4] Willex Plastic says that in any event it cannot be proceeded against
without first exhausting all property of nter-Resin ndustrial. Willex Plastic
thus claims the benefit of excussion. The Civil Code provides, however:
Art. 2059. This excussion shall not take place:
(1) f the guarantor has expressly renounced it;
(2) f he has bound himself solidarily with the debtor;
The pertinent portion of the "Continuing Guaranty" executed by Willex
Plastic and nter-Resin ndustrial in favor of UCP (now nterbank) reads:
f default be made in the payment of the NOTE/s
herein guaranteed you and/or your principal/s may
directly proceed against Me/Us without first
proceeding against and exhausting DEBTOR/s
properties in the same manner as if all such liabilities
constituted My/Our direct and primary obligations.
(emphasis supplied)
This stipulation embodies an express renunciation of the right of
excussion. n addition, Willex Plastic bound itself solidarily liable with nter-
Resin ndustrial under the same agreement:
For and in consideration of the sums obtained and/or
to be obtained by NTER-RESN NDUSTRAL
Credit Transactions Full Text Cases Atty. Adviento!!!!*"
CORPORATON, hereinafter referred to as the
DEBTOR/S, from you and/or your principal/s as may
be evidenced by promissory note/s, checks, bills
receivable/s and/or other evidence/s of indebtedness
(hereinafter referred to as the NOTE/S), /We hereby
jointly and severally and unconditionally guarantee
unto you and/or your principal/s, successor/s and
assigns the prompt and punctual payment at maturity
of the NOTE/S issued by the DEBTOR/S in your
and/or your principal/s, successor/s and assigns favor
to the extent of the aggregate principal sum of FVE
MLLON PESOS (P5,000,000.00), Philippine
Currency, and such interests, charges and penalties
as may hereinafter he specified.
[5] Finally it is contended that nter-Resin ndustrial had already paid its
indebtedness to nterbank and that Willex Plastic should have been
allowed by the Court of Appeals to adduce evidence to prove this. Suffice
it to say that nter-Resin ndustrial had been given generous opportunity to
present its evidence but it failed to make use of the same. On the
otherhand, Willex Plastic rested its case without presenting evidence.
The reception of evidence of nter-Resin ndustrial was set on January 29,
1987, but because of its failure to appear on that date, the hearing was
reset on March 12, 26 and April 2, 1987.
On March 12, 1987 nter-Resin ndustrial again failed to appear. Upon
motion of Willex Plastic, the hearings on March 12 and 26, 1987 were
cancelled and "reset for the last time" on April 2 and 30, 1987.
On April 2, 1987, nter-Resin ndustrial again failed to appear. Accordingly
the trial court issued the following order:
Considering that, as shown by the records, the Court
had exerted every earnest effort to cause the service
of notice or subpoena on the defendant nter-Resin
ndustrial but to no avail, even with the assistance of
the defendant Willex the defendant nter-Resin
ndustrial is hereby deemed to have waived the right
to present its evidence.
On the other hand, Willex Plastic announced it was resting its
case without presenting any evidence.
Upon motion of nter-Resin ndustrial, however, the trial court reconsidered
its order and set the hearing anew on July 23, 1987. But nter-Resin
ndustrial again moved for the postponement of the hearing be postponed
to August 11, 1987. The hearing was, therefore, reset on September 8 and
22, 1987 but the hearings were reset on October 13, 1987, this time upon
motion of nterbank. To give nterbank time to comment on a motion filed
by nter-Resin ndustrial, the reception of evidence for nter-Resin
ndustrial was again reset on November 17, 26 and December 11, 1987.
However, nter-Resin ndustrial again moved for the postponement of the
hearing. Accordingly the hearing was reset on November 26 and
December 11, 1987, with warning that the hearings were intransferrable.
Again, the reception of evidence for nter-Resin ndustrial was reset on
January 22, 1988 and February 5, 1988 upon motion of its counsel. As
nter-Resin ndustrial still failed to present its evidence, it was declared to
have waived its evidence.
To give nter-Resin ndustrial a last opportunity to present its evidence,
however, the hearing was postponed to March 4, 1988. Again nter-Resin
ndustrial's counsel did not appear. The trial court, therefore, finally
declared nter-Resin ndustrial to have waived the right to present its
evidence. On the other hand, Willex Plastic, as before, manifested that it
was not presenting evidence and requested instead for time to file a
memorandum.
There is therefore no basis for the plea made by Willex Plastic that it be
given the opportunity of showing that nter-Resin ndustrial has already
paid its obligation to nterbank.
WHEREFORE, the decision of the Court of Appeals is AFFRMED, with
costs against the petitioner.
SO ORDERED.
EN BANC
G.R. No. L-13817 August 31, 1961
MACONDRAY AND COMPANY, INC., plaintiff-appellee,
vs.
PERFECTO PION, ET AL., defendants.
RUPERTO K. KANGLEON, deceased, substituted by VALENTINA
TAGLE-KANGLEON, ET AL., defendants-appellants.
Jose Agbulos for plaintiff-appellee.
San Juan, Africa and Benedicto for defendants-appellants.
PADILLA, J.:
On 11 May 1955 the plaintiff filed a complaint
1
against the defendants in
the Court of First nstance of Manila alleging that upon representation and
undertaking made by Ruperto K. Kangleon, then a member of the Senate,
in a letter addressed to the plaintiff dated 30 January 1954, that he would
guarantee payment of his co-defendants' obligation, should they fail to pay
on the due date (Exhibit F), on 2 and 9 February 1954, the plaintiff sold on
credit and delivered to the defendants Perfecto Pion and Conrado Piring,
known in the theater and entertainment business as "Tugak" and "Pugak",
respectively and transacting business under a common name known as
"All Stars Productions," 127 rolls of cinematographic films, F.G. release
positive type 825B, 35 mm. x 1,000 ft., for the total sum of P6,985,
payable on or before 9 May 1954, 12% interest thereon from date of
maturity and 20% thereof for attorney's fee in case of suit for collection
(Exhibits A, B, C, D, E; that the principal debtors have failed to pay the
amount owed by them on the due date; that upon extensive investigations
made by the plaintiff as to whether the principal debtors have any property,
real or personal, which may be levied upon for the satisfaction of their
obligation, it has found that they have none; that the defendant Kangleon
could not point to the plaintiff any property of the principal debtors leviable
for execution sufficient to satisfy the obligation; and that the sum of
P6,985, the amount owed or part thereof, has not been paid by the
defendants. t prayed that after hearing judgment be rendered ordering the
defendants, jointly and severally, to pay it the sum of P6,985, 12% interest
thereon from 10 May 1954 until fully paid, 20% of the amount due or
P1,387 as attorney's fee, and costs, and that it be granted other just and
equitable relief (civil No. 23947).
On 10 November 1955 the defendant Kangleon answered the plaintiff's
complaint setting up the defense that the letter he had written to the
plaintiff dated 30 January 1954 (Exhibit F) was only to introduce his co-
defendants; that assuming that there was an intent on his part to
guarantee payment of his co-defendants' obligation, the said letter (Exhibit
F) was but an offer to act as guarantor of his co-defendants; that as the
acceptance of his offer to act as guarantor for his co-defendants has not
been actually made known to him by the plaintiff, the contract of guaranty
between them has not been perfected; and that assuming that there has
been a perfected contract of guaranty between the plaintiff and the
answering defendant, the latter's obligation was extinguished by the
extension for payment up to 3 May 1954 granted by the plaintiff to his co-
defendants. By way of counterclaim, he sought from the plaintiff the sum of
P20,000 as damages suffered by his good name and reputation caused by
the plaintiff's clearly unfounded civil action, P2,000 as attorney's fee and
P1000 for expenses incurred in the litigation. As cross-claim, should he be
finally adjudged liable to pay the plaintiff, he prayed that his co-defendants
be ordered to reimburse him whatever amount he would pay to the
plaintiff, and to pay him P3,000 as attorney's fee and expenses of
litigation. He further prayed that he be absolved from the plaintiff's
complaint and that he be granted other just and equitable relief.
The defendants Pion and Piring did not answer the plaintiff's complaint or
their co-defendants' cross-claim.
Credit Transactions Full Text Cases Atty. Adviento!!!!*#
On 10 November 1955 the plaintiff answered the defendants defendant's
counterclaim.
On 25 August 1956 the plaintiff and the answering de defendant entered
into a stipulation of facts and submitted the case for judgment based upon
the said stipulation.
Not having answered the complaint against them despite notice, the Court
declared the defendants Pion and Piring in default (p. 5, rec. on app.).
At the trial of the case on 30 August 1956, the plaintiff and the answering
defendant further stipulated that the former had looked for properties of his
co-defendants Pion and Piring but found none (p. 23, rec. on app.). The
plaintiff presented its evidence against the defendants in default.
On 30 September 1957 the Court rendered judgment, the dispositive part
of which is:
WHEREFORE, judgment is hereby rendered sentencing the
defendants Perfecto Pion and Conrado Piring to pay the
plaintiff jointly and severally the sum of P6,985.00 plus interest
at the rate of 12% per annum from May 9, 1954 until fully paid
and an amount equivalent to 20% as attorney's fees and co of
suit.
f this judgment becomes unsatisfied by the defendants Perfecto
Pion and Conrado Piring, the defendant Ruperto Kangleon is
hereby sentenced to pay the plaintiff all the amounts to which
his co-defendants were sentenced to pay. (p. 29, rec. on app.).
The answering defendant has appealed.
From the stipulation of facts entered into by and between the appellant
and the appellee and the documentary evidence submitted by the appellee
against the defendants in default, the following appear: On 30 January
1954 the defendants Piring and Pion requested the appellant, then a
member of the Senate, to help them buy on credit from the appellee some
cinematographic films. To accommodate them, the appellant wrote a letter
to the appellee, as follows:
REPUBLC OF THE PHLPPNES
SENATE
MANLA
January 30, 1954
The Manager
Macondray & Company
China Bank Building
Manila
S i r :
This will introduce to you the bearers, Messrs. Conrado Piring
and Perfecto Pion both well known theater characters under
the names of "Pugak" and "Tugak", respectively.
have been made to understand by them in their
representations to me that they wish to place an order for the
following items:
10 rolls negative at P157.00 each, and 100 rolls positive at
P55.00 each .
of Dupont Release Positives Safety Basis for use of their firm
called "All Stars Productions" under the management and
control of Pugak and Tugak payable within three (3) months
time ending April, 1954 and for which by their guaranty pledge
payment.
n view of the foregoing, shall appreciate any help you can give
to facilitate said purchases subject to usual business
procedures.
Sincerely,
(Sgd.) RUPERTO K. KANGLEON
Senator
(Exhibit F) which letter the defendants in default presented to the appellee.
On the strength of the appellant's letter above quoted, on 2 and 9
February 1954, the appellee sold on credit and delivered to the defendants
in default 127 rolls of cinematographic films, F.G. release positive type
825B, 35 mm. x 1,000 ft., for the total sum of P6,985, excluding sales tax,
which is for the buyers' account, payable on or before 9 May 1954. The
parties, among others, further stipulated that the buyers would pay interest
at the rate of 1% per month on all amounts not paid when due; that should
a litigation arise from non-payment, the venue of action would be the
courts of Manila and that the buyers would pay 20% of the amount due for
attorney's fee and costs of the suit (Exhibits A, B, C, D, E). The defendants
in default failed to pay their obligation on the due date. On 27 May 1954
the appellee wrote to the appellant a letter of the following tenor:
May 27 , 1954
Honorable Ruperto K. Kangleon
Philippine Senate
Manila
Dear Sir:
On January 30th, last you requested us to give Messrs.
Conrado Piring and Perfecto Pion of "All-Stars Productions",
certain rolls of negative and positive films, the cost of which was
payable in three months time and payment of which you
guaranteed.
These films were delivered and billed at P6,985.00 on Feb. 9th
last. The amount has not been paid (and) we have difficulty
locating the above gentlemen as they cannot be found in their
offices.
n view of this we hereby request you to send us a check for the
amount as it was due on May 3rd.
Yours very truly,
MACONDRAY & CO., NC.
s/LLEGBLE
Collection Department
On 31 May 1954, the appellant answered the appellee as follows:
May 31, 1954
Macondray & Co., nc.
3rd Floor, China Bank Bldg.
Manila
Gentlemen:
Credit Transactions Full Text Cases Atty. Adviento!!!!*$
This will acknowledge receipt of your letter of May 27th. Messrs.
Conrado Piring and Perfecto Pion are being contacted to invite
their attention to your letter.
Notwithstanding the foregoing, have been made to understand
by Messrs. Piring and Pion that in arrangements with that
Company an extension of time has been granted them; within
which to settle their obligations.
Cordially yours,
(Sgd.) RUPERTO K. KANGLEON
On 2 June 1954 the appellee replied to the appellant's answer to its letter
thus:
June 2, 1954
Hon. Ruperto K. Kangleon
Philippine Senate
Manila
Dear Sir:
We have your letter of May 31st in reply to ours of the 7th and
note that you are getting in touch with Messrs. Conrado Piring
and Perfecto Pion with regard to their account.
We know of no extension of time for payment being granted
these people and certainly no one in authority has made such n
arrangement. For this reason, if payment is not received from
them by the 15th inst. We expect to receive a remittance from
you to cover the full amount.
Yours very truly,
MACONDRAY & CO., NC.
s/LLEGBLE
Collection Department
On 19 July 1954 the appellee wrote the following letter to the defendants
in default:
July 19, 1954
Mr. Conrado Piring
Pureza Extension
Sta Mesa, Manila
Mr. Perfecto Pion
Pureza Extension
Sta. Mesa, Manila
Gentlemen:
Please be advised that Macondray & Co., nc. has turned over
to me for corresponding judicial action your account for films in
the amount of P6,985.00. As this obligation is now long past
due, payment thereof is earnestly requested. Unless payment
thereof is received from you immediately, shall be compelled,
much to my regret, to take this matter to the court.
Very truly yours,
(Sgd.) JOSE AGBULOS
Attorney for Macondray & Co., nc.
which was sent to them by registered mail (Exhibits G, G-1 & G-2). Neither
the defendants in default nor the appellant has paid the amount owed to
the appellee.
During the time this appeal was pending in this Court the appellant died.
His heirs or their legal representatives were directed to appear in
substitution for the deceased appellant. Attorneys San Juan, Africa &
Benedicto entered their appearance for said heirs, namely: Mrs. Valentina
Tagle Kangleon, Benjamin T. Kangleon, Juanita T. Kangleon, Mrs. Flora
San Gabriel, Miss Corazon Kangleon, Miss Lourdes Kangleon, Mrs.
Teresita Limcolioc, Mrs. Aida Rosca, Jesus Kangleon, Jose Kangleon and
Miss Cecilia Kangleon.
The appellant contends that although in the stipulation of facts entered into
by and between him and the appellee, he had admitted the liability of his
co-defendants, who were declared in default, under the principle of res
inter alios acta, that an admission by a third person can not bind another,
his admission cannot bind the defendants in default and no judgment
against them may be rendered on the basis of the stipulation of facts
referred to. Since the appellee had not established a case against the
defendants a default, the principal debtors, it cannot directly held able the
appellant, the guarantor, whose obligation is only subsidiary to that of the
former.
The appellant proceeds from the wrong premise that the case was
submitted to the Court solely on the stipulation of facts entered into by and
between him and the appellee. The records show that when the case was
called for trial on 30 August 1956, after the appellant's co-defendants had
been declared in default, the appellee presented its evidence testimonial
and documentary, against them (pp. 5-18, t.s.n.; Exhibits A, B, C, D, E, F,
G, G-1 & G-2), and thereby established their primary liability.
The appellant claims that the letter (Exhibit F) is mere a letter of
introduction and does not constitute an offer of guaranty. A cursory reading
of the letter (Exhibit F) belies his assertion. While in his opening sentence
he says at that "This will introduce to you the bearers, Messrs. Conrado
Piring and Perfecto Pion, . . ." who "wish to place an order for"
cinematographic films, yet in the later part he says that "for which by their
guaranty pledge payment." This can only mean that he undertakes to
guarantee payment of the principal debtors' obligation should they fail to
pay. The appellant is a responsible man and may be presumed to mean
what he says. At that time, he was occupying the exalted position of
member of the Senate and his plighted word given to another would
immediately be accepted. t is not, therefore, odd that upon receipt of the
appellant's letter (Exhibit F), the appellee readily sold on credit to the
principal debtors, the defendants in default, the cinematographic films in
question.
That the appellant really meant to guarantee payment of the principal
debtors' obligation should they default, is patent in his answer to the
appellee's letter dated 27 May 1954, reminding him that on 30 January he
requested it "to give Messrs. Conrado Piring and Perfecto Pion of 'All-
Stars Productions', certain rolls of negative and positive films, the cost of
which was payable in three months time and payment of which you
guaranteed"; that the "films were delivered and billed at P6,985.00 on Feb.
9th last"; and that "the amount has not been paid (and) we have difficulty
locating the above gentlemen as they cannot be found in their offices," and
requesting the appellant to send a check for the amount. n his answer to
the foregoing letter, dated 31 May 1954, he acknowledged receipt of the
appellee's letter of the 27th of the same month and informed it that the
principal debtors were "being contacted to invite their attention to your
letter." Had the appellant meant otherwise, he would have immediately
denied that he ever guaranteed payment of the principal debtors
obligation. This he did not do.
The appellant's very letter (Exhibit F) constitutes his undertaking of
guaranty. "Contracts shall be obligatory in whatever form they may have
Credit Transactions Full Text Cases Atty. Adviento!!!!*%
been entered into, provided all the essential requisites for their validity are
present."
2
A contract of guaranty is not a formal contract and shall be valid
in whatever form it may be, provided that it complies with the statute of
frauds.
The appellant insists that he should have been notified by the appellee of
the acceptance of his offer of guaranty. n the first place, his letter (Exhibit
F) already constitutes his undertaking of guaranty. n the second place, the
contract entered into by and between the appellee and the defendants in
default is the principal contract and the appellee is subsidiary to the
principal contract. Since the principal contract had already been perfected,
the subsidiary contract of guaranty became binding upon effectivity of the
principal contract. Hence no notice of acceptance by the appellee to the
appellant is necessary for its validity.
The appellant states that assuming that the letter Exhibit F constitutes a
contract of guaranty, the films actually sold to the principal debtors were
127 rolls of F.G. release positive type 825 B 35 mm. x 1,000 ft. at P55 a
roll, payable 9 May 1954, while what he undertook to guarantee payment
was 10 rolls negative at 157 each and 100 rolls positive at 55 each,
payable within three months ending April, 1954. Citing article 2055 of the
Civil Code that a guaranty cannot extend to more than what is stipulated
therein, the appellant contends that he cannot be held liable for the
contract in view of the variation in his undertaking. The total cost of what
was actually sold to and bought by the principal debtors is P6,985, which
is less than the total cost of what was originally intended to be bought by
them amounting to P7,070. The variation was merely in kind and not in
subject matter cinematographic films which did not render the
appellant's obligation more burdensome. nstead his obligation was
rendered less onerous by the reduction in the original price of P7,070 to
P6,985. The fact that in the letter Exhibit F, the appellant mentioned that
the principal debtors' obligation would be "payable within three months
time ending April, 1954," while in the contract entered into by and between
the appellee and the principal debtors they have stipulated that their
obligation would be payable on or before 9 May 1954, is of no moment.
The letter Exhibit F was dated 30 January 1954. Counted from that date,
the three months period would expire on April 1954. However, actually the
principal contract was consummated on 9 February 1954 (Exhibit A). t is
but fair that the three month period be counted from that date ending 9
May 1954. Again, the appellants obligation has not become more onerous
than what he actually bound himself.
The judgment appealed from is affirmed against the heirs of the deceased
appellant herein above named, with costs against them.
Bengzon, C.J., Labrador, Reyes, J.B.L., Barrera, Paredes, Dizon, De Leon
and Natividad, JJ., concur.
Conception, J., took no part.
EN BANC
G.R. No. L-42518 August 29, 1936
WISE & CO., INC., plaintiff-appellee,
vs.
DIONISIO P. TANGLAO, defendant-appellant.
The appellant in his own behalf.
Franco and Reinoso for appellee.
AVANCEA, C. J.:
n the Court of First nstance of Manila, Wise & Co. instituted civil case No.
41129 against Cornelio C. David for the recovery of a certain sum of
money David was an agent of Wise & Co. and the amount claimed from
him was the result of a liquidation of accounts showing that he was
indebted in said amount. n said case Wise & Co. asked and obtained a
preliminary attachment of David's property. To avoid the execution of said
attachment, David succeeded in having his Attorney Tanglao execute on
January 16, 1932, a power of attorney (Exhibit A) in his favor, with the
following clause:
To sign for me as guarantor for himself in his indebtedness to
Wise & Company of Manila, which indebtedness appears in civil
case No. 41129, of the Court of First nstance of Manila, and to
mortgage my lot (No. 517-F of the subdivision plan Psd-20,
being a portion of lot No. 517 of the cadastral survey of Angeles,
G. L. R. O. Cad. Rec. No. 124), to guarantee the said
obligations to the Wise & Company, nc., of Manila.
On the 18th of said month David subscribed and on the 23d thereof, filed
in court, the following document (Exhibit B):
COMPROMSE
Come now the parties, plaintiff by the undersigned attorneys and
defendants in his own behalf and respectfully state:
. That the defendant confesses judgment for the sum
of six hundred forty pesos (P640), payable at the rate
of eighty pesos (P80) per month, the first payment to
be made on February 15, 1932 and successively
thereafter until the full amount is paid; the plaintiff
accepts this stipulation.
. That as security for the payment of said sum of
P640, defendant binds in favor of, and pledges to the
plaintiff, the following real properties:
1. House of light materials described under
tax declaration No. 9650 of the municipality
of Angeles, Province of Pampanga,
assessed at P320.
2. Accesoria apartments with a ground floor
of 180 sq. m. with the first story of cement
and galvanized of iron roofing located on
the lot belonging to Mariano Tablante
Geronimo, said accesoria is described
under tax declaration No. 11164 of the
municipality of Angeles, Province of
Pampanga, assessed at P800.
3. Parcel of land described under Transfer
Certificate of Title No. 2307 of the Province
of Pampanga recorded in the name of
Dionisio Tanglao of which defendant herein
holds a special power of attorney to pledge
the same in favor of Wise & Co., nc., as a
guarantee for the payment of the claim
against him in the above entitled cause. The
said parcel of land is bounded as follows:
NE. lot No. 517 "Part" de Narciso Garcia;
SE. Calle Rizal; SW. lot No. 517 "Part" de
Bernardino Tiongco; NW. lot No. 508 de
Clemente Dayrit; containing 431 sq. m. and
described in tax declaration No. 11977 of
the municipality of Angeles, Pampanga,
assessed at P423.
That this guaranty is attached to the properties above
mentioned as first lien and for this reason the parties agree to
register this compromise with the Register of Deeds of
Pampanga, said lien to be cancelled only on the payment of the
full amount of the judgment in this case.
Wherefore, the parties pray that the above compromise be
admitted and that an order issue requiring the register of Deeds
of Pampanga to register this compromise previous to the filing of
the legal fees.
David paid the sum of P343.47 to Wise & Co., on account of the P640
which he bound himself to pay under Exhibit B, leaving an unpaid balance
of P296.53.
Credit Transactions Full Text Cases Atty. Adviento!!!!*&
Wise & Co. now institutes this case against Tanglao for the recovery of
said balance of P296.53.
There is no doubt that under Exhibit, A, Tanglao empowered David, in his
name, to enter into a contract of suretyship and a contract of mortgage of
the property described in the document, with Wise & Co. However, David
used said power of attorney only to mortgage the property and did not
enter into contract of suretyship. Nothing is stated in Exhibit B to the effect
that Tanglao became David's surety for the payment of the sum in
question. Neither is this inferable from any of the clauses thereof, and
even if this inference might be made, it would be insufficient to create an
obligation of suretyship which, under the law, must be express and cannot
be presumed.
t appears from the foregoing that defendant, Tanglao could not have
contracted any personal responsibility for the payment of the sum of P640.
The only obligation which Exhibit B, in connection with Exhibit A, has
created on the part of Tanglao, is that resulting from the mortgage of a
property belonging to him to secure the payment of said P640. However, a
foreclosure suit is not instituted in this case against Tanglao, but a purely
personal action for the recovery of the amount still owed by David.
At any rate, even granting that defendant Tanglao may be considered as a
surety under Exhibit B, the action does not yet lie against him on the
ground that all the legal remedies against the debtor have not previously
been exhausted (art. 1830 of the Civil Code, and decision of the Supreme
Court of Spain of March 2, 1891). The plaintiff has in its favor a judgment
against debtor David for the payment of debt. t does not appear that the
execution of this judgment has been asked for and Exhibit B, on the other
hand, shows that David has two pieces of property the value of which is in
excess of the balance of the debt the payment of which is sought of
Tanglao in his alleged capacity as surety.
For the foregoing considerations, the appealed judgment is reversed and
the defendant is absolved from the complaint, with the costs to the plaintiff.
So ordered.
Villa-Real, Abad Santos, Imperial, Diaz, Recto, and Laurel, JJ., concur.
EN BANC
G.R. No. 42490 September 9, 1937
VALERIANO SOLON, NATIVIDAD SOLON and MANUEL IBAEZ,
plaintiff-appellants,
vs.
APOLONIA SOLON, ZOILO SOLON, ROBERTA SOLON, FELISA
SUICO (minor), and THE DIRECTOR OF LANDS, defendants-appellees.
Jose Delgado and Vickers, Ohnick, Opisso and Velilla for appellants.
Cuenco and Cuenco for appellees.
DIAZ, J.:
n his lifetime Eugenio Solon, father of the parties surnamed Solon,
grandfather of defendant Felisa Suico, and husband of the plaintiff
Manuela baez in second marriage contract on May 23, 1899, bought, on
installments, from the Bureau of Lands the parcel of land described as "Lot
No. 903 of the Banilad Friar Lands Estate" in transfer certificate of title No.
8379 of the registry of Cebu, situated in the barrio of Cogon, municipality
of Cebu, Cebu Province having an area of 6 hectares, 46 ares and 13
centares, and assessed by said bureau at P403. The sale took place on
December 12, 1919, and the time stipulated for the complete payment of
its price was thirteen years, the first annual installment being P31, and the
subsequent twelve installments to be paid every year being P21 each. On
July 30, 1925, with the amount of P126 as part of the agreed purchase
price still unpaid Eugenio Solon, after securing the consent and approval
of the Bureau of Lands, sold and conveyed for the sum of P1,00 all his
rights, title and interest in the land acquired by him executing for that
purpose in favor of Apolonia Solon who agreed to pay the installments still
owing to the Bureau of Lands, the deed of transfer appearing in the record
as Exhibit B. Apolonia Solon paid to the Bureau of Lands on the same
date of the execution of the deed the amount of P21, and the balance of
P105 at one time only a month thereafter. The year following, or on July
10, 1926, Eugenio Solon died, leaving no will, and two years, eight months
and eight days later, or on March 18, 1929, the register of deeds of Cebu,
upon compliance with the formalities of law, issued transfer certificate of
title No. 8379 in the name of Apolonia Solon. The latter took charge of the
property occupying it as her own through tenants from the time she bought
the same, according to the evidence for the defendants, and from the
death of Eugenio Solon, according to the evidence for the defendants, and
from the death of Eugenio Solon, according to that for the plaintiffs.
Plaintiffs surnamed Solon, all of whom are children of the deceased
Eugenio, Solon in his marriage with his widow Manuela baez, joining
with the latter in maintaining that Exhibit B is false and simulated and that
if the same had been executed by Eugenio Solon, it was without just
consideration, commenced this suit praying (1) that said document be
declared null and void because false and simulated, (2) that they be
adjudged the absolute owners pro indiviso of the land in question together
with the other heir of Eugenio Solon, (3) that defendants Apolonia Solon,
Zoilo Solon, Roberta Solon and the latter's husband Andres Montalban, be
sentenced to pay jointly and severally, to the plaintiffs the value of the
fruits of the land in question from the death of Eugenio Solon, and (4) that
said defendants be sentenced to pay, also jointly and severally to the
plaintiffs the sum of P30,000 as damages, besides the costs of the suit.
Defendants, by way of defense, filed an answer containing a general
denial and the special defense of prescription based on the exercising
their right of action.
After trial the lower court rendered judgment dismissing plaintiffs'
complaint, without any pronouncement as to costs, and declaring valid in
effect the transfer made by Eugenio Solon in favor of Apolonia Solon
appealed to this court after their motion for new trial on the ground that the
judgment was contrary to law and not sufficiently supported by the
evidence was denied.
n support of their appeal appellants assigned eight errors as committed
by the lower court which may be summed up as follows: (1) n giving no
credit to the witnesses for the plaintiffs and in making no mention of the
falsehoods committed by the witnesses for the appellees in their
testimony; (2) in failing to consider the real value of the land in question by
reason of its location and value in 1925 when the alleged transfer took
place; (3) in failing to take into account the conclusion at which it had
arrived during trial, that the land in question, being located near the
Osmea bridge, was worth P0.25 per square meter in 1925, and declaring
afterwards in its decision that it is worthless than P0.01 per square meter;
(4) in not declaring that Eugenio Solon, like other owners of lands adjacent
to his, knew of the plan to construct the provincial capitol on lot No. 850
adjoining lot No. 903 in question; (5) in holding that appellants weakened
their side of the case when, after contending that the document Exhibit B
is false and simulated they conceded that although the same may have
been executed, it must, at all events, be declared void by reason of the
disproportion between the price paid for the land and its true value at the
time; (6) in failing to take into account the various facts and circumstances
showing that the transaction which took place according to Exhibit B, is
fraudulent and false, in view of the fact that the supposed grantor under
said deed was an illiterate, 88 years of age and was furthermore the father
of Apolonia Solon, and also of the fact that the whole transaction was
carried out without the knowledge of his wife and other children; (7) in not
holding that Exhibit B is fraudulent and false and that Eugenio Solon, who
was 88 years old, ignorant and illiterate was induced to sign it; and finally
(8) in not holding null and void the deed in question and in not finding that
the land to which the same refers belongs to all the heirs of the deceased
Eugenio Solon.
1. t is fact clearly shown by the evidence for the defendants, which
appears to us to have more weight than that for the plaintiffs
notwithstanding the latter's efforts to show the contrary, that the transfer of
the land in question made by Eugenio Solon to Apolonia Solon, according
to Exhibit B, had taken place long before the commencement of the suit of
MaCleod and Co., against Andres Montalban, husband of Roberta Solon,
as principal, and Eugenio Solon, as surely of said Montalban. t cannot,
therefore, be believed, and the lower court did well in refusing to believe,
that Andres Montalban had been making statements to the effect that
Apolonia Solon had paid nothing for the reason that the same was not real
Credit Transactions Full Text Cases Atty. Adviento!!!!*'
but only simulated and that it was made solely for the sole purpose of
placing the land in question beyond the reach of any action that might be
brought by Macleod and Company against said Eugenio Solon; and
Apolonia Solon had been telling her tenant named Eugenio Labra that
there had been an understanding among her brothers of the whole blood
that they would cede the said land to her as part of her inheritance from
their father, because, in the first place there was an action against Eugenio
Solon for the collection of an amount himself to pay; and, in the second
place, Apolonia Solon could not have made the above statement attributed
to her for the simple reason that she was then already the owner of the
land aforesaid by virtue of the purchase appearing in Exhibit B.
When Eugenio Solon bound himself as surely for Andres Montalban for
the payment to Macleod and Company of the amount of P5,000 which
Montalban owed to the latter, he limited himself to giving as security, by
way of mortgage, the land, and no other, belonging to him and described
as lot No. 892 of the Banilad Friar Lands Estate in case No. 5988 of the
Court of Land Registration and in transfer certificate of title No. 2499 of the
registry of property of the Province of Cebu. t is not possible that Macleod
and Company could have ever contemplated bringing an action against
Eugenio Solon to obtain possession not only of the land expressly
mortgaged to it, which, as has been said, is lot No. 892 described in the
certificate of title above-mentioned, which is distinct from lot No. 903, but
also of any other land belonging to him or of lot No. 903 itself, for the
purpose of collecting its credit against Andres Montalban, because it would
not have failed to know, better than any one else, that the contract of
suretyship in its favor does not admit of the interpretation that it could
make Eugenio Solon liable for an amount greater than P5,000 and that it
could require him to pay Montalban's indebtedness, should the latter fail to
do so, with lands other than that he had mortgaged. This is so because the
clauses of a contract of suretyship determine the extent of the liability of
the surely (Government of the Philippine slands vs. Herrero, 38 Phil.,
410); because said liability should not be extended farther than the clear
terms of the contract of guarantee by mere implication; and because the
surety should be liable only in the manner and to the extent, and under the
circumstances pointed out in the contract of suretyship or which may be
clearly deduced therefrom (La nsular vs. Machuca Go-Tauco and Nubla
Co-Siong 39 Phil., 567).
2. Plaintiffs believe having proved that the value of the land in question in
1925 was P0.25 per square meter. The evidence upon which they rely was
the testimony of the engineer, surveyor and real estate broker Thomas F.
Breslin, who affirmed that a parcel adjacent to the one under discussion
had been sold to a lady named Consolacion Albade Rodriguez in that year
at P0.25 per square meter. it should be noted that, upon cross-
examination said witness had to admit that all he knew concerning the
transaction had been obtained from said lady. Although the lower spite of a
timely motion by defendants to that effect, inasmuch as it limited itself to
saying: "t will be taken into consideration," the truth is that when it decided
the case dismissing plaintiffs' complaint, it completely disregarded said
evidence which is tantamount to having ordered its exclusion on account
of its incompentency.
The sales made in 1926 and 1927 of lots Nos. 900 and 1009-A by Jose
Vao to Soledad, Salud and Mercedes Espina, and by Maria Solon to
Zenon Diaz, respectively, at the rate of P0.20 and P0.24 per square meter,
according to Exhibits BB and X, and the sale made by Viscal S. Duterte to
the spouses Severino Rodriguez and Consolacion Alba, of lot No. 1009-B,
in October, 1925, at P0.25 per square meter, according to Exhibit Y, do not
necessarily prove that the land in question was worth that mush on the
date of its sale. t must be remembered that this had taken place three
months before the sale of the land referred to in Exhibit Y, and one and
two years before those set forth in Exhibits BB and Y, respectively. Those
who acquired said lands, according to their own testimony, desired to
speculate because they had heard that the capitol of Cebu would be
erected nearby. t is, nevertheless, a fact that since then until the date of
the decision appealed from in the words of the lower court the capitol
had not been erected, nor had any road been opened through said
parcels, nor had the rumors that the capitol would be construed sooner or
later in the vicinity had any appearance of truth. However, although there
may have been a proposal to erect the capitol thereon, the evidence does
not show that Eugenio Solon had never had acknowledge of that fact.
Furthermore, knowing that he had paid for the land only P270.70, it is only
reasonable to suppose that he was more than satisfied when he received
an offer of P1,000 therefor and was paid that amount which is, no doubt,
almost three times that which he had invested, not at one time, of course,
but in six years. On the other hand, the person to whom he transferred the
land was no other than his own daugther. For these reasons, we believe
and so hold that the second error is without merit.
3. There is nothing in the record which proves that the court found that the
value of the land in dispute in 1925 was P0.25 per square meter. All that
the lower court said during the trial, and it appears only incidentally, in
ruling on the objection to a question made for the purpose of finding out
the amount at which the land would quote per square meter in case the
capitol were construed on parcel No. 850 which is a adjacent to the parcel
in question, was the following:
That is extremely remote. believe that the best proof is that of
P0.25 per square meter, in 1925. believe that that is the real
value, and it depends upon whether or not a street will be
opened and on whether or not a capitol will be constructed, and
if it be depression time, as it is now, it can not possibly sell at
P2, so that it is all too problematical.
And it should be added that the lower court said this before hearing the
other evidence of plaintiffs and before having any idea of what the
evidence of defendants would be. t surely corrected the same thereafter
in the manner set forth in the decision appealed from. We hold that the
third error is likewise not well taken.
4. The fourth error is imaginary. As has been said, there is no evidence of
record to show that Eugenio Solon had any knowledge of the plan to
construct the capitol of Cebu near the land in dispute upon selling the
same to Apolonia Solon. The argument of plaintiffs that it must be
presumed that every land owner has knowledge of all the improvements
which are to be made in properties near his own, does not prove anything
because it does nowhere appears as a fact that the capitol of Cebu was to
be constructed sooner or later in the immediate vicinity of the land in
question. But even supposing that Eugenio Solon had guessed that there
would be such a plan, this does not imply that the transfer he made to
Apolonia Solon was void because the owner has the right to sell what
belongs to him to whomever he chooses and for whatever price
satisfactory to him.
5. And it is no error for the lower court to have considered that the cause
of the plaintiffs was weakened on account of the fact that they maintain
two propositions which are, in reality, incompatible with each other. That
the documentary of transfer Exhibit B was false and simulated, and that it
must simply be declared void for the reason that the price paid therefor is
disproportionate to its value in 1925 are two irreconcilable things. f the
latter were true, then it would be useless to insist that the said document is
false or simulated. But the truth is that there is no disproportion between
the price paid for it and its real value in 1925. The Bureau of Lands itself
sold, on July 28, 1924, lot No. 887 of the same Banilad Friar Lands Estate,
located near the land in question and having an area of 3 hectares, 43
ares, 62 centares for the small sum of P190 of less than 6/10 centavo per
square meter. (Exhibit -A.) There is no occasion to repeat here the same
reasons for the statement that there is no evidence of record in support of
the conclusion that there was a proposal on the part of the Province of
Cebu to construct its capitol on lot No. 850. f there was any disproportion
between the price paid and real value of the land, it was not to the
prejudice of Eugenio Solon because he was paid much more than he
really paid therefor to the Bureau of Lands nor withstanding that he had
not made any improvements thereon or completed the payment he had
agreed to make to said office.
6. The sixth error attributed by appellants to the lower court has been
practically shown not to exist for the reasons given in discussing the first
five error. n addition thereto, it may be said transfer did not take place. On
the other hand, defendants proved that it did take place by means of
Exhibit B which, it may be truthfully said, was executed was all the
formalities law before a notary public and in the presence of an official of
the Bureau of Lands in the very office of the latter in Talisay, Cebu, and in
that of another witness, and by means of the approval of said transfer by
the Directors of Lands. They further proved through one of the
instrumental witness to said document and through Apolonia Solon herself
that the price appearing in said document Exhibit B was paid to Eugenio
Solon; and that the latter had tried to sell the land before that date to other
P750. All the foregoing, together with the fact that the last annual
payments which Eugenio Solon should made to the Bureau of Lands were
Credit Transactions Full Text Cases Atty. Adviento!!!!*(
effected by Apolonia Solon and that said defendant took possession of the
land immediately after the execution of Exhibit B conclusively show that
said document was neither fraudulent nor false. And it is not true that
Eugenio Solon was then 8 years old and, therefore, could be easily
imposed upon by reason of his mental and physical weakness because
the best evidence appearing of record with respect to his age, Exhibit F,
shows that he was only 66 years, 2 months and 7 days at the time of the
transfer.
7 and 8. The seventh and eight errors need no further discussion. The
reasons above given clearly show that they do not exist. The inescapable
conclusion, therefore, is that the appeal taken by plaintiffs is unfounded
and without merit for the reason that the judgment appealed from is in
accordance with law and supported by the evidence.
n view of the foregoing, the judgment appealed from is affirmed with the
costs of the appeal against the plaintiffs and appellanEN BANC
G.R. No. L-15808 ApriI 23, 1963
FAUSTA AGCANAS, JUAN MIGUEL, JUANITA MIGUEL, assisted by
her husband ULPIANO PASION,
assisted by her husband JUAN PASCUAL, plaintiffs-appellees,
vs.
BRUNO MERCADO and ANTONIO DASALLA, defendants-appellants.
Melanio T. Singson for plaintiffs-appellees.
Adriano D. Dasalla and Antonio F. Dasalla for defendants-appellants.
MAKALINTAL, J.:
Appeal by defendants from the Court of First nstance of sabela on a
question of law.
On November 25, 1956 plaintiffs filed this action to recover portions of a
parcel of land in sabela, and damages. Under date of December 4, 1956
defendants filed a motion for a bill of particulars, with notice of hearing on
December 8, but since the motion was actually received in court only on
December 12 the court set it for hearing on December 22. On December
17, however, defendants filed a motion to dismiss the complaint, with a
prayer that consideration of their motion for a bill of particulars be held in
abeyance pending resolution of their motion to dismiss. On December 22,
1956, the date set by the court for the hearing of the motion for a bill of
particulars and by defendants for the hearing of their motion to dismiss,
the court issued an order postponing "consideration" of both motions to
December 29. On March 7, 1957 the court denied the motion to dismiss
and ordered defendants "to answer the complaint within the reglementary
period provided for by the Rules of Court." Hearing of the case on the
merits was set for October 29, 1957, notice of which was duly received by
defendants. Defendants not having filed their answer, plaintiffs, on October
17, 1957, moved to have them declared in default. On the same day the
court issued the order of default together with another order
commissioning the clerk of court to receive plaintiff's evidence. On October
21, 1957 defendants moved to cancel the hearing scheduled for October
29, on two grounds one of which was that their motion for a bill of
particulars had not yet been resolved. The motion to cancel was set for
hearing on October 26, 1957. When defendants arrived in court on that
day they learned that an order of default had been issued, so they
immediately filed a motion asking that the same be set aside that their
pending motion for a bill of particulars be resolved and that they be given a
reasonable period thereafter within which to file their answer to the
complaint. On December 13, 1957 the court denied the motion and
rendered its decision in favor of plaintiffs and against defendants. On
January 4, 1958 it denied defendants' motion for reconsideration of the
order of denial. On January 24, defendants filed their record on appeal (to
this Court from the order of December 13, 1957), but as they subsequently
filed a petition for relief from the judgment by default, they asked that
consideration and approval of their record on appeal be held in abeyance
until said petition had been resolved. The request was granted.
Defendant's petition for relief, which was filed on January 28, 1958, was
denied on March 21, as was also, on September 20, 1958 their motion for
reconsideration of the order of denial. On October 4, 1958 the court
denied likewise their motion for a writ of preliminary injunction to restrain
execution of the judgment by default. Hence, this appeal.
Appellants' eighteen assignments of error may be reduced to a single
proposition: Whether or not upon denial of a defendants' motion to dismiss
the reglementary period within which to file an answer resumes running
even though the motion for a bill of particulars of the same defendants is
still pending and unresolved.
Both a motion to dismiss and a motion for a bill of particulars interrupt the
time to file a responsive pleading. n the case of a motion to dismiss, the
period starts running against as soon as the movant receives a copy of the
order of denial.
1
n the case of a motion for a bill of particulars, the
suspended period shall continue to run upon service on the movant of the
bill of particulars, if the motion is granted, or of the notice of its denial, but
in any event he shall have not less than five days within which to file his
responsive pleading.
2
When appellants filed a motion to dismiss they requested that resolution of
their previous motion for a bill of particulars be held in abeyance. This was
but practical because if the court had granted the motion to dismiss, there
would have been no need for a bill of particulars. Resolution of the motion
for the purpose was necessary only in the event that court should deny, as
it did, the motion to dismiss, in which case the period to file an answer
remained suspended until the motion for a bill of particulars is denied or, if
it is granted, until the bill is served on the moving party.
Wherefore, the parties respectfully pray that the foregoing stipulation of
facts be admitted and approved by this Honorable Court, without prejudice
to the parties adducing other evidence to prove their case not covered by
this stipulation of facts. 1wph1.t
The lower court deemed appellants to have "tacitly waived their right to
push through the hearing of the motion for bill of particulars," because of
their failure to set it for hearing or to ask the clerk of court to calendar it
after denial of the motion to dismiss. Appellants did set the motion for
hearing on December 8, 1956, although it was not heard on that day
because it arrived in court only on December 12. Thereafter they did not
have to reset it, as the clerk of court scheduled it for hearing on December
22, 1956. And on that day the court issued an order that "the consideration
of the motion to dismiss, as well as the bill of particulars, is hereby
postponed to December 29, 1956." As to whether or not both motions
were actually heard on December 29, does not appear of record. But
heard or not, the motions should be considered submitted, and it was the
clear duty of the court to resolve the motion for a bill of particulars, as it did
the motion to dismiss. No action having been taken thereon until the
present, the period to answer has not yet expired. The lower court,
therefore, erred in declaring appellants in defaults and in taking all the
subsequent actions it did in the case.
The order of default issued and the decision rendered by the trial court are
set aside and the case is remanded for further proceedings, pursuant to
the Rules. Costs against plaintiffs-appellees.
Bengzon, C.J., Padilla, Bautista Angelo, Concepcion, Reyes, J.B.L.,
Barrera, Paredes, Dizon and Regala, JJ., concur.
ts. So ordered.
SECOND DIVISION
G.R. No. 130886 : January 29, 2004
COMMONWEALTH INSURANCE CORPORATION,, Petitioner, v. COURT
OF APPEALS and RZAL COMMERCAL BANKNG CORPORATON,
Respondents.
D E C I S I O N
AUSTRIA-MARTINEZ, J.:
Before us is a petition for review on certiorari assailing the Decision[1] of
the Court of Appeals (CA), promulgated on May 16, 1997 in CA-G.R. CV
No. 44473[2], which modified the decision dated March 5, 1993 of the
Credit Transactions Full Text Cases Atty. Adviento!!!!*)
Regional Trial Court of Makati (Branch 64); and the Resolution[3] dated
September 25, 1997, denying petitioners motion for reconsideration.
The facts of the case as summarized by the Court of Appeals are as
follows:
n 1984, plaintiff-appellant Rizal Commercial Banking Corporation (RCBC)
granted two export loan lines, one, for P2,500,000.00 to Jigs
Manufacturing Corporation (JGS) and, the other, for P1,000,000.00 to
Elba ndustries, nc. (ELBA). JGS and ELBA which are sister corporations
both drew from their respective credit lines, the former in the amount of
P2,499,992.00 and the latter for P998,033.37 plus P478,985.05 from the
case-to-case basis and trust receipts. These loans were evidenced by
promissory notes (Exhibits A to L, inclusive JGS; Exhibits V to BB,
inclusive ELBA) and secured by surety bonds (Exhibits M to Q inclusive
JGS; Exhibits CC to FF, inclusive ELBA) executed by defendant-appellee
Commonwealth nsurance Company (CC).
Specifically, the surety bonds issued by appellee CC in favor of appellant
RCBC to secure the obligations of JGS totaled P2,894,128.00 while that
securing ELBAs obligation was P1,570,000.00. Hence, the total face value
of the surety bonds issued by appellee CC was P4,464,128.00.
JGS and ELBA defaulted in the payment of their respective loans. On
October 30, 1984, appellant RCBC made a written demand (Exhibit N) on
appellee CC to pay JGs account to the full extend (sic) of the suretyship.
A similar demand (Exhibit O) was made on December 17, 1984 for
appellee CC to pay ELBAs account to the full extend (sic) of the
suretyship. n response to those demands, appellee CC made several
payments from February 25, 1985 to February 10, 1988 in the total
amount of P2,000,000.00. There having been a substantial balance
unpaid, appellant RCBC made a final demand for payment (Exhibit P) on
July 7, 1988 upon appellee CC but the latter ignored it. Thus, appellant
RCBC filed the Complaint for a Sum of Money on September 19, 1988
against appellee CC.[4]
The trial court rendered a decision dated March 5, 1993, the dispositive
portion of which reads as follows:
WHEREFORE, premises considered, in the light of the above facts,
arguments, discussion, and more important, the law and jurisprudence,
the Court finds the defendants Commonwealth nsurance Co. and
defaulted third party defendants Jigs Manufacturing Corporation, Elba
ndustries and luminada de Guzman solidarily liable to pay herein plaintiff
Rizal Commercial Banking Corporation the sum of Two Million Four
Hundred Sixty-Four Thousand One Hundred Twenty-Eight Pesos
(P2,464,128.00), to pay the plaintiff attorneys fees of P10,000.00 and to
pay the costs of suit.
T S SO ORDERED.[5]
Not satisfied with the trial courts decision, RCBC filed a motion for
reconsideration praying that in addition to the principal sum of
P2,464,128.00, defendant CC be held liable to pay interests thereon from
date of demand at the rate of 12% per annum until the same is fully paid.
However, the trial court denied the motion.
RCBC then appealed to the Court of Appeals.
On May 16, 1997, the CA rendered the herein assailed decision, ruling
thus:
. . .
Being solidarily bound, a suretys obligation is primary so that according to
Art. 1216 of the Civil Code, he can be sued alone for the entire obligation.
However, one very important characteristic of this contract is the fact that a
suretys liability shall be limited to the amount of the bond (Sec. 176,
nsurance Code). This does not mean however that even if he defaults in
the performance of his obligation, the extend (sic) of his liability remains to
be the amount of the bond. f he pays his obligation at maturity upon
demand, then, he cannot be made to pay more than the amount of the
bond. But if he faiIs or refuses without justifiabIe cause to pay his
obIigation upon a vaIid demand so that he is in mora soIvendi (Art.
1169, CC), then he must pay damages or interest in consequence
thereof according to Art. 1170. Even if this interest is in excess of the
amount of the bond, the defauIting surety is IiabIe according to
settIed jurisprudence.
. . .
Appellant RCBC contends that when appellee CC failed to pay the
obligation upon extrajudicial demand, it incurred in delay in consequence
of which it became liable to pay legal interest. The obIigation to pay such
interest does not arise from the contract of suretyship but from Iaw
as a resuIt of deIay or mora. Such an interest is not, therefore,
covered by the Iimitation of appeIIees IiabiIity expressed in the
contract. Appellee CC refutes this argument stating that since the surety
bonds expressly state that its liability shall in no case exceed the amount
stated therein, then that stipulation controls. Therefore, it cannot be made
to assume an obligation more than what it secured to pay.
The contention of appellant RCBC is correct because it is supported by
Arts. 1169 and 1170 of the Civil Code and the case of Asia Surety &
nsurance Co., nc. and Manila Surety & Fidelity Co. supra. On the other
hand, the position of appellee CC which upholds the appealed decision is
untenable. The best way to show the untenability of this argument is to
give this hypothetical case situation: Surety issued a bond for P1 million to
secure a Debtors obligation of P1 million to Creditor. Debtor defaults and
Creditor demands payment from Surety. f the theory of appellee and the
lower court is correct, then the Surety may just as well not pay and use the
P1 million in the meantime. t can choose to pay only after several years
after all, his liability can never exceed P1 million. That would be absurd
and the law could not have intended it.[6] (Emphasis supplied)
and disposed of the case as follows:
WHEREFORE, the appealed Decision is MODFED in the manner
following:
The appellee Commonwealth nsurance Company shall pay the appellant
Rizal Commercial Banking Corporation:
1. On the account of JGS, P2,894,128.00 ONLY with 12% legal interest
per annum from October 30, 1984 minus payments made by the latter to
the former after that date; and on the account of ELBA, P1,570,000.00
ONLY with 12% legal interest per annum from December 17, 1984 minus
payments made by the latter to the former after that day; respecting in
both accounts the applications of payment made by appellant RCBC on
appellee CCs payments;
2. Defendant-appellee Commonwealth nsurance Company shall pay
plaintiff-appellant RZAL COMMERCAL BANKNG CORP. and (sic)
attorneys fee of P10,000.00 and cost of this suit;
3. The third-party defendants JGS MANUFACTURNG CORPORATON,
ELBA NDUSTRES and LUMNADA N. DE GUZMAN shall respectively
indemnify COMMONWEALTH NSURANCE CORPORATON for whatever
it had paid and shall pay to RZAL COMMERCAL BANKNG
CORPORATON of their respective individual obligations pursuant to this
decision.
SO ORDERED.[7]
CC filed a motion for reconsideration but the CA denied the same.
Hence, herein petition by CC raising a single assignment of error, to wit:
Respondent Court of Appeals grievously erred in ordering petitioner to pay
respondent RCBC the amount of the surety bonds plus legal interest of
12% per annum minus payments made by the petitioner.[8]
Credit Transactions Full Text Cases Atty. Adviento!!!!**
The sole issue is whether or not petitioner should be held liable to pay
legal interest over and above its principal obligation under the surety
bonds issued by it.
Petitioner argues that it should not be made to pay interest because its
issuance of the surety bonds was made on the condition that its liability
shall in no case exceed the amount of the said bonds.
We are not persuaded. Petitioners argument is misplaced.
Jurisprudence is clear on this matter. As early as Tagawa vs. Aldanese
and Union Gurantee Co.[9] and reiterated in Plaridel Surety & Insurance
Co., Inc. vs. P.L. Galang Machinery Co., Inc.[10], and more recently, in
Republic vs. Court of Appeals and R & B Surety and Insurance Company,
Inc. [11] , we have sustained the principle that if a surety upon demand fails
to pay, he can be held liable for interest, even if in thus paying, its liability
becomes more than the principal obligation. The increased liability is not
because of the contract but because of the default and the necessity of
judicial collection.[12]
Petitioners liability under the suretyship contract is different from its liability
under the law. There is no question that as a surety, petitioner should not
be made to pay more than its assumed obligation under the surety bonds.
[13] However, it is clear from the above-cited jurisprudence that petitioners
liability for the payment of interest is not by reason of the suretyship
agreement itself but because of the delay in the payment of its obligation
under the said agreement.
Petitioner admits having incurred in delay. Nonetheless, it insists that mere
delay does not warrant the payment of interest. Citing Section 244 of the
nsurance Code,[14] petitioner submits that under the said provision of
law, interest shall accrue only when the delay or refusal to pay is
unreasonable; that the delay in the payment of its obligation is not
unreasonable because such delay was brought about by negotiations
being made with RCBC for the amicable settlement of the case.
We are not convinced.
t is not disputed that out of the principal sum of P4,464,128.00 petitioner
was only able to pay P2,000,000.00. Letters demanding the payment of
the respective obligations of JGS and ELBA were initially sent by RCBC
to petitioner on October 30, 1984[15] and December 17, 1984.[16]
Petitioner made payments on an installment basis spanning a period of
almost three years, i.e., from February 25, 1985 until February 10, 1988.
On July 7, 1988, or after a period of almost five months from its last
payment, RCBC, thru its legal counsel, sent a final letter of demand asking
petitioner to pay the remaining balance of its obligation including interest.
[17] Petitioner failed to pay. As of the date of the filing of the complaint on
September 19, 1988, petitioner was even unable to pay the remaining
balance of P2,464,128.00 out of the principal amount it owes RCBC.
Petitioners contention that what prevented it from paying its obligation to
RCBC is the fact that the latter insisted on imposing interest and penalties
over and above the principal sum it seeks to recover is not plausible.
Considering that petitioner admits its obligation to pay the principal
amount, then it should have paid the remaining balance of P2,464,128.00,
notwithstanding any disagreements with RCBC regarding the payment of
interest. The fact that the negotiations for the settlement of petitioners
obligation did not push through does not excuse it from paying the
principal sum due to RCBC.
The issue of petitioners payment of interest is a matter that is totally
different from its obligation to pay the principal amount covered by the
surety bonds it issued. Petitioner offered no valid excuse for not paying the
balance of its principal obligation when demanded by RCBC. ts failure to
pay is, therefore, unreasonable. Thus, we find no error in the appellate
courts ruling that petitioner is liable to pay interest.
As to the rate of interest, we do not agree with petitioners contention that
the rate should be 6% per annum. The appellate court is correct in
imposing 12% interest. t is in accordance with our ruling in Eastern
Shipping Lines, Inc. vs. Court of Appeals,[18] wherein we have established
certain guidelines in awarding interest in the concept of actual and
compensatory damages, to wit:
.When an obligation, regardless of its source, i.e., law, contracts, quasi-
contracts, delicts or quasi-delicts is breached, the contravenor can be held
liable for damages. The provisions under Title XV on Damages of the
Civil Code govern in determining the measure of recoverable damages.
.With regard particularly to an award of interest in the concept of actual
and compensatory damages, the rate of interest, as well as the accrual
thereof, is imposed, as follows
1.When the obIigation is breached, and it consists in the payment of
a sum of money, i.e., a Ioan or forbearance of money, the interest due
shouId be that which may have been stipuIated in writing.
Furthermore, the interest due shaII itseIf earn IegaI interest from the
time it is judiciaIIy demanded. In the absence of stipuIation, the rate
of interest shaII be 12% per annum to be computed from defauIt, i.e.
from judiciaI or extrajudiciaI demand under and subject to the
provisions of ArticIe 1169 of the CiviI Code.
2.When an obligation, not constituting a loan or forbearance of money, is
breached, an interest on the amount of damages awarded may be
imposed at the discretion of the court at the rate of 6% per annum. No
interest, however, shall be adjudged on unliquidated claims or damages
except when or until the demand can be established with reasonable
certainty. Accordingly, where the demand is established with reasonable
certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty
cannot be reasonably established at the time the demand is made, the
interest shall begin to run only from the date the judgment of the court is
made (at which time the quantification of damages may be deemed to
have been reasonably ascertained). The actual base for the computation
of legal interest shall, in any case, be on the amount finally adjudged.
3.When the judgment of the court awarding a sum of money becomes final
and executory, the rate of legal interest, whether the case falls under
paragraph 1 or paragraph 2, above, shall be 12% per annum from such
finality until its satisfaction, this interim period being deemed to be by then
an equivalent to a forbearance of credit.[19] (Emphasis supplied)
n the present case, there is no dispute that petitioners obligation consists
of a loan or forbearance of money. No interest has been agreed upon in
writing between petitioner and respondent. Applying the above-quoted rule
to the present case, the Court of Appeals correctly imposed the rate of
interest at 12% per annum to be computed from the time the extra-judicial
demand was made. This is in accordance with the provisions of Article
1169[20] of the Civil Code and of the settled rule that where there has
been an extra-judicial demand before action for performance was filed,
interest on the amount due begins to run not from the date of the filing of
the complaint but from the date of such extra-judicial demand.[21] RCBCs
extra-judicial demand for the payment of JGS obligation was made on
October 30, 1984; while the extra-judicial demand for the payment of
ELBAs obligation was made on December 17, 1984. On the other hand,
the complaint for a sum of money was filed by RCBC with the trial court
only on September 19, 1988.
WHEREFORE, the instant petition is DENED and the assailed Decision
and Resolution of the Court of Appeals are AFFRMED in toto.
SO ORDERED.
SECOND DVSON
G.R. No. L-45848 November 9,1977
TOWERS ASSURANCE CORPORATION, petitioner,
vs.
ORORAMA SUPERMART, ITS OWNER-PROPRIETOR, SEE HONG and
JUDGE BENJAMIN K. GOROSPE, Presiding Judge, Court of First
Instance of Misamis OrientaI, Branch I, respondents.
Credit Transactions Full Text Cases Atty. Adviento!!!!"++
Benjamin Tabique & Zosimo T. Vasalla for petitioner.
Rodrigo F. Lim, Jr. for private respondent.

AQUINO, J.:
This case is about the liability of a surety in a counterbond for the lifting of
a writ of preliminary attachment.
On February 17, 1976 See Hong, the proprietor of Ororama Supermart in
Cagayan de Oro City, sued the spouses Ernesto Ong and Conching Ong
in the Court of First nstance of Misamis Oriental for the collection of the
sum of P 58,400 plus litigation expenses and attorney's fees (Civil Case
No. 4930).
See Hong asked for a writ of preliminary attachment. On March 5, 1976,
the lower court issued an order of attachment. The deputy sheriff attached
the properties of the Ong spouses in Valencia, Bukidnon and in Cagayan
de Oro City.
To lift the attachment, the Ong spouses filed on March 11, 1976 a
counterbond in 'the amount of P 58,400 with Towers Assurance
Corporation as surety. n that undertaking, the Ong spouses and Towers
Assurance Corporation bound themselves to pay solidarity to See Hong
the sum of P 58,400.
On March 24, 1976 the Ong spouses filed an answer with a counterclaim.
For non-appearance at the pre- trial, the Ong spouses were declared in
default.
On October 25, 1976, the lower court rendered a decision, ordering not
only the Ong spouses but also their surety, Towers Assurance Corporation,
to pay solidarily to See Hong the sum of P 58,400. The court also ordered
the Ong spouses to pay P 10,000 as litigation expenses and attorney's
fees.
Ernesto Ong manifested that he did not want to appeal. On March 8, 1977,
Ororama Supermart filed a motion for execution. The lower court granted
that motion. The writ of execution was issued on March 14 against the
judgment debtors and their surety. On March 29, 1977, Towers Assurance
Corporation filed the instant petition for certiorari where it assails the
decision and writ of execution.
We hold that the lower court acted with grave abuse of discretion in
issuing a writ of execution against the surety without first giving it an
opportunity to be heard as required in Rule 57 of tie Rules of Court which
provides:
SEC. 17. When execution returned unsatisfied,
recovery had upon bound. f the execution be
returned unsatisfied in whole or in part, the surety or
sureties on any counterbound given pursuant to the
provisions of this rule to secure the payment of the
judgment shall become charged on such
counterbound, and bound to pay to the judgment
creditor upon demand, the amount due under the
judgment, which amount may be recovered from such
surety or sureties after notice and summary hearing in
the same action.
Under section 17, in order that the judgment creditor might recover from
the surety on the counterbond, it is necessary (1) that execution be first
issued against the principal debtor and that such execution was returned
unsatisfied in whole or in part; (2) that the creditor made a demand upon
the surety for the satisfaction of the judgment, and (3) that the surety be
given notice and a summary hearing in the same action as to his liability
for the judgment under his counterbond.
The first requisite mentioned above is not applicable to this case because
Towers Assurance Corporation assumed a solidary liability for the
satisfaction of the judgment. A surety is not entitled to the exhaustion of
the properties of the principal debtor (Art. 2959, Civil Code; Luzon Steel
Corporation vs. Sia, L-26449, May 15, 1969, 28 SCRA 58, 63).
But certainly, the surety is entitled to be heard before an execution can be
issued against him since he is not a party in the case involving his
principal. Notice and hearing constitute the essence of procedural due
process. (Martinez vs. Villacete 116 Phil. 326; nsurance & Surety Co., nc.
vs. Hon. Piccio, 105 Phil. 1192, 1200, Luzon Surety Co., nc. vs. Beson, L-
26865-66, January 30. 1970. 31 SCRA 313).
WHEREFORE, the order and writ of execution, insofar as they concern
Towers Corporation, are set aside. The lower court is directed to conduct a
summary hearing on the surety's liability on its counterbound. No costs.
SO ORDERED.
SECOND DVSON
G.R. No. 84084 August 20, 1990
FINMAN GENERAL ASSURANCE CORPORATION, petitioner,
vs.
ABDULGANI SALIK, BALABAGAN AMPILAN ALI KUBA GANDHI PUA,
DAVID MALANAO, THE ADMINISTRATOR, PHILIPPINE OVERSEAS
AND EMPLOYMENT ADMINISTRATION, THE SECRETARY OF LABOR
AND EMPLOYMENT, respondents.
David I. Unay, Jr. for petitioner.
Kamid D. Abdul for private respondents.

