Credit Transactions

1st Batch-Jess

PNB v. Se, Jr., GR 119231, 18 April 1996

Noahs Sugar Ark Refinery issued five warehouse receipts
which were negotiated and endorsed to Ramos and Zoleta
who failed to pay PNB for the loans that matured where they
used said quedans as security for the loans. PNB demanded
to Noahs Ark delivery of the sugars which Noahs Ark refused
to comply with alleging ownership over the sugars when
Zoleta and Ramos also failed to pay Noahs Ark on the
dishonored checks. SC ruled that PNB owns the sugars.
Noahs Ark is now claiing warehouse lien over the sugars and
refused to deliver to PNB until that is paid.
W/N PNB is entitled to a warehouse lien?
Yes, delivery of sugars shall be effected only upon payment
of the storage fees. Imperative is the right of the
warehouseman to demand payment of his lien at this
juncture, because, in accordance with Section 29 of the
Warehouse Receipts Law, the warehouseman loses his lien
upon goods by surrendering possession thereof. In other
words, the lien may be lost where the warehouseman
surrenders the possession of the goods without requiring
payment of his lien, because a warehousemans lien is
possessory in nature. PNB is estopped from disclaiming
liability since it anchors its claim on the warehouse receipt to
which the conditions were written including the payment of
the warehouse lien.

Feati Bank and Trust v CA, GR 94209, 30 April

1991
Villlaluz agreed to sell to Christiansen 2000 lauan logs at
$27/cubic meter which Christiansen would sell at $37/cubic
meter for a profit of $10/cubic meter. Hanmi as consignee
issued an irrevocable Letter of credit through Security Pacific
National Bank of Los Angeles (issuing bank) which was

mailed to FEATI Bank as notifying bank with the instruction

that the LOC be forwarded to the beneficiary. One of the
documents required was a certification from Han-Axel
Chrisitiansen, Ship and Merchandise Broker, stating that the
logs have been approved prior to shipment in accordance
with the terms and conditions of corresponding purchase
order. This was not complied with despite several demands of
Villaluz. Delivery pushed through without compliance of the
condition so FEATI refused to advance the payment to
Villaluz. A complaint was filed making FEATI and Christiansen
solidarily liable to Villaluz when Christiansen absconded.
W/N FEATI is liable to Villaluz?
A correspondent bank which departs from what has been
stipulated under the letter of credit, as when it accepts a
faulty tender, acts on its own risks and it may not thereafter
be able to recover from the buyer or the issuing bank, as the
case may be, the money thus paid to the beneficiary Thus
the rule of strict compliance. Letters of credit are to be
strictly complied with which documents, and shipping
documents must be followed as stated in the letter. There is
no discretion in the bank or trust company to waive any
requirements. The functions assumed by a correspondent
bank are classified according to the obligations taken up by
it. The correspondent bank may be called a notifying bank, a
negotiating bank, or a confirming bank. In case of a notifying
bank, the correspondent bank assumes no liability except to
notify and/or transmit to the beneficiary the existence of the
letter of credit. In the case of a confirming bank, the
correspondent bank assumes a direct obligation to the seller
and its liability is a primary one as if the correspondent bank
itself had issued the letter of credit. In this case, FEATI was
only a notifying bank its responsibility was solely to notify
and/or transmit the documentary of credit to the private
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Credit Transactions
respondent which was the instruction of the issuing bank that
the LOC e forwarded to the beneficiary. FEATI is not liable.

MWSS v Daway and Maynilad Water, GR 160732,

21 June 3004
MWSS granted Maynilad a 25 year concession agreement to
manage water sewerage in the West Zone Area. As
consideration, Maynilad would pay on various dates so
Maynilad arranged for a 3-year facility with different banks
led by Citycorp which led to the issuance of an irrevocable
LOC. Because of the depreciation of the Philippine peso,
Maynilad asked for a mechanism to make up for the losses
but MWSS refused. Maynilad also filed a force majeure notice
that MWSS made a formula so that Maynilad could pay the
fees agreed upon. Maynilad filed for a rehabilitation order so
a stay order was issued. MWSS submitted a written notice to
Citicorp to demand the payment of US$98,239,640.15 to be
drawn from the Irrevocable Letter of Credit.
W/N WON respondent JUDGE erred in enjoining petitioner
from seeking the payment of concession fees from the
Irrevocable Letter of Credit issued by the bank.
Yes. The irrevocable LOC was not included in the financial
statement of Maynilad as part of its assets and liabilities.
Letters of credit were developed for the purpose of insuring
to a seller payment of a definite amount upon the
presentation of documents and is thus a commitment by the
issuer that the party in whose favor it is issued and who can
collect upon it will have his credit against the applicant of the
letter, duly paid in the amount specified in the letter. They
are in effect absolute undertakings to pay the money
advanced or the amount for which credit is given on the faith
of the instrument. They are primary obligations and not
accessory contracts and while they are security
arrangements, they are not converted thereby into contracts
of guaranty. The participating banks obligation are solidary

with respondent Maynilad in that it is a primary, direct,

definite and an absolute undertaking to pay and is not
conditioned on the prior exhaustion of the debtors assets.
These are the same characteristics of a surety or solidary
obligor. Being solidary, the claims against them can be
pursued separately from and independently of the
rehabilitation case.

Colinares and Veloso v CA, GR No. 90828, 5

September 2000
Colinares and Veloso had a contract with Carmelite Sisters for
the renovation of their convent. They obtained construction
materials from CM Builders and the day after applied for LOC
with PBC for the payment of the materials. Petitioner signed
a trust receipt as security. When demand was made, Veloso
confessed that they lost money because of the Carmelite
Project. While the modification for payment was ongoing, PBC
filed a violation of Trust Receipts Law charging Colinares and
Veloso of estafa.
W/N petitioners violated the Trust Receipts Law
There are two possible situations in a trust receipt
transaction. The first is covered by the provision which refers
to money received under the obligation involving the duty to
deliver it (entregarla) to the owner of the merchandise
sold. The second is covered by the provision which refers to
merchandise received under the obligation to return it
(devolvera) to the owner. Transaction was a simple loan since
petitioners obtained the materials a day before they obtained
the loan ad signed the trust receipt.
This situation belies what normally obtains in a pure trust
receipt transaction where goods are owned by the bank and
only released to the importer in trust subsequent to the grant
of the loan.
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Credit Transactions

Velasquez v Solidbank, G.R. No. 157309, 28

March 2008
Velasquez under the business name of Wilderness Trading is
engaged with the selling of sea cucumbers. Business
transaction happened between Wilderness and Goldwell
Trading of Korea so as payment, Goldwell opened a LOC with
Bank of Seoul. Velasquez applied for credit accommodation in
lieu of the two successful LOC transactions but the third
transaction, a sight draft was negotiated to be drawn on the
LOC and a letter of undertaking was made with Velasquez
making a promise that the Bank of Seoul will accept the draft
and holds himself liable if the draft will not be accepted.
Solidbank advanced payment to Velasquez but Bank of Seoul
failed to collect with Goldwell as it issued a stop payment
order after receiving sacks that do not contain dried sea
cucumbers but contained soil instead. Solidbank demanded
payment to which Velazquez failed to pay.
W/N Velazquez is liable under the sight draft or letter of
undertaking?
He is not liable under the sight draft but he is liable for the
letter of the undertaking since it is a separate contract from
the sight draft. The liability of petitioner under the letter of
undertaking is direct and primary. It is independent from his
liability under the sight draft. Liability subsists even if the
sight draft was dishonored for non-acceptance or nonpayment. Petitioner is not only a mere guarantor under the
letter of credit as he cannot be both the primary debtor and
guarantor of his own debt. This is inconsistent with the very
purpose of a guarantee which is for the creditor to proceed

against a third person if the debtor defaults in his obligation.

Petitioner bound himself liable to respondent under the letter
of undertaking if the sight draft is not accepted. He also
warranted that the sight draft is genuine; that the respondent
bank will pay it in accordance to the terms and that he will be
held liable for the full amount of the draft upon demand.
Petitioner breached his undertaking when the Bank of Seoul
dishonored the sight draft and Goldwell Trading ordered a
stop payment order.

Philippine Blooming Mills v CA, GR 142381, 15 Oct

2003
Ching, VP Phil. Blooming Mills (PBM) in his personal
capacity and not as corporate officer signed a deed of
suretyship as primary obligor and not a mere guarantor
of Traders Royal Bank to warrant the due and punctual
payment of Phil. Blooming Mills on the amounts PBM may
now be indebted or may be hereafter indebted to TRB .
Traders Royal Bank granted PBM application by Ching in
his capacity as VP of LOC. In the undertaking, it states
that the one who signed agree to be solidarily liable to
pay on demand on the bank. PBM also obtained a trust
loan and Ching signed as co-maker in the Promissory
Note. PBM defaulted in payment. Upon application of
PBM for suspension of payments with SEC, SEC placed
all of PBMs assets under rehabilitation receivership of
Kalaw, Escaler and Associates.
W/N Ching is liable for the PBM obligations contracted after
execution of Deed of Suretyship?

Ching is liable for credit obligations contracted by PBM

against TRB before and after the execution of the 21 July
1977 Deed of Suretyship. This is evident from the deed itself,
referring to amounts PBM "may now be indebted or may
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Credit Transactions
hereafter become indebted" to TRB. The law expressly allows
a suretyship for "future debts". Article 2053 of the Civil Code
provides:
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.
A guaranty may be given to secure even future debts, the
amount of which may not be known at the time the guaranty
is executed. 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.
In granting the loan to PBM, TRB required Chings surety
precisely to insure full recovery of the loan in case PBM
becomes insolvent or fails to pay in full. This was the very
purpose of the surety. Thus, Ching cannot use PBMs failure
to pay in full as justification for his own reduced liability to
TRB. As surety, Ching agreed to pay in full PBMs loan in case
PBM fails to pay in full for any reason, including its
insolvency.TRB, as creditor, has the right under the surety to
proceed against Ching for the entire amount of PBMs loan.
This is clear from Article 1216 of the Civil Code:
ART. 1216. The creditor may proceed against any one of the
solidary debtors or some or all of them simultaneously. The
demand made against one of them shall not be an obstacle
to those which may subsequently be directed against the
others, so long as the debt has not been fully collected.

Atok Finance v CA, G.R. No. 80078, 18 May 1993

Sanyu Chemical Corp. as principal along with private
stockholders executed a Continuing Suretysip Agreement in
favour of Atok as creditor. Sanyu Chemical assigned its trade

receivables in consideration of receipt to Atok Finance of a

certain amount and assigned receivables carried a standard
term of 30 days(could be extended up to 120 days as
commercial practice). Atok filed an action against Sanyu,
Arrieta spouses, Pablito Bermudo (stockholders) to collect a
sum of money. Atok alleged that Sanyu failed to collect
amount of the trade receivables and sought dismissal as
claim had already prescribed under Art. 1629of CC. They
contended that the Continuing Suretyship is null and void
being an accessory contract, at the time it was executed;
Sanyu had no pre-existing obligation due to Atok.
W/N Whether the individual private respondents may be held
solidarily liable with Sanyu Chemical under the provisions of
the Continuing Suretyship Agreement, or whether that
Agreement must be held null and void as having been
executed without consideration and without a pre-existing
principal obligation to sustain it.
A guaranty or a suretyship agreement is an accessory
contract in the sense that it is entered into for the purpose of
securing the performance of another obligation which is
denominated as the principal obligation. It is also true that
Article 2052 of the Civil Code states that "a guarantee cannot
exist without a valid obligation." Nevertheless, a guaranty
may be constituted to guarantee the performance of a
voidable or an unenforceable contract. It may also guarantee
a natural obligation." Moreover, Article 2053 of the Civil Code
states that 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."
Comprehensive or continuing surety agreements are in fact
quite commonplace in present day financial and commercial
practice. A bank or a financing company which anticipates
entering into a series of credit transactions with a particular
company, commonly requires the projected principal debtor
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Credit Transactions
to execute a continuing surety agreement along with its
sureties. By executing such an agreement, the principal
places itself in a position to enter into the projected series of
transactions with its creditor; with such suretyship
agreement, there would be no need to execute a separate
surety contract or bond for each financing or credit
accommodation extended to the principal debtor. As we
understand it, this is precisely what happened in the case at
bar.

