ANTICHRESIS

ADRID VS. MORGA

Sale with Right to Repurchase vs. Equitable Mortgage
Sale with Right to Repurchase within a period of 2 years.
Vendor, after 18 years, brought an action to recover lot from vendee on the theory that the original
contract of sale with pacto de retro was by acts of the parties to the said contract, converted into
one of antichresis.
Held: The intention of the parties was merely for vendor (Adrid) to borrow the sum of P2,000
from vendee (Morga), the lot being given as security. This is a case of equitable mortgage.
Reasons:
a. Despite the expiration of the two-year period, Morga did not consolidate their title to the land.
b. The certificate of title and the tax declaration remained in the name of the alleged vendors.
c. The price of P2,000 is inadequate for the supposed sale of the lot which has an area of about 3
1\2 hectares.
d. The contract provided for a payment of interest which is a characteristic of a loan or equitable
mortgage.
The contention of plaintiffs that although the original contract was one of sale with right to
repurchase, it was converted into one of antichresis just because the vendee took possession of the
land, is clearly untenable. There is nothing in the document, nor in the acts of the parties
subsequent to its execution to show that the parties had entered into a contract of antichresis.
What characterizes a contract of antichresis is that the creditor acquires the right to receive the
fruits of the property of his debtor with the obligation to apply them to the payment of interest, if
any is due, and then to the principal of his credit, and when such a covenant is not made in the
contract which speaks unequivocally of a sale with right of repurchase, the contract is a sale with
the right to repurchase and not an antichresis.
TAVERA VS. EL HOGAR FILIPINO INC.
Extra-judicial foreclosure may be allowed in a contract of antichresis; Invalidity of the mortgage
does not affect the validity of the loan.
Subject provision: Section 171 of the Corporation Law which reads as follows:
It shall be unlawful for any building and loan association to make any loan after the date when
this Act, as amended, shall become effective upon property that is able for use only as a
manufacturing plant, theater, public hall, church, convent, school, club, hotel, garage, or other
public building. To facilitate the investment of the idle funds of a building and loan association,
however, the Bank Commissioner, with the approval of the Secretary of Finance, may, in special
instances. waive the provisions of this paragraph.

A loan given on a property which may be considered as a public building, is not, in itself, null and
void. It is unlawful to make loans on that kind of security, but the law does not declare the loan,
once made, to be null and void. The unlawful taking of the security may constitute a misuser of
the powers conferred upon the corporation by its charter, for which it may be made to answer in
an action for ouster or dissolution; but certainly the stockholders and depositors of the corporation
should not be punished with a loss of the money loaned nor the borrower be rewarded with it.
Where the charter of a corporation or some other statute prohibits it from lending money on
certain kinds of security, but does not declare that prohibited securities taken by it shall be void,
they are not void, and may be enforced by it. The taking of such security is a misuser of the
powers conferred upon the corporation by its charter, for which the state may enforce a forfeiture,
but the misuser cannot be set up by the borrower to prevent the corporation from enforcing the
security.
It is contended that the contracts in question are not of mortgage, but of antichresis. The
distinction, however, is immaterial, for even if the contracts are of antichresis, the extra-judicial
foreclosure of the security is valid. Stipulations in a contract of antichresis for the extra-judicial
foreclosure of the security may be allowed in the same manner as they are allowed in contracts of
mortgage and of pledge.
DIZON CASE:
The true intention of the parties is that respondent Gaborro would assume and pay the
indebtedness of petitioner Dizon to DBP and PNB, and in consideration therefor, respondent
Gaborro was given the possession, the enjoyment and use of the lands until petitioner can
reimburse fully the respondent the amounts paid by the latter to DBP and PNB, to accomplish the
following ends: (a) payment of the bank obligations; (b) make the lands productive for the benefit
of the possessor, respondent Gaborro, (c) assure the return of the land to the original owner,
petitioner Dizon, thus rendering equity and fairness to all parties concerned.
In view of all these considerations, the law and Jurisprudence, and the facts established. We find
that the agreement between petitioner Dizon and respondent Gaborro is one of those inanimate
contracts under Art. 1307 of the New Civil Code whereby petitioner and respondent agreed "to
give and to do" certain rights and obligations respecting the lands and the mortgage debts of
petitioner which would be acceptable to the bank. but partaking of the nature of the antichresis
insofar as the principal parties, petitioner Dizon and respondent Gaborro, are concerned.
Mistake is a ground for the reformation of an instrument which there having been a meeting of the
minds of the parties of a contract, their true intention is not expressed in the instrument purporting
to embody the agreement, and one of the parries may ask for such reformation to the end that such
true intention may be expressed. (Art. 1359, New Civil code). When a mutual mistake of the

parties causes the failure of the instrument to disclose their real agreement, said instrument may
be reformed. (Art. 1361, New Civil Code.) It was a mistake for the parties to execute the Deed of
Sale With Assumption of Mortgage and the Option to Purchase Real Estate and stand on the literal
meaning of the file and stipulations used therein.
The instruments must, therefore, be reformed in accordance with the intention and legal rights and
obligations of the parties the petitioner, the respondent and the Bank.