PARAS, J.:
This is a petition for certiorari seeking to annuI 1) the Order dated
March 28, 1988 of the HonorabIe Secretary of Labor and EmpIoyment
in POEA, LRO/RRD Case No. 87-09-1022-DP entitIed Abdulgani Salik,
et al, v. Pan Pacific Overseas and Recruiting Services and Finman
General Assurance Corporation, which directed herein petitioner to
pay jointIy and severaIIy with Pan Pacific the cIaims of herein private
respondents amounting to P25,000.00 and 2) the Order dated June 7,
1988, which denied petitioner's motion for reconsideration (RoIIo, p.
2).
The facts of the case are as foIIows:
AbduIgani SaIik et aI., private respondents, aIIegedIy appIied with
Pan Pacific Overseas Recruiting Services, Inc. (hereinafter referred
to as Pan Pacific) on ApriI 22, 1987 and were assured empIoyment
abroad by a certain Mrs. Normita EgiI. In consideration thereof, they
aIIegedIy paid fees totaIIing P30,000.00. But despite numerous
assurances of empIoyment abroad given by CeIia Arandia and Mrs.
EgiI, they were not empIoyed (Ibid., p. 15).
AccordingIy, they fiIed a joint compIaint with the PhiIippine Overseas
EmpIoyment Administration (herein referred to as POEA) against Pan
Pacific for VioIation of ArticIes 32 and 34(a) of the Labor Code, as
amended, with cIaims for refund of a totaI amount of P30,000.00
(Ibid.).
The POEA motu proprio impIeaded and summoned herein petitioner
surety Finman GeneraI Assurance Corporation (hereinafter referred
to as Finman), in the Iatter's capacity as Pan Pacific's bonding
company.
Credit Transactions Full Text Cases Atty. Adviento!!!!"+"
Summons were served upon both Pan Pacific and Finman, but they
faiIed to answer.
On October 9, 1987, a hearing was caIIed, but onIy the private
respondents appeared. Despite being deemed in defauIt for faiIing to
answer, both Finman and Pan Pacific were stiII notified of the
scheduIed hearing. Again they faiIed to appear. Thus, ex-parte
proceedings ensued.
During the hearing, herein private respondents reiterated the
aIIegations in their compIaint that they first paid P20,000.00 thru
Hadji Usop Kabagani for which a receipt was issued signed by
Engineer Arandia and countersigned by Mrs. EgiI and a certain
ImeIda who are aIIegedIy empIoyed by Pan Pacific; that they paid
another P10,000.00 to Engr. Arandia who did not issue any receipt
therefor; that the totaI payment of P30,000.00 aIIegedIy represents
payments for herein private respondents in the amount of P5,000.00
each, and AbduInasser AIi, who did not fiIe any compIaint against
Pan Pacific (Ibid., pp. 15-16).
Herein private respondents presented as their witness, Hadji Usop
Kabagani who they Identified as the one who actuaIIy financed their
appIication and who corroborated their testimonies on aII materiaI
points incIuding the non-issuance of a receipt for P10,000.00 by Engr.
Arandia.
Herein petitioner, Finman, in an answer which was not timeIy fiIed,
aIIeged, among others, that herein private respondents do not have a
vaIid cause of action against it; that Finman is not privy to any
transaction undertaken by Pan Pacific with herein private
respondents; that herein private respondents cIaims are barred by
the statute of frauds and by the fact that they executed a waiver; that
the receipts presented by herein private respondents are mere
scraps of paper; that it is not IiabIe for the acts of Mrs. EgiI that
Finman has a cashbond of P75,000.00 onIy which is Iess than the
required amount of P100,000.00; and that herein private respondents
shouId proceed directIy against the cash bond of Pan Pacific or
against Mrs. EgiI (Ibid., pp. 1617).
On March 18,1988, the HonorabIe FrankIin M. DriIon, then the
Secretary of Labor and EmpIoyment, upon the recommendation of
the POEA hearing officer, issued an Order, the dispositive portion of
which reads:
WHEREFORE, premises considered, both
respondents are hereby directed to pay jointIy and
severaIIy the cIaims of compIainants, as foIIows:
1. AbduIgani SaIik P5,000.00
2. BaIabagan AmpiIan 5,000.00
3. AIi Kuba 5,000.00
4. Gandhi Dua 5,000.00
5. David MaIanao 5,000.00
Based on the records of this Administration,
respondent agency is presentIy serving a totaI
period of suspension of seventeen (1 7) months
imposed in three (3) separate orders issued on
June 2, 1987, August 17, 1987 and September 23,
1987. Under the new scheduIe of penaIties
pubIished on January 21, 1987 in the PhiIippine
Inquirer, the penaIty of canceIIation shaII be
imposed when the offender has been previousIy
penaIized with suspension the totaI period of
which is 12 months or more. Moreover, the penaIty
imposabIe in the case at bar is two (2) months
suspension for each count of vioIation or a totaI
period of suspension of ten (10) months as the
acts were committed in ApriI 1987. Thus, whether
under the oId scheduIe of penaIties which
required a totaI period of suspension of twenty-
four (24) months for canceIIation to be imposed or
under the new scheduIe which provides for a
tweIve (12) month totaI suspension period, the
penaIty of canceIIation may be properIy imposed
upon the herein respondent agency.
In view thereof, the Iicense of Pan Pacific
Overseas Recruiting Services is hereby canceIIed,
effective immediateIy.
SO ORDERED. (Ibid., pp. 20-21).
A motion for reconsideration having been denied (Ibid., p. 22), herein
petitioner instituted the instant petition for certiorari, raising the
foIIowing assigned errors:
I
THE HONORABLE ADMINISTRATOR AND THE
HONORABLE, SECRETARY OF LABOR ACTED
WITH GRAVE ABUSE OF DISCRETION
AMOUNTING TO LACK OF JURISDICTION IN
MOTU PROPRIO IMPLEADING FINMAN AS CO-
RESPONDENT OF PAN PACIFIC IN POEA
LRO/RRD CASE NO. 87-09-1022 DP WHICH WAS
FILED BY ABDULGANI SALIK, ET AL.;
II
THE HONORABLE SECRETARY OF LABOR
ACTED WITHOUT OR IN EXCESS OF
JURISDICTION AND WITH GRAVE ABUSE OF
DISCRETION AMOUNTING TO LACK OF
JURISDICTION IN DIRECTING FINMAN TO PAY
JOINTLY AND SEVERALLY WITH PAN PACIFIC
THE CLAIMS OF PRIVATE RESPONDENTS ON
THE BASIS OF THE SURETYSHIP AGREEMENT
BETWEEN FINMAN AND PAN PACIFIC AND THE
PHILIPPINE OVERSEAS EMPLOYMENT
ADMINISTRATION (POEA FOR SHORT); AND
III
THE FINDINGS OF FACT MADE BY THE POEA
AND UPON WHICH THE HONORABLE
SECRETARY OF LABOR BASED ITS QUESTIONED
ORDERS ARE NOT SUPPORTED BY
SUBSTANTIAL EVIDENCE AND ARE CONTRARY
TO LAW. (Ibid., p. 101)
As required by this Court, herein pubIic respondents fiIed their
memorandum on JuIy 28, 1989 (Ibid., p. 84); whiIe that of petitioner
and private respondents were fiIed on September 11, 1989 (Ibid., p.
89) and March 16, 1990 (Ibid., p. 120), respectiveIy.
The petition is devoid of merit.
In its first and second assigned errors, petitioner maintains that
POEA has no jurisdiction to directIy enforce the suretyship
undertaking of FINMAN (herein petitioner) under the surety bond
(Ibid., p. 104).
In the case at bar, it remains uncontroverted that herein petitioner
and Pan Pacific entered into a suretyship agreement, with the former
agreeing that the bond is conditioned upon the true and faithfuI
performance and observance of the bonded principaI (Pan Pacific) of
its duties and obIigations. It was aIso understood that under the
suretyship agreement, herein petitioner undertook itseIf to be jointIy
Credit Transactions Full Text Cases Atty. Adviento!!!!"+#
and severaIIy IiabIe for aII cIaims arising from recruitment vioIation of
Pan Pacific (Ibid., p. 23), in keeping with Section 4, RuIe V, Book I of
the ImpIementing RuIes of the Labor Code, which provides:
Section 4. Upon approvaI of the appIication, the
appIicant shaII pay to the Ministry (now
Department) a Iicense fee of P6,000.00, post a
cash bond of P50,000.00 or negotiabIe bonds of
equivaIent amount convertibIe to cash issued by
banking or financiaI institution duIy endorsed to
the Ministry (now Department) as weII as a surety
bond of P150,000.00 from an accredited bonding
company to answer for valid and legal claims
arising from violations of the conditions of the
license or the contracts of employment and
guarantee compliance with the provisions of the
Code, its implementing rules and regulations and
appropriate issuances of the Ministry (now
Department). (Emphasis suppIied)
AccordingIy, the nature of Finman's obIigation under the suretyship
agreement makes it privy to the proceedings against its principaI
(Pan Pacific). As such Finman is bound, in the absence of coIIusion,
by a judgment against its principaI even though it was not a party to
the proceedings Leyson v. Rizal Surety and Insurance Co., 16 SCRA
551 (1966). Furthermore, in Government of the PhiIippines v. Tizon
(20 SCRA 1182 [1967]), this Court ruIed that where the surety bound
itseIf soIidariIy with the principaI obIigor the former is so dependent
on the principaI debtor "that the surety is considered in Iaw as being
the same party as the debtor in reIation to whatever is adjudged
touching the obIigation of the Iatter." AppIying the foregoing
principIes to the case at bar, it can be very weII said that even if
herein Finman was not impIeaded in the instant case, stiII it
(petitioner) can be heId jointIy and severaIIy IiabIe for aII cIaims
arising from recruitment vioIation of Pan Pacific. Moreover, as
correctIy stated by the SoIicitor GeneraI, private respondents have a
IegaI cIaim against Pan Pacific and its insurer for the pIacement and
processing fees they paid, so much so that in order to provide a
compIete reIief to private respondents, petitioner had to be
impIeaded in the case (RoIIo, p. 87).
Furthermore, Finman contends that herein respondent Secretary of
Labor cannot vaIidIy assume jurisdiction over the case at bar;
otherwise, proceedings wiII be raiIroaded resuIting in the deprivation
of the former of any remediaI measures under the Iaw.
The records of the case reveaI that herein Finman fiIed a motion for
reconsideration of the adverse decision dated March 18, 1988 of
respondent Secretary of Labor. In the said motion for
reconsideration, no jurisdictionaI chaIIenge was made (Ibid., p. 22). It
was onIy when it fiIed this petition that it assaiIed the jurisdiction of
the respondent Secretary of Labor, and that of the POEA. But then, it
was too Iate. EstoppeI had barred herein petitioner from raising the
issue, regardIess of its merits (Akay Printing Press v. Minister of
Labor and EmpIoyment, 140 SCRA 381 [1985]).
Hence, Finman's contention that POEA's and respondent Secretary's
actions in impIeading and directing herein petitioner to pay jointIy
and severaIIy with Pan Pacific the cIaims of private respondents
constitute a grave abuse of discretion amounting to Iack of
jurisdiction has no basis. (Ibid., p. 101.)
As regards the third assigned error, herein petitioner maintains that
the findings of fact made by the POEA upon which respondent
Secretary of Labor based his questioned Orders are not supported
by substantiaI evidence and are contrary to Iaw, is Iikewise
untenabIe.
Herein petitioner, in raising this third issue, is, in effect, asking this
Court to review the respondent Secretary's findings of facts.
WeII-settIed is the ruIe that findings of facts of the respondent
Secretary are generaIIy accorded great weight unIess there was
grave abuse of discretion or Iack of jurisdiction in arriving at such
findings (AsiaworId PubIishing House, Inc. vs. OpIe, 152 SCRA 219
(1987).
In the case at bar, it is undisputed that when the case was first set for
hearing, onIy the private respondents appeared, despite summons
having been served upon both herein petitioner and Pan Pacific.
This, notwithstanding, both herein petitioner and Pan Pacific were
again notified of the scheduIed hearing, but, as aforestated they aIso'
faiIed to a pear (RoIIo, p. 15). AccordingIy, owing to the absence of
any controverting evidence, respondent Secretary of Labor admitted
and considered private respondents' testimonies and evidence as
substantiaI. Under the circumstances, no justifiabIe reason can be
found to justify disturbance of the findings of facts of the respondent
Secretary of Labor, supported as they are by substantiaI evidence
and in the absence of grave abuse of discretion (AsiaworId
PubIishing House, Inc. v. OpIe, supra); and in Iine with the weII
estabIished principIe that the findings of administrative agencies
which have acquired expertise because their jurisdiction is confined
to specific matters are generaIIy accorded not onIy respect but at
times even finaIity. (NationaI Federation of Labor Union (NAFLU) v.
OpIe, 143 SCRA 124 [1986])
PREMISES CONSIDERED, the questioned Orders of respondent
Secretary of Labor are hereby AFFIRMED in toto,
SO ORDERED.
SECOND DVSON
[G.R. No. 151060. August 31, 2005]
JN DEVELOPMENT CORPORATON, and SPS. RODRGO and LEONOR
STA. ANA, Petitioners, vs. PHLPPNE EXPORT AND FOREGN LOAN
GUARANTEE CORPORATON, respondent.
[G.R. No. 151311. August 31, 2005]
NARCSO V. CRUZ, Petitioner, vs. PHLPPNE EXPORT and FOREGN
LOAN GUARANTEE CORPORATON, respondent.
D E C S O N
TNGA, J.:
Before us are consolidated petitions questioning the Decision[1] of the
Court of Appeals (CA) in CA-G.R. CV No. 61318, entitled Philippine Export
and Foreign Loan Guarantee Corporation v. JN Development Corporation,
et al., which reversed the Decision of the Regional Trial Court (RTC) of
Makati, Branch 60.
On 13 December 1979, petitioner JN Development Corporation (JN') and
Traders Royal Bank (TRB) entered into an agreement whereby TRB would
extend to JN an Export Packing Credit Line for Two Million Pesos
(P2,000,000.00). The loan was covered by several securities, including a
real estate mortgage[2] and a letter of guarantee from respondent
Philippine Export and Foreign Loan Guarantee Corporation
(PhilGuarantee'), now Trade and nvestment Development Corporation of
the Philippines, covering seventy percent (70%) of the credit line.[3] With
PhilGuarantee issuing a guarantee in favor of TRB,[4] JN, petitioner
spouses Rodrigo and Leonor Sta. Ana[5] and petitioner Narciso Cruz[6]
executed a Deed of Undertaking[7] (Undertaking) to assure repayment to
PhilGuarantee.
t appears that JN failed to pay the loan to TRB upon its maturity; thus, on
8 October 1980 TRB requested PhilGuarantee to make good its
guarantee.[8] PhilGuarantee informed JN about the call made by TRB, and
inquired about the action of JN to settle the loan.[9] Having received no
response from JN, on 10 March 1981 PhilGuarantee paid TRB Nine
Hundred Thirty Four Thousand Eight Hundred Twenty Four Pesos and
Thirty Four Centavos (P934,824.34).[10] Subsequently, PhilGuarantee
made several demands on JN, but the latter failed to pay. On 30 May
Credit Transactions Full Text Cases Atty. Adviento!!!!"+$
1983, JN, through Rodrigo Sta. Ana, proposed to settle the obligation 'by
way of development and sale of the mortgaged property.[11]
PhilGuarantee, however, rejected the proposal.
PhilGuarantee thus filed a Complaint[12] for collection of money and
damages against herein petitioners.
n its Decision dated 20 August 1998, the RTC dismissed PhilGuarantee's
Complaint as well as the counterclaim of petitioners. t ruled that
petitioners are not liable to reimburse PhilGuarantee what it had paid to
TRB. Crucial to this holding was the court's finding that TRB was able to
foreclose the real estate mortgage executed by JN, thus extinguishing
petitioners' obligation.[13] Moreover, there was no showing that after the
said foreclosure, TRB had demanded from JN any deficiency or the
payment of the difference between the proceeds of the foreclosure sale
and the actual loan.[14] n addition, the RTC held that since
PhilGuarantee's guarantee was good for only one year from 17 December
1979, or until 17 December 1980, and since it was not renewed after the
expiry of said period, PhilGuarantee had no more legal duty to pay TRB on
10 March 1981.[15] The RTC likewise ruled that Cruz cannot be held liable
under the Undertaking since he was not the one who signed the
document, in line with its finding that his signature found in the records is
totally different from the signature on the Undertaking.
[16]chanroblesvirtuallawlibrary
According to the RTC, the failure of TRB to sue JN for the recovery of the
loan precludes PhilGuarantee from seeking recoupment from the spouses
Sta. Ana and Cruz what it paid to TRB. Thus, PhilGuarantee's payment to
TRB amounts to a waiver of its right under Art. 2058 of the Civil Code.
[17]chanroblesvirtuallawlibrary
Aggrieved by the RTC Decision, PhilGuarantee appealed to the CA. The
appellate court reversed the RTC and ordered petitioners to pay
PhilGuarantee Nine Hundred Thirty Four Thousand Six Hundred Twenty
Four Pesos and Thirty Four Centavos (P934,624.34), plus service charge
and interest.[18]chanroblesvirtuallawlibrary
n reaching its denouement, the CA held that the RTC's finding that the
loan was extinguished by virtue of the foreclosure sale of the mortgaged
property had no factual support,[19] and that such finding is negated by
Rodrigo Sta. Ana's testimony that JN did not receive any notice of
foreclosure from PhilGuarantee or from TRB. [20] Moreover, Sta. Ana even
offered the same mortgaged property to PhilGuarantee to settle its
obligations with the latter.[21]chanroblesvirtuallawlibrary
The CA also ruled that JN's obligation had become due and demandable
within the one-year period of effectivity of the guarantee; thus,
PhilGuarantee's payment to TRB conformed with its guarantee, although
the payment itself was effected one year after the maturity date of the
loan.[22] Contrary to the trial court's finding, the CA ruled that the contract
of guarantee was not extinguished by the alleged lack of evidence on
PhilGuarantee's consent to the extensions granted by TRB to JN.[23]
nterpreting Art. 2058 of the Civil Code,[24] the appellate court explained
that while the provision states that the guarantor cannot be compelled to
pay unless the properties of the debtor are exhausted, the guarantor is not
precluded from waiving the benefit of excussion and paying the obligation
altogether.[25]chanroblesvirtuallawlibrary
Finally, the CA found that Narciso Cruz was unable to prove the alleged
forgery of his signature in the Undertaking, the evidence presented not
being sufficient to overcome the presumption of regularity of the
Undertaking which is a notarized document. [26]
Petitioners sought reconsideration of the Decision and prayed for the
admission of documents evidencing the foreclosure of the real estate
mortgage, but the motion for reconsideration was denied by the CA for
lack of merit. The CA ruled that the documentary evidence presented by
petitioners cannot be considered as newly discovered evidence, it being
already in existence while the case was pending before the trial court, the
very forum before which it should have been presented. Besides, a
foreclosure sale per se is not proof of petitioners' payment of the loan to
PhilGuarantee, the CA added.[27]chanroblesvirtuallawlibrary
So now before the Court are the separate petitions for review of the CA
Decision. JN and the spouses Sta. Ana, petitioners in G.R. No. 151060,
posit that the CA erred in interpreting Articles 2079, 2058, and 2059 of the
Civil Code in its Decision.[28] Meanwhile, petitioner Narciso Cruz in G.R.
No. 151311 claims that the CA erred when it held that petitioners are liable
to PhilGuarantee despite its payment after the expiration of its contract of
guarantee and the lack of PhilGuarantee's consent to the extensions
granted by TRB to JN. Moreover, Cruz questions the reversal of the ruling
of the trial court anent his liability as a signatory to the Undertaking.
[29]chanroblesvirtuallawlibrary
On the other hand, PhilGuarantee maintains that the date of default, not
the actual date of payment, determines the liability of the guarantor and
that having paid TRB when the loan became due, it should be indemnified
by petitioners.[30] t argues that, contrary to petitioners' claim, there could
be no waiver of its right to excussion more explicit than its act of payment
to TRB very directly.[31] Besides, the right to excussion is for the benefit of
the guarantor and is not a defense for the debtor to raise and use to evade
liability.[32] Finally, PhilGuarantee maintains that there is no sufficient
evidence proving the alleged forgery of Cruz's signature on the
Undertaking, which is a notarized document and as such must be
accorded the presumption of regularity.[33]chanroblesvirtuallawlibrary
The Court finds for PhilGuarantee.
Under a contract of guarantee, the guarantor binds himself to the creditor
to fulfill the obligation of the principal debtor in case the latter should fail to
do so.[34] The guarantor who pays for a debtor, in turn, must be
indemnified by the latter.[35] However, the guarantor cannot be compelled
to pay the creditor unless the latter has exhausted all the property of the
debtor and resorted to all the legal remedies against the debtor.[36] This is
what is otherwise known as the benefit of excussion.
t is clear that excussion may only be invoked after legal remedies against
the principal debtor have been expanded. Thus, it was held that the
creditor must first obtain a judgment against the principal debtor before
assuming to run after the alleged guarantor, 'for obviously the 'exhaustion
of the principal's property cannot even begin to take place before judgment
has been obtained.[37] The law imposes conditions precedent for the
invocation of the defense. Thus, in order that the guarantor may make use
of the benefit of excussion, he must set it up against the creditor upon the
latter's demand for payment and point out to the creditor available property
of the debtor within the Philippines sufficient to cover the amount of the
debt.[38]chanroblesvirtuallawlibrary
While a guarantor enjoys the benefit of excussion, nothing prevents him
from paying the obligation once demand is made on him. Excussion, after
all, is a right granted to him by law and as such he may opt to make use of
it or waive it. PhilGuarantee's waiver of the right of excussion cannot
prevent it from demanding reimbursement from petitioners. The law clearly
requires the debtor to indemnify the guarantor what the latter has paid.
[39]chanroblesvirtuallawlibrary
Petitioners' claim that PhilGuarantee had no more obligation to pay TRB
because of the alleged expiration of the contract of guarantee is
untenable. The guarantee, dated17 December 1979, states:
n the event of default by JNDC and as a consequence thereof,
PHLGUARANTEE is made to pay its obligation arising under the
aforesaid guarantee PHLGUARANTEE shall pay the BANK the amount of
P1.4 million or 70% of the total obligation unpaid
. . . .
This guarantee shall be valid for a period of one (1) year from date hereof
but may be renewed upon payment by JNDC of the guarantee fee at the
same rate of 1.5% per annum.[40]chanroblesvirtuallawlibrary
The guarantee was only up to 17 December 1980. JN's obligation with
TRB fell due on 30 June 1980, and demand on PhilGuarantee was made
by TRB on 08 October 1980. That payment was actually made only on 10
March 1981 does not take it out of the terms of the guarantee. What is
Credit Transactions Full Text Cases Atty. Adviento!!!!"+%
controlling is that default and demand on PhilGuarantee had taken place
while the guarantee was still in force.
There is likewise no merit in petitioners' claim that PhilGuarantee's failure
to give its express consent to the alleged extensions granted by TRB to JN
had extinguished the guarantee. The requirement that the guarantor
should consent to any extension granted by the creditor to the debtor
under Art. 2079 is for the benefit of the guarantor. As such, it is likewise
waivable by the guarantor. Thus, even assuming that extensions were
indeed granted by TRB to JN, PhilGuarantee could have opted to waive
the need for consent to such extensions. ndeed, a guarantor is not
precluded from waiving his right to be notified of or to give his consent to
extensions obtained by the debtor. Such waiver is not contrary to public
policy as it is purely personal and does not affect public interest.[41] n the
instant case, PhilGuarantee's waiver can be inferred from its actual
payment to TRB after the latter's demand, despite JN's failure to pay the
renewal/guarantee fee as indicated in the guarantee.
[42]chanroblesvirtuallawlibrary
For the above reasons, there is no basis for petitioner's claim that
PhilGuarantee was a mere volunteer payor and had no legal obligation to
pay TRB. The law does not prohibit the payment by a guarantor on his
own volition, heedless of the benefit of excussion. n fact, it recognizes the
right of a guarantor to recover what it has paid, even if payment was made
before the debt becomes due,[43] or if made without notice to the debtor,
[44] subject of course to some conditions.
Petitioners' invocation of our ruling in Willex Plastic Industries, Corp. v.
Court of Appeals [45] is misplaced, if not irrelevant. n the said case, the
guarantor claimed that it could not be proceeded against without first
exhausting all of the properties of the debtor. The Court, finding that there
was an express renunciation of the benefit of excussion in the contract of
guarantee, ruled against the guarantor.
The cited case finds no application in the case a quo. PhilGuarantee is not
invoking the benefit of excussion. t cannot be overemphasized that
excussion is a right granted to the guarantor and, therefore, only he may
invoke it at his discretion.
The benefit of excussion, as well as the requirement of consent to
extensions of payment, is a protective device pertaining to and conferred
on the guarantor. These may be invoked by the guarantor against the
creditor as defenses to bar the unwarranted enforcement of the guarantee.
However, PhilGuarantee did not avail of these defenses when it paid its
obligation according to the tenor of the guarantee once demand was made
on it. What is peculiar in the instant case is that petitioners, the principal
debtors themselves, are muddling the issues and raising the same
defenses against the guarantor, which only the guarantor may invoke
against the creditor, to avoid payment of their own obligation to the
guarantor. The Court cannot countenance their self-seeking desire to be
exonerated from the duty to reimburse PhilGuarantee after it had paid TRB
on their behalf and to unjustly enrich themselves at the expense of
PhilGuarantee.
Petitioners assert that TRB's alleged foreclosure of the real estate
mortgage over the land executed as security for the loan agreement had
extinguished PhilGuarantee's obligation; thus, PhilGuarantee's recourse
should be directed against TRB, as per the pari-passu provision[46] in the
contract of guarantee.[47] We disagree.
The foreclosure was made on 27 August 1993, 'after the case was
submitted for decision in 1992 and before the issuance of the decision of
the court a quo in 1998.[48] Thus, foreclosure was resorted to by TRB
against JN when they both had become aware that PhilGuarantee had
already paid TRB and that there was a pending case filed by
PhilGuarantee against petitioners. This matter was not raised and proved
in the trial court, nor in the appeal before the CA, but raised for the first
time in petitioners' motion for reconsideration in the CA. n their appellants'
Brief, petitioners claimed that 'there was no need for the defendant-
appellee JNDC to present any evidence before the lower court to show
that indeed foreclosure of the REM took place.[49] As properly held by the
CA,
Firstly, the documents evidencing foreclosure of mortgage cannot be
considered as newly discovered evidence. The said documents were
already subsisting and should have been presented during the trial of the
case. The alleged foreclosure sale was made on August 23, 1993 ' while
the decision was rendered by the trial court on August 20, 1998 about five
(5) years thereafter. These documents were likewise not submitted by the
defendants-appellees when they submitted their appellees' Brief to this
Court. Thus, these cannot be considered as newly discovered evidence
but are more correctly ascribed as suppressed forgotten evidence
Secondly, the alleged foreclosure sale is not proof of payment of the loan
by defendant-appellees to the plaintiffs-appellants.
[50]chanroblesvirtuallawlibrary
Besides, the complaint a quo was filed by PhilGuarantee as guarantor for
JN, and its cause of action was premised on its payment of JN's obligation
after the latter's default. PhilGuarantee was well within its rights to demand
reimbursement for such payment made, regardless of whether the
creditor, TRB, was subsequently able to obtain payment from JN. f double
payment was indeed made, then it is JN which should go after TRB, and
not PhilGuarantee. Petitioners have no one to blame but themselves,
having allowed the foreclosure of the property for the full value of the loan
despite knowledge of PhilGuarantee's payment to TRB. Having been
aware of such payment, they should have opposed the foreclosure, or at
the very least, filed a supplemental pleading with the trial court informing
the same of the foreclosure sale.
Likewise, petitioners cannot invoke the pari-passu clause in the guarantee,
not being parties to the said agreement. The clause is clearly for the
benefit of the guarantor and no other.
The Court notes the letter[51] of Rodrigo Sta. Ana offering, by way of
settlement of JN's obligations to PhilGuarantee, the very same parcel of
land mortgaged as security for the loan agreement. This further weakens
the position of petitioners, since it becomes obvious that they
acknowledged the payment made by PhilGuarantee on their behalf and
that they were in fact willing to negotiate with PhilGuarantee for the
settlement of the said obligation before the filing of the complaint a quo.
Anent the issue of forgery, the CA is correct in reversing the decision of the
trial court. Save for the denial of Narciso Cruz that it was not his signature
in the Undertaking and the perfunctory comparison of the signatures,
nothing in the records would support the claim of forgery. Forgery cannot
be presumed and must be proved by clear, positive and convincing
evidence and the burden of proof lies on the party alleging forgery.[52]
Mere denial will not suffice to overcome the positive value of the
Undertaking, which is a notarized document, has in its favor the
presumption of regularity, and carries the evidentiary weight conferred
upon it with respect to its due execution.[53] Even in cases where the
alleged forged signature was compared to samples of genuine signatures
to show its variance therefrom, this Court still found such evidence
insufficient.[54] Mere variance of the signatures cannot be considered as
conclusive proof that the same were forged.[55]chanroblesvirtuallawlibrary
WHEREFORE, the consolidated petitions are DENED. The Decision of
the Court of Appeals in CA-G.R. CV No. 61318 is AFFRMED.
No pronouncement as to costs.
SO ORDERED.
EN BANC
G.R. No. L-48979 September 29, 1943
MIRA HERMANOS, INC., Plaintiff-Appellee, vs. MANILA
TOBACCONISTS, INC., ET AL., defendants.
PROVIDENT INSURANCE CO., Defendant-Appellant.
OZAETA, J.: chanrobles virtual law library
Credit Transactions Full Text Cases Atty. Adviento!!!!"+&
This appeal has been certified to this court by the Court of Appeals
because it involves only a question of law arising from the following facts:
chanrobles virtual law library
By virtue of a written contract (Exhibit A) entered into between Mira
Hermanos, nc., and Manila Tobacconists, nc., the former agreed to
deliver to the latter merchandise for sale on consignment under certain
specified terms and the latter agreed to pay to the former on or before the
20th day of each month the invoice value of all the merchandise sold
during the preceding month. Mira Hermanos, nc., required of the Manila
Tobacconists, nc., a bond of P3,000, which was executed by the
Provident nsurance Co., on September 2, 1939 (Exhibit B), to secure the
fulfillment of the obligation of the Tobacconists under the contract (Exhibit
A) up to the sum of P3,000.chanroblesvirtualawlibrary chanrobles virtual
law library
n the month of October, 1940, the volume of the business of the
Tobacconists having increased so that the merchandise received by it on
consignment from Mira Hermanos exceeded P3,000 in value, Mira
Hermanos required of the Tobacconist an additional bond of P2,000, and
in compliance with that requirement the defendant Manila Compaia de
Seguros, on October 16, 1940, executed a bond of P2,000 (Exhibit C) with
the same terms and conditions (except as to the amount) as the bond of
the Provident nsurance Co.chanroblesvirtualawlibrary chanrobles virtual
law library
On June 1, 1941, a final and complete liquidation was made of the
transactions between Mira Hermanos and the Tobacconists, as a result of
which there was found a balance due from the latter to the former of
P2,272.79, which indebtedness the Tobacconists recognized but was
unable to pay. Thereupon Mira Hermanos made a demand upon the two
surety companies for the payment of said sum.chanroblesvirtualawlibrary
chanrobles virtual law library
The Provident nsurance Co., paid only the sum of P1,363.67, which is
60% of the amount owned by the Tobacconists to Mira Hermanos, alleging
that the remaining 40% should be paid by the other surety, Manila
Compaia de Seguros, in accordance with article 8137 of the Civil Code.
The Manila Compaia de Seguros refused to pay the balance, contending
that so long as the liability of the Tobacconists did not exceed P3,000, it
was not bound to pay anything because its bond referred only to the
obligation of the Tobacconists in excess of P3,000 and up to P5,000.
Hence Mira Hermanos, nc., brought this action against the Manila
Tobacconists, nc., Provident nsurance Co., and Manila Compaia de
Seguros to recover from them jointly and severally the sum of P909.12
with legal interest thereon from the date of the
complaint.chanroblesvirtualawlibrary chanrobles virtual law library
The controversy is mainly between the two surety companies. n its
answer the defendant Manila Compaia de Seguros alleged as a special
defense:
4. - Que la fianza otorgada por esta demandada 'Manila
Compania de Seguros', el Octubre de 1940 fue exigida por la
demandante solo cuando el importe de las mercancias servidas
por esta y pedidas por la demandada Manila Tobacconists, nc.,
excedio de la suma de P3,000 garantizada por la otra
demandada Provident nsurance Co.; por lo que quedo
entendido entre la demandante y las tres demandadas que la
fianza de P2,000 prestada el Octubre de 1940 por esta
demandada, 'Manila Compaia de Seguros', se limitaba y era
para responder solamente del importe de mercancias servidad
a la demandada Manila Tobacconists, nc., en tanto en cuanto el
valor de esas mercancias excediese de P3,000 asegurada por
la fianza P3,000 de la Manila Tobacconists, nc.
To that the defendant Provident nsurance Co. replied:
Que no es verdad el hecho alegado por la demandada 'Manila
Compaia de Seguros' en el parrafo 4 de su contestacion que
dice: 'que quedo entendido entre la demandante y las tres
demandadas que la fianza de P2,000 prestada el Octubre de
1940 por esta demandada "Manila Compaia de Seguros" se
limitaba y era para responder solamente del importe de
mercancias servidas a la demandada Manila Tocacconists, nc.,
en tanto en cuanto el valor de esas mercancias excediese de
P3,000 asegurada por la fianza de P3,000 de la "Manila
Tobacconists, nc." chanrobles virtual law library
Que la demandada, aqui compareciente, nunca ha tenido
conocimiento ni menos prestado su consentimiento a esa
supuesta inteligencia.chanroblesvirtualawlibrary chanrobles
virtual law library
Que esta demandada no puede ser privada del beneficio de
division a que tiene derecho como co-fiador, sin que conste
expresamente, por escrito, su conformidad y consentimiento de
renunciar a su derecho.
Thus there was an issue of fact between the two surety companies, viz.:
whether the understanding between the plaintiff and the three defendants
was, that the bond of P2,000 given by the Manila Compaia de Seguros
was limited to and responded for the obligation of the Tobacconists only
insofar as it might exceed the amount of P3,000 secured by the bond of
the Provident nsurance Co. That issue of fact was decided by the trial
court in favor of the contention of the Manila Compaia de Seguros; and
judgment was rendered by it against the Provident nsurance Co. alone for
the amount claimed by the plaintiff.chanroblesvirtualawlibrary chanrobles
virtual law library
Appellant's first two assignments of error (the third being a mere
consequence of the first two) read as follows:
1. El juzgado inferior incurrio en error al hacer caso omiso del
beneficio de division reclamado por la demandada Provident
nsurance Co. of the Philippines con arreglo a lo dispuesto en el
Art. 1837 del Codigo Civil.chanroblesvirtualawlibrary chanrobles
virtual law library
2. El juzgado erro al aplicar, en lugar de lo dispuesto en el Art.
1837 del Codigo Civil, una teoria suya, declarando que la fianza
de P3,000.00 prestada por Provident nsurance Co. of the
Philippines y la fianza de P2,000 de Manila Compaia de
Seguros, cada una tiene una esfera de responsabilidad propia e
independiente la una de la otra.
Discussing these two assignments of error jointly, counsel says:
La unica cuestion que se presenta en esta causa es puramente
de derecho. Si el saldo deudor de P2,272.79 que Tobacconists
ha dejado de pagar, deben pagarlo en su lugar, los dos fiadores
proporcionalmente a la cuantia en que se obligaron o debe
pagarlo sola y exclusivamente la fiadora Provident nsurance
Co., como ordena la sentencia opelada.
Thus it appears that the issue of fact raised by and between the two surety
companies before the trial court and decided by the latter in favor of the
appellee Manila Compaia de Seguros is no longer raised before this
Court, appellant Provident nsurance Co. having limited the issue in this
appeal to whether or not it is entitled to the "benefit of division" provided in
article 1837 of the Civil Code, which reads as follows:
Art. 1837. Should there be several sureties of only one debtor
for the same debt, the liability therefor shall be divided among
them all. The creditor can claim from each surety only his
proportional part unless liability in solidum has been expressly
stipulated.chanroblesvirtualawlibrary chanrobles virtual law
library
The right to the benefit of division against the co-sureties for
their respective shares ceases in the same cases and for the
same reason as that to an exhaustion of property against the
principal debtor.
With particular reference to the second assignment of error, we find that
the statement of the trial court to the effect that the bond of P3,000
Credit Transactions Full Text Cases Atty. Adviento!!!!"+'
responded for the obligation of the Tobacconists up to the sum of P3,000
and the bond of P2,000 responded for the obligation of the Tobacconists
only insofar as it might exceed P3,000 and up to P5,000, is not a mere
theory but a finding of fact based upon the undisputed testimony of the
witnesses called by the defendant Manila Compaia de Seguros in
support of its special defense hereinbefore quoted. While on its face the
bond given by the Manila Compaia de Seguros contains the same terms
and conditions (except as to the amount) as those of the bond given by
the Provident nsurance Co., nevertheless it was pleaded by the Manila
Compaia de Seguros and found proven by the trial court "que la intencion
realmente que se habia perseguido, por lo menos en lo que respecta a la
Manila Tobacconists, nc., y la Manila Compaia de Seguros, era la de
que esta fianza de P2,000 habria de responder solamente por todo
aquello que excediera de los P3,000." chanrobles virtual law library
The evidence upon which that finding is based is not only undisputed but
perfectly reasonable and convincing. For, as the trial court observed, there
would have been no need for the additional bond of P2,000 if its purpose
were to cover the first P2,000 already covered by the P3,000 bond of the
Provident nsurance Co. ndeed, we might add, if the purpose of the
additional bond of P2,000 were to cover not the excess over and above
P3,000 but the first P2,000 of the obligation of the principal debtor like the
bond of P3,000 which covered only the first P3,000 of said obligation, then
it would result that had the obligation of the Tobacconists exceeded
P3,000, neither of the two bonds would have responded for the excess,
and that was precisely the event against which Mira Hermanos wanted to
protect itself by demanding the additional bond of P2,000. For instance,
suppose that the obligation of the principal debtor, the Tobacconists,
amounted to P5,000; if both bonds were co-extensive up to P2,000 - as
would logically follow if appellant's contention were correct - the result
would be that the first P2,000 of the obligation would have to be divided
between and paid equally by the two surety companies, which should pay
P1,000 each, and of the balance of P3,000 the Provident nsurance Co.
would have to pay only P1,000 more because its liability is limited to the
first P3,000, thus leaving the plaintiff in the lurch as to the excess of
P2,000. That was manifestly not the intention of the parties. As a matter of
fact, when the Provident gave its bond and fixed the premiums thereon it
assumed an obligation of P3,000 in solidum with the Tobacconists without
any expectation of any benefit of division with any other surety. The
additional bond of P2,000 was, more than a year later, required by the
creditor of the principal debtor for the protection of said creditor and
certainly not for the benefit of the original surety, which was not entitled to
expect any such benefit.chanroblesvirtualawlibrary chanrobles virtual law
library
The foregoing considerations, which fortify the trial court's conclusion as to
the real intent and agreement of the parties with regard to the bond of
P2,000 given by the Manila Compaia de Seguros, destroys at the same
time the theory of the appellant regarding the applicability of article 1837 of
the Civil Code.chanroblesvirtualawlibrary chanrobles virtual law library
That article refers to several sureties of only one debtor for the same debt.
n the instant case, altho the two bonds on their face appear to guarantee
the same debt co-extensively up to P2,000 - that of the Provident
nsurance Co. alone extending beyond that sum up to P3,000 - it was
pleaded and conclusively proven that in reality said bonds, or the two
sureties, do not guarantee the same debt because the Provident
nsurance Co. guarantees only the first P3,000 and the Manila Compaia
de Seguros, only the excess over and above said amount up to P5,000.
Article 1837 does not apply to this factual
situation.chanroblesvirtualawlibrary chanrobles virtual law library
The judgment of the trial court is affirmed, with the only modification that it
shall be entered against the defendants Manila Tobacconists, nc., and
Provident nsurance Co. jointly and severally. Appellant shall pay the costs
of this instance.chanroblesvirtualawlibrary chanrobles virtual law library
EN BANC
G.R. No. L-9353 May 21, 1957
MANILA SURETY AND FIDELITY, INC., plaintiff-appellant,
vs.
BATU CONSTRUCTION AND COMPANY, CARLOS N. BAQUIRAN,
GONZALO P. AMBOY and ANDRES TUNAC, defendants-appellees.
De Santos and Herrera for appellant.
Bienvenido C. Castro and Ruiz, Ruiz, Ruiz and Ruiz for appellees.
PADILLA, J.:
n a complaint filed in the Court of First nstance of Manila, the plaintiff, a
domestic corporation engaged in the bonding business, hereafter called
the company, alleges that the Batu Construction & Company, a partnership
the members of which are the other three defendants, requested it to post,
as it did, a surety bond for P8,812 in favor of the Government of the
Philippines to secure the faithful Performance of the construction of the
Bacarra Bridge, Project PR-72 (3), in locos Norte, undertaken by the
partnership, as stipulated in a construction on contract entered into on 11
July 1950 by and between the partnership and the Government of the
Philippines, on condition that the defendants would "indemnify the
COMPANY for any damage, loss, costs, or charges, or expenses of
whatever kind and nature, including counsel or attorney's fees, which the
COMPANY may, at any time, sustain or incur, as a consequence of having
become surety upon the above mentioned bond; said attorney's fees shall
not be less than fifteen (15%) per cent of the total amount claimed in any
action which the COMPANY may institute against the undersigned (the
defendants except Andres Tunac) in Court," and that "Said indemnity shall
be paid to the COMPANY as soon as it has become liable for the payment
of any amount, under the above-mentioned bond, whether or not it shall
have paid such sum or sums of money, or any part thereof," as stipulated
in a contract executed on 8 July 1950 (Exhibit B); that on 30 May 1951
because of the unsatisfactory progress of the work on the bridge, the
Director of Public Works, with the approval of the Secretary of Public
Works and Communications, annulled, the construction contract referred
to and notified the plaintiff Company that the Government would hold it
(the Company) liable for any amount incurred by the Government for the
completion of the bridge, in excess of the contract price (Exhibit D); that on
19 December 1951 (should be 23 November 1951), Ricardo Fernandez
and 105 other persons brought an action in the Justice of the Peace Court
of Laoag, locos Norte, against the partnership, the individual partners and
the herein plaintiff Company for the collection of unpaid wages amounting
to P5,960.10, lawful interests thereon and costs (Exhibit E); that the
defendants are in imminent danger of becoming insolvent, and are
removing and disposing, or about to remove and dispose, of their
properties with intent to defraud their creditors, particularly the plaintiff
Company; and that the latter has no other sufficient security to protect its
rights against the defendants. Upon these allegations, the plaintiff prays
that, upon the approval of a bond and on the strength of the allegations of
the verified complaint, a writ attachment be issued and levied upon the
properties of the defendants; and that after hearing, judgment be rendered
" ordering the defendants to deliver to the plaintiff such sufficient security
as shall protect plaintiff from the any proceedings by the creditors on the
Surety Bond aforementioned and from the danger of insolvency of the
defendants; and to allow costs to the herein plaintiff," and " for such other
measures of relief as may be proper and just in the premises." Attached to
the complaint are a verification and affidavit of attachment; and copies of
the surety bond marked Annex A; of the indemnity contract marked Annex
B; and of the letter of the Acting Director of Public Works to the plaintiff
dated 30 May 1951, marked Annex C.
Andres Tunac admits in his answer the allegations in paragraphs 1, 2, 3
and 4 of the complaint, but denies the allegations in paragraphs 5, 6, 7, 8
and 9 of the complaint, because he has never promised to put up an
indemnity bond in favor of the plaintiff nor has he ever entered into any
indemnity agreement with it; because the partnership or the Batu
Construction & Company was fulfilling its obligations in accordance with
the terms of the construction contract; because the Republic of the
Philippines, through the Director of Public, Works, had no authority to
annul the contract at its own initiative; because the Justice of the Peace
court of Laoag, locos Norte had no jurisdiction to hear and decide a case
for collection of P5,960.10; and because the defendants were not in
imminent danger of insolvency, neither did they remove or dispose of their
properties with intent to defraud their creditors. By way of affirmative
defenses, he alleges that the signing by Carlos N. Baquiran of the
indemnity agreement for and in behalf of the partnership Batu
Construction & Company did not bind the latter to the plaintiff and as the
partnership is not bound, he (Andres Tunac), as a member thereof, is also
not bound; that he not being a party to the said agreement, the plaintiff has
Credit Transactions Full Text Cases Atty. Adviento!!!!"+(
no cause of action against him; that in the event the partnership is bound
by the indemnity agreement he invokes his right of exhaustion of the
property of the partnership before the plaintiff may proceed against his
property. And as a counterclaim he alleges that the plaintiff brought the
action against him maliciously and in bad faith for the purpose of annoying
him and damaging his professional reputation, he having a flourishing and
successful practice as engineer in locos Norte, thereby compelling him to
defend himself; that to secure the issuance of a writ of attachment the
plaintiff made false representations; and that the issuance of the writ upon
such false representations of the plaintiff caused him damages in the sum
of P10,000 including expenses of litigation and attorney's fees. Upon the
foregoing he prays that the complaint be dismissed as to him and the
defendant Batu Construction & Company, with costs against the plaintiff;
that the latter be ordered to pay him the sum of P10,000; and that he be
granted such other remedies as may be just, equitable and proper.
Gonzalo P. Amboy denies in his answer the allegations of the complaint,
except those that may be deemed admitted in the special defenses, and
alleges that he is not in imminent danger of insolvency and is not removing
and disposing or about to remove and dispose of his properties, because
he has no property; that has been no liquidation of the expenses incurred
in the construction of the Bacarra Bridge, Project PR-72(3) to determine
whether there would be a balance of the contract price which may be
applied to pay the claim for unpaid wages of Ricardo Fernandez et al.
sought to be collected in civil case No. 198 of the Justice of the Peace
Court of Laoag, locos Norte, and not until after such liquidation shall have
been made could his liability and that of his co-defendants be determined
and fixed; that if after proper liquidation's there be a deficit of the contract
price the defendants are willing to pay the claim for unpaid wages of
Ricardo Fernandez et al. Upon these allegations he prays that the
issuance of the writ of attachment prayed for by the plaintiff be held in
abeyance until after civil case No. 198 of the Justice of the Peace Court of
Laoag, locos Norte, shall have been disposed of.
Carlos N. Baquiran admits in his answer the allegations in paragraphs 1,
2, 3,4, 5, 6, and 11 of the complaint but alleges that he has no sufficient
knowledge to form a belief as to the truth of the claim of Ricardo
Fernandez et al. set forth in paragraph 7 of the complaint, for there has
never been a liquidation between the defendants and the Bureau of Public
Works. He further denies specifically paragraphs 8, 9 and 10 of the
complaint. By way of special defenses he alleges that there has been no
liquidation by and between the defendants and the Bureau of Public Works
on Project PR-72(3) to determine whether the total amount spent for the
construction of the bridge exceeded the contract price; that after the
determination of the respective liabilities of the parties in civil case No. 198
of the Justice of the Peace Court of Laoag, locos Norte, if any there be
against the defendants herein, and such liability could not be paid out of
the balance of the contract price of Project PR-72(3), the defendants are
ready and willing to assume their respective responsibilities. Upon these
allegations he prays that the complaint of the plaintiff be dismissed; that
the issuance of the writ of attachment prayed for be denied; and that he be
granted such other relief as may be just and equitable, with costs against
the plaintiff.
At the hearing, the plaintiff presented its evidence. After the plaintiff had
rested its case, defendant Gonzalo P. Amboy moved for the dismissal of
the complaint, on the ground that the remedy provided for in the last
paragraph of article 2071 of the new Civil Code may be availed of by the
guarantor only and not by a surety.
Acting upon this motion to dismiss the trial court made the following
findings:
. . . That on July 8, 1950, the defendant Batu Construction &
Company, as principal, and the plaintiff Manila Surety & Fidelity
Co. nc., as surety, executed a surety bond for the sum of
P8,812.00 to insure faithful performance of the former's
obligation as contractor for the construction of the Bacarra
Bridge, Project PR-72 (No. 3) locos Norte Province. On the
same date, July 8,1950, the Batu Construction & Company and
the defendants Carlos N. Baquiran and Gonzales P. Amboy
executed an indemnity agreement to protect the Manila Surety &
Fidelity Co. nc.., against damage, loss or expenses which it
may sustain as a consequence of the surety bond executed by it
jointly with Batu Construction & Company.
On or about May 30, 1951, the plaintiff received a notice from
the Director of Public Works (Exhibit B) annulling its contract
with the Government for the construction of the Bacarra Bridge
because of its failure to make satisfactory progress in the
execution of the works, with the warning that ,any amount spent
by the Government in the continuation of the work, in excess of
the contract price, will be charged against the surety bond
furnished by the plaintiff. t also appears that a complaint by the
laborers in said project of the Batu Construction & Company
was filed against it and the Manila Surety and Fidelity Co., nc.,
for unpaid wages amounting to P5,960.10.
and, being of the opinion that the provisions of article 2071 of the new Civil
Code may be availed of by a guarantor only and not by a surety the
complaint, with costs against the plaintiff.
From this order the plaintiff Company has appealed to this Court, because
it proposes to raise only a question of law.
After the order dismissing the complaint had been entered, on 16 and 20
July 1953, the defendants Gonzalo P. Amboy and Andres Tunac moved for
leave to prove damages they allegedly suffered as a result of the
attachment levied upon their properties. On 15 August 1953 the Court
heard the evidence on damages. On 23 September 1953 the Court found
and held that the defendant Gonzalo P. Amboy is entitled to recover from
the plaintiff damages equivalent to 6 per cent interest per annum on the
sum of P35 in possession of the Provincial Treasurer of locos Norte,
which was garnished pursuant to the writ of attachment, from the date of
garnishment until its charge; but the claims for damages of Andres Tunac
and Gonzalo P. Amboy allegedly suffered by them in their business, moral
damages and attorney's fees were without basis in law and in fact. Hence
their recovery was denied. The Court dissolved the writ of attachment.
From this last order only the plaintiff Company has appealed.
The main question to determine is whether the last paragraph of article
2071 of the new Civil Code taken from article 1843 of the old Civil Code
may be availed of by a surety.
A guarantor is the insurer of the solvency of the debtor; a surety is an
insurer of the debt. A guarantor binds himself to pay if the principal is
unable to pay; a surety undertakes to pay if the principal does not pay.
1
The reason which could be invoked for the non-availability to a surety of
the provisions of the last paragraph of article 2071 of the new Civil Code
would be the fact that guaranty like commodatum
2
is gratuitous. But
guaranty could also be for a price or consideration as provided for in
article 2048. So, even if there should be a consideration or price paid to a
guarantor for him to insure the performance of an obligation by the
principal debtor, the provisions of article 2071 would still be available to
the guarantor. n suretyship the surety becomes liable to the creditor
without the benefit of the principal debtor's exclusion of his properties, for
he (the surety) maybe sued independently. So, he is an insurer of the debt
and as such he has assumed or undertaken a responsibility or obligation
greater or more onerous than that of guarantor. Such being the case, the
provisions of article 2071, under guaranty, are applicable and available to
a surety. The reference in article 2047 to, the provisions of Section 4,
Chapter 3, Title 1, Book V of the new Civil Code, on solidary or several
obligations, does not mean that suretyship which is a solidary obligation is
withdrawn from the applicable provisions governing guaranty.
The plaintiff's cause of action does not fall under paragraph 2 of article
2071 of the new Civil Code, because there is no proof of the defendants'
insolvency. The fact that the contract was annulled because of lack of
progress in the construction of the bridge is no proof of such insolvency. t
does not fall under paragraph 3, because the defendants have not bound
themselves to relieve the plaintiff from the guaranty within a specified
period which already has expired, because the surety bond does not fix
any period of time and the indemnity agreement stipulates one year
extendible or renewable until the bond be completely cancelled by the
person or entity in whose behalf the bond was executed or by a Court of
competent jurisdiction. t does not come under paragraph 4, because the
debt has not become demandable by reason of the expiration of the period
for payment. t does not come under paragraph 5 because of the lapse of
10 years, when the principal obligation has no period for its maturity, etc.,
for 10 years have not yet elapsed. t does not fall under paragraph 6,
because there is no proof that "there are reasonable grounds to fear that
Credit Transactions Full Text Cases Atty. Adviento!!!!"+)
the principal debtor intends to abscond." t does not come under
paragraph 7, because the defendants, as principal debtors, are not in
imminent danger of becoming insolvent, there being no proof to that effect.
But the plaintiff's cause of action comes under paragraph 1 of article 2071
of the new Civil Code, because the action brought by Ricardo Fernandez
and 105 persons in the Justice of the Peace Court of Laoag, province of
locos Norte, for the collection of unpaid wages amounting to P5,960.10, is
in connection with the construction of the Bacarra Bridge, Project PR-72
(3), undertaken by the Batu Construction & Company, and one of the
defendants therein is the herein plaintiff, the Manila Surety and Fidelity
Co., nc., and paragraph 1 of article 2071 of the new Civil Code provides
that the guarantor, even before having paid, may proceed against the
principal debtor "to obtain release from the guaranty, or to demand a
security that shall protect him from any proceedings by the creditor or from
the danger of insolvency of the debtor, when he (the guarantor) is sued for
payment. t does not provide that the guarantor be sued by the creditor for
the payment of the debt. t simply provides that the guarantor of surety be
sued for the payment of an amount for which the surety bond was put up
to secure the fulfillment of the obligation undertaken by the principal
debtor. So, the suit filed by Ricardo Fernandez and 105 persons in the
Justice of the Peace Court of Laoag, province of locos Norte, for the
collection of unpaid wages earned in connection with the work done by
them in the construction of the Bacarra Bridge, Project PR-72(3), is a suit
for the payment of an amount for which the surety bond was put up or
posted to secure the faithful performance of the obligation undertaken by
the principal debtors (the defendants) in favor of the creditor, the
Government of the Philippines.
The order appealed from dismissing the complaint is reversed and set
aside, and the case remanded to the court below for determination of the
amount of security that would protect the plaintiff Company from any
proceedings by the creditor or from the danger of insolvency of the
defendants, the principal debtors, and direction to the defendants to put up
such amount of security as may be established by competent evidence,
without pronouncement as to costs.
The writ of attachment having been issued improvidently because,
although there is an allegation in the verified complaint that the defendants
were in imminent danger of insolvency and that they were removing or
disposing, or about to remove or dispose, of their properties, with intent to
defraud their creditors, particularly the plaintiff Company, still such
allegation was not proved, the fact that a complaint had been filed against
the defendants and the plaintiff Company in the Justice of the Peace Court
of Laoag, locos Norte, for the collection of an amount for unpaid wages of
the plaintiffs therein who claimed to have worked in the construction of the
bridge, being insufficient to prove it, and because the relief prayed for in
the complaint for security that shall protect it from any proceedings by the
creditor and from the danger of the defendants becoming insolvent is
inconsistent with the state of insolvency of the defendants or their being in
imminent danger of insolvency, the order awarding 6 per cent on the sum
of P35 in possession of the Provincial Treasurer owned by the defendant
Gonzalo P. Amboy garnished by virtue of the writ of attachment, from the
date of the garnishment until its discharge, and denying recovery of the
amounts of damages claimed to have been suffered by the defendants, is
affirmed, the defendants not having appealed therefrom.
Bengzon, Montemayor, Reyes, A., Bautista Angelo, Labrador,
Concepcion, Reyes, J.B.L., Endencia and Felix, JJ., concur.
EN BANC
G.R. No. L-24543 JuIy 12, 1926
ROSA VILLA MONNA, plaintiff-appellee,
vs.
GUILLERMO GARCIA BOSQUE, ET AL., defendants.
GUILLERMO GARCIA BOSQUE, F. H. GOULETTE, and R. G. FRANCE,
appellants.
Eiguren and Razon for the appellant Garcia Bosque.
Benj. S. Ohnick for the appellants France and Goulette.
Fisher, DeWitt, Perkins and Brady and John R. McFie, jr., for appellee.
STREET, J.:
This action was instituted in the Court of First nstance of Manila by Rosa
Villa y Monna, widow of Enrique Bota, for the purpose of recovering from
the defendants, Guillermo Garcia Bosque and Jose Romar Ruiz, as
principals, and from the defendants R. G. France and F. H. Goulette, as
solidary sureties for said principals, the sum of P20,509.71, with interest,
as a balance alleged to be due to the plaintiff upon the purchase price of a
printing establishment and bookstore located at 89 Escolta, Manila, which
had been sold to Bosque and Ruiz by the plaintiff, acting through her
attorney in fact, one Manuel Pirretas y Monros. The defendant Ruiz put in
no appearance, and after publication judgment by default was entered
against him. The other defendants answered with a general denial and
various special defenses. Upon hearing the cause the trial judge gave
judgment in favor of the plaintiff, requiring all of the defendants, jointly and
severally, to pay to the plaintiff the sum of P19,230.01, as capital, with
stipulated interest at the rate of 7 per centum per annum, plus the further
sum of P1,279.70 as interest already accrued and unpaid upon the date of
the institution of the action, with interest upon the latter amount at the rate
of 6 per centum per annum. From this judgment Guillermo Garcia Bosque,
as principal, and R. G. France and F.H. Goulette, as sureties. appealed.
t appears that prior to September 17, 1919, the plaintiff, Rosa Villa y
Monna, viuda de E. Bota, was the owner of a printing establishment and
bookstore located at 89 Escolta, Manila, and known as La Flor de
Cataluna, Viuda de E. Bota, with the machinery, motors, bindery, type
material furniture, and stock appurtenant thereto. Upon the date stated,
the plaintiff, then and now a resident of Barcelona, Spain, acting through
Manuel Pirretas, as attorney in fact, sold the establishment above-
mentioned to the defendants Guillermo Garcia Bosque and Jose Pomar
Ruiz, residents of the City of Manila, for the stipulated sum of P55,000,
payable as follows: Fifteen thousand pesos (P15,000) on November 1,
next ensuing upon the execution of the contract, being the date when the
purchasers were to take possession; ten thousand pesos (P10,000) at one
year from the same date; fifteen thousand pesos (P15,000) at two years;
and the remaining fifteen thousand pesos (P15,000) at the end of three
years. By the contract of sale the deferred installments bear interest at the
rate of 7 per centum per annum. n the same document the defendants
France and Goulette obligated themselves as solidary sureties with the
principals Bosque and Ruiz, to answer for any balance, including interest,
which should remain due and unpaid after the dates stipulated for
payment of said installments, expressly renouncing the benefit of
exhaustion of the property of the principals. The first installment of
P15,000 was paid conformably to agreement.
n the year 1920, Manuel Pirretas y Monros, the attorney in fact of the
plaintiff, absented himself from the Philippine slands on a prolonged visit
to Spain; and in contemplation of his departure he executed a document,
dated January 22, 1920, purporting to be a partial substitution of agency,
whereby he transferred to "the mercantile entity Figueras Hermanos, or
the person, or persons, having legal representation of the same," the
powers that had been previously conferred on Pirretas by the plaintiff "in
order that," so the document runs, "they may be able to effect the
collection of such sums of money as may be due to the plaintiff by reason
of the sale of the bookstore and printing establishment already mentioned,
issuing for such purpose the receipts, vouchers, letters of payment, and
other necessary documents for whatever they shall have received and
collected of the character indicated."
When the time came for the payment of the second installment and
accrued interest due at the time, the purchasers were unable to comply
with their obligation, and after certain negotiations between said
purchasers and one Alfredo Rocha, representative of Figueras Hermanos,
acting as attorney in fact for the plaintiff, an agreement was reached,
whereby Figueras Hermanos accepted the payment of P5,800 on
November 10, 1920, and received for the balance five promissory notes
payable, respectively, on December 1, 1920, January 1, 1921, February 1,
1921, March 1, 1921, and April 1, 1921. The first three of these notes were
in the amount of P1,000 each, and the last two for P2,000 each, making a
total of P7,000. t was furthermore agreed that the debtors should pay 9
per centum per annum on said deferred installments, instead of the 7 per
centum mentioned in the contract of sale. These notes were not paid
promptly at maturity but the balance due upon them was finally paid in full
by Bosque on December 24, 1921.
Credit Transactions Full Text Cases Atty. Adviento!!!!"+*
About this time the owners of the business La Flor de Catalua, appear to
have converted it into a limited partnership under the style of Guillermo
Garcia Bosque, S. en C.;" and presently a corporation was formed to take
over the business under the name "Bota Printing Company, nc." By a
document executed on April 21, 1922, the partnership appears to have
conveyed all its assets to this corporation for the purported consideration
of P15,000, Meanwhile the seven notes representing the unpaid balance
of the second installment and interest were failing due without being paid.
nduced by this dilatoriness on the part the debtor and supposedly
animated by a desire to get the matter into better shape, M. T. Figueras
entered into the agreement attached as Exhibit 1 to the answer of Bosque.
n this document it is recited that Guillermo Garcia Bosque. S. en C., is
indebted to Rosa Villa, viuda de E. Bota, in the amount of P32,000 for
which R. G. France and F. H. Goulette are bound as joint and several
sureties, and that the partnership mentioned had transferred all its assets
to the Bota Printing Company, nc., of which one George Andrews was a
principal stockholder. t is then stipulated that France and Goulette shall be
relieved from all liability on their contract as sureties and that in lieu
thereof the creditor, Doa Rosa Villa y Monna, accepts the Bota Printing
Company, nc., as debtor to the extent of P20,000, which indebtedness
was expressly assumed by it, and George Andrews as debtor to the extent
of P12,000, which he undertook to pay at the rate of P200 per month
thereafter. To this contract the name of the partnership Guillermo Garcia
Bosque, S. en C., was affixed by Guillermo Garcia Bosque while the name
of the Bota Printing Company, nc., was signed by G. Andrews, the latter
also signing in his individual capacity. The name of the plaintiff was affixed
by M.T. Figueras in the following style: "p.p. Rosa Villa, viuda de E. Bota,
M. T. Figueras, party of the second part."
No question is made as to the authenticity of this document or as to the
intention of Figueras to release the sureties; and the latter rely upon the
discharge as complete defense to the action. The defendant Bosque also
relies upon the same agreement as constituting a novation such as to
relieve him from personal liability. All of the defendants furthermore
maintain that even supposing that M. T. Figueras authority to novate the
original contract and discharge the sureties therefrom, nevertheless the
plaintiff has ratified the agreement by accepting part payment of the
amount due thereunder with full knowledge of its terms. n her amended
complaint the plaintiff asserts that Figueras had no authority to execute the
contract containing the release (Exhibit 1) and that the same had never
been ratified by her.
The question thus raised as to whether the plaintiff is bound by Exhibit 1
constitutes the main controversy in the case, since if this point should be
determined in the affirmative the plaintiff obviously has no right of action
against any of the defendants. We accordingly address ourselves to this
point first.
The partial substitution of agency (Exhibit B to amended complaint)
purports to confer on Figueras Hermanos or the person or persons
exercising legal representation of the same all of the powers that had been
conferred on Pirretas by the plaintiff in the original power of attorney. This
original power of attorney is not before us, but assuming, as is stated in
Exhibit B, that this document contained a general power to Pirretas to sell
the business known as La Flor de Catalua upon conditions to be fixed by
him and power to collect money due to the plaintiff upon any account, with
a further power of substitution, yet it is obvious upon the face of the act of
substitution (Exhibit B) that the sole purpose was to authorize Figueras
Hermanos to collect the balance due to the plaintiff upon the price of La
Flor de Catalua, the sale of which had already been affected by Pirretas.
The words of Exhibit B on this point are quite explicit ("to the end that the
said lady may be able to collect the balance of the selling price of the
Printing Establishment and Bookstore above-mentioned, which has been
sold to Messrs. Bosque and Pomar"). There is nothing here that can be
construed to authorize Figueras Hermanos to discharge any of the debtors
without payment or to novate the contract by which their obligation was
created. On the contrary the terms of the substitution shows the limited
extent of the power. A further noteworthy feature of the contract Exhibit 1
has reference to the personality of the purported attorney in fact and the
manner in which the contract was signed. Under the Exhibit B the
substituted authority should be exercised by the mercantile entity Figueras
Hermanos or the person duly authorized to represent the same. n the
actual execution of Exhibit 1, M. T. Figueras intervenes as purpoted
attorney in fact without anything whatever to show that he is in fact the
legal representative of Figueras Hermanos or that he is there acting in
such capacity. The act of substitution conferred no authority whatever on
M. T. Figueras as an individual. n view of these defects in the granting and
exercise of the substituted power, we agree with the trial judge that the
Exhibit 1 is not binding on the plaintiff. Figueras had no authority to
execute the contract of release and novation in the manner attempted; and
apart from this it is shown that in releasing the sureties Figueras acted
contrary to instructions. For instance, in a letter from Figueras in Manila,
dated March 4, 1922, to Pirretas, then in Barcelona, the former stated that
he was attempting to settle the affair to the best advantage and expected
to put through an arrangement whereby Doa Rosa would receive
P20,000 in cash, the balance to be paid in installments, "with the guaranty
of France and Goulette." n his reply of April 29 to this letter, Pirretas
expresses the conformity of Doa Rosa in any adjustment of the claim that
Figueras should see fit to make, based upon payment of P20,000 in cash,
the balance in installments, payable in the shortest practicable periods, it
being understood, however, that the guaranty of Messrs. France and
Goulette should remain intact. Again, on May 9, Pirretas repeats his
assurance that the plaintiff would be willing to accept P20,000 down with
the balance in interest-bearing installments "with the guaranty of France
and Goulette." From this it is obvious that Figueras had no actual authority
whatever to release the sureties or to make a novation of the contract
without their additional guaranty.
But it is asserted that the plaintiff ratified the contract (Exhibit 1) by
accepting and retaining the sum of P14,000 which, it is asserted, was paid
by the Bota Printing Co., nc., under that contract. n this connection it
should be noted that when the firm of Guillermo Garcia Bosque, S. en C.,
conveyed all it assets on April 21, 1922 to the newly formed corporation,
Bota Printing Co., nc., the latter obligated itself to pay al the debts of the
partnership, including the sum of P32,000 due to the plaintiff. On April 23,
thereafter, Bosque, acting for the Bota Printing Co., nc., paid to Figueras
the sum of P8,000 upon the third installment due to the plaintiff under the
original contract of sale, and the same was credited by Figueras
accordingly. On May 16 a further sum of P5,000 was similarly paid and
credited; and on May 25, a further sum of P200 was likewise paid, making
P14,000 in all. Now, it will be remembered that in the contract (Exhibit 1),
executed on May 17, 1922, the Bota Printing Co., nc., undertook to pay
the sum of P20,00; and the parties to the agreement considered that the
sum of P13,800 then already paid by the Bota Printing Co., nc., should be
treated as a partial satisfaction of the larger sum of P20,000 which the
Bota Printing Co., nc., had obligated itself to pay. n the light of these facts
the proposition of the defendants to the effect that the plaintiff has ratified
Exhibit 1 by retaining the sum of P14,000, paid by the Bota Printing Co.,
nc., as above stated, is untenable. By the assumption of the debts of its
predecessor the Bota Printing Co., nc., had become a primary debtor to
the plaintiff; and she therefore had a right to accept the payments made by
the latter and to apply the same to the satisfaction of the third installment
of the original indebtedness. Nearly all of this money was so paid prior to
the execution of Exhibit 1 and although the sum of P200 was paid a few
days later, we are of the opinion that the plaintiff was entitled to accept and
retain the whole, applying it in the manner above stated. n other words
the plaintiff may lawfully retain that money notwithstanding her refusal to
be bound by Exhibit 1.
A contention submitted exclusively in behalf of France and Goulette, the
appellant sureties, is that they were discharged by the agreement between
the principal debtor and Figueras Hermanos, as attorney in fact for the
plaintiff, whereby the period for the payment of the second installment was
extended, without the assent of the sureties, and new promissory notes for
unpaid balance were executed in the manner already mentioned in this
opinion. The execution of these new promissory notes undoubtedly
constituted and extension of time as to the obligation included therein,
such as would release a surety, even though of the solidary type, under
article 1851 of the Civil Code. Nevertheless it is to be borne in mind that
said extension and novation related only to the second installment of the
original obligation and interest accrued up to that time. Furthermore, the
total amount of these notes was afterwards paid in full, and they are not
now the subject of controversy. t results that the extension thus effected
could not discharge the sureties from their liability as to other installments
upon which alone they have been sued in this action. The rule that an
extension of time granted to the debtor by the creditor, without the consent
of the sureties, extinguishes the latter's liability is common both to Spanish
jurisprudence and the common law; and it is well settled in English and
American jurisprudence that where a surety is liable for different
payments, such as installments of rent, or upon a series of promissory
notes, an extension of time as to one or more will not affect the liability of
the surety for the others. (32 Cyc., 196; Hopkirk vs. McConico, 1 Brock.,
220; 12 Fed. Cas., No. 6696; Coe vs. Cassidy, 72 N. Y., 133; Cohn vs.
Credit Transactions Full Text Cases Atty. Adviento!!!!""+
Spitzer, 129 N. Y. Supp., 104; Shephard Land Co. vs. Banigan, 36 R. ., 1;
. J. Cooper Rubber Co. vs. Johnson, 133 Tenn., 562; Bleeker vs.
Johnson, 190, N. W. 1010.) The contention of the sureties on this point is
therefore untenable.
There is one stipulation in the contract (Exhibit A) which, at first suggests a
doubt as to propriety of applying the doctrine above stated to the case
before us. We refer to cause (f) which declares that the non-fulfillment on
the part of the debtors of the stipulation with respect to the payment of any
installment of the indebtedness, with interest, will give to the creditor the
right to treat and declare all of said installments as immediately due. f the
stipulation had been to the effect that the failure to pay any installment
when due would ipso facto cause to other installments to fall due at once,
it might be plausibly contended that after default of the payment of one
installment the act of the creditor in extending the time as to such
installment would interfere with the right of the surety to exercise his legal
rights against the debtor, and that the surety would in such case be
discharged by the extension of time, in conformity with articles 1851 and
1852 of the Civil Code. But it will be noted that in the contract now under
consideration the stipulation is not that the maturity of the later
installments shall be ipso facto accelerated by default in the payment of a
prior installment, but only that it shall give the creditor a right to treat the
subsequent installments as due, and in this case it does not appear that
the creditor has exercised this election. On the contrary, this action was
not instituted until after all of the installments had fallen due in conformity
with the original contract. t results that the stipulation contained in
paragraph (f) does not affect the application of the doctrine above
enunciated to the case before us.
Finally, it is contended by the appellant sureties that they were discharged
by a fraud practiced upon them by the plaintiff in failing to require the
debtor to execute a mortgage upon the printing establishment to secure
the debt which is the subject of this suit. n this connection t is insisted that
at the time France and Goulette entered into the contract of suretyship, it
was represented to them that they would be protected by the execution of
a mortgage upon the printing establishment by the purchasers Bosque
and Pomar. No such mortgage was in fact executed and in the end
another creditor appears to have obtained a mortgage upon the plant
which is admitted to be superior to the claim of the plaintiff. The failure of
the creditor to require a mortgage is alleged to operate as a discharge of
the sureties. With this insistence we are unable to agree, for the reason
that the proof does not show, in our opinion, that the creditor, on her
attorney in fact, was a party to any such agreement. On the other hand it
is to be collected from the evidence that the suggestion that a mortgage
would be executed on the plant to secure the purchase price and that this
mortgage would operate for the protection of the sureties came from the
principal and not from any representative of the plaintiff.
As a result of our examination of the case we find no error in the record
prejudicial to any of the appellants, and the judgment appealed from will
be affirmed, So ordered, with costs against the appellants.
Avancea, C. J., Villamor, Ostrand, Johns, Romualdez and Villa-Real, JJ.,
concur.
EN BANC
G.R. No. 42829 September 30, 1935
RADIO CORPORATION OF THE PHILIPPINES, plaintiff-appellee,
vs.
JESUS R. ROA, ET AL., defendants.
RAMON CHAVES, ANDRES ROA and MANUEL ROA, appellants.
M.H. de Joya and Juan de Borja for appellants.
Barrera and Reyes for appellee.
GODDARD, J.:
This is an appeal from decision of the Court of First nstance of the City of
Manila the dispositive part of which reads:
n view of all the foregoing, judgment is hereby rendered in favor
of the plaintiff Radio Corporation of the Philippines and against
the defendants Jesus R. Roa, Ramon Chavez, Andes Roa and
Manuel Roa: (a) Ordering the defendant Jesus R. Roa to pay
the plaintiff the sum of P22,935, plus P99.64, with legal interest
thereon from the date of the filing of the complaint until fully
paid: (b) that upon failure of the defendant Jesus Roa to pay the
said sum indicated, the chattel described in the second cause of
action shall be sold at public auction to be applied to the
satisfaction of the amount of this judgment; (c) that the
defendants Jesus R. Roa, Ramon Chavez, Andres Roa and
Manuel Roa pay jointly and severally to the plaintiff the amount
of P10,000; (d) and that Jesus R. Roa pay to the plaintiff the
amount equivalent to 10 per cent of P22,935, as attorney's fees,
and that all the defendants in this case pay the costs of this
action.
The defendants Ramon Chavez, Andres Roa and Manuel Roa have
appealed from the judgment against them for P10,00 and costs. These
appellants make the following assignments of error:
1. The court below erred in not finding that the balance of the
total indebtedness became immediately due and demandable
upon the failure of the defendant Jesus R. Roa to pay any
installment on his note.
2. The court below erred in not finding that defendant Jesus R.
Roa defaulted in the payment of the installment due on February
27,1932, and that plaintiff corporation gave him an extension of
time for the payment of said installment.
3. The court below erred in not finding that the extension of time
given to defendant Jesus R. Roa for the payment of an overdue
installment served as a release of defendant sureties from
liability on all the subsequent installments.
4. The court below erred in not finding that the sureties were
discharged from their bond when the plaintiff authorized Jesus
R. Roa to remove the photophone equipment from Cagayan,
Misamis Oriental, to Silay, Occidental Negros, without the
knowledge or consent of said sureties.
5. The court below erred in condemning Ramon Chavez, Andres
Roa and Manuel Roa to pay jointly and severally the sum of
P10,000 to the Radio Corporation of the Philippines.
The defendant Jesus R. Roa became indebted to the Philippine Theatrical
Enterprises, nc., in the sum of P28,400 payable in seventy-one equal
monthly installments at the rate of P400 a month commencing thirty days
after December 11, 1931, with five days grace monthly until complete
payment of said sum. On that same date the Philippine Theatrical
Enterprises, nc., assigned all its right and interest in that contract to the
Radio Corporation of the Philippines.
The paragraph of that contract in which the accelerating clause appears
reads as follows:
n case the vendee-mortgagor fails to make any of the payments
as hereinbefore provided, the whole amount remaining unpaid
under this mortgage shall immediately become due and payable
and this mortgage on the property herein mentioned as well as
the Luzon Surety Bond may be foreclosed by the vendor-
mortgagee; and, in such case, the vendee-mortgager further
agrees to pay the vendor- mortgagee an additional sum
equivalent to 25 per cent of the principal due unpaid as costs,
expenses and liquidated damages, which said sum, shall be
added to the principal sum for which this mortgage is given as
security, and shall become a part, thereof.
On March 15, 1932, Erlanger & Galinger, nc., acting in its capacity as
attorney-in-fact of the Radio Corporation of the Philippines wrote the
following letter (Exhibit 13) to the principal debtor Jesus R. Roa:
Credit Transactions Full Text Cases Atty. Adviento!!!!"""
Mr. JESUS R. ROA
Cagayan, Oriental Misamis
Attention of Mrs. Amparo Chavez de Roa
DEAR SR: We acknowledge with thanks the receipt of your
letter of March 9th together with your remittance of P200 for
which we enclose receipt No. 7558. We are applying this
amount to the balance of your January installment.
We have no objection to the extension requested by you to pay
the February installment by the first week of April. We would,
however, urge you to make every efforts to bring the account up-
to date as we are given very little discretion by the RCP in giving
extension of payment.
Very truly yours,
RADO CORP. OF THE PHL.
By: ERLANGER & GALNGER, NC.
(Sgd.) H.N. SALET
Vice-President
Under the above assignments of error the principal question to be decided
is whether or not the extension granted in the above copied letter by the
plaintiff, without the consent of the guarantors, the herein appellants,
extinguishes the latter's liability not only as to the installments due at that
time, as held by the trial court, but also as to the whole amount of their
obligation. Articles 1851 of the Civil Code reads as follows:
ART. 1851. An extension grated to the debtor by the creditor,
without the consent of the guarantor, extinguishes the latter's
liability.
This court has held that mere delay in suing for the collection of the does
not release the sureties. (Sons of . de la Rama vs. Estate of Benedicto, 5
Phil., 512; Banco Espaol Filipino vs. Donaldson Sim & Co., 5 Phil., 418;
Manzano vs. Tan Suanco, 13 Phil., 183; Hongkong & Shanghai Baking
Corporation vs. Aldecoa & Co., 30 Phil., 255.) n the case of Villa vs.
Garcia Bosque (49 Phil., 126, 134, 135), this court stated:
. . . The rule that an extension of time granted to the debtor by
the creditor, without the consent of the sureties, extinguishes the
latter's liability is common both to Spanish jurisprudence and the
common law; and it is well settled in English and American
jurisprudence that where a surety is liable for different
payments, such as installments of rent, or upon a series of
promissory notes, an extension of time as to one or more will
not affect the liability of the surety for the others. . . .
There is one stipulation in the contract (Exhibit A) which, at first
blush, suggests a doubt as to the propriety of applying the
doctrine above stated to the case before us. We refer to clause
(f) which declares that the non-fulfillment on the part of the
debtors of the stipulation with respect to the payment of any
installment of the indebtedness, with interest, will give to the
creditor the right to treat and declare all of said installments as
immediately due. f the stipulation had been to the effect that the
failure to pay any installment when due would ipso facto cause
the other installments to fall due at once, it might be plausibly
contended that after default of the payment of one installment
the act of the creditor in extending the time as to such
installment would interfere with the right of the surety to exercise
his legal rights against the debtor, and that the surety would in
such case be discharged by the extension of time, in conformity
with article 1851 and 1852 of the Civil Code. But it will be noted
that in the contract now under consideration the stipulation is not
that the maturity of the latter installments shall be ipso facto
accelerated by default in the payment of a prior installment, but
only that it shall give the creditor a right treat the subsequent
installments as due; and in this case it does not appear that the
creditor has exercised this election. On the contrary, this action
was not instituted until after all of the installments had fallen due
in conformity with original contract. t results that the stipulation
contained in paragraph (f) does not effect the application of the
doctrine above enunciated to the case before us.
The stipulation in the contract under consideration, copied above, is to the
effect that upon failure to pay any installment when due the other
installments ipso facto become due and payable. n view of of the fact that
under the express provision of the contract, quoted above, the whole
unpaid balance automatically becomes due and payable upon failure to
pay one installment, the act of the plaintiff in extending the payment of the
installment corresponding to February, 1932, to April, 1932, without the
consent of the guarantors, constituted in fact an extension of the payment
of the whole amount of the indebtedness, as by that extension the plaintiff
could not have filed an action for the collection of the whole amount until
after April, 1932. Therefore appellants' contention that after default of the
payment of one installment the act of the herein creditor in extending the
time of payment discharges them as guarantors in conformity with articles
1851 and 1852 of the Civil Code is correct.
t is a familiar rule that if a creditor, by positive contract with the
principal debtor, and without the consent of the surety, extends
the time of payment, he thereby discharges the surety. . . . The
time of payment may be quite as important a consideration to
the surety as the amount he has promised conditionally to
pay. . . .Again, a surety has the right, on payment of the debt, to
be subrogated to all the rights of the creditor, and to proceed at
once to collect it from the principal; but if the creditor has tied
own hands from proceeding promptly, by extending the time of
collection, the hands of the surety will equally be bound; and
before they are loosed, by the expiration of the extended credit,
the principal debtor may have become insolvent and the right of
subrogation rendered worthless. t should be observed,
however, that it is really unimportant whewther the extension
given has actually proved prejudicial to the surety or not. The
rule stated is quite independent of the event, and the fact that
the principal is insolvent or that the extension granted promised
to be beneficial to the surety would give no right to the creditor
to change the terms of the contract without the knowledge or
consent of the surety. Nor does it matter for how short a period
the time of payment may be extended. The principle is the same
whether the time is long or short. The creditor must be in such a
situation that when the surety comes to be substituted in his
place by paying the debt, he may have an immediate right of
action against the principal. The suspension of the right to sue
for a month, or even a day, is as effectual to release the surety
as a year or two years. (21 R.C.L., 1018-1020.)
Plaintiff's contention that the enforcement of the accelerating clause is
potestative on the part of the obligee, and not self-executing, is clearly
untenable from a simple reading of the clause copied above. What is
potestative on the part of the obligee is the foreclosure of the mortgage
and not the accelerating clause.
Plaintiff-appellee contends that there was no consideration for the
extension granted the principal debtor. Article 1277 of the Civil Code
provides that "even though the consideration should be expressed in the
contract, it shall be presumed that a consideration exists and that it is licit,
unless the debtor proves the contrary." t was incumbent upon the plaintiff
to prove that there was no valid consideration for the extension granted.
n view of the forgoing the judgment of the trial court is reversed as to the
appellants Ramon Chavez, Andres Roa and Manuel Roa, without costs.
SECOND DVSON

G.R. No. L-19632 November 13, 1974
THE PHILIPPINE AMERICAN GENERAL INSURANCE COMPANY, INC.,
plaintiff-appellee,
vs.
Credit Transactions Full Text Cases Atty. Adviento!!!!""#
MANUEL MUTUC DOROTEO Q. MOJICA, and FAUSTO S. ALBERTO,
defendants, FAUSTO S. ALBERTO, defendant-appellant.
Manuel Lim, Manuel Y Macias & Ricardo T. Bancod for plaintiff-appellee.
V. A. Francisco & Associates for defendant-appellant.

FERNANDO, J.:p
There is an obstacle, rather formidable in character, that stands in the way
of the plea of appellant Fausto S. Alberto,
1
to have this Court reverse a
lower court decision of February 14, 1962, holding him liable on an
indemnity agreement. As pointed out therein, the language of his
undertaking is clear and unmistakable and, therefore, leaves no alternative
for a court except to enforce its terms. The attempt to impugn such a
judgment based on the ground that the stipulation relied upon is contrary
to morals and to public order and policy, while vigorously pressed, is none
too successful. Accordingly, we affirm.
The facts as stipulated by the parties may be gleaned from the appealed
decision. Thus: "On July 16, 1957, defendant Manuel C. Mutuc as
principal, and plaintiff, as surety, executed a surety bond in the amount of
P1,000 in behalf of defendant Mutuc and in favor of the Maersk Line, in
which the surety company guaranteed the faithful performance by said
Manuel C. Mutuc of his duties in connection with his employment as
crewmember of the vessel of the Maersk Line, and more particularly, that
he would not desert said vessel while he was engaged as such
crewmember while outside of the Philippines. To protect the plaintiff
company, on July 17, 1957, in consideration of plaintiff's becoming surety
of the defendant Manuel C. Mutuc, under the bond, ... the defendant
Manuel C. Mutuc, Doroteo Q. Mojica, and Fausto S. Alberto, executed an
indemnity agreement in favor of the plaintiff, ... . The duration of the surety
bond, ... was for the period beginning July 16, 1957 to July 17, 1958, but
at the instance of the defendant, Manuel C. Mutuc, it was renewed for
three successive one year periods, the last period of which was from July
17, 1960 to July 17, 1961. The prior consent of the defendant Fausto S.
Alberto to the aforesaid renewal extension was not obtained by the
defendant Manuel C. Mutuc or by the plaintiff. According to the letter of the
mmigration and Naturalization Service, United States Department of
Justice, ... Manuel C. Mutuc was not aboard the vessel M/S Merit Maersk
when it departed from New York at 3:00 o'clock P.M. for Charleston, South
Carolina, and was presumed to be a deserter. The Compania General de
Tabacos de Filipinas which represented the Maersk Lines forwarded this
letter to the plaintiff and asked for the remittance of the forfeited bond of
P1,000. On October 6, 1960, the plaintiff wrote a letter to the defendants
Doroteo Q. Mojica and Fausto S. Alberto demanding the payment of the
amount of P1,000 in accordance with the indemnity agreement. On
October 25, 1960, plaintiff paid the Tabacalera the sum of P5,000 in full
settlement of the latter's claim against the bond ... .This action is for the
recovery of the amount of P1,000 against the defendants Mojica and
Alberto based on the indemnity agreement ... . From the judgment against
them by the Municipal Court, defendant Alberto appealed alleging that the
renewal was made without his consent."
2
The indemnity agreement was insofar as pertinent set forth therein in this
wise: "[ndemnity]: The undersigned agree at all times to jointly and
severally indemnify the [Company] and keep it indemnified and hold and
save it harmless from and against any and all damages, losses, costs,
stamps, taxes, penalties, charges and expenses of whatsoever kind and
nature which the [Company] shall or may, at any time sustain or incur in
consequence of having become surety upon this bond herein above
referred to or any extension, renewal, substitution or alteration thereof,
made at the instance of the undersigned or any of them, or any other bond
executed on behalf of the undersigned or any of them; and to pay,
reimburse and make good to the [Company] its successors and assigns,
all sums and amount of money which it or its representatives shall pay or
cause to be paid, or become liable to pay, on account of the undersigned
or any of them, of whatsoever kind and nature, including 15% of the
amount involved in the litigation or other matters growing out of or
connected therewith, for and as attorney's fees, but in no case less than
P25.00. t is hereby further agreed that in case of any extension or
renewal of the bond we equally bind ourselves to the [Company] under the
same terms and conditions as herein provided without the necessity of
executing another indemnity agreement for the purpose and that we
hereby equally waive our right to be notified of any renewal or extension of
the bond which may be granted under this indemnity agreement.
[Renewals, alterations and substitutions]: The undersigned hereby
empower and authorize the Company to grant or consent to the granting
of any extension, continuation, increase modification, change, alteration,
and/or renewal of the original bond herein referred to, and to execute or
consent to the execution of any substitution for said Bond with the same or
different conditions and parties, and the undersigned hereby hold
themselves jointly and severally liable to the Company for the Original
Bond herein abovementioned or for any extension, continuation, increase,
modification, change, alteration, renewal or substitution thereof, until the
full amount including principal, interests, premiums, costs and other
expenses due to the Company thereunder is fully paid up."
3
The lower court after referring to the above stipulation as to "Renewals"
which refers not to a single extension but to "any extension" agreed to in
advance by defendant, now appellant, found for plaintiff, now appellee. As
set forth in the decision: "The defendant having expressly empowered or
authorized his principal to the granting of any extension, his liability under
the indemnity agreement necessarily follows."
4
t is from that decision in
favor of plaintiff that this appeal is taken. As set forth at the outset, there is
no legal ground for a reversal.
1. Appellant was not compelled to enter into an indemnity agreement. He
did so of his own free will. He agreed to hold himself liable for the amount
therein specified. What is more, he did consent likewise to be so bound
not only for the one year period specified but to any extension thereafter
made, an extension moreover that could be had without his having to be
notified. That was what the contract provided. He gave his plighted word.
The terms were definite and certain. There was no ambiguity. All that was
necessary was to see its enforcement. The Civil Code explicitly provides:
"f the terms of a contract are clear and leave no doubt upon the intention
of the contracting parties, the literal meaning of its interpretation shall
control."
5
that was how it was worded under the Civil Code of Spain of
1899 formerly in force in this jurisdiction.
6
A provision like the above exemplifies according to the leading case of
Perez v. Pomar
7
the principle that "the will of the contracting parties is law,
... ."
8
t is understandable then why in Alburo v. Villanueva,
9
this Court
affirmed that where the terms of a contract are "clear and explicit," they
"do not justify an attempt to read into it any alleged intention of the parties
other than that which appears upon its face."
10
As was so categorically put
forth in Hernandez v. Antonio:
11
"The literal sense of its stipulations must
be observed."
12
t was so succinctly observed by Chief Justice Arellano in
Velasco v. Lao Tam
13
that such is the "first rule on the matter ... ."
14
There
is this excerpt from Chinchilla v. Rafel:
15
"That the terms employed in the
contract Exhibit 1 are clear and leave no doubt as to the true genuine
intention of the contracting parties, it is sufficient, in the opinion of this
court, to demonstrate it by a simple reading of the document Exhibit 1 from
the wording of which it is not possible to find any meaning contrary or
opposed to the evident intention of the contracting parties, Rafel and
Verdaguer. ... From the literal wording of the document in question, it is not
possible under any circumstance whatsoever to infer a contract distinct
from that which really and truly appears to have been specified in the said
document."
16
Thus, contracts, according to Feliciano v. Limjuco,
17
which
are the private laws of the contracting parties, should be fulfilled according
to the literal sense of their stipulations, if their terms are clear and leave no
room for doubt as to the intention of the contracting parties, for contracts
are obligatory, no matter what their form may be, whenever the essential
requisites for their validity are present.
18
A terse summary of the matter is
that of the then Justice, later Chief Justice, Moran: "A writing must be
interpreted according to the legal meaning of its language."
19
2. There was no other valid conclusion that could be reached by the lower
court. Even appellant must have seen that so it ought to be. That would
account for the contention in his brief that the stipulation as to "any
extension" without the need for his being notified was "null and void being
contrary to law, morals, good customs, public order or public policy."
20
That is a pretty tall order. There is more than just a hint of hyperbole in
such a sweeping allegation. Appellant though ought to have realized that
assertion is not the equivalent of proof. A little more objectivity on his part
should bring the realization that no offense to law or morals could be
imputed to such a contractual provision. As to good customs, that category
requires something to substantiate it. A mere denunciatory
Credit Transactions Full Text Cases Atty. Adviento!!!!""$
characterization certainly cannot suffice. That leaves public order or public
policy. t is difficult to follow appellant's train of reasoning. He would
premise it on the indemnity agreement being a contract of adhesion. He
was not at all compelled to agree to it. He was free to act either way. He
had a choice. t may be more offensive to public policy, let alone morals or
good customs, if thereafter he would be allowed to go back on his word.
Besides the policy underlying such a stipulation in this litigation is clear.
What was guaranteed was the faithful performance of defendant Mutuc of
his employment as a member of the crew of a vessel plying overseas.
What was more logical considering the difficulty of contacting him then for
the party concerned, here appellant, to agree in advance to any extension
without the need for notification. So the parties agreed. There could be
thus nothing that did offend public policy or public order when such an
arrangement was explicitly provided for. Appellant, clearly, has not made
out a case for reversal.
21
WHEREFORE, the lower court decision of February 14, 1962 is affirmed.
Costs against appellant.
Antonio, Fernandez and Aquino, JJ., concur.
SECOND DVSON
G.R. No. L-34539 JuIy 14, 1986
EULALIO PRUDENCIO and ELISA T. PRUDENCIO, petitioners,
vs.
THE HONORABLE COURT OF APPEALS, THE PHILIPPINE NATIONAL
BANK, RAMON C. CONCEPCION and MANUEL M. TAMAYO, partners
of the defunct partnership Concepcion & Tamayo Construction
Company, JOSE TORIBIO, Atty-in-Fact of Concepcion & Tamayo
Construction Company, and THE DISTRICT ENGINEER, Puerto
Princesa, PaIawan, respondents.
Fernando R. Mangubat, Jr. for respondent PNB.

GUTIERREZ, JR., J.:
This is a petition for review seeking to annul and set aside the decision of
the Court of Appeals, now the ntermediate Appellate Court, affirming the
order of the trial court which dismissed the petitioners' complaint for
cancellation of their real estate mortgage and held them jointly and
severally liable with the principal debtors on a promissory note which they
signed as accommodation makers.
The factual background of this case is stated in the decision of the
appellate court:
Appellants are the registered owners of a parcel of
land located in Sampaloc, Manila, and covered by
T.C.T. 35161 of the Register of Deeds of Manila. On
October 7, 1954, this property was mortgaged by the
appellants to the Philippine National Bank, hereinafter
called PNB, to guarantee a loan of P1,000.00
extended to one Domingo Prudencio.
Sometime in 1955, the Concepcion & Tamayo
Construction Company, hereinafter called Company,
had a pending contract with the Bureau of Public
Works, hereinafter called the Bureau, for the
construction of the municipal building in Puerto
Princess, Palawan, in the amount of P36,800.00 and,
as said Company needed funds for said construction,
Jose Toribio, appellants' relative, and attorney-in-fact
of the Company, approached the appellants asking
them to mortgage their property to secure the loan of
P10,000.00 which the Company was negotiating with
the PNB.
After some persuasion appellants signed on
December 23, 1955 the 'Amendment of Real Estate
Mortgage', mortgaging their said property to the PNB
to guaranty the loan of P10,000.00 extended to the
Company. The terms and conditions of the original
mortgage for Pl,000.00 were made integral part of the
new mortgage for P10,000.00 and both documents
were registered with the Register of Deeds of Manila.
The promissory note covering the loan of P10,000.00
dated December 29, 1955, maturing on April 27,
1956, was signed by Jose Toribio, as attorney-in-fact
of the Company, and by the appellants. Appellants
also signed the portion of the promissory note
indicating that they are requesting the PNB to issue
the Check covering the loan to the Company. On the
same date (December 23, 1955) that the 'Amendment
of Real Estate' was executed, Jose Toribio, in the
same capacity as attorney-in- fact of the Company,
executed also the 'Deed of Assignment' assigning all
payments to be made by the Bureau to the Company
on account of the contract for the construction of the
Puerto Princesa building in favor of the PNB.
This assignment of credit to the contrary
notwithstanding, the Bureau; with approval, of the
PNB, conditioned, however that they should be for
labor and materials, made three payments to the
Company on account of the contract price totalling
P11,234.40. The Bureau's last request for P5,000.00
on June 20, 1956, however, was denied by the PNB
for the reason that since the loan was already
overdue as of April 28, 1956, the remaining balance of
the contract price should be applied to the loan.
The Company abandoned the work, as a
consequence of which on June 30, 1956, the Bureau
rescinded the construction contract and assumed the
work of completing the building. On November 14,
1958, appellants wrote the PNB contending that since
the PNB authorized payments to the Company
instead of on account of the loan guaranteed by the
mortgage there was a change in the conditions of the
contract without the knowledge of appellants, which
entitled the latter to a cancellation of their mortgage
contract.
Failing in their bid to have the real estate mortgage
cancelled, appellants filed on June 27, 1959 this
action against the PNB, the Company, the latter's
attorney-in-fact Jose Toribio, and the District Engineer
of Puerto Princesa, Palawan, seeking the cancellation
of their real estate mortgage. The complaint was
amended to exclude the Company as defendant, it
having been shown that its life as a partnership had
already expired and, in lieu thereof, Ramon
Concepcion and Manuel M. Tamayo, partners of the
defunct Company, were impleaded in their private
capacity as defendants.
After hearing, the trial court rendered judgment, denying the prayer in the
complaint that the petitioners be absolved from their obligation under the
mortgage contract and that the said mortgage be released or cancelled.
The petitioners were ordered to pay jointly and severally with their co-
makers Ramon C. Concepcion and Manuel M. Tamayo the sum of
P11,900.19 with interest at the rate of 6% per annum from the date of the
filing of the complaint on June 27, 1959 until fully paid and Pl,000.00
attorney's fees.
The decision also provided that if the judgment was not satisfied within 90
days from its receipt, the mortgaged properties together with all the
improvements thereon belonging to the petitioners would be sold at public
auction and applied to the judgment debt.
The Court of Appeals affirmed the trial court's decision in toto stating that,
as accommodation makers, the petitioners' liability is that of solidary co-
Credit Transactions Full Text Cases Atty. Adviento!!!!""%
makers and that since "the amounts released to the construction company
were used therein and, therefore, were spent for the successful
accomplishment of the work constructed for, the authorization made by the
Philippine National Bank of partial payments to the construction company
which was also one of the solidary debtors cannot constitute a valid
defense on the part of the other solidary debtors. Moreover, those who
rendered services and furnished materials in the construction are
preferred creditors and have a lien on the price of the contract." The
appellate court further held that PNB had no obligation whatsoever to
notify the petitioners of its authorizing the three payments in the total
amount of Pll,234.00 in favor of the Company because aside from the fact
that the petitioners were not parties to the deed of assignment, there was
no stipulation in said deed making it obligatory on the part of the PNB to
notify the petitioners everytime it authorizes payment to the Company. t
ruled that the petitioners cannot ask to be released from the real estate
mortgage.
n this petition, the petitioners raise the following issues which they present
in the form of errors:
. First Assignment of Error.
THE HONORABLE COURT OF APPEALS ERRED N
HOLDNG THAT HEREN PETTONERS WERE
SOLDARY CO-DEBTORS NSTEAD OF SURETES:
. Second Assignment of Error.
THE HONORABLE COURT OF APPEALS ERRED N
HOLDNG THAT PETTONERS WERE NOT
RELEASED FROM THER OBLGATON TO THE
RESPONDENT PNB, WHEN THE PNB, WTHOUT
THE KNOWLEDGE AND CONSENT OF
PETTONERS, CHANGED THE TENOR AND
CONDTON OF THE ASSGNMENT OF PAYMENTS
MADE BY THE PRNCPAL DEBTOR; CONCEPCON
& TAMAYO CONSTRUCTON COMPANY; AND
RELEASED TO SUCH PRNCPAL DEBTOR
PAYMENTS FROM THE BUREAU OF PUBLC
WORKS WHCH WERE MORE THAN ENOUGH TO
WPE OUT THE NDEBTEDNESS TO THE PNB.
The petitioners contend that as accommodation makers, the nature of their
liability is only that of mere sureties instead of solidary co-debtors such
that "a material alteration in the principal contract, effected by the creditor
without the knowledge and consent of the sureties, completely discharges
the sureties from all liability on the contract of suretyship. " They state that
when respondent PNB did not apply the initial and subsequent payments
to the petitioners' debt as provided for in the deed of assignment, they
were released from their obligation as sureties and, therefore, the real
estate mortgage executed by them should have been cancelled.
Section 29 of the Negotiable nstrument Law provides:
Liability of accommodation party. An
accommodation party is one who has signed the
instrument as maker, drawer, acceptor, or indorser,
without receiving value therefor, and for the purpose
of lending his name to some other person. Such a
person is liable on the instrument to a holder for
value, notwithstanding such holder at the time of
taking the instrument knew him to be only an
accommodation party.
n the case of Philippine Bank of Commerce v. Aruego (102 SCRA 530,
539), we held that "... in lending his name to the accommodated party, the
accommodation party is in effect a surety. ... . " However, unlike in a
contract of suretyship, the liability of the accommodation party remains not
only primary but also unconditional to a holder for value such that even if
the accommodated party receives an extension of the period for payment
without the consent of the accommodation party, the latter is still liable for
the whole obligation and such extension does not release him because as
far as a holder for value is concerned, he is a solidary co- debtor.
Expounding on the nature of the liability of an accommodation petition
party under the aforequoted section, we ruled in Ang Tiong v. Ting (22
SCRA 713, 716):
3. That the appellant, again assuming him to be an
accommodation indorser, may obtain security from the
maker to protect himself against the danger of
insolvency of the latter, cannot in any manner affect
his liability to the appellee, as the said remedy is a
matter of concern exclusively between
accommodation indorser and accommodated party.
So that the appellant stands only as a surety in
relation to the maker, granting this to be true for the
sake of argument, is immaterial to the claim of the
appellee, and does not a whit diminish nor defeat the
rights of the latter who is a holder for value. The
liability of the appellant remains primary and
unconditional. To sanction the appellant's theory is to
give unwarranted legal recognition to the patent
absurdity of a situation where an indorser, when sued
on an instrument by a holder in due course and for
value, can escape liability on his indorsement by the
convenient expedient of interposing the defense that
he is a mere accommodation indorser.
There is, therefore, no question that as accommodation makers,
petitioners would be primarily and unconditionally liable on the promissory
note to a holder for value, regardless of whether they stand as sureties or
solidary co-debtors since such distinction would be entirely immaterial and
inconsequential as far as a holder for value is concerned. Consequently,
the petitioners cannot claim to have been released from their obligation
simply because the time of payment of such obligation was temporarily
deferred by PNB without their knowledge and consent. There has to be
another basis for their claim of having been freed from their obligation. The
question which should be resolved in this instant petition, therefore, is
whether or not PNB can be considered a holder for value under Section 29
of the Negotiable nstruments Law such that the petitioners must be
necessarily barred from setting up the defense of want of consideration or
some other personal defenses which may be set up against a party who is
not a holder in due course.
A holder for value under Section 29 of the Negotiable nstruments Law is
one who must meet all the requirements of a holder in due course under
Section 52 of the same law except notice of want of consideration.
(Agbayani, Commercial Laws of the Philippines, 1964, p. 208). f he does
not qualify as a holder in due course then he holds the instrument subject
to the same defenses as if it were non-negotiable (Section 58, Negotiable
nstruments Law).
n the case at bar, can PNB, the payee of the promissory note be
considered a holder in due course?
Petitioners contend that the payee PNB is an immediate party and,
therefore, is not a holder in due course and stands on no better footing
than a mere assignee.
n those cases where a payee was considered a holder in due course,
such payee either acquired the note from another holder or has not
directly dealt with the maker thereof. As was held in the case of Bank of
Commerce and Savings v. Randell (186 NorthWestern Reporter 71):
We conclude, therefore, that a payee who receives a
negotiable promissory note, in good faith, for value,
before maturity, and without any notice of any infirmity,
from a holder, not the maker. to whom it was
negotiated as a completed instrument, is a holder in
due course within the purview of a Negotiable
nstruments law, so as to preclude the defense of
fraud and failure of consideration between the maker
and the holder to whom the instrument, was delivered.
Similarly, in the case of Stone v. Goldberg & Lewis (60 Southern Reporter
748) on rehearing and quoting Daniel on Negotiable nstruments, it was
held:
Credit Transactions Full Text Cases Atty. Adviento!!!!""&
t is a general principle of the law merchant that, as
between the immediate parties to a negotiable
instrument-the parties between whom there is a
privity-the consideration may be inquired into; and as
to them the only superiority of a bill or note over other
unsealed evidence of debt is that it prima facie
imports a consideration.
Although as a general rule, a payee may be considered a holder in due
course we think that such a rule cannot apply with respect to the
respondent PNB. Not only was PNB an immediate party or in privy to the
promissory note, that is, it had dealt directly with the petitioners knowing
fully well that the latter only signed as accommodation makers but more
important, it was the Deed of Assignment executed by the Construction
Company in favor of PNB which principally moved the petitioners to sign
the promissory note also in favor of PNB. Petitioners were made to believe
and on that belief entered into the agreement that no other conditions
would alter the terms thereof and yet, PNB altered the same. The Deed of
Assignment specifically provided that Jose F. Toribio, on behalf of the
Company, "have assigned, transferred and conveyed and by these
presents, do assign, transfer and convey unto the said Philippine National
Bank, its successors and assigns all payments to be received from the
Bureau of Public Works on account of contract for the construction of the
Puerto Princesa Municipal Building in Palawan, involving the total amount
of P 36,000.00" and that "This assignment shall be irrevocable and subject
to the terms and conditions of the promissory note and or any other kind of
documents which the Philippine National Bank have required or may
require the assignor to execute to evidence the above-mentioned
obligation."
Under the terms of the above Deed, it is clear that there are no further
conditions which could possibly alter the agreement without the consent of
the petitioners such as the grant of greater priority to obligations other than
the payment of the loan due to the PNB and part of which loan was
guaranteed by the petitioners in the amount of P10,000.00.
This, notwithstanding, PNB approved the Bureau's release of three
payments directly to the Company instead of paying the same to the Bank.
This approval was in violation of the Deed of Assignment and without any
notice to the petitioners who stood to lose their property once the
promissory note falls due without the same having been paid because the
PNB, in effect, waived payments of the first three releases. From the
foregoing circumstances, PNB can not be regarded as having acted in
good faith which is also one of the requisites of a holder in due course
under Section 52 of the Negotiable nstruments Law. The PNB knew that
the promissory note which it took from the accommodation makers was
signed by the latter because of full reliance on the Deed of Assignment,
which, PNB had no intention to comply with strictly. Worse, the third
payment to the Company in the amount of P4,293.60 was approved by
PNB although the promissory note was almost a month overdue, an act
which is clearly detrimental to the petitioners.
We, therefore, hold that respondent PNB is not a holder in due course.
Thus, the petitioners can validly set up their personal defense of release
from the real estate mortgage against PNB. The latter, in authorizing the
third payment to the Company after the promissory note became due, in
effect, extended the term of the payment of the note without the consent of
the accommodation makers who stand as sureties to the accommodated
party and to all other parties who are not holders in due course or who do
not derive their right from the same, including PNB.
t may be argued that the Prudencios could have mortgaged their property
even without the promissory note. The records show, however, that they
would not have mortgaged the lot were it not for the sake of the Company
whose attorney-in-fact was their relative. The spouses did not need the
money for themselves.
The attorney-in-fact tried twice to convince the Prudencios to mortgage
their property in order to secure a loan in favor of the Company but the
Prudencios refused. t was only when the deed of assignment was shown
to the spouses that they consented to the mortgage and signed the
promissory note in the Bank's favor.
Article 2085 of the Civil Code enumerates the requisites of a valid
mortgage contract. Petitioners do not dispute the validity of the mortgage.
They only want to have it cancelled because the Bank violated the deed of
assignment and extended the period of time of payment of the promissory
note without the petitioners' consent and to the latter's detriment.
The mortgage cannot be separated from the promissory note for it is the
latter which is the basis of determining whether the mortgage should be
foreclosed or cancelled. Without the promissory note which determines the
amount of indebtedness there would have been no basis for the mortgage.
True, if the Bank had not been the assignee, then the petition petitioners
would be obliged to pay the Bank as their creditor on the promissory note,
irrespective of whether or not the deed of assignment had been violated.
However, the assignee and the creditor in this case are one and the same
the Bank itself. When the Bank violated the deed of assignment, it
prejudiced itself because its very violation was the reason why it was not
paid on time in its capacity as creditor in the promissory note. t would be
unfair to make the petitioners now answer for the debt or to foreclose on
their property.
Neither can PNB justify its acts on the ground that the Bureau of Public
Works approved the deed of assignment with the condition that the wages
of laborers and materials needed in the construction work must take
precedence over the payment of the promissory note. n the first place,
PNB did not need the approval of the Bureau. But even if it did, it should
have informed the petitioners about the amendment of the deed of
assignment. Secondly, the wages and materials have already been paid.
That issue is academic. What is in dispute is who should bear the loss in
this case. As between the petitioners and the Bank, the law and the
equities of the case favor the petitioners, And thirdly, the wages and
materials constitute a lien only on the constructed building but do not enjoy
preference over the loan unless there is a liquidation proceeding such as
in insolvency or settlement of estate. (See Philippine Savings Bank v.
Lantin, 124 SCRA 476). There were remedies available at the time if the
laborers and the creditors had not been paid. The fact is, they have been
paid. Hence, when the PNB accepted the condition imposed by the
Bureau without the knowledge or consent of the petitioners, it amended
the deed of assignment which, as stated earlier, was the principal reason
why the petitioners consented to become accommodation makers.
WHEREFORE, the petition is GRANTED. The decision of the Court of
Appeals affirming the decision of the trial court is hereby REVERSED and
SET ASDE and a new one entered absolving the petitioners from liability
on the promissory note and under the mortgage contract. The Philippine
National Bank is ordered to release the real estate mortgage constituted
on the property of the petitioners and to pay the amount of THREE
THOUSAND PESOS (P3,000.00) as attorney's fees.
SO ORDERED.
EN BANC
G.R. No. L-41795 August 30, 1935
J.W. SHANNON and MRS. J.W. SHANNON, plaintiffs-appellees,
vs.
THE PHILIPPINE LUMBER & TRANSPORTATION CO., INC., and E.E.
ELSER, defendants.
E.E. ELSER, appellant.
Gibbs and McDonough for appellant.
DeWitt, Perkins and Ponce Enrile for appellees.
IMPERIAL, J.:
On March 1, 1926, the Philippine Lumber & Transportation Co., nc.,
obtained a loan of P12,000 from Mrs. J.W. Shannon and executed a note
promising to pay the said sum to the creditor or to her husband, J.W.
Shannon, on or before March 1, 1927, with interest at 10 per cent per
annum, payable monthly and in advance on the first day of each month.
The obligation with its terms was secured, jointly and severally, by Walter
Credit Transactions Full Text Cases Atty. Adviento!!!!""'
E. Jones and E.E. Elser who signed the note. This note was ratified before
the notary public, Juan L. Diaz, in the City of Manila, on March 22, 1926.
The principal was not paid on its due date or thereafter, but the stipulated
interest up to October, 1929, inclusive, was paid. Walter E. Jones died on
November 24, 1929, and the plaintiffs filed a claim and recovered from his
estate P1,062 in part payment of occurred interest due.
On August 1, 1927, while the principal obligation was pending payment,
J.W. Shannon obtained a loan of P1,000 from Walter E. Jones; on April 9,
1928, he obtained another loan of P2,000, and on April 28, 1928, he made
Jones pay on his account a certain bill of exchange drawn upon him in the
sum of P1,656, making Shannon's total loan from Jones P4,656. Both
agreed that this amount should be paid at the rate of P125 a month, with
10 per cent interest per annum, failing which, Jones was authorized to
retain and apply to the monthly payments whatever amounts he might
have belonging to Shannon or to his wife. Jones did not receive monthly
payments from Shannon under this agreement, but instead he deducted
them from the monthly interest which, on the other hand, the Philippine
Lumber & Transportation Co., nc., of which he was the president, was
bound to pay. These operations were entered in the books of said
corporation.
As the Philippine Lumber & Transportation Co., nc., and its sureties had
not paid the principal and the stipulated interest from November 1, 1929,
the Shannons brought suit against the debtor corporation and the surety,
E.E. Elser, for the recovery of said amounts. The Philippine Lumber &
Transportation Co., nc., neither appeared nor answered the complaint,
and it was declared in default. Neither did it intervene nor defend itself at
the trial. E.E. Elser appealed from the judgment ordering the Philippine
Lumber & Transportation Co., nc., to pay to the plaintiff the sum of
P12,000 with interest at 10 per cent annum from November 1, 1929,
minus the sum of P1,062 which had been recovered from the estate of the
deceased Walter E. Jones, plus another 10 per cent as attorney's fees,
and the costs, and likewise requiring the said E.E. Elser to pay to the
plaintiffs one-half of all the aforesaid sums of money, except attorney's
fees, which the Philippine Lumber & Transportation Co., nc., should fail to
pay.
The appellant argues that the judgment is erroneous: in not holding that
after the note became due, the plaintiffs had received from the Philippine
Lumber & Transportation Co., nc., payments in advance of the stipulated
interest for a relatively long period of time, and that, consequently, said
plaintiffs, as creditors, extended the period fixed for the payment of the
principal without his consent; in not permitting him to adduce evidence on
his defense of laches whereby he attempted to show that in 1927 and
1928 the principal debtor had property and money with which to pay its
entire obligation; in not holding that the plaintiffs were guilty of
unreasonable delay in bringing their action, thereby causing him damages,
and in not absolving him from the complaint.
The first assigned error relates to the loans made by Jones to Shannon up
to the amount of P4,656. The appellant contends that these loans were in
truth payments in advance of the stipulated interest which the principal
debtor had to pay monthly and which had the effect of extending the stated
period for the payment of the indebtedness, thereby relieving him of his
obligation as surety under article 1851 of the Civil Code, because his
consent was not first obtained; and in support of his contention cites the
decision of this court in Banco Espaol Filipino vs. Donaldson Sim & Co.
(5 Phil., 418). The facts, as we find them, do not support the contention. t
indisputably appears that those amounts of money were obtained by
Shannon not as payments in advance of the interest which the principal
debtor was bound to pay, but as independent loans which Jones granted
to him. The only connection of these loans with the interest of the
indebtedness of the Philippine Lumber & Transportation Co., nc.,
consisted in the agreement between Jones and Shannon to the effect that
in case the latter should fail to pay the monthly interest, the former was
authorized to deduct it from any amount which he might have at his
disposal belonging to Shannon or to his wife. As, on the other hand, Jones
was the president of the principal debtor, and the latter had to pay monthly
interest on its indebtedness, Jones deducted monthly from this last
interest that which Shannon failed to pay. t is therefore, evident that
neither the provisions of article 1851 of the Civil Code nor the doctrine on
the matter enunciated in the Banco Espaol Filipino case is squarely in
point.
The appellant attempted to prove at the trial that the plaintiffs had been
guilty of laches and had brought their action against him tardily, because in
1927 and 1928 the principal debtor had sufficient property and money with
which it could have fully paid its obligation, and in so acting the plaintiffs
caused him damages. This kind of evidence was timely objected to, and
the objection was sustained by the court. This ruling is the subject of the
second and third assigned errors. We hold that the judgment is not
erroneous on these grounds. True, the plaintiffs let pass some years from
the maturity of the note before bringing the action for the recovery of its
amount. But we hold that the delay does not constitute laches in the sense
that it had the effect of releasing both the principal debtor and its sureties
from their obligations, nor did it occasion loss of rights and privileges of
such moment as to give rise to the discharge of the obligation contracted
by the appellant. n the aforecited Banco Espaol Filipino case, in ruling
upon a similar question, we said: "The decision en casacion of the
Supreme Court of Spain is jurisprudence properly interpreting the Spanish
Civil Code. The following doctrine is laid down in the judgment of March
22, 1901: The court which pronounced sentence in this case has not
violated article 1851 of the Civil Code, because the mere circumstance
that the creditor does not demand the compliance with the obligation
immediately upon the same becoming due, and that he more or less
delays his action, does not mean or reveal an intention to grant an
extension to the debtor, as according to article 1847 the obligation of the
surety extinguishes at the same time as that of the debtor, and for the
same causes as the other obligations. ...' Deferring the filing of the action
does not imply a change in the efficacy of the contract or liability of any
kind on the part of the debtor. t is merely, without demonstration or proof
to the contrary, respite, waiting, courtesy, leniency, passivity, inaction. t
does not constitute novation, because this must be express. t does not
engender liability, because on the part of the creditor such can not arise
except from delay, and for this class of delay interpellation on the part of
the party who considers himself injured thereby is necessary. n order that
this waiting or inaction, of itself beneficial to the parties obligated, can be
interpreted as injurious to any of them, it is altogether necessary that this
be represented by means of a protest or interpellation against the delay.
Without action of this kind it continues to be what it is merely a failure of
the creditor to act, which it itself does not create liability. t can not do so,
as we see in the aforesaid sentencia de casacion. .... n accordance with
the provisions of number 4 of article 1843, the surety, even before
payment, may proceed against the principal debtor when the debt has
become demandable because the term in which it should have been paid
has expired.' n view of this action, which is a protection against the risk of
possible insolvency on the part of the principal debtor, it is very clearly
seen that the law does not even grant the surety the right to sue the
creditor for delay, as protection against the risks of possible insolvency on
the part of the debtor; but in view of the efficacy of the action of the
contract against the surety, beginning with the date when the obligation
becomes due, his vigilance must be exercised rather against the principal
debtor." (5 Phil., 422, 423.)
n Clark vs. Sellner (42 Phil., 384), this court had occasion to reiterate the
same doctrine as follows: "The trial judge took into account the fact that at
the time of the maturity of the note, the collateral security given to
guarantee the payment was worth more than what was due on the note,
but is depreciated to such an extent that, at the time of the institution of
this action, it was entirely valueless. And taking this circumstance, together
with the fact that this case was not commenced until after the lapse of four
years from the date on which the payment fell due, and with the further
fact that the defendant had not received any part of the amount mentioned
in the note, he was of the opinion, and so decided, that the defendant
could not be held liable. The theory of the judge a quo was that the
plaintiff's failure to enforce the guaranty for the payment of the debt, and
his delay in instituting this action constitute laches, which had the effect of
extinguishing his right of action. We see no sufficient ground for applying
such a theory to the case before us. As stated, the defendant's position
being, as it is, that of a joint surety, he may, at any time after the maturity
of the note, make payment, thus subrogating himself in the place of the
creditor with the right to enforce the guaranty against the other signers of
the note for the reimbursement of what he is entitled to recover from them.
The mere delay of the creditor in enforcing the guaranty has not by any
means impaired his action against the defendant. t should not be lost
sight of that the defendant's signature on the note is an assurance to the
creditor that the collateral guaranty will remain good, and that otherwise,
he, the defendant, will be personally responsible for the payment. True,
that if the creditor had done any act whereby the guaranty was impaired in
its value, or discharged, such an act would have wholly or partially
released the surety; but it must be borne in mind that it is a recognized
Credit Transactions Full Text Cases Atty. Adviento!!!!""(
doctrine in the matter of suretyship that with respect to the surety, the
creditor is under no obligation to display any diligence in the enforcement
of his rights as a creditor. His mere inaction, indulgence, passiveness, or
delay in proceeding against the principal debtor, or the fact that he did not
enforce the guaranty or apply on the payment of such funds as were
available, constitute no defense at all for the surety, unless the contract
expressly requires diligence and promptness on the part of the creditor,
which is not the case in the present action. There is in some decisions a
tendency toward holding that the creditor's laches may discharge the
surety, meaning by laches a negligent forbearance. This theory, however,
is not generally accepted and the courts almost universally consider it
essentially inconsistent with the relation of the parties to the note. (21
R.C.L., 1032-1034.)"
And in Ibaez de Aldecoa vs. Hongkong & Shanghai Banking Corporation
(42 Phil., 1000; 246 U.S., 627; 62 Law. ed., 907), the Supreme Court of
the United States in affirming a decision of this court on the same legal
question, said: "The appellant sabel Palet assigns as error that the
Supreme Court failed to hold (1) that her liability as surety of Aldecoa and
Company had been extinguished in accordance with the provisions of
article 1851 of the Civil Code, which provides that the extension granted
to a debtor by the creditor, without the consent of the surety, extinguishes
the security.' (2) Refused to order for her benefit that the property of the
company should be exhausted before resort be had to her property for
satisfaction of the bank's claim. t will be observe at once that the defense
have some dependence upon questions of fact upon which the two courts
below concurred. From article 1851 of the Civil Code, abstractly
considered, nothing can be deduced. Both the trial and supreme courts
held that the mere failure to bring an action upon a credit, as soon as the
same or any part of it matures, does not constitute an extension of the
term of the obligation.' And it was further held that the extension, to
produce the extinction of the liability, must be based on some new
agreement by which the creditor deprives himself of the right to
immediately enforce the claim.' This interpretation of the local courts of the
local law we defer to. The construction, moreover, expresses the rule that
obtains in other jurisdictions."
The last ground of the remedy requires no extended consideration. Under
the conclusions we have arrived at, it is evident that the judgment is not
erroneous is not absolving the appellant.
The plaintiffs suggest in their brief that we amend the appealed judgment
by ordering the appellant to pay one-half of the attorney's fees which the
principal debtor should fail to pay. We are of the opinion that the
contention is untenable because the plaintiffs did not appeal from the
judgment but accepted and abided by it.
n view of the foregoing, the appealed judgment is affirmed, with the costs
of this instance to the appellant. So ordered.
FRST DVSON
G.R. No. L-47369 June 30, 1987
JOSEPH COCHINGYAN, JR. and JOSE K. VILLANUEVA, petitioners,
vs.
R & B SURETY AND INSURANCE COMPANY, INC., respondent.