1st Batch Kylie

Municipality of Gasan v Marasigan, GR 43486, 30 Sept
1936
Gasan granted Marasigan the privilege of gathering whitefish
pawn. TO secure payment of license fees, Marasigan filed a
bond subscribed by Sevilla & Luna, who bound themselves to
pay IF Marasigan failed to comply with the contract.
The Provincial Board declared contract invalid, therefore
Gasan awarded the privilege to Napa, who in turn failed to
pay the deposit and yielded the privilege to Marasigan.
The Municipality told Marasigan that the contract was to be
effective so the municipality sought to recover from
Marasigan + sureties the license fee.

be valid when Gasan canceled it, so they are no longer bound

to comply with the terms of the contract.
A guaranty cannot exist without a valid obligation. It is not
presumed. It must be expressed and cannot extend beyond
its specified limits.

Willex Plastic Industries v CA, G.R. No. 103066. 25

April 1996
IRIC and IUCP (accommodation party) bound themselves
solidarily, through a continuing surety agreement to pay
obligations of every kind to Manilabank.

IRIC and Willex also executed a continuing guaranty in

favor of IUCP for consideration of the sums obtained by IRIC
from IUCP. IUCP paid to Manilabank the sum representing
IRICs outstanding obligation. IUCP was succeeded by Atrium
Capital Corp.
Atrium demanded from IRIC and Willex the payment of what
IUCP had paid to Manilabank. Neither of them paid so Atrium
filed a case against IRIC and Willex.

Issue: W/N Miguel + Sevilla & Luna are bound to pay the
license fee

Willexs Argument: the continuing agreement, being an

accessory contract, cannot legally exist of the absence of a
valid principal obligation. Since it is not a party to either of
the surety or to the loan agreement bet. IRIC, Manilabank &
Interbank, so it is not liable.

Held: No. They are no longer bound to pay the license fee.
The Contract between Gasan and Marasigan was ceased to

Issue: W/N, under the continuing guaranty, Willex may be

held jointly and severally liable with IRIC
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Credit Transactions
Held: Yes. Willexs argument that is untenable. Willex agreed
to be jointly and severally guarantee IRICs obligation.
The consideration necessary to support a surety obligation
need not to pass directly to the surety, as a consideration to
the principal alone is sufficient . It is never necessary that a
guarantor or surety should receive any part of the benefit is
such there be, accruing to this principal.

Syquia v Palma, G.R. No. L-41320, 9 November 1934

BPI obtained a favorable judgment against Perfecto & Felipe
Jacinto and Rafael Palma. BPI assigned and transferred said
judgment to Gregorio Syquia. Widow of Syquia filed a
complaint against respondents. In this case, Palma is a
guarantor. Palma filed no separate answer nor special
defenses available to him as guarantor, but merely joined in
the answer of his co-defendants pleading that the bank had
been fully paid.
Issue: W/N Palma, as guarantor, is liable for the debt
Held: The action as to the guarantor is premature. The
judgment creditor has made no demand on Palma. Joining
him in the suit against the principal debtor is not the demand
intended by Art. 1832.
According to such, that demand can be made only after
judgment on the debt, for obviously the "exhaustion of the
principal's property" the benefit of which the guarantor
claims cannot even begin to take place before judgment
has been obtained. Only then can the creditor "levy upon the
property of the principal" only then can the liability of the
creditor begin under article 1833 of the Civil Code.

There is no proof that Jacintos are insolvent. The judgment

creditor has not exhausted his remedies against the principal
debtors.

E. Zobel, Inc. v CA, GR 113931, 6 May 1998

Sps. Claveria under Agro Brokers defaulted upon maturity
in paying Solidbank so Solidbank filed a complaint for sum of
money against Sps. Claveria and E. Zobel (guarantor).
E. Zobel moved to dismiss claiming that its liability as
guarantor under the Continuing Agreement is extinguished
pursuant to Art. 2080- ("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)
RTC held that E. Zobel signed as surety based on the
provisions of the documents, thus Art. 2080 will not apply.
Issue: W/N E. Zobel obligated itself to Solidbank as guarantor
or surety
Held: E. Zobel is a surety, thus Art. 2080 will not apply.
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.
Contract of guaranty is a collateral undertaking to pay the
debt of another in case the latter does not pay the debt.
A surety is distinguished from a guaranty in that a guarantor
is the insurer of the solvency of the debtor and thus binds
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Credit Transactions
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.
The contract clearly discloses that petitioner assumed
liability to Solidbank, as a regular party to the undertaking
and obligated itself as an original promissor. It bound itself
jointly and severally to the obligation with the respondent
spouses. In fact, Solidbank need not resort to all other legal
remedies or exhaust respondent spouses' properties before it
can hold petitioner liable for the obligation.
The use of the term "guarantee" does not ipso facto mean
that the contract is one of guaranty. Interpretation of the
contract is not with the title but with the content.

International Finance Corp. v Imperial Textile Mills

IFC extended to PPIC a loan. ITM and Grantex agreed to
guarantee PPICs obligations. PPIC defaulted despite demand
so its properties in Laguna were foreclosed however the
proceeds of the sale left a balance, which PPIC also failed to
pay. IFC demanded payment from ITM and Grantex, as
guarantors.

ITMs argument: by the terms of the Guarantee Agreement, it

was merely a guarantor. Ambiguity in the Agreement should
be construed against IFC -- the party that drafted it.
Issue: W/N ITM and Grandtex are sureties

Held: Creditor was able to show that, although the

agreement was denominated as a Guarantee Agreement, the
contract is a surety: The Guarantors jointly and severally,
irrevocably, absolutely unconditionally guarantee, as primary
obligors and not as sureties
When the obligor undertakes to be jointly and severally liable
= obligation is solidary. If solidary liability was instituted to
guarantee a principal obligation, contract is one of
SURETYSHIP.
Art 1216: The creditor may proceed against any one of the solidary
debtors or some or all of them simultaneously. The demand made
against one of them shall not be an obstacle to those which may
subsequently be directed against the others, so long as the debt
has not been fully collected.

Ong v Phil, Commercial Intl Bank, G.R. 160466, 17 Jan

2005
BMC filed a petition for rehabilitation and suspension of
payments with the Securities and Exchange Commission
(SEC) after its properties were attached by creditors. PCIB
considered BMC in default of its obligations and sought to
collect payment from petitioners (president & treasurer) as
sureties. PCIB filed a case of collection of a sum of money
against the petitioners as sureties on 3 PNs they issued to
secure BMCs loans.
Petitioners moved to dismiss - under the MOA, the creditor
banks agreed to temporarily suspend any pending civil action
against BMC, so the benefits of the MOA should be extended
to petitioners, as BMCs sureties.
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Credit Transactions
Issues: W/N the benefits of the MOA extends to the
petitioners
Held: No. Art. 2063 & 2081 refer to contracts of guaranty and
do not apply to suretyship contracts. In this case, petitioners
are sureties of BMCs debts. The provisions of the MOA
regarding the suspension of payments by BMC and the nonfiling of collection suits by the creditor banks pertain only to
the property of the principal debtor BMC. Nothing in the MOA
that involves the liabilities of the sureties.
o GUARANTOR insures the solvency of the debtor
Gives rise to a subsidiary obligation on the part of the
guarantor.
EXCUSSION: only after the creditor has proceeded against
the properties of the principal debtor

o SURETY is an insurer of the debt itself

Gives rise to a principal/solidary obligation on the part of the

surety
the benefit of excussion is not available to the surety as he
is principally liable
1216: creditor can go directly against the surety although
the principal debtor is solvent/able to
surety is directly, equally and absolutely bound with the
principal debtor for the payment of and the debt remains
unsatisfied can a guarantor can be held liable to answer pay
or no demand is made on him the debt and is deemed as an
original promissor and debtor from the beginning

Manila Surety v Batu Construction, GR L-9353, 21 May

1957

Batus requested the petitioner to place a surety bond in favor

of RP for a construction project of Bacarra Bridge for any
damage, loss, costs, charges or expenses of whatever kind in
nature. The government annulled the project because of
unsatisfactory work, and notified Manila Surety that it would
hold it liable to the amount incurred by the government in
building the bridge.

Defendants argument: 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.
Issue: W/N the last paragraph of Art. 2071 may be availed of
by a Surety
Art. 2071. The guarantor, even before having paid, may proceed against
the principal debtor:
(1) When he is sued for the payment;
(2) In case of insolvency of the principal debtor;
(3) When the debtor has bound himself to relieve him from the
guaranty within a specified period, and this period has expired;
(4) When the debt has become demandable, by reason of the
expiration of the period for payment;
(5) After the lapse of ten years, when the principal obligation has no
fixed period for its maturity, unless it be of such nature that it
cannot be extinguished except within a period longer than ten
years;
(6) If there are reasonable grounds to fear that the principal debtor
intends to abscond;
(7) If the principal debtor is in imminent danger of becoming insolvent.
In all these cases, the action of the guarantor is to obtain release from the
guaranty, or to demand a security that shall protect him from any
proceedings by the creditor and from the danger of insolvency of the
debtor.

Held: Plaintiff's cause of action comes under par. 1 of article

2071 of the new Civil Code, because the action brought by
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Credit Transactions
Ricardo Fernandez and 105 persons is in connection with the
construction of the Bacarra Bridge.
However, 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, and the fact that 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.

NCC, the absence of express stipulation characterizing an

obligation as solidary makes the obligation joint. The Court
likewise deemed it proper to discusses on the difference
between a situation of solidary liability and a suretyship:
As to credits remedy (same)
In both a solidary obligation and a surety, the Creditor may
compel the debtor or the surety to answer for the full amount
of the principal debt; however
As to debtor or suretys remedy (different)
In a solidary obligation, the solidary debtor can only claim
from his co-debtors only the share which corresponds to each
with interest for the payment already made and not the full
amount
In a suretyship, a surety may claim the full amount, by virtue
of his right to subrogation and his right to indemnity
The rights as established and granted to the guarantor by
Arts. 2066 (right of indemnification) and 2067 (right of
subrogation) apply to a Suretyship

Philippine Blooming Mills v CA, GR 142381, 15 Oct

2003

1st Batch-Louisse

Escano v Ortigas, GR 151953, 29 June 2007

Falcon originally obtained a loan from PDCP and as
security thereto, Escano executed a guaranty. After making
few installments, Falcon defaulted. Hence, PDCP filed a
collection suit against Falcon as principal and Escano as
guarantor on the basis of an Undertaking signed by the latter
purportedly binding himself solidarily with PDCP.
Ruling: Escao, Silos and Matti are merely jointly liable to
Ortigas, and not solidarily liable to Ortigas. Under Art. 1217

In 1980, Traders Royal Bank granted PBM Letters of

Credit in favor of PBM. Subsequently, Alfredo Ching in his
capacity as an officer of PBM executed a Deed of Suretyship
to warrant the timely payment of all present and future
obligations of the company. During the course of its business,
PBM obtained further loans from TRB. However, PBM
defaulted, hence, TRB went after Ching and compelled the
latter to settle PBMs loan obligations.
Issue: W/N AC is liable for the PBM obligations contracted
after execution of Deed of Suretyship
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Credit Transactions
Ruling: Ching is liable for credit obligations by PBM ] against
TRB before and after the execution of the Deed of Suretyship,
as evidenced by stipulations in the Deed. Surety ensures that
the principal pays the debt or performs its obligation
covering a series of transactions, generally for an indefinite
time or until revoked liable
Article 2033: A guaranty may also be given as security for
future debts There can be no claim against the guarantor
until the debt is liquidated
Concept of Continuing Guaranty
1. Not limited to a single transaction, but which
contemplates a future course of dealing,
2. Contemplates a succession of liabilities, for which, as
they accrue, the guarantor becomes liable
3. Particular words that indicate continuing guaranty:
from time to time; any debt; any transaction; at
any time; or such time

Adriano v Pangilinan, GR 137471, 16 January 2002

Adriano,owner of a parcel of land,entrusted the original
owners copy of TCT to Angelina Salvador, a distant relative,
to secure a mortgage. However, without Adrianos consent
and knowledge, Salvador mortgaged the property to a third
party. Upon discovery, Adriano filed a complaint against
Salvador in connection with the execution of the allegedly
falsified deed of real estate mortgage.
Issue: WON consent is essential in determining who must
bear the loss in assailing the validity of a mortgage contract
Ruling: It is clear that petitioner who is undisputedly the
property owner -- did not mortgage the property
himself. Neither did he authorize Salvador or anyone else to
do so

Article 2085 of the Civil Code enumerates

the essential requisites of a mortgage,
(1) That they be constituted to secure the fulfillment of a
principal obligation;
(2) That the pledgor or mortgagor be the absolute owner of
the thing pledged
(3) That the persons constituting the pledge or mortgage
have the free disposal of their property, and in the absence
thereof, that they be legally authorized for that purpose.
In the case at bar, not only was it proven in the trial court
that the signature of the mortgagor had been forged, but
also that somebody else -- an impostor -- had pretended to
be the former when the mortgagee made an ocular
inspection of the subject property.
It is clear that petitioner who is undisputedly the property
owner -- did not mortgage the property himself. Neither did
he authorize Salvador or anyone else to do so
Dizon v Suntay, GR L-30817, 29 September 1972
Suntay commissioned the sale of her 3 carat diamond ring to
Clarita Sison. However, far from complying with her
obligation, Clarita instead of selling the jewelry pledged it
with Dizons pawnshop. Upon discovering ehat happened,
Suntay went and sought to recover the ring from Dizon but
the latter refused.
Issue: WON Suntay has a right to possess the pledged ring
Ruling: Art. 559 of the CC states that the possession of a
movable property acquired in good faith is equivalent to a
title. Nevertheless, one who has lost any movable or has
been unlawfully deprived thereof may recover it from the
person in possession of the same. If the possessor of a
movable lost of which the owner has been unlawfully
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Credit Transactions
deprived, has acquired it in good faith at a public sale, the
owner cannot obtain its return without reimbursing the
Cavite Development v Lim, G.R. No. 131679. 1 Feb
2000
Guansing obtained a loan from CDB, as security, he
mortgaged his land . However, due to his failure to pay his
obligation, CDB foreclosed and sold the property in a public
auction. Afterwhich, Lim, offered to purchase the property
from CDB, however, after learning that the land is not
registered under the name of the original mortgagor, Lim
filed an action for specific performance and impugning
serious misrepresentation against CDB.
Issue: WoN petitioner bank should be liable to respondents
for the nullity of the contract of sale between them
Ruling: CDB cannot be considered a mortgagee in good faith.
While petitioners are not expected to conduct an exhaustive
investigation on the history of the mortgagor's title, they
cannot be excused from the duty of exercising the due
diligence required of banking.
A foreclosure sale, though essentially a "forced sale," is still a
sale in accordance with Art. 1458 of the Civil Code, under
which the mortgagor in default, the forced seller, becomes
obliged to transfer the ownership of the thing sold to the
highest bidder who, in turn, is obliged to pay therefor the bid
price in money or its equivalent. Being a sale, the rule that
the seller must be the owner of the thing sold also applies in
a foreclosure sale. This is the reason Art. 2085 of the Civil
Code, in providing for the essential requisites of the contract
of mortgage and pledge, requires, among other things, that
the mortgagor or pledgor be the absolute owner of the thing
pledged or mortgaged, in anticipation of a possible

foreclosure sale should the mortgagor default in the payment

of the loan.
Exception: Doctrine of mortgagee in good faith: if
buyer/mortgagees are in good faith, the sale is given effect
by reason of public policy. Based on the rule that all persons
dealing with property covered by a Torrens Certificate of Title,
as buyers or mortgagees, are not required to go beyond what
appears on the face of the title. If they relied upon it in good
faith, the buyer/mortgagee is protected.
DBP v CA, GR 118367 & 118342, 5 January 1998
Cuba ontained 3 loans from DBP, as security thereto, she
executed 2 Deeds of assignment of her leasehold rights.
Subsequently, Cuba defaulted, however, without any
foreclosure proceeding, the bank appropriated for
themselves the Leasehold right.
Issue: WON the act of DBP in appropriating to itself CUBAs
leasehold rights without foreclosure proceeding valid
Ruling: The elements of pactum commissorium are as
follows: (1) there should be a property mortgaged by way of
security for the payment of the principal obligation, and (2)
there should be a stipulation for automatic appropriation by
the creditor of the thing mortgaged in case of non-payment
of the principal obligation within the stipulated period.

Bustamante v Rosel, GR 126800, 29 November

1999
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Credit Transactions
Bustamante obtained a loan from Rosel secured by a REM
with a stipulation that in the event of default the lender has
an option to buy the property. Bustamante defaulted.
Issue: WON the stipulation automatically appropriating the
subject lot to Rosel valid.
Ruling. No. The stipulation constitutes pactum commissoriam
The elements of pactum commissorium are as follows:
(1) there should be a property mortgaged by way of security
for the payment of the principal obligation, and
(2) there should be a stipulation for automatic appropriation
by the creditor of the thing mortgaged in case of nonpayment of the principal obligation within the stipulated
period.
In this case, the intent to appropriate the property given as
collateral in favor of the creditor appears to be evident, for
the debtor is obliged to dispose of the collateral at the preagreed consideration amounting to practically the same
amount as the loan. In effect, the creditor acquires the
collateral in the event of non-payment of the loan. This is
within the concept of pactum commissorium. Such stipulation
is void.
2nd Batch-Jess

Ong v Roban Lending, GR 172592, 9 July 2008

Sps. Ong obtained several loans from Roban Lending
Corporation (Roban) secured by real estate mortgage on the
sps. Ongs parcels of land in Tarlac City. Both parties
executed a amendment to amended real estate mortgae
consolidating their loans and on the same date, spouses
execute a dacion in payment agreement where spouses
assigned their properties to Roban in payment of their total
obligation. A MOA was executed that spouses will pay the
consolidated outstanding obligations within one year or

failure to do would mean that spouses Ong agree to the

dacion in payment in favour of Roban. Subsequently, Ong
filed a complaint against Roan alleging that the MOA having
the dacion in payment was void for being pactum
commisorium.
W/N the Memorandum of Agreement and Dation in Payment
constitute pactum commissorium prohibited under Art.2088
NCC?
The Memorandum of Agreement and Dacion in Payment
constitute pactum commissorium, which is prohibited under
Article 2088 of the Civil Code which provides:
The creditor cannot appropriate the things given by way of
pledge or mortgage, or dispose of them. Any stipulation to
the contrary is null and void."
The elements of pactum commissorium, which enables the
mortgagee to acquire ownership of the mortgaged property
without the need of any foreclosure proceedings, are: (1)
there should be a property mortgaged by way of security for
the payment of the principal obligation, and (2) there should
be a stipulation for automatic appropriation by the creditor of
the thing mortgaged in case of non-payment of the principal
obligation within the stipulated period. Here, the MOA and
the Dacion in Payment contain no provisions for foreclosure
proceedings nor redemption. Under the Memorandum of
Agreement, the failure by the petitioners to pay their debt
within the one-year period gives respondent the right to
enforce the Dacion in Payment transferring to it ownership of
the properties. In effect, Roban automatically acquires
ownership of the properties upon petitioners failure to pay
their debt within the stipulated period.
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Credit Transactions
Uy Tong v CA, G.R. No. 77465 21 May 1988

b) 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.

Spouses use to be owners of Apt. 307 of LIgaya Bldg. with

leasehold rights for 99 years over the land where the building
stands. The land is registered in the name of Ligaya
Investments. Ligaya Investments sold Apt. 307 and leased a
portion of the land to spouses who purchased from
Bayanihan Automotive 7 units of motor vehicles evidenced
by a written agreement. Spouses after making a down
payment of PHP7000 failed to pay the balance. After a
complaint was filed, an order from CFI ordering spouses to
pay the balance plus interest and failure to do so, Bayanihan
awould execute a deed of absolute sale over Apt. 307.
Bayanihan executed the deed of assignment but spouses
refused to vacate. Bayanihan filed for recovery of possession
which rendered a favorale decision so spouses filed a petion
alleging that the deed of assignment is in the nature of
pactum commisorium.

A perusal of the terms of the questioned agreement evinces

no
basis
for
the
application
of
the pactum
commissorium provision.

W/N deed of assignment is null and void because it is in the

nature of a pactum commissorium and/or was borne out of
the same

Clearly, there was no automatic vesting of title on

BAYANIHAN because it took the intervention of the trial court
to exact fulfillment of the obligation, which, by its very nature
is ". . anathema to the concept of pacto commissorio"

Pactum Commissorium has 2 elements:

a) 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

First, there is no indication of 'any contract of mortgage

entered into by the parties. It is a fact that the parties agreed
on the sale and purchase of trucks.
Second, there is no case of automatic appropriation of the
property by BAYANIHAN. When the petitioners defaulted in
their payments of the second and third installments of the
trucks they purchased, BAYANIHAN filed an action in court for
specific performance. The trial court rendered favorable
judgment for BAYANIHAN and ordered the petitioners to pay
the balance of their obligation and in case of failure to do so,
to execute a deed of assignment over the property involved
in this case. The petitioners elected to execute the deed of
assignment pursuant to said judgment.