FELICIANO, J.:
This case was certified to us by the Court of Appeals in its resolution dated
11 November 1977 as one involving only questions of law and, therefore,
falling within the exclusive appellate jurisdiction of this Court under Section
17, Republic Act 296, as amended.
n November 1963, Pacific Agricultural Suppliers, nc. (PAGRCO) applied
for and was granted an increase in its line of credit from P400,000.00 to
P800,000.00 (the "Principal Obligation"), with the Philippine National Bank
(PNB). To secure PNB's approval, PAGRCO had to give a good and
sufficient bond in the amount of P400,000.00, representing the increment
in its line of credit, to secure its faithful compliance with the terms and
conditions under which its line of credit was increased. n compliance with
this requirement, PAGRCO submitted Surety Bond No. 4765, issued by
the respondent R & B Surety and nsurance Co., nc. (R & B Surety") in
the specified amount in favor of the PNB. Under the terms of the Surety
Bond, PAGRCO and R & B Surety bound themselves jointly and severally
to comply with the "terms and conditions of the advance line [of credit]
established by the [PNB]." PNB had the right under the Surety Bond to
proceed directly against R & B Surety "without the necessity of first
exhausting the assets" of the principal obligor, PAGRCO. The Surety
Bond also provided that R & B Surety's liability was not to be limited to the
principal sum of P400,000.00, but would also include "accrued interest" on
the said amount "plus all expenses, charges or other legal costs incident
to collection of the obligation [of R & B Surety]" under the Surety Bond.
n consideration of R & B Surety's issuance of the Surety Bond, two
dentical indemnity agreements were entered into with R & B Surety: (a)
one agreement dated 23 December 1963 was executed by the Catholic
Church Mart (CCM) and by petitioner Joseph Cochingyan, Jr, the latter
signed not only as President of CCM but also in his personal and
individual capacity; and (b) another agreement dated 24 December 1963
was executed by PAGRCO, Pacific Copra Export nc. (PACOCO), Jose K.
Villanueva and Liu Tua Ben Mr. Villanueva signed both as Manager of
PAGRCO and in his personal and individual capacity; Mr. Liu signed both
as President of PACOCO and in his individual and personal capacity.
Under both indemnity agreements, the indemnitors bound themselves
jointly and severally to R & B Surety to pay an annual premium of
P5,103.05 and "for the faithful compliance of the terms and conditions set
forth in said SURETY BOND for a period beginning ... until the same is
CANCELLED and/or DSCHARGED." The ndemnity Agreements further
provided:
(b) NDEMNTY: TO indemnify the SURETY
COMPANY for any damage, prejudice, loss, costs,
payments, advances and expenses of whatever kind
and nature, including [of] attorney's fees, which the
CORPORATON may, at any time, become liable for,
sustain or incur as consequence of having executed
the above mentioned Bond, its renewals, extensions
or substitutions and said attorney's fees [shall] not be
less than twenty [20%] per cent of the total amount
claimed by the CORPORATON in each action, the
same to be due, demandable and payable,
irrespective of whether the case is settled judicially or
extrajudicially and whether the amount has been
actually paid or not;
(c) MATURTY OF OUR OBLGATONS AS
CONTRACTED HEREWTH: The said indemnities
will be paid to the CORPORATON as soon as
demand is received from the Creditor or upon receipt
of Court order or as soon as it becomes liable to make
payment of any sum under the terms of the above-
mentioned Bond, its renewals, extensions,
modifications or substitutions, whether the said sum or
sums or part thereof, have been actually paid or not.
We authorize the SURETY COMPANY, to accept in
any case and at its entire discretion, from any of us,
payments on account of the pending obligations, and
to grant extension to any of us, to liquidate said
obligations, without necessity of previous knowledge
of [or] consent from the other obligors.
xxx xxx xxx
(e) NCONTESTABLTY OF PAYMENTS MADE BY
THE COMPANY. Any payment or disbursement
made by the SURETY COMPANY on account of the
above-mentioned Bonds, its renewals, extensions or
substitutions, either in the belief that the SURETY
COMPANY was obligate[d] to make such payment or
in the belief that said payment was necessary in order
Credit Transactions Full Text Cases Atty. Adviento!!!!"")
to avoid greater losses or obligations for which the
SURETY COMPANY might be liable by virtue of the
terms of the above-mentioned Bond, its renewals,
extensions or substitutions, shall be final and will not
be disputed by the undersigned, who jointly and
severally bind themselves to indemnify the SURETY
COMPANY of any and all such payments as stated in
the preceding clauses.
xxx xxx xxx
When PAGRCO failed to comply with its Principal Obligation to the PNB,
the PNB demanded payment from R & B Surety of the sum of
P400,000.00, the full amount of the Principal Obligation. R & B Surety
made a series of payments to PNB by virtue of that demand totalling
P70,000.00 evidenced by detailed vouchers and receipts.
R & B Surety in turn sent formal demand letters to petitioners Joseph
Cochingyan, Jr. and Jose K. Villanueva for reimbursement of the
payments made by it to the PNB and for a discharge of its liability to the
PNB under the Surety Bond. When petitioners failed to heed its demands,
R & B Surety brought suit against Joseph Cochingyan, Jr., Jose K.
Villanueva and Liu Tua Ben in the Court of First nstance of Manila,
praying principally that judgment be rendered:
b. Ordering defendants to pay jointly and severally,
unto the plaintiff, the sum of P20,412.20 representing
the unpaid premiums for Surety Bond No. 4765 from
1965 up to 1968, and the additional amount of
P5,103.05 yearly until the Surety Bond No. 4765 is
discharged, with interest thereon at the rate of 12%
per annum; [and]
c. Ordering the defendants to pay jointly and severally,
unto the plaintiff the sum of P400,000.00 representing
the total amount of the Surety Bond No. 4765 with
interest thereon at the rate of 12% per annum on the
amount of P70,000.00 which had been paid to the
Phil. National Bank already, the interest to begin from
the month of September, 1966;
xxx xxx xxx
Petitioner Joseph Cochingyan, Jr. in his answer maintained that the
ndemnity Agreement he executed in favor of R & B Surety: (i) did not
express the true intent of the parties thereto in that he had been asked by
R & B Surety to execute the ndemnity Agreement merely in order to make
it appear that R & B Surety had complied with the requirements of the
PNB that credit lines be secured; (ii) was executed so that R & B Surety
could show that it was complying with the regulations of the nsurance
Commission concerning bonding companies; (iii) that R & B Surety had
assured him that the execution of the agreement was a mere formality and
that he was to be considered a stranger to the transaction between the
PNB and R & B Surety; and (iv) that R & B Surety was estopped from
enforcing the ndemnity Agreement as against him.
Petitioner Jose K. Villanueva claimed in his answer that. (i) he had
executed the ndemnity Agreement in favor of R & B Surety only "for
accommodation purposes" and that it did not express their true intention;
(ii) that the Principal Obligation of PAGRCO to the PNB secured by the
Surety Bond had already been assumed by CCM by virtue of a Trust
Agreement entered into with the PNB, where CCM represented by Joseph
Cochingyan, Jr. undertook to pay the Principal Obligation of PAGRCO to
the PNB; (iii) that his obligation under the ndemnity Agreement was
thereby extinguished by novation arising from the change of debtor under
the Principal Obligation; and (iv) that the filing of the complaint was
premature, considering that R & B Surety filed the case against him as
indemnitor although the PNB had not yet proceeded against R & B Surety
to enforce the latter's liability under the Surety Bond.
Petitioner Cochingyan, however, did not present any evidence at all to
support his asserted defenses. Petitioner Villanueva did not submit any
evidence either on his "accommodation" defense. The trial court was
therefore constrained to decide the case on the basis alone of the terms of
the Trust Agreement and other documents submitted in evidence.
n due time, the Court of First nstance of Manila, Branch 24 1 rendered a
decision in favor of R & B Surety, the dispositive portion of which reads as
follows;
Premises considered, judgment is hereby rendered:
(a) ordering the defendants Joseph Cochingyan, Jr.
and Jose K. Villanueva to pay, jointly and severally,
unto the plaintiff the sum of 400,000,00, representing
the total amount of their liability on Surety Bond No.
4765, and interest at the rate of 6% per annum on the
following amounts:
On P14,000.00 from September 27, 1966;
On P4,000.00 from November 28, 1966;
On P4,000.00 from December 14, 1966;
On P4,000.00 from January 19, 1967;
On P8,000.00 from February 13, 1967;
On P4,000.00 from March 6, 1967;
On P8,000.00 from June 24, 1967;
On P8,000. 00 from September 14, 1967;
On P8,000.00 from November 28, 1967; and
On P8,000. 00 from February 26, 1968
until full payment; (b) ordering said defendants to pay,
jointly and severally, unto the plaintiff the sum of
P20,412.00 as the unpaid premiums for Surety Bond
No. 4765, with legal interest thereon from the filing of
plaintiff's complaint on August 1, 1968 until fully paid,
and the further sum of P4,000.00 as and for attorney's
fees and expenses of litigation which this Court
deems just and equitable.
There being no showing the summons was duly
served upon the defendant Liu Tua Ben who has filed
no answer in this case, plaintiff's complaint is hereby
dismissed as against defendant Liu Tua Ben without
prejudice.
Costs against the defendants Joseph Cochingyan, Jr.
and Jose K. Villanueva.
Not satisfied with the decision of the trial court, the petitioners took this
appeal to the Court of Appeals which, as already noted, certified the case
to us as one raising only questions of law.
The issues we must confront in this appeal are:
1. whether or not the Trust Agreement had extinguished, by novation, the
obligation of R & B Surety to the PNB under the Surety Bond which, in
turn, extinguished the obligations of the petitioners under the ndemnity
Agreements;
2. whether the Trust Agreement extended the term of the Surety Bond so
as to release petitioners from their obligation as indemnitors thereof as
they did not give their consent to the execution of the Trust Agreement;
and
Credit Transactions Full Text Cases Atty. Adviento!!!!""*
3. whether or not the filing of this complaint was premature since the PNB
had not yet filed a suit against R & B Surety for the forfeiture of its Surety
Bond.
We address these issues seriatim.
1. The Trust Agreement referred to by both petitioners in their separate
briefs, was executed on 28 December 1965 (two years after the Surety
Bond and the ndemnity Agreements were executed) between: (1) Jose
and Susana Cochingyan, Sr., doing business under the name and style of
the Catholic Church Mart, represented by Joseph Cochingyan, Jr., as
Trustor[s]; (2) Tomas Besa, a PNB official, as Trustee; and (3) the PNB as
beneficiary. The Trust Agreement provided, in pertinent part, as follows:
WHEREAS, the TRUSTOR has guaranteed a bond in
the amount of P400,000.00 issued by the R & B
Surety and nsurance Co. (R & B) at the instance of
Pacific Agricultural Suppliers, nc. (PAGRCO) on
December 21, 1963, in favor of the BENEFCARY in
connection with the application of PAGRCO for an
advance line of P400,000.00 to P800,000.00;
WHEREAS, the TRUSTOR has also guaranteed a
bond issued by the Consolacion nsurance & Surety
Co., nc. (CONSOLACON) in the amount of
P900,000.00 in favor of the BENEFCARY to secure
certain credit facilities extended by the BENEFCARY
to the Pacific Copra Export Co., nc. (PACOCO);
WHEREAS, the PAGRCO and the PACOCO have
defaulted in the payment of their respective
obligations in favor of the BENEFICIARY guaranteed
by the bonds issued by the R & B and the
CONSOLACON, respectively, and by reason of said
default, the BENEFICIARY has demanded
compliance by the R & B and the CONSOLACON of
their respective obligations under the aforesaid
bonds;
WHEREAS, the TRUSTOR is, therefore, bound to
comply with his obligation under the indemnity
agreements aforementioned executed by him in favor
of R & B and the CONSOLACON, respectively and in
order to forestall impending suits by the
BENEFICIARY against said companies, he is willing
as he hereby agrees to pay the obligations of said
companies in favor of the BENEFICIARY in the total
amount of P1,300,000 without interest from the net
profits arising from the procurement of reparations
consumer goods made thru the allocation of
WARVETS; . . .
l. TRUSTOR hereby constitutes and appoints Atty.
TOMAS BESA as TRUSTEE for the purpose of paying
to the BENEFCARY Philippine National Bank in the
manner stated hereunder, the obligations of the R & B
under the R & B Bond No. G-4765 for P400,000.00
dated December 23, 1963, and of the
CONSOLACON under The Consolacion Bond No. G-
5938 of June 3, 1964 for P900,000.00 or the total
amount of P1,300,000.00 without interest from the net
profits arising from the procurement of reparations
consumer goods under the Memorandum of
Settlement and Deeds of Assignment of February 2,
1959 through the allocation of WARVETS;
xxx xxx xxx
6. THE BENEFCARY agrees to hold in abeyance
any action to enforce its claims against R & B and
CONSOLACON, subject of the bond mentioned
above. n the meantime that this TRUST
AGREEMENT is being implemented, the
BENEFCARY hereby agrees to forthwith reinstate
the R & B and the CONSOLACON as among the
companies duly accredited to do business with the
BENEFCARY and its branches, unless said
companies have been blacklisted for reasons other
than those relating to the obligations subject of the
herein TRUST AGREEMENT;
xxx xxx xxx
9. This agreement shall not in any manner release the
R & B and CONSOLACION from their respective
liabilities under the bonds mentioned above.
(emphasis supplied)
There is no question that the Surety Bond has not been cancelled or fully
discharged
2
by payment of the Principal Obligation. Unless, therefore, the
Surety Bond has been extinguished by another means, it must still subsist.
And so must the supporting ndemnity Agreements.
3

We are unable to sustain petitioners' claim that the Surety Bond and their
respective obligations under the ndemnity Agreements were extinguished
by novation brought about by the subsequent execution of the Trust
Agreement.
Novation is the extinguishment of an obligation by the substitution or
change of the obligation by a subsequent one which terminates it, either
by changing its object or principal conditions, or by substituting a new
debtor in place of the old one, or by subrogating a third person to the
rights of the creditor.
4
Novation through a change of the object or principal
conditions of an existing obligation is referred to as objective (or real)
novation. Novation by the change of either the person of the debtor or of
the creditor is described as subjective (or personal) novation. Novation
may also be both objective and subjective (mixed) at the same time. n
both objective and subjective novation, a dual purpose is achieved-an
obligation is extinguished and a new one is created in lieu thereof.
5

f objective novation is to take place, it is imperative that the new obligation
expressly declare that the old obligation is thereby extinguished, or that
the new obligation be on every point incompatible with the old one.
6
Novation is never presumed: it must be established either by the
discharge of the old debt by the express terms of the new agreement, or
by the acts of the parties whose intention to dissolve the old obligation as
a consideration of the emergence of the new one must be clearly
discernible.
7
Again, if subjective novation by a change in the person of the debtor is to
occur, it is not enough that the juridical relation between the parties to the
original contract is extended to a third person. t is essential that the old
debtor be released from the obligation, and the third person or new debtor
take his place in the new relation. f the old debtor is not released, no
novation occurs and the third person who has assumed the obligation of
the debtor becomes merely a co-debtor or surety or a co-surety.
8
Applying the above principles to the instant case, it is at once evident that
the Trust Agreement does not expressly terminate the obligation of R & B
Surety under the Surety Bond. On the contrary, the Trust Agreement
expressly provides for the continuing subsistence of that obligation by
stipulating that "[the Trust Agreement] shall not in any manner release" R
& B Surety from its obligation under the Surety Bond.
Neither can the petitioners anchor their defense on implied novation.
Absent an unequivocal declaration of extinguishment of a pre-existing
obligation, a showing of complete incompatibility between the old and the
new obligation (and nothing else) would sustain a finding of novation by
implication.
9
But where, as in this case, the parties to the new obligation
expressly recognize the continuing existence and validity of the old one,
where, in other words, the parties expressly negated the lapsing of the old
obligation, there can be no novation. The issue of implied novation is not
reached at all.
What the trust agreement did was, at most, merely to bring in another
person or persons-the Trustor[s]-to assume the same obligation that R & B
Credit Transactions Full Text Cases Atty. Adviento!!!!"#+
Surety was bound to perform under the Surety Bond. t is not unusual in
business for a stranger to a contract to assume obligations thereunder; a
contract of suretyship or guarantee is the classical example. The precise
legal effect is the increase of the number of persons liable to the obligee,
and not the extinguishment of the liability of the first debtor. 10 Thus, in
Magdalena Estates vs. Rodriguez, 11 we held that:
[t]he mere fact that the creditor receives a guaranty or
accepts payments from a third person who has
agreed to assume the obligation, when there is no
agreement that the first debtor shall be released from
responsibility, does not constitute a novation, and the
creditor can still enforce the obligation against the
original debtor.
n the present case, we note that the Trustor under the Trust Agreement,
the CCM, was already previously bound to R & B Surety under its
ndemnity Agreement. Under the Trust Agreement, the Trustor also
became directly liable to the PNB. So far as the PNB was concerned, the
effect of the Trust Agreement was that where there had been only two,
there would now be three obligors directly and solidarily bound in favor of
the PNB: PAGRCO, R & B Surety and the Trustor. And the PNB could
proceed against any of the three, in any order or sequence. Clearly, PNB
never intended to release, and never did release, R & B Surety. Thus, R &
B Surety, which was not a party to the Trust Agreement, could not have
intended to release any of its own indemnitors simply because one of
those indemnitors, the Trustor under the Trust Agreement, became also
directly liable to the PNB.
2. We turn to the contention of petitioner Jose K. Villanueva that his
obligation as indemnitor under the 24 December 1963 ndemnity
Agreement with R & B Surety was extinguished when the PNB agreed in
the Trust Agreement "to hold in abeyance any action to enforce its claims
against R & B Surety .
The ndemnity Agreement speaks of the several indemnitors "apply[ing]
jointly and severally (in solidum) to the R & B Surety] to become
SURETY upon a SURETY BOND demanded by and in favor of [PNB] in
the sum of [P400,000.00] for the faithful compliance of the terms and
conditions set forth in said SURETY BOND ." This part of the
Agreement suggests that the indemnitors (including the petitioners) would
become co-sureties on the Security Bond in favor of PNB. The record,
however, is bereft of any indication that the petitioners-indemnitors ever in
fact became co-sureties of R & B Surety vis-a-vis the PNB. The
petitioners, so far as the record goes, remained simply indemnitors bound
to R & B Surety but not to PNB, such that PNB could not have directly
demanded payment of the Principal Obligation from the petitioners. Thus,
we do not see how Article 2079 of the Civil Code-which provides in part
that "[a]n extension granted to the debtor by the creditor without the
consent of the guarantor extinguishes the guaranty" could apply in the
instant case.
The petitioner-indemnitors are, as, it were, second-tier parties so far as the
PNB was concerned and any extension of time granted by PNB to any of
the first-tier obligators (PAGRCO, R &B Surety and the trustors[s]) could
not prejudice the second-tier parties.
There is no other reason why petitioner Villanueva's contention must fail.
PNB's undertaking under the Trust Agreement "to hold in abeyance any
action to enforce its claims" against R & B Surety did not extend the
maturity of R & B Surety's obligation under the Surety Bond. The Principal
Obligation had in fact already matured, along with that of R &B Surety, by
the time the Trust Agreement was entered into. Petitioner's Obligation had
in fact already matured, for those obligations were to amture "as soon as
[R & B Surety] became liable to make payment of any sum under the
terms of the [Surety Bond] whether the said sum or sums or part
thereof have been actually paid or not." Thus, the situation was that
precisely envisaged in Article 2079:
[t]he mere failure on the part of the creditor to demand
payment after the debt has become due does not of
itself constitute any extension of the referred to
herein.(emphasis supplied)
The theory behind Article 2079 is that an extension of time given to the
principal debtor by the creditor without the surety of his right to pay the
creditor and to be immediately subrogated to the creditor's remedies
against the principal debtor upon the original maturity date. The surety is
said to be entitled to protect himself against the principal debtor upon the
orginal maturity date. The surety is said to be entitled to protect himself
against the contingency of the principal debtor or the indemnitors
becoming insolvent during the extended period. The underlying rationale is
not present in the instant case. As this Court has held,
merely delay or negligence in proceeding against the
principal will not discharge a surety unless there is
between the creditor and the principal debtor a valid
and binding agreement therefor, one which tends to
prejudice [the surety] or to deprive it of the power of
obtaining indemnity by presenting a legal objection for
the time, to the prosecution of an action on the
original security. 12
n the instant case, there was nothing to prevent the petitioners from
tendering payment, if they were so minded, to PNB of the matured
obligation on behalf of R & B Surety and thereupon becoming subrogated
to such remedies as R & B Surety may have against PAGRCO.
3. The last issue can be disposed of quicjly, Clauses (b) and (c) of the
ndemnity Agreements (quoted above) allow R & B Surety to recover from
petitioners even before R & B Surety shall have paid the PNB. We have
previously held similar indemnity clauses to be enforceable and not
violative of any public policy. 13
The petitioners lose sight of the fact that the ndemnity Agreements are
contracts of indemnification not only against actual loss but against liability
as well. 14 While in a contract of indemnity against loss as indemnitor will
not be liable until the person to be indemnified makes payment or sustains
loss, in a contract of indemnity against liability, as in this case, the
indemnitor's liability arises as soon as the liability of the person to be
indemnified has arisen without regard to whether or not he has suffered
actual loss. 15 Accordingly, R & B Surety was entitled to proceed against
petitioners not only for the partial payments already made but for the full
amount owed by PAGRCO to the PNB.
Summarizing, we hold that :
(1) The Surety Bond was not novated by the Trust Agreement. Both
agreements can co-exist. The Trust Agreement merely furnished to PNB
another party obligor to the Principal Obligation in addition to PAGRCO
and R & B Surety.
(2) The undertaking of the PNB to 'hold in abeyance any action to enforce
its claim" against R & B Surety did not amount to an "extension granted to
the debtor" without petitioner's consent so as to release petitioner's from
their undertaking as indemnitors of R & B Surety under the Ndemnity
Agreements; and
(3) Petitioner's are indemnitors of R & B Surety against both payments to
and liability for payments to the PNB. The present suit is therefore not
premature despite the fact that the PNB has not instituted any action
against R & B Surety for the collection of its matured obligation under the
Surety Bond.
WHEREFORE, the petitioner's appeal is DENED for the lack of merit and
the decision of the trial court is AFFRMED in toto. Costs against the
petitioners.
SO ORDERED.
Yap (Chairman), Narvasa, Melencio-Herrera, Cruz, Gancayco and
Sarmiento, JJ., concur.
EN BANC
Credit Transactions Full Text Cases Atty. Adviento!!!!"#"
G.R. No. L-18520 September 23, 1922
THE HONGKONG & SHANGHAI BANKING CORPORATION, plaintiff-
appellee,
vs.
VICENTE ALDANESE and UNION GUARANTEE CO., LTD., defendants.
UNION GUARANTEE CO., LTD., appellant.
William & Ferrier for appellant.
Attorney-General Villa-Real for Aldanese.
No appearance for the appellee.
ROMUALDEZ, J.:
This dispositive clause of the judgment appealed from is as follows:
The defendant Vicente Aldanese, in his capacity as Collector of
Customs, is sentenced to pay the Hongkong & Shanghai
Banking Corporation the sum of $9,340.80, United States
currency, with costs. Messrs. Vamenta & Co., sidro Vamenta,
and Union Guarantee Co., Ltd., are sentenced to pay the same
sum to Mr. Vicente Aldanese, in his aforesaid capacity, with
costs. n the event that the Union Guarantee Co., Ltd., be
compelled to pay the whole or any part of the said sum to the
defendant Mr. Aldanese by reason of the insolvency or inability
to pay of Messrs. Vamenta & Co., and sidro Vamenta, and the
latter are sentenced to pay said surety company all such sum as
it may have paid as aforesaid, together with the costs. Each and
every payment to be made under this judgment shall be with
legal interest at the rate of six per centum per annum from April
29, 1920.
So ordered.
The Union Guarantee Co., Ltd., appeals from this judgment, and assigns
error to the action of the trial court, among others, in finding that said
corporation had given a bond for P9,450 in favor of the Government of the
Philippine slands to enable Vamenta & Co. to withdraw from the
customhouse at Manila the merchandise mentioned in the complaint.
The document containing the bond was not presented as evidence, nor
was any proof introduced about it, and what the trial court considered as
evidence on this point is merely what it took as a stipulation of facts
deduced from the following statements made during the trial, to wit:
COURT. Counsel for Vamenta & Co. and sidro Vamenta
admits that said company and sidro Vamenta personally are
liable to the defendant Collector of Customs and the Hongkong
& Shanghai Banking Corporation in the manner to be
determined by the court for the value of the merchandise
withdrawn from customhouse and sold by them, which
merchandise is worth $9,340.80, United States currency,
according to the complaint.
Mr. FERRER. But we are in a situation where the Union
Guarantee Co., Ltd., is entitled to a judgment against Vamenta &
Co.
COURT (continuing). Same counsel, according to Attorney
Ferrier, who represents the surety company, Union Guarantee
Co., Ltd., states that to protect its interests, he agrees to a
judgment being rendered against the debtors and in favor of the
Union Guarantee Co., Ltd., in the event that the latter, after the
issuance of an execution upon the judgment, shall be compelled
to pay the amount aforementioned or any part thereof on
account of the insolvency of said debtors.
Mr. FERRER. t is also agreed between the parties that the
Union Guarantee Co., Ltd., was company organized and
existing under the laws of the Philippine slands, and Vamenta &
Co. was a company not registered. We have no more objection
to the action of Vamenta & Co. and sidro Vamenta. (Folios 4
and 5, transcript, stenographic notes.)
t is true to that from the above statements of the trial court not
contradicted by Mr. Ferrier, attorney of the Union Guarantee Co., Ltd., it
may be inferred that this corporation, through its said counsel, admitted by
his silence to be surety of Vamenta & Co., although such an inference is
not entirely justified inasmuch as it is based rather on the silence of said
attorney when said statements were made by the trial court, which
undoubtedly attempted to construe the intention of the parties. The Union
Guarantee Co., Ltd., now insists in this court that the so-called stimulation
of facts set out in the judgment appealed from is not the one that was
really entered into the parties. And, as we have seen, the record is
doubtful as to whether or not there was really such a stipulation as was
stated by the trial court.
But even supposing that said statements are sufficient to bind the Union
Guarantee Co., Ltd., the facts is that there is no evidence, not even a
scintilla of evidence, as to the amount of this bond which, according to
paragraph ( f ) of the answer of the defendant Collector of Customs, was
given for the sum of P9,450.
The existence, terms, conditions and amount of the bond given by the
Union Guarantee Co., Ltd., as surety of Vamenta & Co., in favor of the
Government of the Philippine slands, are facts that must be proven or
admitting by the parties before any judgment can be rendered against said
corporation, as prayed for in the answer of the Collector of Customs.
And there exists an intimate connection between the liability of the
Collector of Customs to the Hongkong & Shanghai Banking Corporation,
and the liability of Vamenta & Co. and the Union Guarantee Co., Ltd., to
the Collector of Customs, which latter liability cannot be fixed without
sufficient proof of the scope and conditions of the bond in question. We
think that this case requires further evidence, and to do justice to all the
parties interested, we have decided to remand the record to the court of
origin in order that the proper party may introduce competent evidence as
to the existence, conditions and amount of the alleged bond given by the
Union Guarantee Co., Ltd.
The judgment appealed from is reversed and this cause ordered
remanded to the court below for the holding of a new trial for the purposes
above indicated, without special finding as to costs. So ordered.
Araullo, C.J., Johnson, Street, Malcolm, Avancea, Villamor, Ostrand and
Johns, JJ., concur.
FRST DVSON
G.R. No. 147561 June 22, 2006
STRONGHOLD INSURANCE COMPANY, INC., Petitioner,
vs.
REPUBLIC-ASAHI GLASS CORPORATION, Respondent.
D E C S O N
PANGANIBAN, CJ:
Asurety company's liability under the performance bond it issues is
solidary. The death of the principal obligor does not, as a rule, extinguish
the obligation and the solidary nature of that liability.
The Case
Before us is a Petition for Review
1
under Rule 45 of the Rules of Court,
seeking to reverse the March 13, 2001 Decision
2
of the Court of Appeals
(CA) in CA-GR CV No. 41630. The assailed Decision disposed as follows:
"WHEREFORE, the Order dated January 28, 1993 issued by the lower
court is REVERSED and SET ASDE. Let the records of the instant case
Credit Transactions Full Text Cases Atty. Adviento!!!!"##
be REMANDED to the lower court for the reception of evidence of all
parties."
3

The Facts
The facts of the case are narrated by the CA in this wise:
"On May 24, 1989, [respondent] Republic-Asahi Glass Corporation
(Republic-Asahi) entered into a contract with x x x Jose D. Santos, Jr., the
proprietor of JDS Construction (JDS), for the construction of roadways and
a drainage system in Republic-Asahi's compound in Barrio Pinagbuhatan,
Pasig City, where [respondent] was to pay x x x JDS five million three
hundred thousand pesos (P5,300,000.00) inclusive of value added tax for
said construction, which was supposed to be completed within a period of
two hundred forty (240) days beginning May 8, 1989. n order 'to
guarantee the faithful and satisfactory performance of its undertakings' x x
x JDS, shall post a performance bond of seven hundred ninety five
thousand pesos (P795,000.00). x x x JDS executed, jointly and severally
with [petitioner] Stronghold nsurance Co., nc. (SC) Performance Bond
No. SC-25849/g(13)9769.
"On May 23, 1989, [respondent] paid to x x x JDS seven hundred ninety
five thousand pesos (P795,000.00) by way of downpayment.
"Two progress billings dated August 14, 1989 and September 15, 1989, for
the total amount of two hundred seventy four thousand six hundred twenty
one pesos and one centavo (P274,621.01) were submitted by x x x JDS to
[respondent], which the latter paid. According to [respondent], these two
progress billings accounted for only 7.301% of the work supposed to be
undertaken by x x x JDS under the terms of the contract.
"Several times prior to November of 1989, [respondent's] engineers called
the attention of x x x JDS to the alleged alarmingly slow pace of the
construction, which resulted in the fear that the construction will not be
finished within the stipulated 240-day period. However, said reminders
went unheeded by x x x JDS.
"On November 24, 1989, dissatisfied with the progress of the work
undertaken by x x x JDS, [respondent] Republic-Asahi extrajudicially
rescinded the contract pursuant to Article X of said contract, and wrote a
letter to x x x JDS informing the latter of such rescission. Such rescission,
according to Article XV of the contract shall not be construed as a waiver
of [respondent's] right to recover damages from x x x JDS and the latter's
sureties.
"[Respondent] alleged that, as a result of x x x JDS's failure to comply with
the provisions of the contract, which resulted in the said contract's
rescission, it had to hire another contractor to finish the project, for which it
incurred an additional expense of three million two hundred fifty six
thousand, eight hundred seventy four pesos (P3,256,874.00).
"On January 6, 1990, [respondent] sent a letter to [petitioner] SC filing its
claim under the bond for not less than P795,000.00. On March 22, 1991,
[respondent] again sent another letter reiterating its demand for payment
under the aforementioned bond. Both letters allegedly went unheeded.
"[Respondent] then filed [a] complaint against x x x JDS and SC. t
sought from x x x JDS payment of P3,256,874.00 representing the
additional expenses incurred by [respondent] for the completion of the
project using another contractor, and from x x x JDS and SC, jointly and
severally, payment of P750,000.00 as damages in accordance with the
performance bond; exemplary damages in the amount of P100,000.00 and
attorney's fees in the amount of at least P100,000.00.
"According to the Sheriff's Return dated June 14, 1991, submitted to the
lower court by Deputy Sheriff Rene R. Salvador, summons were duly
served on defendant-appellee SC. However, x x x Jose D. Santos, Jr.
died the previous year (1990), and x x x JDS Construction was no longer
at its address at 2nd Floor, Room 208-A, San Buena Bldg. Cor. Pioneer
St., Pasig, Metro Manila, and its whereabouts were unknown.
"On July 10, 1991, [petitioner] SC filed its answer, alleging that the
[respondent's] money claims against [petitioner and JDS] have been
extinguished by the death of Jose D. Santos, Jr. Even if this were not the
case, [petitioner] SC had been released from its liability under the
performance bond because there was no liquidation, with the active
participation and/or involvement, pursuant to procedural due process, of
herein surety and contractor Jose D. Santos, Jr., hence, there was no
ascertainment of the corresponding liabilities of Santos and SC under the
performance bond. At this point in time, said liquidation was impossible
because of the death of Santos, who as such can no longer participate in
any liquidation. The unilateral liquidation on the party (sic) of [respondent]
of the work accomplishments did not bind SC for being violative of
procedural due process. The claim of [respondent] for the forfeiture of the
performance bond in the amount of P795,000.00 had no factual and legal
basis, as payment of said bond was conditioned on the payment of
damages which [respondent] may sustain in the event x x x JDS failed to
complete the contracted works. [Respondent] can no longer prove its
claim for damages in view of the death of Santos. SC was not informed
by [respondent] of the death of Santos. SC was not informed by
[respondent] of the unilateral rescission of its contract with JDS, thus SC
was deprived of its right to protect its interests as surety under the
performance bond, and therefore it was released from all liability. SC was
likewise denied due process when it was not notified of plaintiff-appellant's
process of determining and fixing the amount to be spent in the completion
of the unfinished project. The procedure contained in Article XV of the
contract is against public policy in that it denies SC the right to procedural
due process. Finally, SC alleged that [respondent] deviated from the
terms and conditions of the contract without the written consent of SC,
thus the latter was released from all liability. SC also prayed for the award
of P59,750.00 as attorney's fees, and P5,000.00 as litigation expenses.
"On August 16, 1991, the lower court issued an order dismissing the
complaint of [respondent] against x x x JDS and SC, on the ground that
the claim against JDS did not survive the death of its sole proprietor, Jose
D. Santos, Jr. The dispositive portion of the [O]rder reads as follows:
'ACCORDNGLY, the complaint against the defendants Jose D. Santos,
Jr., doing business under trade and style, 'JDS Construction' and
Stronghold nsurance Company, nc. is ordered DSMSSED.
'SO ORDERED.'
"On September 4, 1991, [respondent] filed a Motion for Reconsideration
seeking reconsideration of the lower court's August 16, 1991 order
dismissing its complaint. [Petitioner] SC field its 'Comment and/or
Opposition to the Motion for Reconsideration.' On October 15, 1991, the
lower court issued an Order, the dispositive portion of which reads as
follows:
'WHEREFORE, premises considered, the Motion for Reconsideration is
hereby given due course. The Order dated 16 August 1991 for the
dismissal of the case against Stronghold nsurance Company, nc., is
reconsidered and hereby reinstated (sic). However, the case against
defendant Jose D. Santos, Jr. (deceased) remains undisturbed.
'Motion for Preliminary hearing and Manifestation with Motion filed by
[Stronghold] nsurance Company nc., are set for hearing on November 7,
1991 at 2:00 o'clock in the afternoon.
'SO ORDERED.'
"On June 4, 1992, [petitioner] SC filed its 'Memorandum for
Bondsman/Defendant SC (Re: Effect of Death of defendant Jose D.
Santos, Jr.)' reiterating its prayer for the dismissal of [respondent's]
complaint.
"On January 28, 1993, the lower court issued the assailed Order
reconsidering its Order dated October 15, 1991, and ordered the case,
insofar as SC is concerned, dismissed. [Respondent] filed its motion for
reconsideration which was opposed by [petitioner] SC. On April 16, 1993,
the lower court denied [respondent's] motion for reconsideration. x x x."
4

Ruling of the Court of Appeals
Credit Transactions Full Text Cases Atty. Adviento!!!!"#$
The CA ruled that SC's obligation under the surety agreement was not
extinguished by the death of Jose D. Santos, Jr. Consequently, Republic-
Asahi could still go after SC for the bond.
The appellate court also found that the lower court had erred in
pronouncing that the performance of the Contract in question had become
impossible by respondent's act of rescission. The Contract was rescinded
because of the dissatisfaction of respondent with the slow pace of work
and pursuant to Article X of its Contract with JDS.
The CA ruled that "[p]erformance of the [C]ontract was impossible, not
because of [respondent's] fault, but because of the fault of JDS
Construction and Jose D. Santos, Jr. for failure on their part to make
satisfactory progress on the project, which amounted to non-performance
of the same. x x x [P]ursuant to the [S]urety [C]ontract, SC is liable for the
non-performance of said [C]ontract on the part of JDS Construction."
5

Hence, this Petition.
6

ssue
Petitioner states the issue for the Court's consideration in the following
manner:
"Death is a defense of Santos' heirs which Stronghold could also adopt as
its defense against obligee's claim."
7

More precisely, the issue is whether petitioner's liability under the
performance bond was automatically extinguished by the death of Santos,
the principal.
The Court's Ruling
The Petition has no merit.
Sole ssue:
Effect of Death on the Surety's Liability
Petitioner contends that the death of Santos, the bond principal,
extinguished his liability under the surety bond. Consequently, it says, it is
automatically released from any liability under the bond.
As a general rule, the death of either the creditor or the debtor does not
extinguish the obligation.
8
Obligations are transmissible to the heirs,
except when the transmission is prevented by the law, the stipulations of
the parties, or the nature of the obligation.
9
Only obligations that are
personal
10
or are identified with the persons themselves are extinguished
by death.
11

Section 5 of Rule 86
12
of the Rules of Court expressly allows the
prosecution of money claims arising from a contract against the estate of a
deceased debtor. Evidently, those claims are not actually extinguished.
13
What is extinguished is only the obligee's action or suit filed before the
court, which is not then acting as a probate court.
14

n the present case, whatever monetary liabilities or obligations Santos
had under his contracts with respondent were not intransmissible by their
nature, by stipulation, or by provision of law. Hence, his death did not
result in the extinguishment of those obligations or liabilities, which merely
passed on to his estate.
15
Death is not a defense that he or his estate can
set up to wipe out the obligations under the performance bond.
Consequently, petitioner as surety cannot use his death to escape its
monetary obligation under its performance bond.
The liability of petitioner is contractual in nature, because it executed a
performance bond worded as follows:
"KNOW ALL MEN BY THESE PRESENTS:
"That we, JDS CONSTRUCTON of 208-A San Buena Building, contractor,
of Shaw Blvd., Pasig, MM Philippines, as principal and the STRONGHOLD
NSURANCE COMPANY, NC. a corporation duly organized and existing
under and by virtue of the laws of the Philippines with head office at
Makati, as Surety, are held and firmly bound unto the REPUBLC ASAH
GLASS CORPORATON and to any individual, firm, partnership,
corporation or association supplying the principal with labor or materials in
the penal sum of SEVEN HUNDRED NNETY FVE THOUSAND
(P795,000.00), Philippine Currency, for the payment of which sum, well
and truly to be made, we bind ourselves, our heirs, executors,
administrators, successors and assigns, jointly and severally, firmly by
these presents.
"The CONDTONS OF THS OBLGATON are as follows;
"WHEREAS the above bounden principal on the day of ,
19 entered into a contract with the REPUBLC ASAH GLASS
CORPORATON represented by , to fully and
faithfully. Comply with the site preparation works road and drainage
system of Philippine Float Plant at Pinagbuhatan, Pasig, Metro Manila.
"WHEREAS, the liability of the Surety Company under this bond shall in
no case exceed the sum of PESOS SEVEN HUNDRED NNETY FVE
THOUSAND (P795,000.00) Philippine Currency, inclusive of interest,
attorney's fee, and other damages, and shall not be liable for any
advances of the obligee to the principal.
"WHEREAS, said contract requires the said principal to give a good and
sufficient bond in the above-stated sum to secure the full and faithfull
performance on its part of said contract, and the satisfaction of obligations
for materials used and labor employed upon the work;
"NOW THEREFORE, if the principal shall perform well and truly and fulfill
all the undertakings, covenants, terms, conditions, and agreements of said
contract during the original term of said contract and any extension thereof
that may be granted by the obligee, with notice to the surety and during
the life of any guaranty required under the contract, and shall also perform
well and truly and fulfill all the undertakings, covenants, terms, conditions,
and agreements of any and all duly authorized modifications of said
contract that may hereinafter be made, without notice to the surety except
when such modifications increase the contract price; and such principal
contractor or his or its sub-contractors shall promptly make payment to
any individual, firm, partnership, corporation or association supplying the
principal of its sub-contractors with labor and materials in the prosecution
of the work provided for in the said contract, then, this obligation shall be
null and void; otherwise it shall remain in full force and effect. Any
extension of the period of time which may be granted by the obligee to the
contractor shall be considered as given, and any modifications of said
contract shall be considered as authorized, with the express consent of
the Surety.
"The right of any individual, firm, partnership, corporation or association
supplying the contractor with labor or materials for the prosecution of the
work hereinbefore stated, to institute action on the penal bond, pursuant to
the provision of Act No. 3688, is hereby acknowledge and confirmed."
16

As a surety, petitioner is solidarily liable with Santos in accordance with the
Civil Code, which provides as follows:
"Art. 2047. By guaranty a person, called the guarantor, binds himself to the
creditor to fulfill the obligation of the principal debtor in case the latter
should fail to do so.
"f a person binds himself solidarily with the principal debtor, the provisions
of Section 4,
17
Chapter 3, Title of this Book shall be observed. n such
case the contract is called a suretyship."
x x x x x x x x x
"Art. 1216. The creditor may proceed against any one of the solidary
debtors or some or all of them simultaneously. The demand made against
one of them shall not be an obstacle to those which may subsequently be
Credit Transactions Full Text Cases Atty. Adviento!!!!"#%
directed against the others, so long as the debt has not been fully
collected."
Elucidating on these provisions, the Court in Garcia v. Court of Appeals
18
stated thus:
"x x x. The surety's obligation is not an original and direct one for the
performance of his own act, but merely accessory or collateral to the
obligation contracted by the principal. Nevertheless, although the contract
of a surety is in essence secondary only to a valid principal obligation, his
liability to the creditor or promisee of the principal is said to be direct,
primary and absolute; in other words, he is directly and equally bound with
the principal. x x x."
19

Under the law and jurisprudence, respondent may sue, separately or
together, the principal debtor and the petitioner herein, in view of the
solidary nature of their liability. The death of the principal debtor will not
work to convert, decrease or nullify the substantive right of the solidary
creditor. Evidently, despite the death of the principal debtor, respondent
may still sue petitioner alone, in accordance with the solidary nature of the
latter's liability under the performance bond.
WHEREFORE, the Petition is DENED and the Decision of the Court of
Appeals AFFRMED. Costs against petitioner.
SO ORDERED.
THRD DVSON
[G.R. No. 146997. April 26, 2005]
SPOUSES GODOFREDO & DOMNCA FLANCA, Petitioners, vs.
COURT OF APPEALS & WLLAM ONG GENATO, Respondents.
D E C S O N
CORONA, J.:
Before us is a petition for review under Rule 45 of the Rules of Court,
seeking to set aside the October 6, 2000 decision[1] of the Court of
Appeals in CA-G.R. CV No. 56035.
The facts as outlined by the trial court[2] follow.
This is an action to declare null and void the mortgage executed by
defendant Oakland Development Resources Corp. xxx in favor of
defendant William Ong Genato over the house and lot plaintiffs spouses
Godofredo and Dominica Flancia purchased from defendant corporation.
n the complaint, plaintiffs allege that they purchased from defendant
corporation a parcel of land known as Lot 12, Blk. 3, Phase -A containing
an area of 128.75 square meters situated in Prater Village Subd. located
at Brgy. Old Balara, Quezon City; that by virtue of the contract of sale,
defendant corporation authorized plaintiffs to transport all their personal
belongings to their house at the aforesaid lot; that on December 24, 1992,
plaintiffs received a copy of the execution foreclosing [the] mortgage
issued by the RTC, Branch 98 ordering defendant Sheriff Sula to sell at
public auction several lots formerly owned by defendant corporation
including subject lot of plaintiffs; that the alleged mortgage of subject lot is
null and void as it is not authorized by plaintiffs pursuant to Art. 2085 of the
Civil Code which requires that the mortgagor must be the absolute owner
of the mortgaged property; that as a consequence of the nullity of said
mortgage, the execution foreclosing [the] mortgage is likewise null and
void; that plaintiffs advised defendants to exclude subject lot from the
auction sale but the latter refused. Plaintiffs likewise prayed for damages
in the sum of P50,000.00.
Defendant William Ong Genato filed a motion to dismiss the complaint
which was opposed by the plaintiffs and denied by the Court in its Order
dated February 16, 1993.
Defendant Genato, then filed his answer averring that on May 19, 1989
co-defendant Oakland Development Resources Corporation mortgaged to
Genato two (2) parcels of land covered by TCT Nos. 356315 and 366380
as security and guaranty for the payment of a loan in the sum of
P2,000,000.00; that it appears in the complaint that the subject parcel of
land is an unsubdivided portion of the aforesaid TCT No. 366380 which
covers an area of 4,334 square meters more or less; that said real estate
mortgage has been duly annotated at the back of TCT No. 366380 on May
22, 1989; that for non-payment of the loan of P2,000,000.00 defendant
Genato filed an action for foreclosure of real estate mortgage against co-
defendant corporation; that after [trial], a decision was rendered by the
Regional Trial Court of Quezon City, Branch 98 against defendant
corporation which decision was affirmed by the Honorable Court of
Appeals; that the decision of the Court of Appeals has long become final
and thus, the Regional Trial Court, Brach 98 of Quezon City issued an
Order dated December 7, 1992 ordering defendant Sheriff Ernesto Sula to
cause the sale at public auction of the properties covered by TCT No.
366380 for failure of defendant corporation to deposit in Court the money
judgment within ninety (90) days from receipt of the decision of the Court
of Appeals; that plaintiffs have no cause of action against defendant
Genato; that the alleged plaintiffs' Contract to Sell does not appear to have
been registered with the Register of Deeds' of Quezon City to affect
defendant Genato and the latter is thus not bound by the plaintiffs'
Contract to Sell; that the registered mortgage is superior to plaintiffs'
alleged Contract to Sell and it is sufficient for defendant Genato as
mortgagee to know that the subject TCT No. 366380 was clean at the time
of the execution of the mortgage contract with defendant corporation and
defendant Genato is not bound to go beyond the title to look for flaws in
the mortgagor's title; that plaintiffs' alleged Contract to Sell is neither a
mutual promise to buy and sell nor a Contract of Sale. Ownership is
retained by the seller, regardless of delivery and is not to pass until full
payment of the price; that defendant Genato has not received any advice
from plaintiffs to exclude the subject lot from the auction sale, and by way
of counterclaim, defendant Genato prays for P150,000.00 moral damages
and P20,000.00 for attorney's fees.
On the other hand, defendant Oakland Development Resources
Corporation likewise filed its answer and alleged that the complaint states
no cause of action; xxx Defendant corporation also prays for attorney's
fees of P20,000.00 in its counterclaim.[3]chanroblesvirtuallawlibrary
After trial, the assisting judge[4] of the trial court rendered a decision dated
August 16, 1996, the decretal portion of which provided:
Wherefore, premises considered, judgment is hereby rendered.
1) Ordering defendant Oakland Devt. Resources Corporation to pay
plaintiffs:
a) the amount of P10,000.00 representing payment for the
'option to purchase lot;
b) the amount of P140,000.00 representing the first
downpayment of the contract price;
c) the amount of P20,520.80 representing five monthly
amortizations for February, March, April, May and
June 1990;
d) the amount of P3,000.00 representing amortization for
November 1990; all plus legal interest from the
constitution of the mortgage up to the time the instant
case was filed.
2) Ordering said defendant corporation to pay further to plaintiffs the sum
of P30,000.00 for moral damages, P10,000.00 for exemplary damages
and P20,000.00 for and as reasonable attorney's fees plus cost;
3) Dismissing defendant corporation's counterclaim;
4) Dismissing defendant Genato's counterclaim.
[5]chanroblesvirtuallawlibrary
On motion for reconsideration, the regular presiding judge set aside the
judgment of the assisting judge and rendered a new one on November 27,
1996, the decretal portion of which read:
Credit Transactions Full Text Cases Atty. Adviento!!!!"#&
WHEREFORE, premises considered, the Motion for Reconsideration is
hereby GRANTED. The decision dated August 16, 1996 is hereby set
aside and a new one entered in favor of the plaintiffs, declaring the subject
mortgage and the foreclosure proceedings held thereunder as null and
void insofar as they affect the superior right of the plaintiffs over the
subject lot, and ordering as follows:
1. Defendant Oakland Development Resources to pay to
plaintiffs the amount of P20,000.00 for litigation-related
expenses;
2. Ordering defendant Sheriff Ernesto L. Sula to desist from
conducting further proceedings in the extra-judicial
foreclosure insofar as they affect the plaintiffs, or, in the
event that title has been consolidated in the name of
defendant William O. Genato, ordering said defendant to
reconvey to plaintiffs the title corresponding to Lot 12,
Blk. 3, Phase -A of Prater Village [Subd. ], located in
Old Balara, Quezon City, containing an area of 128.75
square meters; and
3. Dismissing the counterclaims of defendants Oakland and
Genato and with costs against them.
[6]chanroblesvirtuallawlibrary
On appeal, the Court of Appeals issued the assailed order:
Wherefore, foregoing premises considered, the appeal having merit in fact
and in law is hereby GRANTED and the decision of the Trial Court dated
27 November 1996 hereby SET ASIDE and REVERSED, and its judgment
dated August 16, 1996 REINSTATED and AFFIRMED IN TOTO. No
Costs.
SO ORDERED.[7]chanroblesvirtuallawlibrary
Hence, this petition.
For resolution before us now are the following issues:
(1) whether or not the registered mortgage constituted over the
property was valid;
(2) whether or not the registered mortgage was superior to the
contract to sell; and
(3) whether or not the mortgagee was in good faith.
Under the Art. 2085 of the Civil Code, the essential requisites of a contract
of mortgage are: (a) that it be constituted to secure the fulfillment of a
principal obligation; (b) that the mortgagor be the absolute owner of the
thing mortgaged; and (c) that the persons constituting the mortgage have
the free disposal of their property, and in the absence thereof, that they be
legally authorized for the purpose.
All these requirements are present in this case.
FRST SSUE: WAS THE REGSTERED MORTGAGE VALD?
As to the first essential requisite of a mortgage, it is undisputed that the
mortgage was executed on May 15, 1989 as security for a loan obtained
by Oakland from Genato.
As to the second and third requisites, we need to discuss the difference
between a contract of sale and a contract to sell.
n a contract of sale, title to the property passes to the vendee upon the
delivery of the thing sold; in a contract to sell, ownership is, by agreement,
reserved by the vendor and is not to pass to the vendee until full payment
of the purchase price.
Otherwise stated, in a contract of sale, the vendor loses ownership over
the property and cannot recover it unless and until the contract is resolved
or rescinded; in a contract to sell, title is retained by the vendor until full
payment of the price.[8]chanroblesvirtuallawlibrary
n the contract between petitioners and Oakland, aside from the fact that it
was denominated as a contract to sell, the intention of Oakland not to
transfer ownership to petitioners until full payment of the purchase price
was very clear. Acts of ownership over the property were expressly
withheld by Oakland from petitioner. All that was granted to them by the
'occupancy permit was the right to possess it.
Specifically, the contract between Oakland and petitioners stated:
xxx xxx xxx
7. That the BUYER/S may be allowed to enter into and take
possession of the property upon issuance of Occupancy
Permit by the OWNER/DEVELOPER exclusively, although
title has not yet passed to the BUYER/S, in which case his
possession shall be that of a possessor by mere tolerance
Lessee, subject to certain restrictions contained in this deed.
xxx xxx xxx
13. That the BUYER/S cannot seII, mortgage, cede, transfer,
assign or in any manner aIienate or dispose of, in whole
or in part, the rights acquired by and the obligations imposed
on the BUYER/S by virtue of this contract, without the
express written consent of the OWNER/DEVELOPER.
xxx xxx xxx
24. That this Contract to SeII shall not in any way [authorize] the
BUYER/S to occupy the assigned house and lot to them.[9]
xxx xxx xxx
Clearly, when the property was mortgaged to Genato in May 1989, what
was in effect between Oakland and petitioners was a contract to sell, not a
contract of sale. Oakland retained absolute ownership over the property.
Ownership is the independent and general power of a person over a thing
for purposes recognized by law and within the limits established thereby.
[10] According to Art. 428 of the Civil Code, this means that:
The owner has the right to enjoy and dispose of a thing, without other
limitations than those established by law.
xxx xxx xxx
Aside from the jus utendi and the jus abutendi [11] inherent in the right to
enjoy the thing, the right to dispose, or the jus disponendi, is the power of
the owner to alienate, encumber, transform and even destroy the thing
owned.[12]chanroblesvirtuallawlibrary
Because Oakland retained all the foregoing rights as owner of the
property, it was entitled absolutely to mortgage it to Genato. Hence, the
mortgage was valid.
SECOND SSUE: WAS THE REGSTERED MORTGAGE SUPEROR TO
THE CONTRACT TO SELL?
n their memorandum, petitioners cite our ruling in State
Investment House, Inc. v. Court of Appeals [13] to the effect that an
unregistered saIe is preferred over a registered mortgage over the
same property. The citation is misplaced.
Credit Transactions Full Text Cases Atty. Adviento!!!!"#'
This Court in that case explained the rationale behind the rule:
The unrecorded sale between respondents-spouses and SOLD is
preferred for the reason that if the original owner xxx had parted with his
ownership of the thing sold then he no longer had ownership and free
disposal of that thing as to be able to mortgage it again.
State Investment House is completely inapplicable to the case at bar. A
contract of sale and a contract to sell are worlds apart. State Investment
House clearly pertained to a contract of sale, not to a contract to sell which
was what Oakland and petitioners had. n State Investment House,
ownership had passed completely to the buyers and therefore, the former
owner no longer had any legal right to mortgage the property,
notwithstanding the fact that the new owner-buyers had not registered the
sale. n the case before us, Oakland retained absolute ownership over the
property under the contract to sell and therefore had every right to
mortgage it.
n sum, we rule that Genato's registered mortgage was superior to
petitioner's contract to sell, subject to any liabilities Oakland may have
incurred in favor of petitioners by irresponsibly mortgaging the property to
Genato despite its commitments to petitioners under their contract to sell.
THRD SSUE: WAS THE MORTGAGE N GOOD FATH?
The third issue involves a factual matter which should not be raised in this
petition. Only questions of law may be raised in a Rule 45 petition. This
Court is not a trier of facts. The resolution of factual issues is the function
of the lower courts. We therefore adopt the factual findings of the Court of
Appeals and uphold the good faith of the mortgagee Genato.
RELANCE ON WHAT APPEARS N THE TTLE
Just as an innocent purchaser for value may rightfully rely on what
appears in the certificate of title, a mortgagee has the right to rely on what
appears in the title presented to him. n the absence of anything to arouse
suspicion, he is under no obligation to look beyond the certificate and
investigate the title of the mortgagor appearing on the face of the said
certificate. [14]chanroblesvirtuallawlibrary
We agree with the findings and conclusions of the trial court regarding the
liabilities of Oakland in its August 16, 1996 decision, as affirmed by the
Court of Appeals:
Anent [plaintiffs' ] prayer for damages, the Court finds that defendant
corporation is liable to return to plaintiffs all the installments/payments
made by plaintiffs consisting of the amount of P10,000.00 representing
payment for the 'option to purchase lot; the amount of P140,000.00 which
was the first downpayment; the sum of P20,520.80 representing five
monthly amortizations for February, March, April, May and June 1990 and
the amount of P3,000.00 representing amortization for November 1990
plus legal interest from the time of the mortgage up to the time this instant
case was filed. Further, considering that defendant corporation wantonly
and fraudulently mortgaged the subject property without regard to
[plaintiffs' ] rights over the same, said defendant should pay plaintiffs moral
damages in the reasonable amount of P30,000.00. xxx Furthermore, since
defendant [corporation's ] acts have compelled the plaintiffs to litigate and
incur expenses to protect their interest, it should likewise be adjudged to
pay plaintiffs' attorney's fees of P20,000.00 under Article 2208 paragraph
two (2) of the Civil Code.[15]chanroblesvirtuallawlibrary
WHEREFORE, the petition for review is hereby DENED. The decision of
the Court of Appeals reinstating the August 16, 1996 decision of the trial
court is hereby AFFRMED.
SO ORDERED.
SECOND DVSON
G.R. No. 94247 September 11, 1991
DIONISIO MOJICA, in behaIf of Spouses LEONARDO MOJICA (now
deceased) and MARINA RUFIDO, petitioner,
vs.
HON. COURT OF APPEALS, and RURAL BANK OF YAWIT, INC.,
respondents.
Lorenzo F. Miravite for petitioner.
Esteban C. Manuel for private respondent.

PARAS, J.:p
This is a petition for review on certiorari which seeks to reverse and set
aside: the decision * of the Court of Appeals dated February 15, 1990 in
AC-G.R. CV No. 05987 entitled "Dionisio Mojica, in behalf of spouses
Leonardo Mojica (now deceased) and Marina Rufido v. Rural Bank of
Kawit, nc.", which affirmed in toto the decision of the trial court and (2) the
resolution dated June 4, 1990 denying the motion for reconsideration.
The facts of the case as gathered from the records are as follows:
On February 1, 1971, plaintiff Leonardo Mojica (now deceased) contracted
a loan of P20,000.00 from defendant Rural Bank of Kawit, nc. (now
respondent). This loan was secured by a real estate mortgage executed
on the same date by the plaintiffs spouses Leonardo Mojica and Marina
Rufido (Rollo, Annex "C" p. 40).
The real estate mortgage contract states among others:
... agreement for the payment of the loan of
P20,000.00 and such other loans or other advances
already obtained or still to be obtained by the
mortgagors ...
2. ... but if the mortgagors shall well and truly fulfill the
obligation above stated according to the terms thereof
then this mortgage shall become null and void. (Rollo
Petitioner's Memorandum, pp. 86-87)
The spouses mortgaged to the Rural Bank of Kawit, a parcel of land
consisting of 218,794 square meters, located in Naic, Cavite, covered by
Transfer Certificate of Title No. RT-155 (Rollo, Annex "A", p. 31). The real
estate mortgage was duly registered under Entry No. 74661 of the
Registry of Deeds of Cavite (Rollo, Annex "C", p. 41).
The loan of P20,000.00 by the plaintiffs spouses was fully and completely
paid (Ibid.).
On March 5, 1974, a new loan in the amount of P18,000.00 was obtained
by plaintiffs spouses from the defendant Rural Bank which loan matured
on March 5, 1975 (Rollo, pp. 32; 41).
No formal deed of real mortgage was constituted over any property of the
borrowers, although the top of the promissory note dated March 5, 1974,
contained the following notation.
This promissory note is secured by a Real Estate
Mortgage executed before the Notary Public of the
Municipality of Kawit, Mrs. Felisa Senti under Doc. No.
62, Page No. 86, Book No., Series of 1971.
The Real Estate Mortgage mentioned above is the registered mortgage
which guaranteed the already paid loan of P20,000.00 granted on
February 1, 1971 (Rollo, p. 8,7).
The spouses Leonardo Mojica and Marina Rufido failed to pay their
obligation after its maturity on March 5, 1975. Respondent rural bank
Credit Transactions Full Text Cases Atty. Adviento!!!!"#(
extrajudicially foreclosed the real estate mortgage on the justification that it
was adopted as a mortgage for the new loan of P18,000.00 (Rollo, pp. 32;
41).
The subject property was set for auction sale by the Provincial Sheriff of
Cavite for June 27, 1979. n that auction sale, defendant rural bank was
the highest bidder, and its bid corresponded to the total outstanding
obligation of plaintiffs spouses Mojica and Rufido (Reno, p. 32).
The proceeds from the sale of the piece of land of plaintiffs spouses were
applied to their outstanding obligation with defendant bank (Ibid.)
The corresponding certificate of sale in favor of defendant bank was
executed by the Provincial Sheriff also on June 27, 1979, and the
instrument was recorded in the Office of the Register of Deeds of Cavite
on June 29, 1979. The one year period for redemption elapses after June
1980 without plaintiffs spouses having redeemed the foreclosure property
(Ibid.)
Meanwhile, on July 19, 1980, Dionisio Mojica, the son of petitioners-
spouses, in an apparent attempt to pay the debt of P18,000.00 made a
partial payment in the amount of P24,658.00 (P19,958.00 of this amount in
check bounced) which the defendant rural bank received and accepted
with the issuance of the defendant's official receipt No. 101 269,
ackowledging the payment as partial payment of 'past due loan', together
with the "interest on past due lose (Rollo, p. 33).
On August 11, 1980, another partial payment was made by Dionisio Mojica
in the amount of P9,958.00 in payment also of 64 past due loan' plus
"interest on past due loan 7 which payment was received by the defendant
rural bank and acknowledged with the issuance of official receipt No.
101844. These payments were, however, considered by the bank as
deposit for the repurchase of the foreclosed property (Ibid., p. 33).
On August 14, 1981, upon inquiry by Dionisio Mojica on the unpaid
balance of the loan, the respondent rural bank issued a 'Computation Slip"
indicating therein, that as of August 14, 1981, the outstanding balance plus
interest computed from March 5, 1975 was P21,272.50 (Ibid.).
On November 10, 1981, said bank executed an affidavit of consolidation of
ownership, which it subsequently filed with the Register of Deeds of
Cavite. As a result, Transfer Certificate of Title No. T-123964, covering the
foreclosed piece of land, was issued in its favor by the Register of Deeds
on January 19, 1982. After having consolidated its ownership over the
foreclosed property, defendant bank scheduled the parcel of land to be
sold at public auction on February 26, 1982, pursuant to the requirement
of the law regarding the disposal by a bank of its acquired assets. Dionisio
Mojica and one Teodorico Rufido, brother-in-law of plaintiff Leonardo
Mojica, were notified of such auction sale However, no sale was
consummated during that scheduled sale and the property concerned up
to now still remains in the possession of respondent bank (Ibid.).
The refusal of the same bank to allow Dionisio Mojica to pay the unpaid
balance of the loan as per the "Computation Slip" amounting to
P21,272.50, resulted in the filing of a complaint (Rollo, p. 42).
On September 3, 1984, the trial court rendered judgment dismissing the
complaint. On November 5, 1984, petitioner filed a motion for
reconsideration of the decision, which motion was denied in the order
dated November 17, 1984. On January 2, 1985, a notice of appeal was
filed in the ntermediate Appellate Court (Rollo, p. 42).
On February 15, 1990, the Appellate Court, rendered its decision, aiming
in toto the decision of the trial court. The dispositive portion of the decision
of the appellate court reads:
WHEREFORE, finding no reversible error in the
decision appealed from, the game is hereby
AFFRMED in toto. With costs against plaintiffs-
appellants.
The motion for reconsideration of said decision was denied in a resolution
dated June 4, 1990 (Rollo, Annex "B", p. 39).
Hence, this petition.
This Court in its resolution dated September 3, 1990 dismissed the petition
for non-compliance with certain requisites but later in its resolution dated
November 5, 1990, it reinstated the petition (Rollo, Petition pp. 9-28);
Resolutions, pp. 52-53; 61).
The petition is devoid of merit.
The pivotal issue in this case is whether or not the foreclosure sale by the
Sheriff on June 27, 1979, had for its basis, a valid and subsisting mortgage
contract. Otherwise stated, there is a need to ascertain the intention of the
parties as to the coverage of the mortgage in question with respect to
future advancements.
Contracts which are not ambiguous are to be interpreted according to their
literal meaning and should not be interpreted beyond their obvious
intendment (Plastic Town Center Corp. v. NLRC, 172 SCRA 580 [1989]).
Thus, where the intent of the parties has been shown unmistakably with
clarity by the language used, the literal meaning shall control (Paramount
Surety & ns. Co., nc. v. Ago, 171 SCRA 481 [1989]). Correspondingly,
stipulations in the mortgage document constitute the law between the
parties, which must be complied with faithfully (Community and Loan
Assn., nc. v. Court of Appeals, 153 SCRA 564 [1987]).
As earlier stated, the Real Estate Mortgage in the case at bar expressly
stipulates that it serves as guaranty
... for the payment of the loan ... of P20,000.00 and
such other loans or other advances already obtained
or still to be obtained by the mortgagors as makers ...
(Rollo, p. 14).
t has long been settled by a long line of decisions that mortgages given to
secure future advancements are valid and legal contracts; that the
amounts named as consideration in said contract do not limit the amount
for which the mortgage may stand as security if from the four corners of
the instrument the intent to secure future and other indebtedness can be
gathered. A mortgage given to secure advancements is a continuing
security and is not discharged by repayment of the amount named in the
mortgage, until the full amount of the advancements are paid (Lim Julian v.
Lutero, 49 Phil. 704-705 [1926]). n fact, it has also been held that where
the annotation on the back of a certificate of title about a first mortgage
states "that the mortgage secured the payment of a certain amount of
money plus interest plus other obligations arising there under' there was
no necessity for any notation of the later loans on the mortgagors' title. t
was incumbent upon any subsequent mortgagee or encumbrances of the
property in question to e e the books and records of the bank, as first
mortgagee, regarding the credit standing of the debtors Tady-Y v. PNB, 12
SCRA 19-20 [1964]).
The evidence on record shows that the amounts of P4,700.00 and
P9,958.00 were accepted by the bank on July 19 and August 11, 1980 as
deposits for conventional redemption after the property covered by real
estate mortgage became the acquired asset of the bank and priced at
P85,000.00 and after petitioner had lost all rights of legal redemption
because more than one year had already elapsed from June 29, 1979, the
date the certificate of sale was registered in the office of the Registry of
Deeds of Cavite. ndeed, the conventional redemption was subject to be
exercised up to March 3, 1982 and was extended up to April 19, 1982 for a
fixed amount of P85,000.00. The respondent bank even favored the
petitioner by giving them the first preference to repurchase the property
but they failed to avail of this opportunity, although the bank "is certainly
disposed to release at anytime" the deposits.
Further, the evidence on record also shows that the mortgage property
was auctioned on June 27, 1979. The only bidder was the respondent
bank which bid for P26,387.04. As the highest bidder, the respondent bank
can rightfully consolidate its title over the property. As aptly stated by
respondent Court:
Credit Transactions Full Text Cases Atty. Adviento!!!!"#)
t would then be unfair to impute that the trial court
allowed defendant bank to appropriate the mortgage
property, because after the plaintiff-appellants failed to
repurchase the property and filed this action with 'lis
pendens', the actions prevented the bank from
negotiating for the sale of the property to other
buyers. (p. 36, Rollo)
PREMSES CONSDERED, the petition is DSMSSED and the assailed
decision and resolution of the ntermediate Appellate Court (Court of
Appeals) are AFFRMED.
SO ORDERED.
EN BANC
G.R. No. L-17072 October 31, 1961
CRISTINA MARCELO VDA. DE BAUTISTA, plaintiff-appellee,
vs.
BRIGIDA MARCOS, ET AL., defendants-appellants.
Aladin B. Bermudez for defendants-appellants.
Cube and Fajardo for plaintiff-appellee.
REYES, J.B.L., J.:
The main question in this appeal is whether or not a mortgagee may
foreclose a mortgage on a piece of land covered by a free patent where
the mortgage was executed before the patent was issued and is sought to
be foreclosed within five years from its issuance.
The facts of the case appear to be as follows:
On May 17, 1954, defendant Brigida Marcos obtained a loan in the
amount of P2,000 from plaintiff Cristina Marcel Vda. de Bautista and to
secure payment thereof conveyed to the latter by way of mortgage a two
(2)-hectare portion of an unregistered parcel of land situated in Sta.
gnacia, Tarlac. The deed of mortgage, Exhibit "A", provided that it was to
last for three years, that possession of the land mortgaged was to be
turned over to the mortgagee by way of usufruct, but with no obligation on
her part to apply the harvests to the principal obligation; that said
mortgage would be released only upon payment of the principal loan of
P2,000 without any interest; and that the mortgagor promised to defend
and warrant the mortgagee's rights over the land mortgaged.
Subsequently, or in July, 1956, mortgagor Brigida Marcos filed in behalf of
the heirs of her deceased mother Victoriana Cainglet (who are Brigida
herself and her three sisters), an application for the issuance of a free
patent over the land in question, on the strength of the cultivation and
occupation of said land by them and their predecessor since July, 1915. As
a result, Free Patent No. V-64358 was issued to the applicants on January
25, 1957, and on February 22, 1957, it was registered in their names
under Original Certificate of Title No. P-888 of the office of Register of
Deeds for the province of Tarlac.
Defendant Brigida Marcos' indebtedness of P2,000 to plaintiff having
remained unpaid up to 1959, the latter, on March 4, 1959, filed the present
action against Brigida and her husband (Civil Case No. 3382) in the court
below for the payment thereof, or in default of the debtors to pay, for the
foreclosure of her mortgage on the land give as security. Defendants
moved to dismiss the action, pointing out that the land in question is
covered by a free patent and could not, therefore, under the Public Land
Law, be taken within five years from the issuance of the patent for the
payment of any debts of the patentees contracted prior to the expiration of
said five-year period; but the lower court denied the motion to dismiss on
the ground that the law cited does not apply because the mortgage sought
to be foreclosed was executed before the patent was issued. Defendants
then filed their answer, reiterating the defense invoked in their motion to
dismiss, and alleging as well that the real contract between the parties
was an antichresis and not a mortgage. Pre-trial of the case followed, after
which the lower court rendered judgment finding the mortgage valid to the
extent of the mortgagor's pro-indiviso share of 15,333 square meters in the
land in question, on the theory that the Public Land Law does not apply in
this case because the mortgage in question was executed before a patent
was issued over the land in question; that the agreement of the parties
could not be antichresis because the deed Exhibit "A" clearly shows a
mortgage with usufruct in favor of the mortgagee; and ordered the
payment of the mortgage loan of P2,000 to plaintiff or, upon defendant's
failure to do so, the foreclosure of plaintiff's mortgage on defendant Brigida
Marcos' undivided share in the land in question. From this judgment,
defendants Brigida Marcos and her husband Osmondo Apolocio appealed
to this Court.
There is merit in the appeal.
The right of plaintiff-appellee to foreclose her mortgage on the land in
question depends not so much on whether she could take said land within
the prohibitive period of five years from the issuance of defendants' patent
for the satisfaction of the indebtedness in question, but on whether the
deed of mortgage Exhibit "A" is at all valid and enforceable, since the land
mortgaged was apparently still part of the public domain when the deed of
mortgage was constituted. As it is an essential requisite for the validity of a
mortgage that the mortgagor be the absolute owner of the thing
mortgaged (Art. 2085), the mortgage here in question is void and
ineffective because at the time it was constituted, the mortgagor was not
yet the owner of the land mortgaged and could not, for that reason,
encumber the same to the plaintiff-appellee. Nor could the subsequent
acquisition by the mortgagor of title over said land through the issuance of
a free patent validate and legalize the deed of mortgage under the
doctrine of estoppel (cf. Art. 1434, New Civil Code,
1
since upon the
issuance of said patient, the land in question was thereby brought under
the operation of the Public Land Law that prohibits the taking of said land
for the satisfaction of debts contracted prior to the expiration of five years
from the date of the issuance of the patent (sec. 118, C.A. No. 141). This
prohibition should include not only debts contracted during the five-year
period immediately preceding the issuance of the patent but also those
contracted before such issuance, if the purpose and policy of the law,
which is "to preserve and keep in the family of the homesteader that
portion of public land which the State has gratuitously given to him"
(Pascua v. Talens, 45 O.G. No. 9 [Supp.] 413; De los Santos v. Roman
Catholic Church of Midsayap, G.R. L-6088, Feb. 24, 1954), is to be
upheld.
The invalidity of the mortgage Exhibit "A" does not, however, imply the
concomitant invalidity of the collate agreement in the same deed of
mortgage whereby possession of the land mortgaged was transferred to
plaintiff-appellee in usufruct, without any obligation on her part to account
for its harvests or deduct them from defendants' indebtedness of P2,000.
Defendant Brigida Marcos, who, together with her sisters, was in
possession of said land by herself and through her deceased mother
before her since 1915, had possessory rights over the same even before
title vested in her as co-owner by the issuance of the free patent to her
and her sisters, and these possessory right she could validly transfer and
convey to plaintiff-appellee, as she did in the deed of mortgage Exhibit "A".
The latter, upon the other hand, believing her mortgagor to be the owner of
the land mortgaged and not being aware of any flaw which invalidated her
mode of acquisition, was a possessor in good faith (Art. 526, N.C.C.), and
as such had the right to all the fruits received during the entire period of
her possession in good faith (Art. 544, N.C.C.). She is, therefore, entitled
to the full payment of her credit of P2,000 from defendants, without any
obligation to account for the fruits or benefits obtained by her from the land
in question.
WHEREFORE, the judgment appealed from is reversed insofar as it
orders the foreclosure of the mortgage in question, but affirmed in all other
respects. Costs again defendants-appellants.
Bengzon, C.J., Padilla, Bautista Angelo, Labrador, Concepcion, Paredes
and De Leon, JJ., concur.
Barrera, J., took no part.
FRST DVSON
G.R. No. L-34404 June 25, 1980
Credit Transactions Full Text Cases Atty. Adviento!!!!"#*
PHILIPPINE NATIONAL BANK, petitioner,
vs.
THE HON. COURT OF APPEALS (SPECIAL FIRST DIVISION), PEDRO
BITANGA, FERNANDO BITANGA, GREGORIO BITANGA, GUILLERMO
BITANGA, CLARITA BITANGA together with her husband AGRIPINO
L. RABAGO and MELITONA LAGPACAN, assisted by her husband
JORGE MALACAS, respondents.

GUERRERO, J.:
This is a petition for review of the decision of the Court of Appeals,
promulgated on September 30, 1971 in CA-G.R. No. 29868-R entitled
"Pedro Bitanga, et al., Plaintiffs-Appellees, versus Philippine National
Bank, et al., Defendants-Appellants, Melitona Lagpacan, assisted by her
husband, Jorge Malacas, ntervenors Appellees which decision
1
affirmed
with certain modifications the judgment of the Court of First nstance of
locos Norte in favor of plaintiffs-appellants, now the herein respondents.
This case was commenced on May 17, 1954 when herein respondents
Pedro, Fernando, Gregorio, Guillermo and Clarita, all surnamed Bitanga,
filed a complaint before the Court of First nstance of locos Norte against
the Philippine National Bank, the Register of Deeds of locos Norte and
Felizardo Reyes, for reconveyance of real property and damages, with a
prayer for the issuance of an ex-parte writ of pre injunction restraining and
enjoining the PNB and Felizardo Reyes from consummating the sale of
the property in question and prohibiting the Register of Deeds from
registering the sale in favor of Felizardo Reyes. As prayed for, the writ of
preliminary injunction was issued. All three of the defendants named in the
complaint filed their respective Answers. During the pendency of the case,
herein respondent-spouses, Melitona Lagpacan and Jorge Maracas, filed
a Motion to admit their complaint in intervention, alleging that they had a
legal interest in the subject matter of the case, and the same was granted.
The factual background of this case as recited in the decision of
respondent court under review is as follows:
t is not disputed that the property in question
originally belonged to the spouses igo Bitanga and
Rosa Ver as their conjugal property. At the cadastral
proceedings during which the said property was
submitted for adjudication, the Cadastral Court
rendered a decision dated December 27, 1934, by
virtue of which a decree of registration of the said lot
bearing date of September 14, 1937 was issued.
Thereafter, a corresponding title in the name of the
spouses igo Bitanga and Rosa Ver was likewise
issued and in the Registry Books of the Register of
Deeds of locos Norte on December 15, 1937 (Exhibit
"A").
Before the issuance of the said original certificate of
tale (Exhibit "A"), however, death came to igo
Bitanga on September 25, 1935, and was survived by
his wife, Rosa Ver, and his children, the plaintiffs
herein. A little over a year from the death of her
husband, or on October 20, 1936, to be exact Rosa
Ver mortgaged the entire property covered by Exhibit
"A" (also known as Exhibit 1-Lagpacan) in favor of the
Philippine National Bank for the with of FVE
HUNDRED PESOS (P500.00) as shown in Exhibit 1-
Lagpacan. The mortgage document was registered in
the day book of the Register of Deeds of locos Norte
on November 12, 1936; this said mortgage lien was,
however, not annotated in the day book of the
Register of Deeds, when the original certificate of title
(Exhibit "A"), was issued. Nevertheless, the power of
attorney dated October 20, 1936 in favor of the
mortgagee Philippine National Bank "to take
possession of, and retain the property herein
mortgaged, to sell or lease the same or any part
thereof, and to do such other acts as necessary in the
performance of the power granted to the mortgagee
should the mortgagor fail or violate the term of the
mortgage" was annotated on said Exhibit "A" some
five years from October 20, 1936, i.e. on February 27,
1941, to be precise (Exhibit "A").
n the meantime, Rosa Ver had defaulted in the
fulfillment of her obligation with the Manila Trading
Company. So the said company levied upon her share
in the lot in question on December 13, 1939, and had
the attachment annotated on the title on February 14,
1940 (Exhibit "A-3"). Rosa Ver's interest in the lot in
question was afterwards sold at public auction, at
which the Manila Trading Company was the highest
bidder; that was on March 19, 1940, and the deed of
sale in favor of the Manila Trading Company was
annotated on the title on May 25, 1940 (Exhibit "A-4").
On November 14, 1940, the Manila Trading Company
sold its rights over the lot in question to Santiago
Sambrano, who secured the annotation of the said
sale on the title on March 20, 1941 (Exhibit "A-5").
Thereafter, as stated, one-half of the said property
passed into the hands of the intervenors as a result of
Civil Case No. 1846 (Exhibits 7, 8, 9, and 9-A).
Because Rosa Ver failed to settle her obligation with
the Philippine National Bank, the latter sold at public
auction the whole lot that the former had mortgaged to
it, and in the same auction sale, the Philippine
National Bank emerged as the highest bidder
(Exhibits 2, 3, 4 and 5); and, after the period of
redemption had expired without the property having
been redeemed, the Philippine National Bank
consolidated its title over it. The document of
consolidation was, however, not annotated upon the
owner's duplicate certificate of title as Rosa Ver failed
to surrender the same.
So it was that on November 25, 1950, the Philippine
National Bank presented a petition before the trial
court (Exhibit 14) asking, on the one hand, that the
owner's certificate of title No. 7683 (Exhibit A), be
declared null and void, and praying, on the other, that
a new certificate of title be issued in its name. Acting
favorably on the petition, the Court, in an order dated
October 2, 1951 (Exhibit 19-A), ordered the Register
of Deeds of the Province of locos Norte to cancel the
owner's duplicate certificate of title No. 7683 (Exhibit
A), and to issue a new owner's duplicate certificate of
title in the name of the petitioner Philippine National
Bank. As issued, the new owner's duplicate certificate
of title carried the number-description T-2701 (Exhibit
B or 23).
Sometime later, that is, on May 24, 1954, the
Philippine National Bank sold the property in question
to Felizardo Reyes (Exhibit 16-A),.as a result of which
a new owner's duplicate certificate of title, No. T-3944
(Exhibit 6), was issued in the latter's name.
2

t further appears from the evidence that by virtue of the judgment
obtained by the Manila Trading and Supply Company against the
defendants Rosa Ver and Guillermo Bitanga in Civil Case No. 121519 in
the Municipal Court of the City of Manila (Exhibit "2-Lagpacan"), the
property in question was sold by the Provincial Sheriff per Certificate of
Sale (Exhibit 4-Lagpacan) to the Manila Trading and Supply Company as
the highest and only bidder at the auction sale, the latter acquiring therefor
"all the rights, title, interest and participation which the defendants
Guillermo Bitanga and Rosa Ver de Bitanga have or might have in the
property. " The sale was registered in the back of the Certificate of Title
No. 7683 (Exhibit 4-A Lagpacan) under Entry No. 5100 dated May 25,
1940.
Credit Transactions Full Text Cases Atty. Adviento!!!!"$+
On November 16, 1960, the trial court rendered a decision in favor of the
plaintiffs and intervenors below, the Court finding and holding that: (a) The
lot in question is a conjugal partnership property, one-half of which must
go to the heirs of the late igo Bitanga, the plaintiffs herein; (b) The other
half goes to Rosa Ver as her share. The mortgage executed by her of her
one-half portion in favor of the Philippine National Bank is not an existing
hen on the said portion because it did not have a "special mention in the
decree of registration." t follows, therefore, that the acquisition of the said
portion by the Manila Trading Company in the manner above-described
was valid and legal. Consequently, the sale made by the said Company to
Santiago Sambrano over the one-half portion must also be valid and legal.
n connection with Civil Case No. 1846 in which the intervenors were the
plaintiffs and Santiago Sambrano was the defendant, what the intervenors
had attached and sold in a public auction in which they (intervenors) were
the highest bidders was the very said portion sold by the Manila Trading
Company to Santiago Sambrano; (c) That Felizardo Reyes is not a
purchaser of a registered land for value and in good faith, and (d) Since
the issuance of Transfer Certificate of Title No. 3944 in favor of the
Philippine National Bank, exhibit "B", and Owner's Duplicate Certificate of
Title No. 3944, Exhibit "16", in favor of Felizardo Reyes were without legal
basis, they are, therefore, declared nun and void and cancelled. With
costs against the defendants.
3

On appeal by PNB and Felizardo Reyes to the Court of Appeals,
respondent Court affirmed the judgment appealed from in all respects
except letter (d) thereof which was modified to read as follows:
(d) Since the issuance of Transfer Certificate of Title
No. T2701, Exhibit "B" in favor of the Philippine
National Bank, and Transfer Certificate of Title No. T-
3944, Exhibit "16", in favor of Felizardo Reyes, was
without legal basis, they are, therefore, declared null
and void and cancelled. The Register of Deeds is
hereby ordered to issue in lieu of the foregoing
transfer certificate of titles another certificate of title in
the names of the plaintiffs and intervenors as follows:
Undivided one-half () share to Pedro Bitanga,
married to Agripina Purisima, Fernando Bitanga,
single, Gregorio Bitanga single, Guillermo Bitanga,
single, Clarita Bitanga, married to Agripino L. Rabago,
and of legal age, Filipino citizens, and residents of
Laoag, locos Norte, and the remaining undivided
one-half () share to the spouses Jorge Maracas and
Melitona Lagpacan, both of legal age, Filipino citizens,
and residents of Burgos, locos Norte, free from
incumbrance regarding the claims of the Philippine
National Bank and Felizardo Reyes, after payment of
lawful fees.
4

Petitioner, not satisfied with the Decision of respondent Court of Appeals
and its Resolution denying the motion for its reconsideration, now comes
to Us and submits the following assignment of errors:
. The Court of Appeals erred in holding that the
mortgage deed (Exhibit 1-Bank) is valid and existing
only with respect to the one-half portion of the lot in
question allegedly belonging to the mortgagor Rosa
Ver as her share in the conjugal partnership with her
husband igo Bitanga.
. The Court of Appeals erred in holding that the
mortgage deed (Exhibit 1-Bank) executed by Rosa
Ver was no longer subsisting simply because the
same was not annotated on the face of original
certificate of title No. 7683 (Exhibit A).
. The Court of Appeals erred in holding that estoppel
and/or laches has not stepped in to defeat the right of
respondents Bitanga's and Rabago over the lot in
question, specifically to the one-half portion thereof
representing their undivided share of the lot as their
inheritance from their father igo Bitanga.
li720V. The Court of Appeals erred in holding that the acquisition of the
other half portion of the lot in question by the intervenors spouses Melitona
Lagpacan and Jorge Malacas bears the earmarks of validity and regularity.
Upon being required to comment on this petition, respondents filed a
Motion to Dismiss on the grounds that the decision of respondent court
sought to be reviewed had become final and executory on account of the
failure of Felizardo Reyes, the real party in interest, to join the PNB in this
petition, and that the issues presented are questions of fact and not of law,
hence, not proper for review by this Court.
By Resolution of January 10, 1972, this Court denied the petition for lack
of merit.
On January 25, 1972, the PNB moved to reconsider the denial contending
that at least the validity of the mortgage deed as to the share of herein
respondent-heirs should be upheld because of their acquiescence thereto,
and that the bank still has an interest over the case for the reason that
although it had already sold its interests over the property which is the
subject matter of this litigation to Felizardo Reyes, it still stands to be
affected in the event that this case is finally decided in favor of
respondents. n other words, it is the contention of PNB that it has the
personality to bring this petition, even without Felizardo Reyes, since it still
has an interest in the final outcome of this case.
On March 2, 1972, this Court reconsidered the Resolution of January 10,
1972 and resolved to give due course to the petition.
On the first assigned error, PNB contends that the mortgage constituted by
Rosa Ver in its favor on October 20, 1936 is valid and covers the entire
property known as Lot 9068 for the reasons that: (1) the valid execution,
existence and registration of said real estate mortgage under Act No. 3344
are not denied; and (2) the fact that Tax Declaration No. 120225-A then
covering the mortgaged property was issued in the exclusive name of
mortgagor Rosa Ver was likewise not denied but in fact admitted by herein
respondents and, therefore, the latter in effect admitted the genuineness
and due execution of said Tax Declaration.
There is no dispute that the document of mortgage executed by Rosa Ver
was in accordance with the formalities required by law and that was
register in the day book of the Register of Deeds of locos Norte within a
month after its execution. What is here contested is whether Rosa Ver
could, as she did in fact, m the entire Lot 9068 to petitioner PNB. n other
words, the issue refers to the intrinsic vanity of the mortgage, as
distinguished from its formal sufficiency.
The trial court found and so held that Lot 9068 belonged to the conjugal
partnership of the spouse lingo Bitanga and Rosa Ver. Therefore, when
nigo died on September 25, 1936, his one-half share in said lot was
transmitted to his heirs (Article 777, New Civil Code; Article 657, old Civil
Code)
5
and a co-ownership was established between them and igo's
surviving spouse Rosa Ver. Hence, on October 20, 1936, a little over a
year after igo's death, Rosa Ver, by herself alone, could not have validly
mortgaged the whole of Lot 9068 to PNB.
Under Article 2085, New Civil Code (Art. 1857, Old Civil Code), one of the
essential requisites to the contract of pledge and mortgage is that the
pledgor or mortgagor be the absolute owner of the thing pledged or
mortgaged. And under Article 493, New Civil Code (Art. 399, Old Civil
Code), each co-owner shall have the full ownership of his part and of the
fruits and benefits pertaining thereto, and he may therefore alienate,
assign or mortgage it, and even substitute another person in its
enjoyment, except when personal rights are involved. But the effect of the
alienation or the mortgage, with respect to the co-owners, shag be limited
to the portion which may be allotted to him in the division upon the
termination of the co-ownership.
Hence, We fully agree with the trial court and the respondent Court and
affirm the holding that "what the Philippine National Bank had acquired
from Rosa Ver by virtue of the mortgage was simply one-half () of the
entire property, for this was all she had in her power to convey the other
half being, as it still is, the lawful share of the plaintiffs-appellees as
Credit Transactions Full Text Cases Atty. Adviento!!!!"$"
inheritance from their father, igo Bitanga. Nemo date quod non habet
One cannot give what is not his.
6