Guanzon v Argel, G.R. No. L-27706, 16 June

1970
Dumaraog filed an action against Guanzon for redemption of
parcel of land in Antique as Dumaraogs mother mortgaged
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Credit Transactions
to Guanzon said land. Guanzon alleged that the document
was a pacto de retro and title as vendee has been
consolidated. Judge Argel ordered Guanzon to make a
reconveyance in favor of Dumaraog and shall be executed
withn 20 days from payment of Dumaraog as document
involved is one of mortgage. Dumaraog failed to pay and was
given additional 10 days to deposit payment and upon
application of the bill of costs, was granted. Dumaraog
eventually paid but Guanzon opposed the orders given by the
judge on the extension of payment and approval of bill of
costs.
W/N respondent Judge acted in excess of his jurisdiction and
with grave abuse of discretion?
Sec. 10 Rule 39 of the Rules of Court states that:
SEC. 10. Judgment for specific acts; vesting title. If a
judgment directs a party to execute a conveyance of land, or
to deliver deeds or other documents, or to perform any
other specific act, and the party fails to comply within the
time specified, the court may direct the act to be done at
the costs of the disobedient party by some other person
appointed by the court and the act when so done shall have
like effect as if done by the party. If real or personal property
is within the Philippines, the court in lieu of directing a
conveyance thereof may enter judgment divesting the title
of any party and vesting it in others and such judgment shall
have the force and effect of a conveyance executed in due
form of law. To apply that if Dumaraog failed to pay within
the specified time, Sheriff would convey the land to Guanzon
is wrong.
As the contract between the parties is a mortgage contract,
the only right of mortgagee (Guanzon) in case of nonpayment of debt is to foreclose the mortgage and have the
encumbered property sold to satisfy the indebtedness. The

mortgagors (Dumaraog) default does not mean that the

ownership will be transferred to mortgagee (Guanzon) as
this is against public policy. It was correct for Judge Argel to
refuse in ordering Sheriff to convey property to Guanzon as
she prayed for and instead ordered Guanzon to reconvey
property to Dumaraog after receiving PHP1500.

Central Bank v CA and Tolentino, G.R. No. L45710, 3 October 1985

Sulpicio M. Tolentino obtained a loan from Island Savings
Bank worth P80,000 with real estate mortgage over his 100hectareland in Agusan. Only 17,000 were released for
Tolentino. MonetaryBank issued a resolution stating that
Island Savings Bank is suffering liquidity problems and is
prohibited from making new loans and investments.
Subsequently, Monetary Board provided another resolution
prohibiting Bank fromdoing business due to insolvency. Island
Savings Bank filed an extra-judicial foreclosure of the real
estate of Tolentino in view of the non-payment of the 17k
loan. Tolentino on the other hand filed for specific
performance over the 63000 that was not released. RTC
dismissed Tolentinos petition and CA modified the decision
that the bank can neither foreclose the mortgage nor collect
17,000.
W/N Tolentino is liable to pay for the 17,000 debt and
assuming he is liable, can his real estate mortgage be
foreclosed to satisfy the amount?

Because of the resolution that Bank is prohibited from doing

business, the only option that Tolentino could execute is
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Credit Transactions
rescission but only on the part where the obligation of the
Bank was complied with, the release of 17,000 and not on
the remaining 63,000 that was no complied with. Being a
reciprocal obligation, Tolentino has the obligatin on his part to
pay for 17,000 which he failed to do.
When there is partial failure of consideration, the mortgage
becomes unenforceable to the extent of such failure. Since
Island Savings Bank failed to furnish the P63,000.00, the real
estate mortgage of Sulpicio M. Tolentino became
unenforceable to such extent. P63,000.00 is 78.75% of
P80,000.00, hence the real estate mortgage covering 100
hectares is unenforceable to the extent of 78.75 hectares.
The mortgage covering the remainder of 21.25 hectares
subsists as a security for the P17,000.00 debt. 21.25
hectares is more than sufficient to secure a P17,000.00 debt.
The rule of indivisibility of a real estate mortgage provided
for by Article 2089 of the Civil Code is inapplicable to the
facts of this case.
Article 2089 provides:
A pledge or mortgage is indivisible even though the debt
may be divided among the successors in interest of the
debtor or creditor.
Therefore, the debtor's heirs who has paid a part of the debt
can not ask for the proportionate extinguishment of the
pledge or mortgage as long as the debt is not completely
satisfied.

Neither can the creditor's heir who have received his share of
the debt return the pledge or cancel the mortgage, to the
prejudice of other heirs who have not been paid.
The rule of indivisibility of the mortgage as outlined by Article
2089 above-quoted presupposes several heirs of the debtor
or creditor which does not obtain in this case. Hence, the rule
of indivisibility of a mortgage cannot apply

Paray and Espeleta v Rodriguez, GR 132287, 24

Jan. 2006
Rodriguez and Co. were owners of shares of stocks in
Quirino-Leonor-Rodriguz Realty Inc. R&CO. secured loans
using shares of stock to Paray. They failed to pay so
upon filing of Paray for foreclosure, it was favoured upon
and became final and executory. When R&CO. was
informed of the scheduled public auction, they
consigned various amounts with the Clerk of Court but
auction still continued. R&CO. filed for the nullity of the
public sale but lower court held that consignation was
long overdue and was not done within a reasonable
time. CA reversed RTC ruling as consignation was
sufficient and should be aplplied in pursuant of the law
that favoured redemption that buyer at the auction do
not become owners pending the lapse of the one year
period.
W/N a right of redemption can be applied?
W/N consignations acquitted respondents of their
principal obligatons?
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Credit Transactions
No, right of redemption only applies to real properties
and not to personal properties as what is involved in this
case.
What is involved here is a pledge contract which is an
accessory contract. It is discharged if the principal
obligation is extinguished. The right to retain possession
of the item exists only until debt is paid acc. to Art.
2098 of the CC. Art. 2015 of the CC states that the
debtor cannot ask for the return of the thing pledged
against the creditors will unless he has paid the debt
and interest. If this is not satisfied, extrajudicial sales is
proper or proceed with the auction. Phrase of the 1st
decision giving due course to the foreclosure and sale at
public auction may give rise to the impression that such sale
is judicial in character but sale so authorized is actually
extrajudicial in character. The decision to proceed with the
sale by public auction is in the sole discretion of the Parays
because 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 . No similar
option is given to pledgors under the Civil Code
Consignation did not discharge them from the loan.

Yuliongsiu v PNB, GR L-19227, 17 February

1968
Yuliongsiu owned two vessels and such vessels were
purchased from Phil. Shipping Commission. To pay for the
balance, he obtained a loan from PNB and used the vessels
as security for the loan. He executed payments on some
remaining balance with two promissory notes but Yuliongsiu
failed to pay the notes. An estafa case was filed against
Yuliongsiu and PNB took possession of the vessels which led
Yuliongsiu to file a civil action against PNB to recover

vessels.Yuliongsiu said that he needs to be declared in

default first before vessel can be taken in lieu of the chattel
mortgage.
W/N the nature of the agreement was that of a pledge or a
chattel mortgage?
It was a pledge contract as what was admitted by Yuliogsiu in
submitting the contract. It served as a judicial admission that
it was a pledge contract. The defendant bank was, pursuant
to the terms of pledge contract, in full control of the vessels
thru the plaintiff, the former could take actual possession at
any time during the life of the pledge to make more effective
its security. Its taking of the vessels therefore on April 6,
1948, was not unlawful. Nor was it unjustified considering
that plaintiff had just defrauded the defendant bank in the
huge sum of P184,000.
Act 3135 refers only to foreclosure of real estate mortgages.
Whatever formalities there are in Act 3135 do not apply to
pledge. Regarding the bank's authority to be the purchaser in
the foreclosure sale, Sec. 33 of Act 2612, as amended by
Acts 2747 and 2938 only states that if the sale is public, the
bank could purchase the whole or part of the property sold
" free from any right of redemption on the part of the
mortgagor or pledgor." This even argues against plaintiff's
case since the import thereof is this if the sale were private
and the bank became the purchaser, the mortgagor or
pledgor could redeem the property. Hence, plaintiff could
have recovered the vessels by exercising this right of
redemption. He is the only one to blame for not doing so.

Prudential Bank v. Alviar, GR 150197, 28 July

2005
Prudential Bank granted a loan to Don Alviar and to secure
such, a real estate mortgage was executed over the property
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Credit Transactions
which states in part "To secure payment of the P250,000 loan
and those that may be hereafter be obtained." Promissory
note was applied by Don Alviar secured byhold-out on foreign
currency account. Another loan was incurred by Donalco
Trading which was approved and securities for the loan were
the deed of assignment on two promissory notes executed by
Bancom Realty Corporation with Deed of Guarantee in favor
of A.U. Valencia and Co. and the chattel mortgage on various
heavy and transportation equipment. Donalco paid the loan
to Prudential Bank to release the mortgage on property.
Prudential Bank filed for foreclosure over properties because
the payment was for Alviar and not Donalco so it still owes
Prudential Bank an amount over the loans as the contract
included a blanket mortgage clause or dragnet clause.

W/N the real estate mortgage covered other loans?

No, for the additional loans, the security of the foreign
currency account must first be exhausted.

A "blanket mortgage clause," also known as a "dragnet

clause" is one which is specifically phrased to subsume all
debts of past or future origins. Such clauses are "carefully
scrutinized and strictly construed."
In the case at bar, the subsequent loans obtained by
respondents were secured by other securities.A mortgage
with such a clause will not secure a note that expresses on its
face that it is otherwise secured as to its entirety, at least to
anything other than a deficiency after exhausting the
security specified therein, such deficiency being an
indebtedness within the meaning of the mortgage, in the
absence of a special contract excluding it from the
arrangement.
It was therefore improper for petitioner in this case to seek
foreclosure of the mortgaged property because of nonpayment of all the three promissory notes. While the
existence and validity of the "dragnet clause" cannot be
denied, there is a need to respect the existence of the other
security given.

2nd batch Kylie

Philippine Bank of Communications v CA, GR 118552,
5 February 1996
Sps. Casafranca obtained a favorable judgment against
Carlos so it acquired the lot, while on the other hand, PBCom
executed an extrajudicial foreclosure of mortgage for Carlos
loan, which also acquired the lot being the highest bidder.

Casafranca, who stepped into the shoes of Carlos, offered to

redeem the property from PBCom by tendering a check, but
PBCom did not accept the check because if there would be
any redemption, the price considered must be the price it
paid for the lot during the auction sale. PBCom advised
Casafranca to pay P884,281 (principal, interest, charges &
taxes)
PBCom applied for another extrajudicial foreclosure of
mortgage as an auction sale happened. The lot was sold to
Natalie Limchio for P1,184,000.
Sps. Casafranca sought to nullify the sale alleging that the
second foreclosure was void a it was based on a bloated
account and that PBCom refused to turn over the correct
amount of residue after paying off the mortgage and costs of
the sale.
Issue: Whether or not in a foreclosure of a real estate
mortgage, the penalties stipulated in two promissory notes
secured by mortgage may be charged against the
mortgagors as part of the sums secured, although the
mortgage contract does not mention the said penalties.
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Credit Transactions
Held: The Court ruled that the mortgage contract does not
at all mention the penalties stipulated in the promissory
notes. It can be concluded that PBCom did not intend to
include the penalties on the promissory notes in the secured
amount.

Issues:

A mortgage must sufficiently describe the debt sought to be

secured, which description must not be so much as to
mislead or deceive, and an obligation is not secured by a
mortgage unless it comes fairly within the terms of the
mortgage.

Held:

Peoples Bank and Trust

L017500, 16 May 1967

Dahican

Lumber,

GR

DALCO executed in favor of the bank, as security, 2 deeds of

mortgage, which contained contained a provision extending
the mortgage lien to properties to be subsequently acquired.
Both mortgages were registered in the Office of the Register
of Deeds. DALCO and DAMCO failed to pay the fifth
promissory note upon its maturity.
DALCO purchased various machineries, equipment, spare
parts and supplies in addition to, or in replacement of some
of those already owned and used by it on the date aforesaid.
Pursuant to the provision of the mortgage deeds regarding
"after acquired properties," the BANK requested DALCO to
submit complete lists of said properties but the latter failed
to do so.

1. W/N "after acquired properties" covered by and subject to

the deeds of mortgage subject of foreclosure
2. W/N the mortgages are valid and binding in spite of the fact
that they were not registered in accordance with the
provisions of the Chattel Mortgage Law?
1. Yes. Under the fourth paragraph of both deeds of mortgage,
it is crystal clear that all property of every nature and
description that the mortgagor may acquire, "shall
immediately be and become subject to the lien" of both
mortgages in the same manner and to the same extent as if
already included therein at the time of their execution. Such
stipulation is neither unlawful nor immoral, its obvious
purpose being to maintain, to the extent allowed by
circumstances, the original value of the properties given as
security.
2. the "after acquired properties" were purchased by DALCO in
connection with, and for use in the development of its
lumber concession and that they were purchased in addition
to, or in replacement of those already existing in the
premises on July 13, 1950. In Law, therefore, they must be
deemed to have been immobilized, with the result that the
real estate mortgages involved herein which were
registered as such did not have to be registered a second
time as chattel mortgages in order to bind the "after
acquired properties" and affect third parties.

Korea International Bank v. Filkor, GR 138292, 10 April

2002
Filkor was only able to pay $40K out of $140K loan from
petitioner, which is secured by REM improvements
constructed on the lot it was leasing @ Cavite Export
Processing Zone Authority.

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Credit Transactions
Filkor failed to pay. RTC KEBs prayers, however, failed to
order that the property mortgaged by respondent Filkor be
foreclosed and sold at public auction in the event that Filkor
fails to pay its obligations to petitioner.
Issue: W/N petitioners complaint before the RTC was an
action for foreclosure of REM, or an action for collection of a
sum of money
Held: It is an action for foreclosure of REM.
The allegations raised by the petitioner
requirements of Sec. 1, Rule 68 of ROC:

satisfies

the

date and due execution of the mortgage;

its assignments, if any; the names and residences of the
mortgagor and the mortgagee; a description of
the mortgaged property; a statement of the date of the note
or other documentary evidence of the
obligation secured by the mortgage, the amount claimed to
be unpaid thereon; and the names and
residences of all persons having or claiming an interest in
the property subordinate in right to that of the
holder of the mortgage, all of whom shall be made
defendants in the action.

What determines the nature of an action, as well as which

court or body has jurisdiction over it, are the allegations of
the complaint and the character of the relief sought.
Petitioners action being one for foreclosure of real estate
mortgage, it was incumbent upon the trial court to order that
the mortgaged property be foreclosed and sold at public
auction in the event that respondent Filkor fails to pay its
outstanding obligations.

Huerta Alba Resort v CA, GR 128567, 1 September

2000
SMGI instituted an action for judicial foreclosure over 4
parcels of land allegedly mortgaged by petitioner in favor of
Intercon Fund Resource Inc., saying that they are the
mortgagee-assignee of a loan obtained by Huerta Alba from
Intercon. Petitioners questioned the assignment on the on
theground that the same was ultra vires; Later that year,
Huerta Alba filed a Motion to Quash and set aside the Writ of
Execution arguing that the 150-day period for the petitioner
the judgment obligation had not yet lapsed.
Issue: W/N Petitioner has the one-year right of redemption
under Section 78 of the General Banking Law
Held: Huerta Albas failure to seasonably invoke their right
precludes them from doing so at a later stage---The principle
of Estoppel may be successfully invoked if the party fails to
raise the question in the early stages of the proceedings.
Right of Redemption v. Equity of Redemption
Right of Redemption in relation to mortgage--

understood in the sense of a prerogative to re-acquire

mortgaged property after
Only exists in Extra-Judicial foreclosures
Only time it is recognized in judicial foreclosure is where the
mortgagee is the PNB or banking institution
In accord with Article 3135: Where a mortgage is foreclosed
extra judicially, the

Equity of Redemption (Applies on the case)

Operates in judicial foreclosures

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Judicial foreclosure- when a sale is confirmed by an order of

the court
In this case, no right of redemption exists

Remedy available: Right of the debtor to extinguish the

mortgage and retain ownership of the property by paying the
secured debt:
1. Within 90-days from the finality of judgement.
2. After the foreclosure sale but before the confirmation of
the sale
Spouses Rosales and Sibug v Spouses Suba, GR
137782, 12 August 2003
Petitioners manifested their difficulty in paying and
eventually failed to pay. The RTC issued a writ of execution
ordering the sale of the property for the satisfaction of
judgment. At the auction sale, the property was purchases by
Sps Suba (respondents) as the highest bidders.
Upon Petitioners MR on the writ of p, the RTC held that the
Petitioners had no right to redeem since the case is a judicial
foreclosure under Rule 68 of the Rules of Court.
Issue: W/N the petitioners had a right to redeem the property
subject of the auction sale
Held: No. The transaction is equitable mortgage, one which
reveals the intention of the parties to charge real property as
security
for a debt, and contains nothing impossible or contrary to
law, and when foreclosed, execution of judgment is governed
by Sections 2 and 3, Rule 68.

General Rule: there is no right of redemption in a judicial

foreclosure of mortgage
Exception: when the mortgagee is the Philippine National
Bank or a bank or a banking institution

Grand Farms et al v CA et al, GR 91779, 7 February

1991
Grand Farms filed an annulment of the extrajudicial
foreclosure proceedings over the mortgaged properties w/
damages against the respondents. After the respondents filed
their answers, Grand Farms filed a request for admission of
the allegation that no notice of intention to foreclose was
sent by respondents to petitioners.
Banco Filipino averred that that petitioners were "notified of
the auction sale by the posting of notices and the publication
of notice in the Metropolitan Newsweek, a newspaper of
general circulation in the province where the subject
properties are located.
Issue: W/N personal notice is required before foreclosure?
Held: Yes. While private respondent was constituted as
their attorney-in-fact by petitioners, the inclusion of
paragraph (k) in the mortgage contract nonetheless rendered
personal notice to the latter indispensable. We do not agree
with respondent court that paragraph (k) of the mortgage
contract in question was intended merely to indicate the
address to which the communications stated therein should
be sent.
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Credit Transactions
"k) All correspondence relative to this Mortgage, including
demand letters, summons, subpoena or notifications of any
judicial or extrajudical actions shall be sent to the Mortgagor
at the address given above or at the address that may
hereafter be given in writing by the Mortgagor to the
Mortgagee
Medida v Court of Appeals, GR 98334, 8 May 1992
During pendency of 1-year redemption period, SD took a loan
from City Savings Bank (CSB), secured by REM over same
Cebu property. SD failed to pay such loan, hence CSB
extrajudicially foreclosed and sold property
SD now filing complaint for annulment of sale. CA declared
2nd REM void.
Issue: w/n the 2nd REM, constituted during pendency of
redemption period, is valid
Held: Valid since SD still owners of property at the time
mortgage was effected. During pendency of redemption
period, judgment debtor remains in possession of subject
property, with all rights of ownership, except right to sell
property. Purchaser becomes owner only after redemption
period

2nd Batch-Louisse
Suico v PNB, G.R. No. 170215, 28 August 2007
Facts:
Sps. Suico obtained a loan from PNB secured by a real estate
mortgage. The petitioners were unable to pay, which

prompted PNB to extrajudicially foreclose the mortgage. Sps.

Suico thereafter filed a complaint against PNB for Declaration
of Nullity of Extrajudicial Foreclose of Mortgage, alleging that
the bid grossly exceeded the amount of petitioners
outstanding obligation. Hence, prayed that the excess
amount be given back to them.
Issue: WON PNB is obliged to deliver the excess
Ruling:
After payment of the costs of suit and satisfaction of the
claim of the first mortgagee/senior mortgagee, the claim of
the second mortgagee/junior mortgagee may be satisfied
from the surplus proceeds. The application of the proceeds
from the sale of the mortgaged property to the mortgagors
obligation is an act of payment, not payment by dacion; Thus
it has been 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 give the
mortgagor a cause of action to recover such surplus.

BPI Family Savings v Golden Power Diesel Sales,

GR 170169, 12 January 2011
Two parcels of land were mortgaged by CEDEC Transport Inc.
with BPI to secure a loan. CEDEC defaulted upon demand
hence the bank initiated the foreclosure of the properties.
The one year redemption period has passed without CEDEC
redeeming the property. Upon the filing of a Writ of
Possession, Golden Power sought to hold the writs
implementation on the ground that they acquired the
property and that as adverse possessors, they cannot be
deprived of possession.
Issue: W/N Golden Power should be categorized as third
persons
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Credit Transactions
Ruling:
As a general rule, a purchaser is entitled to a writ of
possession and upon ex parte petition, it is the ministerial
duty of the court to issue a writ in favour of purchaser. The
exception is stated in
Section 33, Rule 39 of the Rules of Court which provides:
Section 33. Deed and possession to be given at expiration of
redemption period; by whom executed or given. - x x x
Upon the expiration of the right of redemption, the purchaser
or redemptioner shall be substituted to and acquire all the
rights, title, interest and claim of the judgment obligor to the
property as of the time of the levy. 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
obligor.
Respondents became successors in interest by the
agreement stated in the deed of absolute sale and cannot be
considered as adverse possessors from CEDEC. Respondents
cannot assert that their right of possession is adverse to that
of CEDEC when they have no independent right of possession
other than what they acquired from CEDEC
Goldenway Merchandising v Equitable PCI Bank, GR
195540, 13 March 2013
Golden obtained a loan secured by a REM from PCI Bank.
However, due to default, the bank foreclosed on the
mortagage and subsequelty sold to the bank as the highest
bidder. Golden then offered to redeem the property but were
informed that the property was already transferred in the
name of PCI. Petitioner filed a complaint for specific
performance with RTC claiming that it is Act No. 3135 which

should apply on the redemption period of one year and not

R.A. No. 8791 that has a shorter redemption period.
Issue: W/N the foregoing amendment be validly applied in
this case when the real estate mortgage contract was
executed in 1985 and the mortgage foreclosed when R.A. No.
8791 was already in effect?
Ruling: juridical persons whose property is being sold
pursuant to an
extrajudicial foreclosure, shall have the right to redeem the
property in accordance with this provision until, but not after,
the registration of the certificate of foreclosure sale with the
applicable Register of Deeds which in no case shall be more
than three (3) months after foreclosure, whichever is earlier.
Owners of property that has been sold in a foreclosure sale
prior to the effectivity of this Act shall retain their redemption
rights until their expiration.
Since petitioner is a juridical person, the applicable period for
the right to redeem shall be prior to the registration of the
certificate of foreclosure of sale and such registration shall
not be more than three months, whichever is earlier. Here,
the right to redeem was only exercised AFTER the
registration of the certificate of sale. Moreover, even if the
mortgage was executed in 1985, it was only in 2000 that the
mortgage was foreclosed making the provision applicable in
this case.
PCI Leasing v Trojan Metal, GR 176381, 15 December
2010
Trojan Metal Industries sought to obtain a loan from PCI
Leasing instead of extending a loan the bank offered to buy
the subject equipment. Subsequently, the parties entered
22