Applying the provisions of the Old Civil Code
7
the law in force at the time
of nigo Bitanga's death in 1935, Rosa Ver, as surviving spouse, cannot
take part legally in the sharing of the estate left by her deceased husband
(one-half () of Lot 9068) with respect to which she only had usufructuary
rights. "The usufructuary not being an owner, cannot alienate or dispose of
the objects included in the usufruct. Thus, he cannot ... mortgage or
pledge the thing ...
8
t is not disputed that Tax Declaration No. 120225-A, then covering Lot
9068, was in the exclusive name of Rosa Ver. Such fact, however, even if
expressly admitted by herein respondent-heirs does not and cannot alter
the conjugal character of the lot in question, much less would it affect the
mortgage in favor of petitioner PNB. We have already held in several
cases that declarations of ownership for purposes of taxation are not
sufficient evidence of title.
9
f petitioner relied upon Tax Declaration No.
120225-A in assuming that the whole property belonged exclusively to
mortgagor Rosa Ver, such erroneous assumption should not prejudice the
rights of the other co-owners, herein respondent-heirs As far as the latter
are concerned, their respective shares were not included m the mortgage
in favor of PNB.
We, therefore, reject PNB's contention that the mortgage constituted by
Rosa Ver in its favor on October 20, 1936 is valid and covers the entire
property known as Lot 9068.
n the second assignment of error, petitioner maintains that the respondent
appellate court erred in holding that the mortgage deed (Exhibit 1-Bank)
executed by Rosa Ver was no longer subsisting simply because the same
was not annotated on the face of original certificate of title No. 7683
(Exhibit A).
Petitioner argues that Rosa Ver, being the one who constituted the
mortgage deed and has full knowledge of the existence of the same as
well as the respondent Bitanga's and Rabago in their capacity as heirs,
subscribing witnesses and as notary public, respectively, having also full
knowledge of the existence of the mortgage contract, have the legal duty
to apprise petitioner Philippine National Bank of the impending registration
proceedings covering the lot in question as well as to the issuance of the
original certificate of title No. 7683, in line with Section 19 of the Land
Registration Act, paragraph 2 (b) that the mortgagor shall not make
application without the consent in writing of the mortgagee, and paragraph
3 which requires that the decree of registration in case the mortgagor does
not consent to the making of the application shall state that registration is
made subject to such mortgage, describing it ... Petitioner further argues
that no notice whatsoever, either verbal or in writing, having been made by
the mortgagor Rosa Ver and/or the respondents Bitanga's and Rabago,
petitioner could not have taken any action to annotate its mortgage lien on
the lot in question on the face of original certificate of title No. 7683 and,
therefore, should not be blamed for its failure to annotate the mortgage
lien on the lot within a period of one (1) year from the issuance of the
decree on September 14, 1937 since under Section 19 of Act 496, it is
specifically provided that the decree of registration in such a case shall
state that the registration is subject to such mortgage. Petitioner concludes
that if the mortgage is not so annotated on the face of original certificate of
title No. 7683 within a period of one (1) year from September 14, 1937,
then it is not a fatal defect for the enforcement of the said mortgage lien.
Petitioner further buttresses its stand in distinguishing the requirements of
the law as embodied in Sections 19 and 21 of the Land Registration Act
from the "general notice" contemplated under Section 31 in relation to
Section 35 of the same Act in that the notice required in Sections 19 and
21 are specific while in the latter, the notice is merely constructive. And to
cap his argument, petitioner contends that mortgagor Rosa Ver and her
heirs had already benefitted from the loan and the mortgage transaction
and that they should not be allowed to enrich themselves at the expense
of the petitioner.
Petitioner's theory is clearly untenable and cannot be sustained for
otherwise it would do violence to the fundamental and basic foundation of
the Torrens system which is the indefeasibility of a Torrens title under
Sections 38, 39 and 47 of Act 496, which provide as follows:
Sec 38. f the court after hearing finds that the
applicant or adverse claimant has title as stated in his
application or adverse claim and proper for
registration, a decree of confirmation and registration
shall be entered. Every decree of registration shall
bind the land, and quiet title thereto, subject only to
the exceptions stated in the following section. t shall
be conclusive upon and against all persons, including
the nsular Government and all the branches thereof,
whether mentioned by name in the application, notice,
or citation, or included in the general description "To
all whom it may concern." Such decree shall not be
opened by reason of the absence, infancy, or other
disability of any person affected thereby, nor by any
proceeding in any court for reversing judgments or
decrees; subject, however, to the right of any person
deprived of land or any estate or interest therein by
decree of registration obtained by fraud to file in the
competent Court of First nstance a petition for review
within one year after entry of the decree provided no
innocent purchaser for value has acquired an interest.
Upon the expiration of said term of one year, every
decree or certificate of title issued in accordance with
this section shall be incontrovertible. f there is any
such purchaser, the decree of registration shall not be
opened, but shall remain in full force and effect
forever, subject only to the right of all hereinbefore
provided: Provided, however, That no decree or
certificate of title issued to persons not parties to the
appeal shall be cancelled or annulled. But any person
aggrieved by such decree in any case may pursue his
remedy by action for damages against the applicant
or any other person for fraud in procuring the decree.
Whenever the phrase "innocent purchaser for value"
or an equivalent phrase occurs in this Act, it shall be
deemed to include an innocent lessee, mortgagee, or
other encumbrances for value. (As amended by Sec.
3, Act No. 3621; and Sec. 1, Act No. 3630).
Sec. 39. Every person receiving a certificate of title in
purchase office of a decree of registration, and every
subsequent purchaser of registered land who takes a
certificate of title for value in good faith shall hold the
same five of all encumberance except those noted on
mid certificate and any of the following encumbrances
which may be sub existing, namely:
First. Liens or rights arising or existing under the laws
or Constitution of the United States or of the
Philippine slands which the statues of the Philippine
slands cannot require to appear of record in the
registry.
Second. Taxes within two years after the same
become due and payable.
Third. Any public highway, way, private way
established by law, or any Government irrigation canal
or lateral thereof, where the certificate of title does not
state that the boundaries of such highway, way, or
irrigation canal or lateral thereof, have been
determined.
But if there are easements or other rights appurtenant
to a Parcel of registered land which for any reason
have failed to be registered, such easements or rights
shall remain so appurtenant notwithstanding such
failure, and shall be held to pass with the land until cut
off or extinguished by the registration of the servient
estate, or in any other manner. (As amended by Act
No. 2011, and Sec. 4, Act No. 3621).
Sec. 47. The original certificate in the registration
book, any copy thereof duly certified under the
signature of the clerk, or of the register of deeds of the
Credit Transactions Full Text Cases Atty. Adviento!!!!"$#
province or city where the land is situated and the
seal of the court, and also the owner's duplicate
certificate shag be received as evidence in all the
courts of the Philippine slands and shall be
conclusive as to all matters contained therein except
so far as otherwise provided in this Act.
Parenthetically, it may be stated that Presidential Decree No. 1529 which
amends and codifies the laws relative to registration of property reiterates
the provisions cited above under the Land Registration Act, Act No. 496.
Thus, Section 38 of Act 496 is reiterated by Sections 29, 30, 31 and 32 of
P.D. No. 1529, while Section 39 of Act 496 is repeated under Section 44 of
P.D. No. 1529. Section 47 of Act 496 is substantially repeated in paragraph
2 of Sec. 31 of the Presidential Decree.
t is well-settled in Our jurisprudence that a decree of registration, after the
lapse of the one-year period from its entry, becomes indefeasible and
conclusive. (Garcia, et al. vs. Bello, et al., L-21355, April 30, 1965, 13
SCRA 769, 770; Baldoz vs. Papa, et al., L-18150, July 30, 1965, 14 SCRA
691; Ylarde, et all vs. Lichauco, et al., L-22115, Dec. 29, 1971, 42 SCRA
641, 650). The reason for the rule is succinctly stated in Gestosani et al.,
vs. Insular Development Company, et al., L-21166, September 15, 1967,
21 SCRA 114 by the Supreme Court, speaking through Justice Dizon,
thus:
At the risk of stating what is obvious, We say that land
registration proceedings under Act 496 are in rem and
that such proceedings, as well as the title issued as a
result thereof, are binding and conclusive upon the
whole world. Upon the expiration of one year within
which a petition to review the decree of registration
may be filed, said decree and the title issued pursuant
thereto become incontrovertible (Sec. 38, Act 496),
and the same may no longer be changed, altered or
modified, much less set, aside (Director of Lands vs.
Gutierrez David, 50 Phil. 797). This has to be the rule,
for if even after the ownership of a property has been
decreed by a land registration court in favor of a
particular person, the title issued may still be annulled,
changed, altered or modified after the lapse of the one
year period fixed by the legal provision mentioned
above, the object of the Torrens system, namely, to
guarantee the indefeasibility of the title to the property,
would be defeated (Cabanos vs. Register of Deeds,
40 Phil. 620).
We agree with the ruling of both the trial and the appellate courts in their
adherence to the doctrine laid down by Us in Snyder vs. the Provincial
Fiscal of Cebu and Jose Avila No. 17132, February 8, 1922, 42 Phil. 761,
which presented a nearly dentical situation as that in the case at bar,
where the issue decided was whether or not a lease contract entered into
prior to the original registration of the land subject of the lease and existing
pending the registration proceedings could be registered or recorded after
such original registration. Like the mortgage executed by Rosa Ver in the
instant petition, the contract of lease was entered into prior to the issuance
of the decree of registration and the Supreme Court held, thus:
t will be noted from the provisions of section 38,
above quoted, that the decree of registration cannot
be opened or altered even by reason of the absence,
infancy, or other disability of any person affected
thereby; and it can only be reviewed or modified upon
the petition, filed within one year after the entry of the
decree, of any person who has been deprived of land
or of any estate or interest therein through fraud.
x x x x x x x x x
f, under the Land Registration Act, an owner of land,
as against third parties, and after the lapse of one
year, by failing to appear and claim such ownership
duly the registration proceeding, thereby loses the
same, with equal or greater reason does a lessee,
mortgagee, or other person having an interest in said
land lose such interest or right, so far as the land is
concerned by not claiming the same during the
registration proceeding and by allowing said land to
be registered free of all encumbrances ... (Emphasis
supplied)
Since a clean title was issued in the name of the spouse igo Bitanga and
Rosa Ver by virtue of the decree of registration entered on September 14,
1937, and said decree not having been contested or reopened for a period
of one year, the same became incontrovertible. We must reiterate here the
rationale of the doctrine We laid d wn in ! William H. Anderson and Co. vs.
Garcia, 64 Phil. 506, 514-515, after an analysis of the Apparently
conflicting decisions in the cases of Worcester vs. Ocampo and Ocampo,
34 Phil. 646; Lanci vs Yangco, 52 Phil. 563; and Laxamana vs. Carlos, 57
Phil. 722 thus:
Whatever might have been generally or unqualifiedly
stated in the cases heretofore decided by this court,
We hold that under the Torrens system registration is
the operative act that gives validity to the transfer or
creates a lien upon the land (Secs. 50 and 51, Land
Registration Act). A person dealing with registered
land is not required to go behind the register to
determine the condition of the property. He is only
charged with notice of the burdens on the property
which are noted on the face of the register or the
certificate of title. To require him to do more is to
defeat one of the pry objects of the Torrens system. A
bona fide purchaser for value of such property at an
auction sale acquires good title as against a prior
transferee of the same property if such transfer was
unrecorded at the time of the auction sale. ...
n the instant case, there is no showing that the Manila Trading Company
(MTC) had any knowledge or notice of the prior mortgage in favor of the
PNB, hence, it may be safely presumed that it (MTC) acquired the rights of
Rosa Ver and Guillermo Bitanga as an innocent purchaser for value and
free from all incumbrances. From the MTC, the aforesaid rights of Rosa
and Guillermo passed to Santiago Sambrano, and from the latter, to herein
intervenors. There is no question, therefore, as to intervenors' rights over
the property, as against the PNB or its transferee, Felizardo Reyes. The
intervenors merely stepped into the shoes of MTC, a prior purchaser in
good faith, and thereby became entitled to an the defenses available to
said Company, including those arising from the acquisition of the property
in good faith and for value. (Granados vs. Monton, L-1698, April 8, 1950,
86 Phil. 42).
Upon the clear and explicit provisions of the Land Registration Act and the
jurisprudence on the indefeasibility of the Torrens title after the lapse of
one year as reiterated and emphasized in the unbroken line of authorities,
We hold that the respondent court committed no error in holding that "the
lien by reason or on account of the mortgage executed by Rosa Ver over
the entire parcel on October 20, 1936, which was not annotated on the
original certificate of title, could not have attached to the land. Otherwise
stated, the failure of the interested party to appear during the registration
proceeding and claim such interest in the land barred him from thereafter
having such interest annotated on the certificate of title."
The third assignment of error assails the respondent court in holding that
estoppel and/or laches has not stepped in to defeat the right of
respondents Bitangas and Rabago over the lot in question, specifically to
the one-half (1/2) portion thereof representing their undivided share of the
lot as their in. inheritance from their father, nigo Bitanga.
n rejecting appellant's defense of estoppel or laches, the respondent
Court of Appeals ruled:
Corollary to the foregoing, appellants cannot maintain
that estoppel or laches has stepped in to defeat the
right of the plaintiffs-appellees to institute an action to
indicate their right. And the reason is basic in its
simplicity: the mortgage contract entered into by Rosa
Ver respecting the other half of the lot in question
having been null and void ab initio, lapse of time could
Credit Transactions Full Text Cases Atty. Adviento!!!!"$$
not have validated or ratified it, and an action,
predicated upon the indubitable nullity of the contract
constituted may always be maintained by the
aggrieved party to set it aside. (pp. 13-14, CA
Decision).
Petitioner argues that respondents Bitangas and Rabago, as heirs and/or
successors-in-interest of Rosa Ver are bound by the mortgage and may
not be permitted to question the validity of the same, and assuming that
Rosa Ver does not have any right to constitute a mortgage on the other
half of the lot in question, petitioner contends that nonetheless the validity
Of the mortgage deed constituted by her over the share of her husband
should be upheld as well as its acquisition by the petitioner because
respondents Bitangas and Rabago are likewise estopped to question the
validity of the same by reason of acquisence On their Part in that
Guillermo Bitanga together with Mary Bitanga Castillo signed as witness to
the mortgage deed executed by their mother on the whole portion of the
lot in question on October 20, 1936 while respondent Atty. Agripino L.
Rabago, the son-in-law of the mortgagor Rosa Ver, notarized the said
mortgage deed. Petitioner also points to the fact that respondent Pedro
Bitanga offered to repurchase the whole portion of the property from the
petitioner, which offer is an admission, conclusive upon him that the PNB
is the absolute and legal owner of the lot in question and have the right to
dispose of the same. And citing the case of Cruz vs Ilagan 81 Phil. 554,
and authority quoted from 21 Am. Jur. 756, petitioner concludes that
respondents Bitangas and Rabago, as heirs of the deceased husband, by
their conduct, in effect bound themselves to the real estate mortgage
contract over the share of the husband, as completely and effectively as
though they themselves signed the document as mortgagors over the
share of the husband.
Petitioner also stresses that respondents Bitangas and Rabago filed the
complaint for reconveyance and annulment of mortgage on May 17,1954,
after nineteen (19) solid years have already elapsed from the time the
mortgage was executed on October 20, 1936 by Rosa Ver, and the lot in
question had been the subject of several transactions during which time
said respondents never did anything in assuming or vindicating their right
to institute a suit against the petitioner though with ample opportunity to do
so and, therefore, said respondents slept on or neglected in asserting their
right, hence they are guilty of laches.
Petitioner's contention is without merit. First, it must be clarified that not all
the respondent heirs signed the mortgage deed as instrumental witnesses.
An examination of the mortgage contract (Exhibit "1") that of the five (5)
Bitanga respondents, namely, Pedro, Fernando, Gregorio, Guillermo and
Clarita only Guillermo Bitanga signed as one of the instrumental
witnesses, the first being Mary B. Castillo.
Even as regards Guillermo Bitanga, who signed as witness of the deed of
mortgage, PNB's reliance upon the case of Vda de la Cruz vs. Ilagan is
unavailing. n the De la Cruz case, the heirs of the decedent, who were the
es sought to be estopped from questioning the validity of the sale made by
their co-heir and the administrator of the decedent's estate, did not merely
sign as witnesses to the deed of sale. n the words of Justice Zaldivar who
penned the decision, they "gave their approval and conformity to the made
and to the administrator's motion by signing with appropriate expressions
both papers." (Cruz vs. lagan, 81 Phil. 554, 556). Thus, that the heirs
gave their consent to the sale could not be doubted, as in fact it was
expressed in words in the deed itself and in the motion submitted to the
court for judicial approval of the sale, and on the basis of this express
approval and conformity, the Court held them in estoppel and bound as co-
vendors. n the instant case, on the other hand, the party sought to be
estopped signed merely as an instrumental witness. A distinction should
be made, as indeed there is, between one who signs a document merely
as an instrumental witness, and one who affixes his signature as proof of
his consent to, approval of, and conformity with, the contents of the deed
or document. The former simply attests that the party or parties to the
instrument signed the same in his presence, so that he is frequently
referred to as a "Witness to the signature," and he is not bound to know or
be aware of the contents of the document; while the latter is not only
presumed to know the subject matter of the deed, but more importantly,
binds himself thereto as effectively as the party if would be bound thereby.
The foregoing distinction makes clear the inapplicability of the ruling in
Vda de la Cruz vs. Ilagan to the facts obtaining in the case at bar. We
cannot hold Guillermo Bitanga in estoppel by declaring that he bound
himself to the mortgage as effectively as the mortgagor Rosa Ver when he
signed the mortgage deed as a witness in the absence of clear proof that
he was in fact aware of the contents of the document at the time of its
execution. We can only go as far as stating that the deed was signed by
the parties thereto in his presence.
Moreover, there is no allegation nor evidence on record to show that
petitioner-mortgagee relied upon the signature of Guillermo Bitanga on the
mortgage deed, or that he made any representations with the PNB for the
acceptance of the mortgage. On the contrary, PNB states that Rosa Ver
mortgaged the entire lot "on the basis and strength of Tax Declaration No.
120225-A" which "was issued and declared in her exclusive name.
10
As
held by this Court, speaking through Justice Zaldivar, in the case of Kalalo
vs. Luz, L-27782, July 31, 1970, 34 SCRA 337, 346-347:
An essential element of estoppel is that the person
invoking it has been influenced and has relied on the
representations or conduct of the person sought to be
estopped, and this element is wanting in the instant
case ... And in Republic of the Philippines vs. Garcia,
et al. (91 Phil. 46, 49 ), this Court ruled that there is no
estoppel where the statement or action invoked as its
basis did not mislead the adverse party. Estoppel has
been characterized as harsh or odious and not
favored by law (Coronet, et al. vs. C..R., et al., 24
SCRA 990, 996) ... Estoppel cannot be sustained by
mere argument or doubtful inference; it must be
clearly proved in all its essential elements by clear,
convincing and satisfactory evidence (Rivers vs.
Metropolitan Life ns. Co. of New York, 6 N.Y., 2d, 3,
5) ...
Consequently, there is no estoppel where there is no reliance upon
representations and where there is no deliberate misleading of another.
ntention to mislead is an important element of estoppel, as well as the
lead party's reliance upon the declaration, act or omission of the party
sought to be estopped. Both elements have not been proved in the instant
case, hence again, estoppel does not lie against Guillermo Bitanga.
Under this same ground of estoppel, petitioner makes capital of the fact
that it was Atty. Agripino L. Rabago, son-in-law of mortgagor Rosa Ver and
husband of one of herein respondent-heirs, Clarita Bitanga Rabago, who
notarized the mortgage deed. t is contended that since Atty. Rabago acted
as the judicial administrator and lawyer of the Bitanga family estate at the
time of the execution of the mortgage, he should have prevailed upon his
mother-in-law Rosa Ver not to mortgage the entire lot but only half thereof
to PNB when he was approached to notarize the Hipoteca de Bienes
mmuebles (Exhibit 1). Furthermore, knowing that the property was
already the subject of original registration proceedings under Act No. 496,
he should have informed the bank thereof.
Again, this contention of petitioner is untenable. Assuming that Atty.
Rabago was the lawyer for the Bitanga family administrator of its estate of
which the trial and appellate courts made no such finding, his acts,
declarations and omissions in the performance of his duties as such,
whether deliberate or not, cannot adversely affect herein respondent hers
as to deprive them of their right to umpugn a contract which was
prejudicial to their interests. Under the circumstances of the case at bar,
that Atty. Rabago could have or should have done a particular thing which
he did not do is his own responsibility. The settled rule in Philippines
Jurisprudence that a client is bound by his 's actions, negligence, mistakes
and/or shortcomings enunciated in a number of cases
11
presupposes the
existence of a ending litigation whether in court or in an administrative
body, and refers only to matters to the conduct of such case. Precisely
said rule requires the existence of an attorney-client relationship, while
herein, there is merely a single, independent transaction, that of a
mortgage, which was in no way con. connected with any pending litigation
at the time of its execution. Therefore, the above-stated rule finds no
application in the instant case.
We likewise disagree with the contention that Pedro Bitanga's offer to buy
the lot in question, as contained in his letter to the PNB dated September
14, 1949 (Exhibit 10), is a conclusive admission on his part that the bank
was the absolute and legal owner of the property so as to estop him from
Credit Transactions Full Text Cases Atty. Adviento!!!!"$%
contesting the validity of the mortgage (Exhibit 1) and the title (TCT T-
2701) procured by the bank over the property. For in the aforesaid letter,
Bitanga categorically wrote: "1. That offer the amount of P800.00 to buy
said lot, and please consider that the rights which the bank had purchased
was the property and shares of my mother and brother, Guillermo, and
that my rights as well as the rights of my other brothers and sisters were
not sold to the bank;" There can be no estoppel arising from said
vehement and assertive claim. f he offered to buy the entire property
despite such expressed claim, his purpose may well be that he wished to
avoid a long-drawn, expensive litigation and not necessarily to admit that
petitioner was the absolute and legal owner of the property.
As to petitioner's contention that respondents are guilty of laches for
having slept on or neglected in asserting their right to the land after the
lapse of more than nineteen (19) years from the time the mortgage was
executed on October 20, 1936 by Rosa Ver, the ruling in Angeles, et al.,
vs. Court of Appeals, et al., 102 Phil. 1006, declares that "where the sale
of a homestead is null and void, the action to recover the same does not
prescribe because mere lapse of the time Cannot give efficacy to the
contracts that are null and void and inexistent." This is a principle
recognized since Tipton vs. Velasco, 6 Phil. 67, that "mere lapse of time to
give efficacy to contracts that are null and void cited in Eugenie vs.
Perdido et al., 97 Phil. 41.
As to the fourth assignment of error faulting the respondent appellate court
in holding that the acquisition of the other half portion of the lot in question
by the intervenors-spouses Melitona Lagpacan and Jorge Maracas bears
the earmarks of validity and registry petitioner theorizes that the mortgage
executed by Rosa Ver on the lot in question in its entirety was valid and
that said mortgage was very much ahead than that of the levy made by
the Manila Trading & Supply Co. since the mortgage was registered on
November 12, 1936 under Act 3344 as then the property mortgaged was
still an unregistered land. On the other hand, the levy made by the Manila
Trading & Supply Co. was noted in the first Torrens title of the land after its
registration under the Torrens system, on February 14, 1940. And being
first in time, herein petitioner maintains it should be first in right and the
mortgage should enjoy preference over the levy.
t must be noted, however, that in Our resolution of the first assignment of
error, We ruled that the mortgage deed was valid and existing only with
respect to the one-half portion of the lot in question belonging to the
mortgagor Rosa Ver as her share in the conjugal partnership with her
husband igo Bitanga. Hence, petitioner's assumption that the mortgage
of the whole lot was valid, is erroneous. What this Court held is that the
mortgagor, Rosa Ver, as surviving spouse, could convey in mortgage to
the petitioner bank one-half () of the entire property being her share in
the conjugal partnership with her deceased husband, the other half being
the lawful share of the respondent heirs as inheritance from their
deceased father, igo Bitanga.
And resolving the sec nd assignment of error, We have ruled likewise that !
the respondent court committed no error in holding that the mortgage lien
executed by Rosa Ver over the entire parcel of land on October 20, 1936
which was not annotated on the original certificate of title could not have
attached to the land. Stated otherwise, the failure of the petitioner bank to
appear during the registration proceedings and claim such interest in the
land, and further to do so after more than a year after the issuance of the
decree of registration which rendered the title undefeasible and free from
any collateral attack by any person g title to or interest in the land prior to
registration proceedings, has resulted into the petitioner bank being
virtually deprived of its mortgage. t follows, therefore, that the acquisition
of the other half portion of the lot in question by the intervenors-spouses
Melitona Lagpacan and Jorge Macalas into whose hands said one-half ()
passed as a result of Civil Case No. 1846 of the Court of First nstance of
locos Norte entitled "Jorge Maracas, et al., vs. Alfredo Formoso, et al."
was valid and regular, which holding of the Court of Appeals is correct and
We affirm the same.
To recapitulate, the mortgage executed by Rosa Ver in favor of the PNB
was valid only as regards her one-half () conjugal share in Lot 9068. On
the other hand, the intervenors-spouses Melitona Lagpacan and Jorge
Malacas acquired their right to the shares of Rosa Ver and Guillermo
Bitanga in the same lot from the Manila Trading Co., another creditor of
Rosa Ver, which acquired "all the rights, title, interests and participations
which ... Guillermo Bitanga and Row Ver de Bitanga have or might have"
over Lot 9068 (Exh 4-Lagpacan) more than two (2) years after the decree
of registration was entered in the name of the Bitanga spouses on
September 14, 1937. Since Original Certificate of Title No. 7683 covering
the land in question was issued on December 15, 1937 free from any
mortgage lien and no such lien was recorded thereafter even until May 25,
1940 when the certificate of sale in favor of the Manila Trading Co. as
highest bidder of the shares of Rosa and Guillermo was annotated on the
title (Exh. A-4), it is quite clear that as between the PNB and the Manila
Trading Co., the latter had the better rights.
One further point that militates against the claim of the petitioner bank who
now prosecutes its claim or mortgage lien in behalf of Felizardo Reyes to
whom the bank sold the property on May 24, 1954, is the finding of the
appellate court that said Felizardo Reyes is a purchaser in bad faith, a
notice of lis pendens having been annotated on the certificate of title
cover. ing the property sometime before the de thereof was made by the
Philippine National Bank in favor of F o Reyes. This finding of fact is
conclusive and binding upon Us and bad faith We can neither condone nor
reward.
The judgment of the Court of Appeals must, however, be modified.
Paragraph (d) of the dispositive portion of the decision appealed from
directed the Register of Deeds to issue in lieu of Transfer Certificate of
Title Nos. T-2701 and T-3944 another certificate of title in the names of the
plaintiffs and in. intervenors as follows:
Undivided behalf () share to Pedro Bitanga married
to Agripina . Fernando Bitanga single Gregorio
Bitanga single, Guillermo Bitanga, single, Clarita
Bitanga, married to Agripino L. Rabago, all of legal
age, Filipino citizens, and residents of Laoag, locos
Norte, and the remaining undivided one-half (1/2) re
to the spouses Jorge Malacas and Melitona
Lagpacan, both of legal age, Filipino citizens, and
residents of Burgos, locos Norte free from
incumbrance regarding the claims of the Philippine
National Bank and Felizardo Reyes, after payment of
lawful fees.
As We have hereinbefore ruled that the Manila Trading Company acquired
not only the rights, title, interests and participation of Rosa Ver to one-half
() of Lot 9068 but also that pertaining to Guillermo Bitanga or one-fifth
(1/5) of the other half of the lot which the latter shared with his sister and
three (3) brothers, each one having one-fifth (1/5) share each, the
intervenor spouses as successors-in-interest of the Manila Trading
Company are entitled to six-tenths (6/10) or three-fifths (3/5) of the entire
lot, and not merely one-half () thereof as held by the lower court and the
appellate court. The undivided two-fifths (2/5) share only should appertain
to Pedro Bitanga, Fernando Bitanga, Gregorio Bitanga and Clarita
Bitanga.
WHEREFORE, N VEW OF THE FOREGONG, the judgment of the Court
of Appeals is hereby affirmed with modification in the sense that paragraph
(d) is hereby amended to read as follows:
(d) Since the issuance of Transfer Certificate of Title No. T2701, Exhibit
"D" in favor of the Philippine National Bank, and Transfer Certificate of Title
No. T-3944, Exhibit "16", in favor of Felizardo Reyes, was without legal
basis, they are, therefore, declared null and void and cancelled. The
Register of Deeds is hereby ordered to issue in hell of the foregoing
transfer certificates of title another certificate of title in the names of the
private respondents as follows:
Undivided two-fifths (2/5) share to Pedro Bitanga, married to Agripina,
Purisima Fernando Bitanga, single, Gregorio Bitanga, single, and Clarita
Bitanga, married to Agripino L. Rabago, all of legal age, Filipino citizens,
and residents of Laoag, locos Norte, and the remaining undivided three-
fifths (3/5) share to the spouses Jorge Maracas and Melitona Lagpacan,
both of legal age, Filipino citizens, and residents of Burgos, locos Norte,
free from incumbrance regarding the claims of the Philippine National
Bank and Felizardo Reyes, after payment of lawful fees.
Costs against the petitioner.
Credit Transactions Full Text Cases Atty. Adviento!!!!"$&
SO ORDERED.
FIRST DIVISION
G.R. No. 109946 February 9, 1996
DEVELOPMENT BANK OF THE PHILIPPINES, petitioner,
vs.
COURT OF APPEALS, MYLO O. QUINTO and JESUSA CHRISTINE S.
CHUPUICO, respondents.
D E C I S I O N
BELLOSILLO, J.:
DEVELOPMENT BANK OF THE PHLPPNES filed this petition for review
on certiorari assailing the decision of the Court of Appeals holding that the
mortgages in favor of the bank were void and ineffectual because when
constituted the mortgagors, who were merely applicants for free patent of
the property mortgaged, were not the owners thereof in fee simple and
therefore could not validly encumber the same.
1
On 20 April 1978 petitioner granted a loan of P94,000.00 to the spouses
Santiago Olidiana and Oliva Olidiana. To secure the loan the Olidiana
spouses executed a real estate mortgage on several properties among
which was Lot 2029 (Pls-61) with Tax Declaration No. 2335/1, situated in
Bo. Bago Capalaran, Molave, Zamboanga del Sur, with an area of 84,108
square meters, more or less. At the time of the mortgage the property was
still the subject of a Free Patent application filed by the Olidianas with the
Bureau of Lands but registered under their name in the Office of the
Municipal Assessor of Molave for taxation purposes.
2
On 2 November 1978 the Olidiana spouses filed with the Bureau of Lands
a Request for Amendment of their Free Patent applications over several
parcels of land including Lot No. 2029 (Pls-61). n this request they
renounced, relinquished and waived all their rights and interests over Lot
No. 2029 (Pls-61) in favor of Jesusa Christine Chupuico and Mylo O.
Quinto, respondents herein. On 10 January 1979 Free Patent Nos. X-5-
2223 (covering one-half of Lot No. 2029 [Pls-61] and X-5-2224 (covering
the other half of the same Lot No. 2029 [Pls-61]) were accordingly granted
respectively to respondents Jesusa Christine Chupuico and Mylo O.
Quinto by the Bureau of Lands District Land Office No. X-5, Pagadian
City. Jesusa Christine Chupuico later obtained Original Certificate of Title
No. P-27,361 covering aforementioned property while Mylo O. Quinto was
also issued Original Certificate of Title No. P-27,362 in view of the
previous free patent.
3
On 20 April 1979 an additional loan of P62,000.00 was extended by
petitioner to the Olidiana spouses. Thus on 23 April 1979 the Olidianas
executed an additional mortgage on the same parcels of land already
covered by the first mortgage of 4 April 1978. This second mortgage also
included Lot No. 2029 (Pls-61) as security for the Olidiana spouses'
financial obligation with petitioner.
4
Thereafter, for failure of Santiago and Oliva Olidiana to comply with the
terms and conditions of their promissory notes and mortgage contracts,
petitioner extrajudicially foreclosed all their mortgaged properties.
Consequently, on 14 April 1983 these properties, including Lot No. 2029
(Pls-61) were sold at public auction for P88,650.00 and awarded to
petitioner as the highest bidder. A Certificate of Sale was thereafter
executed in favor of petitioner and an Affidavit of Consolidation of
Ownership registered in its name. However, when petitioner tried to
register the sale and the affidavit of consolidation and to have the tax
declaration transferred in its name it was discovered that Lot No. 2029
(Pls-61) had already been divided into two (2) parcels, one-half (l/2) now
known as Lot 2029-A and covered by OCT No. P-27,361 in the name of
Jesusa Christine Chupuico, while the other half known as Lot 2029-B was
covered by the same OCT No. P-27,361 in the name of Mylo O. Quinto.
5
n view of the discovery, petitioner filed an action for Quieting of Title and
Cancellation or Annulment of Certificate of Title against respondents. After
trial the Regional Trial Court of Molave, Zamboanga del Sur, Branch 23,
rendered judgment against petitioner.
6
The court ruled that the contracts of
mortgage entered into by petitioner and the subsequent foreclosure of
subject property could not have vested valid title to petitioner bank
because the mortgagors were not the owners in fee simple of the property
mortgaged. The court also found the mortgages over Lot No. 2029 (Pls-
61) of no legal consequence because they were executed in violation of
Art. 2085, par. 2, of the New Civil Code which requires that the mortgagor
be the absolute owner of the thing mortgaged. According to the court a
quo there was no evidence to prove that the mortgagors of the land in
dispute were its absolute owners at the time of the mortgage to petitioner.
The factual findings of the lower court disclose that when the Olidiana
spouses mortgaged Lot No. 2029 (Pls-61) to petitioner it was still the
subject of a miscellaneous sales application by the spouses with the
Bureau of Lands. Since there was no showing that the sales application
was approved before the property was mortgaged, the trial court
concluded that the Olidiana spouses were not yet its owners in fee simple
when they mortgaged the property. The lower court also said that with the
subsequent issuance of the Free Patent by the Bureau of Lands in the
name of respondents Chupuico and Quinto, it could be gleaned that the
property was indeed public land when mortgaged to petitioner. Therefore
petitioner could not have acquired a valid title over the subject property by
virtue of the foreclosure and subsequent sale at public auction.
7
Resultantly, the trial court declared the following as null and void insofar as
they related to Lot No. 2029 (Pls-61) being a public land: the real estate
mortgage dated 4 April 1978, the second mortgage dated 23 April 1979,
the foreclosure sale on 14 April 1983, the certificate of sale registered with
the Register of Deeds of Zamboanga del Sur on 1 September 1983, and
the affidavit of consolidation of ownership registered with the Register of
Deeds on 2 August 1985.
Petitioner then appealed to the Court of Appeals which likewise ruled in
favor of respondents, hence the instant petition.
8
Petitioner now seeks to overturn the decision of respondent Court of
Appeals holding that Lot No. 2029 (Pls-61) could not have been the
subject of a valid mortgage and foreclosure proceeding because it was
public land at the time of the mortgage, and that the act of Jesusa
Christine S. Chupuico and Mylo O. Quinto in securing the patents was not
tainted with fraud. The crux of this appeal thus lies in the basic issue of
whether the land in dispute could have been validly mortgaged while still
the subject of a Free Patent Application with the government.
9
We agree with the court a quo. We hold that petitioner bank did not
acquire valid title over the land in dispute because it was public land when
mortgaged to the bank. We cannot accept petitioner's contention that the
lot in dispute was no longer public land when mortgaged to it since the
Olidiana spouses had been in open, continuous, adverse and public
possession thereof for more than thirty (30) years.
10
n Visayan Realty,
Inc. v. Meer
11
we ruled that the approval of a sales application merely
authorized the applicant to take possession of the land so that he could
comply with the requirements prescribed by law before a final patent could
be issued in his favor. Meanwhile the government still remained the owner
thereof, as in fact the application could still be canceled and the land
awarded to another applicant should it be shown that the legal
requirements had not been complied with. What divests the government of
title to the land is the issuance of the sales patent and its subsequent
registration with the Register of Deeds. t is the registration and issuance
of the certificate of title that segregate public lands from the mass of public
domain and convert it into private property.
12
Since the disputed lot in the
case before us was still the subject of a Free Patent Application when
mortgaged to petitioner and no patent was granted to the Olidiana
spouses, Lot No. 2029 (Pls-61) remained part of the public domain.
With regard to the validity of the mortgage contracts entered into by the
parties, Art. 2085, par. 2, of the New Civil Code specifically requires that
the pledgor or mortgagor be the absolute owner of the thing pledged or
mortgaged. Thus, since the disputed property was not owned by the
Olidiana spouses when they mortgaged it to petitioner the contracts of
mortgage and all their subsequent legal consequences as regards Lot No.
2029 (Pls-61) are null and void. n a much earlier case
13
we held that it
was an essential requisite for the validity of a mortgage that the mortgagor
be the absolute owner of the property mortgaged, and it appearing that the
mortgage was constituted before the issuance of the patent to the
mortgagor, the mortgage in question must of necessity be void and
Credit Transactions Full Text Cases Atty. Adviento!!!!"$'
ineffective. For, the law explicitly requires as imperative for the validity of a
mortgage that the mortgagor be the absolute owner of what is mortgaged.
Finally, anent the contention of petitioner that respondents fraudulently
obtained the property in litigation, we also find for the latter. As correctly
found by the lower courts, no evidence existed to show that respondents
had prior knowledge of the real estate mortgages executed by the Olidiana
spouses in favor of petitioner. The act of respondents in securing the
patents cannot therefore be categorized as having been tainted with fraud.
WHEREFORE, the petition is DENED and the questioned decision of the
Court of Appeals is AFFRMED.
SO ORDERED.
EN BANC
[G.R. No. L-9306. May 25, 1956.]
SOUTHERN MOTORS, INC., Plaintiff-Appellee, vs. ELISEO BARBOSA,
Defendant-Appellant.

D E C I S I O N
CONCEPCION, J.:
This is an appeal from a decision of the Court of First nstance of
loilo:chanroblesvirtuallawlibrary
"(a) Ordering the Defendant Eliseo Barbosa to pay to the Court, for the
benefit of the Plaintiff within a period of ninety (90) days from receipt by
the Defendant hereof, the sum of P2,889.53, with interest at the rate of
12% per annum computed on the basis of the amounts of the installments
mentioned in the mortgage and of the dates they respectively fell due, until
fully paid; chan roblesvirtualawlibrarythe sum of P200 by way of attorney's
fees, plus costs; chan roblesvirtualawlibraryand (b) Upon failure of the
Defendant to pay as aforesaid, ordering the land described in the
complaint and subject of the mortgage to be sold at public auction in
accordance with law in order to realize the amount of the judgment debt
and costs.
Although originally forwarded to the Court of Appeals, the same has
certified the record to this Court in view of the fact that the issues raised in
the appeal involve merely questions of law.
Plaintiff, Southern Motors, nc., brought this action against Eliseo Barbosa,
to foreclose a real estate mortgage, constituted by the latter in favor of the
former, as security for the payment of the sum of P2,889.53 due to said
Plaintiff from one Alfredo Brillantes, who had failed to settle his obligation
in accordance with the terms and conditions of the corresponding deed of
mortgage. Defendant Eliseo Barbosa filed an answer admitting the
allegations of the complaint and alleging, by way of "special and
affirmative defense:chanroblesvirtuallawlibrary
"That the Defendant herein has executed the deed of mortgage Annex A
for the only purpose of guaranteeing as surety and/or guarantor the
payment of the above mentioned debt of Mr. Alfredo Brillantes in favor of
the Plaintiff.
"That the Plaintiff until now has no right action against the herein
Defendant on the ground that said Plaintiff, without motive whatsoever, did
not intent or intent to exhaust all recourses to collect from the true debtor
Mr. Alfredo Brillantes the debt contracted by the latter in favor of said
Plaintiff, and did not resort nor intends to resort all the legal remedies
against the true debtor Mr. Alfredo Brillantes, notwithstanding the fact that
said Mr. Alfredo Brillantes is solvent and has many properties within the
Province of loilo.
Thereupon, Plaintiff moved for summary judgment which a branch of the
Court of First nstance of loilo, presided over by Hon. Roman baez,
Judge, denied upon the ground that it "is premature. Plaintiff moved for a
reconsideration of the order to this effect. Soon later, he filed, also, another
motion praying that the case be transferred to another branch of said
court, because that of Judge baez would be busy trying cadastral cases,
and had adopted the "policy of refraining from entertaining any other civil
cases and all incidents related thereto, until after said cadastral cases
shall have been finally disposed of. With the express authority of Judge
baez, the case was referred to the branch of said court, presided over by
Hon. Querube C. Makalintal, Judge, for action, upon said motion for
reconsideration. Thereafter, Judge Makalintal rendered the
aforementioned decision, from which the Defendant has appealed. He
maintains, in his brief, that:chanroblesvirtuallawlibrary
"1. The trial court erred in hearing Plaintiff-Appellee's 'motion for
reconsideration' dated June 9, 1951, notwithstanding the fact that
Defendant-Appellant was not served with a copy thereof nor served with
notice of the hearing thereof.
2. "The trial court erred in rendering a 'judgment on the pleadings' in
Appellee's favor when no issue was at all submitted to it for resolution, to
the prejudice of the substantial rights of Appellant.
3. "The court a quo erred in depriving Defendant-Appellant of his property
rights without due process of law.
The first assignment of error is based upon an erroneous predicate, for,
contrary to Defendant's assertion, his counsel in the lower court, Atty.
Manuel F. Zamora, through an employee of his office, by the name of
Agripino Aguilar, was actually served on June 9, 1951, with copy of
Plaintiff's motion for reconsideration, with notice to the effect that said
motion would be submitted for the consideration and approval of the lower
court, on Saturday, June 16, 1951, at 8:chanroblesvirtuallawlibrary00 a.m.,
or soon thereafter as counsel may be heard.
The second assignment of error is, likewise, untenable. t is not true that
there was no issue submitted for determination by the lower court when it
rendered the decision appealed from.
t will be recalled that each one of the allegations made in Plaintiff's
complaint were expressly admitted in Defendant's answer, in which he
merely alleged, as "special and affirmative defense, that Plaintiff is not
entitled to foreclose the mortgage constituted in its favor by the Defendant,
because the property of Alfredo Brillantes, the principal debtors, had not
been exhausted as yet, and were not sought to be exhausted, for the
satisfaction of Plaintiff's credit. Thus, there was no question of fact left for
determination. The only issue set up by the pleadings was the sufficiency
of said affirmative defense. And such was the only point discussed by the
Defendant in his opposition to Plaintiff's motion for a summary judgment,
referring, evidently, to a judgment on the pleadings.
Plaintiff's motion for reconsideration of the order of Judge Roman baez
refusing to render said judgment, upon the ground that it was premature,
revived said issue of sufficiency of the aforementioned affirmative defense,
apart from calling for a reexamination of the question posed by said order
of Judge baez, namely, whether it was proper, under the circumstances,
to render a judgment on the pleadings. n other words, said motion for
reconsideration had the effect of placing before then Judge Makalintal, for
resolution, the following issues, to wit:chanroblesvirtuallawlibrary (1)
whether a summary judgment or a judgment on the pleadings was in
order, considering the allegations of Plaintiff's complaint and those of
Defendant's answer; chan roblesvirtualawlibraryand (2) whether the
mortgage in question could be foreclosed although Plaintiff had not
exhausted, and did not intend to exhaust, the properties of his principal
debtor, Alfredo Brillantes.
The third assignment of error is predicated upon the alleged lack of notice
of the hearing of Plaintiff's motion for reconsideration. As stated in our
discussion of the first assignment of error, this pretense is refuted by the
record. Moreover, it is obvious that Defendant's affirmative defense is
devoid of merit for:chanroblesvirtuallawlibrary
1. The deed of mortgage executed by him specifically
provides:chanroblesvirtuallawlibrary
"That if said Mr. Alfredo Brillantes or herein mortgagor, his heirs,
executors, administrators and assigns shall well and truly perform the full
obligations above-stated according to the terms thereof, then this
mortgage shall be null and void, otherwise it shall remain in full force and
effect, in which event herein mortgagor authorizes and empowers herein
mortgagee-company to take any of the following actions to enforce said
payment;.
"(a) Foreclose, judicially or extrajudicially, the chattel mortgage above
referred to and/or also this mortgage, applying the proceeds of the
purchase price at public sale of the real property herein mortgaged to any
deficiency or difference between the purchase price of said chattel at
public auction and the amount of P2,889.53, together with its interest
hereby secured; chan roblesvirtualawlibraryor
Credit Transactions Full Text Cases Atty. Adviento!!!!"$(
"(b) Simply foreclose this mortgage judicially in accordance with the
provisions of section 2, Rule 70, Rules of Court, or extra- judicially under
the provisions of Act No. 3135 and Act No. 4118, to satisfy the full amount
of P2,889.53, together with its interest of 12 per cent per annum.
2. The right of guarantors, under Article 2058 of the Civil Code of the
Philippines, to demand exhaustion of the property of the principal debtor,
exists only when a pledge or a mortgage has not been given as special
security for the payment of the principal obligation. Guarantees, without
any such pledge or mortgage, are governed by Title XV of said Code,
whereas pledges and mortgages fall under Title XV of the same Code, in
which the following provisions, among others, are
found:chanroblesvirtuallawlibrary
ART. 2087. "t is also of the essence of these contracts 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.
ART. 2126. "The mortgage directly and immediately subjects the property
upon which it is imposed, whoever the possessor may be, to the fulfillment
of the obligation for whose security it was constituted.
3. t has been held already (Saavedra vs. Price, 68 Phil., 688), that a
mortgagor is not entitled to the exhaustion of the property of the principal
debtor.
4. Although an ordinary personal guarantor not a mortgagor or pledgor
may demand the aforementioned exhaustion, the creditor may, prior
thereto, secure a judgment against said guarantor, who shall be entitled,
however, to a deferment of the execution of said judgment against him
until after the properties of the principal debtor shall have been exhausted
to satisfy the obligation involved in the case.
Wherefore, the decision appealed from is hereby affirmed, with costs
against the Defendant-Appellant. t is SO ORDERED.
SECOND DVSON

G.R. No. 125055 October 30, 1998
A. FRANCISCO REALTY AND DEVELOPMENT CORPORATION,
petitioner,
vs.
COURT OF APPEALS and SPOUSES ROMULO S.A. JAVILLONAR and
ERLINDA P. JAVILLONAR, respondents.

MENDOZA, J.:
This is a petition for review on certiorari of the decision rendered on
February 29, 1996 by the Court of Appeals
1
reversing, in toto, the decision
of the Regional Trial Court of Pasig City in Civil Case No. 62290, as well
as the appellate court's resolution of May 7, 1996 denying reconsideration.
Petitioner A. Francisco Realty and Development Corporation granted a
loan of P7.5 Million to private respondents, the spouses Romulo and
Erlinda Javillonar, in consideration of which the latter executed the
following documents: (a) a promissory note, dated November 27, 1991,
stating an interest charge of 4% per month for six months; (b) a deed of
mortgage over realty covered by TCT No. 58748, together with the
improvements thereon; and (c) an undated deed of sale of the mortgaged
property in favor of the mortgagee, petitioner A. Francisco Realty.
2
The interest on the said loan was to be paid in four installments: half of the
total amount agreed upon (P900,000.00) to be paid in advance through a
deduction from the proceeds of the loan, while the balance to be paid
monthly by means of checks post-dated March 27, April 27, and May 27,
1992. The promissory note expressly provided that upon "failure of the
MORTGAGOR (private respondents) to pay the interest without prior
arrangement with the MORTGAGEE (petitioner), full possession of the
property will be transferred and the deed of sale will be registered.
3
For
this purpose, the owner's duplicate of TCT No. 58748 was delivered to
petitioner A. Francisco Realty.
Petitioner claims that private respondents failed to pay the interest and, as
a consequence, it registered the sale of the land in its favor on February
21, 1992. As a result, TCT No. 58748 was cancelled and in lieu thereof
TCT No. PT-85569 was issued in the name of petitioner A. Francisco
Realty.
4
Private respondents subsequently obtained an additional loan of P2.5
Million from petitioner on March 13, 1992 for which they signed a
promissory note which reads:
PROMISSORY NOTE
For value received promise to pay A. FRANCSCO
REALTY AND DEVELOPMENT CORPORATON, the
additional sum of Two Million Five Hundred Thousand
Pesos (P2,500,000.00) on or before April 27, 1992,
with interest at the rate of four percent (4%) a month
until fully paid and if after the said date this note
and/or the other promissory note of P7.5 Million
remains unpaid and/or unsettled, without any need for
prior demand or notification, promise to vacate
voluntarily and willfully and/or allow A.FRANCSCO
REALTY AND DEVELOPMENT CORPORATON to
appropriate and occupy for their exclusive use the real
property located at 56 Dragonfly, Valle Verde V,
Pasig, Metro Manila.
5
Petitioner demanded possession of the mortgaged realty and the payment
of 4% monthly interest from May 1992, plus surcharges. As respondent
spouses refused to vacate, petitioner filed the present action for
possession before the Regional Trial Court in Pasig City.
6
n their answer, respondents admitted liability on the loan but alleged that
it was not their intent to sell the realty as the undated deed of sale was
executed by them merely as an additional security for the payment of their
loan. Furthermore, they claimed that they were not notified of the
registration of the sale in favor of petitioner A. Francisco Realty and that
there was no interest then unpaid as they had in fact been paying interest
even subsequent to the registration of the sale. As an alternative defense,
respondents contended that the complaint was actually for ejectment and,
therefore, the Regional Trial Court had no jurisdiction to try the case. As
counterclaim, respondents sought the cancellation of TCT No. PT-85569
as secured by petitioner and the issuance of a new title evidencing their
ownership of the property.
7
On December 19, 1992, the Regional Trial Court rendered a decision, the
dispositive portion of which reads as follows:
WHEREFORE, prescinding from the foregoing
considerations, judgment is hereby rendered
declaring as legal and valid, the right of ownership of
A. Francisco Realty Find Development Corporation,
over the property subject of this case and now
registered in its name as owner thereof, under TCT
No. 85569 of the Register of Deeds of Rizal, situated
at No. 56 Dragonfly Street, Valle Verde V, Pasig,
Metro Manila.
Consequently, defendants are hereby ordered to
cease and desist from further committing acts of
dispossession or from withholding possession from
plaintiff of the said property as herein described and
specified.
Claim for damages in all its forms, however, including
attorney's fees, are hereby denied, no competent
proofs having been adduced on record, in support
thereof.
8
Credit Transactions Full Text Cases Atty. Adviento!!!!"$)
Respondent spouses appealed to the Court of Appeals which reversed the
decision of the trial court and dismissed the complaint against them. The
appellate court ruled that the Regional Trial Court had no jurisdiction over
the case because it was actually an action for unlawful detainer which is
exclusively cognizable by municipal trial courts. Furthermore, it ruled that,
even presuming jurisdiction of the trial court, the deed of sale was void for
being in fact a pactum commissorium which is prohibited by Art. 2088 of
the Civil Code.
Petitioner A. Francisco Realty filed a motion for reconsideration, but the
Court of Appeals denied the motion in its resolution, dated May 7, 1996.
Hence, this petition for review on certiorari raising the following issues:
WHETHER OR NOT THE COURT OF APPEALS
ERRED N RULNG THAT THE REGONAL TRAL
COURT HAD NO JURSDCTON OVER THE
COMPLANT FLED BY THE PETTONER.
WHETHER OR NOT THE COURT OF APPEALS
ERRED N RULNG THAT THE CONTRACTUAL
DOCUMENTS SUBJECT OF THE NSTANT CASE
ARE CONSTTUTVE OF PACTUM
COMMSSORUM AS DEFNED UNDER ARTCLE
2088 OF THE CVL CODE OF THE PHLPPNES.
On the first issue, the appellate court stated:
Ostensibly, the cause of action in the complaint
indicates a case for unlawful detainer, as contra-
distinguished from accion publiciana. As contemplated
by Rule 70 of the Rules of Court, an action for
unlawful detainer which falls under the exclusive
jurisdiction of the Metropolitan or Municipal Trial
Courts, is defined as withholding from by a person
from another for not more than one year, the
possession of the land or building to which the latter is
entitled after the expiration or termination of the
supposed rights to hold possession by virtue of a
contract, express or implied. (Tenorio vs. Gamboa, 81
Phil. 54; Dikit vs. Dicaciano, 89 Phil. 44). f no action
is initiated for forcible entry or unlawful detainer within
the expiration of the 1 year period, the case may still
be filed under the plenary action to recover
possession by accion publiciana before the Court of
First nstance (now the Regional Trial Court) (Medina
vs. Valdellon, 63 SCRA 278). n plain language, the
case at bar is a legitimate ejectment case filed within
the 1 year period from the jurisdictional demand to
vacate. Thus, the Regional Trial Court has no
jurisdiction over the case. Accordingly, under Section
33 of B.P. Blg. 129 Municipal Trial Courts are vested
with the exclusive original jurisdiction over forcible
entry and unlawful detainer case. (Sen Po Ek
Marketing Corp. vs. CA, 212 SCRA 154 [1990])
9
We think the appellate court is in error. What really distinguishes an action
for unlawful detainer from a possessory action (accion publiciana) and
from a reivindicatory action (accion reivindicatoria) is that the first is limited
to the question of possession de facto.
An unlawful detainer suit (accion interdictal) together
with forcible entry are the two forms of an ejectment
suit that may be filed to recover possession of real
property. Aside from the summary action of ejectment,
accion publiciana or the plenary action to recover the
right of possession and accion reivindicatoria or the
action to recover ownership which includes recovery
of possession, make up the three kinds of actions to
judicially recover possession.
llegal detainer consists in withholding by a person
from another of the possession of a land or building to
which the latter is entitled after the expiration or
termination of the former's right to hold possession by
virtue of a contract, express or implied. An ejectment
suit is brought before the proper inferior court to
recover physical possession only or possession de
facto and not possession de jure, where
dispossession has lasted for not more than one year.
Forcible entry and unlawful detainer are quieting
processes and the one-year time bar to the suit is in
pursuance of the summary nature of the action. The
use of summary procedure in ejectment cases is
intended to provide an expeditious means of
protecting actual possession or right to possession of
the property. They are not processes to determine the
actual title to an estate. f at all, inferior courts are
empowered to rule on the question of ownership
raised by the defendant in such suits, only to resolve
the issue of possession. ts determination on the
ownership issue is, however, not conclusive.
10
The allegations in both the original and the amended complaints of
petitioner before the trial court clearly raise issues involving more than the
question of possession, to wit: (a) the validity of the Transfer of ownership
to petitioner; (b) the alleged new liability of private respondents for
P400,000.00 a month from the time petitioner made its demand on them to
vacate; and (c) the alleged continuing liability of private respondents under
both loans to pay interest and surcharges on such. As petitioner A.
Francisco Realty alleged in its amended complaint:
5. To secure the payment of the sum of 7.5 Million
together with the monthly interest, the defendant
spouses agreed to execute a Deed of Mortgage over
the property with the express condition that if and
when they fail to pay monthly interest or any
infringement thereof they agreed to convert the
mortgage into a Deed of Absolute Sale in favor of the
plaintiff by executing Deed of Sale thereto, copy of
which is hereto attached and incorporated herein as
Annex "A";
6. That in order to authorize the Register of Deeds
into registering the Absolute Sale and transfer to the
plaintiff, defendant delivered unto the plaintiff the said
Deed of Sale together with the original owner's copy
of Transfer Certificate of Title No. 58748 of the
Registry of Rizal, copy of which is hereto attached and
made an integral part herein as Annex "B";
7. That defendant spouses later secured from the
plaintiff an additional loan of P2.5 Million with the
same condition as aforementioned with 4% monthly
interest;
8. That defendants spouses failed to pay the
stipulated monthly interest and as per agreement of
the parties, plaintiff recorded and registered the
Absolute Deed of Sale in its favor on and was issued
Transfer Certificate of Title No. PT-85569, copy of
which is hereto attached and incorporated herein as
Annex "C";
9. That upon registration and transfer of the Transfer
Certificate of Title in the name of the plaintiff, copy of
which is hereto attached and incorporated herein as
Annex "C", plaintiff demanded the surrender of the
possession of the above-described parcel of land
together with the improvements thereon, but
defendants failed and refused to surrender the same
to the plaintiff without justifiable reasons thereto;
Neither did the defendants pay the interest of 4% a
month from May, 1992 plus surcharges up to the
present;
10. That it was the understanding of the parties that if
and when the defendants shall fail to pay the interest
due and that the Deed of Sale be registered in favor
Credit Transactions Full Text Cases Atty. Adviento!!!!"$*
of plaintiff, the defendants shall pay a monthly rental
of P400,000.00 a month until they vacate the
premises, and that if they still fail to pay as they are
still failing to pay the amount of P400,000.00 a month
as rentals and/or interest, the plaintiff shall take
physical possession of the said property;
11
t is therefore clear from the foregoing that petitioner A. Francisco Realty
raised issues which involved more than a simple claim for the immediate
possession of the subject property. Such issues range across the full
scope of rights of the respective parties under their contractual
arrangements. As held in an analogous case:
The disagreement of the parties in Civil Case No. 96
of the Justice of the Peace of Hagonoy, Bulacan
extended far beyond the issues generally involved in
unlawful detainer suits. The litigants therein did not
raise merely the question of who among them was
entitled to the possession of the fishpond of Federico
Suntay. For all judicial purposes, they likewise prayed
of the court to rule on their respective rights under the
various contractual documents their respective
deeds of lease, the deed of assignment and the
promissory note upon which they predicate their
claims to the possession of the said fishpond. n other
words, they gave the court no alternative but to rule
on the validity or nullity of the above documents.
Clearly, the case was converted into the determination
of the nature of the proceedings from a mere detainer
suit to one that is "incapable of pecuniary estimation"
and thus beyond the legitimate authority of the Justice
of the Peace Court to rule on.
12
Nor can it be said that the compulsory counterclaim filed by respondent
spouses challenging the title of petitioner A. Francisco Realty was merely
a collateral attack which would bar a ruling here on the validity of the said
title.
A counterclaim is considered a complaint, only this
time, it is the original defendant who becomes the
plaintiff (Valisno v. Plan, 143 SCRA 502 (1986). t
stands on the same footing and is to be tested by the
same rules as if it were an independent action.
Hence, the same rules on jurisdiction in an
independent action apply to a counterclaim (Vivar v.
Vivar, 8 SCRA 847 (1963); Calo v. Ajar nternational,
nc. v. 22 SCRA 996 (1968); Javier v. ntermediate
Appellate Court, 171 SCRA 605 (1989); Quiason,
Philippine Courts and Their Jurisdictions, 1993 ed., p.
203).
13
On the second issue, the Court of Appeals held that, even "on the
assumption that the trial court has jurisdiction over the instant case,"
petitioner's action could not succeed because the deed of sale on which it
was based was void, being in the nature of a pactum commissorium
prohibited by Art. 2088 of the Civil Code which provides:
Art. 2088. The creditor cannot appropriate the things
given by way to pledge or mortgage, or dispose of
them. Any stipulation to the contrary is null and void.
With respect to this question, the ruling of the appellate court should be
affirmed. Petitioner denies, however, that the promissory notes contain a
pactum commissorium. t contends that
What is envisioned by Article 2088 of the Civil Code of
the Philippines is a provision in the deed of mortgage
providing for the automatic conveyance of the
mortgaged property in case of the failure of the debtor
to pay the loan (Tan v. West Coast Life Assurance
Co., 54 Phil. 361). A pactum commissorium is a
forfeiture clause in a deed of mortgage (Hechanova v.
Adil, 144 SCRA 450; Montevergen v. Court of
Appeals, 112 SCRA 641; Report of the Code
Commission, 156).
Thus, before Article 2088 can find application herein,
the subject deed of mortgage must be scrutinized to
determine if it contains such a provision giving the
creditor the right "to appropriate the things given by
way of mortgage without following the procedure
prescribed by law for the foreclosure of the mortgage"
(Ranjo v. Salmon, 15 Phil. 436). IN SHORT, THE
PROSCRIBED STIPULATION SHOULD BE FOUND
IN THE MORTGAGE DEED ITSELF.
14
The contention is patently without merit. To sustain the theory of petitioner
would be to allow a subversion of the prohibition in Art. 2088.
n Nakpil v. Intermediate Appellate Court,
15
which involved the violation of
a constructive trust, no deed of mortgage was expressly executed
between the parties in that case: Nevertheless, this Court ruled that an
agreement whereby property held in trust was ceded to the trustee upon
failure of the beneficiary to pay his debt to the former as secured by the
said property was void for being a pactum commissorium. twas there
held:
The arrangement entered into between the parties,
whereby Pulong Maulap was to be "considered sold to
him (respondent) . . ." in case petitioner fails to
reimburse Valdes, must then be construed as
tantamount to a pactum commissorium which is
expressly prohibited by Art. 2088 of the Civil Code.
For, there was to be automatic appropriation of the
property by Valdez in the event of failure of petitioner
to pay the value of the advances. Thus, contrary to
respondent's manifestations, all the elements of a
pactum commissorium were present: there was a
creditor-debtor relationship between the parties; the
property was used as security for the loan; and, there
was automatic appropriation by respondent of Pulong
Maulap in case of default of petitioner.
16
Similarly, the Court has struck down such stipulations as contained in
deeds of sale purporting to be pacto de retro sales but found actually to be
equitable mortgages.
t has been consistently held that the presence of
even one of the circumstances enumerated in Art.
1602 of the New Civil Code is sufficient to declare a
contract of sale with right to repurchase an equitable
mortgage. This is so because pacto de retro sales
with the stringent and onerous effects that accompany
them are not favored. n case of doubt, a contract
purporting to be a sale with the right to repurchase
shall be construed as an equitable mortgage.
Petitioner, to prove her claim, cannot rely on the
stipulation in the contract providing that complete and
absolute title shall be vested on the vendee should
the vendors fail to redeem the property on the
specified date. Such stipulation that the ownership of
the property would automatically pass to the vendee
in case no redemption was effected within the
stipulated period is void for being a pactum
commissorium which enables the mortgagee to
acquire ownership of the mortgaged property without
need of foreclosure. ts insertion in the contract is an
avowal of the intention to mortgage rather that to sell
the property.
17
ndeed, in Reyes v. Sierra
18
this Court categorically ruled that a
mortgagee's mere act of registering the mortgaged property in his own
name upon the mortgagor's failure to redeem the property amounted to
the exercise of the privilege of a mortgagee in a pactum commissorium.
Credit Transactions Full Text Cases Atty. Adviento!!!!"%+
Obviously, from the nature of the transaction,
applicant's a predecessor-in-interest is a mere
mortgagee, and ownership of the thing mortgaged is
retained by Basilia Beltran, the mortgagor. The
mortgagee, however, may recover the loan, although
the mortgage document evidencing the loan was
nonregistrable being a purely private instrument.
Failure of mortgagor to redeem the property does not
automatically vest ownership of the property to the
mortgagee, which would grant the latter the right to
appropriate the thing mortgaged or dispose of it. This
violates the provision of Article 2088 of the New Civil
Code, which reads:
The creditor cannot appropriate the things given by
way of pledge or mortgage, or dispose by them. Any
stipulation to the contrary is null and void.
The act of applicant in registering the property in his
own name upon mortgagor's failure to redeem the
property would to a pactum commissorium which is
against good morals and public policy.
19
Thus, in the case at bar, the stipulations in the promissory notes providing
that, upon failure of respondent spouses to pay interest, ownership of the
property would be automatically transferred to petitioner A. Francisco
Realty and the deed of sale in its favor would be registered, are in
substance a pactum commissorium. They embody the two elements of
pactum commissorium as laid down in Uy Tong v. Court of Appeals,
20
to
wit:
The prohibition on pactum commissorium stipulations
is provided for by Article 2088 of the Civil Code:
Art. 2088. The creditor cannot appropriate the things
given by way of pledge or mortgagee, or dispose of
the same. Any stipulation to the contrary is null and
void.
The aforequoted provision furnishes the two elements
for pactum commissorium to exist: (1) that there
should be a pledge or mortgage wherein a property is
pledged or mortgaged by way of security for the
payment of the principal obligation; and (2) that there
should be a stipulation for an automatic appropriation
by the creditor of the thing pledged or mortgaged in
the event of non-payment of the principal obligation
within the stipulated period.
21
The subject transaction being void, the registration of the deed of sale, by
virtue of which petitioner A. Francisco Realty was able to obtain TCT No.
PT-85569 covering the subject lot, must also be declared void, as prayed
for by respondents in their counterclaim.
WHEREFORE, the decision of the Court of Appeals is AFFRMED, insofar
as it dismissed petitioner's complaint against respondent spouses on the
ground that the stipulations in the promissory notes are void for being a
pactum commissorium, but REVERSED insofar as it ruled that the trial
court had no jurisdiction over this case. The Register of Deeds of Pasig
City is hereby ORDERED to CANCEL TCT No. PT-85569 issued to
petitioner and SSUE a new one in the name of respondent spouses.
SO ORDERED.
DAYRT v CA (36 scra 548) L-29388 (Not available online)
RepubIic of the PhiIippines
Supreme Court
ManiIa
FIRST DIVISION
SPOUSES VICENTE YU AND G.R. No. 147902
DEMETRIA LEE-YU,
Petitioners, Present:
PANGANIBAN, C.J.,
(Chairperson)
YNARES-SANTIAGO,
- versus - AUSTRIA-MARTINEZ,
CALLEJO, SR., and
CHICO-NAZARIO, JJ.
PHILIPPINE COMMERCIAL
INTERNATIONAL BANK, PromuIgated:
Respondent. March 17, 2006
x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x
D E C I S I O N
AUSTRIA-MARTINEZ, J.:
Before the Court is a Petition for Review on Certiorari of the Decision[1]
dated November 14, 2000 of the Court of Appeals (CA) in CA-G.R. SP No.
58982 and the CA Resolution dated April 26, 2001, which denied
petitioner's Motion for Reconsideration.
The factual background of the case is as follows:
Under a Real Estate Mortgage dated August 15, 1994[2] and Amendments
of Real Estate Mortgage dated April 4, 1995[3] and December 4, 1995,[4]
spouses Vicente Yu and Demetria Lee-Yu (petitioners) and spouses
Ramon T. Yu and Virginia A. Tiu, or Yu Tian Hock aka Victorino/Vicente Yu,
mortgaged their title, interest, and participation over several parcels of
land located in Dagupan City and Quezon City, in favor of the Philippine
Commercial nternational Bank (respondent) as security for the payment of
a loan in the amount of P9,000,000.00.[5]
As the petitioners failed to pay the loan, the interest, and the penalties due
thereon, respondent filed on July 21, 1998 with the Office of the Clerk of
Court and Ex-Officio Sheriff of the Regional Trial Court of Dagupan City a
Petition for Extra-Judicial Foreclosure of Real Estate Mortgage on the
Dagupan City properties.[6] On August 3, 1998, the City Sheriff issued a
Notice of Extra-Judicial Sale scheduling the auction sale on September
10, 1998 at 10:00 o'clock in the morning or soon thereafter in front of the
Justice Hall, Bonuan, Tondaligan, Dagupan City.[7]
At the auction sale on September 10, 1998, respondent emerged as the
highest bidder.[8] On September 14, 1998, a Certificate of Sale was
issued in favor of respondent.[9] On October 1, 1998, the sale was
registered with the Registry of Deeds of Dagupan City.
About two months before the expiration of the redemption period, or on
August 20, 1999, respondent filed an Ex-Parte Petition for Writ of
Credit Transactions Full Text Cases Atty. Adviento!!!!"%"
Possession before the Regional Trial Court of Dagupan City, docketed as
Special Proceeding No. 99-00988-D and raffled to Branch 43 (RTC Branch
43).[10] Hearing was conducted on September 14, 1999 and respondent
presented its evidence ex-parte.[11] The testimony of Rodante Manuel
was admitted ex-parte and thereafter the petition was deemed submitted
for resolution.
On September 30, 1999, petitioners filed a Motion to Dismiss and to Strike
Out Testimony of Rodante Manuel stating that the Certificate of Sale dated
September 14, 1998 is void because respondent violated Article 2089 of
the Civil Code on the indivisibility of the mortgaged by conducting two
separate foreclosure proceedings on the mortgage properties in Dagupan
City and Quezon City and indicating in the two notices of extra-judicial sale
that petitioners' obligation is P10,437,015.20[12] as of March 31, 1998,
when petitioners are not indebted for the total amount of P20,874,031.56.
[13]
n the meantime, petitioners filed a complaint for Annulment of Certificate
of Sale before the Regional Trial Court of Dagupan City, docketed as Civil
Case No. 99-03169-D and raffled to Branch 44 (RTC Branch 44).
On February 14, 2000, RTC Branch 43 denied petitioners' Motion to
Dismiss and to Strike Out Testimony of Rodante Manuel, ruling that the
filing of a motion to dismiss is not allowed in petitions for issuance of writ
of possession under Section 7 of Act No. 3135.[14]
On February 24, 2000, petitioners filed a Motion for Reconsideration,
further arguing that the pendency of Civil Case No. 99-03169-D in RTC
Branch 44 is a prejudicial issue to Spec. Proc. No. 99-00988-D in RTC
Branch 43, the resolution of which is determinative on the propriety of the
issuance of a writ of possession.[15]
On May 8, 2000, RTC Branch 43 denied petitioners' Motion for
Reconsideration, holding that the principle of prejudicial question is not
applicable because the case pending before RTC Branch 44 is also a civil
case and not a criminal case.[16]
On June 1, 2000, petitioners filed a Petition for Certiorari with the CA.[17]
On November 14, 2000, the CA dismissed petitioners' Petition for
Certiorari on the grounds that petitioners violated Section 8 of Act No.
3135 and disregarded the rule against multiplicity of suits in filing Civil
Case No. 99-03169-D in RTC Branch 44 despite full knowledge of the
pendency of Spec. Proc. No. 99-00988-D in RTC Branch 43; that since the
one-year period of redemption has already lapsed, the issuance of a writ
of possession in favor of respondent becomes a ministerial duty of the trial
court; that the issues in Civil Case No. 99-03169-D are not prejudicial
questions to Spec. Proc. No. 99-00988-D because: (a) the special
proceeding is already fait accompli, (b) Civil Case No. 99-03169-D is
deemed not filed for being contrary to Section 8 of Act No. 3135, (c) the
filing of Civil Case No. 99-03169-D is an afterthought and dilatory in
nature, and (d) legally speaking what seems to exist is litis pendentia and
not prejudicial question.[18]
Petitioners filed a Motion for Reconsideration[19] but it was denied by the
CA on April 26, 2001.[20]
Hence, the present Petition for Review on Certiorari.
Petitioners pose two issues for resolution, to wit:
A. Whether or not a real estate mortgage over several properties located
in different locality [sic] can be separately foreclosed in different places.
B. Whether or not the pendency of a prejudicial issue renders the issues in
Special Proceedings No. 99-00988-D as [sic] moot and academic.[21]
Anent the first issue, petitioners contend that since a real estate mortgage
is indivisible, the mortgaged properties in Dagupan City and Quezon City
cannot be separately foreclosed. Petitioners further point out that two
notices of extra-judicial sale indicated that petitioners' obligation is
P10,437,015.20[22] each as of March 31, 1998 or a total of
P20,874,030.40,[23] yet their own computation yields only P9,957,508.90
as of February 27, 1998.
As to the second issue, petitioners posit that the pendency of Civil Case
No. 99-03169-D is a prejudicial issue, the resolution of which will render
the issues in Spec. Proc. No. 99-00988-D moot and academic. Petitioners
further aver that they did not violate Section 8 of Act No. 3135 in filing a
separate case to annul the certificate of sale since the use of the word
"may in said provision indicates that they have the option to seek relief of
filing a petition to annul the certificate of sale in the proceeding involving
the application for a writ of possession or in a separate proceeding.
Respondent contends[24] that, with respect to the first issue, the filing of
two separate foreclosure proceedings did not violate Article 2089 of the
Civil Code on the indivisibility of a real estate mortgage since Section 2 of
Act No. 3135 expressly provides that extra-judicial foreclosure may only
be made in the province or municipality where the property is situated.
Respondent further submits that the filing of separate applications for
extra-judicial foreclosure of mortgage involving several properties in
different locations is allowed by A.M. No. 99-10-05-0, the Procedure on
Extra-Judicial Foreclosure of Mortgage, as further amended on August 7,
2001.
As to the second issue, respondent maintains that there is no prejudicial
question between Civil Case No. 99-03169-D and Spec. Proc. No. 99-
00988-D since the pendency of a civil action questioning the validity of the
mortgage and the extra-judicial foreclosure thereof does not bar the
issuance of a writ of possession. Respondent also insists that petitioners
should have filed their Petition to Annul the Certificate of Sale in the same
case where possession is being sought, that is, in Spec. Proc. No. 99-
00988-D, and not in a separate proceeding (Civil Case No. 99-01369-D)
because the venue of the action to question the validity of the foreclosure
is not discretionary since the use of the word "may in Section 8 of Act No.
3135 refers to the filing of the petition or action itself and not to the venue.
Respondent further argues that even if petitioners filed the Petition to
Annul the Certificate of Sale in Spec. Proc. No. 99-00988-D, the writ of
possession must still be issued because issuance of the writ in favor of the
purchaser is a ministerial act of the trial court and the one-year period of
redemption has already lapsed.
Anent the first issue, the Court finds that petitioners have a mistaken
notion that the indivisibility of a real estate mortgage relates to the venue
of extra-judicial foreclosure proceedings. The rule on indivisibility of a real
estate mortgage is provided for in Article 2089 of the Civil Code, which
provides:
Art. 2089. A pledge or mortgage is indivisible, even though the debt may
be divided among the successors in interest of the debtor or of the
creditor.
Therefore, the debtor's heir who has paid a part of the debt cannot ask for
the proportionate extinguishment of the pledge or mortgage as the debt is
not completely satisfied.
Neither can the creditor's heir who received his share of the debt return
the pledge or cancel the mortgage, to the prejudice of the other heirs who
have not been paid.
From these provisions is excepted the case in which, there being several
things given in mortgage or pledge, each one of them guarantees only a
determinate portion of the credit.
The debtor, in this case, shall have a right to the extinguishment of the
pledge or mortgage as the portion of the debt for which each thing is
specially answerable is satisfied.
This rule presupposes several heirs of the debtor or creditor[25] and
therefore not applicable to the present case. Furthermore, what the law
proscribes is the foreclosure of only a portion of the property or a number
of the several properties mortgaged corresponding to the unpaid portion of
the debt where, before foreclosure proceedings, partial payment was
made by the debtor on his total outstanding loan or obligation. This also
means that the debtor cannot ask for the release of any portion of the
Credit Transactions Full Text Cases Atty. Adviento!!!!"%#
mortgaged property or of one or some of the several lots mortgaged
unless and until the loan thus secured has been fully paid, notwithstanding
the fact that there has been partial fulfillment of the obligation. Hence, it is
provided that the debtor who has paid a part of the debt cannot ask for the
proportionate extinguishment of the mortgage as long as the debt is not
completely satisfied.[26] n essence, indivisibility means that the mortgage
obligation cannot be divided among the different lots,[27] that is, each and
every parcel under mortgage answers for the totality of the debt.[28]
On the other hand, the venue of the extra-judicial foreclosure proceedings
is the place where each of the mortgaged property is located, as
prescribed by Section 2 of Act No. 3135,[29] to wit:
SECTON 2. Said sale cannot be made legally outside of the province in
which the property sold is situated; and in case the place within said
province in which the sale is to be made is subject to stipulation, such sale
shall be made in said place or in the municipal building of the municipality
in which the property or part thereof is situated.
A.M. No. 99-10-05-0,[30] the Procedure on Extra-Judicial Foreclosure of
Mortgage, lays down the guidelines for extra-judicial foreclosure
proceedings on mortgaged properties located in different provinces. t
provides that the venue of the extra-judicial foreclosure proceedings is the
place where each of the mortgaged property is located. Relevant portion
thereof provides:
Where the application concerns the extrajudicial foreclosure of mortgages
of real estates and/or chattels in different locations covering one
indebtedness, only one filing fee corresponding to such indebtedness shall
be collected. The collecting Clerk of Court shall, apart from the official
receipt of the fees, issue a certificate of payment indicating the amount of
indebtedness, the filing fees collected, the mortgages sought to be
foreclosed, the real estates and/or chattels mortgaged and their respective
locations, which certificate shaII serve the purpose of having the
appIication docketed with the CIerks of Court of the pIaces where the
other properties are Iocated and of aIIowing the extrajudiciaI
forecIosures to proceed thereat. (Emphasis supplied)
The indivisibility of the real estate mortgage is not violated by conducting
two separate foreclosure proceedings on mortgaged properties located in
different provinces as long as each parcel of land is answerable for the
entire debt. Petitioners' assumption that their total obligation is
P20,874,030.40 because the two notices of extra-judicial sale indicated
that petitioners' obligation is P10,437,015.20[31] each, is therefore flawed.
Considering the indivisibility of a real estate mortgage, the mortgaged
properties in Dagupan City and Quezon City are made to answer for the
entire debt of P10,437,015.29.[32]
As to the second issue, that is, whether a civil case for annulment of a
certificate of sale is a prejudicial question to a petition for issuance of a
writ of possession, this issue is far from novel and, in fact, not without
precedence. n Pahang v. Vestil,[33] the Court said:
A prejudicial question is one that arises in a case the resolution of which is
a logical antecedent of the issue involved therein, and the cognizance of
which pertains to another tribunal. t generally comes into play in a
situation where a civil action and a criminal action are both pending and
there exists in the former an issue that must be preemptively resolved
before the criminal action may proceed, because howsoever the issue
raised in the civil action is resolved would be determinative juris et de jure
of the guilt or innocence of the accused in the criminal case. The rationale
behind the principle of prejudicial question is to avoid two conflicting
decisions.
n the present case, the complaint of the petitioners for Annulment of
Extrajudicial Sale is a civil action and the respondent's petition for the
issuance of a writ of possession of Lot No. 3-A, Block 1, Psd-07-021410,
TCT No. 44668 is but an incident in the land registration case and,
therefore, no prejudicial question can arise from the existence of the two
actions. A similar issue was raised in Manalo v. Court of Appeals, where
we held that:
At any rate, it taxes our imagination why the questions raised in Case No.
98-0868 must be considered determinative of Case No. 9011. The basic
issue in the former is whether the respondent, as the purchaser in the
extrajudicial foreclosure proceedings, may be compelled to have the
property repurchased or resold to a mortgagor's successor-in-interest
(petitioner); while that in the latter is merely whether the respondent, as
the purchaser in the extrajudicial foreclosure proceedings, is entitled to a
writ of possession after the statutory period for redemption has expired.
The two cases, assuming both are pending, can proceed separately and
take their own direction independent of each other.[34]
n the present case, Civil Case No. 99-01369-D and Spec. Proc. No. 99-
00988-D are both civil in nature. The issue in Civil Case No. 99-01369-D
is whether the extra-judicial foreclosure of the real estate mortgage
executed by the petitioners in favor of the respondent and the sale of their
properties at public auction are null and void, whereas, the issue in Spec.
Proc. No. 99-00988-D is whether the respondent is entitled to a writ of
possession of the foreclosed properties. Clearly, no prejudicial question
can arise from the existence of the two actions. The two cases can
proceed separately and take their own direction independently of each
other.
Nevertheless, there is a need to correct the CA's view that petitioners
violated Section 8 of Act No. 3135 and disregarded the proscription on
multiplicity of suits by instituting a separate civil suit for annulment of the
certificate of sale while there is a pending petition for issuance of the writ
of possession in a special proceeding.
Section 8 of Act No. 3135 provides:
Sec. 8. Setting aside of sale and writ of possession. The debtor may, in
the proceedings in which possession was requested, but not Iater
than thirty days after the purchaser was given possession, petition
that the saIe be set aside and the writ of possession canceIIed,
specifying the damages suffered by him, because the mortgage was not
violated or the sale was not made in accordance with the provisions
hereof, and the court shall take cognizance of this petition in accordance
with the summary procedure provided for in section one hundred and
twelve of Act Numbered Four hundred and ninety-six; and if it finds the
complaint of the debtor justified, it shall dispose in his favor of all or part of
the bond furnished by the person who obtained possession. Either of the
parties may appeal from the order of the judge in accordance with section
fourteen of Act Numbered Four hundred and ninety-six; but the order of
possession shall continue in effect during the pendency of the appeal.
(Emphasis supplied)
Under the provision above cited, the mortgagor may file a petition to set
aside the sale and for the cancellation of a writ of possession with the trial
court which issued the writ of possession within 30 days after the
purchaser mortgagee was given possession. t provides the plain, speedy,
and adequate remedy in opposing the issuance of a writ of possession.
[35] Thus, this provision presupposes that the trial court already issued a
writ of possession. n Sps. Ong v. Court of Appeals,[36] the Court
elucidated:
The law is clear that the purchaser must first be placed in possession of
the mortgaged property pending proceedings assailing the issuance of the
writ of possession. f the trial court later finds merit in the petition to set
aside the writ of possession, it shall dispose in favor of the mortgagor the
bond furnished by the purchaser. Thereafter, either party may appeal from
the order of the judge in accordance with Section 14 of Act 496, which
provides that "every order, decision, and decree of the Court of Land
Registration may be reviewedin the same manner as an order, decision,
decree or judgment of a Court of First nstance (RTC) might be reviewed.
The rationale for the mandate is to allow the purchaser to have possession
of the foreclosed property without delay, such possession being founded
on his right of ownership.[37]
Accordingly, Section 8 of Act No. 3135 is not applicable to the present
case since at the time of the filing of the separate civil suit for annulment of
the certificate of sale in RTC Branch 44, no writ of possession was yet
issued by RTC Branch 43.
Credit Transactions Full Text Cases Atty. Adviento!!!!"%$
Similarly, the Court rejects the CA's application of the principle of litis
pendentia to Civil Case No. 99-03169-D in relation to Spec. Proc. No. 99-
00988-D. Litis pendentia refers to that situation wherein another action is
pending between the same parties for the same cause of actions and that
the second action becomes unnecessary and vexatious. For litis
pendentia to be invoked, the concurrence of the following requisites is
necessary: (a) identity of parties or at least such as represent the same
interest in both actions; (b) identity of rights asserted and reliefs prayed
for, the reliefs being founded on the same facts; and, (c) the identity in the
two cases should be such that the judgment that may be rendered in one
would, regardless of which party is successful, amount to res judicata in
the other.[38]
Applying the foregoing criteria in the instant case, litis pendentia does not
obtain in this case because of the absence of the second and third
requisites. The issuance of the writ of possession being a ministerial
function, and summary in nature, it cannot be said to be a judgment on the
merits, but simply an incident in the transfer of title. Hence, a separate
case for annulment of mortgage and foreclosure sale cannot be barred by
litis pendentia or res judicata.[39] Thus, insofar as Spec. Proc. No. 99-
00988-D and Civil Case No. 99-03169-D pending before different
branches of RTC Dagupan City are concerned, there is no litis pendentia.
To sum up, the Court holds that the rule on indivisibility of the real estate
mortgage cannot be equated with the venue of foreclosure proceedings on
mortgaged properties located in different provinces since these are two
unrelated concepts. Also, no prejudicial question can arise from the
existence of a civil case for annulment of a certificate of sale and a petition
for the issuance of a writ of possession in a special proceeding since the
two cases are both civil in nature which can proceed separately and take
their own direction independently of each other.
Furthermore, since the one-year period to redeem the foreclosed
properties lapsed on October 1, 1999, title to the foreclosed properties had
already been consolidated under the name of the respondent. As the
owner of the properties, respondent is entitled to its possession as a
matter of right.[40] The issuance of a writ of possession over the
properties by the trial court is merely a ministerial function. As such, the
trial court neither exercises its official discretion nor judgment.[41] Any
question regarding the validity of the mortgage or its foreclosure cannot be
a legal ground for refusing the issuance of a writ of possession.[42]
Regardless of the pending suit for annulment of the certificate of sale,
respondent is entitled to a writ of possession, without prejudice of course
to the eventual outcome of said case.[43]
WHEREFORE, the petition is DENIED.
SO ORDERED.
EN BANC
G.R. No. L-24137 March 29, 1926
EULOGIO BETITA, Plaintiff-Appellee , vs. SIMEON GANZON, ALEJO DE
LA FLOR, and CLEMENTE PEDRENA, Defendants-Appellants.
OSTRAND, J.: chanrobles virtual law library
This action is brought to recover the possession of four carabaos with
damages in the sum of P200. Briefly stated, the facts are as follows: On
May 15, 1924, the defendant Alejo de la Flor recovered a judgment
against Tiburcia Buhayan for the sum of P140 with costs. Under this
judgment the defendant Ganzon, as sheriff levied execution on the
carabaos in question which were found in the possession of one Simon
Jacinto but registered in the name of Tiburcia Buhayan. The plaintiff
herein, Eulogio Betita, presented a third party claim (terceria) alleging that
the carabaos had been mortgaged to him and as evidence thereof
presented a document dated May 6, 1924, but the sheriff proceeded with
the sale of the animals at public auction where they were purchased by
the defendant Clemente Perdena for the sum of P200, and this action was
thereupon brought.chanroblesvirtualawlibrary chanrobles virtual law library
The document upon which the plaintiff bases his cause of action is in the
Visayan dialect and in translation reads as follows:
, Tiburcia Buhatan, of age, widow and resident of the sitio of Jimamanay,
municipality of Balasan, Province of loilo, Philippine slands, do hereby
execute this document extrajudicially and state that am indebted to Mr.
Eulogio Betita, resident of the municipality of Estancia, Province of loilo,
Philippine slands, in the sum of P470, Philippine currency, and was so
indebted since the year 1922, and as a security to my creditor hereby
offer four head of carabaos belonging to me exclusively (three females
and one male), the certificates of registration of said animals being Nos.
2832851, 4670520, 4670521 and 4670522, which delivered to said Mr.
Eulogio Betita.chanroblesvirtualawlibrary chanrobles virtual law library
hereby promise to pay said debt in the coming month of February, 1925,
in case will not be able to pay, Mr. Eulogio Betita may dispose of the
carabaos given as security for said debt.chanroblesvirtualawlibrary
chanrobles virtual law library
This document is a new one or a renewal of our former document because
the first carabaos mortgaged died and were substituted for by the newly
branded ones." chanrobles virtual law library
n testimony whereof and not knowing how to sign my name, caused my
name to be written and marked same with my right
thumb.chanroblesvirtualawlibrary chanrobles virtual law library
Estancia, May 6, 1924.
(Marked). TBURCA BUHAYAN
Signed in the presence of:
MGUEL MERCURO
TRZO ZEPEDA
The court below held that inasmuch as this document was prior in date to
the judgment under which the execution was levied, it was a preferred
credit and judgment was rendered in favor of the plaintiff for the
possession of the carabaos, without damages and without costs. From this
judgment the defendants appeal.chanroblesvirtualawlibrary chanrobles
virtual law library
The judgment must be reversed unless the document above quoted can
be considered either a chattel mortgage or else a pledge. That it is not a
sufficient chattel mortgage is evident; it does not meet the requirements of
section 5 of the Chattel Mortgage Law (Act No. 1508), has not been
recorded and, considered as a chattel mortgage, is consequently of no
effect as against third parties (Williams vs. McMicking, 17 Phil., 408;
Giberson vs. A. N. Jureidini Bros., 44 Phi., 216; Benedicto de Tarrosa vs.
F. M. Yap Tico & Co. and Provincial Sheriff of Occidental Negros, 46 Phil.,
753).chanroblesvirtualawlibrary chanrobles virtual law library
Neither did the document constitute a sufficient pledge of the property
valid against third parties. Article 1865 of the Civil Code provides that "no
pledge shall be effective as against third parties unless evidence of its
date appears in a public instrument." The document in question is not
public, but it is suggested that its filing with the sheriff in connection with
the terceria gave in the effect of a public instrument and served to fix the
date of the pledge, and that it therefore fulfills the requirements of article
1865. Assuming, without conceding, that the filing of the document with
the sheriff had that effect, it seems nevertheless obvious that the pledge
only became effective as against the plaintiff in execution from the date of
the filing and did not rise superior to the execution attachment previously
levied (see Civil Code, article 1227).chanroblesvirtualawlibrary chanrobles
virtual law library
Manresa, in commenting on article 1865, says:
Credit Transactions Full Text Cases Atty. Adviento!!!!"%%
ART. 1865. A pledge will not be valid against a third party if the
certainty of the date is not expressed in a public
instrument.chanroblesvirtualawlibrary chanrobles virtual law
library
This article, the precept of which did not exist in our old law,
answers the necessity for not disturbing the relationship or the
status of the ownership of things with hidden or simulated
contracts of pledge, in the same way and for the identical
reasons that were taken into account by the mortgage law in
order to suppress the implied and legal mortgages which
produce so much instability in real
property.chanroblesvirtualawlibrary chanrobles virtual law library
Considering the effects of a contract of pledge, it is easily
understood that, without this warranty demanded by law, the
case may happen wherein a debtor in bad faith from the
moment that he sees his movable property in danger of
execution may attempt to withdraw the same from the action of
justice and the reach of his creditors by simulating, through
criminal confabulations, anterior and fraudulent alterations in his
possession by means of feigned contracts of this nature; and,
with the object of avoiding or preventing such abuses, almost all
the foreign writers advise that, for the effectiveness of the
pledge, it be demanded as a precise condition that in every case
the contract be executed in a public writing, for, otherwise, the
determination of its date will be rendered difficult and its proof
more so, even in cases in which it is executed before witnesses,
due to the difficulty to be encountered in seeking those before
whom it was executed.chanroblesvirtualawlibrary chanrobles
virtual law library
Our code has not gone so far, for it does not demand in express
terms that in all cases the pledge be constituted or formalized in
a public writing, nor even in private document, but only that the
certainty of the date be expressed in the first of the said class of
instruments in order that it may be valid against a third party;
and, in default of any express provision of law, in the cases
where no agreement requiring the execution in a public writing
exists, it should be subjected to the general rule, and especially
to that established in the last paragraph of article 1280,
according to which all contracts not included in the foregoing
cases of the said article should be made in writing even though
it be private, whenever the amount of the presentation of one or
of the two contracting parties exceeds 1,500 pesetas. (Vol. 12,
ed., p. 421.)
f the mere filing of a private document with the sheriff after the levy of
execution can create a lien of pledge superior to the attachment, the
purpose of the provisions of article 1865 as explained by Manresa clearly
be defeated. Such could not have been the intention of the authors of the
Code. (See also Ocejo, Perez & Co. vs. nternational Banking Corporation,
37 Phil., 631 and Tec Bi & Co. Chartered Bank of ndia, Australia & China,
41 Phil., 596.) chanrobles virtual law library
The alleged pledge is also ineffective for another reason, namely, that the
plaintiff pledgee never had actual possession of the property within the
meaning of article 1863 of the Civil Code. But it is argued that at the time
of the levy the animals in question were in the possession of one Simon
Jacinto; that Jacinto was the plaintiff's tenant; and that the tenant's
possession was the possession of his landlord.chanroblesvirtualawlibrary
chanrobles virtual law library
t appears, however, from the evidence that though not legally married,
Simon Jacinto and Tiburcia Buhayan were living together as husband and
wife and had been so living for many years. Testifying as a witness for the
plaintiff, Jacinto on cross-examination made the following statements:
Q. But the caraballas in question had never been in possession
of Eulogio Betita? - A. The three young ones did not get into his
hands.chanroblesvirtualawlibrary chanrobles virtual law library
Q. And the others? - A. Sometimes they were in the hands of
Betita and at other times in the hands of
Buhayan.chanroblesvirtualawlibrary chanrobles virtual law
library
Q. Those are the caraballas which formerly were mortgaged by
Buhayan to Betita, isn't that so? - A. Yes,
sir.chanroblesvirtualawlibrary chanrobles virtual law library
Q. And the four carabaos now in question had never been in
possession of Betita, but were in your possession? - A. When
worked they were in my hands.chanroblesvirtualawlibrary
chanrobles virtual law library
Q. And before you worked, these caraballas were in possession
of your mistress, Tiburcia Buhayan? - A. Yes,
sir.chanroblesvirtualawlibrary chanrobles virtual law library
Q. Do you mean to say that from the possession of Tiburcia
Buhayan the animals passed immediately into your possession?
- A. Yes sir.
This testimony is substantially in accord with that of the defendant sheriff
to the effect that he found the animals at the place where Tiburcia
Buhayan was living. Article 1863 of the Civil Code reads as follows:
n addition to the requisites mentioned in article 1857, it shall be
necessary, in order to constitute the contract of pledge, that the
pledge be placed in the possession of the creditor or of a third
person appointed by common consent.
n his commentary on this article Manresa says:
This requisite is most essential and is characteristic of a pledge
without which the contract cannot be regarded as entered into or
completed, because, precisely, in this delivery lies the security of
the pledge. Therefore, in order that the contract of pledge may
be complete, it is indispensable that the aforesaid delivery take
place . . . . (P. 411, supra.)
t is, of course, evident that the delivery of possession referred to in article
1863 implies a change in the actual possession of the property pledged
and that a mere symbolic delivery is not sufficient. n the present case the
animals in question were in the possession of Tiburcia Buhayan and
Simon Jacinto before the alleged pledge was entered into and apparently
remained with them until the execution was levied, and there was no
actual delivery of possession to the plaintiff himself. There was therefore in
reality no change in possession.chanroblesvirtualawlibrary chanrobles
virtual law library
t may further be noted that the alleged relation of landlord and tenant
between the plaintiff and Simon Jacinto is somewhat obscure and it is,
perhaps, doubtful if any tenancy, properly speaking, existed. The land
cultivated by Jacinto was not the property of the plaintiff, but it appears
that a part of the products was to be applied towards the payment of
Tiburcia Buhayan's debt to the plaintiff. Jacinto states that he was not a
tenant until after the pledge was made.chanroblesvirtualawlibrary
chanrobles virtual law library
From what has been said it follows that the judgment appealed from must
be reversed and it is ordered and adjudged that the plaintiff take nothing
by his action. Without costs. So ordered.
SECOND DVSON
G.R. No. L-33157 June 29, 1982
BENITO H. LOPEZ, petitioner,
vs.
THE COURT OF APPEALS and THE PHILIPPINE AMERICAN
GENERAL INSURANCE CO., INC., respondents.
Credit Transactions Full Text Cases Atty. Adviento!!!!"%&

GUERRERO, J.:
On June 2, 1959, petitioner Benito H. Lopez obtained a loan in the amount
of P20,000.00 from the Prudential Bank and Trust Company. On the same
date, he executed a promissory note for the same amount, in favor of the
said Bank, binding himself to repay the said sum one (1) year after the
said date, with interest at the rate of 10% per annum. n addition to said
promissory note, he executed Surety Bond No. 14164 in which he, as
principal, and Philippine American General nsurance Co., nc.
(PHLAMGEN) as surety, bound themselves jointly and severally in favor
of Prudential Bank for the payment of the sum of P20,000.00.
On the same occasion, Lopez also executed in favor of Philamgen an
indemnity agreement whereby he agreed "to indemnify the Company and
keep it indemnified and hold the same harmless from and against any and
all damages, losses, costs, stamps, taxes, penalties, charges and
expenses of whatever kind and nature which the Company shall or may at
any time sustain or incur in consequence of having become surety upon
the bond."
1
At the same time, Lopez executed a deed of assignment of
4,000 shares of the Baguio Military nstitution entitled "Stock Assignment
Separate from Certificate", which reads:
This deed of assignment executed by BENTO H.
LOPEZ, Filipino, of legal age, married and with
residence and postal address at Baguio City,
Philippines, now and hereinafter called the
"ASSGNOR", in favor of the PHLPPNE AMERCAN
GENERAL NSURANCE CO., NC., a corporation duly
organized and existing under and by virtue of the laws
of the Philippines, with principal offices at Wilson
Building, Juan Luna, Manila, Philippines, now and
hereinafter called the "ASSGNEE-SURETY
COMPANY"
WTNESSETH
That for and in consideration of the obligations
undertaken by the ASSGNEE-SURETY COMPANY
under the terms and conditions of SURETY BOND
NO. 14164, issued on behalf of said BENTO H.
LOPEZ and in favor of the PRUDENTAL BANK &
TRUST COMPANY, Manila, Philippines, in the amount
of TWENTY THOUSAND PESOS ONLY
(P20,000.00), Philippine Currency, and for value
received, the ASSGNOR hereby sells, assigns, and
transfers unto THE PHLPPNE AMERCAN
GENERAL NSURANCE CO., NC., Four Thousand
(4,000) shares of the Baguio military nstitute, nc.
standing in the name of said Assignor on the books of
said Baguio Military nstitute, nc. represented by
Certificate No. 44 herewith and do hereby irrevocably
constitutes and appoints THE PHLPPNE
AMERCAN GENERAL NSURANCE CO., NC. as
attorney to transfer the said stock on the books of the
within named military institute with full power of
substitution in the premises.
2

With the execution of this deed of assignment, Lopez endorsed the stock
certificate and delivered it to Philamgen.
t appears from the evidence on record that the loan of P20,000.00 was
approved conditioned upon the posting of a surety bond of a bonding
company acceptable to the bank. Thus, Lopez persuaded Emilio Abello,
Assistant Executive Vice-President of Philamgen and member of the Bond
Under writing Committee to request Atty. Timoteo J. Sumawang, Assistant
Vice- President and Manager of the Bonding Department, to
accommodate him in putting up the bond against the security of his shares
of stock with the Baguio Military nstitute, nc. t was their understanding
that if he could not pay the loan, Vice-President Abello and Pio Pedrosa of
the Prudential Bank would buy the shares of stocks and out of the
proceeds thereof, the loan would be paid to the Prudential Bank.
On June 2, 1960, Lopez' obligation matured without it being settled. Thus,
the Prudential Bank made demands for payment both upon Lopez and
Philamgen. n turn, Philamgen sent Lopez several written demands for the
latter to pay his note (Exhibit H, H-1 & H-2), but Lopez did not comply with
said demands. Hence, the Prudential Bank sometime in August, 1961 filed
a case against them to enforce payment on the promissory note plus
interest.
Upon receipt of the copies of complaint, Atty. Sumawang confronted Emilio
Abello and Pio Pedrosa regarding their commitment to buy the shares of
stock of Lopez in the event that the latter failed to pay his obligations to
the Prudential Bank. Vice-President Abello then instructed Atty. Sumawang
to transfer the shares of stock to Philamgen and made a commitment that
thereafter he (Abello) and Pio Pedrosa will buy the shares of stock from it
so that the proceeds could be paid to the bank, and in the meantime
Philamgen will not pay the bank because it did not want payment under
the terms of the bank.
3

Due to said commitment and instruction of Vice-President Abello, Assistant
Treasurer Marcial C. Cruz requested the transfer of Stock Certificate No.
44 for 4,000 shares to Philamgen in a letter dated October 31, 1961. Stock
Certificate No. 44 in the name of Lopez was accordingly cancelled and in
lieu thereof Stock Certificate No. 171 was issued by the Baguio Military
nstitute in the name of Philamgen on November 17, 1961.
The complaint was thereafter dismissed. But when no payment was still
made by the principal debtor or by the surety, the Prudential Bank filed on
November 8, 1963 another complaint for the recovery of the P20,000.00.
On November 18, 1963, after being informed of said complaint, Lopez
addressed the following letter to Philamgen:
Dear Mr. Sumawang:
This is with reference to yours of the 13th instant
advising me of a complaint filed against us by
Prudential Bank & Trust Co. regarding my loan of
P20,000.00. n this connection, would like to know
what happened to my shares of stocks of Baguio
Military Academy which were pledged to your
goodselves to secure said obligation. These shares of
stock think are more than enough to answer for said
obligation.
4

On December 9, 1963, Philamgen was forced to pay the Prudential Bank
the sum of P27,785.89 which included the principal loan and accumulated
interest and the Prudential Bank executed a subrogation receipt on the
same date.
On March 18, 1965, Philamgen brought an action in the Court of First
nstance of Manila (Civil Case No. 60272, "The Philippine American
General nsurance Co., nc. vs. Benito H. Lopez") for reimbursement of the
said amount. After hearing, the said court rendered judgment dismissing
the complaint holding:
The contention of the plaintiff that the stock of the
defendant were merely pledged to it by the defendant
is not borne out by the evidence. On the contrary, it
appears to be contradicted by the facts of the case.
The shares of stock of the defendant were actually
transferred to the plaintiff when it became clear after
the plaintiff and the defendant had been sued by the
Prudential Bank that plaintiff would be compelled to
make the payment to the Prudential Bank, in view of
the inability of the defendant Benito H. Lopez to pay
his said obligation. The certificate bearing No. 44 was
cancelled and upon request of the plaintiff to the
Baguio Military nstitute a new certificate of stock was
issued in the name of the plaintiff bearing No. 171, by
means of which plaintiff became the registered owner
of the 4,000 shares originally belonging to the
defendant.
Credit Transactions Full Text Cases Atty. Adviento!!!!"%'
t is noteworthy that the transfer of the stocks of the
defendant in the name of the plaintiff company was
made at the instance of Messrs. Abello and Pedrosa,
who promised to buy the same from the plaintiff. Now
that these shares of stock of the defendant had
already been transferred in the name of the plaintiff,
the defendant has already divested himself of the said
stocks, and it would seem that the remedy of the
plaintiff is to go after Messrs. Abello and Pedrosa on
their promise to pay for the said stocks. To go after the
defendant after the plaintiff had already become the
owner of his shares of stock and compel him to pay
his obligation to the Prudential Bank would be most
unfair, unjust and illogical for it would amount to
double payment on his part. After the plaintiff had
already appropriated the said shares of stock, it has
already lost its right to recover anything from the
defendant, for the reason that the transfer of the said
stocks was made without qualification. This transfer
takes the form of a reimbursement of what plaintiff
had paid to the Prudential Bank, thereby depriving the
plaintiff of its right to go after the defendant herein.
5
Philamgen appealed to the Court of Appeals raising these assignments of
errors:

The lower court erred in finding that the evidence
does not bear out the contention of plaintiff that the
shares of stock belonging to defendant were
transferred by him to plaintiff by way of pledge.

The lower court erred in finding that plaintiff company
appropriated unto itself the shares of stock pledged to
it by defendant Benito Lopez and in finding that, with
the transfer of the stock in the name of plaintiff
company, the latter has already been paid or
reimbursed what it paid to Prudential Bank.