Credit Transactions
into a lease agreement whereby TMI is to pay back the
equipment. However, there was default, which prompted PCI
to file for recovery of the outstanding obligations.
Issue: WON the agreement entered into was a financial lease
or a loan secured by a chattel mortgage
Ruling: It was a loan secured by a chattel mortgage.
Financial leasing is an extension of credit to assist an aspiring
buyer in acquiring movable property P which he (the aspiring
buyer) can use and eventually own. However, if the
equipment already belonged to the borrower-lessee, the
transaction is a loan with mortgage in the guise of a lease.
Acme Shoe Rubber v CA, GR 103576, 22 Aug 1996
Although a promise expressed in a chattel mortgage to
include debts that are yet to be contracted canbe 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.
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), the fact,
however, that the statute has provided that the parties to the
contract must execute an oath that - "x x x (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.
Makati Leasing v Wearever Textiles, GR L-58469, 16
May 1983
In order to obtain financial accommodations from petitioner,
respondent discounted and assigned several receivables with
the former under a Receivable Purchase Agreement, secured
by a Chattel Mortgage over certain raw materials and
machineries. However, Wearever defaulted thus Makati
Leasing moved to extrajudicially foreclose the property. The
respondent anchored their defense on the fact that the
machine being attached to the ground by bolts cannot be a
subject of a chattel mortgage for being a real property within
the purview of Article 415.
Issue: Won the property is a personal property.
Ruling: Hence, 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. 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.

3rd Batch-Jess
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Credit Transactions
Peoples Bank & Trust v Dahican Lumber, GR L17500, 16 May 1967
Atlantic Gulf sold all its rights in the Dahican Lumber
concession to DALCO (Dahican Lumber) and to be able to
obtain concession, DALCO made loans with Peoples Bank
(BANK) and Export-Import Bank of Washington. As security,
DALCO executed a deed of mortgage in favour of the BANK
covering five parcels of land in CAMSUR with all buildings and
improvements and a second mortgage was executed in
favour of Atlantic over the same properties to secure unpaid
balance to Atlantic. DALCO pledged stocks to secure
payment. DALCO and DAMCO failed to pay the fifth PN.
DALCO purchased various machineries from Connel.Pursuant
to the provision of the mortgage regarding after acquired
properties, BANK requested DALCO to submit a complete list
of machineries which the latter failed to comply. Atlantic and
the BANK commenced foreclosure proceedings and five years
after, court orered the sale of all machineries.
Whether the after acquired machinery and equipment of
defendant are included as subject of the Real Estate
mortgage, thus can be foreclosed.
Yes, machineries are subject to real estate mortgage. Under
the fourth paragraph of both deeds of mortgage, it is crystal
clear that all property of every nature and description taken
in exchange or replacement, as well as all buildings,
machineries, fixtures, tools, equipments, and other property
that the mortgagor may acquire, construct, install, attach; or
use in, to upon, or in connection with the premises that is,
its lumber concession "shall immediately be and become
subject to the lien" of both mortgages in the same manner
and to the same extent as if already included therein at the
time of their execution. Article 415 does not define real
property but enumerates what are considered as such,
among them being machinery, receptacles, instruments or

replacements intended by owner of the tenement for an

industry or works which may be carried on in a building or on
a piece of land, and shall tend directly to meet the needs of
the said industry or works.
the "after acquired properties" were purchased by DALCO in
connection with, and for use in the development of its lumber
concession and that they were purchased in addition to, or in
replacement of those already existing in the premises on July
13, 1950. In Law, therefore, they must be deemed to have
been immobilized, with the result that the real estate
mortgages involved herein which were registered as such
did not have to be registered a second time as chattel
mortgages in order to bind the "after acquired properties"
and affect third parties.

Dy v Court of Appeals, GR 92989, 8 July 1991

Perfecto Dy and Wilfredo Dy are brothers. Wilfredo Dy
purchased a truck and a farm tractor through financing
extended by Libre Finance and Investment Corp. (Libra). Both
were mortgaged to Libra as security for the loan.Perfecto
assumed mortgage debt of his brother Wilfredo with Libra so
a Deed of Absolute Sale was executed by Wilfredo in favour
of Perfecto. Both truck and tractor were still in possession of
Libra at the time the Deed was executed but despite offer of
full payment of Perfecto of the tractor, Libra could not release
properties as Libra insisted on full payment of both the truck
and tractor. Their sister Carol issued a check to pay for the
truck. On the other hand, GELAC Inc. has a collection case
against Wilfredo and the former attained a favourable
decision so a sheriff was able to seize the tractor and upon
auction, was bought by Gonzales. When the Carols check
was cleared, it was only this time that Perfecto learned about
the seizure of the tractor. An action for replevin was filed
against Gelac.
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Credit Transactions
W/N ownership of the farm tractor had already passed to
Perfecto Dy (petitioner) when it was levied on by the sheriff
pursuant to the writ of execution issued in another case in
favor of Gelac Inc.
Yes. The mortgagor (Wilfredo) who gave the property as
security under a chattel mortgage did not part with the
ownership over the same. He had the right to sell it although
he was under the obligation to secure the written consent of
the mortgagee or he lays himself open to criminal
prosecution under the provision of Article 319 par. 2 of the
Revised Penal Code. And even if no consent was obtained
from the mortgagee, the validity of the sale would still not be
affected.
There is no reason why Wilfredo Dy, as the chattel mortgagor
cannot sell the subject tractor. There is no dispute that the
consent of Libra Finance was obtained via a letter. Libra
allowed the petitioner to purchase the tractor and assume
the mortgage debt of his brother. The sale between the
brothers was therefore valid and binding as between them
and to the mortgagee, as well. There was constructive
delivery already upon the execution of the public instrument
pursuant to Article 1498 and upon the consent or agreement
of the parties when the thing sold cannot be immediately
transferred to the possession of the vendee.

Pameca Wood v CA, GR 106435, 14 July 1999

PAMECA obtained a loan from DBP and Teves as Pres of
PAMECA executed a PN to be payable in instalments. A
chattel mortgage was executed over PAMECAs
properties including furniture and equipments to secure
the loan. PAMECA failed to pay so bank extrajudicially
foreclosed the chattel mortgage but the amount from

the auction was deficient. DBP filed for a collection for

the balance of payment and both RTC and CA ordered
PAMECA and Teves to pay for the balance.
W/N deficiency shall be paid by PAMECA?
Sec. 14 of the Chattel Mortgage Law states in part: 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.
It 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.

Servicewide Specialist Inc. v CA, Gr 116363, 10

Dec 1999
In 1975, Spouses Ponce (respondents) bought on installment
a Holden Torana vehicle from CR Tecson Enterprises. They
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Credit Transactions
executed a promissory note and a chattel mortgage in favor
of the latter to secure payment of the note. CR Tecson
executed a deed of assignment of said promissory note and
chattel mortgage in favor of Filinvest Credit Corp. with the
conformity of respondent spouses and the latter was aware
of this fact. Spouses sold the vehicle to Conrado Tecson.
Subsequently, Filnvest assigned all its rights to Servicewide
without notice to the spouses. Spouses failed to pay so
Servicewide filed for an action for replevin. CA ruled that
Spouses were not notified of the assignment of the PN and
chattel mortgage to Servicewide.
the consent of the creditors assignee to the debtormortgagors sale of the property to another.
W/N the consent of the creditor-mortgagee (FilinvestServicewides predecessor) when the debtor-mortgagor
alienates the property to a third person and consent of
creditors assignee to the debtor-mortgagors sale of the
property to another is necessary?
Spouses should have obtained the consent of Filinvest since
they were already aware of the assignment when sale was
made (from CR Tecson to FIlinvest).Thus, for the failure of the
spouses to obtain the consent of Filinvest, the sale of the
vehicle to Conrado Tecson was not binding on the former.
When the credit was assigned by Filinvest to Servicewide, the
spouses stood on record as the debtor-mortgagor.
Art. 2128 of the Civil Code to a chattel mortgage, it appears
that a mortgage credit may be alienated or assigned to a
third person. Since the assignee of the credit steps into the
shoes of the creditor-mortgagee to whom the chattel was
mortgaged, it follows that the assignees consent is necessary
in order to bind him of the alienation of the mortgaged thing

by the debtor-mortgagor. As the new assignee, Servicewides

consent is necessary before the spouses alienation of the
vehicle can be considered against third persons. In this case,
however, the alienation by the spouses of the vehicle
occurred prior to the assignment of credit to Servicewide, so,
Spouses are not bound to obtain consent from Servicewide as
it was not an assignee of the credit at the time alienation of
the vehicle occurred. Mere notice of the creditor is not
enough as his consent is always necessary.

RCBC v Royal Cargo, GR 179756, 20 October

2009
Terrymanila filed for voluntary insolvency while it is also a
debtor of both RCBC and Royal Cargo (Royal) which owes
PHP3M by the chattel mortgage that was executed on 1989.
Royal Collection filed an action for collection of sum and
Preliminary Attachment of personal property to secure
satisfaction of judgment award of P296k . Terrymanila was
declared insolvent and was allowed to have an auction over
the properties being the highest bidder and sold properties to
third persons. Royal Cargo sought to annul the sale and CA
held the right of Royal Cargo to be timely informed of the
foreclosure sale as it too had interests over the mortgagee
Terrymanila, Inc.s assets in accordance with Sec. 14 of the
Chattel Mortgage Law.
W/N foreclosure sale of chattel mortgaged properties was
valid?
Yes, even prior to receiving a mailed notice of the
auction sale on the date of the auction sale itself on June 16,
1992, respondent was already put on notice of the impending
foreclosure sale of the mortgaged chattels. It could thus have
expediently exercised its equity of redemption, at the earliest
when it received the insolvency courts Order of March 20,
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Credit Transactions
1992 denying its Motion for Reconsideration of the February
3, 1992 Order.
Despite its window of opportunity to exercise its equity
of redemption, however, respondent chose to be technically
shrewd about its chances, preferring instead to seek
annulment of the auction sale, which was the result of the
foreclosure of the mortgage, permission to conduct which it
had early on opposed before the insolvency court. Its
negligence or omission to exercise its equity of redemption
within a reasonable time, or even on the day of the auction
sale, warrants a presumption that it had either abandoned it
or opted not to assert it.

Servicewide Specialists v CA, GR 110048, 19

November 1999
Leticia Laus owned a ColtGalant from Forune Corp. payable
in installments and default of such will make it due and
demandable. As security, Laus mortgaged the vehicle with
Fortune and such mortgage rights was assigned with
Filinvest.Filinvest transferred its right and assigned its credit
with Servicewide. Laus failed to pay and refused to return
the vehicle so an action for replevin was filed. Alberto
Villafranca filed a third party claim saying he owns the car
evidenced by the Bureau of Land Transportation's Certificate
of Registration issued in his name.
W/N a case for replevin may be pursued against the
defendant, Alberto Villafranca, without impleading the
absconding debtor-mortgagor?