The lower court erred in not finding that the instant
case is one where the pledge has abandoned the
security and elected instead to enforce his claim
against the pledgor by ordinary action.
6

On December 17, 1970, the Court of Appeals promulgated a decision in
favor of the Philamgen, thereby upholding the foregoing assignments of
errors. t declared that the stock assignment was a mere pledge that the
transfer of the stocks in the name of Philamgen was not intended to make
it the owner thereof; that assuming that Philamgen had appropriated the
stocks, this appropriation is null and void as a stipulation authorizing it is a
pactum commissorium; and that pending payment, Philamgen is merely
holding the stock as a security for the payment of Lopez' obligation. The
dispositive portion of the said decision states:
WHEREFORE, the decision of the lower court is
hereby reversed, and another one is hereby entered
ordering the defendant to pay the plaintiff the sum of
P27,785.89 with interest at the rate of 12% per annum
from December 9, 1963, 10% of the P27,785.89 as
attorney's fees and the costs of the suit.
7

The motion for reconsideration with prayer to set the same for oral
argument having been denied, Lopez brought this petition for review on
certiorari presenting for resolution these questions:
a) Where, as in this case, a party "sells, assigns and transfers" and
delivers shares of stock to another, duly endorsed in blank, in
consideration of a contingent obligation of the former to the latter, and, the
obligations having arisen, the latter causes the shares of stock to be
transferred in its name, what is the juridical nature of the transaction-a
dation in payment or a pledge?
b) Where, as in this case, the debtor assigns the shares of stock to the
creditor under an agreement between the latter and determinate third
persons that the latter would buy the shares of stock so that the
obligations could be paid out of the proceeds, was there a novation of the
obligation by substitution of debtor?
8

Philamgen failed to file its comment on the petition for review on certiorari
within the extended period which expired on March 19, 1971. This Court
thereby resolved to require Lopez to file his brief.
9

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

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

We agree with the holding of the respondent Court of Appeals that the
stock assignment, Exhibit C, is in truth and in fact, a pledge. ndeed, the
facts and circumstances leading to the execution of the stock assignment,
Exhibit C, and the admission of Lopez prove that it is in fact a pledge. The
appellate court is correct in ruling that the following requirements of a
contract of pledge have been satisfied: (1) that it be constituted to secure
the fulfillment of a principal obligation; (2) that the pledgor be the absolute
owner of the thing pledged; and (3) that the person constituting the pledge
has the free disposal of the property, and in the absence thereof, that he
be legally authorized for the purpose. (Article 2085, New Civil Code).
Article 2087 of the New Civil Code providing that it is also the essence of
these contracts (pledge, mortgage, and antichresis) that when the
principal obligation becomes due, the things in which the pledge or
mortgage consists may be alienated for the payment to the creditor, further
supports the appellate court's ruling, which We also affirm. On this point
further, the Court of Appeals correctly ruled:
n addition to the requisites prescribed in article 2085,
it is necessary, in order to constitute the contract of
pledge, that the thing pledged be placed in the
possession of the creditor, or of a third person by
common agreement. (Art. 2093, N.C.C.) ncorporeal
rights, including shares of stock may also be pledged
(Art. 2095, N.C.C.) All these requisites are found in
the transaction between the parties leading to the
execution of the Stock Assignment, Exhibit C. And that
it is a pledge was admitted by the defendant in his
letter of November 18, 1963, Exhibit G, already
quoted above, where he asked what had happened to
his shares of stock "which were pledged to your
goodselves to secure the said obligation". The
testimony of the defendant-appellee that it was their
agreement or understanding that if he would be
unable to pay the loan to the Prudential Bank, plaintiff
could sell the shares of stock or appropriate the same
in full payment of its debt is a mere after-thought,
conceived after he learned of the transfer of his stock
to the plaintiff in the books of the Baguio Military
nstitute.
We also do not agree with the contention of petitioner that "petitioner's
'sale assignment and transfer' unto private respondent of the shares of
stock, coupled with their endorsement in blank and delivery, comes exactly
under the Civil Code's definition of dation in payment, a long recognized
and deeply rooted concept in Civil Law denominated by Spanish
commentators as 'adjudicacion en pago'".
According to Article 1245 of the New Civil Code, dation in payment,
whereby property is alienated to the creditor in satisfaction of a debt in
money, shall be governed by the law of sales.
Speaking of the concept of dation in payment, it is well to cite that:
Dation in payment is the delivery and transmission of
ownership of a thing by the debtor to the creditor as
an accepted equivalent of the performance of the
obligation. (2 Castan 525; 8 Manresa, 324) The
property given may consist, not only of a thing, but
also of a real right (such as a usufruct) or of a credit
against a third person. (Perez Gonzales & Alguer :2-
Enneccerus, Kipp & Wolff 317). Thus, it has been held
that the assignment to the creditor of the interest of
the debtor in an inheritance in payment of his debt, is
valid and extinguishes the debt. (gnacio vs. Martinez,
33 Phil. 576)
The modern concept of dation in payment considers it
as a novation by change of the object, and this is to
our mind the more juridically correct view. Our Civil
Code, however, provides in this article that, where the
debt is in money, the law on sales shall govern; in this
case, the act is deemed to be a sale, with the amount
of the obligation to the extent that it is extinguished
being considered as the price. Does this mean that
there can be no dation in payment if the debt is not in
money? We do not think so. t is precisely in
obligations which are not money debts, in which the
true juridical nature of dation in payment becomes
manifest. There is a real novation with immediate
performance of the new obligation. The fact that there
must be a prior agreement of the parties on the
delivery of the thing in lieu of the original prestation
shows that there is a novation which, extinguishes the
original obligation, and the delivery is a mere
performance of the new obligation.
The dation in payment extinguishes the obligation to
the extent of the value of the thing delivered, either as
agreed upon by the parties or as may be proved,
unless the parties by agreement, express or implied,
or by their silence, consider the thing as equivalent to
the obligation, in which case the obligation is totally
extinguished. (8 Manresa 324; 3 Valverde 174 fn
Assignment of property by the debtor to his creditors,
provided for in article 1255, is similar to dation in
payment in that both are substitute forms of
performance of an obligation. Unlike the assignment
for the benefit of creditors, however, dation in
payment does not involve plurality of creditors, nor the
whole of the property of the debtor. t does not
suppose a situation of financial difficulties, for it may
be made even by a person who is completely solvent.
t merely involves a change of the object of the
obligation by agreement of the parties and at the
same time fulfilling the same voluntarily. (8 Manresa
324).
12

Considering the above jurisprudence, We find that the debt or obligation at
bar has not matured on June 2, 1959 when Lopez "alienated" his 4,000
shares of stock to Philamgen. Lopez' obligation would arise only when he
Credit Transactions Full Text Cases Atty. Adviento!!!!"%)
would default in the payment of the principal obligation (the loan) to the
bank and Philamgen had to pay for it. Such fact being adverse to the
nature and concept of dation in payment, the same could not have been
constituted when the stock assignment was executed. Moreover, there is
no express provision in the terms of the stock assignment between
Philamgen and Lopez that the principal obligation (which is the loan) is
immediately extinguished by reason of such assignment.
n case of doubt as to whether a transaction is a pledge or a dation in
payment, the presumption is in favor of pledge, the latter being the lesser
transmission of rights and interests. Under American jurisprudence,
A distinction might also be made between delivery of
property in payment of debt and delivery of such
property as collateral security for the debt. Generally,
such a transfer was presumed to be made for
collateral security, in the absence of evidence tending
to show an intention on the part of the parties that the
transfer was in satisfaction of the debt. This
presumption of a transfer for collateral security arose
particularly where the property given was commercial
paper, or some other 'specialty' chose of action, that
conferred rights upon transfer by delivery of a different
nature from the debt, whose value was neither
intrinsic nor apparent and was not agreed upon by the
parties.
13

Petitioner's argument that even assuming, arguendo that the transaction
was at its inception a pledge, it gave way to a dation in payment when the
obligation secured came into existence and private respondent had the
stocks transferred to it in the corporate books and took a stock certificate
in its name, is without merit. The fact that the execution of the stock
assignment is accompanied by the delivery of the shares of stock, duly
endorsed in blank to Philamgen is no proof that the transaction is a dation
in payment. Likewise, the fact that Philamgen had the shares of stock
transferred to it in the books of the corporation and took a certificate in its
name in lieu of Lopez which was cancelled does not amount to conversion
of the stock to one's own use. The transfer of title to incorporeal property is
generally an essential part of the delivery of the same in pledge. t merely
constitutes evidence of the pledgee's right of property in the thing pledged.
By the contract of pledge, the pledgor does not part
with his general right of property in the collateral. The
general property therein remains in him, and only a
special property vests in the pledgee. The pledgee
does not acquire an interest in the property, except as
a security for his debt. Thus, the pledgee holds
possession of the security subject to the rights of the
pledgor; he cannot acquire any interest therein that is
adverse to the pledgor's title. Moreover, even where
the legal title to incorporeal property which may be
pledged is transferred to a pledgee as collateral
security, he takes only a special property therein Such
transfer merely performs the office that the delivery of
possession does in case of a pledge of corporeal
property.
xxx xxx xxx
The pledgee has been considered as having a lien on
the pledged property. The extent of such lien is
measured by the amount of the debt or the obligation
that is secured by the collateral, and the lien
continues to exist as long as the pledgee retains
actual or symbolic possession of the property, and the
debt or obligation remains unpaid. Payment of the
debt extinguishes the lien.
Though a pledgee of corporation stock does not
become personally liable as a stockholder of the
company, he may have the shares transferred to him
on the books of the corporation if he has been
authorized to do so.
The general property in the pledge remains in the
pledgor after default as well as prior thereto. The
failure of the pledgor to pay his debt at maturity in no
way affects the nature of the pledgee's rights
concerning the property pledged, except that he then
becomes entitled to proceed to make the security
available in the manner prescribed by law or by the
terms of the contract, ... .
14

n his second assignment of error, petitioner contends that the Court of
Appeals erred in not holding that since private respondent entered into an
agreement with determinate third persons whereby the latter would buy
the said shares so sold, assigned and transferred to the former by the
petitioner for the purpose of paying petitioner's obligation out of the
proceeds, there was a novation of the obligation by substitution of debtor.
We do not agree.
Under Article 1291 of the New Civil Code, obligations may be modified by:
(1) changing their object or principal condition; (2) substituting the person
of the debtor; (3) subrogating a third person in the rights of the creditor.
And in order that an obligation may be extinguished by another which
substitute the same, it is imperative that it be so declared in unequivocal
terms, or that the old and the new obligations be on every point
incompatible with each other. (Article 1292, N.C.C.) Novation which
consists in substituting a new debtor in the place of the original one, may
be made even without the knowledge or against the will of the latter, but
not without the consent of the creditor. Payment by the new debtor gives
him the rights mentioned in Articles 1236 and 1237. (Article 1293, N.C.C.)
Commenting on the second concept of novation, that is, substituting the
person of the debtor, Manresa opines, thus:
n this kind of novation it is pot enough to extend the
juridical relation to a third person; it is necessary that
the old debtor be released from the obligation, and the
third person or new debtor take his place in the
relation. Without such release, there is no novation;
the third person who has assumed the obligation of
the debtor merely becomes a co-debtor or a surety. f
there is no agreement as to solidarity, the first and the
new debtor are considered obligated jointly. (8
Manresa 435, cited in Tolentino, Commentaries and
Jurisprudence on the Civil Code of the Philippines,
Vol. V, p. 360)
n the case at bar, the undertaking of Messrs. Emilio Abello and Pio
Pedrosa that they would buy the shares of stock so that Philamgen could
be reimbursed from the proceeds that it paid to Prudential Bank does not
necessarily imply the extinguishment of the liability of petitioner Lopez.
Since it was not established nor shown that Lopez would be released from
responsibility, the same does not constitute novation and hence,
Philamgen may still enforce the obligation. As the Court of Appeals
correctly held that "(t)he representation of Mr. Abello to Atty. Sumawang
that he and Mr. Pedrosa would buy the stocks was a purely private
arrangement between them, not an agreement between (Philamgen) and
(Lopez)" and which We hereby affirm, petitioner's second assignment of
error must be rejected.
n fine, We hold and rule that the transaction entered into by and between
petitioner and respondent under the Stock Assignment Separate From
Certificate in relation to the Surety Bond No. 14164 and the ndemnity
Agreement, all executed and dated June 2, 1959, constitutes a pledge of
the 40,000 shares of stock by the petitioner-pledgor in favor of the private
respondent-pledgee, and not a dacion en pago. t is also Our ruling that
upon the facts established, there was no novation of the obligation by
substitution of debtor.
The promise of Abello and Pedrosa to buy the shares from private
respondent not having materialized (which promise was given to said
respondent only and not to petitioner) and no action was taken against the
two by said respondent who chose instead to sue the petitioner on the
ndemnity Agreement, it is quite clear that this respondent has abandoned
its right and interest over the pledged properties and must, therefore,
Credit Transactions Full Text Cases Atty. Adviento!!!!"%*
release or return the same to the petitioner-pledgor upon the latter's
satisfaction of his obligation under the ndemnity Agreement.
t must also be made clear that there is no double payment nor unjust
enrichment in this case because We have ruled that the shares of stock
were merely pledged. As the Court of Appeals said:
The appellant (Philam) is not enriching himself at the
expense of the appellee. True, the stock certificate of
the appellee had been in the name of the appellant
but the transfer was merely nominal, and was not
intended to make the plaintiff the owner thereof. No
offer had been made for the return of the stocks to the
defendant. As the appellant had stated, the appellee
could have the stocks transferred to him anytime as
long as he reimburses the plaintiff the amount it had
paid to the Prudential Bank. Pending payment, plaintiff
is merely holding the certificates as a pledge or
security for the payment of defendant's obligation.
The above holding of the appellate court is correct and We affirm the
same.
As to the third assignment of error which is merely the consequence of the
first two assignments of errors, the same is also devoid of merit.
WHEREFORE, N VEW OF ALL THE FOREGONG, the decision of the
Court of Appeals is hereby AFFRMED in toto, with costs against the
petitioner.
SO ORDERED.
THRD DVSON
G.R. No. 132287 January 24, 2006
SPOUSES BONIFACIO and FAUSTINA PARAY, and VIDAL ESPELETA,
Petitioners,
vs.
DRA. ABDULIA C. RODRIGUEZ, MIGUELA R. JARIOL assisted by her
husband ANTOLIN JARIOL, SR., LEONORA NOLASCO assisted by
her husband FELICIANO NOLASCO, DOLORES SOBERANO assisted
by her husband JOSE SOBERANO, JR., JULIA R. GENEROSO,
TERESITA R. NATIVIDAD and GENOVEVA R. SORONIO assisted by
her husband ALFONSO SORONIO, Respondents.
D E C S O N
TINGA, J.:
The assailed decision of the Court of Appeals took off on the premise that
pledged shares of stock auctioned off in a notarial sale could still be
redeemed by their owners. This notion is wrong, and we thus reverse.
The facts, as culled from the record, follow.
Respondents were the owners, in their respective personal capacities, of
shares of stock in a corporation known as the Quirino-Leonor-Rodriguez
Realty nc.
1
Sometime during the years 1979 to 1980, respondents
secured by way of pledge of some of their shares of stock to petitioners
Bonifacio and Faustina Paray ("Parays") the payment of certain loan
obligations. The shares pledged are listed below:
Miguel Rodriguez Jariol .1,000 shares covered by Stock Certifi-
cates No. 011, 060, 061 & 062;
Abdulia C. Rodriguez . 300 shares covered by Stock Certificates
No. 023 & 093;
Leonora R. Nolasco .. 407 shares covered by Stock Certificates
No. 091 & 092;
Genoveva Soronio. 699 shares covered by Stock Certificates
No. 025, 059 & 099;
Dolores R. Soberano. 699 shares covered by Stock Certificates
No. 021, 053, 022 & 097;
Julia Generoso .. 1,100 shares covered by Stock Certificates
No. 085, 051, 086 & 084;
Teresita Natividad.. 440 shares covered by Stock Certificates
Nos. 054 & 055
2
When the Parays attempted to foreclose the pledges on account of
respondents' failure to pay their loans, respondents filed complaints with
the Regional Trial Court (RTC) of Cebu City. The actions, which were
consolidated and tried before RTC Branch 14, Cebu City, sought the
declaration of nullity of the pledge agreements, among others. However
the RTC, in its decision
3
dated 14 October 1988, dismissed the complaint
and gave "due course to the foreclosure and sale at public auction of the
various pledges subject of these two cases."
4
This decision attained finality
after it was affirmed by the Court of Appeals and the Supreme Court. The
Entry of Judgment was issued on 14 August 1991.
Respondents then received Notices of Sale which indicated that the
pledged shares were to be sold at public auction on 4 November 1991.
However, before the scheduled date of auction, all of respondents caused
the consignation with the RTC Clerk of Court of various amounts. t was
claimed that respondents had attempted to tender these payments to the
Parays, but had been rebuffed. The deposited amounts were as follows:
Abdulia C. Rodriguez.. P 120,066.66 .. 14 Oct. 1991
Leonora R. Nolasco . 277,381.82 .. 14 Oct. 1991
Genoveva R. Soronio 425,353.50 .. 14 Oct. 1991
38,385.44 .. 14 Oct. 1991
Julia R. Generoso .. 638,385.00 .. 25 Oct. 1991
Teresita R. Natividad . 264,375.00 .. 11 Nov. 1991
Dolores R. Soberano .. 12,031.61.. 25 Oct. 1991
520,216.39 ..11 Nov. 1991
Miguela Jariol . 490,000.00.. 18 Oct. 1991
88,000.00 ..18 Oct. 1991
5
Notwithstanding the consignations, the public auction took place as
scheduled, with petitioner Vidal Espeleta successfully bidding the amount
of P6,200,000.00 for all of the pledged shares. None of respondents
participated or appeared at the auction of 4 November 1991.
Credit Transactions Full Text Cases Atty. Adviento!!!!"&+
Respondents instead filed on 13 November 1991 a complaint seeking the
declaration of nullity of the concluded public auction. The complaint,
docketed as Civil Case No. CEB-10926, was assigned to Branch 16 of the
Cebu City RTC. Respondents argued that their tender of payment and
subsequent consignations served to extinguish their loan obligations and
discharged the pledge contracts. Petitioners countered that the auction
sale was conducted pursuant to the final and executory judgment in Civil
Cases Nos. R-20120 and 20131, and that the tender of payment and
consignations were made long after their obligations had fallen due.
The Cebu City RTC dismissed the complaint, expressing agreement with
the position of the Parays.
6
t held, among others that respondents had
failed to tender or consign payments within a reasonable period after
default and that the proper remedy of respondents was to have
participated in the auction sale.
7
The Court of Appeals Eighth Division
however reversed the RTC on appeal, ruling that the consignations
extinguished the loan obligations and the subject pledge contracts; and
the auction sale of 4 November 1991 as null and void.
8
Most crucially, the
appellate court chose to uphold the sufficiency of the consignations owing
to an imputed policy of the law that favored redemption and mandated a
liberal construction to redemption laws. The attempts at payment by
respondents were characterized as made in the exercise of the right of
redemption.
The Court of Appeals likewise found fault with the auction sale, holding
that there was a need to individually sell the various shares of stock as
they had belonged to different pledgors. Thus, it was observed that the
minutes of the auction sale should have specified in detail the bids
submitted for each of the shares of the pledgors for the purpose of
knowing the price to be paid by the different pledgors upon redemption of
the auctioned sales of stock.
Petitioners now argue before this Court that they were authorized to refuse
as they did the tender of payment since they were undertaking the auction
sale pursuant to the final and executory decision in Civil Cases Nos. R-
20120 and 20131, which did not authorize the payment of the principal
obligation by respondents. They point out that the amounts consigned
could not extinguish the principal loan obligations of respondents since
they were not sufficient to cover the interests due on the debt. They
likewise argue that the essential procedural requisites for the auction sale
had been satisfied.
We rule in favor of petitioners.
The fundamental premise from which the appellate court proceeded was
that the consignations made by respondents should be construed in light
of the rules of redemption, as if respondents were exercising such right. n
that perspective, the Court of Appeals made three crucial conclusions
favorable to respondents: that their act of consigning the payments with
the RTC should be deemed done in the exercise of their right of
redemption; that the buyer at public auction does not ipso facto become
the owner of the pledged shares pending the lapse of the one-year
redemptive period; and that the collective sale of the shares of stock
belonging to several individual owners without specification of the
apportionment in the applications of payment deprives the individual
owners of the opportunity to know of the price they would have to pay for
the purpose of exercising the right of redemption.
The appellate court's dwelling on the right of redemption is utterly off-
tangent. The right of redemption involves payments made by debtors after
the foreclosure of their properties, and not those made or attempted to be
made, as in this case, before the foreclosure sale. The proper focus of the
Court of Appeals should have been whether the consignations made by
respondents sufficiently acquitted them of their principal obligations. A
pledge contract is an accessory contract, and is necessarily discharged if
the principal obligation is extinguished.
Nonetheless, the Court is now confronted with this rather new fangled
theory, as propounded by the Court of Appeals, involving the right of
redemption over pledged properties. We have no hesitation in pronouncing
such theory as discreditable.
Preliminarily, it must be clarified that the subject sale of pledged shares
was an extrajudicial sale, specifically a notarial sale, as distinguished from
a judicial sale as typified by an execution sale. Under the Civil Code, the
foreclosure of a pledge occurs extrajudicially, without intervention by the
courts. All the creditor needs to do, if the credit has not been satisfied in
due time, is to proceed before a Notary Public to the sale of the thing
pledged.
9
n this case, petitioners attempted as early as 1980 to proceed
extrajudicially with the sale of the pledged shares by public auction.
However, extrajudicial sale was stayed with the filing of Civil Cases No. R-
20120 and 20131, which sought to annul the pledge contracts. The final
and executory judgment in those cases affirmed the pledge contracts and
disposed them in the following fashion:
WHEREFORE, premises considered, judgment is hereby rendered
dismissing the complaints at bar, and
(1) Declaring the various pledges covered in Civil Cases Nos. R-
20120 and R-20131 valid and effective; and
(2) Giving due course to the foreclosure and sale at public
auction of the various pledges subject of these two cases.
Costs against the plaintiffs.
SO ORDERED.
10
The phrase "giving due course to the foreclosure and sale at public
auction of the various pledges subject of these two cases" may give rise to
the impression that such sale is judicial in character. While the decision did
authorize the sale by public auction, such declaration could not detract
from the fact that the sale so authorized is actually extrajudicial in
character. Note that the final judgment in said cases expressly did not
direct the sale by public auction of the pledged shares, but instead upheld
the right of the Parays to conduct such sale at their own volition.
ndeed, as affirmed by the Civil Code,
11
the decision to proceed with the
sale by public auction remains in the sole discretion of the Parays, who
could very well choose not to hold the sale without violating the final
judgments in the aforementioned civil cases. f the sale were truly in
compliance with a final judgment or order, the Parays would have no
choice but to stage the sale for then the order directing the sale arises
from judicial compulsion. But nothing in the dispositive portion directed the
sale at public auction as a mandatory recourse, and properly so since the
sale of pledged property in public auction is, by virtue of the Civil Code,
extrajudicial in character.
The right of redemption as affirmed under Rule 39 of the Rules of Court
applies only to execution sales, more precisely execution sales of real
property.
The Court of Appeals expressly asserted the notion that pledged property,
necessarily personal in character, may be redeemed by the creditor after
being sold at public auction. Yet, as a fundamental matter, does the right of
redemption exist over personal property? No law or jurisprudence
establishes or affirms such right. ndeed, no such right exists.
The right to redeem property sold as security for the satisfaction of an
unpaid obligation does not exist preternaturally. Neither is it predicated on
proprietary right, which, after the sale of property on execution, leaves the
judgment debtor and vests in the purchaser. nstead, it is a bare statutory
privilege to be exercised only by the persons named in the statute.
12

The right of redemption over mortgaged real property sold extrajudicially is
established by Act No. 3135, as amended. The said law does not extend
the same benefit to personal property. n fact, there is no law in our statute
books which vests the right of redemption over personal property. Act No.
1508, or the Chattel Mortgage Law, ostensibly could have served as the
vehicle for any legislative intent to bestow a right of redemption over
personal property, since that law governs the extrajudicial sale of
mortgaged personal property, but the statute is definitely silent on the
point. And Section 39 of the 1997 Rules of Civil Procedure, extensively
relied upon by the Court of Appeals, starkly utters that the right of
Credit Transactions Full Text Cases Atty. Adviento!!!!"&"
redemption applies to real properties, not personal properties, sold on
execution.
Tellingly, this Court, as early as 1927, rejected the proposition that
personal property may be covered by the right of redemption. n Sibal 1.
v. Valdez,
13
the Court ruled that sugar cane crops are personal property,
and thus, not subject to the right of redemption.
14
No countervailing statute
has been enacted since then that would accord the right of redemption
over personal property, hence the Court can affirm this decades-old ruling
as effective to date.
Since the pledged shares in this case are not subject to redemption, the
Court of Appeals had no business invoking and applying the inexistent
right of redemption. We cannot thus agree that the consigned payments
should be treated with liberality, or somehow construed as having been
made in the exercise of the right of redemption. We also must reject the
appellate court's declaration that the buyer of at the public auction is not
"ipso facto" rendered the owner of the auctioned shares, since the debtor
enjoys the one-year redemptive period to redeem the property. Obviously,
since there is no right to redeem personal property, the rights of ownership
vested unto the purchaser at the foreclosure sale are not entangled in any
suspensive condition that is implicit in a redemptive period.
The Court of Appeals also found fault with the apparent sale in bulk of the
pledged shares, notwithstanding the fact that these shares were owned by
several people, on the premise the pledgors would be denied the
opportunity to know exactly how much they would need to shoulder to
exercise the right to redemption. This concern is obviously rendered a
non-issue by the fact that there can be no right to redemption in the first
place. Rule 39 of the Rules of Court does provide for instances when
properties foreclosed at the same time must be sold separately, such as in
the case of lot sales for real property under Section 19. However, these
instances again pertain to execution sales and not extrajudicial sales. No
provision in the Rules of Court or in any law requires that pledged
properties sold at auction be sold separately.
On the other hand, under the Civil Code, it is the pledgee, and not the
pledgor, who is given the right to choose which of the items should be sold
if two or more things are pledged.
15
No similar option is given to pledgors
under the Civil Code. Moreover, there is nothing in the Civil Code
provisions governing the extrajudicial sale of pledged properties that
prohibits the pledgee of several different pledge contracts from auctioning
all of the pledged properties on a single occasion, or from the buyer at the
auction sale in purchasing all the pledged properties with a single
purchase price. The relative insignificance of ascertaining the definite
apportionments of the sale price to the individual shares lies in the fact
that once a pledged item is sold at auction, neither the pledgee nor the
pledgor can recover whatever deficiency or excess there may be between
the purchase price and the amount of the principal obligation.
16

A different ruling though would obtain if at the auction, a bidder expressed
the desire to bid on a determinate number or portion of the pledged
shares. n such a case, there may lie the need to ascertain with
particularity which of the shares are covered by the bid price, since not all
of the shares may be sold at the auction and correspondingly not all of the
pledge contracts extinguished. The same situation also would lie if one or
some of the owners of the pledged shares participated in the auction,
bidding only on their respective pledged shares. However, in this case,
none of the pledgors participated in the auction, and the sole bidder cast
his bid for all of the shares. There obviously is no longer any practical
reason to apportion the bid price to the respective shares, since no matter
how slight or significant the value of the purchase price for the individual
share is, the sale is completed, with the pledgor and the pledgee not
entitled to recover the excess or the deficiency, as the case may be. To
invalidate the subject auction solely on this point serves no cause other
than to celebrate formality for formality's sake.
Clearly, the theory adopted by the Court of Appeals is in shambles, and
cannot be resurrected. The question though yet remains whether the
consignations made by respondents extinguished their respective pledge
contracts in favor of the Parays so as to enjoin the latter from auctioning
the pledged shares.
There is no doubt that if the principal obligation is satisfied, the pledges
should be terminated as well. Article 2098 of the Civil Code provides that
the right of the creditor to retain possession of the pledged item exists only
until the debt is paid. Article 2105 of the Civil Code further clarifies that the
debtor cannot ask for the return of the thing pledged against the will of the
creditor, unless and until he has paid the debt and its interest. At the same
time, the right of the pledgee to foreclose the pledge is also established
under the Civil Code. When the credit has not been satisfied in due time,
the creditor may proceed with the sale by public auction under the
procedure provided under Article 2112 of the Code.
Respondents argue that their various consignations made prior to the
auction sale discharged them from the loan and the pledge agreements.
They are mistaken.
Petitioners point out that while the amounts consigned by respondents
could answer for their respective principal loan obligations, they were not
sufficient to cover the interests due on these loans, which were pegged at
the rate of 5% per month or 60% per annum. Before this Court,
respondents, save for Dolores Soberano, do not contest this interest rate
as alleged by petitioners. Soberano, on the other hand, challenges this
interest rate as "usurious."
17

The particular pledge contracts did not form part of the records elevated to
this Court. However, the 5% monthly interest rate was noted in the
statement of facts in the 14 October 1988 RTC Decision which had since
become final. Moreover, the said decision pronounced that even assuming
that the interest rates of the various loans were 5% per month, "it is
doubtful whether the interests so charged were exorbitantly or excessively
usurious. This is because for sometime now, usury has become 'legally
inexistent.'"
18
The finality of this 1988 Decision is a settled fact, and thus
the time to challenge the validity of the 5% monthly interest rate had long
passed. With that in mind, there is no reason for the Court to disagree with
petitioners that in order that the consignation could have the effect of
extinguishing the pledge contracts, such amounts should cover not just the
principal loans, but also the 5% monthly interests thereon.
t bears noting that the Court of Appeals also ruled that respondents had
satisfied the requirements under Section 18, Rule 39, which provides that
the judgment obligor may prevent the sale by paying the amount required
by the execution and the costs that have been incurred therein.
19
However,
the provision applies only to execution sales, and not extra-judicial sales,
as evidenced by the use of the phrases "sale of property on execution"
and "judgment obligor." The reference is inapropos, and even if it were
applicable, the failure of the payment to cover the interests due renders it
insufficient to stay the sale.
The effect of the finality of the judgments in Civil Cases Nos. R-20120 and
R-20131 should also not be discounted. Petitioners' right to proceed with
the auction sale was affirmed not only by law, but also by a final court
judgment. Any subsequent court ruling that would enjoin the petitioners
from exercising such right would have the effect of superseding a final and
executory judgment.
Finally, we cannot help but observe that respondents may have saved
themselves much trouble if they simply participated in the auction sale, as
they are permitted to bid themselves on their pledged properties.
20
Moreover, they would have had a better right had they
matched the terms of the highest bidder.
21
Under the circumstances, with
the high interest payments that accrued after several years, respondents
were even placed in a favorable position by the pledge agreements, since
the creditor would be unable to recover any deficiency from the debtors
should the sale price be insufficient to cover the principal amounts with
interests. Certainly, had respondents participated in the auction, there
would have been a chance for them to recover the shares at a price lower
than the amount that was actually due from them to the Parays. That
respondents failed to avail of this beneficial resort wholly accorded them
by law is their loss. Now, all respondents can recover is the amounts they
had consigned.
WHEREFORE, the petition is GRANTED. The assailed decision of the
Court of Appeals is SET ASDE and the decision of the Cebu City RTC,
Credit Transactions Full Text Cases Atty. Adviento!!!!"&#
Branch 16, dated 18 November 1992 is RENSTATED. Costs against
respondents.
SO ORDERED.
EN BANC
DECSON
October 2, 1922
G.R. No. L-18500
FILOMENA SARMIENTO and her husband EUSEBIO M. VILLASEOR,
plaintiffs-appellants,
vs.
GLICERIO JAVELLANA, defendant-appellant.
Montinola, Montinola and Hontiveros for plaintiffs-appellants.
J. M. Arroyo and Fisher and DeWitt for defendant-appellant.
, J.:
On August 28, 1991, the defendant loaned the plaintiffs the sum of P1,500
with interest at the rate of 25 per cent per annum for the term of one year.
To guarantee this loan, the plaintiffs pledged a large medal with a diamond
in the center and surrounded with ten diamonds, a pair of diamond
earrings, a small comb with twenty-two diamonds, and two diamond rings,
which the contracting parties appraised at P4,000. This loan is evidenced
by two documents (Exhibits A and 1) wherein the amount appears to be
P1,875, which includes the 25 per cent interest on the sum of P1,500 for
the term of one year.
The plaintiffs allege that at the maturity of this loan, August 31, 1912, the
plaintiff Eusebio M. Villaseor, being unable to pay the loan, obtained from
the defendant an extension, with the condition that the loan was to
continue, drawing interest at the rate of 25 per cent per annum, so long as
the security given was sufficient to cover the capital and the accrued
interest. n the month of August, 1919, the plaintiff Eusebio M. Villaseor,
in company with Carlos M. Dreyfus, went to the house of the defendant
and offered to pay the loan and redeem the jewels, taking with him, for this
purpose, the sum of P11,000, but the defendant then informed them that
the time for the redemption had already elapsed. The plaintiffs renewed
their offer to redeem the jewelry by paying the loan, but met with the same
reply. These facts are proven by the testimony of the plaintiffs,
corroborated by Carlos M. Dreyfus.
The plaintiffs now bring this action to compel the defendant to return the
jewels pledged, or their value, upon the payment by them of the sum they
owe the defendant, with the interest thereon.
The defendant alleges, in his defense, that upon the maturity of the loan,
August 31, 1912, he requested the plaintiff, Eusebio M. Villaseor, to
secure the money, pay the loan and redeem the jewels, as he needed
money to purchase a certain piece of land; that one month thereafter, the
plaintiff, Filomena Sarmiento, went to his house and offered to sell him the
jewels pledged for P3,000; that the defendant then told her to come back
on the next day, as he was to see his brother, Catalino Javellana, and ask
him if he wanted to take the jewels for that sum; that on the next day the
plaintiff, Filomena Sarmiento, went back to the house of the defendant
who then paid her the sum of P1,125, which was the balance remaining of
the P3,000 after deducting the plaintiff's loan.
t appearing that the defendant possessed these jewels originally, as a
pledge to secure the payment of a loan stated in writing, the mere
testimony of the defendant to the effect that later they were sold to him by
the plaintiff, Filomena Sarmiento, against the positive testimony of the
latter that she did not make any such sale, requires a strong corroboration
to be accepted. We do not find the testimony of Jose Sison to be of
sufficient value as such corroboration. This witness testified to having
been in the house of the defendant when Filomena went there to offer to
sell the defendant the jewels, as well as on the third day when she
returned to receive the price. According to this witness, he happened to be
in the house of the defendant, having gone there to solicit a loan, and also
accidentally remained in the house of the defendant for three days, and
that that was how he happened to witness the offer to sell, as well as the
receipt of the price on the third day. But not only do we find that the
defendant has not sufficiently established, by his evidence, the fact of the
purchase of the jewels, but also that there is a circumstance tending to
show the contrary, which is the fact that up to the trial of this cause the
defendant continued in possession of the documents, Exhibits A and 1,
evidencing the loan and the pledge. f the defendant really bought these
jewels, its seems natural that Filomena would have demanded the
surrender of the documents evidencing the loan and the pledge, and the
defendant would have returned them to plaintiff.
Our conclusion is that the jewels pledged to defendant were not sold to
him afterwards.
Another point on which evidence was introduced by both parties is as to
the value of the jewels in the event that they were not returned by the
defendant. n view of the evidence of record, we accept the value of
P12,000 fixed by the trial court 3Dru1n.
From the foregoing it follows that, as the jewels in question were in the
possession of the defendant to secure the payment of a loan of P1,500,
with interest thereon at the rate of 25 per cent per annum from Augusts 31,
1911, to August 31, 1912, and the defendant having subsequently
extended the term of the loan indefinitely, and so long as the value of the
jewels pledged was sufficient to secure the payment of the capital and the
accrued interest, the defendant is bound to return the jewels or their value
(P12,000) to plaintiffs, and the plaintiffs have the right to demand the same
upon the payment by them of the sum of P1,5000, plus the interest
thereon at the rate of 25 per cent per annum from August 28, 1911.
The judgment appealed from being in accordance with this findings, the
same is affirmed without special pronouncement as to costs. So ordered.
Araullo, C.J., Street, Malcolm, Villamor, Ostrand and Romualdez, JJ.,
concur.
R E S O L U T O N
April 4, 1923
AVANCEA, J.:
The defendant contends that the plaintiffs' action for the recovery of the
jewels pledged has prescribed. Without deciding whether or not the action
to recover the thing pledged may prescribe in any case, it not being
necessary for the purposes of this opinion, but supposing that it may, still
the defendant's contention is untenable. n the document evidencing the
loan in question there is stated: " transfer by way of pledge the following
jewels." That this is a valid contract of pledge there can be no question. As
a matter of fact the defendant does not question it, but take s it for
granted. However, it is contended that the obligation of the defendant to
return the jewels pledged must be considered as not stated in writing, for
this obligation is not expressly mentioned in the document. But if this
contract of pledge is in writing, it must necessarily be admitted that the
action to enforce the right, which constitutes the essence of this contract,
is covered by a written contract. The duty of the creditor to return the thing
pledged in case the principal obligation is fulfilled is essential in all
contracts of pledge. This constitutes, precisely, the consideration of the
debtor in this accessory contract, so that if this obligation of the creditor to
return to thing pledged, and the right of the debtor to demand the return
thereof, are eliminated, the contract would not be a contract of pledge. t
would be a donation.
f the right of the plaintiffs to recover the thing pledged is covered by a
written contract, the time for the prescription of this action is ten years,
according to section 43 of the Code of Civil Procedure.
The defendant contends that the time of prescription of the action of the
plaintiffs to recover the thing pledged must be computed from August 28,
1911, the date of the making of the contract of loan secured by this pledge.
The term of this loan is one year. However, it is contended that the action
of the plaintiff to recover the thing pledged accrued on the very date of the
making of the contract, inasmuch as from that date they could have
recovered the same by paying the loan even before the expiration of the
period fixed for payment. This view is contrary to law. Whenever a term for
the performance of an obligation is fixed, it is presumed to have been
established for the benefit of the creditor as well as that of the debtor,
unless from its tenor or from other circumstances it should appear that the
Credit Transactions Full Text Cases Atty. Adviento!!!!"&$
term was established for the benefit of one or the other only (art. 1128 of
the Civil Code.) n this case it does not appear, either from any
circumstance, or from the tenor of the contract, that the term of one year
allowed the plaintiffs to pay the debt was established in their favor only.
Hence it must be presumed to have been established for the benefit of the
defendant also. And it must be so, for this is a case of a loan, with interest,
wherein the term benefits the plaintiffs by the use of the money, as well as
the defendant by the interest. This being so, the plaintiffs had no right to
pay the loan before the lapse of one year, without the consent of the
defendant, because such a payment in advance would have deprived the
latter of the benefit of the stipulated interest. t follows from this that
appellant is in error when he contents that the plaintiffs could have paid
the loan and recovered the thing pledged from the date of the execution of
the contract and, therefore, his theory that the action of the plaintiffs to
recover the thing pledged accrued from the date of the execution of the
contract is not tenable.
t must, therefore, be admitted that the action of the plaintiffs for the
recovery of the thing pledged did not accrue until August 31, 1912, when
the term fixed for the loan expired. Computing the time from that date to
that of the filing of the complaint in this cause, October 9, 1920, it appears
that the ten years fixed by the law for the prescription of the action have
not yet elapsed.
On the other hand, the contract of loan with pledge is in writing and the
action of the defendant for the recovery of the loan does not prescribe until
after ten years. t is unjust to hold that the action of the plaintiffs for the
recovery of the thing pledged, after the payment of the loan, has already
prescribed while the action of the defendant for the recovery of the loan
has not yet prescribed. The result of this would be that the defendant
might have collected the loan and at the same time kept the thing pledged.
The motion for reconsideration is denied kaMaabs1.
Araullo, C.J., Malcolm, Ostrand and Romualdez, JJ., concur.
EN BANC
G.R. No. L-26371 September 30, 1969
MOBIL OIL PHILIPPINES, INC., plaintiff-appellant,
vs.
RUTH R. DIOCARES, ET AL., defendants-appellees.
Faylona, Berroya, Norte and Associates for plaintiff-appellant.
Vivencio G. Ibrado Jr. for defendants-appellees.

FERNANDO, J.:
t may very well be, as noted by jurists of repute, that to stress the
element of a promise as the basis of contracts is to acknowledge the
influence of natural law.
1
Nonetheless, it does not admit of doubt that
whether under the civil law or the common law, the existence of a contract
is unthinkable without one's word being plighted. So the New Civil Code
provides: "A contract is a meeting of minds between two persons whereby
one binds himself, with respect to the other, to give something or to render
some service."
2
So it is likewise under American law. Thus: "A contract is a
promise or a set of promises for the breach of which the law gives a
remedy, or the performance of which the law in some way recognizes as a
duty."
3
The law may go further and require that certain formalities be
executed. Thus, for a mortgage to be validly constituted, "it is
indispensable, ..., that the document in which it appears be recorded in the
Registry of Property." The same codal provision goes on: "f the instrument
is not recorded, the mortgage is nevertheless binding between the
parties."
4
The question before us in this appeal from a lower court decision,
one we have to pass upon for the first time, is the effect, if any, to be given
to a mortgage contract admittedly not registered, only the parties being
involved in the suit. The lower court was of the opinion that while it
"created a personal obligation [it] did not establish a real estate mortgage."
5
t did not decree foreclosure therefor. Plaintiff-appellant appealed. We
view the matter differently and reverse the lower court.
The case for the plaintiff, Mobil Oil Philippines, nc., now appellant,
was summarized in the lower court order of February 25, 1966, subject of
this appeal. Thus: "n its complaint plaintiff alleged that on Feb. 9, 1965
defendants Ruth R. Diocares and Lope T. Diocares entered into a contract
of loan and real estate mortgage wherein the plaintiff extended to the said
defendants a loan of P45,000.00; that said defendants also agreed to buy
from the plaintiff on cash basis their petroleum requirements in an amount
of not less than 50,000 liters per month; that the said defendants will pay
to the plaintiff 9-1/2% per annum on the diminishing balance of the amount
of their loan; that the defendants will repay the said loan in monthly
installments of P950.88 for a period of five (5) years from February 9,
1965; that to secure the performance of the foregoing obligation they
executed a first mortgage on two parcels of land covered by Transfer
Certificates of Title Nos. T-27136 and T-27946, both issued by the Register
of Deeds of Bacolod City. The agreement further provided that in case of
failure of the defendants to pay any of the installments due and purchase
their petroleum requirements in the minimum amount of 50,000 liters per
month from the plaintiff, the latter has the right to foreclose the mortgage
or recover the payment of the entire obligation or its remaining unpaid
balance; that in case of foreclosure the plaintiff shall be entitled to 12% of
the indebtedness as damages and attorney's fees. A copy of the loan and
real estate mortgage contract executed between the plaintiff and the
defendants is attached to the complaint and made a part thereof. The
complaint further alleges that the defendant paid only the amount of
P1,901.76 to the plaintiff, thus leaving a balance of P43,098.24, excluding
interest, on their indebtedness. The said defendants also failed to buy on
cash basis the minimum amount of petroleum which they agreed to
purchase from the plaintiff. The plaintiff, therefore, prayed that the
defendants be ordered to pay the amount of P43,098.24, with interest at 9-
1/2% per annum from the date it fell due, and in default of such payment
that the mortgaged properties be sold and the proceeds applied to the
payment of defendants' obligation."
6
Defendants, Ruth R. Diocares and Lope T. Diocares, now appellees,
admitted their indebtedness as set forth above, denying merely the alleged
refusal to pay, the truth, according to them, being that they sought for an
extension of time to do so, inasmuch as they were not in a position to
comply with their obligation. They further set forth that they did request
plaintiff to furnish them with the statement of accounts with the view of
paying the same on installment basis, which request was, however, turned
down by the plaintiff.
Then came a motion from the plaintiff for a judgment on the
pleadings, which motion was favorably acted on by the lower court. As
was stated in the order appealed from: "The answer of the defendants
dated October 21, 1965 did not raise any issue. On the contrary, said
answer admitted the material allegations of the complaint. The plaintiff is
entitled to a judgment on the pleadings."
7
As to why the foreclosure sought by plaintiff was denied, the lower
court order on appeal reads thus: "The Court cannot, however, order the
foreclosure of the mortgage of properties, as prayed for, because there is
no allegation in the complaint nor does it appear from the copy of the loan
and real estate mortgage contract attached to the complaint that the
mortgage had been registered. The said loan agreement although binding
among the parties merely created a personal obligation but did not
establish a real estate mortgage. The document should have been
registered. (Art. 2125, Civil Code of the Phil.)"
8
The dispositive portion is
thus limited to ordering defendants "to pay the plaintiff the account of
P43,098.24, with interest at the rate of 9-1/2% per annum from the date of
the filing of the complaint until fully paid, plus the amount of P2,000.00 as
attorneys' fees, and the costs of the suit."
9
Hence this appeal, plaintiff-appellant assigning as errors the holding
of the lower court that no real estate mortgage was established and its
consequent refusal to order the foreclosure of the mortgaged properties.
As set forth at the outset, we find the appeal meritorious. The lower court
should not have held that no real estate mortgage was established and
should have ordered its foreclosure.
Credit Transactions Full Text Cases Atty. Adviento!!!!"&%
The lower court predicated its inability to order the foreclosure in
view of the categorical nature of the opening sentence of the governing
article
10
that 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." Note that it ignored the succeeding sentence: "f the
instrument is not recorded, the mortgage is nevertheless binding between
the parties." ts conclusion, however, is that what was thus created was
merely "a personal obligation but did not establish a real estate mortgage."
Such a conclusion does not commend itself for approval. The codal
provision is clear and explicit. Even if the instrument were not recorded,
"the mortgage is nevertheless binding between the parties." The law
cannot be any clearer. Effect must be given to it as written. The mortgage
subsists; the parties are bound. As between them, the mere fact that there
is as yet no compliance with the requirement that it be recorded cannot be
a bar to foreclosure.1awphl.nt
A contrary conclusion would manifest less than full respect to what
the codal provision ordains. The liability of the mortgagor is therein
explicitly recognized. To hold, as the lower court did, that no foreclosure
would lie under the circumstances would be to render the provision in
question nugatory. That we are not allowed to do. What the law requires in
unambiguous language must be lived up to. No interpretation is needed,
only its application, the undisputed facts calling for it.
11
Moreover to rule as the lower court did would be to show less than
fealty to the purpose that animated the legislators in giving expression to
their will that the failure of the instrument to be recorded does not result in
the mortgage being any the less "binding between the parties." n the
language of the Report of the Code Commission: "n article [2125] an
additional provision is made that if the instrument of mortgage is not
recorded, the mortgage is nevertheless binding between the parties."
12
We are not free to adopt then an interpretation, even assuming that the
codal provision lacks the forthrightness and clarity that this particular norm
does and, therefore, requires construction, that would frustrate or nullify
such legislative objective.
Nor is the reason difficult to discern why such an exception should
be made to the rule that is indispensable for a mortgage to be validly
constituted that it be recorded. Equity so demands, and justice is served.
There is thus full acknowledgment of the binding effect of a promise, which
must be lived up to, otherwise the freedom a contracting party is supposed
to possess becomes meaningless. t could be said of course that to allow
foreclosure in the absence of such a formality is to offend against the
demands of jural symmetry. What is "indispensable" may be dispense
with. Such an objection is far from fatal. This would not be the first time
when logic yields to what is fair and what is just. To such an overmastering
requirement, law is not immune.
WHEREFORE, the lower court order of February 25, 1966 is
affirmed with the modification that in default of the payment of the above
amount of P43,028.94 with interests at the rate of 9-1/2% per annum from
the date of the filing of the complaint, that the mortgage be foreclosed with
the properties subject thereof being sold and the proceeds of the sale
applied to the payment of the amounts due the plaintiff in accordance with
law. With costs against defendants-appellees.
Concepcion, C.J., Dizon, Makalintal, Zaldivar, Sanchez, Castro,
Capistrano, Teehankee and Barredo, JJ., concur.
Reyes, J.B.L., J., is on leave.
FRST DVSON
G.R. No. L-49940 September 25, 1986
GEMMA R. HECHANOVA, accompanied by her husband, NICANOR
HECHANOVA, JR., and PRESCILLA R. MASA, accompanied by her
husband, FRANCISCO MASA, petitioners,
vs.
HON. MIDPANTAO L. ADIL, Presiding Judge, Branch II, Court of First
Instance of IIoiIo, THE PROVINCIAL SHERIFF OF ILOILO, and PIO
SERVANDO, respondents.

YAP, J.:
Petitioners seek the annulment of various orders issued by the respondent
Presiding Judge of Branch , Court of First nstance of loilo, in Civil Case
No. 12312 entitled "Pio Servando versus Jose Y. Servando et al." A
temporary restraining order was issued by this Court on May 9, 1979,
staying until further orders the execution of the decision rendered by the
respondent Judge in said case.
The case under review is for the annulment of a deed of sale dated March
11, 1978, executed by defendant Jose Y. Servando in favor of his co-
defendants, the petitioners herein, covering three parcels of land situated
in loilo City. Claiming that the said parcels of land were mortgaged to him
in 1970 by the vendor, who is his cousin, to secure a loan of P20,000.00,
the plaintiff Pio Servando impugned the validity of the sale as being
fraudulent, and prayed that it be declared null and void and the transfer
certificates of title issued to the vendees be cancelled, or alternatively, if
the sale is not annulled, to order the defendant Jose Servando to pay the
amount of P20,000.00, plus interests, and to order defendants to pay
damages. Attached to the complaint was a copy of the private document
evidencing the alleged mortgage (Annex A), which is quoted hereunder:
August 20, 1970
This is to certify that , Jose Yusay Servando, the sole
owner of three parcel of land under Tax Declaration
No. 28905, 44123 and 31591 at Lot No. 1, 1863-
Portion of 1863 & 1860 situated at Sto. Nino St.,
Arevalo, Compania St. & Compania St., nterior Molo,
respectively, have this date mortgaged the said
property to my cousin Pio Servando, in the amount of
TWENTY THOUSAND PESOS (P20,000.00),
redeemable for a period not exceeding ten (10) years,
the mortgage amount bearing an interest of 10% per
annum.
further certify that in case fail to redeem the said
properties within the period stated above, my cousin
Pio Servando, shall become the sole owner thereof.
(SGD.) JOSE YUSAY SERVANDO
WTNESSES:
(Sgd) Ernesto G. Jeruta
(Sgd) Francisco B. Villanueva
The defendants moved to dismiss the complaint on the grounds that it did
not state a cause of action, the alleged mortgage being invalid and
unenforceable since it was a mere private document and was not recorded
in the Registry of Deeds; and that the plaintiff was not the real party in
interest and, as a mere mortgagee, had no standing to question the
validity of the sale. The motion was denied by the respondent Judge, in its
order dated June 20, 1978, "on the ground that this action is actually one
for collection."
On June 23, 1978, defendant Jose Y. Servando died. The defendants filed
a Manifestation and Motion, informing the trial court accordingly, and
moving for the dismissal of the complaint pursuant to Section 21 of Rule 3
of the Rules of Court, pointing out that the action was for. recovery of
money based on an actionable document to which only the deceased
defendant was a party. The motion to dismiss was denied on July 25,
1978, "it appearing from the face of the complaint that the instant action is
not purely a money claim, it being only incidental, the main action being
one for annulment and damages."
On August 1, 1978, plaintiff filed a motion to declare defendants in default,
and on the very next day, August 2, the respondent Judge granted the
Credit Transactions Full Text Cases Atty. Adviento!!!!"&&
motion and set the hearing for presentation of plaintiff's evidence ex-parte
on August 24, 1978.
On August 2, 1978, or the same day that the default order was issued,
defendants Hechanova and Masa filed their Answers, denying the
allegations of the complaint and repeating, by way of special and
affirmative defenses, the grounds stated in their motions to dismiss.
On August 25, 1978, a judgment by default was rendered against the
defendants, annulling the deed of sale in question and ordering the
Register of Deeds of loilo to cancel the titles issued to Priscilla Masa and
Gemma Hechanova, and to revive the title issued in the name of Jose Y.
Servando and to deliver the same to the plaintiff.
The defendants took timely steps to appeal the decision to the Court of
Appeals by filing a notice of appeal, an appeal bond, and a record on
appeal. However, the trial court disapproved the record on appeal due to
the failure of defendants to comply with its order to eliminate therefrom the
answer filed on August 2, 1978 and accordingly, dismissed the appeal, and
on February 2, 1978, issued an order granting the writ of execution prayed
for by plaintiff.
We find the petition meritorious, and the same is hereby given due course.
t is clear from the records of this case that the plaintiff has no cause of
action. Plaintiff has no standing to question the validity of the deed of sale
executed by the deceased defendant Jose Servando in favor of his co-
defendants Hechanova and Masa. No valid mortgage has been
constituted plaintiff's favor, the alleged deed of mortgage being a mere
private document and not registered; moreover, it contains a stipulation
(pacto comisorio) which is null and void under Article 2088 of the Civil
Code. Even assuming that the property was validly mortgaged to the
plaintiff, his recourse was to foreclose the mortgage, not to seek
annulment of the sale.
WHEREFORE, the decision of the respondent court dated August 25,
1973 and its Order of February 2, 1979 are set aside, and the complaint
filed by plaintiff dated February 4, 1978 is hereby dismissed.
SO ORDERED.
FRST DVSON
G.R. No. L-56450 JuIy 25, 1983
RODOLFO T. GANZON and GREGORIO L. LIRA, in his capacity as Ex-
Oficio ProvinciaI Sheriff of IIoiIo, petitioners,
vs.
THE HONORABLE SANCHO Y. INSERTO, Presiding Judge, Branch I
of the Court of First Instance of IIoiIo, RANDOLPH C. TAJANLANGIT
and ESTEBAN C. TAJANLANGIT, respondents.
Salvador A. Cabaluna, Jr. and Jose W. Diokno for petitioners.
Hannibal de los Reyes for private respondent.

GUTIERREZ, JR., J.:
May the respondent court order that a mortgage on real property be
substituted by a surety bond and direct the Register of Deeds to cancel
the mortgage lien annotated on the Torrens Title since the surety bond
already secures the obligation earlier secured by the cancelled mortgage?
The petitioner comes to us stating that the lower court acted with grave
abuse of discretion and in excess of its jurisdiction in so ruling.
On August 28, 1979, petitioner Rodolfo Ganzon initiated proceedings to
extra-judicially foreclose a real estate mortgage executed by the private
respondents in his favor. The Deed of Real Estate Mortgage executed on
March 19, 1979 (Annex "A", Petition) between Randolph Tajanlangit and
Esteban Tajanlangit as mortgagors on one hand and Rodolfo Ganzon as
mortgagee on the other hand was to secure the payment by the
Tajanlangits of a promissory note amounting to P40,000.00 in favor of
Ganzon, to wit:
xxx xxx xxx
That whereas, the MORTGAGORS are justly indebted
to the MORTGAGEE in the amount of FORTY
THOUSAND (P40,000.00) PESOS, Philippine
Currency, as evidenced by their promissory note for
said sum, in the words and figures as follows:
P40,000.00 loilo City
March 19, 1979
For value received, we promise to pay RODOLFO T.
GANZON, or order, at his residence in Molo, loilo
City, the sum of FORTY THOUSAND (P40,000.00)
PESOS, Philippine Currency, in two (2) installments
as follows: P20,000.00 on or before 25 May 1979; and
P20,000.00 on or before 25 August 1979. This note
shall not draw interest. (Annex "A", Rollo, p. 15)
The mortgage covered a parcel of residential land, Lot No. 1901-E-61-B-1-
F of the subdivision plan Psd-274802, located in the District of Molo, loilo
City covered by Transfer Certificate of Title No. T-50324.
Thereafter, petitioner Gregorio Lira, in his capacity as ex-oficio provincial
sheriff of loilo served personal notice of the foreclosure proceedings on
the private respondents. Lira also caused the publication in a newspaper
of general circulation in the City and Province of loilo of a Notice of Extra
Judicial Sale of Mortgaged Property, setting the sale at public auction of
the mortgaged property at 10:00 a.m. on September 28, 1979, at his office
at the Provincial Capitol, loilo City.
On September 27, 1979, a day before the scheduled public auction, the
private respondents filed a civil action for specific performance, damages,
and prohibition with preliminary injunction against the petitioners with the
respondent court. The action, docketed as CF Case No. 13053, sought to
declare the extrajudicial foreclosure proceedings and all proceedings
taken in connection therewith null and void. The private respondents
asked for the issuance of a writ of preliminary injunction to enjoin the
petitioners from proceeding with the foreclosure and public auction sale.
Acting on the urgent ex-parte motion of private respondents, the trial court
issued an order enjoining the provincial sheriff from proceeding with the
scheduled auction sale on September 28, 1979.
On October 31, 1979, the private respondents filed an amended
complaint. For purposes of the instant petition, the pertinent allegations in
the amended complaint are the following: (1) On August 25, 1978,
defendant, now petitioner Rodolfo Ganzon executed a deed of absolute
sale of a parcel of land in favor of plaintiff, now respondent Esteban
Tajanlangit. The parcel of land, subject of the sale is described as Lot No.
1900 of the Cadastral Survey of loilo located at Molo, loilo City covered
by Transfer Certificate of Title No. T- 39579 with an area of 24,442 square
meters, more or less; (2) The deed of real estate mortgage which is the
subject of the extra-judicial proceedings initiated by defendant Rodolfo
Ganzon executed by plaintiffs Esteban Tajanlangit and Randolph
Tajanlangit in his favor was for the purpose of securing the payment of
P40,000.00 which formed part of the purchase price of Lot No. 1900; (3)
ncorporated in the aforesaid deed of absolute sale was a proviso to the
effect that vendor-defendant Rodolfo Ganzon guaranteed to have the
occupants of the lot to vacate the premises within 120 days after the
execution thereof, to wit:
xxx xxx xxx
Credit Transactions Full Text Cases Atty. Adviento!!!!"&'
The vendor warrants to the vendee peaceful
possession of the above- mentioned parcel of land
and that the said vendor shall see to it that all
occupants thereof at the execution of this deed shall
vacate the premises within a period of one hundred
twenty (120) days computed from the date of the
execution of this document.
(4) The aforestated guaranty was violated by defendant Ganzon since the
occupants of the said lot up to the present are still within the premises of
the lot; and (5) The extra-judicial foreclosure is illegal since defendant
Ganzon committed a breach in his warranty and the deed of real estate
mortgage does not contain any stipulation authorizing mortgagee Ganzon
to extrajudicially foreclose the mortgaged property.
On March 28, 1980 the petitioners filed their answer to the amended
complaint. They admitted the veracity of the deed of absolute sale
covering said Lot No. 1900 but denied that the real estate mortgage
covering Lot No. 1901 subject of the extra-judicial foreclosure proceedings
was executed by Esteban Tajanlangit and Randolph Tajanlangit in favor of
Rodolfo Ganzon to secure the payment of the balance of the purchase
price of Lot No. 1900. They maintained that the real estate mortgage was
an entirely different transaction between the Tajanlangits and Ganzon from
the sale of Lot No. 1900 embodied in the absolute deed of sale of realty.
They further maintained that the extra-judicial foreclosure proceedings
would be in accordance with the terms and conditions of the said
mortgage.
After the issues had been joined but before actual trial, the private
respondents filed a "Motion For Release Of Real Estate And For The Clerk
Of Court To Accept Bond Or Cash n Lieu Thereof," to which the
petitioners interposed an Opposition.
n an order dated November 20, 1980, the respondent court granted the
respondents' motion. The order states:
This is a Motion for Release of Real Estate Mortgage
and for the Clerk of Court to Accept Bond or Cash in
Lieu Thereof.
t appears that defendant sold to Esteban Tajanlangit,
Jr. Lot No. 1900 of the Cadastral Survey of loilo
under Transfer Certificate of Title No. T- 39579. The
document of sale provides that the vendee who is the
defendant herein, promised to exclude from the
premises the occupants. To secure the unpaid
balance of P40,000.00, plaintiffs executed a real
estate mortgage on their Lot No. 1901-4-61-B-1-1 of
the subdivision plan Psd-274802. Because defendant
failed to clear the occupants of Lot No. 1900, as
provided for in the contract of sale, plaintiffs withheld
payment of the P40,000.00. To clear the title of Lot
No. 1901-E-61-B-1-1 plaintiffs are willing to submit a
bond in the sum of P80,000.00 which is double the
consideration of the mortgage.
WHEREFORE, in the interest of justice, considering
that plaintiffs are willing and able to pay the
P40,000.00 and considering further that defendant
has not yet cleared the premises he sold to plaintiffs
of tenants, the Register of Deeds of loilo City is
ordered to cancel the mortgage lien on Transfer
Certificate of Title No. T-50324, upon showing by the
plaintiffs that they have put up the surety bond in the
sum of P80,000.00. " (Annex "F", Rollo, p. 58)
On January 28, 1981, the respondents after receipt of the aforesaid order,
put up a surety bond in the amount of P80,000.00 with the Summa
nsurance Corporation as surety (Annex " G ") for the approval of the
respondent court,
On February 14, 1981, the petitioners filed an Urgent Motion for
Reconsideration Of The Order Dated November 20, 1980, And Opposition
To The Approval of Surety Bond.
The respondent court in its order dated February 24, 1981, denied the
aforesaid motion. The order states:
Finding the motion filed by plaintiff through counsel for
approval of surety bond well taken and considering
that the opposition filed by defendants does not
question the validity of the surety bond itself but is
anchored upon grounds that had already been passed
upon by this Court in the order dated November 20,
1980, the surety bond in the amount of P80,000.00
issued by Summa nsurance Corporation is hereby
approved.
The defendant Rodolfo T. Ganzon, through Atty.
Salvador Cabaluna, Jr., is hereby ordered to
surrender to the plaintiffs, through Atty. Hannibal de
los Reyes the owner's copy of TCT No. 50324, so that
the mortgage annotated therein in favor of defendant
Rodolfo T. Ganzon could be duly cancelled. (Annex
"", Rollo, p. 65).
Hence, the instant petition.
On March 18, 198 1, we issued a temporary restraining order enjoining the
respondents from enforcing the orders dated November 20, 1980 and
February 24, 1981 of the Court of First nstance of loilo, Branch at loilo
City.
On July 8, 1981, we gave due course to the petition and required the
parties to submit their respective memoranda.
As stated earlier, the issue raised before us is whether or not the trial court
may order the cancellation of a mortgage lien annotated in a Torrens
Certificate of Title to secure the payment of a promissory note and
substitute such mortgage lien with a surety bond approved by the same
court to secure the payment of the promissory note.
n issuing its November 20, 1980 order, the trial court before trial on the
merits of the case assumed that the real estate mortgage subject of the
extra- judicial foreclosure proceedings was indeed a security for the
payment of a P40,000.00 promissory note which answered for the balance
of the purchase price of the sale between Ganzon as vendor and Esteban
Tajanlangit was vendee of Lot No. 1900. With this assumption, the trial
court concluded that Rodolfo Ganzon violated his warranty that he would
clear the parcel of land of its occupants within 120 days after the execution
of the deed of absolute sale of realty. On this premise and upon motion of
the private respondents, the court ordered the Register of Deeds to cancel
the mortgage lien annotated in the Transfer Certificate of Title covering the
mortgaged parcel of land and to substitute therein a surety bond approved
by the trial court.
t must be noted that petitioner Rodolfo Ganzon vehemently denied the
allegation that the P 40,000.00, consideration of the promissory note which
resulted in the execution of the real estate mortgage to secure its payment
was a balance of the purchase price of Lot No. 1900. As earlier stated,
Ganzon maintained in his Answer that the real estate mortgage arose from
a different transaction. At the pre-trial, what the parties admitted were the
existence and due execution of the documents, including the absolute
deed of sale of realty and the subject real estate mortgage. n connection
with the documents, the issues per the pre-trial order were "... whether or
not the documents express the true intention of the parties, and whether or
not they complied with the provisions of the document. (Rollo, p. 78)
Hence, at that stage of the case, the trial court's order dated November
20, 1980 had no factual basis.
Even on the assumption that the factual bases of the trial court's
questioned orders were justified by evidence in the records the same
would still not be proper.
Credit Transactions Full Text Cases Atty. Adviento!!!!"&(
A mortgage is but an accessory contract. "The consideration of the
mortgage is the same consideration of the principal contract without which
it cannot exist as an independent contract." (Banco de Oro v. Bayuga, 93
SCRA 443, citing China Banking Corporation v. Lichauco, 46 Phil. 460).
On the effects of a mortgage we ruled in Philippine National Bank v.
Mallorca (21 SCRA 694):
xxx xxx xxx
... By Article 2126 of the Civil Code, (Formerly Article
1876 of the Civil Code of Spain of 1889.) a 'mortgage
directly and immediately subjects the property upon
which it is imposed, whoever the possessor may be,
to the fulfillment of the obligation for whose security it
was constituted.' Sale or transfer cannot affect or
release the mortgage. A purchaser is necessarily
bound to acknowledge and respect the encumbrance
to which is subject the purchased thing and which is at
the disposal of the creditor 'in order that he, under the
terms of the contract, may recover the amount of his
credit therefrom.' (Bischoff vs. Pomar, 12 Phil. 690,
700) For, a recorded real estate is a right in rem, a
lien on the property whoever its owner may be.
(Altavas, The Law of Mortgages in the Philippine
slands, 1924 ed., p. 2) Because the personality of the
owner is disregarded; the mortgage subsists
notwithstanding changes of ownership; the last
transferee is just as much of a debtor as the first one;
and this, independent of whether the transferee
knows or not the person of the mortgagee. (Id., at p.
6) So it is, that a mortgage lien is inseparable from the
property mortgaged. All subsequent purchasers
thereof must respect the mortgage, whether the
transfer to them be with or without the consent of the
mortgagee. For, the mortgage, until discharge, follows
the property. (Pea, Registration of Land Titles and
Deeds, 1961 ed., p. 225; emphasis supplied. See also
V. Tolentino, Civil Code of the Philippines, 1962 ed., p.
477)
Applying the principles underlying the nature of a mortgage, the real estate
mortgage constituted on Lot No. 1901-E-61-B-lF of the subdivision plan
Psd-27482, located in the District of Molo, loilo City covered by Transfer
Certificate of Title No. T-50324 can not be substituted by a surety bond as
ordered by the trial court. The mortgage lien in favor of Petitioner Rodolfo
Ganzon is inseparable from the mortgaged property. t is a right in rem, a
lien on the property. To substitute the mortgage with a surety bond would
convert such lien from a right in rem, to a right in personam. This
conversion can not be ordered for it would abridge the rights of the
mortgagee under the mortgage contract.
Moreover, the questioned orders violate the non-impairment of contracts
clause guaranteed under the Constitution. Substitution of the mortgage
with a surety bond to secure the payment of the P40,000.00 note would in
effect change the terms and conditions of the mortgage contract. Even
before trial on the very issues affecting the contract, the respondent court
has directed a deviation from its terms, diminished its efficiency, and
dispensed with a primary condition.
WHEREFORE, the instant petition is hereby GRANTED. The Orders dated
November 20, 1980 and February 24, 1981 of the trial court are SET
ASDE. Our March 18, 1981 Temporary Restraining Order is made
PERMANENT. No costs.
SO ORDERED.
SECOND DVSON
G.R. No. L-49101 October 24, 1983
RAOUL S.V. BONNEVIE and HONESTO V. BONNEVIE, petitioners,
vs.
THE HONORABLE COURT OF APPEALS and THE PHILIPPINE BANK
OF COMMERCE, respondents.
Edgardo I. De Leon for petitioners.
Siguion Reyna, Montecillo & Associates for private respondent.

GUERRERO, J:
Petition for review on certiorari seeking the reversal of the decision of the
defunct Court of Appeals, now ntermediate Appellate Court, in CA-G.R.
No. 61193-R, entitled "Honesto Bonnevie vs. Philippine Bank of
Commerce, et al.," promulgated August 11, 1978
1
as well as the
Resolution denying the motion for reconsideration.
The complaint filed on January 26, 1971 by petitioner Honesto Bonnevie
with the Court of First nstance of Rizal against respondent Philippine
Bank of Commerce sought the annulment of the Deed of Mortgage dated
December 6, 1966 executed in favor of the Philippine Bank of Commerce
by the spouses Jose M. Lozano and Josefa P. Lozano as well as the
extrajudicial foreclosure made on September 4, 1968. t alleged among
others that (a) the Deed of Mortgage lacks consideration and (b) the
mortgage was executed by one who was not the owner of the mortgaged
property. t further alleged that the property in question was foreclosed
pursuant to Act No. 3135 as amended, without, however, complying with
the condition imposed for a valid foreclosure. Granting the validity of the
mortgage and the extrajudicial foreclosure, it finally alleged that
respondent Bank should have accepted petitioner's offer to redeem the
property under the principle of equity said justice.
On the other hand, the answer of defendant Bank, now private respondent
herein, specifically denied most of the allegations in the complaint and
raised the following affirmative defenses: (a) that the defendant has not
given its consent, much less the requisite written consent, to the sale of
the mortgaged property to plaintiff and the assumption by the latter of the
loan secured thereby; (b) that the demand letters and notice of foreclosure
were sent to Jose Lozano at his address; (c) that it was notified for the first
time about the alleged sale after it had foreclosed the Lozano mortgage;
(d) that the law on contracts requires defendant's consent before Jose
Lozano can be released from his bilateral agreement with the former and
doubly so, before plaintiff may be substituted for Jose Lozano and Alfonso
Lim; (e) that the loan of P75,000.00 which was secured by mortgage, after
two renewals remain unpaid despite countless reminders and demands; of
that the property in question remained registered in the name of Jose M.
Lozano in the land records of Rizal and there was no entry, notation or
indication of the alleged sale to plaintiff; (g) that it is an established
banking practice that payments against accounts need not be personally
made by the debtor himself; and (h) that it is not true that the mortgage, at
the time of its execution and registration, was without consideration as
alleged because the execution and registration of the securing mortgage,
the signing and delivery of the promissory note and the disbursement of
the proceeds of the loan are mere implementation of the basic consensual
contract of loan.
After petitioner Honesto V. Bonnevie had rested his case, petitioner Raoul
SV Bonnevie filed a motion for intervention. The intervention was premised
on the Deed of Assignment executed by petitioner Honesto Bonnevie in
favor of petitioner Raoul SV Bonnevie covering the rights and interests of
petitioner Honesto Bonnevie over the subject property. The intervention
was ultimately granted in order that all issues be resolved in one
proceeding to avoid multiplicity of suits.
On March 29, 1976, the lower court rendered its decision, the dispositive
portion of which reads as follows:
WHEREFORE, all the foregoing premises considered,
judgment is hereby rendered dismissing the complaint
with costs against the plaintiff and the intervenor.
Credit Transactions Full Text Cases Atty. Adviento!!!!"&)
After the motion for reconsideration of the lower court's decision was
denied, petitioners appealed to respondent Court of Appeals assigning the
following errors:
1. The lower court erred in not finding that the real
estate mortgage executed by Jose Lozano was null
and void;
2. The lower court erred in not finding that the auction
sale decide on August 19, 1968 was null and void;
3. The lower court erred in not allowing the plaintiff
and the intervenor to redeem the property;
4. The lower court erred in not finding that the
defendant acted in bad faith; and
5. The lower court erred in dismissing the complaint.
On August 11, 1978, the respondent court promulgated its decision
affirming the decision of the lower court, and on October 3. 1978 denied
the motion for reconsideration. Hence, the present petition for review.
The factual findings of respondent Court of Appeals being conclusive upon
this Court, We hereby adopt the facts found the trial court and found by the
Court of Appeals to be consistent with the evidence adduced during trial,
to wit:
t is not disputed that spouses Jose M. Lozano and
Josefa P. Lozano were the owners of the property
which they mortgaged on December 6, 1966, to
secure the payment of the loan in the principal
amount of P75,000.00 they were about to obtain from
defendant-appellee Philippine Bank of Commerce;
that on December 8, 1966, executed in favor of
plaintiff-appellant the Deed of Sale with Mortgage ,,
for and in consideration of the sum of P100,000.00,
P25,000.00 of which amount being payable to the
Lozano spouses upon the execution of the document,
and the balance of P75,000.00 being payable to
defendant- appellee; that on December 6, 1966, when
the mortgage was executed by the Lozano spouses in
favor of defendant-appellee, the loan of P75,000.00
was not yet received them, as it was on December 12,
1966 when they and their co-maker Alfonso Lim
signed the promissory note for that amount; that from
April 28, 1967 to July 12, 1968, plaintiff-appellant
made payments to defendant-appellee on the
mortgage in the total amount of P18,944.22; that on
May 4, 1968, plaintiff-appellant assigned all his rights
under the Deed of Sale with Assumption of Mortgage
to his brother, intervenor Raoul Bonnevie; that on
June 10, 1968, defendant-appellee applied for the
foreclosure of the mortgage, and notice of sale was
published in the Luzon Weekly Courier on June 30,
July 7, and July 14, 1968; that auction sale was
conducted on August 19, 1968, and the property was
sold to defendant-appellee for P84,387.00; and that
offers from plaintiff-appellant to repurchase the
property failed, and on October 9, 1969, he caused an
adverse claim to be annotated on the title of the
property. (Decision of the Court of Appeals, p. 5).
Presented for resolution in this review are the following issues:

Whether the real estate mortgage executed by the
spouses Lozano in favor of respondent bank was
validly and legally executed.

Whether the extrajudicial foreclosure of the said
mortgage was validly and legally effected.

Whether petitioners had a right to redeem the

foreclosed property.
V
Granting that petitioners had such a right, whether
respondent was justified in refusing their offers to
repurchase the property.
As clearly seen from the foregoing issues raised, petitioners' course of
action is three-fold. They primarily attack the validity of the mortgage
executed by the Lozano spouses in favor of respondent Bank. Next, they
attack the validity of the extrajudicial foreclosure and finally, appeal to
justice and equity. n attacking the validity of the deed of mortgage, they
contended that when it was executed on December 6, 1966, there was yet
no principal obligation to secure as the loan of P75,000.00 was not
received by the Lozano spouses "So much so that in the absence of a
principal obligation, there is want of consideration in the accessory
contract, which consequently impairs its validity and fatally affects its very
existence." (Petitioners' Brief, par. 1, p. 7).
This contention is patently devoid of merit. From the recitals of the
mortgage deed itself, it is clearly seen that the mortgage deed was
executed for and on condition of the loan granted to the Lozano spouses.
The fact that the latter did not collect from the respondent Bank the
consideration of the mortgage on the date it was executed is immaterial. A
contract of loan being a consensual contract, the herein contract of loan
was perfected at the same time the contract of mortgage was executed.
The promissory note executed on December 12, 1966 is only an evidence
of indebtedness and does not indicate lack of consideration of the
mortgage at the time of its execution.
Petitioners also argued that granting the validity of the mortgage, the
subsequent renewals of the original loan, using as security the same
property which the Lozano spouses had already sold to petitioners,
rendered the mortgage null and void,
This argument failed to consider the provision 2 of the contract of
mortgage which prohibits the sale, disposition of, mortgage and
encumbrance of the mortgaged properties, without the written consent of
the mortgagee, as well as the additional proviso that if in spite of said
stipulation, the mortgaged property is sold, the vendee shall assume the
mortgage in the terms and conditions under which it is constituted. These
provisions are expressly made part and parcel of the Deed of Sale with
Assumption of Mortgage.
Petitioners admit that they did not secure the consent of respondent Bank
to the sale with assumption of mortgage. Coupled with the fact that the
sale/assignment was not registered so that the title remained in the name
of the Lozano spouses, insofar as respondent Bank was concerned, the
Lozano spouses could rightfully and validly mortgage the property.
Respondent Bank had every right to rely on the certificate of title. t was
not bound to go behind the same to look for flaws in the mortgagor's title,
the doctrine of innocent purchaser for value being applicable to an
innocent mortgagee for value. (Roxas vs. Dinglasan, 28 SCRA 430;
Mallorca vs. De Ocampo, 32 SCRA 48). Another argument for the
respondent Bank is that a mortgage follows the property whoever the
possessor may be and subjects the fulfillment of the obligation for whose
security it was constituted. Finally, it can also be said that petitioners
voluntarily assumed the mortgage when they entered into the Deed of
Sale with Assumption of Mortgage. They are, therefore, estopped from
impugning its validity whether on the original loan or renewals thereof.
Petitioners next assail the validity and legality of the extrajudicial
foreclosure on the following grounds:
Credit Transactions Full Text Cases Atty. Adviento!!!!"&*
a) petitioners were never notified of the foreclosure
sale.
b) The notice of auction sale was not posted for the
period required by law.
c) publication of the notice of auction sale in the
Luzon Weekly Courier was not in accordance with
law.
The lack of notice of the foreclosure sale on petitioners is a flimsy ground.
Respondent Bank not being a party to the Deed of Sale with Assumption
of Mortgage, it can validly claim that it was not aware of the same and
hence, it may not be obliged to notify petitioners. Secondly, petitioner
Honesto Bonnevie was not entitled to any notice because as of May 14,
1968, he had transferred and assigned all his rights and interests over the
property in favor of intervenor Raoul Bonnevie and respondent Bank not
likewise informed of the same. For the same reason, Raoul Bonnevie is
not entitled to notice. Most importantly, Act No. 3135 does not require
personal notice on the mortgagor. The requirement on notice is that:
Section 3. Notice shall be given by posting notices of
the sale for not less than twenty days in at least three
public places of the municipality or city where the
property is situated, and if such property is worth more
than four hundred pesos, such notice shall also be
published once a week for at least three consecutive
weeks in a newspaper of general circulation in the
municipality or city
n the case at bar, the notice of sale was published in the Luzon Courier
on June 30, July 7 and July 14, 1968 and notices of the sale were posted
for not less than twenty days in at least three (3) public places in the
Municipality where the property is located. Petitioners were thus placed on
constructive notice.
The case of Santiago vs. Dionisio, 92 Phil. 495, cited by petitioners is
inapplicable because said case involved a judicial foreclosure and the sale
to the vendee of the mortgaged property was duly registered making the
mortgaged privy to the sale.
As regards the claim that the period of publication of the notice of auction
sale was not in accordance with law, namely: once a week for at least
three consecutive weeks, the Court of Appeals ruled that the publication of
notice on June 30, July 7 and July 14, 1968 satisfies the publication
requirement under Act No. 3135 notwithstanding the fact that June 30 to
July 14 is only 14 days. We agree. Act No. 3135 merely requires that such
notice shall be published once a week for at least three consecutive
weeks." Such phrase, as interpreted by this Court in Basa vs. Mercado, 61
Phil. 632, does not mean that notice should be published for three full
weeks.
The argument that the publication of the notice in the "Luzon Weekly
Courier" was not in accordance with law as said newspaper is not of
general circulation must likewise be disregarded. The affidavit of
publication, executed by the Publisher, business/advertising manager of
the Luzon Weekly Courier, stares that it is "a newspaper of general
circulation in ... Rizal, and that the Notice of Sheriff's sale was published in
said paper on June 30, July 7 and July 14, 1968. This constitutes prima
facie evidence of compliance with the requisite publication. Sadang vs.
GSS, 18 SCRA 491).
To be a newspaper of general circulation, it is enough that "it is published
for the dissemination of local news and general information; that it has a
bona fide subscription list of paying subscribers; that it is published at
regular intervals." (Basa vs. Mercado, 61 Phil. 632). The newspaper need
not have the largest circulation so long as it is of general circulation. Banta
vs. Pacheco, 74 Phil. 67). The testimony of three witnesses that they do
read the Luzon Weekly Courier is no proof that said newspaper is not a
newspaper of general circulation in the province of Rizal.
Whether or not the notice of auction sale was posted for the period
required by law is a question of fact. t can no longer be entertained by this
Court. (see Reyes, et al. vs. CA, et al., 107 SCRA 126). Nevertheless, the
records show that copies of said notice were posted in three conspicuous
places in the municipality of Pasig, Rizal namely: the Hall of Justice, the
Pasig Municipal Market and Pasig Municipal Hall. n the same manner,
copies of said notice were also posted in the place where the property was
located, namely: the Municipal Building of San Juan, Rizal; the Municipal
Market and on Benitez Street. The following statement of Atty. Santiago
Pastor, head of the legal department of respondent bank, namely:
Q How many days were the
notices posted in these two
places, if you know?
A We posted them only once in
one day. (TSN, p. 45, July 25,
1973)
is not a sufficient countervailing evidence to prove that there was no
compliance with the posting requirement in the absence of proof or even
of allegation that the notices were removed before the expiration of the
twenty- day period. A single act of posting (which may even extend beyond
the period required by law) satisfies the requirement of law. The burden of
proving that the posting requirement was not complied with is now shifted
to the one who alleges non-compliance.
On the question of whether or not the petitioners had a right to redeem the
property, We hold that the Court of Appeals did not err in ruling that they
had no right to redeem. No consent having been secured from respondent
Bank to the sale with assumption of mortgage by petitioners, the latter
were not validly substituted as debtors. n fact, their rights were never
recorded and hence, respondent Bank is charged with the obligation to
recognize the right of redemption only of the Lozano spouses. But even
granting that as purchaser or assignee of the property, as the case may
be, the petitioners had acquired a right to redeem the property, petitioners
failed to exercise said right within the period granted by law. Thru
certificate of sale in favor of appellee was registered on September 2,
1968 and the one year redemption period expired on September 3, 1969.
t was not until September 29, 1969 that petitioner Honesto Bonnevie first
wrote respondent and offered to redeem the property. Moreover, on
September 29, 1969, Honesto had at that time already transferred his
rights to intervenor Raoul Bonnevie.
On the question of whether or not respondent Court of Appeals erred in
holding that respondent Bank did not act in bad faith, petitioners rely on
Exhibit "B" which is the letter of lose Lozano to respondent Bank dated
December 8, 1966 advising the latter that Honesto Bonnevie was
authorized to make payments for the amount secured by the mortgage on
the subject property, to receive acknowledgment of payments, obtain the
Release of the Mortgage after full payment of the obligation and to take
delivery of the title of said property. On the assumption that the letter was
received by respondent Bank, a careful reading of the same shows that
the plaintiff was merely authorized to do acts mentioned therein and does
not mention that petitioner is the new owner of the property nor request
that all correspondence and notice should be sent to him.
The claim of appellants that the collection of interests on the loan up to
July 12, 1968 extends the maturity of said loan up to said date and
accordingly on June 10, 1968 when defendant applied for the foreclosure
of the mortgage, the loan was not yet due and demandable, is totally
incorrect and misleading. The undeniable fact is that the loan matured on
December 26, 1967. On June 10, 1968, when respondent Bank applied for
foreclosure, the loan was already six months overdue. Petitioners'
payment of interest on July 12, 1968 does not thereby make the earlier act
of respondent Bank inequitous nor does it ipso facto result in the renewal
of the loan. n order that a renewal of a loan may be effected, not only the
payment of the accrued interest is necessary but also the payment of
interest for the proposed period of renewal as well. Besides, whether or
not a loan may be renewed does not solely depend on the debtor but more
so on the discretion of the bank. Respondent Bank may not be, therefore,
charged of bad faith.
WHEREFORE, the appeal being devoid of merit, the decision of the Court
of Appeals is hereby AFFRMED. Costs against petitioners.
Credit Transactions Full Text Cases Atty. Adviento!!!!"'+
SO ORDERED.
FRST DVSON
G.R. No. 88602 ApriI 6, 1990
TOMASA VDA. DE JACOB, as SpeciaI Administratrix of the Estate of
the Deceased ALFREDO E. JACOB, petitioner,
vs.
HONORABLE COURT OF APPEALS, BICOL SAVINGS & LOAN
ASSOCIATION, JORGE CENTENERA, AND LORENZO C. ROSALES,
respondents.
G.R. No. 89544 ApriI 6, 1990
THE ESTATE OF THE LATE ALFREDO JACOB, represented by its
Administrator, TOMASA VDA. DE JACOB, petitioner
vs.
HONORABLE COURT OF APPEALS, AND UNITED BICOL SAVINGS
BANK, respondents.
Benito P. Fable for petitioner.
Contreras & Associates for private respondents.
Rosales & Associates Law Office for private respondent Rosales.
Ramon Quisumbing, Jr. for private respondent Centenera.

GANCAYCO J.:
The question of whether or not an extrajudicial foreclosure of a mortgage
may proceed even after the death of the mortgagor and whether or not a
petition for the issuance of a writ of possession may be barred by
estoppel, are the issues presented in this petition.
Dr. Alfredo E. Jacob was the registered owner of a parcel of land
described under Transfer Certificate of Title No. 1433 of the Register of
Deeds of Naga City.
1
Sometime in 1972 Jorge Centenera was appointed
as administrator of Hacienda Jacob until January 1, 1978 when the
Special Power of Attorney executed in his favor by Dr. Jacob was revoked
by the latter.
2
The land in question is located at Liboton, Naga City and
has an area of approximately 3,376 square meters. Because of the
problem of paying realty taxes, internal revenue taxes and unpaid wages
of farm laborers of the hacienda, Dr. Jacob asked Centenera to negotiate
for a loan. For this purpose, a special power of attorney was executed and
acknowledged by Dr. Jacob before notary public Lorenzo Rosales the
material portions of which read as follows:
That , ALFREDO E. JACOB, Filipino, of legal age,
widower, address at Tigaon, Camarines Sur, have
named, constituted and appointed and by these
presents do name, constitute and appoint JORGE
CENTENERA, Filipino, of legal age, married to Judith
E. Centenera, resident of and with postal address at
Naga City, to be my true and lawful attorney-in-fact,
for me and in my name, place and stead. and to do
and perform all the necessary acts and deeds, to wit:
1. To mortgage and/or, hypothecate with any banking
institution in the City of Naga or elsewhere in the
Philippines, the following described properties of
which am the absolute owner, as follows:
A parcel of land (Plan Ps-80014,
Lot 818 of Naga Cad. 290 Case
No. M 472 L.R.C. Rec. No. N-
5986) located at Liboton, Naga
City. Bounded on the NE, by
Alfredo Cleto (Lot 383); Martin
Perez (Lot 385) and Benedicto
Naz (Lot 394), SE. by Benedicto
Naz (Lot 394); S. by Pedro San
Juan (Lot 317); SW by Margarita
Narciso vs. Simeon Ty Ganco
(Lot 319); and NW by the
Calawag Street, containing an
area of 3,376 square meters
covered by TCT No. 1433.
A parcel of land (Lot 15, Block 4
of the subdivision plan Psd-
46484, being a portion of Lot
1105-now of the Cad. survey of
Naga, L.R.C. Cad. Rec. N. N-78),
situated in Tinago, Naga City.
Bounded on the SE., along line 1-
2 by Lot 17, Block 4; along line 2-
3 by road lot 4; along line 3-4 by
Lot 13, Block 4; and along line 4-
1 by Lot 14, Block 4 all of the
subdivision plan. Containing an
area of 236 square meters,
covered by TCT No. 393.
A parcel of land (Lot 14, Block 4
of the subdivision plan Psd-
46464, being a portion of Lot
1106-now Cad. survey of Naga,
L.R.C. Cad. Rec. No. N-78),
situated in Tinago, Naga City,
Bounded on SW., along line 1-2
by Lot 15; Block 4; along line 23
by Lot 12, Block 4; along line 3-4
by road lot 3; and along line 41 by
Lot 16, Block 4, all of the
subdivision plan, containing an
area of 239 square meters,
covered by TCT No. 397.
2. To receive cash in any amount made in payment of
the mortgage of the above described properties; to
sign checks, drafts, money orders, treasury warrants,
to indorse the same, to cash and make deposits with
any bank here or elsewhere and to withdraw such
deposit; to execute, sign and deliver any or all
documents of mortgage, contracts, deeds or any
instrument necessary and pertinent for purposes of
mortgaging and/or encumbering said properties in
favor of any banking institution in the City of Naga or
elsewhere and lastly, to do and perform any and all
acts and deeds which to him may seem most to my
own benefit and advantage.
HEREBY GVNG AND GRANTNG unto my said
attorney-in-fact full power and authority to do and
perform any and every act and thing whatever
requisite or necessary or proper to be done in and
about the premises, as fully to all intents and
purposes as might or could do if personally present
and acting in person and hereby ratify and confirm
all that my said attorney shall do and had done
lawfully or cause to be done under any by virtue of
these presents.
3
Consequently, Centenera secured a loan in the amount of P18,000.00
from the Bicol Savings & Loan Association sometime in September 1972.
Centenera signed and executed the real estate mortgage and promissory
note as attorney-in-fact of Dr. Jacob.
4
When the loan fell due in 1975
Centenera failed to pay the same but was able to arrange a restructuring
of the loan using the same special power of attorney and property as
security. Another set of loan documents, namely: an amended real estate
Credit Transactions Full Text Cases Atty. Adviento!!!!"'"
mortgage and promissory note dated November 27, 1975 was executed
by Centenera as attorney-in-fact of Dr. Jacob.
5
Again, Centenera failed to
pay the loan when it fell due and so he arranged for another restructuring
of the loan with the bank on November 23, 1976. The corresponding
promissory note was again executed by Centenera on behalf of Jacob
under the special power of attorney.
The mortgage was annotated on the title
6
and when the loan was twice re-
structured, the proceeds of the same were not actually given by the bank
to Centenera since the transaction was actually nothing but a renewal of
the first or original loan and the supposed proceeds were applied as
payment for the loan. The accrued interest for sixty (60) days was,
however, paid by Centenera.
Centenera again failed to pay the loan upon the maturity date forcing the
bank to send a demand letter.
7
A copy of the demand letter was sent to Dr.
Jacob but no reply or denial was received by the bank. Thus, the bank
foreclosed the real estate mortgage and the corresponding provisional
sale of the mortgaged property to the respondent bank was effected. On
November 5, 1982 a definite deed of sale of the property was executed in
favor of the respondent bank as the sole and highest bidder.
8
Tomasa Vda. de Jacob who was subsequently named administratrix of the
estate of Dr. Jacob and who claimed to be an heir of the latter, conducted
her own investigation and therefore she filed a complaint in the Regional
Trial Court of Camarines Sur alleging that the special power of attorney
and the documents therein indicated are forged and therefore the loan
and/or real estate mortgages and promissory notes are null and void. After
trial on the merit a decision was rendered on July 30, 1987, the dispositive
part of which reads as follows:
WHEREFORE, plaintiff's complaint is ordered
DSMSSED for lack of a cause of action and/or her
failure to prove the cause(s) of action alleged in the
complaint; and judgment is rendered against the
Estate of the late Dr. Alfredo Jacob in favor of the
defendants on their respective counterclaim, ordering
payment from said estate of the following:
(a) actual damages in the sum of P30,000.00;
exemplary damages in the sum of P20,000.00; and
attorney's fees of P10,000.00; to defendant Bicol
Savings and Loan Association;
(b) actual damages in the sum of P30,000.00;
exemplary damages in the sum of P20,000.00; moral
damages in the sum of P50,000.00; attorneys fees in
the sum of P10,000.00 to defendant Jorge Centenera;
(c) actual damages in the sum of P30,000.00;
exemplary damages in the sum of P20,000.00;
attorney's fees in the sum of P10,000.00 to defendant
Atty. Lorenzo Rosales.
with interest at the legal rate from the time of the filing
of the complaint, until full payment.
Costs against the plaintiff.
SO ORDERED.
9
Not satisfied therewith the plaintiff appealed therefrom to the Court of
Appeals wherein on May 30, 1989 a decision was rendered affirming in
toto the decision of the lower court and dismissing the appeal for lack of
merit.
10
Hence, the herein petition for review docketed as G.R. No. 88602 that was
filed by plaintiff therein and which raises two issues, to wit:
A. The Honorable Court of Appeals failed and
completely neglected to exercise appellate
determination on material issues which, independently
of what said Court determined, would cause
nullification of the mortgage deed and amendment
thereto, as well as extrajudicial foreclosure
proceedings and sale thereof.
B. The Honorable Court of Appeals likewise ignored to
resolve, nay, pass upon, the issue of excessive and
unfounded award of damages, which certainly calls for
appellate determination as it was squarely raised on
appeal.
11
However, while the action for annulment of mortgage, etc. aforestated was
pending in the trial court, on November 5, 1982, a definite deed of sale
was issued by the sheriff in favor of respondent bank. Without redemption
having been exercised within the prescribed period, the title in the name of
Dr. Jacob was cancelled and in its place, Transfer Certificate of Title No.
14661 was issued on August 9, 1983 in favor of respondent bank.
Respondent bank then filed a petition for the issuance of a writ of
possession in the Regional Trial Court of Naga City which was opposed by
petitioner. n due course a writ of possession was issued by the trial court
in a decision dated July 21, 1987 in favor of the respondent bank, the
dispositive part of which reads as follows:
WHEREFORE, the petitioner UNTED BCOL
SAVNGS BANK being entitled to possession of the
property covered by Transfer Certificate of Title No.
14661 (registry of Naga City) let a Writ of Possession
issue addressed to the respondent ESTATE OF THE
LATE ALFREDO JACOB, by its administratrix Tomasa
Vda. de Jacob, directing the said respondent to
deliver the possession of said property to the
petitioner United Bicol Savings Bank within thirty (30)
days from the date this judgment becomes final; and
for the Provincial Sheriff to enforce said writ and to
place said petitioner United Bicol Savings Bank in
possession of said property, with costs against the
said respondent.
SO ORDERED.
Not satisfied therewith petitioner appealed to the Court of Appeals wherein
in due course a decision was rendered on June 27, 1989 affirming the
decision appealed from without pronouncement as to costs.
12
A motion for
reconsideration of said decision which was filed by the petitioner was
denied tied in a resolution dated July 28, 1989.
Hence the petition for review docketed as G.R. No. 89544 wherein
petitioner contends that the writ of possession may not validly issue where
from the admitted facts the extrajudicial foreclosure and auction sale is
patently void.
The petition in G.R. No. 89544 was consolidated with the petition in G.R.
No. 88602 hereinabove discussed being closely related to each other.
The petition in G.R. No. 88602 is devoid of merit.
Petitioner contends that the extrajudicial foreclosure proceedings and the
sale of the property mortgaged under the amended real estate mortgage
after the mortgagor died are null and void. t is pointed out that Dr. Jacob
died on March 9, 1979 and that the extrajudicial foreclosure proceedings
were effected after his death, that is, the public auction sale was made on
May 11, 1979. Petitioner argues that such extrajudicial foreclosure can
only be prosecuted during the lifetime of Dr. Jacob for the reason that such
kind of foreclosure under Act No. 3135, as amended, is authorized only
because of the special power of attorney inserted in the mortgage deed;
and that said special power of attorney cannot extend beyond the lifetime
of the supposed mortgagor.
Section 7, Rule 86 of the Rules of Court provides as follows:
Credit Transactions Full Text Cases Atty. Adviento!!!!"'#
Sec. 7. Mortgage debt due from estate. A creditor
holding a claim against the deceased secured by
mortgage or other collateral security, may abandon
the security and prosecute claim in the manner
provided in this rule, and share in the general
distribution of the assets of the estate; or he may
foreclose his mortgage or realize upon his security, by
action in court, making the executor or administrator a
party defendant, and if there is a judgment for a
deficiency, after the sale of the mortgaged premises,
or the property pledged, in the foreclosure or other
proceeding to realize upon the security, he may claim
his deficiency judgment in the manner provided in the
preceding section; or he may rely upon his mortgage
or other security alone, and foreclose the same at any
time within the period of the statute of limitations, and
in that event he shall not be admitted as a creditor,
and shall receive no share in the distribution of the
other assets of the estate; but nothing herein
contained shall prohibit the executor or administrator
from redeeming the property mortgaged or pledged,
by paying the debt for which it is held as security,
under the direction of the court, if the court shall
adjudge it to be for the best interest of the estate that
such redemption shall be made
From the foregoing provision of the Rules it is clearly recognized that a
mortgagee has three remedies that may be alternately availed of in case
the mortgagor dies, to wit:
(1) to waive the mortgage and claim the entire debt from the estate of the
mortgagor as an ordinary claim;
(2) to foreclose the mortgage judicially and prove the deficiency as an
ordinary claim; and;
(3) to rely on the mortgage exclusively, or other security and foreclose the
same at anytime, before it is barred by prescription, without the right to file
a claim for any deficiency.
From the foregoing it is clear that the mortgagee does not lose its light to
extrajudicially foreclose the mortgage even after the death of the
mortgagor as a third alternative under Section 7, Rule 86 of the Rules of
Court.
The power to foreclose a mortgage is not an ordinary agency that
contemplated exclusively the representation of the principal by the agent
but is primarily an authority conferred upon the mortgagee for the latter's
own protection. That power survives the death of the mortgagor.
13
The right of the mortgagee bank to extrajudicially foreclose the mortgage
after the death of the mortgagor, acting through his attorney-in-fact, did not
depend on the authority in the deed of mortgage executed by the latter.
That right existed independently of said stipulation and is clearly
recognized in Section 7, Rule 86 of the Rules of Court aforecited.
14
The other issues raised in the petition are questions of fact which cannot
be considered in this proceeding. The findings of facts of the appellate
court are conclusive and cannot be reviewed at this level.
Likewise, the petition in G.R. No. 89544 is devoid of merit.
t is premised on the assumption that the extrajudicial foreclosure and
auction sale was patently void and was without basis. On the contrary the
appellate court found and so does this Court, that the extrajudicial
foreclosure and auction sale was regular and in accordance with law.
While it is true that the question of the validity of said mortgage and
consequently the extrajudicial foreclosure thereof was raised in a separate
proceeding before the trial court the pendency of such separate civil suit
can be no obstacle to the issuance of the writ of possession which is a
ministerial act of the trial court after a title on the property has been
consolidated in the mortgagee.
15
WHEREFORE, petitions in G.R. Nos. 88602 and 89544 are hereby
DSMSSED for lack of merit, with costs against petitioner.
SO ORDERED.
EN BANC
G.R. No. L-4373 February 2, 1909
SAMUEL BISCHOFF, plaintiff-appellant,
vs.
JUAN D. POMAR and THE COMPAIA GENERAL DE TABACOS DE
FILIPINAS, defendants-appellees.
Espiridion Guanko, for appellant.
Jose M. Arroyo, for appellee.
TORRES, J.:
Without prejudice to the issuance of a statement of the basis upon which
this court affirms the judgment of the lower court of February 28, 1907,
appealed from, by virtue whereof it is held that the steam sugar mill fitted
with a portable 8-horsepower boiler, with its attachments and a complete
tramway with rails and other fittings and fifteen small cars, all of which
were at the Hacienda San Jose, should be considered as included in the
mortgage executed by Romana Ganzon in favor of Lazaro Mota, which
mortgage was afterwards transferred and conveyed by the mortgagor to
the Compaia General de Tabacos, we absolve the defendants without
special ruling as to costs, and reserve in favor of the plaintiff, Samuel
Bischoff, the right of action which he may have to recover from Romana
Ganzon the sum paid for that property, and said judgment is hereby
affirmed without special ruling as to the costs in this instance.
Arellano, C.J., Mapa, Carson, Willard, and Tracey, JJ., concur.
BASIS OF THE DECISION.
FEBRUARY 6, 1909.
TORRES, J.:
On the 27th of December, 1905, counsel for Samuel Bischoff filed a
complaint, alleging that the latter was the owner of the steam sugar mill
fitted with a portable 8-horse-power boiler with its attachments, a complete
tramway with rails and other fittings for a distance of not less than 3
kilometers, and fifteen small cars, all of which were at the Hacienda San
Jose, of San Carlos, occidental Negros; that the defendant Compaia de
Tabacos had asked and obtained from the Court of First nstance, in or
about the month of October of the same year, the appointment of a receive
for the property of Romana Ganzon, among which property that the
described above was included at the instance of the defendant as
belonging to the debtor Ganzon; that at the designation of the Compaia
de Tabacos Juan Pomar was appointed receiver and upon taking charge
of the property of the said Romana Ganzon he did not confine himself
thereto, but unlawfully and without any right whatever took possession, as
receive, of the property of the plaintiff herein before described; that
notwithstanding the repeated demands made by the plaintiff, Bischoff, the
latter was unable to secure from the defendants the return of the said
property; that they refused to deliver the said property to him and
continued to use the same to the prejudice of the plaintiff, whose loss and
damages amounted to P30 a day; the plaintiff therefore prayed that
judgment be entered in his favor, declaring that the property described in
the first paragraph of the complaint belonged to him, and that the said
defendants be ordered to pay the said losses and damages with costs.
n his written answer, counsel for the Compaia General de Tabacos
denied the allegations 1, 4, 6, 7, and 8 of the complaint, and as a defense
Credit Transactions Full Text Cases Atty. Adviento!!!!"'$
alleged, that under a public instrument executed before the notary
Gregorio Yulo, on the 20th of July, 1900, Lazaro Mota y Ayo loaned to
Romana Ganzon or Tanson, widow of Vega, the sum of 11,209 pesos,
payable at the expiration of two years from the date of the instrument, and
as a security for her debt, the said Romana Ganzon mortgaged to her
creditor, Mota, the sugar plantation called San Jose, situated in the sitio of
Sibungcogon, barrio of San Carlos, in the town of Calatrava, Occidental
Negros; that by another instrument executed on October 8, 1900, Lazaro
Mota and Romana Ganzon agreed to increase the said mortgage credit by
a further sum of 4,177.20 pesos; that this was duly paid to the debtor,
whose total indebtedness thus amounted to 15,386.20 pesos, the said
mortgage remaining as security for both amounts; that by another
instrument executed on September 6, 1902, before the same notary, the
loan or debt was further increased by the sum of 6,037.73 pesos, which
Mota delivered to Ganzon; this last amount, added to the previous
15,386.20 pesos, makes a total of 21,423.93 pesos, and it was agreed
upon between the parties in this last instrument that, if Ganzon was not
able to pay the creditor Mota on or before July 20, 1904, the mortgaged
hacienda would be disposed of at public auction, together with its
buildings, machinery and agricultural implements, and the whole amount
of the indebtedness would be collected from the proceeds thereof; that this
instrument was entered in the registry of property on October 11, 1902;
that by an instrument dated September 30, 1904, Lazaro Mota y Ayo
unreservedly transferred the said credit, free of all incumbrance, together
with all of the rights, to the Compaia General de Tabacos for the sum of
P21,423.93, subrogating to the latter all his rights with respect to the
collection of the debt from Ganzon; that by another instrument dated
December 10, 1904, Roman Ganzon created a mortgage in favor of the
said company on the aforesaid Hacienda of San Jose for all the amounts
owed, which amounts are the said P21,423.93 transferred by Mota to the
Compaia General de Tabacos, and P31,195.99 plus P422.61 as interest
at 10 per cent on Mota's credit, making a grand total of P53,042.53, said
instrument being entered in the registry of property; that the aforesaid
steam sugar mill and portable 8-horsepower boiler, the tramway, with all its
fittings, appurtenances, and rails, and all the cars upon the above-
mentioned Hacienda of San Jose, are fixtures thereon, and the machinery,
vessels, implements, and utensils are necessary for the working of said
hacienda and formed an integral part of the same when the said
mortgages were executed; that the plaintiff Bischoff was informed and
knew of said mortgages prior to making the alleged purchase of the goods
mentioned in his complaint; that the property referred to in the complaint,
together with the hacienda of San Jose, was mortgaged to the creditor
company as security for its loan of P53,042.53; the said mortgage still
stands because neither Romana Ganzon nor the plaintiff have paid it; that
the credit of the Compaia General de Tabacos, secured by the said
mortgages, is anterior and preferent to the purchase alleged by the
plaintiff, and, therefore, the defendant prays that judgment be entered in
his favor dismissing the complaint; that all the property claimed by the
plaintiffs as his own property, be held to be included in the mortgage in
favor of the Compaia General de Tabacos, and that the mortgage credit
of the said Compaia General de Tabacos be declared as preferred.
The other defendant, Juan Pomar, in his answer denied the allegations
contained in the complaint, and as a defense set forth that by virtue of an
order of the Court of First nstance of Occidental Negros, dated
September 27, 1905, in the matter of The Compaia General de Tabacos
vs. Romana Ganzon or Tanson, viuda de Vega, the deponent was
appointed receiver of the property claimed in the complaint; that both of
the petitioner and the Compaia Tabacalera had executed the bonds
required by law in the amounts of P12,000 and P6,000, respectively, which
bonds were approved on the 31st of October of the same year; that after
being duly sworn, he was appointed receiver, assumed the duties of his
office, and took charge of the said property with no other interest than the
faithful and exact compliance of his duties; for this reason he prayed that
the complaint be dismissed with costs.
At the trial of the case evidence was adduced by both parties and their
exhibits were made of record. On February 28, 1907, the court below
rendered judgment, holding that the steam sugar mill and 8-horsepower
portable boiler and fittings, the tramway, rails and cars upon the Hacienda
of San Jose, should be considered as included in the mortgage executed
by Romana Ganzon in favor of Lazaro Mota, which mortgage was
transferred to the Compaia General de Tabacos and ratified in favor of
the latter by the debtor; the defendants were therefore absolved of the
complaint without costs, and such right of action was reserved to Samuel
Bischoff as he may be entitled for the return from Romana Ganzon of
whatever sum he paid for the said property.
From the above judgment the plaintiff appealed and moved that the same
be set aside and a new trial granted; his motion was overruled, to which
overruling he excepted and presented the corresponding bill of exceptions;
the latter was approved by the court below submitted to this court.
Supposing that the steam sugar mill and portable boiler, and the tramway
with fifteen small wagons, rail, and other fittings, mounted at the Hacienda
San Jose and in use thereon, were improvements upon said hacienda, are
they to be considered for this sole reason as necessarily included in the
mortgage of the said hacienda, even though not specifically described in
the instruments as included therein?
The plaintiff avers, without proof, that the said articles were excluded from
the mortgage of the Hacienda San Jose were they are to be found,
because in the instruments wherein the Hacienda San Jose was
repeatedly mortgaged, far from it being stated that, by agreement between
the contracting parties, the objects claimed the complaint should be
understood to be positively excluded, in the successive mortgage deeds
executed by Romana Ganzon in favor of Lazaro Mota y Ayo on July 20
and October 8, 1900, and September 6, 1902, Exhibit D, as security for
the increasing loans made by the latter, the debtor mortgaged her
Hacienda San Jose with the improvements thereon to guarantee the
payment of the total sum of 21,423.93 pesos; in the last instrument, as
well as in the previous ones, it is stated that the warehouse, farmhouse,
furnaces, machinery, and the described land that constitutes the said
hacienda shall be liable for the payment of her total indebtedness, the
legal interest thereon, and loss and damages and costs in case of judicial
proceedings having to be instituted; said instrument, like the previous
ones, was recorded in the registry of property, and is should be noted that
by express desire of the contracting parties, in the successive documents
of indebtedness of 1900, the mortgage of the hacienda with the
improvements thereon was maintained, and was afterwards repeated in
the last instrument.
Owing to the non -payment of the said sum of P21,423.93,
notwithstanding the demands made upon and extensions of time granted
to the debtor, on September 30, 1904, the creditor, Lazaro Mota, assigned
and transferred the said Tabacos by means of a public instrument which
was recorded in the registry, and appears as Exhibit B herein.
n the private document marked as Exhibit A, dated September 10, 1902, it
appears that the Compaia General de Tabacos opened an anual credit of
P15,000 under the conditions therein stated, the debtor having offered as
security the said hacienda with the cattle, buildings, and two steam
engines, and stating in addition, that the said hacienda with its buildings,
machinery, and cattle had already been mortgaged by her to Lazaro Mota.
Moreover, even in the instrument on the 10th of December, 1904, when
Romana Ganzon created a mortgaged in favor of the Compaia General
de Tabacos to guarantee her debt of P53,042.53, she designated the said
hacienda with all the improvements, buildings, machinery, and carabaos
thereon, and in addition declared that the same hacienda and its
dependencies were already mortgaged to the said Lazaro Mota.
So that in the instruments of mortgage above referred to, three of which
are anterior to the sale a retro, effected on the 8th of November, 1904,
upon which the plaintiff bases his claim, the improvements on the
Hacienda San Jose, among which is the machinery that was already
mounted, appear as expressly mortgaged at the time of executing the
instrument of mortgage of September 6, 1902, and later on, that of transfer
of the mortgage credit on the 30th of September, 1904, to the Compaia
General de Tabacos.
From none of the said instruments does it appear that the contracting
parties had expressly agreed to exclude the said machinery and tramway
from the repeated mortgages, of said hacienda, so that no value would be
given to the words written therein proving in an unquestionable manner
that it was the will of the contracting parties to include the lien all the
improvements upon the hacienda, among which was the machinery
mounted thereon for the needs of the said hacienda:
Article 110 of the Mortgage Law in force reads:
Credit Transactions Full Text Cases Atty. Adviento!!!!"'%
A mortgage extends to natural increase, improvements, growing
crop, and rents not collected when the obligation falls due, and
the value of indemnities allowed or due the owner for insurance
on the property mortgaged, or by virtue of condemnation by right
of eminent domain.
The same precept is repeated in detail and more extensively in the
following article 111 of said law.
Article 1877 of the Civil Code contains the same precept but treats as
greater length than in the preinserted article 110 of the Mortgage Law; it is
as follows:
A mortgage includes the natural accessions, improvements,
growing fruits, and rents not collected when the obligation is
due, and the amount of the indemnities granted or due the
owner by the underwriters of the property mortgaged or by virtue
of the exercise of eminent domain by reason of public utility, with
the declarations, amplifications, and limitations established by
law, in case the estate continues in the possession of the person
who mortgaged it, as well as when it passes into the hands of a
third person.
As may be seen from the doctrine established by the Supreme Court of
Washington in its decision in the matter of The Royal nsurance Company
vs. R. Miller, liquidator, and Amadeo (26 Sup. Ct. Rep., 46
1
) the above
quoted legal precepts in force in these slands are in accord with the
American laws:
3. Mortgage Right of Mortgagee to Insurance on Harvested
Crop. The avails of insurance on sugar and molasses coming
into the sugar house on a sugar plantation as the result of the
manufacture of a crop growing thereon when the insurance was
effected inure to the benefit of the mortgagee in a mortgage of
the realty and the fruits thereof if the loss occurred after the
execution of the mortgage, under the Porto Rico Mortgage Law
of 1880, which subjects to a mortgage of real property the crops
growing or harvested when the mortgage fails due, "but not yet
removed or warehoused," and the indemnities awarded or due
the owner of the realty either for the insurance or for the crops,
provided the damage occurred after the creation of the
mortgage.
4. Mortgage Right of Mortgage to Sue for nsurance without
Exhausting Other Remedies. The mortgage creditor in a
mortgage governed by the civil law may sue for the avails of the
insurance subject to his mortgage without first exhausting his
remedies against other property embraced by the mortgaged.
So that even though no mention had been made of said machinery and
tramway in the mortgage instrument, the mortgage of the property
whereon they are located is understood by law to extend to them and they
must be considered as included therein, as well as all other improvements,
unless there was an express stipulation between the parties that they
should be excluded. Such exclusion, however, certainly does not appear in
the record; on the contrary, they are manifestly included in the mortgage.
t has already been stated that the machinery in question was already
mounted on said property and was in use thereon when the mortgage
given to secure the debt of Romana Ganzon to the original creditor,
Lazaro Mota was created; but even if these were not so, article 111 of the
Mortgage Law, hereinbefore cited, provides that the following shall be
considered as mortgaged with the estate, provided they belong to the
owner of said estate, although they not be mentioned in the contract:
1. Chattels permanently located in a building, either useful or
ornamental, or for the service of some industry even though
they were placed there after the creation of the mortgage.
t should be noted that the said machinery and tramway were exclusively
owned by Romana Ganzon, the owner of the hacienda, and that at the
time when the mortgage was made they had not yet been sold a retro to
the plaintiff Bischoff; this sale was effected on November 8, 1904, long
after the property was mortgaged.
Given the rights of dominion possessed by Romana Ganzon over the
articles in question it is not possible to deny that she had the right to
dispose of them, as she did, by sale under pacto de retro to the plaintiff,
but the alienation thereof does not release them from the encumbrance to
which they are subjected until the redeemed from the mortgage that
weighs upon them, since the right of the creditor limits that the owner of
the thing mortgaged, and the purchaser, is necessarily bond to
acknowledge and respect the encumbrance to which is subjected the
purchased thing and which is at the disposal of the said creditor in order
that he, under the terms of the contract, may recover the amount of his
credit therefrom.
f it be true and inconvertible fact that at the time the plaintiff Bischoff
acquired under pacto de retro the machinery and the tramway in question,
they were already affected by and included in the mortgaged of the
Hacienda San Jose, the placing of the said hacienda, together with all of
the property existing thereon in the hands of a receiver at the instance of
the creditor, the Compaia General de Tabacos, has not occasioned any
damage to the plaintiff, inasmuch as the defendant limited itself to the duty
of the plaintiff to respect the encumbrance that burdens of the property
acquired by him under these conditions, and therefore, he cannot acquired
any right to indemnity for loss and damages, for the reason that he
purchased goods that were already liable to the credit of the company that
was the creditor of Romana Ganzon and which latter sold them on pacto
de retro; he therefore did not obtain possession of the same.
For the above considerations, and accepting the conclusion contained in
the judgment appealed from so far as they agree with the foregoing, it is
our opinion that the same should be affirmed, without any ruling as to the
costs of this instance.
Arellano, C.J., Mapa, Carson, and Willard, JJ., concur.
THRD DVSON
Spouses RODRGO PADERES and SONA PADERES ,
Petitioners,

- versus -

The Hon. COURT OF APPEALS,[1] Hon. CARLOTA P. VALENZUELA, in
her capacity as the Liquidator of Banco Filipino Savings and Mortgage
Bank,[2]
Respondents.

x---------------------------------------------x
G. R. No. 147074
Spouses SABELO BERGARDO and JUANA HERMNA BERGARDO,
Petitioners,

- versus -

Credit Transactions Full Text Cases Atty. Adviento!!!!"'&
The Hon. COURT OF APPEALS,1 Hon. CARLOTA P. VALENZUELA, in
her capacity as the Liquidator of Banco Filipino Savings and Mortgage
Bank,2
Respondents.

G. R. No. 147075
Promulgated:

July 15, 2005

xx - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - xx

D E C S O N

CARPO MORALES, J.:

By their Petition for review on certiorari under Rule 45 of the Rules of
Court, petitioners spouses Rodrigo and Sonia Paderes and spouses
sabelo and Juana Bergado seek the reversal of the September 20, 2000
Decision[3] and February 16, 2001 Resolution of the Court of Appeals,
which dismissed their original Petition and denied their Motion for
Reconsideration, respectively.

On September 14, 1982, Manila nternational Construction Corporation
(MCC) executed a real estate mortgage[4] over 21 registered parcels of
land including the improvements thereon in favor of Banco Filipino
Savings and Mortgage Bank (Banco Filipino) in order to secure a loan of
P1,885,000.00. The mortgage was registered with the Registry of Deeds
of Pasay City and annotated on the corresponding transfer certificates of
title (TCTs) covering the properties on December 17, 1982.[5]

The 21 mortgaged properties included two lots, one with an area of 264
square meters, and the other with an area of 263, both located in the then
Municipality of Paraaque (now Paraaque City) covered by TCT Nos.
61062[6] and 61078,[7] respectively.

Subsequently or in August 1983, MCC sold the lot[8] covered by TCT No.
61078, together with the house[9] thereon, to the petitioners in the first
case, the Paderes spouses. And on January 9, 1984, MCC sold the
house[10] built on the lot covered by TCT No. 61062 to the petitioners in
the second case, the Bergado spouses. Neither sale was registered,
however.[11]

On January 25, 1985, for failure of MCC to settle its obligations, Banco
Filipino filed a verified Petition[12] for the extrajudicial foreclosure of
MCC's mortgage. At the auction sale of the foreclosed properties on
March 25, 1985, Banco Filipino submitted a bid of P3,092,547.82 and was
declared the highest bidder. A Certificate of Sale[13] was issued in its favor
which was registered with the Registry of Deeds and annotated on the
corresponding TCTs covering the mortgaged properties on July 29, 1985.

No redemption of the foreclosed mortgage having been made within the
reglementary period, Carlota P. Valenzuela, the then Liquidator of Banco
Filipino, filed on October 16, 1987 an ex parte Petition[14] for the issuance
of a Writ of Possession of the foreclosed properties with the Regional Trial
Court (RTC) of Makati. After hearing, the Petition was granted by Order
dated September 8, 1988[15] of Branch 59 of the RTC.

On November 7, 1996, copies of the Writ of Possession dated November
5, 1996, together with a notice addressed to MCC 'and/or All persons
claiming rights under them to voluntarily vacate the premises within 7 days
from receipt thereof, were served on petitioners.[16]

nstead of vacating the two lots, however, petitioners filed separate
petitions before the Court of Appeals, docketed as C.A. G.R. Numbers
42470 and 42471 which were later consolidated,[17] assailing the validity
of the Writ of Possession.

On September 20, 2000, the Court of Appeals promulgated its questioned
Decision[18] dismissing the consolidated petitions for lack of merit and
upholding the validity of the Writ of Possession.

Petitioners' Motion for Reconsideration of the appellate court's decision
having been denied by Resolution of February 16, 2001, they jointly come
before this Court arguing that: (1) having purchased their respective
properties in good faith from MCC, they are third parties whose right
thereto are superior to that of Banco Filipino; (2) they are still entitled to
redeem the properties and in fact a binding agreement between them and
the bank had been reached; (3) their respective houses should not have
been included in the auction sale of the mortgaged properties; (4) on the
contrary, as builders in good faith, they are entitled to the benefits of Article
448 of the Civil Code;
and (5) the writ of possession issued by the RTC in 1996 had already lost
its validity and efficacy.

The petition must be denied.

n extra-judicial foreclosures of real estate mortgages, the issuance of a
writ of possession, which is an order commanding the sheriff to place a
person in possession of the foreclosed property,[19] is governed by
Section 7 of Act No. 3135 (an act to regulate the sale of property under
special powers inserted in or annexed to real estate mortgages), as
amended:

Sec. 7. n any sale made under the provisions of this Act, the purchaser
may petition the Court of First nstance of the province or place where the
property or any part thereof is situated, to give him possession thereof
during the redemption period, furnishing bond in an amount equivalent to
the use of the property for a period of twelve months, to indemnify the
debtor in case it be shown that the sale was made without violating the
mortgage or without complying with the requirements of this Act. Such
petition shall be made under oath and filed in form of an ex parte motion in
the registration or cadastral proceedings if the property is registered, or in
special proceedings in the case of property registered under the Mortgage
Law or under section one hundred and ninety-four of the Administrative
Code, or of any other real property encumbered with a mortgage duly
registered in the office of any register of deeds in accordance with any
existing law, and in each case the clerk of the court shall, upon the filing of
such petition, collect the fees specified in paragraph eleven of section one
hundred and fourteen of Act Numbered Four hundred and ninety-six, as
amended by Act Numbered Twenty-eight hundred and sixty-six, and the
court shall, upon approval of the bond, order that a writ of possession
issue, addressed to the sheriff of the province in which the property is
situated, who shall execute said order immediately.

That petitioners purchased their properties from MCC in good faith is of
no moment. The purchases took place after MCC's mortgage to Banco
Filipino had been registered in accordance with Article 2125[20] of the Civil
Code and the provisions of P.D. 1529 (property registry decree).[21] As
such, under Articles 1312[22] and 2126[23] of the Civil Code, a real right
Credit Transactions Full Text Cases Atty. Adviento!!!!"''
or lien in favor of Banco Filipino had already been established, subsisting
over the properties until the discharge of the principal obligation, whoever
the possessor(s) of the land might be.

n rejecting a similar argument, this Court, in Philippine National Bank v.
Mallorca,[24] ratiocinated:

1. Appellant's stand is that her undivided interest consisting of 20,000
square meters of the mortgaged lot, remained
unaffected by the foreclosure and subsequent sale to PNB, and she
'neither secured nor contracted a loan with said bank. What PNB
foreclosed, she maintains, 'was that portion belonging to Ruperta Lavilles
only, not the part belonging to her.

Appellant's position clashes with precepts well-entrenched in law. By
Article 2126 of the Civil Code, a 'mortgage directly and immediately
subjects the property on which it is imposed, whoever the possessor may
be, to the fulfillment of the obligation for whose security it was constituted.
Sale or transfer cannot affect or release the mortgage. A purchaser is
necessarily bound to acknowledge and respect the encumbrance to which
is subjected the purchased thing and which is at the disposal of the
creditor 'in order that he, under the terms of the contract, may recover the
amount of his credit therefrom. For, a recorded real estate mortgage is a
right in rem, a lien on the property whoever its owner may be. Because the
personality of the owner is disregarded; the mortgage subsists
notwithstanding changes of ownership; the last transferee is just as much
of a debtor as the first one; and this, independent of whether the
transferee knows or not the person of the mortgagee. So it is, that a
mortgage lien is inseperable from the property mortgaged. All subsequent
purchasers thereof must respect the mortgage, whether the transfer to
them be with or without the consent of the mortgagee. For, the mortgage,
until discharge, follows the property.[25] (Emphasis and underscoring
supplied; italics in the original; citations omitted)


And in Roxas v. Buan[26] this Court held:

Contending that petitioner Roxas is a party actually holding the property
adversely to the debtor, Arcadio Valentin, petitioners argue that under the
provisions of Act No. 3135 they cannot be ordered to vacate the property.
Hence, the question of whether, under the circumstances, petitioner Roxas
indeed is a party actually holding the property adversely to Valentin.
t will be recalled that Roxas' possession of the property was premised on
its alleged sale to him by Valentin for the amount of P100,000.00.
Assuming this to be true, it is readily apparent that Roxas holds title to and
possesses the property as Valentin's transferee. Any right he has to the
property is necessarily derived from that of Valentin. As transferee, he
steps into the latter's shoes. Thus, in the instant case, considering that the
property had already been sold at public auction pursuant to an
extrajudicial foreclosure, the only interest
that may be transferred by Valentin to Roxas is the right to redeem it within
the period prescribed by law. Roxas is therefore the successor-in-interest
of Valentin, to whom the latter had conveyed his interest in the property for
the purpose of redemption [Rule 39, Sec. 29 (a) of the Revised Rules of
Court; Magno v. Viola, 61 Phil. 80 (1934); Rosete v. Prov. Sheriff of
Zambales, 95 Phil. 560 (1954).] Consequently, Roxas' occupancy of the
property cannot be considered adverse to Valentin.
Thus, in Belleza v. Zandaga [98 Phil. 702 (1956)], the Court held that
where the purchaser in an execution sale has already received the
definitive deed of sale, he becomes the owner of the property bought and,
as absolute owner, he is entitled to its possession and cannot be excluded
therefrom by one who merely claims to be a successor-in-interest of the
judgment debtor, unless it is adjudged that the alleged successor has a
better right to the property than the purchaser at the execution sale. Stated
differently, the purchaser's right of possession is recognized only as
against the judgment debtor and his successor-in-interest but not against
persons whose right of possession is adverse to the latter. The rule was
reiterated in Guevara v. Ramos [G.R. No. L-24358, March 31, 1971, 38
SCRA 194].
The rule in Belleza, although relating to the possession of property sold in
execution sales under what is now Sec. 35, Rule 39 of the Revised Rules
of Court, is also applicable to the possession of property sold at
extrajudicial foreclosure sales pursuant to Sec. 6 of Act No. 3135 [see FC
Service Leasing and Acceptance Corp. v. Nera, supra]. Thus, as petitioner
Roxas is not a party holding the property adversely to Valentin, being the
latter's successor-in-interest, there was no bar to the respondent trial
court's issuance of a writ of possession upon private respondent Buan's
application.
t does not matter that petitioner Roxas was not specifically named in the
writ of possession, as he merely stepped into the shoes of Valentin, being
the latter's successor-in-interest. On the other hand, petitioner de Guia
was occupying the house as Roxas' alleged tenant [Rollo, p. 24].
Moreover, respondent court's decision granting private respondent Buan's
petition for the issuance of a writ of possession ordered the Provincial
Sheriff of Zambales or any of his deputies to remove Valentin 'or any
person claiming interest under him from the property [Rollo, p. 16].
Undeniably, petitioners fell under this category.[27] (Emphasis supplied)

As transferees of mortgagor MCC, petitioners merely stepped into its
shoes and are necessarily bound to acknowledge and respect the
mortgage it had earlier executed in favor of Banco Filipino.

As for petitioners' argument that they are still entitled to redeem the
foreclosed properties, it must be rejected too.

The debtor in extra-judicial foreclosures under Act No. 3135, or his
successor-in-interest, has, one year from the date of registration of the
Certificate of Sale with the Registry of Deeds, a right to redeem the
foreclosed mortgage,[28] hence, petitioners, as MCC's successors-in-
interest, had one year from the registration of the Certificate of Sale on
July 29, 1985 or until July 29, 1986 for the purpose.

Petitioners, however, failed to do so. Ownership of the subject properties
was thus consolidated in favor of Banco Filipino,[29] and TCT Nos. 112352
(in lieu of TCT No. 61078) and 112353 (in lieu of TCT No. 61062) were
issued in its name.

As this Court held in F. David Enterprises v. nsular Bank of Asia and
America:[30]

t is settled that the buyer in a foreclosure sale becomes the absolute
owner of the property purchased if it is not redeemed during the period of
one year after the registration of the sale. As such, he is entitled to the
possession of the said property and can demand it at any time following
the consolidation of ownership in his name and the issuance to him of a
new transfer certificate of title. The buyer can in fact demand possession
of the land even during the redemption period except that he has to post a
bond in accordance with Section 7 of Act No. 3135 as amended. No such
bond is required after the redemption period if the property is not
redeemed. Possession of the land then becomes an absolute right of the
purchaser as confirmed owner. Upon proper application and proof of title,
the issuance of the writ of possession becomes a ministerial duty of the
court.[31] (Emphasis supplied)

Petitioners assert, however, that a binding agreement for the repurchase
of the subject properties was reached with Banco Filipino as, so they
claim, reflected in the following exchange of communications:
Credit Transactions Full Text Cases Atty. Adviento!!!!"'(
October 17, 1996

Mrs. Luz B. Dacasin
Asst. Vice-President
Real Estate Dept.
Banco Filipino Savings and Mortgage Bank
101 Paseo De Roxas cro. [sic] Dela Rosa Sts.
Makati City

Dear Madam:

am writing to you, on behalf of spouses Sonia and Rodrigo Paderes re:
TCT No. 61078 formerly owned by Manila nternational Construction
Corporation (MCC for short) now TCT No. 112352, registered in the name
of Banco Filipino Savings and Mortgage Bank in July 30, 1996 at the
Register of Deeds of Paraaque, Metro Manila. ncidentally, the property is
denominated as Block 48, Lot 5 located at Leon Florentino St., BF
Executive , Paraaque, Metro Manila.

The background facts of TCT No. 61078 are as follows:

n August 1983, the MCC executed a Deed of Absolute Sale of that lot
covered by TCT No. 61078 in favor of spouses Sonia and Rodrigo
Paderes which was acknowledged before a Notary Public on October 1,
1983. The value of the lot was P115,720.00. n the same year, the parties
executed an addendum to the said deed of absolute sale which covered a
house valued at P242,874.45. The net package price of the house and lot
was fixed at P329,405.75. From this amount, the spouses Sonia and
Rodrigo Paderes paid MCC inclusive of equity the amount of P125,437.35
leaving a balance of P212,985.60. The spouses moved in the house in
November 1983.

Unknown to the spouses, MCC mortgaged TCT No. 61078 in favor of
Banco Filipino Savings and Mortgage Bank for P1,885.00 duly inscribed in
TCT No. 112352 on December 12, 1982. t was foreclosed by the bank for
P3,092,547.82 pursuant to the certificate of sale executed by the sheriff as
inscribed on TCT No. 112352 [should be TCT No. 61078] on July 29, 1985
. . .

Then came the news that Banco Filipino Savings and Mortgage Bank was
under conservatorship by the Board of Liquidators. On the other hand,
MCC became bankrupt and closed shop. The spouses were [sic] nowhere
to go to then at the time to get the title of the property they purchased from
MCC.

Until, the spouses received a letter dated April 6, 1987 from the Board of
Liquidators via Alberto Reyes, Deputy Liquidator, informing the spouses
that the property they purchased from MCC was already foreclosed by the
bank. The spouses answered the letter and disclaimed any knowledge of
the foreclosure. n their answer to the said letter, they emphasized that
their unpaid balance with MCC was P188,985.60.

We are addressing your goodself [sic] to inform the bank that the spouses
Sonia and Rodrigo Paderes are exercising their right of redemption as
subrogees of the defunct MCC under special laws.

From reliable information, the bank had already made appraisal of the
property and from that end, may we be informed [at] the soonest possible
time the value of the property to enable the spouses to prepare for such
eventuality. And, upon receipt of the said appraisal value we shall
immediately inform you [of] our position on the matter.

Thank you very much.

Very truly yours,


[SGD.]
LUCANO D. VALENCA
Counsel for Spouses Paderes
JPA Subdivision, City of Muntinlupa[32]

x x x (Emphasis supplied).





October 25, 1996

Mr. Luciano D. Valencia
Counsel for Sps. Paderes
JPA Subdivision, Muntinlupa

Dear Sir:

This is with regard to your letter dated October 17, 1996 concerning the
property formerly owned by Manila nternational Construction Corporation
(MCC) foreclosed by the Bank.

Please inform Sps. Rodrigo and Sonia Paderes to come to the bank to
discuss said foreclosed property directly with the bank.

Thank you.

Very truly yours,
Credit Transactions Full Text Cases Atty. Adviento!!!!"')

[SGD.]
LUZ B. DACASN
Assistant Vice-President
Real Estate Department[33]

x x x (Emphasis supplied; italics in the original).


November 4, 1996

Mrs. Luz B. Dacasin
Asst. Vice-President
Real Estate Dept., Banco Filipino
Makati City

Dear Madam:

Thank you very much for your letter dated October 25, 1996, which was
received on October 31, 1996, the contents of which had been duly noted.
Pursuant thereto advised my clients ' spouses Rodrigo and Sonia
Paderes to see [you].

With your indulgence, also advised my other clients ' spouses sabelo
and Juana Herminia Bergado to go along with the spouses Paderes, who
are similarly situated with spouses Paderes property.

ncidentally, on October 28, 1996, also wrote your goodself another letter
at the behest of spouses sabelo and Juana Herminia Bergado whose
property is equally footed with spouses Paderes.

t is hoped that, out of that conference per your invitation my clients above-
named be informed formally the total amounts due the bank as a
consequence of the right of redemption extended to them. Of course,
whatever appraised value arrived at by the bank on the properties subject
of redemption the same shall not be construed as my clients' committed
liability.

Thank you very much.

Very truly yours,


[SGD.]
LUCANO D. VALENCA
Counsel for Spouses Paderes
JPA Subdivision, City of Muntinlupa[34]

x x x (Emphasis supplied).


November 8, 1996

Mrs. Luz B. Dacasin
Asst. Vice-President
Real Estate Department
Banco Filipino Savings & Mortgage Bank
Makati City

Re: Lot 18, Block 48 Gamboa St.
BF Homes, Paraaque, MM (264 SQ.M.)
Occupied by Sps. sabelo Bergado &
Juana Herminia Bergado

Lot 5, Block 48, L. Florentino St.
BF Homes, Paraaque, MM (263 SQ.M.)
Occupied by Sps. Rodrigo Paderes &
Sonia Paderes

Dear Madam Asst. Vice-President:

Pursuant to our conference this morning November 8, 1996, regarding our
desire to redeem the properties above-captioned, which your good office
accommodated, and per your advi[c]e, we submit the following facts taken
out and our proposals:

1. Regarding the lot, you mentioned that, the cost per square meter was
P7,500.00. To this price we are no-committal for the said price is high.
Although, we are still to have the amount re-negotiated.

2. We appreciate very much your having excluded the house built in the
said lot for purposes of fixing the redemption price.

3. Your advi[c]e to subject the properties (house and lot) to a real-estate
mortgage with the bank so that the amount to be loaned will be used as
payment of the properties to be redeemed is accepted, and we are
committed to it.

Credit Transactions Full Text Cases Atty. Adviento!!!!"'*
Thank you very much

Very truly yours,

[SGD.]
SPS. SONA &
RODRGO PADERES

[SGD.]
SPS. SABELO &
JUANA HERMNA BERGADO[35]
(Emphasis supplied).

Petitioners' assertion does not pass muster.

Under Article 1318 of the Civil Code, there are three essential requisites
which must concur in order to give rise to a binding contract: (1) consent of
the contracting parties; (2) object certain which is the subject matter of the
contract; and (3) cause of the obligation which is established. 'Consent is
further defined in Article 1319 of the Code as follows:

Art. 1319. Consent is manifested by the meeting of the offer and the
acceptance upon the thing and the cause which are to constitute the
contract. The offer must be certain and the acceptance absolute. A
qualified acceptance constitutes a counter-offer.

Acceptance made by letter or telegram does not bind the offerer except
from the time it came to his knowledge. The contract, in such a case, is
presumed to have been entered into in the place where the offer was
made. (Emphasis supplied)

By 'offer is meant a unilateral proposition which one party makes to the
other for the celebration of the contract. There is an 'offer in the context of
Article 1319 only if the contract can come into existence by the mere
acceptance of the offeree, without any further act on the part of the offeror.
Hence, the 'offer must be definite, complete and intentional.[36]

With regard to the 'acceptance, a learned authority notes that:

To produce a contract, the acceptance must not qualify the terms of the
offer. There is no acceptance sufficient to produce consent, when a
condition in the offer is removed, or a pure offer is accepted with a
condition, or when a term is established, or changed, in the acceptance, or
when a simple obligation is converted by the acceptance into an
alternative one; in other words, when something is desired which is not
exactly what is proposed in the offer. t is necessary that the acceptance
be unequivocal and unconditional, and the acceptance and the proposition
shall be without any variation whatsoever; and any modification or
variation from the terms of the offer annuls the latter and frees the offeror.
[37] (Emphasis supplied)

A reading of the above-quoted correspondence reveals the absence of
both a definite offer and an absolute acceptance of any definite offer by
any of the parties.

The letters dated October 17, 1996 and November 4, 1996, signed by
petitioners' counsel, while ostensibly proposing to redeem the foreclosed
properties and requesting Banco Filipino to suggest a price for their
repurchase, made it clear that any proposal by the bank would be subject
to further action on the part of petitioners.

The letter dated October 25, 1996 signed by Luz Dacasin, Assistant Vice-
President of Banco Filipino, merely invited petitioners to engage in further
negotiations and does not contain a recognition of petitioners' claimed
right of redemption or a definite offer to sell the subject properties back to
them.

Petitioners emphasize that in item no. 3 of their letter dated November 8,
1996 they committed to 'subject the properties (house and lot) to a real-
estate mortgage with the bank so that the amount to be loaned will be
used as payment of the properties to be redeemed. t is clear from item
no. 1 of the same letter, however, that petitioners did not accept Banco
Filipino's valuation of the properties at P7,500.00 per square meter and
intended to 'have the amount [renegotiated].

Moreover, while purporting to be a memorandum of the matters taken up
in the conference between petitioners and Banco Filipino Vice-President
Dacasin, petitioners' letter of November 8, 1996 does not contain the
concurrence of Ms. Dacasin or any other authorized agent of Banco
Filipino. Where the alleged contract document was signed by only one
party and the record shows that the other party did not execute or sign the
same, there is no perfected contract.[38]

The Court of Appeals, therefore, committed no error in concluding that
nothing concrete came out of the meeting between petitioners and Banco
Filipino.

Respecting petitioners' claim that their houses should have been excluded
from the auction sale of the mortgaged properties, it does not lie. The
provision of Article 448[39] of the Civil Code, cited by petitioners, which
pertain to those who, in good faith, mistakenly build, plant or sow on the
land of another, has no application to the case at bar.

Here, the record clearly shows that petitioners purchased their respective
houses from MCC, as evidenced by the Addendum to Deed of Sale dated
October 1, 1983 and the Deed of Absolute Sale dated January 9, 1984.

Being improvements on the subject properties constructed by mortgagor
MCC, there is no question that they were also covered by MCC's real
estate mortgage following the terms of its contract with Banco Filipino and
Article 2127 of the Civil Code:


Art. 2127. The mortgage extends to the natural accessions, to the
improvements, growing fruits, and the rents or income not yet received
when the obligation becomes due, and to the amount of the indemnity
granted or owing to the proprietor from the insurers of the property
mortgaged, or in virtue of expropriation for public use, with the
declarations, amplifications and limitations established by law, whether the
Credit Transactions Full Text Cases Atty. Adviento!!!!"(+
estate remains in the possession of the mortgagor, or it passes into the
hands of a third person. (Underscoring supplied).

The early case of Cu Unjieng e Hijos v. Mabalacat Sugar Co.[40] is
illustrative. n that case, this Court held:

. . . (1) That a mortgage constituted on a sugar central includes not only
the land on which it is built but also the buildings, machinery, and
accessories installed at the time the mortgage was constituted as well as
all the buildings, machinery and accessories belonging to the mortgagor,
installed after the constitution thereof (Bischoff vs. Pomar and Compaia
General de Tabacos, 12 Phil. 690); (2) that the notice announcing the sale
at public auction of all the properties of a sugar central extends to the
machinery and accessories acquired and installed in its mill after the
constitution of the mortgage; (3) that the court, that has ordered the
placing of the mortgaged properties in the hands of a receiver in a
foreclosure suit, has jurisdiction to order the sale at public auction of the
said mortgaged properties even before the termination of the receivership;
and (4) that the fact that the price at which the mortgaged properties were
sold at public auction is inadequate, is not in itself sufficient to justify the
annulment of the sale.[41] (Emphasis supplied)

Petitioners finally proffer that the issuance, on Banco Filipino's mere
motion, of the Writ of Possession on November 5, 1996, more than 8
years since the promulgation of the RTC Order granting its petition on
September 8, 1988, violated Section 6, Rule 39 of the Rules of Court, viz:

Sec. 6. Execution by motion or by independent action. ' A final and
executory judgment or order may be executed on motion within five (5)
years from the date of its entry. After the lapse of such time, and before it
is barred by the statute of limitations, a judgment may be enforced by
action. The revived judgment may also be enforced by motion within five
(5) years from the date of its entry and thereafter by action before it is
barred by the statute of limitations.

Hence, petitioners argue, the writ of possession had lost its validity and
efficacy and should therefore be declared null and void.

Petitioners' ultimate argument fails too. n Rodil vs. Benedicto,[42] this
Court categorically held that the right of the applicant or a subsequent
purchaser to request for the issuance of a writ of possession of the land
never prescribes:

The respondents claim that the petition for the issuance of a writ of
possession was filed out of time, the said petition having been filed more
than five years after the issuance of the final decree of registration. n
support of their contention, the respondents cite the case of Sorogon vs.
Makalintal [80 Phil. 259 (1948)], wherein the following was stated:
"t is the law and well settled doctrine in this jurisdiction that a writ of
possession must be issued within the same period of time in which a
judgment in ordinary civil actions may be summarily executed (section 17,
Act 496, as amended), upon the petition of the registered owner or his
successors in interest and against all parties who claim a right to or
interest in the land registered prior to the registration proceeding."

The better rule, however, is that enunciated in the case of Manlapas and
Tolentino vs. Lorente [48 Phil. 298 (1925)], which has not yet been
abandoned, that the right of the applicant or a subsequent purchaser to
ask for the issuance of a writ of possession of the land never
prescribes. . .
x x x
n a later case [Sta. Ana v. Menla, 111 Phil. 947 (1961)], the Court also
ruled that the provision in the Rules of Court to the effect that judgment
may be enforced within five years by motion, and after five years but within
ten years by an action (Section 6, Rule 39) refers to civil actions and is not
applicable to special proceedings, such as land registration cases. The
Court said:
"The second assignment of error is as follows:
'That the lower court erred in ordering that the decision rendered in this
land registration case on November 28, 1931 or twenty six years ago, has
not yet become final and unenforceable.
We fail to understand the arguments of the appellant in support of the
above assignment, except in so far as it supports his theory that after a
decision in a land registration case has become final, it may not be
enforced after the lapse of a period of 10 years, except by another
proceeding to enforce the judgment or decision. Authority for this theory is
the provision in the Rules of Court to the effect that judgment may be
enforced within 5 years by motion, and after five years but within 10 years,
by an action (Sec. 6, Rule 39). This provision of the Rules refers to civil
actions and is not applicable to special proceedings, such as a land
registration case. This is so because a party in a civil action must
immediately enforce a judgment that is secured as against the adverse
party, and his failure to act to enforce the same within a reasonable time
as provided in the Rules makes the decision unenforceable against the
losing party. n special proceedings the purpose is to establish a status,
condition or fact; in land registration proceedings, the ownership by a
person or a parcel of land is sought to be established. After the ownership
has been proved and confirmed by judicial declaration, no further
proceeding to enforce said ownership is
necessary, except when the adverse or losing party had been in
possession of the land and the winning party desires to oust him
therefrom.[43] (Emphasis and underscoring supplied)

Petitioners have not supplied any cogent reason for this Court to deviate
from the foregoing ruling.

The established doctrine that the issuance of a writ of possession is a
ministerial function whereby the issuing court exercises neither discretion
nor judgment bears reiterating. The writ issues as a matter of course upon
the filing of the proper motion and, if filed before the lapse of the
redemption period, the approval of the corresponding bond.[44]
Petitioners, however, are not without remedy. As reflected in the
challenged Court of Appeals decision, under Section 8[45] of Act No.
3135, as amended, petitioners, as successors-in-interest of mortgagor
MCC, have 30 days from the time Banco Filipino is given possession of
the subject properties to question the validity of the auction sale under any
of the two grounds therein stated by filing a petition to set aside the same
and cancel the writ of possession.

WHEREFORE, the petition is hereby DENED.

Costs against petitioners.

SO ORDERED.
FRST DVSON
G.R. No. 150097 February 26, 2007
Credit Transactions Full Text Cases Atty. Adviento!!!!"("
DEVELOPMENT BANK OF THE PHILIPPINES, Petitioner
vs.
ALEJANDRO and ADELAIDA LICUANAN, Respondents.
D E C S O N
CORONA, J.:
n this petition for review on certiorari,
1
petitioner Development Bank of the
Philippines assails the February 9, 2001 decision
2
and September 17,
2001 resolution
3
of the Court of Appeals (CA) in CA-G.R. CV No. 37784.
Respondent spouses Alejandro and Adelaida Licuanan were granted a
piggery loan in the amount of P4,700 by petitioner, evidenced by a
promissory note dated September 20, 1974 and secured by a real estate
mortgage
4
over a 980-square meter parcel of land with a two-storey
building. The loan's maturity date was September 23, 1979.
5
Petitioner granted respondents an additional loan of P12,000 evidenced
by a promissory note dated May 29, 1975 payable on or before the year
1980. This was secured by a real estate mortgage over four parcels of
land situated in Pangasinan covered by TCT Nos. 109825, 109762,
109763 and 109764.
6

On October 2, 1975, petitioner granted respondent spouses another loan
of P22,000 evidenced by a promissory note maturing on October 3, 1985.
This was secured by a real estate mortgage executed in favor of petitioner
over three parcels of land covered by TCT Nos. 112608, 112607 and
112609, all of the Registry of Deeds of Pangasinan.
7
On August 6, 1979, petitioner and respondents restructured the P12,000
loan, extending the maturity date from June 22, 1979 to June 22, 1982. On
the same date, respondents executed a promissory note for P12,320.73
and another for P6,519.90.
8
On July 6, 1981, petitioner sent a letter by registered mail to respondents
informing them that, since the conditions of the mortgage had been
breached, petitioner would have the mortgaged properties sold by the
sheriff under Act 3135. The total amount due from the three loans had by
then ballooned to P75,298.32.
9

On July 20, 1981, petitioner filed an application for extrajudicial
foreclosure.
10
The mortgaged properties were sold in a public auction on
December 16, 1981. Petitioner, as the highest bidder, acquired them for a
total of P16,340. The certificate of sale was registered on January 25,
1982.
11
On February 4, 1983, petitioner consolidated its ownership over the
properties. After more than a year or on October 16, 1984, petitioner wrote
respondents by registered mail, informing them that the properties (now
acquired assets of the bank) would be disposed of by public auction. On
November 11, 1984, petitioner published an advertisement stating that on
November 14, 1984, the properties would be sold by oral bidding. On this
date, however, there were no bidders.
12

On November 16, 1984, petitioner sent respondents a letter informing
them that the properties could be reacquired by negotiated sale for cash or
installment.
13
Three days later, however, on November 19, 1984, the
properties were sold through negotiated sale to one Emelita A. Peralta.
Respondents were informed of the sale by petitioner through a letter dated
December 6, 1984.
On the same day, petitioner executed a deed of conditional sale in favor of
Peralta.
14
On December 11, 1984, respondents offered to repurchase the
properties from petitioner but they had already been sold to Peralta.
15
Respondents then filed a complaint for recovery of real properties and
damages on July 18, 1985 in the Regional Trial Court (RTC) of Lingayen,
Pangasinan, Branch 39 against petitioner and Peralta.
16
The RTC
rendered judgment dated September 17, 1991 in favor of respondents.
The trial court found that there was no demand for payment prior to the
extrajudicial foreclosure. Thus, the foreclosure proceedings were null and
void. t ordered Peralta to reconvey the properties to respondents subject
to Peralta's right to be paid by respondents the amount of P104,000 in
consideration of such reconveyance. t also held that petitioner did not
deal fairly with respondents making it liable for nominal and moral
damages to the latter. The RTC further ordered petitioner to pay
respondents attorney's fees and litigation expenses.
On appeal, the CA affirmed the RTC but decreased the amount of nominal
damages from P75,000 to P50,000.
17
Hence this petition.
18

The main issues to be resolved are the following:
1) whether a demand for payment of the loans was made before
the mortgage was foreclosed;
2) whether demand is necessary to make respondents guilty of
default;
3) whether or not respondents are liable for the deficiency claim
of petitioner and
4) whether or not petitioner is liable for damages.
The issue of whether demand was made before the foreclosure was
effected is essential. f demand was made and duly received by the
respondents and the latter still did not pay, then they were already in
default and foreclosure was proper. However, if demand was not made,
then the loans had not yet become due and demandable. This meant that
respondents had not defaulted in their payments and the foreclosure by
petitioner was premature. Foreclosure is valid only when the debtor is in
default in the payment of his obligation.
19
Whether or not demand was made is a question of fact. n petitions for
review on certiorari under Rule 45, only questions of law may be raised by
the parties and passed upon by this Court.
20
Factual findings of the trial
court, when adopted and confirmed by the CA, are binding and conclusive
on this Court and will generally not be reviewed on appeal.
21
nquiry into
the veracity of the CA's factual findings and conclusions is not the function
of the Supreme Court for the Court is not a trier of facts.
22
Neither is it our
function to re-examine and weigh anew the respective evidence of the
parties.
23
While this Court has recognized several exceptions to this rule,
24
none of these exceptions finds application here.
Both the CA and RTC found that demand was never made. No compelling
reason whatsoever has been shown by petitioner for this Court to review
and reverse the trial court's findings and conclusions, as affirmed by the
CA.
Petitioner asserts that demand was unnecessary because the maturity
dates of all loans were specified, i.e., the notes expressly stated the
specific dates when the amortizations were to fall due.
25

We disagree.
Unless demand is proven, one cannot be held in default.
26
Petitioner's
cause of action did not accrue on the maturity dates stated in the
promissory notes. t is only when demand to pay is made and
subsequently refused that respondents can be considered in default and
petitioner obtains the right to file an action to collect the debt or foreclose
the mortgage.
27
As we held in China Banking Corporation v. Court of
Appeals:
28

Well-settled is the rule that since a cause of action requires, as essential
elements, not only a legal right of the plaintiff and a correlative duty of the
defendant but also "an act or omission of the defendant in violation of said
Credit Transactions Full Text Cases Atty. Adviento!!!!"(#
legal right," the cause of action does not accrue until the party obligated
refuses, expressly or impliedly, to comply with its duty.
Otherwise stated, a cause of action has three elements, to wit, (1) a right
in favor of the plaintiff by whatever means and under whatever law it arises
or is created; (2) an obligation on the part of the named defendant to
respect or not to violate such right; and (3) an act or omission on the part
of such defendant violative of the right of the plaintiff or constituting a
breach of the obligation of the defendant to the plaintiff.
t bears stressing that it is only when the last element occurs that a cause
of action arises. Accordingly, a cause of action on a written contract
accrues only when an actual breach or violation thereof occurs.
Applying the foregoing principle to the instant case, we ruIe that private
respondent's cause of action accrued onIy on JuIy 20, 1995, when its
demand for payment of the Home Notes was refused by petitioner. t
was only at that time, and not before that, when the written contract was
breached and private respondent could properly file an action in court.
The cause of action cannot be said to accrue on the uniform maturity
date of the Home Notes as petitioner posits because at that point, the
third essentiaI eIement of a cause of action, nameIy, an act or
omission on the part of petitioner vioIative of the right of private
respondent or constituting a breach of the obIigation of petitioner to
private respondent, had not yet occurred.
29
(emphasis supplied)
The acceleration clause of the promissory notes stated that "[i]n case of
non-payment of this note or any portion of it on demand, when due, on
account of this note, the entire obligation shall become due and
demandable ."
30
Hence, the maturity dates only indicate when payment
can be demanded. t is the refusal to pay after demand that gives the
creditor a cause of action against the debtor.
Since demand, which is necessary to make respondents guilty of default,
was never made on respondents, the CA and RTC correctly ruled that the
foreclosure was premature and therefore null and void.
n arguing that the foreclosure was valid, petitioner also avers that
respondents are estopped from questioning the validity of the foreclosure
sale since they offered to repurchase the foreclosed properties.
31
We are
not persuaded. The reason why respondents offered to repurchase the
properties was clearly stated in their letter to petitioner:
am very much interested in repurchasing back these properties because
they are the only properties which my family have and because our house
is located inside this property and for this matter am willing to pay [for]
these properties in cash which already told the bank when went there.
32
Besides, we have already ruled that an offer to repurchase should not be
construed as a waiver of the right to question the sale.
33
nstead, it must be
taken as an intention to avoid further litigation and thus is in the nature of
an offer to compromise.
34
By offering to redeem the properties,
respondents can attain their ultimate objective: to pay off their debt and
regain ownership of their lands.
35

Moreover, it was petitioner, in its November 16, 1984 letter, which informed
respondents that the properties were available for sale. Respondents
merely took up petitioner's offer for them to reacquire their properties.
Petitioner assigns as error the failure of the CA to rule on its deficiency
claim. t alleged that the price the mortgaged property was sold for
(P104,000) was less than the amount of respondents' indebtedness
(P131,642.33), thus it is entitled to claim the difference (P27,642.33) with
interest. Respondents cannot be held liable for the deficiency claim. While
it is true that in extrajudicial foreclosure of mortgage, the mortgagee has
the right to recover the deficiency from the debtor,
36
this presupposes that
the foreclosure must first be valid.
37
The last issue is whether the award of moral and nominal damages,
expenses of litigation and attorney's fees is proper. Crucial to the
determination of the propriety of the award of damages are the findings of
the RTC, which were affirmed by the CA, on the matter of bad faith:
Apart from the precipitate foreclosure proceedings, the Court observes
that certain acts of [petitioner] were most certainly less than fair and less
than honest, which negates the rehabilitation (prior name of the bank) or
development aspect or purpose of [petitioner]. These certainly caused
serious anxiety and wounded feelings to [respondents]. They are: -
FRST. [Petitioner] granted a loan of P4,700.00; then a second
loan of P12,000.00 re-structured to P18,840.61; and a third loan
of P22,200.00, or a total of P45,740.61 during the period from
September 1974 to October 2, 1975. Obviously, these loans
were granted because the market value of the collaterals
exceeds P100,000.00 and [petitioner's] appraisal value is more
or less P80,000.00. However, six (6) years later, when the value
must have appreciated in terms of pesos, the [petitioner] bidded
for a [measly] P16,000.00 and [claimed] a deficiency. That it was
[measly] and shocking to the conscience was conclusively
proven by the fact that [Peralta] offered and did in fact buy the
properties for P104,000.00 barely three (3) years later. To the
mind of the Court, the actuations of the bank must have been
revolting to [respondents] and to honest men, especially
considering that [petitioner] is a government financial institution,
capitalized with the money of the people, and created principally
"to assist agricultural producers xxx in developing their farms
xxx to accelerate national progress", more than to realize profit.
SECOND. [Respondents] are simple-minded persons in the
country side. t strikes the court as odd and certainly less than
candid WHY on AUGUST 6, 1979, [petitioner] restructured the
second loan which will mature on May 1980, but did not
restructure the first loan which was due to mature on September
23, 1979 or barely one month hence. t appears that the result
lulled [respondents] into a false sense of security and a feeling
of relief that the entire loan accommodation will mature in 1985.
And then like a bolt of lightning from a clear sky, [respondents]
were hit with [foreclosure] proceedings, causing them to suffer
sleepless nights.
THRD. A letter dated November 16, 1984 was addressed to
[respondents] informing them practically that they are given the
priority to recover their properties by negotiated sale. And yet
before the letter was sent, or on November 14, 1984 the
[petitioner] had already negotiated with [Peralta] for the latter to
buy the assets for P104,000.00 in installment and as a matter of
fact the Contract for Conditional Sale was executed on
November 19, 1984 even before the letter was received by
[respondents]. [Heart-rending] was the plea of [respondents]
which we quote: -
" am very much interested in repurchasing back these properties because
they are the only properties which my family have and because our house
is located inside this property and for this matter am willing to pay [for]
these properties in cash which already told the bank when went there."
(underscoring supplied)
Nevertheless, such supplications fell on deaf ears and did not even merit
sympathy from a heartless [petitioner]. At the very least, the letter of 16
November 1984 was a very bad joke gleefully made in bad taste and
foisted on the hapless [respondents]. t added insult to injury.
And to top it all, [petitioner] even has the temerity to allege in paragraph 2
of its compulsory counterclaim "that as of November 7, 1984 the total
obligations of [respondents] on account of their loans with [petitioner]
amounted to P131,642.33" and making a deficiency claim of P27,642.33
plus daily interest of P9.61 beginning November 8, 1984 "which
[respondents] are allegedly still liable to pay the [petitioner]".1avvphi1.net
This is unconscionable.1awphi1.net
Certainly, there is abundant evidence that the rights of [respondents] have
been violated or invaded with unconcerned ruthlessness by the
[petitioner].
38
Credit Transactions Full Text Cases Atty. Adviento!!!!"($
Both the RTC and CA found that there was factual basis for the moral
damages adjudged against petitioner. They found that petitioner was guilty
of bad faith in its actuations against respondents. Again, this is a factual
matter binding and conclusive on this Court:
t is settled that bad faith must be duly proved and not merely presumed.
The existence of bad faith, being a factual question, and the Supreme
Court not being a trier of facts, the findings thereon of the trial court as well
as of the Court of Appeals shall not be disturbed on appeal and are
entitled to great weight and respect. Said findings are final and conclusive
upon the Supreme Court except, inter alia, where the findings of the Court
of Appeals and the trial court are contrary to each other.
39
The lower court also found that respondents' property rights were invaded
or violated,
40
hence the grant of nominal damages was also proper.
Respondents are likewise entitled to the award of attorney's fees and
expenses of litigation since the premature foreclosure by petitioner
compelled them to incur expenses to protect their interest.
41
WHEREFORE, we hereby AFFIRM the decision of the Court of Appeals in
CA-G.R. CV No. 37784.
Costs against petitioner.
SO ORDERED.
THIRD DIVISION
G.R. No. 128567 September 1, 2000
HUERTA ALBA RESORT INC., petitioner,
vs.
COURT OF APPEALS and SYNDICATED MANAGEMENT GROUP INC.,
respondents.
PURISIMA, J.:
Litigation must at some time be terminated, even at the risk of occasional
errors. Public policy dictates that once a judgment becomes final,
executory and unappealable, the prevailing party should not be denied the
fruits of his victory by some subterfuge devised by the losing party.
Unjustified delay in the enforcement of a judgment sets at naught the role
of courts in disposing justiciable controversies with finality.
The Case
At bar is a petition assailing the Decision, dated November 14, 1996, and
Resolution, dated March 11, 1997, of the Court of Appeals in CA-G.R. No.
38747, which set aside the Order, dated July 21, 1995 and Order, dated
September 4, 1997, of the Regional Trial Court of Makati City, in Civil Case
No. 89-5424. The aforesaid orders of the trial court held that petitioner had
the right to redeem subject pieces of property within the one-year period
prescribed by Section 78 of Republic Act No. 337 otherwise known as the
General Banking Act.
Section 78 of R.A. No. 337 provides that "in case of a foreclosure of a
mortgage in favor of a bank, banking or credit institution, whether judicially
or extrajudicially, the mortgagor shall have the right, within one year after
the sale of the real estate as a result of the foreclosure of the respective
mortgage, to redeem the property."
The Facts
The facts that matter are undisputed:
n a complaint for judicial foreclosure of mortgage with preliminary
injunction filed on October 19, 1989, docketed as Civil Case No. 89-5424
before the Regional Trial Court of Makati City, the herein private
respondent sought the foreclosure of four (4) parcels of land mortgaged by
petitioner to ntercon Fund Resource, nc. ("ntercon").
Private respondent instituted Civil Case No. 89-5424 as mortgagee-
assignee of a loan amounting to P8.5 million obtained by petitioner from
ntercon, in whose favor petitioner mortgaged the aforesaid parcels of land
as security for the said loan.
n its answer below, petitioner questioned the assignment by ntercon of its
mortgage right thereover to the private respondent, on the ground that the
same was ultra vires. Petitioner also questioned during the trial the
correctness of the charges and interest on the mortgage debt in question.
On April 30, 1992, the trial court, through the then Judge now Court of
Appeals Justice Buenaventura J. Guerrero, came out with its decision
"granting herein private respondent SMG's complaint for judicial
foreclosure of mortgage", disposing as follows:
"WHEREFORE, judgment is hereby rendered ordering
defendant to pay plaintiff the following:
(1) P8,500,000.00 representing the principal of the
amount due;
(2) P850,000.00 as penalty charges with interest at
6% per annum, until fully paid;
(3) 22% per annum interest on the above principal
from September 6, 1998, until fully paid;
(4) 5% of the sum total of the above amounts, as
reasonable attorney's fees; and,
(5) Costs.
All the above must be paid within a period of not less than 150
days from receipt hereof by the defendant. n default of such
payment, the four parcels of land subject matter of the suit
including its improvements shall be sold to realize the mortgage
debt and costs, in the manner and under the regulations that
govern sales of real estate under execution."
1

Petitioner appealed the decision of the trial court to the Court of Appeals,
the appeal docketed as CA-G.R. CV No. 39243 before the Sixth Division
of the appellate court, which dismissed the case on June 29, 1993 on the
ground of late payment of docket fees.
Dissatisfied with the dismissal of CA-G.R. No. 39243, petitioner came to
this Court via a petition for certiorari, docketed as G.R. No. 112044, which
this court resolved to dismiss on December 13, 1993, on the finding that
the Court of Appeals erred not in dismissing the appeal of petitioner.
Petitioner's motion for reconsideration of the dismissal of its petition in
G.R. No. 112044 was denied with finality in this Court's Resolution
promulgated on February 16, 1994. On March 10, 1994, leave to present a
second motion for reconsideration in G.R. No. 112044 or to submit the
case for hearing by the Court en banc was filed, but to no avail. The Court
resolved to deny the same on May 11, 1994.
On March 14, 1994, the Resolution dated December 13, 1993, in G.R. No.
112044 became final and executory and was entered in the Book of
Entries of Judgment.
On July 4, 1994, private respondent filed with the trial court of origin a
motion for execution of the Decision promulgated on April 30, 1992 in Civil
Case No. 89-5424. The said motion was granted on July 15, 1994.
Accordingly, on July 15, 1994 a writ of execution issued and, on July 20,
1994, a Notice of Levy and Execution was issued by the Sheriff
Credit Transactions Full Text Cases Atty. Adviento!!!!"(%
concerned, who issued on August 1, 1994 a Notice of Sheriff's Sale for the
auction of subject properties on September 6, 1994.
On August 23, 1994, petitioner filed with the same trial court an Urgent
Motion to Quash and Set Aside Writ of Execution ascribing to it grave
abuse of discretion in issuing the questioned Writ of Execution. To support
its motion, petitioner invited attention and argued that the records of the
case were still with the Court of Appeals and therefore, issuance of the writ
of execution was premature since the 150-day period for petitioner to pay
the judgment obligation had not yet lapsed and petitioner had not yet
defaulted in the payment thereof since no demand for its payment was
made by the private respondent. n petitioner's own words, the dispute
between the parties was "principally on the issue as to when the 150-day
period within which Huerta Alba may exercise its equity of redemption
should be counted."
n its Order of September 2, 1994, the lower court denied petitioner's
urgent motion to quash the writ of execution in Civil Case No. 89-5424,
opining that subject judgment had become final and executory and
consequently, execution thereof was a matter of right and the issuance of
the corresponding writ of execution became its ministerial duty.
Challenging the said order granting execution, petitioner filed once more
with the Court of Appeals another petition for certiorari and prohibition with
preliminary injunction, docketed as C.A.-G.R. SP No. 35086, predicated on
the same grounds invoked for its Motion to Quash Writ of Execution.
On September 6, 1994, the scheduled auction sale of subject pieces of
properties proceeded and the private respondent was declared the highest
bidder. Thus, private respondent was awarded subject bidded pieces of
property. The covering Certificate of Sale issued in its favor was registered
with the Registry of Deeds on October 21, 1994.
On September 7, 1994, petitioner presented an Ex-Parte Motion for
Clarification asking the trial court to "clarify" whether or not the twelve (12)
month period of redemption for ordinary execution applied in the case.
On September 26, 1994, the trial court ruled that the period of redemption
of subject property should be governed by the rule on the sale of judicially
foreclosed property under Rule 68 of the Rules of Court.
Thereafter, petitioner then filed an Exception to the Order dated
September 26, 1994 and Motion to Set Aside Said Order, contending that
the said Order materially altered the Decision dated April 30, 1992 "which
declared that the satisfaction of the judgment shall be in the manner and
under the regulation that govern sale of real estate under execution."
Meanwhile, in its Decision of September 30, 1994, the Court of Appeals
resolved the issues raised by the petitioner in C.A.-G.R. SP No. 35086,
holding that the one hundred-fifty day period within which petitioner may
redeem subject properties should be computed from the date petitioner
was notified of the Entry of Judgment in G.R. No. 112044; and that the
150-day period within which petitioner may exercise its equity of
redemption expired on September 11, 1994.
Thus:
"Petitioner must have received the resolution of the Supreme
Court dated February 16, 1994 denying with finality its motion
for reconsideration in G.R. No. 112044 before March 14, 1994,
otherwise the Supreme Court would not have made an entry of
judgment on March 14, 1994. While, computing the 150-day
period. Petitioner may have until September 11, 1994. within
which to pay the amounts covered by the judgment, such period
has already expired by this time, and therefore, this Court has
no more reason to pass upon the parties' opposing contentions,
the same having become moot and academic."
2
(Emphasis
supplied).
Petitioner moved for reconsideration of the Decision of the Court of
Appeals in C.A.-G.R. SP No. 35086. n its Motion for Reconsideration
dated October 18, 1994, petitioner theorized that the period of one
hundred fifty (150) days should not be reckoned with from Entry of
Judgment but from receipt on or before July 29, 1994 by the trial court of
the records of Civil Case No. 89-5424 from the Court of Appeals. So also,
petitioner maintained that it may not be considered in default, even after
the expiration of 150 days from July 29, 1994, because prior demand to
pay was never made on it by the private respondent. According to
petitioner, it was therefore, premature for the trial court to issue a writ of
execution to enforce the judgment.
The trial court deferred action on the Motion for Confirmation of the
Certificate of Sale in view of the pendency of petitioner's Motion for
Reconsideration in CA-G.R. SP No. 35086.
On December 23, 1994, the Court of Appeals denied petitioner's motion
for reconsideration in CA-G.R. SP No. 35086. Absent any further action
with respect to the denial of the subject motion for reconsideration, private
respondent presented a Second Motion for Confirmation of Certificate of
Sale before the trial court.
As regards the Decision rendered on September 30, 1994 by the Court of
Appeals in CA G.R. SP No. 35086 it became final and executory on
January 25, 1995.
On February 10, 1995, the lower court confirmed the sale of subject
properties to the private respondent. The pertinent Order declared that all
pending incidents relating to the Order dated September 26, 1994 had
become moot and academic. Conformably, the Transfer Certificates of
Title to subject pieces of property were then issued to the private
respondent.
On February 27, 1995, petitioner filed with the Court of Appeals a Motion
for Clarification seeking "clarification" of the date of commencement of the
one (1) year period for the redemption of the properties in question.
n its Resolution dated March 20, 1995, the Court of Appeals merely noted
such Motion for Clarification since its Decision promulgated on September
30, 1994 had already become final and executory; ratiocinating thus:
"We view the motion for clarification filed by petitioner,
purportedly signed by its proprietor, but which we believe was
prepared by a lawyer who wishes to hide under the cloak of
anonymity, as a veiled attempt to buy time and to delay further
the disposition of this case.
Our decision of September 30, 1994 never dealt on the right and
period of redemption of petitioner, but was merely circumscribed
to the question of whether respondent judge could issue a writ
of execution in its Civil Case No. 89-5424 . . .
We further ruled that the one-hundred fifty day period within
which petitioner may exercise its equity of redemption should be
counted, not from the receipt of respondent court of the records
of Civil Case No. 89-5424 but from the date petitioner was
notified of the entry of judgment made by the appellate court.
But we never made any pronouncement on the one-year right of
redemption of petitioner because, in the first place, the
foreclosure in this case is judicial. and as such the mortgagor
has only the equity not the right of redemption . . . While it may
be true that under Section 78 of R.A. 337 as amended,
otherwise known as the General Banking Act, a mortgagor of a
bank, banking or credit institution, whether the foreclosure was
done judicially or extrajudicially, has a period of one year from
the auction sale within which to redeem the foreclosed property,
the question of whether the Syndicated Management Group,.
Inc., is a bank or credit institution was never brought before us
squarely, and it is indeed odd and strange that petitioner would
now sarcastically ask a rhetorical question in its motion for
clarification."
3
(Emphasis supplied).
Credit Transactions Full Text Cases Atty. Adviento!!!!"(&
ndeed, if petitioner did really act in good faith, it would have ventilated
before the Court of Appeals in CA-G.R. No. 35086 its pretended right
under Section 78 of R.A. No. 337 but it never did so.
At the earliest opportunity, when it filed its answer to the complaint for
judicial foreclosure, petitioner should have averred in its pleading that it
was entitled to the beneficial provisions of Section 78 of R.A. No. 337; but
again, petitioner did not make any such allegation in its answer.
From the said Resolution, petitioner took no further step such that on
March 31, 1995, the private respondent filed a Motion for ssuance of Writ
of Possession with the trial court.
During the hearing called on April 21, 1995, the counsel of record of
petitioner entered appearance and asked for time to interpose opposition
to the Motion for ssuance of Writ of Possession.
On May 2, 1995, in opposition to private respondent's Motion for ssuance
of writ of Possession, petitioner filed a "Motion to Compel Private
Respondent to Accept Redemption." t was the first time petitioner ever
asserted the right to redeem subject properties under Section 78 of R.A.
No. 337, the General Banking Act; theorizing that the original mortgagee,
being a credit institution, its assignment of the mortgage credit to petitioner
did not remove petitioner from the coverage of Section 78 of R.A. No. 337.
Therefore, it should have the right to redeem subject properties within one
year from registration of the auction sale, theorized the petitioner which
concluded that in view of its "right of redemption," the issuance of the titles
over subject parcels of land to the private respondent was irregular and
premature.
n its Order of July 21, 1995, the trial court, presided over by Judge
Napoleon noturan, denied private respondent's motion for a writ of
possession, opining that Section 78 of the General Banking Act was
applicable and therefore, the petitioner had until October 21, 1995 to
redeem the said parcels of land, said Order ruled as follows:
"t is undisputed that ntercon is a credit institution from which
defendant obtained a loan secured with a real estate mortgage
over four (4) parcels of land. Assuming that the mortgage debt
had not been assigned to plaintiff, there is then no question that
defendant would have a right of redemption in case of
foreclosure, judicially or extrajudicially, pursuant to the above
quoted Section 78 of RA 337, as amended.
However, the pivotal issue here is whether or not the defendant
lost its right of redemption by virtue of the assignment of its
mortgage debt by ntercon to plaintiff, which is not a bank or
credit institution. The issue is resolved in the negative. The right
of redemption in this case is vested by law and is therefore an
absolute privilege which defendant may not lose even though
plaintiff-assignee is not a bank or credit institution (Tolentino
versus Court of Appeals, 106 SCRA 513). ndeed, a contrary
ruling will lead to a possible circumvention of Section 78
because all that may be needed to deprive a defaulting
mortgagor of his right of redemption is to assign his mortgage
debt from a bank or credit institution to one which is not.
Protection of defaulting mortgagors, which is the avowed policy
behind the provision, would not be achieved if the ruling were
otherwise. Consequently, defendant still possesses its right of
redemption which it may exercise up to October 21, 1995 only,
which is one year from the date of registration of the certificate
of sale of subject properties (GSIS versus Iloilo, 175 SCRA 19,
citing Limpin versus IAC, 166 SCRA 87).
Since the period to exercise defendant's right of redemption has
not yet expired, the cancellation of defendant's transfer
certificates of title and the issuance of new ones in lieu thereof
in favor of plaintiff are therefore illegal for being premature,
thereby necessitating reconveyance (see Sec. 63 (a) PD 1529,
as amended).
WHEREFORE, the Court hereby rules as follows:
(1) The Motion for ssuance of Writ of Possession is
hereby denied;
(2) Plaintiff is directed to accept the redemption on or
before October 21, 1995 in an amount computed
according to the terms stated in the Writ of Execution
dated July 15, 1994 plus all other related costs and
expenses mentioned under Section 78, RA 337, as
amended; and
(3) The Register of Deeds of Valenzuela, Bulacan is
directed (a) to reconvey to the defendant the following
titles of the four (4) parcels of land, namely TCT Nos.
V-38878, V-38879, V-38880, and V-38881, now in the
name of plaintiff, and (b) to register the certificate of
sale dated October 7, 1994 and the Order confirming
the sale dated February 10, 1995 by a brief
memorandum thereof upon the transfer certificates of
title to be issued in the name of defendant, pursuant
to Sec. 63 (a) PD 1529, as amended.
The Omnibus Motion dated June 5, 1995, together with the
Opposition thereto, is now deemed resolved.
SO ORDERED."
4
Private respondent interposed a Motion for Reconsideration seeking the
reversal of the Order but to no avail. n its Order dated September 4, 1995,
the trial court denied the same.
To attack and challenge the aforesaid order of July 21, 1995 and
subsequent Order of September 4, 1995 of the trial court, the private
respondent filed with this court a Petition for Certiorari, Prohibition and
Mandamus, docketed as G.R. No. 121893, but absent any special and
cogent reason shown for entertaining the same, the Court referred the
petition to the Court of Appeals, for proper determination.
Docketed as G.R. No. 387457 on November 14, 1996, the Court of
Appeals gave due course to the petition and set aside the trial court's
Order dated July 21, 1995 and Order dated September 4, 1995.
n its Resolution of March 11, 1997, the Court of Appeals denied
petitioner's Motion for Reconsideration of the Decision promulgated on
November 14, 1996 in CA-G.R. No. 38747.
Undaunted, petitioner has come to this Court via the present petition,
placing reliance on the assignment of errors, that:

THE RESPONDENT COURT OF APPEALS ERRED GRAVELY

N HOLDNG THAT THE COURT OF APPEALS (TWELFTH
DVSON) N CA G.R. SP NO. 35086 HAD RESOLVED "WITH
FINALITY" THAT PETTONER HUERTA ALBA HAD NO RGHT
OF REDEMPTON BUT ONLY THE EQUTY OF
REDEMPTON.

THE RESPONDENT COURT OF APPEALS ERRED GRAVELY

N GNORNG THAT PETTONER HUERTA ALBA
POSSESSES THE ONE-YEAR RGHT OF REDEMPTON
UNDER SECTON 78, R.A. NO. 337 (THE GENERAL
BANKNG ACT).

THE RESPONDENT COURT OF APPEALS ERRED GRAVELY

N HOLDNG THAT PRVATE RESPONDENT SYNDCATED
MANAGEMENT GROUP, NC. S ENTTLED TO THE
Credit Transactions Full Text Cases Atty. Adviento!!!!"('
SSUANCE OF A WRT OF POSSESSON OVER THE
SUBJECT PROPERTY.
5

n its comment on the petition, private respondent countered that:
"A. THE HONORABLE COURT OF APPEALS CORRECTLY
HELD THAT T RESOLVED WTH FNALTY N C.A.-G.R. SP
NO. 35086 THAT PETTONER ONLY HAD THE RGHT OF
REDEMPTON N RESPECT OF THE SUBJECT
PROPERTES.
B. THE PETTON S AN NSDOUS AND UNDERHANDED
ATTEMPT TO EVADE THE FNALTY OF VAROUS
DECSONS, RESOLUTONS AND ORDERS WHCH HELD
THAT, PETTONER ONLY POSSESSES THE EQUTY OF
REDEMPTON N RESPECT OF THE SUBJECT
PROPERTES.
C. PETTONER S BARRED BY ESTOPPEL FROM
BELATEDLY RASNG THE SSUE OF TS ALLEGED 'RGHT
OF REDEMPTON. HDAEC
D. N HOLDNG THAT THE PETTONER HAD THE 'RGHT OF
REDEMPTON' OVER THE SUBJECT PROPERTES, THE
TRAL COURT MADE A MOCKERY OF THE 'LAW OF THE
CASE."'
6

And by way of Reply, petitioner argued, that:
.
THE COURT OF APPEALS N CA G.R. SP NO. 35086 COULD
NOT HAVE POSSBLY RESOLVED THEREN WHETHER
WTH FNALTY OR OTHERWSE - THE SSUE OF
PETTONER HUERTA ALBA'S RGHT OF REDEMPTON
UNDER SECTON 78, R.A. NO. 337.
.
THERE S NO ESTOPPEL HERE. PETTONER HUERTA ALBA
NVOKED TS RGHT OF REDEMPTON UNDER SECTON 78,
R.A. NO. 337 N TMELY FASHON, i.e., AFTER
CONFRMATON BY THE COURT OF THE FORECLOSURE
SALE, AND WTHN ONE (1) YEAR FROM THE DATE OF
REGSTRATON OF THE CERTFCATE OF SALE.
.
THE PRNCPLE OF 'THE LAW OF THE CASE' HAS
ABSOLUTELY NO BEARNG HERE:
(1)
THE RGHT OF REDEMPTON UNDER SECTON 78, R.A. NO.
337 S N FACT PREDCATED UPON THE FNALTY AND
CORRECTNESS OF THE DECSON N CVL CASE NO. 89-
5424.
(2)
THUS, THE RTC'S ORDER RECOGNZNG PETTONER
HUERTA ALBA'S RGHT OF REDEMPTON UNDER SECTON
78, R.A. NO. 37 DOES NOT N ANY WAY HAVE THE EFFECT
OF AMENDNG, MODFYNG, OR SETTNG ASDE THE
DECSON N CVL CASE NO. 89-5424.
The above arguments and counter-arguments advanced relate to the
pivotal issue of whether or not the petitioner has the one-year right of
redemption of subject properties under Section 78 of Republic Act No. 337
otherwise known as the General Banking Act.
The petition is not visited by merit.
Petitioner's assertion of right of redemption under Section 78 of Republic
Act No. 337 is premised on the submission that the Court of Appeals did
not resolve such issue in CA-G.R. SP No. 35086; contending thus:
(1)
BY NO STRETCH OF LOGC CAN THE 20 MARCH 1995
RESOLUTON N CA G.R. SP NO. 35086 BE NTERPRETED
TO MEAN THE COURT OF APPEALS HAD RESOLVED 'WTH
FNALTY' THE SSUE OF WHETHER PETTONER HUERTA
ALBA HAD THE RGHT OF REDEMPTON WHEN ALL THAT
THE RESOLUTON DD WAS TO MERELY NOTE THE
MOTON FOR CLARFCATON.
(2)
THE 20 MARCH 1995 RESOLUTON N CA G.R. SP NO. 35086
S NOT A FNAL JUDGMENT, ORDER OR DECREE. T S NOT
EVEN A JUDGMENT OR ORDER TO BEGN WTH. T
ORDERS NOTHNG; T ADJUDCATES NOTHNG.
(3)
PETTONER HUERTA ALBA'S RGHT OF REDEMPTON
UNDER SECTON 78, R.A. NO. 37 WAS NOT AN SSUE AND
WAS NOT N SSUE, AND COULD NOT HAVE POSSBLY
BEEN AN SSUE NOR N SSUE, N CA G.R. SP NO. 35086.
(4)
THE 30 SEPTEMBER 1994 DECSON N CA G.R. SP NO.
35086 HAVNG ALREADY BECOME FNAL EVEN BEFORE
THE FLNG OF THE MOTON FOR CLARFCATON, THE
COURT OF APPEALS NO LONGER HAD ANY JURSDCTON
TO ACT OF THE MOTON OR ANY OTHER MATTER N CA
G.R. SP NO. 35086, EXCEPT TO MERELY NOTE THE
MOTON. EASHa
.
N STARK CONTRAST, THE SSUE OF PETTONER HUERTA
ALBA'S RGHT OF REDEMPTON UNDER SECTON 78, R.A.
NO. 337 WAS DRECTLY RASED AND JONED BY THE
PARTES, AND THE SAME DULY RESOLVED BY THE TRAL
COURT.
.
THE RGHT OF REDEMPTON UNDER SECTON 78 OF R.A.
NO. 337 S MANDATORY AND AUTOMATCALLY EXSTS BY
LAW. THE COURTS ARE DUTY-BOUND TO RECOGNZE
SUCH RGHT.
V.
EQUTABLE CONSDERATONS WEGH HEAVLY N FAVOR
OF PETTONER HUERTA ALBA, NOT THE LEAST OF WHCH
S THE WELL-SETTLED POLCY OF THE LAW TO AD
RATHER THAN DEFEAT THE RGHT OF REDEMPTON.
V.
Credit Transactions Full Text Cases Atty. Adviento!!!!"((
THEREFORE THE 21 JULY 1995 AND 04 SEPTEMBER 1995
ORDERS OF THE TRAL COURT ARE VALD AND PROPER N
ACCORDANCE WTH THE MANDATE OF THE LAW.
From the various decisions, resolutions and orders a quo it can be
gleaned that what petitioner has been adjudged to have was only the
equity of redemption over subject properties. On the distinction between
the equity of redemption and right of redemption, the case of Gregorio Y.
Limpin vs. Intermediate Appellate Court,
7
comes to the fore. Held the
Court in the said case:
"The equity of redemption is, to be sure, different from and
should not be confused with the right of redemption.
The right of redemption in relation to a mortgage understood
in the sense of a prerogative to re-acquire mortgaged property
after registration of the foreclosure sale exists only in the case
of the extrajudicial foreclosure of the mortgage. No such right is
recognized in a judicial foreclosure except only where the
mortgagee is the Philippine National Bank or a bank or banking
institution.
Where a mortgage is foreclosed extrajudicially, Act 3135 grants
to the mortgagor the right of redemption within one (1) year from
the registration of the sheriff's certificate of foreclosure sale.
Where the foreclosure is judicially effected, however, no
equivalent right of redemption exists. The law declares that a
judicial foreclosure sale 'when confirmed be an order of the
court. . . . shall operate to divest the rights of all the parties to
the action and to vest their rights in the purchaser, subject to
such rights of redemption as may be allowed by law.' Such
rights exceptionally 'allowed by law' (i.e., even after confirmation
by an order of the court) are those granted by the charter of the
Philippine National Bank (Acts No. 2747 and 2938), and the
General Banking Act (R.A. 337). These laws confer on the
mortgagor, his successors in interest or any judgment creditor of
the mortgagor, the right to redeem the property sold on
foreclosure after confirmation by the court of the foreclosure
sale which right may be exercised within a period of one (1)
year, counted from the date of registration of the certificate of
sale in the Registry of Property.
But, to repeat, no such right of redemption exists in case of
judicial foreclosure of a mortgage if the mortgagee is not the
PNB or a bank or banking institution. n such a case, the
foreclosure sale, 'when confirmed by an order of the court. . .
shall operate to divest the rights of all the parties to the action
and to vest their rights in the purchaser.' There then exists only
what is known as the equity of redemption. This is simply the
right of the defendant mortgagor to extinguish the mortgage and
retain ownership of the property by paying the secured debt
within the 90-day period after the judgment becomes final, in
accordance with Rule 68, or even after the foreclosure sale but
prior to its confirmation.
Section 2, Rule 68 provides that
'. . f upon the trial . . the court shall find the facts set forth in the
complaint to be true, it shall ascertain the amount due to the
plaintiff upon the mortgage debt or obligation, including interest
and costs, and shall render judgment for the sum so found due
and order the same to be paid into court within a period of not
less than ninety (90) days from the date of the service of such
order, and that in default of such payment the property be sold
to realize the mortgage debt and costs.'
This is the mortgagor's equity (not right) of redemption which, as
above stated, may be exercised by him even beyond the 90-day
period 'from the date of service of the order,' and even after the
foreclosure sale itself, provided it be before the order of
confirmation of the sale. After such order of confirmation, no
redemption can be effected any longer."
8
(Emphasis supplied)
Petitioner failed to seasonably invoke its purported right under Section 78
of R.A. No. 337.
Petitioner avers in its petition that the ntercom, predecessor in interest of
the private respondent, is a credit institution, such that Section 78 of
Republic Act No. 337 should apply in this case. Stated differently, it is the
submission of petitioner that it should be allowed to redeem subject
properties within one year from the date of sale as a result of the
foreclosure of the mortgage constituted thereon.
The pivot of inquiry here therefore, is whether the petitioner seasonably
invoked its asserted right under Section 78 of R.A. No. 337 to redeem
subject properties.
Petitioner theorizes that it invoked its "right" in "timely fashion", that is,
after confirmation by the court of the foreclosure sale, and within one (1)
year from the date of registration of the certificate of sale. ndeed, the facts
show that it was only on May 2, 1995 when, in opposition to the Motion for
ssuance of Writ of Possession, did petitioner file a Motion to Compel
Private Respondent to Accept Redemption, invoking for the very first time
its alleged right to redeem subject properties under to Section 78 of R.A.
No. 337.
n light of the aforestated facts, it was too late in the day for petitioner to
invoke a right to redeem under Section 78 of R.A. No. 337. Petitioner
failed to assert a right to redeem in several crucial stages of the
proceedings.
For instance, on September 7, 1994, when it filed with the trial court an
Ex-part Motion for Clarification, petitioner failed to allege and prove that
private respondent's predecessor in interest was a credit institution and
therefore, Section 78 of R.A. No. 337 was applicable. Petitioner merely
asked the trial court to clarify whether the sale of subject properties was
execution sale or judicial foreclosure sale.
So also, when it presented before the trial court an Exception to the Order
and Motion to Set Aside Said Order dated October 13, 1994, petitioner
again was silent on its alleged right under Section 78 of R.A. No. 337,
even as it failed to show that private respondent's predecessor in interest
is a credit institution. Petitioner just argued that the aforementioned Order
materially altered the trial court's Decision of April 30, 1992.
Then, too, nothing was heard from petitioner on its alleged right under
Section 78 of R.A. No. 337 and of the predecessor in interest of private
respondent as a credit institution, when the trial court came out with an
order on February 10, 1995, confirming the sale of subject properties in
favor of private respondent and declaring that all pending incidents with
respect to the Order dated September 26, 1994 had become moot and
academic.
Similarly, when petitioner filed on February 27, 1995 a Motion for
Clarification with the Court of Appeals, seeking "clarification" of the date of
commencement of the one (1) year redemption period for the subject
properties, petitioner never intimated any alleged right under Section 78 of
R.A. No. 337 nor did it invite attention to its present stance that private
respondent's predecessor-in-interest was a credit institution.
Consequently, in its Resolution dated March 20, 1995, the Court of
Appeals ruled on the said motion thus:
"But we never made any pronouncement on the one-year right
of redemption of petitioner because, in the first place, the
foreclosure in this case is judicial, and as such. the mortgagor
has only the equity. not the right of redemption . . . While it may
be true that under Section 78 of R.A. 337 as amended,
otherwise known as the General Banking Act, a mortgagor of a
bank, banking or credit institution, whether the foreclosure was
done judicially or extrajudicially, has a period of one year from
the auction sale within which to redeem the foreclosed property,
the question of whether the Syndicated Management Group.
Inc., is bank or credit institution was never brought before us
squarely, and it is indeed odd and strange that petitioner would
now sarcastically ask a rhetorical question in its motion for
clarification."
9
(Emphasis supplied).
Credit Transactions Full Text Cases Atty. Adviento!!!!"()
f petitioner were really acting in good faith, it would have ventilated before
the Court of Appeals in CA-G.R. No. 35086 its alleged right under Section
78 of R.A. No. 337; but petitioner never did do so.
ndeed, at the earliest opportunity, when it submitted its answer to the
complaint for judicial foreclosure, petitioner should have alleged that it was
entitled to the beneficial provisions of Section 78 of R.A. No. 337 but
again, it did not make any allegation in its answer regarding any right
thereunder. t bears stressing that the applicability of Section 78 of R.A.
No. 337 hinges on the factual question of whether or not private
respondent's predecessor in interest was a credit institution. As was held
in Limpin, a judicial foreclosure sale, "when confirmed by an order of the
court, . . shall operate to divest the rights of all the parties to the action and
to vest their rights in the purchaser, subject to such rights of redemption as
may be allowed by law',"
10
which confer on the mortgagor, his successors
in interest or any judgment creditor of the mortgagor, the right to redeem
the property sold on foreclosure after confirmation by the court of the
judicial foreclosure sale. Thus, the claim that petitioner is entitled to the
beneficial provisions of Section 78 of R.A. No. 337 since private
respondent's predecessor-in-interest is a credit institution is in the
nature of a compulsory counterclaim which should have been averred in
petitioner's answer to the compliant for judicial foreclosure.
". . . A counterclaim is, most broadly, a cause of action existing
in favor of the defendant against the plaintiff. More narrowly, it is
a claim which. if established, will defeat or in some way qualify a
judgment or relief to which plaintiff is otherwise entitled It is
sometimes defined as any cause of action arising in contract
available against any action also arising in contract and existing
at the time of the commencement of such an action. t is
frequently defined by the codes as a cause of action arising out
of the contract or transaction set forth in the complaint as the
foundation of the plaintiff's claim, or connected with the subject
of the action."
11
(emphasis supplied)
"The counterclaim is in itself a distinct and independent cause of
action, so that when properly stated as such, the defendant
becomes, in respect to the matters stated by him, an actor, and
there are two simultaneous actions pending between the same
parties, wherein each is at the same time both a plaintiff and a
defendant. Counterclaim is an offensive as well as a defensive
plea and is not necessarily confined to the justice of the
plaintiff's claim. It represents the right of the defendant to have
the claims of the parties counterbalanced in whole or in part,
and judgment to be entered in excess, if any. A counterclaim
stands on the same footing, and is to be tested be the same
rules, as if it were an independent action."
12
(emphasis supplied)
The very purpose of a counterclaim would have been served had
petitioner alleged in its answer its purported right under Section 78 of R.A.
No. 337:
". . . The rules of counterclaim are designed to enable the
disposition of a whole controversy of interested parties'
conflicting claims, at one time and in one action, provided all
parties' be brought before the court and the matter decided
without prejudicing the rights of any party."
13