In a suit for replevin, a clear right of possession must be

established. A foreclosure under a chattel mortgage may
properly be commenced only once there is default on the
part of the mortgagor of his obligation secured by the
mortgage. The replevin in this case has been resorted to in
order to pave the way for the foreclosure of what is covered
by the chattel mortgage. The conditions essential for such
foreclosure would be to show, firstly, the existence of the
chattel mortgage and, secondly, the default of the
mortgagor. These requirements must be shown because the
validity of the plaintiffs exercise of the right of foreclosure is
inevitably dependent thereon.
Since the mortgagee's right of possession is conditioned
upon the actual fact of default which itself may be
controverted, the inclusion of other parties, like the debtor or
the mortgagor himself, may be required in order to allow a
full and conclusive determination of the case. Laus, being an
indispensable party should have been impleaded in the case.

De Barretto v Villanueva, GR L-14938, 29

December 1962
Wife Cruzado mortgaged the property to Rehabilitation
Finance Corp. (RFC) to secure repayment of a loan. She
failed to pay some instalments so I was foreclosed. An
agreement was made between Cruzado and RFC selling
back property to Rosario Cruzado with a condition that title
to property shall remain under RFC until full payment of the
price but she defaulted again so RFC rescinded the sale.
Cruzado sold the rights of property to Villanueva who
assumed the obligation with RFC. Villanueva was able to
obtain a promissory note to pay and mortgaged the property
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Credit Transactions
to Magdalena to secure a loan. Villanueva deflated so
Magdalena foreclosed the mortgage. Cruzado filed a
recognition fo her vendors lien and was granted which was
annotated a the back of the title. Magdalena Barreto insists
that vendors lien can only become effective in the event of
insolvency which was not proved to exist.
W/N the vendors lien exist?

No, Under the system of the Civil Code of the Philippines,

only taxes enjoy a similar absolute preference. All the
remaining thirteen classes of preferred creditors under Article
2242 enjoy no priority among themselves, but must be
paid pro-rata i.e., in proportion to the amount of the
respective credits. Thus, Article 2249 provides:
If there are two or more credits with respect to the
same specific real property or real rights, they, shall be
satisfied pro-rata after the payment of the taxes and
assessments upon the immovable property or real
rights."
But in order to make this prorating fully effective must
necessarily be convened, and the import of their claims
ascertained. It is thus apparent that the full, application (of
Articles 2249 and 2242 demands that there must be first
some proceedings where the claims of all the preferred
creditors may be bindingly adjudicated, such as insolvency,
the settlement of decedents estate under Rule 87 of the
Rules of Court, or other liquidation proceedings of similar
import. It becomes evident that one preferred creditor's thirdparty claim to the proceeds of a foreclosure sale (as in the

case now before us) is not the proceeding contemplated by

law for the enforcement of preferences under Article 2242,
unless the claimant were enforcing a credit for taxes that
enjoy absolute priority.

J.L. Bernardo v CA, GR 105827, 31 January

2000
Municipal of Nueva Ecija approved e construction of a public
market. J.L. Bernardo was given the Construction Agreement
as the highest bidder to construct for the market but when it
was nearly completed in construction, they remained unpaid.
J.L filed for specific performance and claim for contractors
lien. They alleged that Municipality will assume payment on
the demolition and clearing of the site to be remitted back to
J.L. RTC gave right of possession of the market to J.L. to which
CA reversed the ruling.
W/N Municipality is liable to pay the contractors lien?
No. Contractors lien is under the third paragraph of Art.
2242. Article 2242 only finds application when there is a
concurrence of credits, i.e. when the same specific property
of the debtor is subjected to the claims of several creditors
and the value of such property of the debtor is insufficient to
pay in full all the creditors. In such a situation, the question
of preference will arise, that is, there will be a need to
determine which of the creditors will be paid ahead of the
others. Fundamental tenets of due process will dictate that
this statutory lien should then only be enforced in the context
of some kind of a proceeding where the claims of all the
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Credit Transactions
preferred creditors may be bindingly adjudicated, such as
insolvency proceedings. However in this case, there was no
insolvency proceeding as the action filed was one for
specific performance hence the provision is inapplicable in
the case at bar. Such lien cannot be enforced in the present
action for there is no way of determining whether or not
there exist other preferred creditors with claims over the San
Antonio Public Market. The records do not contain any
allegation that petitioners are the only creditors with respect
to such property. The fact that no third party claims have
been filed in the trial court will not bar other creditors from
subsequently bringing actions and claiming that they also
have preferred liens against the property involved.
3rd batch Kylie
Diego v Fernando gr L-15128 Aug. 25,1960
Defendant mortgaged 2 parcels of land to plaintiff to secure a
P2K loan (w/out interest). Defendant failed to pay so plaintiff
demanded foreclosure of mortgage.
Defendant argued that transaction between him and plaintiff
was really one of antichresis not mortgage admitted fact
that the loan was without interest + transfer of the
possession of the properties mortgaged to the mortgagee
Issue: W/N the contract was of mortgage or antichresis
Held: Mortgage. 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
ANTICHRESIS

CONTRACT

IS

MORTGAGE

AND

NOT

ANTICHRESIS (Art. 2132)

must be expressly agreed between creditor and debtor
that creditor, 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

DBP v CA, GR 126200, 16 August 2001

MMIC purchased and delivered construction materials from
Remington. The purchases remained unpaid when Remington
filed a complaint for sum of money and damages against
MMIC.
Remington amended its complaint and included PNB, DBP,
NMIC, Maricalum and Island Cement, asserting that they
must be treated in law as one and the same entity by
disregarding the veil of corporate fiction since they are
corporations created by the government who benefited from
the transactions of the properties of MMIC, and submits that
the transfer of the properties was made in fraud of creditors.
The presence of fraud, according to Remington, warrants the
piercing of the corporate veil such that MMIC and its
transferees could be considered as one and the same
corporation. The transferees, therefore, are also liable for the
value of the MMICs purchases.
Issues:
1. Whether or not there is any fraud on the part of MMIC and
its transferees to warrant the piercing of corporate veil.

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Credit Transactions
2. Whether or not Remington can enforce its claim and lien to
DBP

SEC placed Philfinance under receivership, and Reyes Daway

Lim Bernardo Lindo Rosales Law Offices and Atty. Wendell
Coronel (private respondents) were appointed as liquidators.

Held:
1. The doctrine of piercing the veil of corporate fiction applies
only when such corporate fiction is used to defeat public
convenience, justify wrong, protect fraud or defend crime. To
disregard the separate juridical personality of a corporation,
the wrongdoing must be established. It cannot be presumed.
In this case, the Court finds that Remington failed to
discharge its burden of proving bad faith on the part of MMIC
and its transferees in the mortgage and foreclosure of the
subject properties to justify the piercing of the corporate veil.
2. As the extra-judicial foreclosure instituted by PNB and DBP
is not the liquidation proceeding contemplated by the Civil
Code, Remington cannot claim its pro rata share from DBP.
One preferred creditors third-party claim to the proceeds of a
foreclosure sale is not the proceeding contemplated by law
for the enforcement of preferences under Art. 2242, unless
the claimant were enforcing a credit for taxes that enjoy
absolute priority. If none of the claims is for taxes, a dispute
between two creditors will not enable the Court to ascertain
the pro rata dividend corresponding to each, because the
rights of the other creditors likewise enjoying preference
under Art. 2242 cannot be ascertained.

Without the knowledge and consent of petitioner and without

authority from the SEC, private respondents withdrew
petitioners CSPI shares from his custodian banks, and sold it
Northeast Corporation and included the proceeds thereof in
the funds of Philfinance.
Petitioner lodged a complaint. Meanwhile, SEC approved a
15% rate of recovery for Philfinances creditors and investors.
The liquidators began the process of settling the claims
against Philfinance, from its assets.
SEC Decision: Petitioners status was converted into that of an
ordinary creditor for the value of such shares since, the
shares had already been sold and the proceeds commingled
with the other assets of Philfinance
Issue: Whether petitioner should be considered as a preferred
(and secured) creditor of Philfinance;
Held: Petitioner is NOT a preferred creditor

Cordova v. Reyes

Petitioner argues that he was a preferred creditor

because private respondents illegally withdrew his CSPI
shares from the custodian banks and sold them without
his knowledge and consent and without authority from
the SEC, citing Art. 2241 (2)
The Court held that Article 2241 refers only to specific
movable property. His claim was for the payment of
money, which, as already discussed, is generic property
and not specific or determinate. Therefore, he was
deemed an ordinary creditor.
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Ruby Industrial v CA, G.R. No. 124185-87, 20 January
1998
Disclaimer: I couldnt understand the case so I looked for the doctrine in
relation to rehabilitation na lang.

Rehabilitation contemplates a continuance of corporate life

and activities in an effort to restore and reinstate the
corporation to its former position of successful operation and
solvency.
When a distressed company is placed under rehabilitation,
the appointment of a management committee follows to
avoid collusion between the previous management and
creditors it might favor, to the prejudice of the other
creditors. All assets of a corporation under rehabilitation
receivership are held in trust for the equal benefit of all
creditors to preclude one from obtaining an advantage or
preference over another by the expediency of attachment,
execution or otherwise. As between the creditors, the key
phrase is equality in equity.

Rubberworld filed a petition for suspension of payments with

SEC. SEC favorably ruled on the petition.
Private respondents, claiming to be employees of petitioner
corporation, filed against petitioners their respective
complaints for illegal dismissal, unfair labor practice,
damages and payment of separation pay, retirement
benefits, 13th month pay and service incentive pay.
Petitioners moved to suspend the proceedings in the above
labor cases on the strength of the SEC order.

Labor Arbiters decision: SEC suspending all actions for

claims against petitioners does not cover the claims of
private respondents in the labor cases because said claims
and the concomitant liability of petitioners still had to be
determined, thus carrying no dissipation of the assets of
petitioners.
Issue: Whether or not the Respondent NLRC acted without or
in excess of jurisdiction or with grave abuse of discretion
amounting to lack of jurisdiction in affirming the order of
Labor Arbiter

Once the corporation threatened by bankruptcy is taken over

by a receiver, all the creditors ought to stand on equal
footing. Not any one of them should be paid ahead of the
others. This is precisely the reason for suspending all pending
claims against the corporation under receivership.

Held: the applicable law is PD 902A, which provides that

"upon the appointment [by the SEC] of a management
committee or a rehabilitation receiver," all actions for claims
against the corporation pending before any court, tribunal or
board shall ipso jure be suspended.

Rubber World (Phils) Inc. v NLRC, G.R 126773, 14 April

1999

The justification for the automatic stay of all pending action

is to enable the management committee/rehabilitation
receiver to effectively exercise its/his powers free from any
judicial or extrajudicial interference that might unduly hinder
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or prevent the rescue of the debtor company. To allow such
other actions to continue would only add to the burden of the
management committee or rehabilitation receiver, whose
time, effort and resources would be wasted in defending
claims against the corporation instead of being directed
toward its restructuring and rehabilitation.
No exception in favor of labor claims is mentioned in the law.
Since the law makes no distinction or exemptions, neither
should this Court. Allowing labor cases to proceed clearly
defeats the purpose of the automatic stays and severally
encumbers the management committee's and resources. The
said committee would need to defend against these suits, to
the detriment of its primary and urgent duty to work towards
rehabilitating the corporation and making it viable again. The
rule otherwise would open the floodgates to other similarly
situated claimants and forestall if not defeat the rescue
efforts. Besides, even if the NLRC awards the claims of
private respondents, as it did, its ruling could not be enforced
as long as the petitioner is under the management
committee.