The failure of petitioner to seasonably assert its alleged right under
Section 78 of R.A. No. 337 precludes it from so doing at this late stage
case. Estoppel may be successfully invoked if the party fails to raise the
question in the early stages of the proceedings.
14
Thus, "a party to a case
who failed to invoked his claim in the main case, while having the
opportunity to do so, will be precluded, subsequently, from invoking his
claim, even if it were true, after the decision has become final, otherwise
the judgment may be reduced to a mockery and the administration of
justice may be placed in disrepute."
15

All things viewed in proper perspective, it is decisively clear that the trial
court erred in still allowing petitioner to introduce evidence that private
respondent's predecessor-in-interest was a credit institution, and to
thereafter rule that the petitioner was entitled to avail of the provisions of
Section 78 of R.A. No. 337. n effect, the trial court permitted the petitioner
to accomplish what the latter failed to do before the Court of Appeals, that
is, to invoke its alleged right under Section 78 of R.A. No. 337 although the
Court of Appeals in CA-G.R. no. 35086 already found that 'the question of
whether the Syndicated Management Council Group, nc. is a bank or
credit institution was never brought before (the Court of Appeals)
squarely." The said pronouncement by the Court of Appeals unerringly
signified that petitioner did not make a timely assertion of any right under
Section 78 of R.A. No. 337 in all the stages of the proceedings below.
Verily, the petitioner has only itself to blame for not alleging at the outset
that the predecessor-in-interest of the private respondent is a credit
institution. Thus, when the trial court, and the Court of Appeals repeatedly
passed upon the issue of whether or not petitioner had the right of
redemption or equity of redemption over subject properties in the
decisions, resolutions and orders, particularly in Civil Case no. 89-5424,
CA-G.R. CV No. 39243, CA-G.R. SP No. 35086, and CA-G.R. SP No.
38747, it was unmistakable that the petitioner was adjudged to just have
the equity of redemption without any qualification whatsoever, that is,
without any right of redemption allowed by law.
The "law of case" holds that petitioner has the equity of
redemption without any qualification.
There is, therefore, merit in private respondent's contention that to allow
petitioner to belatedly invoke its right under Section 78 of R.A. No. 337 will
disturb the "law of the case." However, private respondent's statement of
what constitutes the "law of the case" is not entirely accurate. The "law of
the case" is not simply that the defendant possesses an equity of
redemption. As the Court has stated, the "law of the case" holds that
petitioner has the equity of the redemption without any qualification
whatsoever, that is, without the right of redemption afforded by Section 78
of R.A. No. 337. Whether or not the "law of the case" is erroneous is
immaterial, it still remains the "law of the case". A contrary rule will
contradict both the letter and spirit of the rulings of the Court of Appeals in
CA-G.R. SP No. 35086, CA-G.R. CV No. 39243, and CA-G.R. 38747,
which clearly saw through the repeated attempts of petitioner to forestall
so simple a matter as making the security given for a just debt to answer
for its payment.
Hence, in conformity with the ruling in Limpin, the sale of the subject
properties, as confirmed by the Order dated February 10, 1995 of the trial
court in Civil Case No. 89-5424 operated to divest the rights of all the
parties to the action and to vest their rights in private respondent. There
then existed only what is known as the equity of redemption, which is
simply the right of the petitioner to extinguish the mortgage and retain
ownership of the property by paying the secured debt within the 90-day
period after the judgment became final. There being an explicit finding on
the part of the Court of Appeals in its Decision of September 30, 1994 in
CA-G.R. No. 35086 that the herein petitioner failed to exercise its equity
of redemption within the prescribed period, redemption can no longer be
effected. The confirmation of the sale and the issuance of the transfer
certificates of title covering the subject properties to private respondent
was then, in order. The trial court therefore, has the ministerial duty to
place private respondent in the possession of subject properties.
WHEREFORE, the petition is DENED, and the assailed decision of the
Court of Appeals, declaring null and void the Order dated 21 July 1995
and Order dated 4 September 1997 of the Regional Trial Court of Makati
City in Civil Case No. 89-5424, AFFRMED. No pronouncement as to
costs.
SO ORDERED.
SECOND DVSON
[G.R. No. 143896. July 8, 2005]
BANCO FLPNO SSAVNGS AND MORTGAGE BANK, Petitioner, vs.
COURT OF APPEALS and SANTAGO (sabela) MEMORAL PARK, NC.,
Respondents.
D E C S O N
Credit Transactions Full Text Cases Atty. Adviento!!!!"(*
AUSTRA-MARTNEZ, J.:
Before us is a petition for review on certiorari filed by petitioner seeking to
annul the Decision[1] of the Court of Appeals (CA) dated March 31, 2000
in CA-G.R. CV No. 47044, which reversed the Order of the trial court
dated May 10, 1994, dismissing private respondent's complaint for failure
to state a cause of action; and the Resolution dated July 3,
2000[2]chanroblesvirtuallawlibrary
denying petitioner's motion for reconsideration.
On December 20, 1993, private respondent Santiago (sabela) Memorial
Park, nc. filed a complaint for redemption and specific performance with
the Regional Trial Court of Santiago, sabela, Branch 21, against herein
petitioner Banco Filipino Savings & Mortgage Bank, the material and
relevant allegations of which read as follows:
COMPLANT
Plaintiff, by counsel, to this Honorable Court most respectfully alleges:
1. .
2. .
3. That in February 1981, plaintiff mortgaged the above described property
in favor of defendant to secure a loan of P500,000.00 obtained by plaintiff
from defendant;
4. That due to the failure of plaintiff to pay the aforementioned loan,
defendant foreclosed the mortgage and in consequence thereof Sheriff
David R. Medina of this Honorable Court issued a SHERFF'S
CERTFCATE OF SALE in favor of defendant which is dated October 9,
1990 and which instrument was inscribed at the back of TCT T-128647 of
sabela on January 21, 1991;
5. That in a letter of the President of plaintiff dated August 6, 1991, plaintiff
made manifest its interest to exercise its right of redemption and made an
offer of P700,000.00 as redemption to defendant through the then Deputy
Liquidator, ROSAURO NAPA; this started the negotiation for the
redemption of the above described property;
6. That in a letter of the Deputy Liquidator dated January 23, 1992, plaintiff
was given up to the end of March 1992 to negotiate and make special
arrangement for any satisfactory plan of payment for the redemption;
7. That in a letter of the Deputy Liquidator dated March 12, 1992, plaintiff
was directed to remit at least P50,000.00 to defendant which would
manifest the interest and willingness of plaintiff to redeem the property,
and forthwith on March 24, 1992, plaintiff remitted the sum of P50,000.00
to defendant which was duly receipted by the latter under Official Receipt
No. 279968 A dated March 24, 1992;
8. That in a letter of the President of plaintiff dated January 20, 1993,
plaintiff amended its first offer and made an offer of P1,000,000.00 as
redemption which offer included a plan of payment;
9. That between January 20, 1993 to November 1993, plaintiff exerted
earnest efforts in order to finally effect the redemption, but defendant dilly
dallied on the matter.
10. That in a letter of Atty. ORLANDO O. SAMSON, Senior Vice President
of defendant, dated November 5, 1993, there is a turn-around by
defendant and is now demanding P5,830,000.00 as purchase price of the
property, instead of the original agreed redemption;
11. That the delay of the defendant in the finalization of the terms of
redemption did not in any manner alter the right of plaintiff to redeem the
property from defendant;
12. That plaintiff is still in actual possession of the property and intend to
remain in actual possession of the property, while defendant was never in
actual possession of said property;
13. That plaintiff is ready and willing to pay the redemption money, which
is the total bank claim of P925,448.17 plus lawful interest and other
allowable expenses incident to the foreclosure proceedings:
14. That the latest actuations of defendant are indicative of the refusal of
defendant to allow the exercise of redemption by herein plaintiff, reason for
which there is a need for judicial determination of the rights and
obligations of the parties to this case;
15. That on account of the unlawful actuations of defendant in refusing the
redemption of the property by plaintiff, the latter engaged the services of
counsel for a fee of P30,000.00 which defendant should pay to plaintiff.
WHEREFORE, it is respectfully prayed of this Honorable Court that, after
due hearing, judgment be rendered:
a. ordering defendant to accept from plaintiff the lawful
redemption amount which shall be determined by this
Honorable Court;
b. ordering defendant to execute the necessary instrument in
order to effect the redemption of the property;
c. ordering defendant to pay to plaintiff the sum of P30,000.00
by way of attorney's fees;
AND PLANTFF PRAYS for further reliefs just and equitable under the
premises.
Petitioner filed a motion to dismiss on the ground that the complaint does
not state a cause of action. t alleges that assuming that the allegations in
the complaint are true and correct, still there was no redemption effected
within one year from the date of registration of the sheriff's certificate of
sale with the Register of Deeds on January 21, 1991, thus private
respondent had lost its right to redeem the subject land. Petitioner claimed
that the letter cited in paragraph 5 of the complaint was a mere offer to
redeem the property which was promptly answered by a letter dated
August 28, 1991, which categorically denied private respondent's offer and
stated that when it comes to redemption, the basis of payment is the total
claim of the bank at the time the property was foreclosed plus 12% thereof
and all litigation expenses attached thereto or its present appraised value
whichever is higher; that the letter mentioned in paragraph 6 of the
complaint dated January 23, 1992 of the Deputy Liquidator was about
negotiation and special arrangement and not redemption for at that stage
the period of redemption had already expired; that the letter mentioned in
paragraph 7 dated March 12, 1992 was of the postponement of the
consolidation of the subject property and not of any extension for the
period of redemption; that the amount of P50,000.00 remitted by private
respondent was in consideration of the postponement of the consolidation
of the property in petitioner's name and as manifestation of private
respondent's sincerity to repurchase the foreclosed property; that when
private respondent remitted P50,000.00, the Deputy Liquidator of
petitioner bank requested the legal counsel of petitioner to defer
consolidation of property in petitioner's name; that in a letter dated
November 5, 1993, petitioner's Senior Vice President declared that the
subject property is available for repurchase in the amount of
P5,830,600.00 to which private respondent in another letter asked for an
extension of 30 days to make an offer.
Private respondent filed its opposition to the motion to dismiss alleging
among others that the complaint states a cause of action; that the annexes
of the motion to dismiss should not be considered in the resolution of such
motion.
On May 10, 1994, the trial court rendered an Order[3] dismissing the
complaint. t ratiocinated that (1) the letter dated August 6, 1991 was an
offer to redeem for P700,000.00 without any tender of the money; (2) the
reply letter of petitioner dated August 28, 1991 stated that the redemption
Credit Transactions Full Text Cases Atty. Adviento!!!!")+
price is P1,146,837.81 representing the bank's claim of P925,448.17 plus
12% interest and expenses of foreclosure or the appraised value which
was P1,457,650.00; (3) the March 12, 1992 letter of the petitioner
categorically informed private respondent that the period for redemption
had expired, however, the bank agreed to postpone the consolidation of
title of the land in the bank's name up to the end of March 1992 if the
plaintiff shall deposit P50,000.00 in order to avoid consolidation. Under
Section 6 of Act 3135, on redemption of foreclosed property, it is provided
that a debtor may redeem the property at anytime within one year from
and after the date of sale, i.e., one year period to be reckoned from the
registration of the sheriff's certificate of sale. The registration of sheriff's
sale was on January 21, 1991 so that the redemption period was until
January 21, 1992; that although there was an offer to redeem the property
for P700,000.00 on August 6, 1991, which was within the redemption
period, there was no tender of redemption price and the P700,000.00
offered was not the correct redemption price. t found that the complaint
did not state that private respondent tendered the correct redemption price
within the redemption period as required under Section 30 of Rule 39 of
the Rules of Court. Private respondent's motion for reconsideration was
denied in an Order dated July 25, 1994.[4]chanroblesvirtuallawlibrary
Private respondent filed its appeal with the CA which reversed the trial
court in its assailed decision, the dispositive portion of which reads:
WHEREFORE, the Orders of the respondent trial court dated May 10,
1994, and July 25, 1994 are hereby REVERSED and SET ASDE. The
appellants are declared entitled to repurchase the property in question
within THRTY (30) days from notice hereof which shall be effected upon
payment of the repurchase price of P925,448.17 less P50,000.00, which is
the deposit on the redemption price, with legal interest from March 24,
1992, the time the contract extending the period of redemption of the
property took effect until it is fully paid.[5]chanroblesvirtuallawlibrary
The CA ruled that:
A perusal of the allegations in the complaint shows that there was
sufficient basis to make out a case against Banco Filipino. The complaint
alleged that as early as August 6, 1991 or about six (6) months before the
statutory period for redemption would expire, the appellant had exerted
earnest efforts to effect the redemption of the property in question and that
after an agreement had been reached by the parties, with the
corresponding deposit on the redemption price had been given by the
appellant, the appellee bank led the appellant to believe that the appellee
was negotiating with the former in good faith. However, the true intention
of the appellee bank was to refuse the redemption of the property as
manifested by its act of increasing the amount of the redemption price
after the period for redemption had expired and after a deposit on the
redemption price had been duly accepted by it as evidenced by a receipt
issued by the appellee.
Even assuming however that the appellant is now barred from exercising
its right of redemption, yet it can still repurchase the property in question
based on a new contract entered into between the parties extending the
period within which to purchase the property as evidenced by the
appellee's Deputy Liquidator Rosauro Napa's letter to Belen Jocson dated
March 12, 1992 and the letter addressed to Atty. German M. Balot, Legal
Counsel, Banco Filipino ' Santiago, sabela dated April 7, 1992.
. . .
n the case of Philippine National Bank vs. Court of Appeals, the Court
held: ndeed under Article 1482 of the Civil Code, earnest money given in
a sale transaction is considered part of the purchase price and proof of the
perfection of the sale. This provision, however, gives no more than a
disputable presumption that prevails in the absence of contrary or rebuttal
evidence. n the instant case, the letter-agreements themselves are the
evidence of an intention on the part of herein private parties to enter into
negotiations leading to a contract of sale that is mutually acceptable as to
absolutely bind them to the performance of their obligations thereunder.
The letter-agreements are replete with substantial condition precedents,
acceptance of which on the part of private respondent must first be made
in order for petitioner to proceed to the next step in the negotiations.
. . . [6]
n compliance with the CA decision, private respondent on April 27, 2000,
made a tender of payment and consignation with the CA in the amount of
P1,300,987.96 through a Philippine National Bank check which was duly
receipted by the appellate court. [7]
Hence, the herein petition for review on certiorari filed by petitioner
alleging that the appellate court erred in holding that (1) the allegations in
the complaint of private respondent against petitioner are sufficient to
constitute a cause of action for redemption and specific performance; and
(2) respondent was entitled to repurchase back from petitioner it's
foreclosed property for only P925,448.17.
The basic issue is whether private respondent's complaint for redemption
and specific performance states a cause of action against petitioner.
t is a well-settled rule that the existence of a cause of action is determined
by the allegations in the complaint.[8] n resolving a motion to dismiss
based on the failure to state a cause of action, only the facts alleged in the
complaint must be considered. The test is whether the court can render a
valid judgment on the complaint based on the facts alleged and the prayer
asked for.[9] ndeed, the elementary test for failure to state a cause of
action is whether the complaint alleges facts which if true would justify the
relief demanded. Only ultimate facts and not legal conclusions or
evidentiary facts, which should not be alleged in the complaint in the first
place, are considered for purposes of applying the test.
[10]chanroblesvirtuallawlibrary
Based on the allegations in the complaint, we find that private respondent
has no cause of action for redemption against petitioner.
Paragraph 4 of the complaint states:
4. That due to the failure of plaintiff to pay the aforementioned loan,
defendant foreclosed the mortgage and in consequence thereof Sheriff
David R. Medina of this Honorable Court issued a SHERFF'S
CERTFCATE OF SALE in favor of defendant which is dated October 9,
1990 and which instrument was inscribed at the back of TCT T-128647 of
sabela on January 21, 1991;
The sheriff's certificate of sale was registered on January 21, 1991.
Section 6 of Act 3135 provides for the requisites for a valid redemption,
thus:
SEC. 6. n all cases in which an extrajudicial sale is made under the
special power hereinbefore referred to, the debtor, his successors in
interest or any judicial creditor or judgment creditor of said debtor, or any
person having a lien on the property subsequent to the mortgage or deed
of trust under which the property is sold, may redeem the same at any
time within the term of one year from and after the date of sale; and such
redemption shall be governed by the provisions of sections four hundred
and sixty-four to four hundred and sixty-six, inclusive, of the Code of Civil
Procedure,[11] insofar as these are not inconsistent with the provisions of
this Act.
However, considering that petitioner is a banking institution, the
determination of the redemption price is governed by Section 78 of the
General Banking Act which provides:
n the event of foreclosure, whether judicially or extrajudicially, of any
mortgage on real estate which is security for any loan granted before the
passage of this Act or under the provisions of this Act, the mortgagor or
debtor whose real property has been sold at public auction, judicially or
extrajudicially, for the full or partial payment of an obligation to any bank,
banking or credit institution, within the purview of this Act shall have the
right, within one year after the sale of the real estate as a result of the
foreclosure of the respective mortgage, to redeem the property by paying
the amount fixed by the court in the order of execution, or the amount due
under the mortgage deed, as the case may be, with interest thereon at the
rate specified in the mortgage, and all the costs, and judicial and other
expenses incurred by the bank or institution concerned by reason of the
execution and sale and as a result of the custody of said property less the
income received from the property.
Credit Transactions Full Text Cases Atty. Adviento!!!!")"
Clearly, the right of redemption should be exercised within the specified
time limit, which is one year from the date of registration of the certificate
of sale. The redemptioner should make an actual tender in good faith of
the full amount of the purchase price as provided above, i.e., the amount
fixed by the court in the order of execution or the amount due under the
mortgage deed, as the case may be, with interest thereon at the rate
specified in the mortgage, and all the costs, and judicial and other
expenses incurred by the bank or institution concerned by reason of the
execution and sale and as a result of the custody of said property less the
income received from the property.
n case of disagreement over the redemption price, the redemptioner may
preserve his right of redemption through judicial action which in every case
must be filed within the one-year period of redemption.[12] The filing of the
court action to enforce redemption, being equivalent to a formal offer to
redeem, would have the effect of preserving his redemptive rights and
'freezing the expiration of the one-year period. n this case, the period of
redemption expired on January 21, 1992. The complaint was filed on
December 20, 1992.
Moreover, while the complaint alleges that private respondent made an
offer to redeem the subject property on August 6, 1991, which was within
the period of redemption, it is not alleged in the complaint that there was
an actual tender of payment of the redemption price as required by the
rules. t was alleged that private respondent merely made an offer of
P700,000.00 as redemption price, which however, as stated under
paragraph 13 of the same complaint, the redemption money was the total
bank claim of P925,448.17 plus lawful interest and other allowable
expenses incident to the foreclosure proceedings. Thus, the offer was
even very much lower than the price paid by petitioner as the highest
bidder in the auction sale.
n BPI Family Savings Bank, Inc. vs. Veloso,[13] we held:
The general rule in redemption is that it is not sufficient that a person
offering to redeem manifests his desire to do so. The statement of
intention must be accompanied by an actual and simultaneous tender of
payment. This constitutes the exercise of the right to repurchase.
. . .
Whether or not respondents were diligent in asserting their willingness to
pay is irrelevant. Redemption within the period allowed by law is not a
matter of intent but a question of payment or valid tender of the full
redemption price within said period.
Although the letter dated January 23, 1992 gave private respondent up to
the end of March 1992, to negotiate and make special arrangement for a
satisfactory plan of payment for the redemption, there was no categorical
allegation in the complaint that the original period of redemption had been
extended. Assuming arguendo that the period for redemption had been
extended, i.e., up to end of March 1992, still private respondent failed to
exercise its right within said period. This is shown by private respondent's
allegation under paragraph 8 of its complaint that in a letter dated January
20, 1993, private respondent's President amended his first offer and made
an offer of P1 million as redemption price. Notably, such offer was made
beyond the end of the March 1992 alleged extended period. Thus, private
respondent has no more right to seek redemption by force of law which
petitioner was bound to accept.
We find that the CA also erred in stating that assuming appellant is now
barred from exercising its right of redemption, it can still repurchase the
property in question based on a new contract entered into between the
parties extending the period within which to purchase the property.
The allegations in the complaint do not show that a new contract was
entered into between the parties. The March 12, 1992 letter referred to by
the CA as well as in the complaint only directed private respondent to
remit at least P50,000.00 to petitioner as a manifestation of the former's
interest and willingness to redeem the property. Thus, the P50,000.00
remitted by private respondent was only the first step to show its interest in
redeeming the property. n no way did it establish that a contract of sale,
as found by the CA, had been perfected and that the P50,000.00 remitted
by private respondent is considered as earnest money.
Article 1475 of the Civil Code provides:
The contract of sale is perfected at the moment there is a meeting of
minds upon the thing which is the object of the contract and upon the
price.
From that moment, the parties may reciprocally demand performance,
subject to the provisions of the law governing the form of contracts.
There was no showing in the complaint that private respondent and
petitioner had already agreed on the purchase price of the foreclosed
property. n fact, the allegations in paragraphs 8 to 10 of the complaint
show otherwise, thus:
8. That in a letter of the President of plaintiff dated January 20,
1993, plaintiff amended its first offer and made an offer of
P1,000,000.00 as redemption which offer included a plan of
payment;
9. That between January 20, 1993 to November 1993, plaintiff
exerted earnest efforts in order to finally effect the redemption, but
defendant dilly dallied on the matter.
10. That in a letter of Atty. ORLANDO O. SAMSON, Senior Vice
President of defendant, dated November 5, 1993, there is a turn-
around by defendant and is now demanding P5,830,000.00 as
purchase price of the property, instead of the original agreed
redemption;
The complaint does not allege that there was already a meeting of the
minds of the parties.
Based on the foregoing, there is no basis for the order of the CA to allow
private respondent to repurchase the foreclosed property in the amount of
P925,448.17 plus the expenses incurred in the sale of the property,
including the necessary and useful expenses made on the thing sold.
WHEREFORE, the decision of the Court of Appeals dated March 31, 2000
is hereby REVERSED and SET ASDE. The Order of the Regional Trial
Court of Santiago, sabela, Branch 21, dated May 10, 1994 in Civil Case
No. 2036 dismissing the complaint for redemption and specific
performance is RENSTATED and AFFRMED.
SO ORDERED.
FRST DVSON
G.R. No. 129644 September 7, 2001
CHINA BANKING CORPORATION, petitioner,
vs.
HON. COURT OF APPEALS, PAULINO ROXAS CHUA and KIANG
MING CHU CHUA, respondents.
R E S O L U T I O N
YNARES-SANTIAGO, J.:
Private respondents Paulino Roxas Chua and Kiang Ming Chu Chua have
filed before this Court a Motion for Reconsideration of the Decision dated
March 7, 2000, the dispositive portion of which reads:
WHEREFORE, the petition is GRANTED. The decision of the
Court of Appeals in CA-G.R. CV No. 46735 is REVERSED and
SET ASIDE. The permanent injunction enjoining petitioner, the
Credit Transactions Full Text Cases Atty. Adviento!!!!")#
Sheriff of Manila, the Register of Deeds of San Juan, their
officers, representatives, agents and persons acting on their
behalf from causing the transfer of possession, ownership and
title of the property covered by TCT No. 410603 in favor of
petitioner is LIFTED. The Assignment of Rights to Redeem
dated November 21, 1988 executed by Alfonso Roxas Chua in
favor of Paulino Roxas Chua is ordered RESCINDED. The levy
on execution dated February 4, 1991 and the Certificate of Sale
dated April 30, 1992 in favor of petitioner are DECLARED
VALID against the one-half portion of the subject property.
SO ORDERED.
Briefly, the facts are restated as follows:
By virtue of the adverse decision of the Regional Trial Court of Manila,
Branch 46, in Civil Case No. 82-14134, entitled "Metropolitan Bank and
Trust Company v. Pacific Multi Commercial Corporation and Alfonso
Roxas Chua," the residential land covered by Transfer Certificate of Title
No. 410603 in the name of spouses Alfonso Roxas Chua and Kiang Ming
Chu Chua was levied on execution. Kiang Ming Chu Chua filed an action
questioning the levy on the ground that the land was conjugal partnership
property. This resulted in a compromise agreement to the effect that the
levy shall be valid only to the extent of the share pertaining to Alfonso
Roxas Chua. Accordingly, an alias notice of levy was issued affecting the
said undivided portion of the property. After the execution sale, a
certificate of sale was executed in favor of Metrobank, the judgment
creditor, and the same was annotated on TCT No. 410603 on December
22, 1987.
Meanwhile, China Banking Corporation filed a complaint for sum of money
against Pacific Multi Agro-ndustrial Corporation and Alfonso Roxas Chua,
docketed as Civil Case No. 85-31257 of the Regional Trial Court of Manila,
Branch 29. On November 7, 1985, judgment was rendered ordering
defendants to pay Chinabank the aggregate amount of P2,500,000.00
plus interests, penalties and attorney's fees. Defendants appealed to the
Court of Appeals but the same was dismissed for failure to file appellants'
brief. Thus, notice of levy on execution was issued on February 4, 1991
against the right and interest of Alfonso Roxas Chua in TCT No. 410603.
The same was later sold at public auction and a certificate of sale was
executed in favor of Chinabank, and inscribed on TCT 410603 on May 4,
1992.
Previously, however, on November 21, 1988, Alfonso Roxas Chua
executed in favor of his son, Paulino Roxas Chua, an "Assignment of
Right to Redeem," pertaining to his right to redeem the undivided
portion of the land sold to Metrobank. On January 11, 1989, Paulino
redeemed the property from Metrobank. On March 14, 1989, the
Assignment of Right to Redeem and the redemption by Paulino Roxas
Chua of the property from Metrobank were annotated on TCT No. 410603.
Private respondents Paulino Roxas Chua and Kiang Ming Chu Chua filed
Civil Case No. 63199 before the Regional Trial Court of Pasig, Branch
163, alleging that Paulino has a prior and better right over Chinabank
inasmuch as the assignment to him of the right to redeem and his
redemption of Alfonso's share in the property were inscribed on the title on
an earlier date than the annotation of the notice of levy and certificate of
sale in favor of Chinabank. Both the trial court and the Court of Appeals
ruled in favor of private respondents and enjoined Chinabank, the Sheriff
of Manila and the Register of Deeds of San Juan from causing the transfer
of possession, ownership and certificate of title, or otherwise disposing of
the property covered by TCT No. 410603 in favor of Chinabank or any
other person.
On March 7, 2000, we rendered the now assailed Decision reversing the
judgment of the Court of Appeals and rescinding the Assignment of Right
to Redeem executed by Alfonso in favor of Paulino Roxas Chua, for
having been entered into in fraud of creditors.
n their Motion for Reconsideration, private respondents raise the following
grounds:
2.1. The Decision, with due respect, failed to consider vital facts
showing that the assignment was indubitably:
[a] for valuable consideration; and
[b] n good faith;
which if considered, would result in a complete reversal.
2.2. The dispositive portion of the decision rescinding the
assignment of the right to redeem and validating the levy on
execution dated April 30, 1992 in favor of petitioner, with due
respect, cannot be enforced because:
[a] rescission is late; and
[b] levy on execution was on the wrong property.
2.3. The Petition was invalid and failed to vest the Honorable
Court with the jurisdiction to review the decision by the Court of
Appeals.
1

Petitioner filed its Comment,
2
and private respondents filed their Reply with
leave of Court.
3

Under their first ground, private respondents argue that there was
sufficient evidence to overthrow the presumption that the assignment of
the right to redeem was in fraud of creditors. After a re-examination of the
evidence, we agree with private respondents.
ndeed, Article 1387 of the Civil Code provides that alienations made by a
debtor by gratuitous title are presumed fraudulent when the donor did not
reserve sufficient property to pay his outstanding debts. Likewise,
alienations by onerous title are presumed fraudulent when made by
persons against whom some judgment has been rendered or some writ of
attachment has been issued. These, however, are mere presumptions
which are in no way conclusive. The presumption of fraud can be
overthrown by evidence showing that the conveyance was made in good
faith and for a sufficient and valuable consideration.
4

n the case at bar, private respondents sufficiently established that the
conveyance was made in good faith and for valuable consideration.
Paulino maintains that he had no knowledge of his father Alfonso's
financial problem with petitioner Chinabank until he was about to cause
the cancellation of TCT No. 410603.
5
Furthermore, he paid the sum of
P100,000.00 to Alfonso for the right to redeem,
6
and paid the redemption
amount of P1,463,375.39 to Metrobank.
7

Expectedly, petitioner refutes these, saying that the amounts paid by
Paulino were grossly disproportionate to the right to redeem the property,
which is a residential house and lot located in North Greenhills, San Juan,
Metro Manila. But as correctly pointed out by private respondents, the
amount of P100,000.00 paid by Paulino to Alfonso was not for the property
itself, but merely for the right to redeem the same. As a matter of fact,
Paulino still had to pay Metrobank the redemption price of P1,463,375.39.
Whether or not the latter amount was adequate is beyond the scope of this
inquiry. Suffice it to state that Metrobank accepted the same and
reconveyed the property to Paulino. Moreover, only Alfonso's conjugal
share in the property was affected, and the determination of its value was
still subject to liquidation of debts and charges against the conjugal
partnership.
t must be emphasized that the reconsideration of our earlier Decision on
this score does not depart from well-settled doctrines and jurisprudence.
Rather, it entailed merely a re-evaluation of the evidence on record.
Going now to the second ground, private respondent points out that the
dispositive portion of our Decision can not be executed without affecting
the rights of Metrobank inasmuch as Alfonso's right of redemption, which
he assigned to Paulino, only had a lifetime of twelve months from the date
Credit Transactions Full Text Cases Atty. Adviento!!!!")$
of registration of the certificate of sale in favor of Metrobank. The
rescission of the assignment of the right to redeem would have had the
effect of allowing the twelve-month period of redemption to lapse, and thus
confer on Metrobank the right to consolidate ownership over the property
and to the execution of the sheriff's final deed of sale.
The certificate of sale in favor of Metrobank was registered on December
22, 1987. Under the 1964 Rules of Court which were in effect at that time,
the judgment debtor or redemptioner had the right to redeem the property
from Metrobank within twelve months
8
from the date of registration of the
certificate of sale.
9
Chinabank was a redemptioner, being then a creditor
with a lien by judgment on the property sold, subsequent to the judgment
under which the property was sold.
10

Upon the expiration of the twelve-month period of redemption and no such
redemption is made, the purchaser shall be entitled to the final deed of
sale over the property sold on execution.
Deed and possession to be given at expiration of redemption
period. By whom executed or given. --- f no redemption be
made within twelve (12) months after the sale, the purchaser, or
his assignee, is entitled to a conveyance and possession of the
property; or, if so redeemed, whenever sixty (60) days have
elapsed and no other redemption has been made, and notice
thereof given, and the time for redemption has expired, the last
redemptioner, or his assignee, is entitled to the conveyance and
possession; but in all cases the judgment debtor shall have the
entire period of twelve (12) months from the date of the sale to
redeem the property. The deed shall be executed by the officer
making the sale or by his successor in office, and in the latter
case shall have the same validity, as though the officer making
the sale had continued in office and executed it.
Upon the execution and delivery of said deed, the purchaser, or
redemptioner, or his assignee, shall be substituted to and
acquire all the right, title, interest and claim of the judgment
debtor to the property as of the time of the levy, except as
against the judgment debtor in possession, in which case the
substitution shall be effective as of the date of the deed. The
possession of the property shall be given to the purchaser or
last redemptioner by the same officer unless a third party is
actually holding the property adversely to the judgment debtor.
11

Hence, at the time Chinabank levied on Alfonso Roxas Chua's share in
TCT No. 410603 on February 4, 1991, the said property was no longer his.
The same had already been acquired by Metrobank and, later, redeemed
by Paulino Roxas Chua. Even without the assignment of the right to
redeem to Paulino, the subject share in the property would pertain to
Metrobank. Either way, Chinabank would not stand to acquire the same. t
is an established doctrine that a judgment creditor only acquires at an
execution sale the identical interest possessed by the judgment debtor in
the property which is the subject of the sale. t follows that if, at the time of
the execution sale, the judgment debtor had no more right to or interest in
the property because he had already sold it to another, then the purchaser
acquires nothing.
12

Otherwise stated, the rescission of the assignment of the right to redeem
would have nullified Paulino's redemption of the property. Thus,
Metrobank's inchoate right to the property would have become complete
as of December 1988, when the twelve-month redemption period expired
without the right of redemption having been exercised.
As stated above, Chinabank was a redemptioner that could redeem the
property from Metrobank. t was a judgment creditor with a lien on the
property sold subsequent to the judgment under which the property was
sold. Hence, what Chinabank could have done was to redeem the
property ahead of Paulino. n the alternative, it could have moved for the
rescission of the assignment to Paulino of the right to redeem, but within
the twelve-month period of redemption. Beyond that, there would be no
more right of redemption and, thus, no more assignment to rescind.
Assuming that there was no valid assignment of the right to redeem,
Paulino, as the son and compulsory heir of Alfonso, could still redeem his
father's share in the property from Metrobank. Under Rule 39, Section
29 (a) of the 1964 Rules of Court, the judgment debtor or his successor in
interest may redeem real property sold on execution. Paulino is included
within the term "successor in interest."
The "successor-in-interest" contemplated by the above provisions includes
a person to whom the judgment debtor has transferred his right of
redemption, or one to whom he has conveyed his interests in the property
for purposes of redemption, or one who succeeds to his property by
operation of law, or a person with a joint interest in the property, or his
spouse or heirs. A compulsory heir to the judgment debtor qualifies as a
successor-in-interest who can redeem property sold on execution.
13

n Director of Lands v. Lagniton,
14
we held that "the right of a son, with
respect to the property of a father or mother, is an inchoate or contingent
interest, because upon the death of the father or the mother or both, he
will have a right to inherit said conjugal property. f any holder of an
inchoate interest is a successor in interest with right to redeem a property
sold on execution, then the son is such a successor in interest, as he has
an inchoate right to the property of his father."
Thus, Paulino's redemption on January 11, 1989 from Metrobank of the
share of Alfonso Roxas Chua in the property covered by TCT No. 410603,
with or without the execution of the "Assignment of Right to Redeem", was
valid. Necessarily, therefore, the said property no longer belonged to
Alfonso Roxas Chua on February 4, 1991, when notice of levy was made
against him pursuant to the judgment in Civil Case No. 85-31257 in favor
of Chinabank. Petitioner should have levied on other properties of Alfonso
Roxas Chua.
Finally, it is not disputed that the property covered by TCT No. 410603 is a
family home occupied by Kiang Ming Chu Chua and her children. The levy
and execution sale in favor of Metrobank affected the undivided share
thereof. n the instant petition, Chinabank prays that the assignment to
Paulino of Alfonso's right to redeem be declared null and void and that the
levy in its favor on the undivided portion of the property be declared
valid. Ultimately, petitioner Chinabank's objective is to acquire ownership
of the undivided portion of the property. However, the acquisition by
Chinabank, or Metrobank for that matter, of the said portion will create an
absurd co-ownership between a bank, on the one hand, and a family, on
the other hand, of the latter's family home.
The rigid and technical application of the Rules may be relaxed in order to
avoid an absurd result. After all, the Rules of Court mandates that a liberal
construction of the Rules be adopted in order to promote their object and
to assist the parties in obtaining just, speedy and inexpensive
determination of every action and proceeding. This rule of construction is
especially useful in the present case where adherence to the letter of the
law would result in absurdity and manifest injustice.
15

Therefore, we affirm the decision of the Court of Appeals in CA-G.R. CV
No. 46735, except the awards of moral and exemplary damages, which
are deleted. There is no proof of private respondents' physical or mental
suffering as a result of petitioner's acts. Likewise, petitioner does not
appear to have acted in a malevolent or oppressive manner towards
private respondents. However, petitioner should be liable for the attorney's
fees incurred by private respondents, since its act of resisting private
respondents' causes of action compelled private respondents to litigate.
WHEREFORE, in view of the foregoing, our Decision dated March 7, 2000
is RECONSDERED AND SET ASDE. The decision of the Court of
Appeals in CA-G.R. CV No. 46735 is AFFRMED with MODFCATON.
Petitioner is ordered to pay private respondents the sum of P100,000.00
as attorney's fees and to pay the costs. Petitioner China Banking
Corporation, the Sheriff of Manila, and the Register of Deeds of San Juan,
Metro Manila, their officers, representatives, agents or persons acting on
their behalf, are PERMANENTLY ENJONED from causing the transfer of
possession, ownership and title, or from otherwise disposing, of the
property covered by Transfer Certificate of Title No. 410603 in favor of
petitioner China Banking Corporation or to any other person acting on its
behalf. The Register of Deeds of San Juan, Metro Manila is ordered to
CANCEL all annotations on TCT No. 410603 in favor of China Banking
Corporation pursuant to Civil Case No. 85-31257.1wphi1.nt
SO ORDERED.
Credit Transactions Full Text Cases Atty. Adviento!!!!")%
THIRD DIVISION
G.R. No. 141974 August 9, 2004
BPI FAMILY SAVINGS BANK, INC., petitioner,
vs.
SPS. JANUARIO ANTONIO VELOSO AND NATIVIDAD VELOSO,
respondents.
D E C I S I O N
CORONA, J.:
Before us is a petition for review of the decision
1
dated February 14, 2000
of the Court of Appeals affirming the decision of the Regional Trial Court,
Branch 94, Quezon City,
2
which upheld the validity of the extra-judicial
foreclosure proceedings initiated by Family Bank and Trust Company
(Family Bank) on the mortgaged properties of respondent spouses
Januario Antonio Veloso and Natividad Veloso but allowed the latter to
redeem the same properties.
On January 8, 1983, respondent spouses obtained a loan of P1,300,000
from petitioner's predecessor-in-interest Family Bank and Trust Company.
To secure payment of the loan, respondent spouses executed in favor of
the bank a deed of mortgage over three parcels of land, with
improvements, registered in their names under TCT Nos. 272227, 272228
and 272229 of the Registry of Deeds of Quezon City.
On February 9, 1983, respondents, for value received, executed a
promissory note for P1,300,000. Subsequently, however, respondents
defaulted in the monthly installments due on their loan. When efforts to
update the account failed, Family Bank instituted extra-judicial foreclosure
proceedings on the respondents' mortgaged properties.
On July 1, 1985, the properties were sold at public auction with Family
Bank as the highest bidder for P2,782,554.66.
On August 5, 1985, Family Bank assigned all its rights and interests in the
foreclosed properties to petitioner BP Family Bank, nc. (BP).
On August 28, 1985, the sheriff's certificate of sale was registered with the
Registry of Deeds of Quezon City.
On July 24, 1986, respondents, through counsel, wrote BP offering to
redeem the foreclosed properties for P1,872,935. This was, however,
rejected by petitioner.
On August 27, 1986, respondents filed in the RTC of Quezon City, Branch
94, a complaint for annulment of foreclosure, with consignation and prayer
for damages. On motion of respondents, the trial court, in an order dated
August 27, 1986, allowed respondents to deposit with the clerk of court the
sum of P1,500,000 representing the redemption price. Thereafter, trial on
the merits ensued.
Meanwhile, in Branch 76 of the Regional Trial Court of Quezon City, BP
was able to secure a writ of possession over the foreclosed properties.
This prompted respondents to file with the Court of Appeals a petition for
certiorari with preliminary injunction docketed as CA-G.R. SP No. 22681.
On October 8, 1990, the Court of Appeals resolved to grant respondents'
motion for preliminary mandatory injunction.
Eventually, however, in a decision promulgated on May 31, 1991, the
Court of Appeals, in CA-G.R. SP No. 22681, resolved the issue of
possession in favor of BP and accordingly lifted the preliminary
mandatory injunction it had earlier issued, denying altogether respondents'
petition. From this decision, respondents came to this Court via a petition
for review which was, however, denied in a resolution dated January 13,
1992. The resolution affirmed, in effect, petitioner's right to the possession
of the subject properties.
On December 16, 1992, upon motion of respondents and despite the
opposition of petitioner, Branch 94 ordered the release of P1,400,000 of
the consigned amount to respondents, with the balance of P100,000 to
take the place of the injunction bond to answer for whatever damages
petitioner might suffer because of the issuance of the preliminary
injunction (previously issued and later lifted) in favor of respondents.
Finally, on August 18, 1995, after almost a decade of protracted litigation,
the trial court rendered a decision declaring the validity of the extra-judicial
foreclosure of the mortgaged properties of respondents but allowed the
redemption of the same at a redemption price of P2,140,000.
BP elevated the matter to the Court of Appeals which affirmed the trial
court's decision, with modification:
WHEREFORE, subject to the modification declaring
P2,678,639.80 as the redemption price due the appellant, the
decision appealed from is hereby AFFRMED in all other
respects.
3

Hence, the instant petition based on the following assigned errors:

THE HONORABLE COURT OF APPEALS DECDED A

QUESTON OF SUBSTANCE N A WAY NOT N ACCORD
WTH LAW AND THE APPLCABLE DECSONS OF THS
HONORABLE COURT WHEN T AFFRMED THE DECSON
OF THE TRAL COURT AND ALLOWED THE RESPONDENTS
TO REDEEM THE FORECLOSED PROPERTY.

ASSUMNG FOR THE SAKE OF ARGUMENT, BUT WTHOUT

ADMTTNG, THAT THE HONORABLE COURT OF APPEALS
DD NOT ERR N AFFRMNG THE DECSON OF THE TRAL
COURT, NEVERTHELESS T DECDED A QUESTON OF
SUBSTANCE N A WAY NOT N ACCORD WTH LAW AND
THE APPLCABLE DECSONS OF THS HONORABLE
COURT WHEN T FXED THE REDEMPTON PRCE TO BE
PAD BY RESPONDENTS TO PETTONER AT ONLY
P2,678,639.80 AND SHALL ONLY EARN 1% PER MONTH
UNDER SECTON 28, RULE 39 OF THE 1997 RULES OF
CVL PROCEDURE.
The fact is that, at the time of the foreclosure sale on July 1, 1985,
respondent spouses Veloso had already defaulted on their loan to
petitioner's predecessor-in-interest family bank. n a real estate mortgage,
when the principal obligation is not paid when due, the mortgagee has the
right to foreclose on the mortgage and to have the property seized and
sold, and to apply the proceeds to the obligation.
4
foreclosure is proper if
the debtor is in default in the payment of his obligation.
5
and in this case,
the validity of the extra-judicial foreclosure on July 1, 1985 was confirmed
by both the trial court and the court of appeals. We find no reason to
question it.
The sole question therefore that remains to be resolved is: did respondent
spouses comply with all the requirements for the redemption of the subject
properties?
We answer in the negative.
The general rule in redemption is that it is not sufficient that a person
offering to redeem manifests his desire to do so. The statement of
intention must be accompanied by an actual and simultaneous tender of
payment. This constitutes the exercise of the right to repurchase.
6
Credit Transactions Full Text Cases Atty. Adviento!!!!")&
n several cases
7
decided by the Court where the right to repurchase was
held to have been properly exercised, there was an unequivocal tender of
payment for the fuII amount of the repurchase price. Otherwise, the offer
to redeem is ineffectual.
8
Bona fide redemption necessarily implies a
reasonable and valid tender of the entire repurchase price, otherwise the
rule on the redemption period fixed by law can easily be circumvented. As
explained by this Court in Basbas vs. Entena:
9
x x x the existence of the right of redemption operates to
depress the market value of the land until the period expires,
and to render that period indefinite by permitting the tenant to
file a suit for redemption, with either party unable to foresee
when final judgment will terminate the action, would render
nugatory the period of two years fixed by the statute for making
the redemption and virtually paralyze any efforts of the
landowner to realize the value of his land. No buyer can be
expected to acquire it without any certainty as to the amount for
which it may be redeemed, so that he can recover at least his
investment in case of redemption. n the meantime, the
landowner's needs and obligations cannot be met. t is doubtful
if any such result was intended by the statute, absent clear
wording to that effect.
Consequently, in this case, the offer by respondents on July 24, 1986 to
redeem the foreclosed properties for P1,872,935 and the subsequent
consignation in court of P1,500,000 on August 27, 1986, while made within
the period
10
of redemption, was ineffective since the amount offered and
actually consigned not only did not include the interest but was in fact also
way below the P2,782,554.66 paid by the highest bidder/purchaser of the
properties during the auction sale.
n Bodiongan vs. Court of Appeals,
11
we held:
n order to effect a redemption, the judgment debtor must pay
the purchaser the redemption price composed of the following:
(1) the price which the purchaser paid for the property; (2)
interest of 1% per month on the purchase price; (3) the amount
of any assessments or taxes which the purchaser may have
paid on the property after the purchase; and (4) interest of 1%
per month on such assessments and taxes x x x.
Furthermore, Article 1616 of the Civil Code of the Philippines provides:
The vendor cannot avail himself of the right to repurchase
without returning to the vendee the price of the sale x x x.
t is not difficult to understand why the redemption price should either be
fully offered in legal tender or else validly consigned in court. Only by such
means can the auction winner be assured that the offer to redeem is being
made in good faith.
The sum of P1,400,000 consigned by respondents in Branch 94 was
subsequently withdrawn by them, leaving only P100,000 to take the place
of the injunction bond. This would have been tantamount to requiring
petitioner to accept payment by installments as there would have
necessarily been an indefinite extension of the redemption period.
12
f a
partial payment can bind the winning bidder or purchaser in an auction
sale, by what rule can the payment of the balance be determined?
Petitioner could not be expected to entertain an offer of redemption without
any assurance that respondents could pay the repurchase price
immediately. A contrary rule would leave the buyers at foreclosure sales
open to harassment by expectedly angry debtors and cause unnecessary
prolongation of the redemption period, contrary to the policy of the law.
Whether or not respondents were diligent in asserting their willingness to
pay is irrelevant. Redemption within the period allowed by law is not a
matter of intent but a question of payment or valid tender of the full
redemption price within said period.
The disposition of the instant case in the trial court unnecessarily dragged
for almost a decade. Now, it is on its 18
th
year and still respondents have
not tendered the full redemption price. Nor have they consigned the full
amount, if only to prove their willingness and ability to pay. This would
have evidenced their good faith.
The law granted respondents the right of redemption. But in so granting
that right, the law intended that their offer to redeem be valid and effective,
accompanied by an actual tender of the redemption price. Fixing a definite
term within which the property should be redeemed is meant to avoid
prolonged economic uncertainty over the ownership of the thing sold. n
the case at bar, the offer was not a legal and effective exercise of the right
of redemption contemplated by law, hence, refusal of the offer by petitioner
was completely justified.
Finally, respondents cannot argue that the law on equity should prevail.
Equity applies only in the absence of, and never against, statutory law or
judicial rules of procedure.
13
WHEREFORE, the appealed decision of the Court of Appeals is hereby
REVERSED and SET ASDE. The complaint filed by respondents, the
spouses Veloso, is hereby dismissed.
SO ORDERED.
EN BANC
G.R. No. L-15128 August 25, 1960
CECILIO DIEGO, plaintiff-appellee,
vs.
SEGUNDO FERNANDO, defendant-appellant.
Espinosa Law Offices for appellant.
N.L. Dasig and C.L. Francisco for appellee.
REYES, J.B.L., J.:
Appeal by defendant Segundo Fernando from the judgment of the Court of
First nstance of Nueva Ecija in its Civil Case No. 1694 for foreclosure of
mortgage. The appeal was originally brought to the Court of Appeals, but
was certified to us by that tribunal because it raises only questions of law.
The facts are not disputed. On May 26, 1950, the defendant Segundo
Fernando executed a deed of mortgage in favor of plaintiff Cecilio Diego
over two parcels of land registered in his name, to secure a loan P2,000,
without interest, payable within four years from the date of the mortgage
(Exhibit "A"). After the execution of the deed, possession of the mortgaged
properties were turned over to the mortagagee.
The debtor having failed to pay the loan after four years, the mortagagee
Diego made several demands upon him for payment; and as the demands
were unheeded, Diego filed this action for foreclosure of mortgage.
Defendant Fernando's defense was that the true transaction between him
and plaintiff was one of antichresis and not of mortgage; and that as
plaintiff had allegedly received a total of 120 cavans of palay from the
properties given as security, which, at the rate of P10 a cavan,
represented a value of P5,200, his debt had already been paid, with
plaintiff still owing him a refund of some P2,720.00.
The Court below, however, found that there was nothing in the deed of
mortgage Exhibit "A" to show that it was not a true contract of mortgage,
and that the fact that possession of the mortgaged properties were turned
over to the mortgagee did not alter the transaction; that the parties must
have intended that the mortgagee would collect the fruits of the mortgaged
properties as interest on his loan, which agreement is not uncommon; and
that the evidence showed that plaintiff had already received 55 cavans of
palay from the properties during the period of his possession. Whereupon,
judgment was rendered for plaintiff in the amount of P2,000, the loan he
gave the defendant, with legal interest from the filing of the action until full
payment, plus P500 as attorney's fees and the costs; and in case of
Credit Transactions Full Text Cases Atty. Adviento!!!!")'
default in payment, for the foreclosure of the mortgage. From this
judgment, defendant took the present appeal.
The main issue raised is whether the contract between the parties is one
of mortgage or of antichresis. Appellant, while admitting that the contract
Exhibit "A" shows a deed of mortgage, contends that the admitted fact that
the loan was without interest, coupled with the transfer of the possession
of the properties mortgaged to the mortgagee, reveals that the true
transaction between him and appellee was one of antichresis. As correctly
pointed out by appellee and the lower court, however, it is not an essential
requisite of a mortgage that possession of the mortgaged premises be
retained by the mortagagor (Legaspi and Salcedo vs. Celestial, 66 Phil.,
372). To be antichresis, it must be expressly agreed between creditor and
debtor that the former, having been given possession of the properties
given as security, is to apply their fruits to the payment of the interest, if
owing, and thereafter to the principal of his credit (Art. 2132, Civil Code,
Barretto vs. Barretto, 37 Phil., 234; Diaz vs. De Mendezona, 48 Phil., 666);
so that if a contract of loan with security does not stipulate the payment of
interest but provides for the delivery to the creditor by the debtor of the
property given as security, in order that the latter may gather its fruits,
without stating that said fruits are to be applied to the payment of interest,
if any, and afterwards that of the principal, the contract is a mortgage and
not antichresis (Legaspi vs. Celestial, supra). The court below, therefore,
did not err in holding that the contract Exhibit "A" is a true mortgage and
not an antichresis.
The above conclusion does not mean, however, that appellee, having
received the fruis of the properties mortgaged, will be allowed to
approprite them for himself and not be required to account for them to the
appellant. For the contract of mortgage Exhibit "A" clearly provides that the
loan of P2,000 was "without interest within four (4) years from date of this
instrument"; and there being no evidence to show that the parties had
intended to supersede such stipulation when the possession of the
mortgaged properties were turned over to the appellee by another allowing
the latter to collect, the fruits thereof as interest on the loan, the trial court
is not authorized to infer from this transfer of possession alone that the
loan was to be without interest for four years, and substituted another
giving appellee the right to receive the fruits of the mortgaged properties
as interests.
The true position of appellee herein under his contract with appellant is a
"mortgage in possession" as that term is understood in American equity
jurisprudence; that is "one who has lawfully acquired actual or constructive
possession of the premises mortgaged to him, standing upon his rights as
mortgagee and not claiming under another title, for the purpose of
enforcing his security upon such property or making its income help to pay
his debt" (Diaz vs. De Mendezona, citing 27 Cyc. 1237, 48 Phil., 666). As
such mortgagee in possession, his rights and obligations are, as pointed
out by this Court in Macapinlac vs. Gutierrez Repide (43 Phil., 770), similar
to those of an antichretic creditor:
The respective rights and obligations of the parties to a contract
of antichresis, under the Civil Code, appear to be similar and in
many respects identical with those recognized in the equity
jurisprudence of England and America as incident to the position
of a mortgagee in possession, in reference to which the
following propositions may be taken to be established, namely,
that if the mortgagee acquires possession in any lawful manner,
he is entitled to retain such possession until the indebtedness is
satisfied and the property redeemed; that the non-payment of
the debt within the term agreed does not vest the ownership of
the property in the creditor; that the general duty of the
mortgagee in possession towards the premises is that of the
ordinary prudent owner; that the mortgagee must account for
the rents and profits of the land, or its value for purposes of use
and occupation, any amount thus realized going towards the
discharge on the mortgage debt; that if the mortgage remains in
possession after the mortgage debt has been satisfied, he
becomes a trustee for the mortgagor as to the excess of the
rents and profits over such debt; and lastly, that the mortgagor
can only enforce his rights to the land by an equitable action for
an account and to redeem. (3 Pom. Eq. Jur. secs. 1215-1218)
Similarly, in Enriquez vs. National Bank, 55 Phil., 414, we ruled that a
creditor with a lien on real property who took possession thereof with the
consent of the debtor, held it as an "antichretic creditor with the right to
collect the credit with interest from the fruits, returning to the antichretic
creditor the balance, if any, after deducting the expenses," because the
fact that the debtor consented and asked the creditor to take charge of
managing his property "does not entitle the latter to appropriate to itself the
fruits thereof unless the former has expressly waived his right thereto."
n the present case, the parties having agreed that the loan was to be
without interest, and the appellant not having expressly waived his right to
the fruits of the properties mortgaged during the time they were in
appellee's possession, the latter, like an antichretic creditor, must account
for the value of the fruits received by him, and deduct it from the loan
obtained by appellant. According to the findings of the trial court, appellee
had received a net share of 55 cavans of palay out of the mortgaged
properties up to the time he filed the present action; at the rate of P9.00
per cavan (a rate admitted by the parties), the total value of the fruits
received by appellee is P495.00. Deducting this amount from the loan of
P2,000.00 received by appellant from appellee, the former has only
P1,505.00 left to pay the latter.
Appellant also claims that the lower court erred in ordering him to pay
legal interest on his indebtedness to plaintiff from the filing of the action,
since the latter is, up to the present, still in the possession of the
properties mortgaged and still enjoying the fruits. The court did not err in
so holding, since at the time the action was filed and up to the present,
appellant has not discharged his indebtedness to appellee, and the law
allows the latter, in the absence of stipulation as to payment of interest,
legal interest from the time of the debtor's default (Art. 2209, New Civil
Code, Art. 1108, old). However, appellee should be made to account for
the fruits he received from the properties mortgaged from the time of the
filing of this action until full payment by appellant, which fruits should be
deducted from the total amount due him from appellant under this
judgment.
Wherefore, the judgment of the court below is modified in the sense that
the amount of appellee's principal recovery is reduced to P1,505.00, with
an obligation on the part of appellee to render an accounting of all the
fruits received by him from the properties in question from the time of the
filing of this action until full payment, or in case of appellant's failure to pay,
until foreclosure of the mortgage thereon, the value of which fruits shall be
deducted from the total amount of his recovery. No costs in this instance.
Paras, C.J., Bengzon, Padilla, Bautista Angelo, Labrador, Concepcion,
Barrera and Gutierrez David, JJ., concur.
FRST DVSON

G.R. No. 103576 August 22, 1996
ACME SHOE, RUBBER & PLASTIC CORPORATION and CHUA PAC,
petitioners,
vs.
HON. COURT OF APPEALS, BANK OF THE PHILIPPINES and
REGIONAL SHERIFF OF CALOOCAN CITY, respondents.

VITUG, J.:p
Would it be valid and effective to have a clause in a chattel mortgage that
purports to likewise extend its coverage to obligations yet to be contracted
or incurred? This question is the core issue in the instant petition for
review on certiorari.
Petitioner Chua Pac, the president and general manager of co-petitioner
"Acme Shoe, Rubber & Plastic Corporation," executed on 27 June 1978,
for and in behalf of the company, a chattel mortgage in favor of private
respondent Producers Bank of the Philippines. The mortgage stood by
way of security for petitioner's corporate loan of three million pesos
Credit Transactions Full Text Cases Atty. Adviento!!!!")(
(P3,000,000.00). A provision in the chattel mortgage agreement was to
this effect
(c) f the MORTGAGOR, his heirs, executors or
administrators shall well and truly perform the full
obligation or obligations above-stated according to the
terms thereof, then this mortgage shall be null and
void. . . .
n case the MORTGAGOR executes subsequent
promissory note or notes either as a renewal of the
former note, as an extension thereof, or as a new
loan, or is given any other kind of accommodations
such as overdrafts, letters of credit, acceptances and
bills of exchange, releases of import shipments on
Trust Receipts, etc., this mortgage shall also stand as
security for the payment of the said promissory note
or notes and/or accommodations without the
necessity of executing a new contract and this
mortgage shall have the same force and effect as if
the said promissory note or notes and/or
accommodations were existing on the date thereof.
This mortgage shall also stand as security for said
obligations and any and all other obligations of the
MORTGAGOR to the MORTGAGEE of whatever kind
and nature, whether such obligations have been
contracted before, during or after the constitution of
this mortgage.
1
n due time, the loan of P3,000,000.00 was paid by petitioner corporation.
Subsequently, in 1981, it obtained from respondent bank additional
financial accommodations totalling P2,700,000.00.
2
These borrowings
were on due date also fully paid.
On 10 and 11 January 1984, the bank yet again extended to petitioner
corporation a loan of one million pesos (P1,000,000.00) covered by four
promissory notes for P250,000.00 each. Due to financial constraints, the
loan was not settled at maturity.
3
Respondent bank thereupon applied for
an extra judicial foreclosure of the chattel mortgage, herein before cited,
with the Sheriff of Caloocan City, prompting petitioner corporation to
forthwith file an action for injunction, with damages and a prayer for a writ
of preliminary injunction, before the Regional Trial Court of Caloocan City
(Civil Case No. C-12081). Ultimately, the court dismissed the complaint
and ordered the foreclosure of the chattel mortgage. t held petitioner
corporation bound by the stipulations, aforequoted, of the chattel
mortgage.
Petitioner corporation appealed to the Court of Appeals
4
which, on 14
August 1991, affirmed, "in all respects," the decision of the court a quo.
The motion for reconsideration was denied on 24 January 1992.
The instant petition interposed by petitioner corporation was initially dinied
on 04 March 1992 by this Court for having been insufficient in form and
substance. Private respondent filed a motion to dismiss the petition while
petitioner corporation filed a compliance and an opposition to private
respondent's motion to dismiss. The Court denied petitioner's first motion
for reconsideration but granted a second motion for reconsideration,
thereby reinstating the petition and requiring private respondent to
comment thereon.
5
Except in criminal cases where the penalty of reclusion perpetua or death
is imposed
6
which the Court so reviews as a matter of course, an appeal
from judgments of lower courts is not a matter of right but of sound judicial
discretion. The circulars of the Court prescribing technical and other
procedural requirements are meant to weed out unmeritorious petitions
that can unnecessarily clog the docket and needlessly consume the time
of the Court. These technical and procedural rules, however, are intended
to help secure, not suppress, substantial justice. A deviation from the rigid
enforcement of the rules may thus be allowed to attain the prime objective
for, after all, the dispensation of justice is the core reason for the existence
of courts. n this instance, once again, the Court is constrained to relax the
rules in order to give way to and uphold the paramount and overriding
interest of justice.
Contracts of security are either personal or real. n contracts of personal
security, such as a guaranty or a suretyship, the faithful performance of the
obligation by the principal debt or is secured by the personal commitment
of another (the guarantor or surety). n contracts of real security, such as a
pledge, a mortgage or an antichresis, that fulfillment is secured by an
encumbrance of property in pledge, the placing of movable property in
the possession of the creditor; in chattel mortgage, by the execution of the
corresponding deed substantially in the form prescribed by law; in real
estate mortgage, by the execution of a public instrument encumbering the
real property covered thereby; and in antichresis, by a written instrument
granting to the creditor the right to receive the fruits of an immovable
property with the obligation to apply such fruits to the payment of interest,
if owing, and thereafter to the principal of his credit upon the essential
condition that if the obligation becomes due and the debtor defaults, then
the property encumbered can be alienated for the payment of the
obligation,
7
but that should the obligation be duly paid, then the contract is
automatically extinguished proceeding from the accessory character
8
of
the agreement. As the law so puts it, once the obligation is complied with,
then the contract of security becomes, ipso facto, null and void.
9
While a pledge, real estate mortgage, or antichresis may exceptionally
secure after-incurred obligations so long as these future debts are
accurately described,
10
a chattel mortgage, however, can only cover
obligations existing at the time the mortgage is constituted. Although a
promise expressed in a chattel mortgage to include debts that are yet to
be contracted can be a binding commitment that can be compelled upon,
the security itself, however, does not come into existence or arise until
after a chattel mortgage agreement covering the newly contracted debt is
executed either by concluding a fresh chattel mortgage or by amending
the old contract conformably with the form prescribed by the Chattel
Mortgage Law.
11
Refusal on the part of the borrower to execute the
agreement so as to cover the after-incurred obligation can constitute an
act of default on the part of the borrower of the financing agreement
whereon the promise is written but, of course, the remedy of foreclosure
can only cover the debts extant at the time of constitution and during the
life of the chattel mortgage sought to be foreclosed.
A chattel mortgage, as hereinbefore so intimated, must comply
substantially with the form prescribed by the Chattel Mortgage
Law itself. One of the requisites, under Section 5 thereof, is an
affidavit of good faith. While it is not doubted that if such an
affidavit is not appended to the agreement, the chattel mortgage
would still be valid between the parties (not against third
persons acting in good faith
12
), the fact, however, that the
statute has provided that the parties to the contract must
execute an oath that
. . . (the) mortgage is made for the purpose of
securing the obligation specified in the conditions
thereof, and for no other purpose, and that the same
is a just and valid obligation, and one not entered into
for the purpose of fraud.
13
makes it obvious that the debt referred to in the law is a current,
not an obligation that is yet merely contemplated. n the chattel
mortgage here involved, the only obligation specified in the
chattel mortgage contract was the P3,000,000.00 loan which
petitioner corporation later fully paid. By virtue of Section 3 of
the Chattel Mortgage Law, the payment of the obligation
automatically rendered the chattel mortgage void or terminated.
n Belgian Catholic Missionaries, Inc., vs. Magallanes Press,
Inc., et al.,
14
the Court
said
. . . A mortgage that contains a stipulation in regard to
future advances in the credit will take effect only from
the date the same are made and not from the date of
the mortgage.
15
The significance of the ruling to the instant problem would be
that since the 1978 chattel mortgage had ceased to exist
coincidentally with the full payment of the P3,000,000.00 loan,
16
there no longer was any chattel mortgage that could cover the
new loans that were concluded thereafter.
Credit Transactions Full Text Cases Atty. Adviento!!!!"))
We find no merit in petitioner corporation's other prayer that the case
should be remanded to the trial court for a specific finding on the amount
of damages it has sustained "as a result of the unlawful action taken by
respondent bank against it."
1
7 This prayer is not reflected in its complaint
which has merely asked for the amount of P3,000,000.00 by way of moral
damages.
18
n LBC Express, Inc. vs. Court of Appeals,
19
we have said:
Moral damages are granted in recompense for
physical suffering, mental anguish, fright, serious
anxiety, besmirched reputation, wounded feelings,
moral shock, social humiliation, and similar injury. A
corporation, being an artificial person and having
existence only in legal contemplation, has no feelings,
no emotions, no senses; therefore, it cannot
experience physical suffering and mental anguish.
Mental suffering can be experienced only by one
having a nervous system and it flows from real ills,
sorrows, and griefs of life all of which cannot be
suffered by respondent bank as an artificial person.
20
While Chua Pac is included in the case, the complaint, however,
clearly states that he has merely been so named as a party in
representation of petitioner corporation.
Petitioner corporation's counsel could be commended for his zeal in
pursuing his client's cause. t instead turned out to be, however, a source
of disappointment for this Court to read in petitioner's reply to private
respondent's comment on the petition his so-called "One Final Word;" viz:
n simply quoting in toto the patently erroneous
decision of the trial court, respondent Court of
Appeals should be required to justify its decision
which completely disregarded the basic laws on
obligations and contracts, as well as the clear
provisions of the Chattel Mortgage Law and well-
settled jurisprudence of this Honorable Court; that in
the event that its explanation is wholly unacceptable,
this Honorable Court should impose appropriate
sanctions on the erring justices. This is one positive
step in ridding our courts of law of incompetent and
dishonest magistrates especially members of a
superior court of appellate jurisdiction.
21
(Emphasis
supplied.)
The statement is not called for. The Court invites counsel's
attention to the admonition in Guerrero vs. Villamor;
22
thus:
(L)awyers . . . should bear in mind their basic duty "to
observe and maintain the respect due to the courts of
justice and judicial officers and . . . (to) insist on
similar conduct by others." This respectful attitude
towards the court is to be observed, "not for the sake
of the temporary incumbent of the judicial office, but
for the maintenance of its supreme importance." And it
is through a scrupulous preference for respectful
language that a lawyer best demonstrates his
observance of the respect due to the courts and
judicial officers . . .
23
The virtues of humility and of respect and concern for others
must still live on even in an age of materialism.
WHEREFORE, the questioned decisions of the appellate court and the
lower court are set aside without prejudice to the appropriate legal
recourse by private respondent as may still be warranted as an unsecured
creditor. No costs.
Atty. Francisco R. Sotto, counsel for petitioners, is admonished to be
circumspect in dealing with the courts.
SO ORDERED.
EN BANC
[G.R. No. L-8133. May 18, 1956.]
MANUEL C. MANARANG and LUCIA D. MANARANG, Petitioners-
Appellants, vs. MACARIO M. OFILADA, Sheriff of the City of ManiIa
and ERNESTO ESTEBAN, Respondents-Appellees.

D E C I S I O N
LABRADOR, J.:
On September 8, 1951, Petitioner Lucia D. Manarang obtained a loan of
P200 from Ernesto Esteban, and to secure its payment she executed a
chattel mortgage over a house of mixed materials erected on a lot on
Alvarado Street, Manila. As Manarang did not pay the loan as agreed
upon, Esteban brought an action against her in the municipal court of
Manila for its recovery, alleging that the loan was secured by a chattel
mortgage on her property. Judgment having been entered in Plaintiff's
favor, execution was issued against the same property mortgaged.
Before the property could be sold Manarang offered to pay the sum of
P277, which represented the amount of the judgment of P250, the interest
thereon, the costs, and the sheriff's fees, but the sheriff refused the tender
unless the additional amount of P260 representing the publication of the
notice of sale in two newspapers be paid also. So Defendants therein
brought this suit to compel the sheriff to accept the amount of P277 as full
payment of the judgment and to annul the published notice of sale.
t is to be noted that in the complaint filed in the municipal court, a copy of
the chattel mortgage is attached and mention made of its registration, and
in the prayer request is made that the house mortgaged be sold at public
auction to satisfy the debt. t is also important to note that the house
mortgaged was levied upon at Plaintiff's request (Exhibit "E).
On the basis of the above facts counsel for Manarang contended in the
court below that the house in question should be considered as personal
property and the publication of the notice of its sale at public auction in
execution considered unnecessary. The Court of First nstance held that
although real property may sometimes be considered as personal
property, the sheriff was in duty bound to cause the publication of the
notice of its sale in order to make the sale valid or to prevent its being
declared void or voidable, and he did not, therefore, err in causing such
publication of the notice. So it denied the petition.
There cannot 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. We held so expressly in the
cases of Luna vs. Encarnacion, et al., 48 Off. Gaz., No. 7, p. 2664; chan
roblesvirtualawlibraryStandard Oil Co. of New York vs. Jaranillo, 44 Phil.,
630; chan roblesvirtualawlibraryand De Jesus vs. Guan Dee Co., nc., 72
Phil., 464. The matter depends on the circumstances and the intention of
the parties.
" cralaw The general principle of law is that a building permanently fixed to
the freehold becomes a part of it, that prima facie a house is real estate,
belonging to the owner of the land on which it stands, even though it was
erected against the will of the landowner, or without his consent cralaw .
The general rule is otherwise, however, where the improvement is made
with the consent of the landowner, and pursuant to an understanding
either expressed or implied that it shall remain personal property. Nor does
the general rule apply to a building which is wrongfully removed from the
land and placed on the land of the person removing it. (42 Am. Jur. 199-
200.)
" cralaw Among the principal criteria for determining whether property
remains personally or becomes realty are annexation to the soil, either
actual or construction, and the intention of the parties cralaw
"Personal property may retain its character as such where it is so agreed
by the parties interested even though annexed to the realty, or where it is
affixed in the soil to be used for a particular purpose for a short period and
then removed as soon as it has served its purpose cralaw . (bid., 209-
210.)
The question now before us, however, is:chanroblesvirtuallawlibrary Does
the fact that the parties entering into a contract regarding a house gave
said property the consideration of personal property in their contract, bind
the sheriff in advertising the property's sale at public auction as personal
property? t is to be remembered that in the case at bar the action was to
collect a loan secured by a chattel mortgage on the house. t is also to be
Credit Transactions Full Text Cases Atty. Adviento!!!!")*
remembered that in practice it is the judgment creditor who points out to
the sheriff the properties that the sheriff is to levy upon in execution, and
the judgment creditor in the case at bar is the party in whose favor the
owner of the house and conveyed it by way of chattel mortgage and,
therefore, knew its consideration as personal property.
These considerations notwithstanding, we hold that the rules on execution
do not allow, and we should not interpret them in such a way as to allow,
the special consideration that parties to a contract may have desired to
impart to real estate, for example, as personal property, when they are not
ordinarily so. Sales on execution affect the public and third persons. The
regulation governing sales on execution are for public officials to follow.
The form of proceedings prescribed for each kind of property is suited to
its character, not to the character which the parties have given to it or
desire to give it. When the rules speak of personal property, property
which is ordinarily so considered is meant; chan roblesvirtualawlibraryand
when real property is spoken of, it means property which is generally
known as real property. The regulations were never intended to suit the
consideration that parties, may have privately given to the property levied
upon. Enforcement of regulations would be difficult were the convenience
or agreement of private parties to determine or govern the nature of the
proceedings. We, therefore, hold that the mere fact that a house was the
subject of a chattel mortgage and was considered as personal property by
the parties does not make said house personal property for purposes of
the notice to be given for its sale at public auction. This ruling is demanded
by the need for a definite, orderly and well- defined regulation for official
and public guidance and which would prevent confusion and
misunderstanding.
We, therefore, declare that the house of mixed materials levied upon on
execution, although subject of a contract of chattel mortgage between the
owner and a third person, is real property within the purview of Rule 39,
section 16, of the Rules of Court as it has become a permanent fixture on
the land, which is real property. (42 Am. Jur. 199-200; chan
roblesvirtualawlibraryLeung Yee vs. Strong Machinery Co., 37 Phil., 644;
chan roblesvirtualawlibraryRepublic vs. Ceniza, et al., 90 Phil., 544; chan
roblesvirtualawlibraryLadera, et al. vs. Hodges, et al., [C. A], 48 Off. Gaz.,
5374.).
The judgment appealed from is hereby affirmed, with costs. SO
ORDERED.
Paras, C.J., Bengzon, PadiIIa., Montemayor, Reyes, A., Jugo, Bautista
AngeIo, Concepcion, Reyes, J.B.L. and Endencia, JJ., concur.
EN BANC

G.R. No. L-30173 September 30, 1971
GAVINO A. TUMALAD and GENEROSA R. TUMALAD, plaintiffs-
appellees,
vs.
ALBERTA VICENCIO and EMILIANO SIMEON, defendants-appellants.
Castillo & Suck for plaintiffs-appellees.
Jose Q. Calingo for defendants-appellants.

REYES, J.B.L., J.:
Case certified to this Court by the Court of Appeals (CA-G.R. No. 27824-
R) for the reason that only questions of law are involved.
This case was originally commenced by defendants-appellants in the
municipal court of Manila in Civil Case No. 43073, for ejectment. Having
lost therein, defendants-appellants appealed to the court a quo (Civil Case
No. 30993) which also rendered a decision against them, the dispositive
portion of which follows:
WHEREFORE, the court hereby renders judgment in
favor of the plaintiffs and against the defendants,
ordering the latter to pay jointly and severally the
former a monthly rent of P200.00 on the house,
subject-matter of this action, from March 27, 1956, to
January 14, 1967, with interest at the legal rate from
April 18, 1956, the filing of the complaint, until fully
paid, plus attorney's fees in the sum of P300.00 and
to pay the costs.
t appears on the records that on 1 September 1955 defendants-
appellants executed a chattel mortgage in favor of plaintiffs-appellees over
their house of strong materials located at No. 550 nt. 3, Quezon
Boulevard, Quiapo, Manila, over Lot Nos. 6-B and 7-B, Block No. 2554,
which were being rented from Madrigal & Company, nc. The mortgage
was registered in the Registry of Deeds of Manila on 2 September 1955.
The herein mortgage was executed to guarantee a loan of P4,800.00
received from plaintiffs-appellees, payable within one year at 12% per
annum. The mode of payment was P150.00 monthly, starting September,
1955, up to July 1956, and the lump sum of P3,150 was payable on or
before August, 1956. t was also agreed that default in the payment of any
of the amortizations, would cause the remaining unpaid balance to
becomeimmediately due and Payable and
the Chattel Mortgage will be enforceable in
accordance with the provisions of Special Act No.
3135, and for this purpose, the Sheriff of the City of
Manila or any of his deputies is hereby empowered
and authorized to sell all the Mortgagor's property
after the necessary publication in order to settle the
financial debts of P4,800.00, plus 12% yearly interest,
and attorney's fees...
2
When defendants-appellants defaulted in paying, the mortgage was
extrajudicially foreclosed, and on 27 March 1956, the house was sold at
public auction pursuant to the said contract. As highest bidder, plaintiffs-
appellees were issued the corresponding certificate of sale.
3
Thereafter,
on 18 April 1956, plaintiffs-appellant commenced Civil Case No. 43073 in
the municipal court of Manila, praying, among other things, that the house
be vacated and its possession surrendered to them, and for defendants-
appellants to pay rent of P200.00 monthly from 27 March 1956 up to the
time the possession is surrendered.
4
On 21 September 1956, the
municipal court rendered its decision
... ordering the defendants to vacate the premises
described in the complaint; ordering further to pay
monthly the amount of P200.00 from March 27, 1956,
until such (time that) the premises is (sic) completely
vacated; plus attorney's fees of P100.00 and the costs
of the suit.
5

Defendants-appellants, in their answers in both the municipal court and
court a quo impugned the legality of the chattel mortgage, claiming that
they are still the owners of the house; but they waived the right to
introduce evidence, oral or documentary. nstead, they relied on their
memoranda in support of their motion to dismiss, predicated mainly on the
grounds that: (a) the municipal court did not have jurisdiction to try and
decide the case because (1) the issue involved, is ownership, and (2)
there was no allegation of prior possession; and (b) failure to prove prior
demand pursuant to Section 2, Rule 72, of the Rules of Court.
6

During the pendency of the appeal to the Court of First nstance,
defendants-appellants failed to deposit the rent for November, 1956 within
the first 10 days of December, 1956 as ordered in the decision of the
municipal court. As a result, the court granted plaintiffs-appellees' motion
for execution, and it was actually issued on 24 January 1957. However,
the judgment regarding the surrender of possession to plaintiffs-appellees
could not be executed because the subject house had been already
demolished on 14 January 1957 pursuant to the order of the court in a
separate civil case (No. 25816) for ejectment against the present
defendants for non-payment of rentals on the land on which the house
was constructed.
Credit Transactions Full Text Cases Atty. Adviento!!!!"*+
The motion of plaintiffs for dismissal of the appeal, execution of the
supersedeas bond and withdrawal of deposited rentals was denied for the
reason that the liability therefor was disclaimed and was still being
litigated, and under Section 8, Rule 72, rentals deposited had to be held
until final disposition of the appeal.
7

On 7 October 1957, the appellate court of First nstance rendered its
decision, the dispositive portion of which is quoted earlier. The said
decision was appealed by defendants to the Court of Appeals which, in
turn, certified the appeal to this Court. Plaintiffs-appellees failed to file a
brief and this appeal was submitted for decision without it.
Defendants-appellants submitted numerous assignments of error which
can be condensed into two questions, namely: .
(a) Whether the municipal court from which the case
originated had jurisdiction to adjudicate the same;
(b) Whether the defendants are, under the law, legally
bound to pay rentals to the plaintiffs during the period
of one (1) year provided by law for the redemption of
the extrajudicially foreclosed house.
We will consider these questions seriatim.
(a) Defendants-appellants mortgagors question the jurisdiction of the
municipal court from which the case originated, and consequently, the
appellate jurisdiction of the Court of First nstance a quo, on the theory
that the chattel mortgage is void ab initio; whence it would follow that the
extrajudicial foreclosure, and necessarily the consequent auction sale, are
also void. Thus, the ownership of the house still remained with defendants-
appellants who are entitled to possession and not plaintiffs-appellees.
Therefore, it is argued by defendants-appellants, the issue of ownership
will have to be adjudicated first in order to determine possession. lt is
contended further that ownership being in issue, it is the Court of First
nstance which has jurisdiction and not the municipal court.
Defendants-appellants predicate their theory of nullity of the chattel
mortgage on two grounds, which are: (a) that, their signatures on the
chattel mortgage were obtained through fraud, deceit, or trickery; and (b)
that the subject matter of the mortgage is a house of strong materials, and,
being an immovable, it can only be the subject of a real estate mortgage
and not a chattel mortgage.
On the charge of fraud, deceit or trickery, the Court of First nstance found
defendants-appellants' contentions as not supported by evidence and
accordingly dismissed the charge,
8
confirming the earlier finding of the
municipal court that "the defense of ownership as well as the allegations of
fraud and deceit ... are mere allegations."
9

t has been held in Supia and Batiaco vs. Quintero and Ayala
10
that "the
answer is a mere statement of the facts which the party filing it expects to
prove, but it is not evidence;
11
and further, that when the question to be
determined is one of title, the Court is given the authority to proceed with
the hearing of the cause until this fact is clearly established. n the case of
Sy vs. Dalman,
12
wherein the defendant was also a successful bidder in
an auction sale, it was likewise held by this Court that in detainer cases
the aim of ownership "is a matter of defense and raises an issue of fact
which should be determined from the evidence at the trial." What
determines jurisdiction are the allegations or averments in the complaint
and the relief asked for.
13
Moreover, even granting that the charge is true, fraud or deceit does not
render a contract void ab initio, and can only be a ground for rendering the
contract voidable or annullable pursuant to Article 1390 of the New Civil
Code, by a proper action in court.
14
There is nothing on record to show
that the mortgage has been annulled. Neither is it disclosed that steps
were taken to nullify the same. Hence, defendants-appellants' claim of
ownership on the basis of a voidable contract which has not been voided
fails.
t is claimed in the alternative by defendants-appellants that even if there
was no fraud, deceit or trickery, the chattel mortgage was still null and void
ab initio because only personal properties can be subject of a chattel
mortgage. The rule about the status of buildings as immovable property is
stated in Lopez vs. Orosa, Jr. and Plaza Theatre nc.,
15
cited in
Associated Insurance Surety Co., Inc. vs. Iya, et al.
16
to the effect that
... it is obvious that the inclusion of the building,
separate and distinct from the land, in the
enumeration of what may constitute real properties
(art. 415, New Civil Code) could only mean one thing
that a building is by itself an immovable property
irrespective of whether or not said structure and the
land on which it is adhered to belong to the same
owner.
Certain deviations, however, have been allowed for various reasons. n the
case of Manarang and Manarang vs. Ofilada,
17
this Court stated that "it is
undeniable that the parties to a contract may by agreement treat as
personal property that which by nature would be real property", citing
Standard Oil Company of New York vs. Jaramillo.
18
n the latter case, the
mortgagor conveyed and transferred to the mortgagee by way of mortgage
"the following described personal property."
19
The "personal property"
consisted of leasehold rights and a building. Again, in the case of Luna vs.
Encarnacion,
20
the subject of the contract designated as Chattel Mortgage
was a house of mixed materials, and this Court hold therein that it was a
valid Chattel mortgage because it was so expressly designated and
specifically that the property given as security "is a house of mixed
materials, which by its very nature is considered personal property." n the
later case of Navarro vs. Pineda,
21
this Court stated that
The view that parties to a deed of chattel mortgage
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. t is based,
partly, upon the principle of estoppel" (Evangelista vs.
Alto Surety, No. L-11139, 23 April 1958). n a case, a
mortgaged 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 (Evangelists vs. Abad,
[CA]; 36 O.G. 2913), for it is now settled that an object
placed on land by one who had only a temporary right
to the same, such as the lessee or usufructuary, does
not become immobilized by attachment (Valdez vs.
Central Altagracia, 222 U.S. 58, cited in Davao
Sawmill Co., nc. vs. 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 as so stipulated in
the document of mortgage. (Evangelista vs. 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 vs. C.N. Hodges, [CA] 48 O.G.
5374):
22

n the contract now before Us, the house on rented land is not only
expressly designated as Chattel Mortgage; it specifically provides that "the
mortgagor ... voluntarily CEDES, SELLS and TRANSFERS by way of
Chattel Mortgage
23
the property together with its leasehold rights over the
lot on which it is constructed and participation ..."
24
Although there is no
specific statement referring to the subject house as personal property, yet
by ceding, selling or transferring a property by way of chattel mortgage
defendants-appellants could only have meant to convey the house as
chattel, or at least, intended to treat the same as such, so that they should
not now be allowed to make an inconsistent stand by claiming otherwise.
Moreover, the subject house stood on a rented lot to which defendats-
appellants merely had a temporary right as lessee, and although this can
not in itself alone determine the status of the property, it does so when
combined with other factors to sustain the interpretation that the parties,
particularly the mortgagors, intended to treat the house as personalty.
Finally unlike in the ya cases, Lopez vs. Orosa, Jr. and Plaza Theatre,
Inc.
25
and Leung Yee vs. F. L. Strong Machinery and Williamson,
26
wherein third persons assailed the validity of the chattel mortgage,
27
it is
Credit Transactions Full Text Cases Atty. Adviento!!!!"*"
the defendants-appellants themselves, as debtors-mortgagors, who are
attacking the validity of the chattel mortgage in this case. The doctrine of
estoppel therefore applies to the herein defendants-appellants, having
treated the subject house as personalty.
(b) Turning to the question of possession and rentals of the premises in
question. The Court of First nstance noted in its decision that nearly a
year after the foreclosure sale the mortgaged house had been demolished
on 14 and 15 January 1957 by virtue of a decision obtained by the lessor
of the land on which the house stood. For this reason, the said court
limited itself to sentencing the erstwhile mortgagors to pay plaintiffs a
monthly rent of P200.00 from 27 March 1956 (when the chattel mortgage
was foreclosed and the house sold) until 14 January 1957 (when it was
torn down by the Sheriff), plus P300.00 attorney's fees.
Appellants mortgagors question this award, claiming that they were
entitled to remain in possession without any obligation to pay rent during
the one year redemption period after the foreclosure sale, i.e., until 27
March 1957. On this issue, We must rule for the appellants.
Chattel mortgages are covered and regulated by the Chattel Mortgage
Law, Act No. 1508.
28
Section 14 of this Act allows the mortgagee to have
the property mortgaged sold at public auction through a public officer in
almost the same manner as that allowed by Act No. 3135, as amended by
Act No. 4118, provided that the requirements of the law relative to notice
and registration are complied with.
29
n the instant case, the parties
specifically stipulated that "the chattel mortgage will be enforceable in
accordance with the provisions of Special Act No. 3135 ... ."
30
(Emphasis
supplied).
Section 6 of the Act referred to
31
provides that the debtor-mortgagor
(defendants-appellants herein) may, at any time within one year from and
after the date of the auction sale, redeem the property sold at the extra
judicial foreclosure sale. Section 7 of the same Act
32
allows the purchaser
of the property to obtain from the court the possession during the period of
redemption: but the same provision expressly requires the filing of a
petition with the proper Court of First nstance and the furnishing of a
bond. t is only upon filing of the proper motion and the approval of the
corresponding bond that the order for a writ of possession issues as a
matter of course. No discretion is left to the court.
33
n the absence of such
a compliance, as in the instant case, the purchaser can not claim
possession during the period of redemption as a matter of right. n such a
case, the governing provision is Section 34, Rule 39, of the Revised Rules
of Court
34
which also applies to properties purchased in extrajudicial
foreclosure proceedings.
35
Construing the said section, this Court stated in
the aforestated case of Reyes vs. Hamada.
n other words, before the expiration of the 1-year
period within which the judgment-debtor or mortgagor
may redeem the property, the purchaser thereof is not
entitled, as a matter of right, to possession of the
same. Thus, while it is true that the Rules of Court
allow the purchaser to receive the rentals if the
purchased property is occupied by tenants, he is,
nevertheless, accountable to the judgment-debtor or
mortgagor as the case may be, for the amount so
received and the same will be duly credited against
the redemption price when the said debtor or
mortgagor effects the redemption. Differently stated,
the rentals receivable from tenants, although they
may be collected by the purchaser during the
redemption period, do not belong to the latter but still
pertain to the debtor of mortgagor. The rationale for
the Rule, it seems, is to secure for the benefit of the
debtor or mortgagor, the payment of the redemption
amount and the consequent return to him of his
properties sold at public auction. (Emphasis supplied)
The Hamada case reiterates the previous ruling in Chan vs. Espe.
36
Since the defendants-appellants were occupying the house at the time of
the auction sale, they are entitled to remain in possession during the
period of redemption or within one year from and after 27 March 1956, the
date of the auction sale, and to collect the rents or profits during the said
period.
t will be noted further that in the case at bar the period of redemption had
not yet expired when action was instituted in the court of origin, and that
plaintiffs-appellees did not choose to take possession under Section 7, Act
No. 3135, as amended, which is the law selected by the parties to govern
the extrajudicial foreclosure of the chattel mortgage. Neither was there an
allegation to that effect. Since plaintiffs-appellees' right to possess was not
yet born at the filing of the complaint, there could be no violation or breach
thereof. Wherefore, the original complaint stated no cause of action and
was prematurely filed. For this reason, the same should be ordered
dismissed, even if there was no assignment of error to that effect. The
Supreme Court is clothed with ample authority to review palpable errors
not assigned as such if it finds that their consideration is necessary in
arriving at a just decision of the cases.
37

t follows that the court below erred in requiring the mortgagors to pay
rents for the year following the foreclosure sale, as well as attorney's fees.
FOR THE FOREGONG REASONS, the decision appealed from is
reversed and another one entered, dismissing the complaint. With costs
against plaintiffs-appellees.
SECOND DVSON
G.R. No. L-58469 May 16, 1983
MAKATI LEASING and FINANCE CORPORATION, petitioner,
vs.
WEAREVER TEXTILE MILLS, INC., and HONORABLE COURT OF
APPEALS, respondents.
Loreto C. Baduan for petitioner.
Ramon D. Bagatsing & Assoc. (collaborating counsel) for petitioner.
Jose V. Mancella for respondent.

DE CASTRO, J.:
Petition for review on certiorari of the decision of the Court of Appeals
(now ntermediate Appellate Court) promulgated on August 27, 1981 in
CA-G.R. No. SP-12731, setting aside certain Orders later specified herein,
of Judge Ricardo J. Francisco, as Presiding Judge of the Court of First
instance of Rizal Branch V, issued in Civil Case No. 36040, as wen as the
resolution dated September 22, 1981 of the said appellate court, denying
petitioner's motion for reconsideration.
t appears that in order to obtain financial accommodations from herein
petitioner Makati Leasing and Finance Corporation, the private respondent
Wearever Textile Mills, nc., discounted and assigned several receivables
with the former under a Receivable Purchase Agreement. To secure the
collection of the receivables assigned, private respondent executed a
Chattel Mortgage over certain raw materials inventory as well as a
machinery described as an Artos Aero Dryer Stentering Range.
Upon private respondent's default, petitioner filed a petition for extrajudicial
foreclosure of the properties mortgage to it. However, the Deputy Sheriff
assigned to implement the foreclosure failed to gain entry into private
respondent's premises and was not able to effect the seizure of the
aforedescribed machinery. Petitioner thereafter filed a complaint for judicial
foreclosure with the Court of First nstance of Rizal, Branch V, docketed
as Civil Case No. 36040, the case before the lower court.
Acting on petitioner's application for replevin, the lower court issued a writ
of seizure, the enforcement of which was however subsequently
restrained upon private respondent's filing of a motion for reconsideration.
Credit Transactions Full Text Cases Atty. Adviento!!!!"*#
After several incidents, the lower court finally issued on February 11, 1981,
an order lifting the restraining order for the enforcement of the writ of
seizure and an order to break open the premises of private respondent to
enforce said writ. The lower court reaffirmed its stand upon private
respondent's filing of a further motion for reconsideration.
On July 13, 1981, the sheriff enforcing the seizure order, repaired to the
premises of private respondent and removed the main drive motor of the
subject machinery.
The Court of Appeals, in certiorari and prohibition proceedings
subsequently filed by herein private respondent, set aside the Orders of
the lower court and ordered the return of the drive motor seized by the
sheriff pursuant to said Orders, after ruling that the machinery in suit
cannot be the subject of replevin, much less of a chattel mortgage,
because it is a real property pursuant to Article 415 of the new Civil Code,
the same being attached to the ground by means of bolts and the only way
to remove it from respondent's plant would be to drill out or destroy the
concrete floor, the reason why all that the sheriff could do to enfore the writ
was to take the main drive motor of said machinery. The appellate court
rejected petitioner's argument that private respondent is estopped from
claiming that the machine is real property by constituting a chattel
mortgage thereon.
A motion for reconsideration of this decision of the Court of Appeals having
been denied, petitioner has brought the case to this Court for review by
writ of certiorari. t is contended by private respondent, however, that the
instant petition was rendered moot and academic by petitioner's act of
returning the subject motor drive of respondent's machinery after the Court
of Appeals' decision was promulgated.
The contention of private respondent is without merit. When petitioner
returned the subject motor drive, it made itself unequivocably clear that
said action was without prejudice to a motion for reconsideration of the
Court of Appeals decision, as shown by the receipt duly signed by
respondent's representative.
1
Considering that petitioner has reserved its
right to question the propriety of the Court of Appeals' decision, the
contention of private respondent that this petition has been mooted by
such return may not be sustained.
The next and the more crucial question to be resolved in this Petition is
whether the machinery in suit is real or personal property from the point of
view of the parties, with petitioner arguing that it is a personality, while the
respondent claiming the contrary, and was sustained by the appellate
court, which accordingly held that the chattel mortgage constituted thereon
is null and void, as contended by said respondent.
A similar, if not dentical issue was raised in Tumalad v. Vicencio, 41 SCRA
143 where this Court, speaking through Justice J.B.L. Reyes, ruled:
Although there is no specific statement referring to the
subject house as personal property, yet by ceding,
selling or transferring a property by way of chattel
mortgage defendants-appellants could only have
meant to convey the house as chattel, or at least,
intended to treat the same as such, so that they
should not now be allowed to make an inconsistent
stand by claiming otherwise. Moreover, the subject
house stood on a rented lot to which defendants-
appellants merely had a temporary right as lessee,
and although this can not in itself alone determine the
status of the property, it does so when combined with
other factors to sustain the interpretation that the
parties, particularly the mortgagors, intended to treat
the house as personality. Finally, unlike in the ya
cases, Lopez vs. Orosa, Jr. & Plaza Theatre, Inc. &
Leung Yee vs. F.L. Strong Machinery & Williamson,
wherein third persons assailed the validity of the
chattel mortgage, it is the defendants-appellants
themselves, as debtors-mortgagors, who are attacking
the validity of the chattel mortgage in this case. The
doctrine of estoppel therefore applies to the herein
defendants-appellants, having treated the subject
house as personality.
Examining the records of the instant case, We find no logical justification
to exclude the rule out, as the appellate court did, the present case from
the application of the abovequoted pronouncement. f a house of strong
materials, like what was involved in the above Tumalad case, may be
considered as personal property for purposes of executing a chattel
mortgage thereon as long as the parties to the contract so agree and no
innocent third party will be prejudiced thereby, there is absolutely no
reason why a machinery, which is movable in its nature and becomes
immobilized only by destination or purpose, may not be likewise treated as
such. This is really because one who has so agreed is estopped from
denying the existence of the chattel mortgage.
n rejecting petitioner's assertion on the applicability of the Tumalad
doctrine, the Court of Appeals lays stress on the fact that the house
involved therein was built on a land that did not belong to the owner of
such house. But the law makes no distinction with respect to the
ownership of the land on which the house is built and We should not lay
down distinctions not contemplated by law.
t must be pointed out that the characterization of the subject machinery as
chattel by the private respondent is indicative of intention and impresses
upon the property the character determined by the parties. As stated in
Standard Oil Co. of New York v. Jaramillo, 44 Phil. 630, it is undeniable
that the parties to a contract may by agreement treat as personal property
that which by nature would be real property, as long as no interest of third
parties would be prejudiced thereby.
Private respondent contends that estoppel cannot apply against it because
it had never represented nor agreed that the machinery in suit be
considered as personal property but was merely required and dictated on
by herein petitioner to sign a printed form of chattel mortgage which was in
a blank form at the time of signing. This contention lacks persuasiveness.
As aptly pointed out by petitioner and not denied by the respondent, the
status of the subject machinery as movable or immovable was never
placed in issue before the lower court and the Court of Appeals except in a
supplemental memorandum in support of the petition filed in the appellate
court. Moreover, even granting that the charge is true, such fact alone
does not render a contract void ab initio, but can only be a ground for
rendering said contract voidable, or annullable pursuant to Article 1390 of
the new Civil Code, by a proper action in court. There is nothing on record
to show that the mortgage has been annulled. Neither is it disclosed that
steps were taken to nullify the same. On the other hand, as pointed out by
petitioner and again not refuted by respondent, the latter has indubitably
benefited from said contract. Equity dictates that one should not benefit at
the expense of another. Private respondent could not now therefore, be
allowed to impugn the efficacy of the chattel mortgage after it has
benefited therefrom,
From what has been said above, the error of the appellate court in ruling
that the questioned machinery is real, not personal property, becomes very
apparent. Moreover, the case of Machinery and Engineering Supplies, Inc.
v. CA, 96 Phil. 70, heavily relied upon by said court is not applicable to the
case at bar, the nature of the machinery and equipment involved therein
as real properties never having been disputed nor in issue, and they were
not the subject of a Chattel Mortgage. Undoubtedly, the Tumalad case
bears more nearly perfect parity with the instant case to be the more
controlling jurisprudential authority.
WHEREFORE, the questioned decision and resolution of the Court of
Appeals are hereby reversed and set aside, and the Orders of the lower
court are hereby reinstated, with costs against the private respondent.
SO ORDERED.
EN BANC
G.R. No. L-19207 December 21, 1922
W. R. GIBERSON, plaintiff-appellee,
vs.
A. N. JUREIDINI BROS., INC., defendant-appellant.
Credit Transactions Full Text Cases Atty. Adviento!!!!"*$
Del Rosario and Del Rosario for appellant.
McVean and Vickers and Block, Johnston and Greenbaum for appellee.

MALCOLM, J.:
This is an appeal from a judgment rendered by the Honorable Adolph
Wislizenus, Judge of First nstance of Cebu, finding in favor of each of
plaintiff's four causes of action, and authorizing the recovery by the
plaintiff, the receiver in insolvency proceedings in civil case No. 3586, of
various goods, wares, merchandise, credits, and money transferred by H.
K. Motoomul & Co. to A. N. Jureidini Bros., nc., on May 24, 1921, and
June 13, 1921.
H. K. Motoomul & Co. was, at the times mentioned in the complaint, a
partnership doing business in the cities of Cebu and loilo. Sometime prior
to May 24, 1921, the company became financially embarrassed. A. N.
Jureidini Bros., nc., a larger creditor of Motoomul & Co., became aware of
the precarious condition of the latter, because of the diminishing payments
on account of a debt. Ultimately, Motoomul & Co. delivered to Jureidini
Brothers, on May 24, 1921, one of the debtor's loilo stores known as
Bazar Aguila de Oro. On the same day also, credits receivable belonging
to Motoomul & Co. were transferred to Jureidini Bros. Still later, on June
13, 1921, another stock of goods belonging to Motoomul & Co. passes to
Jureidini Bros. The documents evidencing these transfer appears in the
record.
Within thirty days after these assignments were made, or, to be exact, on
June 22, 1921, a number of creditors of H. K. Motoomul & Co. initiated
successfully involuntary insolvency proceedings against it. Later, action
was brought by the receiver appointed by the court, with the results above
related.
The above constitute the principal facts, which are accurately stated in the
decision of the trial court. n so far as the ten assignments of error made in
this court relate to question of fact, we may say, generally, that we agree
with the findings of the trial judge.
t would be possible to forego consideration of many of appellant's point,
because he himself announces on page 46 of the bill of exceptions, "That
the defendant has not filed the bond required by the court, because it
agrees to the judgment being executed in accordance with law, except so
far as concerns the second cause of action." We prefer, however, not to
hold appellant to this allegation or admission in his own pleadings, and
propose, therefore, to comment on the various assignments of error.
Addressing attention directly to appellant's third, fifth, sixth, and eight
assignments of error, the court clearly did not err in holding that the
transfer or assignments must be revoked, because made for the purpose
of giving A. N. Jureidini Bros., nc., preference over the other creditors of
H. K. Motoomul & Co. The provisions of section 70 of the nsolvency Law
(Act No. 1956), were placed on the statute books to cover exactly such a
situation, and to give equal rights to all of the creditors of the insolvent.
The evidence discloses that A. N. Jureidini Bros., nc. had reasonable
cause to believe that H. K. Motoomul & Co. was insolvent.
With reference to appellant's first and seventh assignments of error, no
one denies that H. K. Motoomul & Co. was indebted to A. N. Jureidini
Bros., nc., for a considerable sum of money. This reason, alone, however,
gives the creditor no right to a preference. But, in this connection,
appellant relies on Exhibit 1, which purports to be a chattel mortgage
executed in the sum of P100,000 by H. Dialdas Motoomul and A. N.
Jureidini Bros., nc., on December 1, 1919, but not registered until May 5,
1921. The operative words in the alleged mortgage make reference to the
list A, and the only description of the property contained in this list is: "1. A
store No. 79 on Magallanes Street, municipality of Cebu, formerly
belonging to T. Thakurdas, with all the merchandise, effects, wares, and
other bazar goods contained on the said store. 2. A store No. 19 on Real
Street, loilo, Panay, P. ., formerly belonging to Guillermo Asayas, with all
the merchandise, effects, wares and other bazar goods contained in the
said store." The document contains no oath as required by our Chattel
Mortgage Law.
The trial judge held, and properly, that Exhibit 1 was invalid because the
oath required by law did not appear therein, and because the subject-
matter was not described therein with sufficient particularity. The Chattel
Mortgage Law, in its section 5, in describing what shall be deemed
sufficient to constitute a good chattel mortgage, includes the requirements
of an affidavit of good faith appended to the mortgage and recorded
therewith. t has been held by reputable courts that the absence of the
affidavits vitiates a mortgage as against creditors and subsequent
encumbrancers. (People vs. Burns [1910], 161 Mich., 169; 137 A. S. R.,
466, and notes; Deseret National Bank vs. Kidman [1903], 25 Utah, 379;
95 A. S. R., 856.) Section 7 of the Chattel Mortgage Law provides that
"The description of the mortgage property shall be such as to enable the
parties to the mortgage, or any other person, after reasonable inquiry and
investigation, to identify the same." dentification of the mortgaged
property would be impossible in this case.lawphil.net
Moreover, if there should exist any doubt on the questions we have just
discussed, they should be thrashed out in the insolvency proceedings. Our
constant ruling has been that the court having possession of the property
of the insolvent has ancillary jurisdiction to hear and determine all
questions concerning the title, possession, or control of the same. (De
Amuzategui vs. Macleod [1915], 33 Phil., 80; De Krafft vs. Velez [1916], 34
Phil., 854; Mitsui Bussan Kaisha vs. Hongkong & Shanghai Banking
Corporation [1917], 36 Phil., 27.)
With reference to the proper valuation of the merchandise, which is the
subject of appellant's second and fourth assignments of error, we find
sufficient evidence in the record to support the findings of the trial court.
The documents of transfer did not accurately appraise the value of the
property.
As to the credits amounting to P16,892.72, assigned by H. K. Motoomul &
Co. to the defendant, the evidence discloses that with the possible
exception of P1,117.06 paid by Florentino Espiritu and P400 paid by
Panjoomul Fulsidas, none of the rest have been collected. Hence,
appellant's ninth assignment of error should be sustained in part. The
assignee takes the property in the same plight and condition that the
bankrupt held it. (Winsor vs. McLellan [1843], 2 Story 492; Fed. Cas. No.
17887; Stewart vs. Platt [1879], 101 U. S., 739.)
Judgment is affirmed, with the sole modification that the defendant, under
plaintiff's second cause of action, shall turn over to the plaintiff only such
portions of the credits as have been realized, but the evidences of
indebtedness shall pass to the receiver for such action as may be proper.
Without special finding as to costs in this instance, it is so ordered.
Araullo, C. J., Street, Avancea, Villamor, Ostrand, Johns, and
Romualdez, JJ., concur.
FRST DVSON
G.R. No. L-25771 March 29, 1982
URBANO JACA and BONIFACIO JACA, petitioners,
vs.
DAVAO LUMBER COMPANY and HONORABLE MANASES REYES, as
Judge of the Court of First Instance of Davao, respondents.

FERNANDEZ, J.:
This is a petition for certiorari with a prayer for a writ of preliminary
injunction filed by Urbano Jaca and Bonifacio Jaca against the Davao
Lumber Company and Honorable Manases Reyes as Judge of the Court
of First nstance of Davao seeking the following relief:
WHEREFORE, petitioners pray
1. That a writ of Preliminary njunction be immediately
issued restraining the respondent Judge from carrying
Credit Transactions Full Text Cases Atty. Adviento!!!!"*%
out or enforcing the Orders (Annexes "Z" and "FF")
complained of pending the hearing of the merits of the
instant petition;
2. After due hearing, that this Honorable Court annuls
and sets aside the complained Orders (Annexes "Z"
and "FF");
Petitioners further pray for all other reliefs which are
just and equitable in the premises.
Davao City, Philippines, February 5, 1966.
1
n November, 1963, Urbano Jaca and Bonifacio Jaca filed with the Court
of First nstance of Davao a complaint for Accounting, Return of Price
Differentials and Damages against the Davao Lumber Company. The case
was docketed as Civil Case No. 4189.
The complaint alleges that the plaintiff Urbano Jaca has been, and still is,
a licensee of a logging concession located in the City of Davao, and
together with his co-plaintiff, Bonifacio Jaca, engaged in the logging
business of producing timber and logs for export and/or domestic
purposes; that the defendant is a business corporation with which plaintiffs
had business dealings covering the sale and/or exportation of their logs;
that sometime in 1954, the herein parties-litigants entered into an
agreement whereby plaintiffs may secure, by way of advances, either cash
or materials, foodstuffs, and/or equipment's from the defendant
corporation; that the payment of such account was to be made either in
cash and/or by plaintiff's turning over all the logs that they produce in the
aforesaid concession to the defendant, and in the latter case, the current
prices, either export or domestic, of the logs at the time of their delivery
was to be considered; that while the aforesaid business relationship
between the parties was subsisting, defendant made plaintiff Urbano Jaca
execute in its favor a chattel mortgage, a copy of which instrument.
however, plaintiffs were never furnished but that as far as they can
recollect the primary conditions of such chattel mortgage were that
plaintiffs would turn over to defendant corporation all the logs they may
produce from the aforesaid concession the same to be priced either as
export or domestic and their value to be applied by defendant to, and be
credited for, the account of plaintiff's indebtedness, and further that in case
of need, plaintiffs may secure, by way of advances, either cash, foodstuffs,
materials or equipment's, under an "open credit account"; that under the
aforementioned "open credit account" relationship between the plaintiffs
and defendant, orders were secured by plaintiffs, by way of advances,
from the defendant, this to be paid by them with plaintiffs' production from
their concession, liquidating those old accounts and keeping all accounts
current; that in pursuance to the agreement, as aforestated, plaintiff
Urbano Jaca executed assignments of letters of credit in favor of the
defendant, in order that the latter may be able to use, as defendant
corporation did in fact use, the said letters of credit for bank negotiations of
the former in the exportation of logs; that the plaintiffs and the defendant
had this business relationship, as aforementioned, from 1954 up to
sometime in August, 1963; that during this whole period of time, the
plaintiffs had been faithfully delivering all their log production to the
defendant for export or domestic purposes; that before the filing of this
complaint, the plaintiff made repeated demands on the defendant for a
formal accounting of their business relationship from 1954 up to August,
1963, but that the defendant failed and refused, and still fails and refuses,
to effect such formal accounting, asserting that it had no time as yet to
examine into all the details of the accounting; that sometime on October
30, 1963, much to their surprise, plaintiffs received letters of demand from
the defendant in which they were requested to pay their accounts in favor
of defendant, which according to the latter had long been overdue;
(Copies of such letters are hereto attached marked as Annexes "A" and
"B", and made integral parts of this complaint) that plaintiffs are no longer
indebted to the defendant, and as a matter of act it is their belief that, if a
formal accounting be made, there would still appear a claim in their favor
in the amount of P250,000.00 more or less, representing the price
differentials of logs which they delivered to the defendant from 1954 up to
August, 1963; and that further, there was a deliberate fraud practiced by
the defendant on them, especially in defendant's under grading and/or
reclassification of logs delivered to it by plaintiffs; that further, there were
many errors committed in the monthly statements submitted to the
plaintiffs, arising from the fact that there were charges of cash,
equipment's, materials and foodstuffs in said statements never ordered
and/or received by the plaintiffs; and still further that the proceeds of the
letter of credit were not fully applied and/or credited to the account of
plaintiffs; that defendant has up to the present denied the plaintiffs the
benefits of a formal accounting and inasmuch as the invoices, receipts,
vouchers, requisition slips and other pertinent papers and document of
their business transactions are in the possession of defendant, it is difficult
for plaintiffs to ascertain with accuracy the ledger balance between the
parties, unless a detailed examination of the matter is had; that plaintiffs
have thereby been constrained to file this case in Court in order to compel
defendant to have a formal accounting between them, and that it is the
desire of plaintiffs that pending the formal hearing of this case, three
commissioners, constituting accountants be judicially appointed for the
purpose of examining all the books, pertinent papers and documents and
all other data in relation with their business transaction; that in order to
protect their interest and to litigate this case, the plaintiffs were compelled
to secure and retain the services of attorneys, and that they have thereby
suffered damages in the sum of Twenty Thousand Pesos (P20,000.00) by
way of attorney's fees.
2

n December, 1963, the Davao Lumber Company filed its Answer with
Affirmative Defenses and Counterclaim.
3

n its counterclaim, the Davao Lumber Company alleged that Plaintiffs
Urbano Jaca and Bonifacio Jaca are the ones indebted to the defendant in
the sum of P756,236.52 and P91,651.97, respectively; that on January 24,
1961, the plaintiff Urbano Jaca executed a chattel mortgage in favor of the
defendant to secure the payment of any and all obligations contracted by
him in favor of the defendant covering several chattels valued at
P532,000.00; that said obligation of Urbano Jaca totalling P756,236.52 is
overdue and unpaid despite repeated formal demands for settlement
thereof made by defendant; that the action brought by the plaintiffs is
purely baseless and malicious for which the plaintiffs should be required to
pay defendant damages and attorney's fees amounting to at least
P20.000.00.
4

n June, 1965, the respondent Judge rendered a decision the dispositive
portion of which reads:
CONSDERNG THE FOREGONG, judgment is
hereby rendered in favor of defendant and against the
plaintiff, ordering that:
1. The complaint for accounting, return of price
differentials and damages filed by plaintiffs Urbano
Jaca and Bonifacio Jaca versus defendant Davao
Lumber Company is dismissed, as it is hereby
dismissed;
2. Ordering Urbano Jaca to pay defendant the amount
of P756,236.52 with legal interest from the date of the
filing of the counterclaim;
3. Ordering plaintiff Bonifacio Jaca to pay defendant
the amount of P91,651.00 with legal interest;
4. Ordering that the chattel mortgage executed by
Urbano Jaca in favor of defendant Exhibit "3", be
foreclosed as it is hereby foreclosed;
5. Ordering plaintiffs to pay jointly and severally
P20,000.00 as attorney's fees in favor of defendant.
6. With cost against plaintiffs.
SO ORDERED.
Given at Davao City, on this 11th day of June, 1965.
5

n September, 1965, the Davao Lumber Company filed a motion for
execution pending appeal on the following grounds:
Credit Transactions Full Text Cases Atty. Adviento!!!!"*&
3. There are good reasons to authorize an order of
execution pending appeal pursuant to Rule 39,
Section 2 of the Rules of Court, which provides:
SEC. 2. Execution pending appeal. On motion of
the prevailing party with notice to the adverse party
the court may, in its discretion, order execution to
issue before the expiration of the. time to appeal,
upon good reasons to be stated in a special order. f a
record on appeal is filed thereafter the motion and the
special order shall be included therein.
(a) n this same civil case,, the court issued an Order
dated November 17, 1964 directing the plaintiffs 'to
deliver to the receiver all the properties, chattels and
equipment covered by the Chattel Mortgage, the
delivery to be made within thirty (30) days', but
plaintiffs did not, comply with said Order of November
17, 1964.
(b) Defendant's counsel filed a 'Motion to mplement
Order ordering Urbano Jaca to deliver Chattels to
Receiver' dated July 28, 1965, but up this date,
plaintiffs have not complied with said Order.
(c) That there are various reports from the receiver,
one of them dated April 19, 1965, stating that the
Receiver has not taken custody of the mortgaged
chattels due to the refusal or inability to mortgagor
Urbano Jaca to deliver the same to him.
(d) Despite the long lapse of time from the Order of
November 17, 1964, the court in its Order of
September 1, 1965, directed said mortgagor Urbano
Jaca to comply forthwith with the Order dated
November 17, 1964 'fifteen (15) days upon receipt of
this Order', but up to this date there has been
consistent refusal or failure to comply with said order
of delivery.
(2) Another good reason for execution pending appeal
(Rule 39, Section 2) is the fact that plaintiff Urbano
Jaca the mortgagor in the deed of chattel mortgage
dated January 24, 1961, has violated Article 319 of
the Revised Penal Code, for he has sold some of the
mortgaged properties to third persons, particularly, a
wrecker, to Teodoro M. Alagon of Davao City on
February 12, 1962 for P10,000.00. A copy of the
letter-complaint addressed by defendant's counsel to
the City Fiscal of Davao, dated February 5, 1964 is
attached hereto and made an integral part of this
Motion as Annex "A".
(3) Moreover, plaintiffs have not only failed to comply
with the Order of the Honorable Court for the delivery
of the properties under receivership to the Receiver
(par. 3 of this Motion) and in fact has violated the
Chattel Mortgage contract (Par. 4 of this Motion); but
plaintiffs have no properties or assets with which to
satisfy the judgment of this Honorable Court, which
amounts to principal items of P756,326.52,
P91,651.00 and P20,000.00, or a total of
P867,887.52.
(4) Obviously, the appeal interposed by the plaintiffs is
to delay the enforcement and/or execution of the
decision rendered by this Honorable Court, so that
when the Decision correctly rendered by this
Honorable Court should be affirmed on appeal the
judgment will become nugatory.
6

The respondent judge granted the motion for execution pending appeal in
an order dated November 29, 1965.
7
Urbano Jaca and Bonifacio Jaca filed a motion for reconsideration of the
order granting execution pending appeal in December, 1965,
8
but the
same was denied in an order dated January 10, 1966.
9

Petitioners Urbano Jaca and Bonifacio Jaca contend that the respondent
Judge acted in excess of jurisdiction and/or with grave abuse of discretion
in issuing the order granting execution pending appeal and the order
denying the motion for reconsideration of the order granting execution
pending appeal because said orders were issued in complete disregard of
the applicable provisions of the Rules of Court, the laws, and the settled
decisions of the Honorable Supreme Court.
Petitioners assail the order granting execution pending appeal and the
order denying the motion for execution pending appeal on the following
grounds:
1) granting that execution pending appeal win issue in
a foreclosure proceedings
the respondent Judge acted in excess of jurisdiction
when he considered, over the objection of petitioners,
in the motion for reconsideration of the Order granting
premature execution (Annex "AA") the alleged sale by
Florentina Perez, wife of petitioner, Urbano Jaca of
the two (2) chevrolet trucks which were not part of the
mortgaged chattels to Atty. Raul Nengasca as a
reason for execution pending appeal in his Order
(Annex "FF") denying the motion for reconsideration,
since this matter is not among the grounds stated in
the motion for execution pending appeal (Annex "X")
neither has it been brought out during the hearing of
said motion, nor is it one of the reasons stated in the
Order of execution pending appeal (Annex "Z") which
is the Order sought to be reconsidered and it is a
cardinal rule in pleadings that a motion should state
the grounds upon which it is based (Section 3, Rule
15 of the Rules of Court) and the order sought to be
obtained and that no other grounds can be
entertained, passed upon and considered by the court
over the objection of the adverse party;
2) the respondent judge acted with grave abuse of
discretion equivalent to lack of jurisdiction in finding
that there exists special or good reasons for execution
pending appeal because discretionary execution
under Section 2, Rule 39 of the Rules of Court will
only issue if there are superior circumstances
demanding urgency which outweigh the injury or
damage that the losing party may suffer upon
securing a reversal of the judgment on appeal
considering the merits of his appeal (Moran, Com. on
the Rules of Court Vol. 2, Part , 1963 ed., p. 239 and
p. 242, citing Aguilos vs. Barrios, et al. 72 Phil. 285:
Ledesma vs. Teodoro, 52 O.G. 784; De Leon, et al.
vs. Soriano, et al., L-7684, Sept. 17, 1954; City of
Bacolod vs. Enriquez, 55 O.G. p. 10545), and in the
instant case, the reasons ultimately relied upon by the
respondent Judge in granting execution pending
appeal as stated in the Order (Annex "FF"), denying
petitioners motion for reconsideration of the Order
granting execution, are not such superior
circumstances demanding urgency of execution
because:
(a) the first reason that petitioner Urbano Jaca sold a
wrecker to Teodoro M. Alagon is alleged to have been
made yet on February 12, 1962, or about over one
and half years prior to the filing of the instant case on
November 22, 1963, and such sale would not show a
fraudulent design on the part of petitioner Urbano
Jaca to defeat the judgment against him by disposing
of the mortgaged chattels and thus would demand
urgency of execution of the judgment;
Credit Transactions Full Text Cases Atty. Adviento!!!!"*'
(b) the second reason regarding the sale of the two
chevrolet trucks (not alleged to be a part of the
mortgaged chattels to the respondent Davao Lumber
Company) to Atty. Raul Nengasca does not refer to
the property of either of the petitioners, neither does it
refer to a sale made by anyone of them; rather, it
refers to a sale made by Florentina Perez (wife of
petitioner Urbano Jaca), who is not a party to the
action, regarding her own property;
(c) the third and last reason that the orders of the
court directing petitioner Urbano Jaca to deliver all the
mortgaged chattels to the receiver are valid and must
be complied with could not even be considered any
reason at all for immediate execution, as it does not
supply at all any element of a superior circumstance
requiring urgency of execution for there is, in fact, no
legal connection whatsoever in the validity of such
Orders and their compliance with the propriety of an
immediate execution of the judgment pending appeal;
furthermore, the appeal of petitioners are based on
good grounds and could never be said to be intended
merely for delay, and that the amount involved in the
judgment is huge;
3) That there are, in fact, good reasons for not
allowing execution pending appeal considering
(1) that the amount involved in the judgment is huge;
(2) that the petitioners have challenged the
Counterclaim, under which the judgment sought to be
executed is rendered, for lack of cause of action;
(3) that the petitioners have challenged the chattel
mortgage, under which the judgment of foreclosure
has been rendered, as null and void ab initio and that
no cause of action can arise therefrom;
(4) that the petitioners have challenged the
Commissioner's Report to be null and void which is
the primary, if not in fact the sole, evidence of said
respondent on its Counterclaim and upon which the
judgment sought to be executed is based;
4) no execution pending appeal, in fact, can issue on
foreclosure proceedings because the ninety-day
period provided in Section 2, Rule 68 of the Rules of
Court is a substantive right granted to the mortgagor-
debtor which may not be omitted and that upon taking
an appeal, said period is suspended and is not
revived until the judgment is affirmed by the appellate
court and the case returned to the trial court, and in
the instant case, the respondent judge acted in
excess of jurisdiction in allowing execution pending
appeal when the Counterclaim under which the
judgment sought to be executed is rendered, is for a
foreclosure of chattel mortgage and that petitioners
have taken an appeal to the judgment rendered
against them ...;
5) granting arguendo, that the foreclosure
proceedings is only against petitioner Urbano Jaca as
mortgagor, but the action against petitioner Bonifacio
Jaca is for a collection of a sum of money, the
respondent Judge acted with grave abuse of
discretion equivalent to lack of jurisdiction in allowing
execution pending appeal as against said petitioner
Bonifacio Jaca because in so far as said petitioner is
concerned there is no showing of any special or good
reasons, in fact, there is no showing of any reason at
all anywhere in the records of the case, including the
Orders complained of, as a basis for which
discretionary execution may be issued against him.
10

The private respondent maintains that the respondent judge acted in full
compliance with the Rules of Court, the law and applicable decisions of
this Honorable Court because:
1) The present case is an action for accounting and not a foreclosure
proceeding. Therefore, execution pending appeal can be issued pursuant
to Sec. 2 of Rule 39, Rules of Court. This provision of the Rules of Court
applies in the present case for there are good and valid reasons for the
issuance of a writ of execution pending appeal as stated in respondents'
Motion (Annex "X"). Moreover, petitioners have no properties or assets
with which to satisfy the judgment of P867,887.52 plus other items stated
in the Decision. The respondent Judge, therefore, was correct in ordering
the issuance of a writ of execution (Annex "1"). Furthermore, to stay
execution, petitioners should have filed a supersedeas bond in
accordance with Sec. 3 of Rule 3.
a) Respondent denies the erroneous and gratuitous
conclusion of alleged 'excess of jurisdiction' as alleged
in par. 44(a) of the Petition. t further denies the other
misleading statements alleged therein, the truth of the
matter being the grounds enumerated in the Motion
for Execution Pending Appeal (Annex "X") and the
reasons mentioned in the Order (Annex "Z") granting
said motion.
b) Respondent denies the erroneous conclusion that
the respondent Judge acted with grave abuse of
discretion, equivalent to lack of jurisdiction' as alleged
in par. 44(b) of the Petition, and states that the
respondent Judge correctly acted in accordance with
Sec. 2, Rule 39 of the Rules of Court. t further denies
the misleading statement therein that the reasons
ultimately relied upon by the respondent Judge are
those stated in the Order (Annex "FF"), which is false,
because the good and valid reasons relied upon by
the respondent Judge are those stated in his Order
(Annex "Z") granting the Motion for Execution Pending
Appeal (Annex "X").
(1) Respondent admits the allegation that petitioner
Urbano Jaca sold a wrecker to Teodoro M. Alagon on
February 12, 1962 for P10,000.00; and denies the
statement that such sale would not show a fraudulent
design on his part to defeat the judgment against him.
t further alleges that it is one of the good and valid
reasons for execution pending appeal (Rule 39, Sec.
2), because said petitioner, the mortgagor in the deed
of chattel mortgage dated January 24, 1961, has
violated Article 319 of the Revised Penal Code in
selling the said mortgaged property;
(2) The misleading allegations contained in
subparagraphs 2 and 3 of par. 44(b) of the Petition
are false, for they are matters that arose in the
petitioners' Motion for Reconsideration of the Order
granting execution pending appeal. Respondent
further states that they are not the original and valid
reasons given by the respondent Judge in his Order
(Annex "Z");
c) There are goods reasons for allowing execution
pending appeal considering that
(1) the amount involved in the judgment in favor of
respondent Davao Lumber Company is P867,887.52
plus attorney's fees of P20,000.00, and the petitioners
admitted at the hearing of the Motion for Execution
Pending Appeal that they are insolvent (See Order,
Annex "Z" );
Credit Transactions Full Text Cases Atty. Adviento!!!!"*(
(2) the petitioners have never challenged the
Counterclaim of respondent Davao Lumber Company
during the hearing on the merits;
(3) the petitioners failed to present any evidence
challenging the chattel mortgage under which the
counterclaim for foreclosure has been rendered;
(4) the petitioners have not disproved the
Commissioner's Report (Annex "K"). n fact, they
failed to present their own evidence before the
Commissioner which might tend to controvert the
undisputed documentary evidence of respondent
Davao Lumber Company;
(5.) execution pending appeal was properly issued in
the present case, which is an ordinary civil action for
accounting and not primarily a foreclosure of chattel
mortgage the respondent Judge, therefore, acted in
full compliance with the law and jurisprudence in
allowing execution pending appeal;
(6) the judgment sought to be executed pending
appeal sentences petitioner Urbano Jaca to pay
respondent Davao Lumber Company the amount of
P756,236.52 with legal interest; sentences petitioner
Bonifacio Jaca to pay said respondent the amount of
P91,651.00 with legal interest; orders the Chattel
Mortgage executed by Urbano Jaca in favor of said
respondent foreclosed; orders petitioners to pay,
jointly and severally, the amount of P20,000.00 as
attorney's fees and costs; the said judgment was
rendered after hearing on the merits of its action for
accounting, which is not a proceeding for foreclosure
of chattel mortgage; the provisions of the Rules of
Court on foreclosure proceeding invoked by
petitioners do not find any application in the case at
bar; the respondent Judge, therefore, in allowing
execution pending appeal, precisely acted in full
compliance with Sec. 2 of Rule 39;
(7) as above pointed out, the judgment rendered in
this case is joint and several, and consequently, the
respondent Judge was correct in ordering the
execution thereof as against both petitioners who
have no properties or assets to satisfy the judgment in
favor of respondent company.
11

The basic issue in this case is whether or not there are good reasons
justifying the issuance of an order granting premature execution.
Section 2, Rule 39 of the Rules of Court provides that on motion of the
prevailing party with notice to the adverse party the court may, in its
discretion, order execution to issue even before the expiration of the time
to appeal, upon good reasons to be stated in a special order. f a record on
appeal is filed thereafter, the motion and the special order shall be
included therein. The discretionary power of the Court of First nstance to
grant or deny a motion for execution before the expiration of the time to
appeal will not be interfered with by the appellate court, unless it be shown
that there has been an abuse thereof or a subsequent change of
conditions.
12

As provided in Sec. 2, Rule 39 of the New Rules of Court, the existence of
good reasons is what confers discretionary power on a court of first
instance to issue a writ of execution pending appeal.
13
The reasons
allowing execution must constitute superior circumstances demanding
urgency which will outweigh the injury or damage should the losing party
secure a reversal of the judgment on appeal.
14

The decision in Civil Case No. 4189 requires petitioners to pay the
enormous amount of P867,887.52. Clearly, premature execution of said
decision wig result in irreparable damage to petitioners as the collection of
said amount may be enforced through the seizure of money and/or sale of
properties used in the logging business of petitioners. n other words,
execution of the decision in Civil Case No. 4189 may result in the
termination of petitioner's business. Thus, any damage to the petitioners
brought about by the premature execution of the decision will be justified
only upon a finding that the appeal is being taken only for the purpose of
delay and of rendering the judgment nugatory.
The facts of record show that the petitioner's appeal is not frivolous and
not intended for delay. The findings of the respondent judge that the
petitioners are indebted to the respondent Davao Lumber Company are
based solely on the report submitted by Estanislao R. Lagman, the
commissioner appointed by the court. This report was assailed by the
petitioners as null and void in a motion to strike out the report from the
records of the case. According to petitioners, the report is null and void
because:
... the so-called 'findings of the Commissioner in his
report filed before this Honorable Court is the result of
the exercise of certain highly irregular function not
contemplated by the Rules of Court and therefore
deprived Plaintiffs' their constitutional right to their day
in court.
ARGUMENTS:
1. That among other things, Section 3, Rule 33 of Rules of Court, provides:
Section 3: ... Subject to the specifications and
limitations stated in the order the commissioner has
and shall exercise the power to regulate the
proceedings in every hearing before him and to do all
act and take measures necessary or proper for the
efficient performance of his duties under the order, ...
The trial or hearing before him shall proceed in all
respect as though the same had been had before the
Court.
2. That on August 22, 1964, without the proper notice
to their respective counsels, the Plaintiffs received the
following letter from the Commissioner, pertinent
portions of which reads as follows: and, copy of which
letter is attached hereto, forming an integral part in
this Opposition, marked Annex "A" n compliance to
the above order, am now to proceed, as ordered by
the Court, to examine your books of accounts and
other records for the year 1962 and 1963.
I will be dropping at your office on August 25, 1964.
Kindly have our records ready.
3. That on August 25, 1964, the Commissioner went
to Plaintiff's' office and asked to see the Books, and if
possible to bring the same with him to his office; that,
the plaintiffs' counsel refused to have said records
examined in such manner;
4. That the Counsel for the Plaintiffs reminded the
Commissioner on many occasions that, the
examination of books and records of Accounts should
be done in a manner provided for under the Rules of
Court and, that in pursuance of said mandate, a
hearing and/or proceedings be conducted in the
presence of all parties, their witnesses and, their
counsels and, the hearing be conducted as if it were
taken before the court of justice, as said accounts
being one controversial and contested in issues;
5. That said commissioner refused to conduct said
hearing in accordance to law;
6. That report is void in law.
15

Credit Transactions Full Text Cases Atty. Adviento!!!!"*)
n an order dated November 17, 1964, the respondent judge approved the
commissioners' report in toto As to the allegation of the plaintiff that they
were denied their day in court, the respondent judge stated that "plaintiffs
deliberately ignored to comply with the lawful order of the court directing
them to present the pertinent books of accounts on the 12th day of
October, 1964, at 2:00 P.M. Sala of Branch 11, and therefore, their position
that they are denied their day in court is clearly untenable."
16

Petitioners filed their motion for reconsideration of the order approving the
commissioner's report in November, 1964, explaining that their failure to
appear was due to the fact that they received the order requiring them to
appear on October 12, 1964 already after said date when it was too late
for them to comply with the order of appearance.
17
Notwithstanding the
reasonable explanation of their absence in the hearing of October 12,
1964, the respondent judge denied the motion for reconsideration in an
order dated December 4, 1964.
18

t is obvious that the refusal of the respondent judge to order a hearing
before the commissioner was in clear violation of Section 3, Rule 33,
Revised Rules of Court, which specifically provides "... that the trial or
hearing before a commissioner shall proceed in all respects as though the
same had been had before the court." For this purpose Section 5 of the
same Rule provides that "upon receipt of the order of reference, unless
otherwise provided therein, the commissioner shall forthwith set a time
and place for the first meeting of the parties or their attorneys to be held
within ten (10) days after the date of reference ..." Pertinent also is Section
10 of Rule 33 which provides that "... Objections to the report based upon
grounds which were available to the parties during the proceedings before
the commissioner, other than objections to the findings and conclusions
therein set forth, shall not be considered by the court unless they were
made before the commissioner."
The respondent judge's refusal to order the commissioner to conduct a
hearing in accordance with Section 5, Rule 33 was fatal to the cause of
the petitioners. Under Section 10 of Rule 33, objections to the report
based upon grounds which were available to the parties during the
proceedings before the commissioner other than objections to the findings
and conclusions therein set forth shall not be considered by the court,
unless they were made before the commissioner. Objections to the report
which were available to the parties during the proceedings refer to
objections to the admissibility or non-admissibility of evidence to be
considered by the commissioner. Since no meeting was held before the
commissioner, petitioners never had the opportunity to object to the
admissibility of evidence of cash, equipment, materials and foodstuff,
which they alleged in their complaint, were never received by them. Also,
they failed to question the failure of the commissioner to include in his
examination the price quotations of the logs which, as claimed in the
complaint, were under classified and undergraded.
The records show that respondent Davao Lumber Company was able to
prove its claim against petitioners because respondent judge refused to
order the commissioner to hold a hearing as required by the rules. Thus,
objections which petitioners may have against the claims of respondent
were never considered. n the same manner, the claim of petitioner that
respondent Davao Lumber Company is indebted to them was not also
considered. The Commissioner limited his examination to the following:
MR. URBANO LACAS ACCOUNTS:
(a) From Feb. 17, 1961 to Oct. 31, 1962, Urbano Jaca
purchased on account from the Merchandise Dept. of
Davao Lumber Co. per statement attached, marked
schedule
1....................................................................................
.. P190:010.41
(b) From July 2, 1960 to Oct. 31, 1962, Urbano Jaca
purchased on account from the Sawmill Dept. of
Davao Lumber Co. per statement hereto attached,
marked schedule
2....................................................................................
... P75,075.73
(c) Old vales or cash advances prior to July 25, 1963
which Urbano Jaca replaced with four (4) BP Checks
Nos. D-236619 to D-236622 P50,000.00 each as
alleged by
DLC ..............................................................................
............. P200,000.00
(d) From Nov. 3, 1962 to Aug. 30, 1963, Urbano Jaca
purchased on accounts from the Sawmill Dept.
various goods, per attached statement, marked
Schedule
3 ...................................................................................
................ P57,459.27
(e) From Nov. 3, 1962 to Aug. 30, 1963, Urbano Jaca
purchased from the Mds. Dept. of DLC various goods,
per attached statement, marked Scheduled
4 ...................................................................................
............. P68,857.07
(f) From July 25, 1963 to Sept. 16, 1963 Urbano Jaca
obtained cash advances or vales per attached
statement, marked schedule 5............ P164,844.45
(g) Purchase of gasoline made by Urbano Jaca from
Shell Co., under Davao Lumber Co.'s
guaranty ......................................................................
P2,523.60
Total amount due Davao Lumber Co. from Urbano
Jaca .......... P758,770.53
The amount of P2,523.60 due Shell Co. may be
deducted from the total amount if Urbano Jaca can
show proof that the account has been paid.
MR. BONIFACIO JACAS ACCOUNTS:
(a) From Nov. 3, 1962 to Aug. 8, 1963 Bonifacio Jaca
purchased on account various goods from the Sawmill
Dept. of DLC per attached statement,. marked
schedule
6....................................................................................
.............. P39,999.69
(b) From Feb. 4, 1963 to Aug. 8, 1963 Bonifacio Jaca
purchased on account from the Mdse. Dept. various
goods, per attached statement marked schedule
7....................................................................................
............................... P48,319.08
(c) Purchases of gasoline from Shell Co. guaranteed
by Davao Lumber
Co. ...............................................................................
................................. P5,252.12.
(d) From Aug. 6, 1963 to Aug. 23, 1963, Bonifacio
Jaca obtained cash advances or vales, per attached
statement marked schedule 8........... P3,333.20
Total amount due Davao Lumber Co. from Mr.
Bonifacio Jaca P96,904.09.
19

Clearly, the examination was only made on advances made to petitioners.
There was not even an attempt to examine receipts of payments made by
petitioners. t is hard to believe that the petitioners had not paid any
amount for the advances made to them. n fact, the respondents stated in
paragraph 4 of its answer to the complaint that the plaintiffs stopped
delivering logs in August, 1963,
20
indicating that from 1962 to 1963, the
years included in the report of the commissioner, the petitioners had
delivered logs to the Davao Lumber Company.
Credit Transactions Full Text Cases Atty. Adviento!!!!"**
There is doubt that petitioners are really indebted to respondent Davao
Lumber Company in such a big amount as found by the trial court. The
appeal of the petitioner appears to be meritorious. The fear of respondent
that the judgment of the trial court might not be satisfied if not executed at
once is not well founded. f the judgment is executed now, and on appeal
the same is reversed, although there are provisions for restitution,
damages incurred by petitioners can not be fully compensated.
21

The reasons stated in the order of execution pending appeal are not well
founded.
The first reason stated in the order was the consistent refusal of petitioner
to deliver the mortgaged chattels to the receiver.
22
The records disclose
that respondent Davao Lumber Company is not even entitled to the
appointment of a receiver. t is an established rule that the applicant for
receivership must have an actual and existing interest in the property for
which a receiver is sought to be appointed.
23
The Davao Lumber
Company's proof of interest in the property is the deed of chattel mortgage
executed by Urbano Jaca in favor of the Davao Lumber Company on
January 24, 1961. This deed of chattel mortgage is void because it
provides that the security stated therein is for the payment of any and all
obligations herein before contracted and which may hereafter be
contracted by the Mortgagor in favor of the Mortgagee.
24
n the case of
Belgian Catholic Missionaries vs. Magallanes Press this Court held:
A mortgage that contains a stipulation in regard to
future advances in the credit will take effect only from
the date the same are made and not from the date of
the mortgage (11 CJ, 448; 5 RCL 420-421). ... Where
the statute provides that the parties to a chattel
mortgage must make oath that the debt is a just debt,
honestly due and owing from the mortgagor to the
mortgagee, it is obvious that a valid mortgage cannot
be made to secure a debt to be thereafter contracted.
(11 CJ. 448)
25

The second reason stated was the fact that petitioner Urbano Jaca
violated Article 319 of the Revised Penal Code by selling to a certain
Teodoro Alagon some of the mortgaged properties.
26
As already
discussed, the deed of chattel mortgage executed by Urbano Jaca in favor
of the Davao Lumber Company is void. Hence, petitioner Urbano Jaca
could not have violated Article 319 of the Revised Penal Code. Moreover,
the respondent Davao Lumber Company has not successfully refuted the
allegation of the petitioners that the sale of the wrecker to Teodoro Alagon
was exclusively negotiated by the lumber company's managing partner,
Tian Se, and that the latter caused Urbano Jaca to sign the deed of sale
because he was the owner of the wrecker.
The third reason stated is the fact that petitioners have no properties and
assets to satisfy the judgment.
27
The basis of respondent judge's
conclusion that petitioners do not have sufficient assets is an
unsubstantiated allegation in the motion for execution pending appeal of
respondent lumber company.
28
To rectify this omission, respondent lumber
company, in its opposition to the motion for reconsideration of the order of
execution pending appeal, tried to point out that the sale of two chevrolet
trucks by Urbano Jaca and their failure to file a counterbond indicate that
they are without sufficient assets.
29
This later attempt to substantiate a
baseless allegation in the motion for execution pending appeal is futile.
The trucks alleged to be sold are not properties of petitioner Urbano Jaca
They are paraphernalia properties of his wife, Florentina Perez, and the
same trucks were in fact sold by her. And even if said trucks were owned
by Urbano Jaca their sale to Atty. Raul Nengasca does not totally indicate
insolvency. As has been repeatedly observed, petitioner Urbano Jaca is
engaged in business. Sale of property used in business does not establish
insolvency. The sale may have been prompted by the need for more
modern equipment on account of obsolescence, or the need of to be
directed to more profitable endeavor. The same reason applies to their
failure to file a counterbound. The cash needed for the counterbound may
be utilized for the continuance of the business or to increase business
profits. n short, the acts of petitioner can not be always be interpreted as
signs of insolvency but may also indicate sound business judgment
prompted by the need to have liquid reserve of cash.
n its answer to the petition,
30
respondent lumber company contends that
petitioners, having availed of the remedy of appeal are barred form filling a
petition for certiorari. Although Section 1, Rule 65 of the Rules of Court
provides that the special civil action of certiorari may only be invoked when
"there is no appeal, nor any plain speedy and adequate remedy in the
course of law," this rule is not without exception. The availability of the
ordinary course of appeal does not constitute sufficient ground to prevent
a party from making use of the extraordinary remedy of certiorari where
the appeal is not an adequate remedy or equally beneficial, speedy and
sufficient.
31
t is the inadequacy not the mere absence of all other
legal remedies and the danger of failure of justice without the writ, that
must usually determine the propriety of certiorari.
n the case at bar, the remedy of appeal is inadequate. t will not
immediately relieve petitioners from the injurious effect of the order
granting execution. The slow and inexpensive remedy of appeal will not
prevent respondent judge from executing his decision requiring petitioners
to pay the huge amount of P867,887.52. Moreover, to dismiss the petition
on the ground that petitioner has already availed of the remedy of appeal
will only aggravate the patent injustice already inflicted on petitioners.
The reasons stated in the order granting execution pending appeal are not
sufficient.
WHEREFORE, the petition for writ of certiorari is granted and the orders
granting execution pending appeal dated November 29, 1965 and the
order denying the motion for reconsideration of the order granting
execution pending appeal dated January 10, 1966 are nullified and set
aside, without pronouncement as to costs.
SO ORDERED.
FRST DVSON

G.R. No. 107554 February 13, 1997
CEBU INTERNATIONAL FINANCE CORPORATION, petitioner,
vs.
COURT OF APPEALS, ROBERTO ONG AND ANG TAY, respondents.

KAPUNAN, J.:
n this petition for review on certiorari under Rule 45 of the Revised Rules
of Court, petitioner seeks to set aside the decision of the Court of Appeals
in CA-G.R C.V. No. 26257 dated 2 July 1992 which affirmed the decision
of the Regional Trial Court in Civil Case No. CEB-6919, declaring the
chattel mortgage void and ordering petitioner and private respondent
Robert Ong to pay damages to private respondent Ang Tay. The Court of
Appeals' resolution dated 30 September 1992 is similarly impugned for
denying petitioner's motion for reconsideration.
Gleaned from the records are the following facts:
On 4 March 1987, Jacinto Dy executed a Special Power of Attorney
1
in
favor of private respondent Ang Tay, authorizing the latter to sell the cargo
vessel Owned by Dy and christened LCT "Asiatic."
On 28 April 1987, through a Deed of Absolute Sale,
2
Ang Tay sold the
subject vessel to private respondent Robert Ong (Ong) for P900,000.00.
Ong paid the purchase price by issuing three (3) checks in the following
amounts: P150,000.000, P600,000.00 and P150,000.00. However, since
the payment was not made in cash, it was specifically stipulated in the
deed of sale that the "LCT Asiatic shall not be registered or transferred to
Robert Ong until complete payment."
3
Thereafter, Ong obtained
possession of the subject vessel so he could begin deriving economic
benefits therefrom. He, likewise, obtained copies of the unnotarized deed
of sale allegedly to be shown to the banks to enable him to acquire a loan
to replenish his (Ong's) capital. The aforequoted condition, however,which
Credit Transactions Full Text Cases Atty. Adviento!!!!#++
was handwritten on the original deed of sale does not appear on Ong's
copies.
Contrary to the aforementioned agreements and without the knowledge of
Ang Tay, Ong had his copies of the deed of sale (on which the
aforementioned prohibition does not appear) notarized on 18 May 1987.
4
Ong presented the notarized deed to the Philippine Coast Guard which
subsequently issued him a Certificate of Ownership
5
and a Certificate of
Philippine Register
6
over the subject vessel on 27 May 1987. Ong also
succeeded in having the name of the vessel changed to LCT "Orient
Hope."
On 29 October 1987, Ong acquired a loan from petitioner in the amount of
P496,008.00 to be paid in installments as evidenced by a promissory note
of even date.
7
As security for the loan, Ong executed a chattel mortgage over the subject
vessel,
8
which mortgage was registered with the Philippine Coast Guard
and annotated on the Certificate of Ownership.
9
n paragraph 3 of the
Deed of Chattel Mortgage, it was stated that:
3. The said sum of FOUR HUNDRED NINETY SIX
THOUSAND EIGHT ONLY (496,008.00) represents
the balance due on of MORTGAGOR(S) from the
MORTGAGEE and is payable in the office of the
MORTGAGEE at Cebu City or in the office of the
latter's assignee, in case the rights and interests of
the MORTGAGEE in the foregoing mortgage are
assigned to a third person, under the terms of said
promissory note, as follows: (a) TWENTY
THOUSAND SX HUNDRED SXTY SEVEN ONLY
Pesos (P20,667.00) on or before . . . . . . and (b) the
balance in Twenty Four (24) equal successive monthly
installments on the . . . . . . day of each and every
succeeding month thereafter until the amount is fully
paid. The interest on the foregoing installments shall
be paid on the same date that the installments
become payable and additional interest at the rate of
fourteen (14%) per cent per annum will be charged on
all amounts, principal and interest, not paid on due
date.
10
(Emphasis ours.)
Ong defaulted in the payment of the monthly installments. Consequently,
on 11 May 1988, petitioner sent him a letter
11
demanding delivery of the
mortgaged vessel for foreclosure or in the alternative to pay the balance of
P437,802.00 pursuant to paragraph 11 of the deed of chattel mortgage.
12
Meanwhile, the two checks (worth P600,000.00 and P150,000.00) paid by
Ong to Ang Tay for the purchase of the subject vessel bounced. Ang Tay's
search for the elusive Ong and all attempts to confer with him proved to be
futile. A subsequent investigation and inquiry with the Office of the Coast
Guard revealed that the subject vessel was already in the name of Ong, in
violation of the express undertaking contained in the original deed of sale.
As a result thereof, on 13 January 1988, Ang Tay and Jacinto Dy filed a
civil case for rescission and replevin with damages against Ong and his
wife (docketed as Civil Case No. CEB-6565) with the Regional Trial Court
of Cebu . City, Branch 10. The trial court issued a writ of replevin and the
subject vessel was seized and subsequently delivered to Ang Tay.
On 9 March 1988, petitioner filed a motion for intervention but withdrew
the same on 29 April 1988. nstead, on 26 May 1988, petitioner filed a
separate case for replevin and damages against Ong and "John Doe"
(Ang Tay) with the same trial court, docketed as Civil Case No. CEB-6919.
The trial court granted petitioner's prayer for replevin. The vessel was
seized and placed in the custody of the trial court. However, Ang Tay
posted a counterbond and the vessel was returned to his possession.
On 3 October 1990 in CEB-6565, the trial court rendered a decision in
favor of Ang Tay and Jacinto Dy. The sale of the subject vessel was
rescinded, the registration of the vessel with the Office of the Coast Guard
and other government agencies in Ong's name nullified and the vessel's
registration in Dy's name revived. Ong was, likewise, ordered to pay
Jacinto Dy and Ang Tay actual damages for lost income, moral damages,
attorney's fees and litigation
expenses.
13
The Court of Appeals affirmed the trial court's decision and Ong's petition
for review before this Court was dismissed for lack of merit in a resolution
dated 15 March 1993,
On the other hand, in CEB-6919, the subject of the present appeal, the
trial court in a decision dated 14 February 1990, declared the chattel
mortgage on the subject vessel null and void and ordered petitioner and
Ong to pay Ang Tay damages. The dispositive portion states, thus:
WHEREFORE, in view of all the foregoing, the chattel
mortgage on the vessel LCT ORENT HOPE is
declared null and void, rendering its annotation and
registration at the back of the Certificate of Ownership
and Certificate of Philippine Registry respectively, to
be of no force and effect.
Plaintiff CFC and defendant Robert Ong are hereby
ordered to pay jointly and severally to defendant Ang
Tay the following amounts: P50,000.00 as unrealized
income during the five-day period when the vessel
was take from Ang Tay's possession; P100,000.00,
representing the premiums Ang Tay paid for the
redelivery of the vessel to him and other expenses;
P10,000.00 as actual expenses for the recovery of the
vessel; P100,000.00 as moral damages; P50,000.00
as exemplary damages; P40,000.00 as actual
expenses in attending trials and litigation expenses;
and P30,000.00 as attorney's fees.
SO ORDERED.
14
On 2 July 1992, the Court of Appeals affirmed in toto the above mentioned
decision.
15
Hence, the present petition for review on certiorari.
Petitioner enumerates the alleged errors oft he Court of Appeals as
follows:

THE COURT OF APPEALS ERRED N BASNG TS

DECSON ON SPECULATON, CONJECTURE, AND
SURMSE, WHEN T DECLARED THAT THE
CONTRACT BETWEEN CFC AND ROBERT ONG
WAS ONE OF SALE, AND NOT LOAN (MUTUUM)
WTH MORTGAGE.

THE RULNG OF THE COURT OF APPEALS S

CONTRARY TO EXSTNG AND WELL-SETTLED
JURSPRUDENCE THAT A MORTGAGEE HAS THE
RGHT TO RELY ON WHAT APPEARS N THE
CERTFCATE OF OWNERSHP (TTLE).

THE DECSON OF THE COURT OF APPEALS S

REPUGNANT TO THE CLEAR RULNG OF THE
HONORABLE COURT THAT BETWEEN TWO
NNOCENT
PERSONS, THE ONE WHO MADE THE DAMAGE
POSSBLE BY HS ACT OF CONFDENCE MUST
BEAR THE LOSS.
16
Credit Transactions Full Text Cases Atty. Adviento!!!!#+"
We grant the petition.
n upholding the nullity of the chattel mortgage on the subject vessel, the
Court of Appeals declared thus:
n Par. 3 of the Chattel Mortgage Contract executed
between appellants CFC and Robert Ong, it was
made to appear that the subject vessel was sold by
the plaintiff Cebu nternational Finance Corporation to
Robert Ong on installment. However, there is no
showing that appellant CFC acquired the vessel in
question from either Jacinto Dy or Ang Tay, the owner
of such vessel. Since, CFC appears to have sold the
vessel in question to Ong on installment basis, the
said contract is null and void, because CFC was
never the owner of the vessel.
Moreover, Robert Ong CFC's mortgagor, did not
acquire ownership of the vessel because of an
express stipulation in the Deed of Sale that the vessel
"shall not be registered or transferred to Robert Ong
until complete payment." (Exh. "7-C-1".) Since Ong
clearly was not the owner of the vessel at the time of
the execution of the mortgage, the said mortgage is
null and void on that ground.
Furthermore, the evidence on record shows the
chattel mortgage in question did not comply with the
requirements of P.D. 1521, The Ship Mortgage
Decree of 1978. . . .
17
The Court of Appeals nullified the chattel mortgage contract between
petitioner and Ong because paragraph 3 of the said contract (where it
appeared that petitioner sold the subject vessel to Ong on installment
basis and that the amount supposedly loaned to Ong represented the
balance due on the purchase price) seemed to indicate that the owner of
the vessel mortgaged was petitioner although it had been duly established
that another party (Jacinto Dy) was the true owner thereof.
18
We disagree with the aforequoted ruling of the Court of Appeals. The
chattel mortgage contract should not be viewed in such a myopic context.
The key lies in the certificate of ownership issued in Ong's name (which,
along with the deed of sale, he submitted to petitioner as proof that he is
the owner of the ship he gave as security for his loan). t was plainly stated
therein that the ship LCT "Orient Hope" ex "Asiatic," by means of a Deed
of Absolute Sale dated 28 April 1987, was "sold and transferred by Jacinto
Dy to Robert Ong."
19
There can be no dispute then that it was Dy who was
the seller and Ong the buyer of the subject vessel. Coupled with the fact
that there is no evidence euphony transaction between Jacinto Dy or Ang
Tay and petitioner, it follows, therefore, that petitioner's role in the picture is
properly and logically that of a creditor-mortgagee and not owner-seller. t
is paragraph 2 of the mortgage contract
20
which accurately expresses the
true nature of the transaction between petitioner and Ong--that it is a
simple loan with chattel mortgage. The amount petitioner loaned to Ong
does not represent the balance of any purchase price since, as we have
previously discussed, the aforementioned documents state that Ong is
already the absolute owner of the subject vessel. Obviously, therefore,
paragraph 3 of the said contract was filled up by mistake. Considering that
petitioner used a form contract, it is not improbable that such an oversight
may have been committed--negligently but unintentionally and without
malice. As testified to by Mr. Benjamin C. Alfaro, petitioner's Senior Vice
President for Operations they only use one form for several kinds of
transaction:
ATTY. UY: (TO WTNESS)
Q: Mr. Alfaro, as a financing
institution, Cebu nternational
finance Corporation, how many
kinds of lending transaction do
you have in a firm? Do you have
financial leasing, discounting or
whatever? Can you explain briefly
to the Honorable Court?
WTNESS:
A: We have direct loan
transaction. We have financing
transaction and we have leasing
transaction. Now, in the leasing
transaction, the document will
show that we are the owner of the
equipment and we leased it out.
n the financing transaction,
where we used the same Chattel
Mortgage instrument, there are
three parties involved, the seller
of the equipment. And then, the
seller of the equipment would sell
or assign the contract with the
financing company. That is the
financing transaction. And in the
simple loan transaction, there
appears only two parties involved,
the borrower and the lender.
ATTY. UY: (TO WTNESS)
Q: Now, Mr. Alfaro, the same
document, Chattel Mortgage will
apply also to financing
transaction, leasing transaction
and simple loan transaction?
WTNESS:
A: Simple loan and financing
transactions.
ATTY. UY (TO WTNESS)
Q: Now, Mr. Alfaro, this paragraph
2 of Chattel Mortgage, can this
apply to a financing transaction?
WTNESS:
A: No, the paragraph 3 will be the
one that is applicable to a
financing transaction. (Witness
reading the document and after
reading continued) Paragraph 2
applies to both financing and
simple loan transaction.
ATTY. UY:
Q: And paragraph 3?
WTNESS:
A: Paragraph 3 applies to both
financing and lending
transactions but paragraph 3
does not apply to Simple lending
transaction.
xxx xxx xxx
21
ATTY. LOGRONO: (TO
WTNESS)
Credit Transactions Full Text Cases Atty. Adviento!!!!#+#
Q: You do not affirm the assertion
made by your counsel that
paragraph 3 arise only in case
that your rights to a mortgage
were assigned by you to a third
person, do you agree that also?
WTNESS:
A: This form of chattel mortgage,
in fact, you will notice that the
portion for mortgagor and
mortgagee are all blank because
this is the same form which is
used by the company, used for
the parties when there is a dealer
involved, when there is
installment buyer involved and
when we come in as third party
purchaser of the document
because as practiced by the
different dealer, this is the same
form used between the buyer and
the dealer of the motor vehicle.
After this is being consummated
already, it is assigned to a finance
company and these are the same
documents used. Now, in this
particular case, this becomes
already . . . this is a direct
transaction between the finance
company and the borrower. We,
the finance company becomes
the direct lender and Mr. Ong
became the direct borrower. As
explained earlier, this document is
also the form used between a
dealer of a motor vehicle and an
installment buyer wherein after
paying the down payment, the
unpaid balance which is secured
by the chattel mortgage, the
promissory note, and the
disclosure statement and this
document is sold to a third party
and that is the finance company
by the dealer.
ATTY. LOGRONO:
Q: Up to this point, when you had
the transaction with Mr. Ong, this
form that you executed, the
Chattel Mortgage was in what
kind of form that was already
used by the company?
WTNESS:
A: These are forms available to
us.
ATTY. LOGRONO:
Q: This is a form used when there
is a buyer and a ...
WTNESS:
A: Third party or direct borrowing
lender.
ATTY. LOGRONO:
Q: And this refers to a direct
borrower or lending transaction.
WTNESS:
A: Yes.
ATTY. LOGRONO:
Q: No third party assignment has
been involved so far?
WTNESS:
A: No.
xxx xxx xxx
22
Accordingly, the chattel mortgage contract between petitioner
and Ong is valid and subsisting.
The next issue for our determination is whether or not petitioner is a
mortgagee in good faith whose lien over the mortgaged vessel should be
respected.
The prevailing jurisprudence is that a mortgagee has a right to rely in good
faith on the certificate of title of the mortgagor to the property given as
security and in the absence of any sign that might arouse suspicion, has
no obligation to undertake further investigation. Hence, even if the
mortgagor is not the rightful owner of or does not have a valid title to the
mortgaged property, the mortgagee or transferee in good faith is
nonetheless entitled to protection.
23
Although this rule generally pertains
to real property, particularly registered land, it may also be applied by
analogy to personal property, in this case specifically, since shipowners
are, likewise, required by law to register their vessels with the Philippine
Coast Guard.
Private respondent Ang Tay, however, contends that the aforementioned
rule does not apply in the case at bar in the face of the numerous "badges
of bad faith" on the part of petitioner.
Capitalizing on paragraph 3 of the chattel mortgage contract, Ang Tay
argues as follows:
. . . The fraud and conspiracy by Robert Ong and
some responsible employees of CFC against Jacinto
Dy and Ang Tay are thus brought to the open by this
stipulation. Since CFC appears in the registered
chattel mortgage to have sold the vessel in question
to Robert Ong, the said contract is null and void
because CFC never for a second or a moment
became the owner of the vessel. CFC was the one
who prepared the chattel mortgage and the one who
registered the same without contemporaneous or
subsequent correction or modification; it cannot, after
it notified the public by means of registration that it
acquired the vessel and became its owner, now shy
away from a stipulation which is the heart and nerve-
center of the contract and which it made and
registered. This is both the essence and consequence
of estoppel. Applicable is Article 1459 of the Civil
Code which provides inter-alia: ". . . the vendor must
have a right to transfer the ownership thereof (the
thing sold) at the time it is delivered."
2. Robert Ong, CFC's mortgagor, did not acquire
ownership of the vessel because of an express
stipulation which he signed that the vessel "shall not
Credit Transactions Full Text Cases Atty. Adviento!!!!#+$
be registered or transferred to Robert Ong until
complete payment." (Exh. "7-C-1".) This stipulation is
expressly covered by Article 1478 of the Civil Code:
"The parties may stipulate that ownership in the thing
shall not pass to the purchaser until he has fully paid
the price." Since Ong clearly was not the owner of the
vessel at the time of the execution of the mortgage,
the said mortgage is null and void on that ground.
24
Ang Tay's contentions are unmeritorious. As previously discussed,
paragraph 3 of the chattel mortgage contract was erroneously but
unintentionally filled up. The failure of petitioner to exercise due care in
filling up the necessary provisions in the chattel mortgage contract does
not, however, amount to bad faith. t was a mere oversight and not a
deliberate and malicious act.
Petitioner's bad faith is further demonstrated, Ang Tay avers, by its failure
to comply with the following requirements of P.D. No. 1521 or the Ship
Mortgage Decree of 1978:
1) The loan secured by the mortgaged vessel was not
for any of purposes specified in Sec. 2 of P.D. No.
1521, i.e., "financing the construction, acquisition,
purchase of vessels or initial operation of vessels"
25
and that petitioner failed to furnish the Central Bank a
copy of the mortgage;
26

2) The special affidavit of good faith required in Sec. 4
of P.D. No. 1521 was lacking; and
3) Ong failed to disclose his creditors and lienors as
provided in Sec. 6 of P.D. No. 1521.
There is no merit in private respondent's allegations. n the 9 November
1989 hearing, Ang Tay confirmed his statement in his affidavit, executed in
Civil Case No. CEB-6565, that Ong wanted to obtain a loan to replenish
his capital because he had used up his money in the purchase of the
subject vessel
27
and that the ship was delivered to Ong so that he could
begin deriving economic benefits therefrom.
28
Mr. Randolph Veloso
petitioner's collector, processing clerk, credit investigator and appraiser,
further testified as follows:
xxx xxx xxx
Q: Do you know the purpose for
that loan
A: Yes.
Q: What was his purpose?
A: He was going to mortgage the
vessel to us.
Q: What was the purpose of the
loan?
A: We don't usually ask our client
what they will do with it.
Q: You don't ask the purpose?
A: t is understood that whenever
a client approach the institution
he usually has a purpose for the
money.
Q: Did not the corporation was
what need has he for the money?
A: He is going to use it for his
business in the boat.
Q: And that is his only statement?
What was his specific statement?
ATTY. UY:
Already answered. He will use it
in the business of his boat.
ATTY. LOGRONO:
What was the purpose.
ATTY. UY:
Already answered Your Honor
and besides it is immaterial.
ATTY. LOGRONO:
Very material and it is important
Your Honor as there is a violation
of the law. am entitled to insist
for the answer.
COURT:
Witness may answer, if he knows.
(TO WTNESS)
Q: Did he tell you what was the
purpose?
A: For the business of the boat.
ATTY. LOGRONO: (TO
WTNESS)
Q: That's all, that he is going to
use the money for the business of
the boat?
A: Yes.
xxx xxx xxx
29
From the foregoing, therefore, it can be readily deduced that the loan was
for the initial operation of the subject vessel and thus falls under the
purposes laid down in the Ship Mortgage Decree.
The special affidavit of good faith, on the other hand, is required only for
the purpose of transforming an already valid mortgage into a "preferred
mortgage."
30
Thus, the abovementioned affidavit is not necessary for the
validity of the chattel mortgage itself but only to give it a preferred status.
As to the disclosure requirement in Sec. 6 of the Ship Mortgage Decree,
31
it was intentional on Ong's part not to inform petitioner that he had yet to
pay in full the purchase price of the subject vessel. Ong presented himself
to petitioner as the absolute owner of the LCT "Orient Hope" ex "Asiatic."
The Certificate of Ownership in Ong's name showed that the ship was
conveyed to him by means of a Deed of Absolute Sale which gave the
idea that the purchase price had been fully paid and the sale completed.
Credit Transactions Full Text Cases Atty. Adviento!!!!#+%
Petitioner had every right to rely on the Certificate of Ownership and
Certificate of Philippine Register duly issued by the Philippine Coast
Guard in Ong's name. Petitioner had no reason to doubt Ong's ownership
over the subject vessel. The documents presented by Ong, upon
petitioner's insistence before accepting the said vessel as loan security,
were all in order and properly issued by the duly constituted authorities.
There was no circumstance that might have aroused petitioner's suspicion
or alerted it to any infirmity committed by Ong. t had no participation in
and was not privy to the sale transaction between Jacinto Dy (through Ang
Tay) and Ong. Petitioner, thus, had no obligation to undertake further
investigation since it had the necessary documents to prove Ong's
ownership. n addition petitioner even took pains to inspect the subject
vessel which was in Ong's possession. Mr. Benjamin C. Alfaro testified
thus: . . .
xxx xxx xxx
ATTY. LOGRONO:
Q: n your credit investigation of
Mr. Robert Ong did you have a
chance yourself or any of your
employees to verify the condition
and the location of the vessel at
the very time?
WTNESS:
A: Yes.
ATTY. LOGRONO:
Q: Will you tell the Court where
was the vessel at the time that he
applied for a loan with your bank?
WTNESS:
A: t was under finishing touches
in the drydock in . . . think in
Lapulapu or Mandaue.
ATTY. LOGRONO:
Q: So, more or less, you are sure
that at the time that he applied for
a loan and you approved the
same, this vessel was still at the
drydock?
WTNESS:
A: Yes finishing touches. n fact, it
had pictures to support the
application. don't know if we
have it now.
ATTY. UY:
We have. (Counsel producing a
picture of a vessel and handing it
to the witness).
WTNESS: (Cont)
This is the picture of the vessel
because we required him to
submit.
ATTY. LOGRONO:
Q: You are referring to the picture
which you asked the Court to
mark as Exhibit . . . .
ATTY. UY:
No, we are requesting now Your
Honor. This has not been marked
yet. We asked that the picture
showing the back portion of the
vessel, Orient Hope be marked
as Exhibit "" and the picture
showing the front portion of the
vessel as Exhibit "-1".
COURT: (TO NTERPRETER)
Mark it.
ATTY. LOGRONO: (TO
WTNESS)
Q: So, at the time that the vessel
was submitted to you as collateral
for the loan, the condition of the
vessel was as it is reflected in this
exhibit? (Cross- examiner
referring to the picture).
WTNESS:
A: Yes.
xxx xxx xxx
32
Anent the last issue, although Ang Tay may also be an innocent person, a
similar victim of Ong's fraudulent machinations, it was his act of
confidence which led to the present fiasco. Ang Tay readily agreed to
execute a deed of absolute sale in Ong's favor even though Ong had yet
to make a complete payment of the purchase price. t is true that in the
copy of the said deed submitted by Ang Tay there was an undertaking that
ownership will not vest in Ong until full payment.
33
However, Ong was able
to obtain several copies of the deed
34
with Ang Tay's signature and had
these notarized without the aforementioned undertaking as evidenced by
the copy of the deed of sale presented by petitioner.
35
The Deed of
Absolute Sale consisted of two (2) pages. The signatures of Ang Tay and
Ong appeared only on the first page of the deed. The Second page
contained the continuation of the acknowledgment and the undertaking.
Ong could have easily reproduced the second page without the
undertaking since this page was not signed by the contracting parties. To
complete the deception, Ang Tay unwittingly allowed Ong to have
possession of the ship. Hence, in consonance with our ruling that:
. . . as between two innocent persons, the mortgagee
and the owner of the mortgaged property, one of
whom must suffer the consequence of a breach of
trust, the one who made it possible by his act of
confidence must bear the loss.
36
it is Ang Tay and his principal Jacinto Dy who must,
unfortunately, suffer the consequences thereof. They are
considered bound by the chattel mortgage on the subject
vessel.
WHEREFORE, this Court GRANTS the Petition for Review and
REVERSES the questioned decision and resolution of the Court of
Appeals. The validity of the chattel mortgage on the vessel LCT ORENT
HOPE is hereby upheld without prejudice to whatever legal remedies
Credit Transactions Full Text Cases Atty. Adviento!!!!#+&
private respondent Ang Tay may have against private1 respondent Robert
Ong in the premises.
SO ORDERED.
EN BANC
DECSON
January 29, 1960
G.R. No. L-13194
BUENAVENTURA T. SALDANA, plaintiff-appellant,
vs.
PHILIPPINE GUARANTY COMPANY, INC., et aI., defendants-appellees.
Gatchalian & Padilla for appellant.
Emiliano Tabasondra for appellee Company.Teodoro Padilla for the other
appellees.
, J.:
This case arose from a complaint for damages filed by Buenaventura
Saldana (docketed as Civil Case No. 32703 of the Court of First nstance
of Manila) that was dismissed by order of the Court dated August 20,
1957, for lack of sufficient cause of action. n another order of September
30, 1957 of the same court, plaintiff's motion for reconsideration was
denied, and the case was appealed to this Court.
The facts are that on May 8, 1953, in order to secure an indebtedness of
P15,000.00, Josefina Vda. de Aleazar executed in favor of the plaintiff-
appellant Buenaventura Saldana a chattel mortgage covering properties
described as follows:
A building of strong materials, used for restaurant business, located in
front of the San Juan de Dios Hospital at Dewey Boulevard, Pasay City,
and the following personal properties therein contained:
1 Radio, Zenith, cabinet type.
1 Cooler.
1 Electric range, stateside, 4 burners.
1 Frigidaire, 8 cubic feet.
1 G.E. Deepfreezer.
8 Tables, stateside.
32 Chromium chairs, stateside.
1 Sala set upholstered, 6 pieces.
1 Bedroom set, 6 pieces.
And all other furniture's, fixtures or equipment found in the said premises.
Subsequent to the execution of said mortgage and while the same was
still in force, the defendant Hospital de San Juan de Dios, nc. obtained, in
Civil Case No. 1930 of the Municipal Court of Pasay City, a judgment was
duly Josewfina Vda. de Eleazar. A writ of execution was duly issued and,
on January 28, 1957, the same was served on the judgment debtor by the
sheriff of Pasay City; whereupon the following properties of Josefina
Eleazar were levied upon:
8 Tables with 4 (upholstered) chairs each.
1 Table with 4 (wooden) chairs.
1 Table (large) with 5 chairs.
1 Radio-phono (Zenith, 8 tubes).
2 Showcases (big, with mirrors).
1 Rattan sala set with 4 chairs, 1 table and 3 sidetables .
1 Wooden drawer.
1 Tocador (brown with mirror).
1 Aparador .
2 Beds (single type).
1 Freezer (deep freeze).
1 Gas range (magic chef, with 4 burners).
1 Freezer (G.E.).
On January 31, 1957, the plaintiff-appellant Saldana filed a third-party
claim asserting that the above-described properties levied are subject to
his chattel mortgage of May 8, 1953. n virtue thereof, the sheriff released
only some of the property originally included in the levy of January 28,
1957, to wit:
1 Radio, Zenith, cabinet type.
8 Tables, stateside aQK0x.
32 Chromiun chairs, stateside z4XN3oS91.
1 G.E. Deep freezer.
To proceed with the execution sale of the rest of the properties still under
levy, the defendants-appellees Hospital de San Juan de Dios, nc. and the
Philippine Guaranty Co., nc., executed an indemnity bond to answer for
any damages that plaintiff might suffer. Accordingly, on February 13, 1957,
the said properties were sold to the defendant hospital as the highest
bidder, for P1,500.00.
Appellants claims that the phrase in the chattel mortgage contract "and
all other furnitures, fixtures and equipment found in the said premises",
validly and sufficiently covered within its terms the personal properties
disposed of in the auction sale, as to warrant an action for damages by the
plaintiff mortgagee.
There is merit in appellant's contention. Section 7 of Act No. 1508,
commonly and better known as the Chattel Mortgage Law, does not
demand a minute and specific description of every chattel mortgaged in
the deal of mortgage but only requires that the description of the
properties be such "as to enable the parties in the mortgage, or any other
person, after reasonable inquiry and investigation to identify the same".
Gauged by this standard, general description have been held by this
Court. (See Stockholder vs. Ramirez, 44 Phil. 993; Pedro de Jesus vs.
Guam Bee Co., nc., 72 Phil. 464).
A similar rule obtains in the United States courts and decisions there have
repeatedly upheld clauses of general import in mortgages of chattels other
than goods for trade, and containing expressions similar to that of the
contract now before us. Thus, "and all other stones belonging to me and
all other goods and chattels" (Russel vs. Winne, 97 Am. Dec. 755); "all of
the property of the said W.W. Allen used or situated upon the leased
premises" (Dorman vs. Crooks State Bank, 64 A.L.R. 614); "all goods in
the store where they are doing business in E. City, N.C." (Davis vs. Turner,
120 Fed. 605); "all and singular the goods, wares, stock, iron tools
manufactured articles and property of every description, being situated in
or about the shop or building now occupied by me in Howley Stree"
(Winslow vs. Merchants ns. Co., 38 Am. Dec. 368,) were held sufficient
description, on the theory that parol evidence could supplement it to
render identification rule is expressed in Walker vs. Johnson (Mont.) 1254
A.L.R. 937:
The courts and textbook writers have developed several rules for
determination of the sufficiency of the description in a chattel mortgage.
The rules are general in nature and are different where the controversy is
between the parties to the mortgage from the situation where third parties
with out actual notice come in. n 11 C.J. 457, it is said: "Ad against third
persons the description in the mortgage must point out its subject matter
so that such person may identify the chattels observed, but it is not
Credit Transactions Full Text Cases Atty. Adviento!!!!#+'
essential that the description be so specific that the property may be
identified by it alone, if such description or means of identification which, if
pursued will disclose the property conveyed." n 5 R.C.L. 423 the rule is
stated that a description which will enable a third person, aided by inquires
which the instrument itself suggest to identify the property is sufficiently
definite." n 1 Jones on Chattel Mortgages and Conditional Sales, Bowers
Edition, at page 95 the writer says: "As to them (third persons), the
description is sufficient if it points to evidence whereby the precise thing
mortgaged may be ascertained with certainty." Here there is nothing in the
description "873 head of sheep" from which anyone, the mortgagee or
third persons, could ascertain with any certainty what chattels were
covered by the mortgage.
n many instances the courts have held the description good where,
though otherwise faulty, the mortgage explicity states that the property is in
the possession of the mortgagor, and especially where it is the only
property of that kind owned by him.
The specifications in the chattel mortgage contract in the instant case, we
believe, in substantial compliance with the "reasonable description rule"
fixed by the chattel Mortgage Act. We may notice in the agreement,
moreover, that the phrase in question is found after an enumeration of
other specific articles. t can thus be reasonably inferred therefrom that the
"furnitures, fixture and equipment" referred to are properties of like nature,
similarly situated or similarly used in the restaurant of the mortgagor
located in front of the San Juan de Dos Hospital at Dewey Boulevard,
Pasay City, which articles can be definitely pointed out or ascertain by
simple inquiry at or about the premises. Note that the limitation found in
the last paragraph of section 7 of the Chattel Mortgage Law1 on "like or
subsituated properties" make reference to those "thereafter acquired by
the mortgagor and placed in the same depository as the property originally
mortgaged", not to those already existing and originally included at the
date of the constitution of the chattel mortgage. A contrary view would
unduly impose a more rigid condition than what the law prescribes, which
is that the description be only such as to enable identification after a
reasonable inquiry and investigation.
The case of Giberson vs. A.N. Jureidini Bros., 44 Phil. 216, 219, cited by
the appellees and the lower court, cannot be likened to the case at bar, for
there, what were sought to be mortgaged included two stores wit all its
merchandise, effects, wares, and other bazar goods which were being
constantly disposed of and replaced with new supplies in connection with
the business, thereby making any particular or definite identification either
impractical or impossible under the circumstances. Here, the properties
deemed overed were more or less fixed, or at least permanently situated
or used in the premises of the mortgagor's restaurant.
The rule in the Jureidini case is further weakened by the court's
observation that (44 Phil. p. 220)
Moreover, if there should exist any doubts on the questions we have just
discussed, they should be treshed out in the insolvency proceedings,
which appears inconsistent with the definitive character of the rulings
invoked.
We find that the ground for the appealed order (lack of cause of action)
does not appear so indubitable as to warrant a dismissal of the action
without inquiry into the merits and without the description in the deed of
mortgage (Nico vs. Blanco, 81 Phil. 213; Zobel vs. Abreau, 52 O.G. 3592).
Wherefore, the orders appealed from are set aside and the case
remanded to the lower court for further proceedings. Costs against
appellee.
Paras, C.J., Bengzon, Montemayor, Bautista Angelo, Labrador,
Concepcion, Endencia, Barrera and Gutierrez David, J., concur.
THRD DVSON

G.R. No. 106435 JuIy 14, 1999
PAMECA WOOD TREATMENT PLANT, INC., HERMINIO G. TEVES,
VICTORIA V. TEVES and HIRAM DIDAY R. PULIDO, petitioners,
vs.
HON. COURT OF APPEALS and DEVELOPMENT BANK OF THE
PHILIPPINES, respondents.

GONZAGA-REYES, J.:
Before Us for review on certiorari is the decision of the respondent Court
of Appeals in C.A. G.R. C.V. No. 27861, promulgated on April 23, 1992,
1
affirming in toto the decision of the Regional Trial Court of Makati
2
to a
award respondent bank's deficiency claim, arising from a loan secured by
chattel mortgage.
The antecedents of the case are as follows:
On April 17, 1980, petitioner PAMECA Wood Treatment Plant, nc.
(PAMECA) obtained a loan of US$267,881.67, or the equivalent of
P2,000,000.00 from respondent Bank. By virtue of this loan, petitioner
PAMECA, through its President, petitioner Herminio C. Teves, executed a
promissory note for the said amount, promising to pay the loan by
installment. As security for the said loan, a chattel mortgage was also
executed over PAMECA's properties in Dumaguete City, consisting of
inventories, furniture and equipment, to cover the whole value of the loan.
On January 18, 1984, and upon petitioner PAMECA's failure to pay,
respondent bank extrajudicially foreclosed the chattel mortgage, and, as
sole bidder in the public auction, purchased the foreclosed properties for a
sum of P322,350.00. On June 29, 1984, respondent bank filed a complaint
for the collection of the balance of P4,366,332.46
3
with Branch 132 of the
Regional Trial Court of Makati City against petitioner PAMECA and private
petitioners herein, as solidary debtors with PAMECA under the promissory
note.
On February 8, 1990, the RTC of Makati rendered a decision on the case,
the dispositive portion of which we reproduce as follows:
WHEREFORE, judgment is hereby rendered ordering
the defendants to pay jointly and severally plaintiff the
(1) sum of P4,366,332.46 representing the deficiency
claim of the latter as of March 31, 1984, plus 21%
interest per annum and other charges from April 1,
1984 until the whole amount is fully paid and (2) the
costs of the suit. SO ORDERED."
4
The Court of Appeals affirmed the RTC decision. Hence, this Petition.
The petition raises the following grounds:
1. Respondent appellate court gravely erred in not
reversing the decision of the trial court, and in not
holding that the public auction sale of petitioner
PAMECA's chattels were tainted with fraud, as the
chattels of the said petitioner were bought by private
respondent as sole bidder in only 1/6 of the market
value of the property, hence unconscionable and
inequitable, and therefore null and void.
2. Respondent appellate court gravely erred in not
applying by analogy Article 1484 and Article 2115 of
the Civil Code by reading the spirit of the law, and
taking into consideration the fact that the contract of
loan was a contract of adhesion.
3. The appellate court gravely erred in holding the
petitioners Herminio Teves, Victoria Teves and Hiram
Diday R. Pulido solidarily liable with PAMECA Wood
Treatment Plant, nc. when the intention of the parties
was that the loan is only for the corporation's benefit.
Credit Transactions Full Text Cases Atty. Adviento!!!!#+(
Relative to the first ground, petitioners contend that the amount of
P322,350.00 at which respondent bank bid for and purchased the
mortgaged properties was unconscionable and inequitable considering
that, at the time of the public sale, the mortgaged properties had a total
value of more than P2,000,000.00. According to petitioners, this is evident
from an inventory dated March 31, 1980
5
, which valued the properties at
P2,518,621.00, in accordance with the terms of the chattel mortgage
contract
6
between the parties that required that the inventories "be
maintained at a level no less than P2 million". Petitioners argue that
respondent bank's act of bidding and purchasing the mortgaged properties
for P322,350.00 or only about 1/6 of their actual value in a public sale in
which it was the sole bidder was fraudulent, unconscionable and
inequitable, and constitutes sufficient ground for the annulment of the
auction sale.
To this, respondent bank contends that the above-cited inventory and
chattel mortgage contract were not in fact submitted as evidence before
the RTC of Makati, and that these documents were first produced by
petitioners only when the case was brought to the Court of Appeals.
7
The
Court of Appeals, in turn, disregarded these documents for petitioners'
failure to present them in evidence, or to even allude to them in their
testimonies before the lower courtr.
8
nstead, respondent court declared
that it is not at all unlikely for the chattels to have sufficiently deteriorated
as to have fetched such a low price at the time of the auction sale.
9
Neither did respondent court find anything irregular or fraudulent in the
circumstance that respondent bank was the sole bidder in the sale, as all
the legal procedures for the conduct of a foreclosure sale have been
complied with, thus giving rise to the presumption of regularity in the
performance of public duties.
10
Petitioners also question the ruling of respondent court, affirming the RTC,
to hold private petitioners, officers and stockholders of petitioner PAMECA,
liable with PAMECA for the obligation under the loan obtained from
respondent bank, contrary to the doctrine of separate and distinct
corporate personality.
11
Private petitioners contend that they became
signatories to the promissory note "only as a matter of practice by the
respondent bank", that the promissory note was in the nature of a contract
of adhesion, and that the loan was for the benefit of the corporation,
PAMECA, alone.
12
Lastly, invoking the equity jurisdiction of the Supreme Court, petitioners
submit that Articles 1484
13
and 2115
14
of the Civil Code be applied in
analogy to the instant case to preclude the recovery of a deficiency claim.
15
Petitioners are not the first to posit the theory of the applicability of Article
2115 to foreclosures of chattel mortgage. n the leading case of Ablaza vs.
Ignacio
16
, the lower court dismissed the complaint for collection of
deficiency judgment in view of Article 2141 of the Civil Code, which
provides that the provisions of the Civil Code on pledge shall also apply to
chattel mortgages, insofar as they are not in conflict with the Chattel
Mortgage Law. t was the lower court's opinion that, by virtue of Article
2141, the provisions of Article 2115 which deny the creditor-pledgee the
right to recover deficiency in case the proceeds of the foreclosire sale are
less than the amount of the principal obligation, will apply.
This Court reversed the ruling of the lower court and held that the
provisions of the Chattel Mortgage Law regarding the effects of foreclosure
of chattel mortgage, being contrary to the provisions of Article 2115, Article
2115, in relation to Article 2141, may not be applied to the case.
Sec. 14 of Act No. 1508, as amended, or the chattel Mortgage Law, states:
xxx xxx xxx
The officer making the sale shall, within thirty days
thereafter, make in writing a return of his doings and
file the same in the office of the Registry of Deeds
where the mortgage is recorded, and the Register of
Deeds shall record the same. The fees of the officer
for selling the property shall be the same as the case
of sale on execution as provided in Act Numbered
One Hundred and Ninety, and the amendments
thereto, and the fees of the Register of Deeds for
registering the officer's return shall be taxed as a part
of the costs of sale, which the officer shall pay to the
Register of Deeds. The return shall particularly
describe the articles sold, and state the amount
received for each article, and shall operate as a
discharge of the lien thereon created by the mortgage.
The proceeds of such sale shall be applied to the
payment, first, of the costs and expenses of keeping
and sale, and then to the payment of the demand or
obligation secured by such mortgage, and the residue
shall be paid to persons holding subsequent
mortgages in their order, and the balance, after paying
the mortgage, shall be paid to the mortgagor or
persons holding under him on demand. (Emphasis
supplied).
t is clear from the above provision that the effects of foreclosure under the
Chattel Mortgage Law run inconsistent with those of pledge under Article
2115. Whereas, in pledge, the sale of the thing pledged extinguishes the
entire principal obligation, such that the pledgor may no longer recover
proceeds of the sale in excess of the amount of the principal obligation,
Section 14 of the Chattel Mortgage Law expressly entitles the mortgagor
to the balance of the proceeds, upon satisfaction of the principal obligation
and costs.
Since the Chattel Mortgage Law bars the creditor-mortgagee from
retaining the excess of the sale proceeds there is a corollary obligation on
the part of the debtor-mortgagee to pay the deficiency in case of a
reduction in the price at public auction. As explained in Manila Trading and
Supply Co. vs. Tamaraw Plantation Co.
17
, cited in Ablaza vs. Ignacio,
supra:
While it is true that section 3 of Act No. 1508 provides
that "a chattel mortgage is a conditional sale", it
further provides that it "is a conditional sale of
personal property as security for the payment of a
debt, or for the performance of some other obligation
specified therein." The lower court overlooked the fact
that the chattels included in the chattel mortgage are
only given as security and not as a payment of the
debt, in case of a failure of payment.
The theory of the lower court would lead to the absurd
conclusion that if the chattels mentioned in the
mortgage, given as security, should sell for more than
the amount of the indebtedness secured, that the
creditor would be entitled to the full amount for which
it might be sold, even though that amount was greatly
in excess of the indebtedness. Such a result certainly
was not contemplated by the legislature when it
adopted Act No. 1508. There seems to be no reason
supporting that theory under the provision of the law.
The value of the chattels changes greatly from time to
time, and sometimes very rapidly. f for example, the
chattels should greatly increase in value and a sale
under that condition should result in largely
overpaying the indebtedness, and if the creditor is not
permitted to retain the excess, then the same token
would require the debtor to pay the deficiency in case
of a reduction in the price of the chattels between the
date of the contract and a breach of the condition.
Mr. Justice Kent, in the 12th Edition of his
Commentaries, as well as other authors on the
question of chattel mortgages, have said, that "in case
of a sale under a foreclosure of a chattel mortgage,
there is no question that the mortgagee or creditor
may maintain an action for the deficiency, if any
should occur." And the. fact that Act No. 1508 permits
a private sale, such sale is not, in fact, a satisfaction
of the debt, to any greater extent than the value of the
property at the time of the sale. The amount received
at the time of the sale, of course, always requiring
good faith and honesty in the sale, is only a payment,
Credit Transactions Full Text Cases Atty. Adviento!!!!#+)
pro tanto, and an action may be maintained for a
deficiency in the debt.
We find no reason to disturb the ruling in Ablaza vs Ignacio, and the cases
reiterating it.
18
Neither do We find tenable the application by analogy of Article 1484 of the
Civil Code to the instant case. As correctly pointed out by the trial court,
the said article applies clearly and solely to the sale of personal property
the price of which is payable in installments. Although Article 1484,
paragraph (3) expressly bars any further action against the purchaser to
recover an unpaid balance of the price, where the vendor opts to foreclose
the chattel mortgage on the thing sold, should the vendee's failure to pay
cover two or more installments, this provision is specifically applicable to a
sale on installments.
To accommodate petitioners' prayer even on the basis of equity would be
to expand the application of the provisions of Article 1484 to situations
beyond its specific purview, and ignore the language and intent of the
Chattel Mortgage Law. Equity, which has been aptly described as "justice
outside legality", is applied only in the absence of, and never against,
statutory law or judicial rules of procedure.
19
We are also unable to find merit in petitioners' submission that the public
auction sale is void on grounds of fraud and inadequacy of price.
Petitioners never assailed the validity of the sale in the RTC, and only in
the Court of Appeals did they attempt to prove inadequacy of price through
the documents, i.e., the "Open-End Mortgage on nventory" and inventory
dated March 31, 1980, likewise attached to their Petition before this Court.
Basic is the rule that parties may not bring on appeal issues that were not
raised on trial.
Having nonetheless examined the inventory and chattel mortgage
document as part of the records, We are not convinced that they
effectively prove that the mortgaged properties had a market value of at
least P2,000,000.00 on January 18, 1984, the date of the foreclosure sale.
At best, the chattel mortgage contract only indicates the obligation of the
mortgagor to maintain the inventory at a value of at least P2,000,000.00,
but does not evidence compliance therewith. The inventory, in turn, was as
of March 31, 1980, or even prior to April 17, 1980, the date when the
parties entered into the contracts of loan and chattel mortgage, and is far
from being an accurate estimate of the market value of the properties at
the time of the foreclosure sale four years thereafter. Thus, even assuming
that the inventory and chattel mortgage contract were duly submitted as
evidence before the trial court, it is clear that they cannot suffice to
substantiate petitioners' allegation of inadequacy of price.1wphi1.nt
Furthermore, the mere fact that respondent bank was the sole bidder for
the mortgaged properties in the public sale does not warrant the
conclusion that the transaction was attended with fraud. Fraud is a serious
allegation that requires full and convincing evidence,
20
and may not be
inferred from the lone circumstance that it was only respondent bank that
bid in the sale of the foreclosed properties. The sparseness of petitioners'
evidence in this regard leaves Us no discretion but to uphold the
presumption of regularity in the conduct of the public sale.
We likewise affirm private petitioners' joint and several liability with
petitioner corporation in the loan. As found by the trial court and the Court
of Appeals, the terms of the promissory note unmistakably set forth the
solidary nature of private petitioners' commitment. Thus:
On or before May 12, 1980, for value received,
PAMECA WOOD TREATMENT PLANT, NC., a
corporation organized and existing under the laws of
the Philippines, with principal office at 304 El Hogar
Filipina Building, San Juan, Manila, promise to pay to
the order of DEVELOPMENT BANK OF THE
PHLPPNES at its office located at corner Buendia
and Makati Avenues, Makati, Metro Manila, the
principal sum of TWO HUNDRED SXTY SEVEN
THOUSAND EGHT HUNDRED AND EGHTY ONE &
67/100 US DOLLARS (US$ 267,881.67) with interest
at the rate of three per cent (3%) per annum over
DBP's borrowing rate for these funds. Before the date
of maturity, we hereby bind ourselves, jointly and
severally, to make partial payments as follows:
xxx xxx xxx
n case of default in the payment of any installment
above, we bind ourselves to pay DBP for
advances . . .
xxx xxx xxx
We further bind ourselves to pay additional interest
and penalty charges on loan amortizations or portion
thereof in arrears as follows:
xxx xxx xxx
n addition to the above, we also bind ourselves to
pay for bank advances for insurance premiums,
taxes . . .
xxx xxx xxx
We further bind ourselves to reimburse DBP on a pro-
rata basis for all costs incurred by DBP on the foreign
currency borrowings from where the loan shall be
drawn . . .
xxx xxx xxx
n case of non-payment of the amount of this note or
any portion of it on demand, when due, or any other
amount or amounts due on account of this note, the
entire obligation shall become due and demandable,
and if, for the enforcement of the payment thereof, the
DEVELOPMENT BANK OF THE PHLPPNES is
constrained to entrust the case to its attorneys, we
jointly and severally bind ourselves to pay for
attorney's fees as provided for in the mortgage
contract, in addition to the legal fees and other
incidental expenses. n the event of foreclosure of the
mortgage securing this note, we further bind
ourselves jointly and severally to pay the deficiency, if
any. (Emphasis supplied)
21
The promissory note was signed by private petitioners in the following
manner:
PAMECA WOOD TREATMENT PLANT, NC.
By:
(Sgd) HERMNO G. TEVES
(For himself & as President of above-named
corporation)
(Sgd) HRAM DDAY PULDO
(Sgd) VCTORA V. TEVES
22
From the foregoing, it is clear that private petitioners intended to bind
themselves solidarily with petitioner PAMECA in the loan. As correctly
submitted by respondent bank, private petitioners are not made to answer
for the corporate act of petitioner PAMECA, but are made liable because
they made themselves co-makers with PAMECA under the promissory
note.
Credit Transactions Full Text Cases Atty. Adviento!!!!#+*
N VEW OF THE FOREGONG, the Petition is DENED and the Decision
of the Court of Appeals dated April 23, 1992 in CA G.R. CV No. 27861 is
hereby AFFRMED. Costs against petitioners.
SO ORDERED.