Leca Realty v Manuela Corp, G.R. 166800 & 168924,

25 Sept 2007
In order to finance the costs of building the Metropolis Star
and the Pacific Mall, respondent obtained loans from two
syndicates of lenders. However, due to the Asian financial
crisis in 1997, the banks stopped their lending activities to
borrowers, including respondent.

Because Respondents malls failed to operate sufficiently,

this resulted to heavy losses. It then filed a Petition for
Rehabilitation.
Acting upon Respondents petition, the Trial court issued a
Stay Order, which includes the provision directing the
payment in full of all administrative expenses incurred after
the issuance of this Stay Order.
Marilou Adea, rehabilitation receiver, submitted to the court a
rehabilitation plan. Aggrieved, petitioner filed an Appeal
alleging that Petitioner now contends that the Rehabilitation
Plan has impaired its contract of lease with respondent over
a tract of land consisting of almost three (3) hectares.
Issue: W/N the approved Rehabilitation Plan drastically
altered the terms of its lease contract with respondent
Manuela, hence, should be declared void
Held: Yes. It must be emphasized that there is nothing in
Section 5 (c) of P.D. No. 902-A authorizing the change or
modification of contracts entered into by the distressed
corporation and its creditors. Court further emphasized that
the administrative expenses mentioned in the trial courts
stay order pertains to costs associated with the general
administration of an organization and include such items as
utilities, rents,
salaries,
postages,
furniture,
and
housekeeping charges.

Inasmuch as rents are considered administrative expenses

and considering that the Stay Order directed respondent
Manuela to pay the rents in full, then it must comply at the
rates agreed upon.
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Chas Realty v Talavera, G.R. No. 151925, 06 February
2003

The requirement is designed to avoid a situation where a

rehabilitation plan, after being developed and judicially
sanctioned, cannot ultimately be realized because of the
refusal of stockholders to cooperate in its implementation

Chas Petition for Rehabilitation

Proposed rehabilitation plan: repayment or restructuring of
loans with Land Bank and Equitable + leasing out available
spaces + completion of fourth floor of mall
Chas claiming it has sufficient assets and a workable
rehabilitation plan which showed continuance of business
was feasible

Angel Concepcion opposing rehabilitation plan

No approval by stockholders representing at least 2/3 of
stockholders, which according to AC, is essential under the
Interim Rules on Corporate Rehabilitation
Chas Response: No need to secure 2/3 consent because the
rehabilitation plan did not include any extraordinary
corporate actions which would require such vote

Issue: W/N 2/3 vote required for the approval of the

rehabilitation plan of Chas
Held: NO. None of the proposed corporate actions would
require a vote of approval by the stockholders representing
at least 2/3 of the outstanding capital stock.
If any extraordinary corporate action is to be done under the
proposed rehabilitation plan, 2/3 approval of stockholders is
necessary

Where no such extraordinary acts are to be done under the

rehabilitation plan, the approval of stockholders need only be
a majority, and not necessarily 2/3

3rd Batch Louisse

RCBC v IAC, G.R. No. 74851, 09 December 1999

In 1984 BF Homes filed a Petition for Rehabilitation with
Suspension of Payments with SEC. Subsequently, RCBC, as
one of RCBCs creditors file to extra-judically foreclose some
of BFs properties. Opposing to this, BF filed for the
annulment of the Sale arguing that SEC had already assumed
jurisdiction over their assets by virtue of the Petition for
Rebilitation
Issue: WON preferred creditors of distressed corporations
stand on equal footing with all other creditors.
Ruling:
Secured creditors retain their preference over unsecured
creditors, but enforcement of such preference is equally
suspended upon the appointment of a management
committee, rehabilitation receiver, board, or body. In the
event that the assets of the corporation, partnership, or
association are finally liquidated, however, secured and
preferred credits under the applicable provisions of the Civil
Code will definitely have preference over unsecured ones.

Sobrejuanite v ASB Development, G.R. 165675,

30 Sept. 2005
Spouses Sobrejuanite (Sobrejuanite) filed a Complaint for
rescission of contract, against ASB Development Corporation
(ASB) before the (HLURB). They alleged that they entered
into a contract to sell with ASB over a condominium unit and
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a parking space and despite full payment and demands, ASB
failed to deliver the property as agreed upon. ASB filed a
motion to dismiss or suspend proceedings in view of the
approval by the Securities and Exchange Commission (SEC)
of the rehabilitation plan of ASB Group of Companies and the
appointment of a rehabilitation receiver.
Issue: WON petitioners claim should be suspended because
ASB in under a rehabilitation plan
Ruling: Yes.
As between creditors, the key phrase is equality and equity.
When a corporation threatened by bankruptcy is taken over
by a receiver, all the creditors should stand on equal footing.
Not anyone of them should be given any preference by
paying one or some of them ahead of the others. This is
precisely the reason for the suspension of all pending claims
against the corporation under receivership. Instead of
creditors vexing the courts with suits against the distressed
firm, they are directed to file their claims with the receiver
who is a duly appointed officer of the SEC.
Metropolitan Bank & Trust v SLGT Holdings, G.R.
175181-82, 14 September 2007
Section 6 (C) of PD 902-A as amended provides that the
suspension of all actions for claims against corporations
refers solely to monetary claims. Also, the appointment of a
receiver does not dissolve the corporation, nor does it
interfere with the exercise of corporate rights. When there
are no restraints imposed upon the respondent as it
undergoes rehabilitation receivership, it should
continue to perform its contractual and statutory
responsibilities.
SLGTs and Dylancos complaints in the case at bar did not
seek monetary recovery or to touch the corporate coffers of
ASB ahead of others. They did not even consider themselves

as money claimants. All they ask was for the enforcement of

ASBs statutory and contractual obligations as a
condominium developer. They pressed for the delivery of
their units free from all liens and encumbrances and the
declaration of nullity of the mortgage in question arising from
the breach of Section 18 of PD 957.
The complaint of respondents is not in the nature of claims
that should be covered by the suspensive effect of a
rehabilitation proceeding.
Clarion Printing House v NLRC, G.R. No. 148372, 27
June 2005
Clarion Printing House, employed Michelle on a probationary
basis as marketing assistant. Subsequently, the company
filed with the SEC a Petition for Declaration of Suspension of
Payment, which the SEC approved. Afterwhich, Miclat
received a phone call conveying her termination without
giving any justifiable reason. Aggreived, she filed a complaint
for illegal dismissal against Clarion before the NLRC
Issue: WON Miclats retrenchment was justified
Section 6 of PD 902-A, as amended, read:
SEC. 6. In order to effectively exercise such jurisdiction, the
Commission shall possess the following powers:
(c) To appoint one or more receivers of the property, real and
personal, which is the subject of the action pending before
the Commission in accordance with the provisions of the
Rules of Court in such other cases whenever necessary in
order to preserve the rights of the parties-litigants
and/or protect the interest of the investing public and
creditors: Provided, however, That the Commission may in
appropriate cases, appoint a rehabilitation receiver of
corporations, partnerships or other associations not
supervised or regulated by other government agencies who
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shall have, in addition to powers of the regular receiver under
the provisions of the Rules of Court, such functions and
powers as are provided for in the succeeding paragraph (d)
hereof: x x x
(d) To create and appoint a management committee, board
or body upon petition or motu propio to undertake the
management of corporations, partnership or other
associations not supervised or regulated by other
government agencies in appropriate cases when there is
imminent danger of dissipation, loss, wastage or destruction
of assets or other properties or paralization of business
operations of such corporations or entities which may be
prejudicial to the interest of minority stockholders, partieslitigants of the general public:
That the SEC appointed an interim receiver for the EYCO
Group on its petition shows that Clarion, together with the
other member-companies of the EYCO Group, was suffering
business reverses justifying the retrenchment of its
employees.
Metropolitan Bank v ASB Holdings, G.R. 166197, 27
Feb 2007
Metrobank is a creditor bank of respondent corporations,
collectively known as the ASB Group of Companies. The loans
extended by Metrobank to ASB Realty and ASB Development,
which were secured by real estate mortgages, amounted
to P523.5 million and P1.073 ASB Group filed with the SEC a
Petition For Rehabilitation With Prayer For Suspension Of
Actions and Proceedings pursuant to PD 902-A,
Metrobank objected to this Rehabilitation Plan, claiming that
the above arrangement is not acceptable---since the
proposed dacion is not acceptable to the bank, there is no

basis to release the properties which serve as collateral for

the loans.
Issue: W/N the approval of the Rehabilitation Plan impairs
Metrobanks lien over the mortgaged properties.
Section 6 [c] of P.D. No. 902-A provides that
"upon appointment of a management committee,
rehabilitation receiver, board or body, pursuant to this
Decree, all actions for claims against corporations,
partnerships or associations under management or
receivership pending before any court, tribunal, board
or body shall be suspended."
By that statutory provision, it is clear that the approval of the
Rehabilitation Plan and the appointment of a rehabilitation
receiver merely suspend the actions for claims against ASB.
Metrobanks preferred status over the unsecured creditors
relative to the mortgage liens is RETAINED, but the
ENFORCEMENT of such preference is SUSPENDED. Metrobank
may still enforce its preference when the assets of ASB Group
will be liquidated. Considering that the provisions of the loan
agreements are merely suspended, there is no impairment of
contracts, specifically its lien in the mortgaged properties.
MWSS v Daway & Maynilad Water, G.R. 160732, 21
June 2004
MWSS granted Maynilad a 25-year Concession
Agreement,however, Maynilad subsequently sought to
terminate the agreement alleging that MWSS failed to
comply with its obligations. Due to Maynilads refusal to pay,
MWSS decided to collect from the L/C applied for by former.
The matter was brought before the Appeals Panel who
ordered Maynilad to pay the concessions fees that had fallen
due to the absence of a clause in the contract pertaining to
the Event of Termination. After the order became final and
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Credit Transactions
executory, Maynilad filed a petition for rehabilitation, where
the respondent judge issued the assailed stay order against
all the claims of MWSS.
Issue: WON the rehabilitation court sitting as such, act in
excess of its authority or jurisdiction when it enjoined herein
petitioner from seeking the payment of the concession fees
from the banks that issued the Irrevocable Standby Letter of
Credit
Ruling:
Being a solidary obligation, the letter of credit is from the
jurisdiction of the rehabilitation court and therefore in
enjoining petitioner from proceeding against the Standby
Letters of Credit to which it had a clear right under the law.
The SC held that Sec. 6 (b) of Rule 4 of the Interim Rules does

not enjoin the enforcement of all claims against guarantors

and sureties, but only those claims against guarantors and
sureties who are not solidarily liable with the debtor.
Taking into consideration the SCs ruling on the nature of
letters of credit and the customs and usage developed over
the years in the banking and commercial practice of letters of
credit, we hold that except when a letter of credit specifically
stipulates otherwise, the obligation of the banks issuing
letters of credit are solidary with that of the person or entity
requesting for its issuance, the same being a direct, primary,
absolute and definite undertaking to pay the beneficiary
upon the presentation of the set of documents required
therein.

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