Purchaser in a foreclosure sale is in bad faith when he sells the property to another
notwithstanding summons received. (GELAC Trading were indeed violative of the provisions on
human relations. As found by the trial court, GELAC knew very well of the transfer of the
property to the petitioners on July 14, 1980 when it received summons based on the complaint for
replevin filed with the RTC by the petitioner. Notwithstanding said summons, it continued to sell
the subject tractor to one of its stockholders.)

CHATTEL MORTGAGE
DAVAO SAWMILL CO. Inc. vs. CASTILLO
Movable property = object of chattel mortgage
Davao Sawmill is a tenant on the land upon which the business was conducted.
Davao Saw Mill Co., Inc., has on a number of occasions treated the machinery as personal
property by executing chattel mortgages in favor of third persons.
Machinery which is movable in its nature only becomes immobilized when placed in a plant by
the owner of the property or plant. Such result would not be accomplished, therefore, by the
placing of machinery in a plant by a tenant or a usufructuary or any person having only a
temporary right.
Ruling: The properties were personal in nature.
DY VS. CA
Mortgagor retains ownership of the property until after consolidation of purchasers title.
The mortgagor 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.
As mortgagee, he has the right of foreclosure upon default by the mortgagor in the performance of
the conditions mentioned in the contract of mortgage. The law implies that the mortgagee is
entitled to possess the mortgaged property because possession is necessary in order to enable him
to have the property sold.
The mortgagee cannot become the owner of or convert and appropriate to himself the property
mortgaged. (Article 2088, Civil Code) Said property continues to belong to the mortgagor. The
only remedy given to the mortgagee is to have said property sold at public auction and the
proceeds of the sale applied to the payment of the obligation secured by the mortgagee.
Where a third person purchases the mortgaged property, he automatically steps into the shoes of
the original mortgagor. His right of ownership shall be subject to the mortgage of the thing sold to
him.

ACME SHOE CASE:

While a pledge, real estate mortgage, or antichresis may exceptionally secure after-incurred
obligations so long as these future debts are accurately described, a chattel mortgage, however,
can only cover obligations existing at the time the mortgage is constituted. Although a promise
expressed in a chattel mortgage to include debts that are yet to be contracted can be a binding
commitment that can be compelled upon, the security itself, however, does not come into
existence or arise until after a chattel mortgage agreement covering the newly contracted debt is
executed either by concluding a fresh chattel mortgage or by amending the old contract
conformably with the form prescribed by the Chattel Mortgage Law.
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 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." makes it obvious that the debt referred to in the law
is a current, not an obligation that is yet merely contemplated. In the chattel mortgage here
involved, the only obligation specified in the chattel mortgage contract was the P3,000,000.00
loan which petitioner corporation later fully paid. By virtue of Section 3 of the Chattel Mortgage
Law, the payment of the obligation automatically rendered the chattel mortgage void or
terminated.
"x x x A mortgage that contains a stipulation in regard to future advances in the credit will take
effect only from the date the same are made and not from the date of the mortgage.

MUTUUM
BANCO FILIPINO SAVINGS AND MORTGAGE BANK VS. HON. NAVARRO
What should be resolved is whether BANCO FILIPINO can increase the interest rate on the
LOAN from 12% to 17% per annum under the Escalation Clause. It is our considered opinion that
it may not.
The Escalation Clause reads as follows:
I/We hereby authorize Banco Filipino to correspondingly increase the interest rate stipulated in
this contract without advance notice to me/us in the event a law increasing the lawful rates of
interest that may be charged on this particular kind of loan.
It is clear from the stipulation between the parties that the interest rate may be increased "in the
event a law should be enacted increasing the lawful rate of interest that may be charged on this
particular kind of loan." " The Escalation Clause was dependent on an increase of rate made by
"law" alone.
CIRCULAR No. 494, although it has the effect of law, is not a law. "Although a circular duly
issued is not strictly a statute or a law, it has, however, the force and effect of law." "An
administrative regulation adopted pursuant to law has the force and effect of law." "That
administrative rules and regulations have the force of law can no longer be questioned."
The distinction between a law and an administrative regulation is recognized in the Monetary
Board guidelines quoted in the letter to the BORROWER of Ms. Paderes of September 24, 1976.
According to the guidelines, for a loan's interest to be subject to the increases provided in
CIRCULAR No. 494, there must be an Escalation Clause allowing the increase "in the event that
any law or Central Bank regulation is promulgated increasing the maximum interest rate for
loans." The guidelines thus presuppose that a Central Bank regulation is not within the term "any
law."
The distinction is again recognized by P.D. No. 1684, promulgated on March 17, 1980, adding
section 7-a to the Usury Law, providing that parties to an agreement pertaining to a loan could
stipulate that the rate of interest agreed upon may be increased in the event that the applicable
maximum rate of interest is increased "by law or by the Monetary Board." To quote:
Sec. 7-a Parties to an agreement pertaining to a loan or forbearance of money, goods or credits
may stipulate that the rate of interest agreed upon may be increased in the event that the
applicable maximum rate of interest is increased by law or by the Monetary Board:

Provided, That such stipulation shall be valid only if there is also a stipulation in the agreement
that the rate of interest agreed upon shall be reduced in the event that the applicable maximum
rate of interest is reduced by law or by the Monetary Board;
Provided, further, That the adjustment in the rate of interest agreed upon shall take effect on or
after the effectivity of the increase or decrease in the maximum rate of interest.
It is now clear that from March 17, 1980, escalation clauses to be valid should specifically
provide: (1) that there can be an increase in interest if increased by law or by the Monetary Board;
and (2) in order for such stipulation to be valid, it must include a provision for reduction of the
stipulated interest "in the event that the applicable maximum rate of interest is reduced by law or
by the Monetary Board."
While P.D. No. 1684 is not to be given retroactive effect, the absence of a de-escalation clause in
the Escalation Clause in question provides another reason why it should not be given effect
because of its one-sidedness in favor of the lender.
The Escalation Clause specifically stipulated that the increase in interest rate was to be "on this
particular kind of loan," meaning one secured by registered real estate mortgage.
In the absence of any indication in CIRCULAR No. 494 as to which particular type of loan was
meant by the Monetary Board, the more equitable construction is to limit CIRCULAR No. 494 to
loans guaranteed by securities other than mortgage upon registered realty.
WHEREFORE, the Court rules that while an escalation clause like the one in question can
ordinarily be held valid, nevertheless, petitioner Banco Filipino cannot rely thereon to raise the
interest on the borrower's loan from 12% to 17% per annum because Circular No. 494 of the
Monetary Board was not the "law" contemplated by the parties, nor should said Circular be held
as applicable to loans secured by registered real estate in the absence of any such specific
indication and in contravention of the policy behind the Usury Law.
The judgment appealed from is, therefore, hereby affirmed in so far as it orders petitioner Banco
Filipino to desist from enforcing the increased rate of interest on petitioner's loan.
FIRST METRO INVESTMENT VS. ESTE DEL SOL MOUNTAIN RESERVE INC.
It is an elementary rule of contracts that the laws, in force at the time the contract was made and
entered into, govern it. More significantly, Central Bank Circular No. 905 did not repeal nor in
any way amend the Usury Law but simply suspended the latters effectivity. The illegality of usury
is wholly the creature of legislation. A Central Bank Circular cannot repeal a law. Only a law can
repeal another law. Thus, retroactive application of a Central Bank Circular cannot, and should
not, be presumed.
An apparently lawful loan is usurious when it is intended that additional compensation for the
loan be disguised by an ostensibly unrelated contract providing for payment by the borrower for

the lenders services which are of little value or which are not in fact to be rendered, such as in the
instant case. In this connection, Article 1957 of the New Civil Code clearly provides that:
Art. 1957. Contracts and stipulations, under any cloak or device whatever, intended to circumvent
the laws against usury shall be void. The borrower may recover in accordance with the laws on
usury.
In usurious loans, the entire obligation does not become void because of an agreement for
usurious interest; the unpaid principal debt still stands and remains valid but the stipulation as to
the usurious interest is void, consequently, the debt is to be considered without stipulation as to
the interest.
In simple loan with stipulation of usurious interest, the prestation of the debtor to pay the principal
debt, which is the cause of the contract (Article 1350, Civil Code), is not illegal. The illegality lies
only as to the prestation to pay the stipulated interest; hence, being separable, the latter only
should be deemed void, since it is the only one that is illegal.
Thus, the nullity of the stipulation on the usurious interest does not affect the lenders right to
receive back the principal amount of the loan. With respect to the debtor, the amount paid as
interest under a usurious agreement is recoverable by him, since the payment is deemed to have
been made under restraint, rather than voluntarily.
SPOUSES JUICO CASE:
Whether the interest rates imposed upon them by respondent are valid.
The principle of mutuality of contracts is expressed in Article 1308 of the Civil Code, which
provides:
Article 1308. The contract must bind both contracting parties; its validity or compliance
cannot be left to the will of one of them. Article 1956 of the Civil Code likewise ordains
that "no interest shall be due unless it has been expressly stipulated in writing."
The binding effect of any agreement between parties to a contract is premised on two settled
principles: (1) that any obligation arising from contract has the force of law between the parties;
and (2) that there must be mutuality between the parties based on their essential equality. Any
contract which appears to be heavily weighed in favor of one of the parties so as to lead to an
unconscionable result is void. Any stipulation regarding the validity or compliance of the contract
which is left solely to the will of one of the parties, is likewise, invalid.
Escalation clauses refer to stipulations allowing an increase in the interest rate agreed upon by the
contracting parties. This Court has long recognized that there is nothing inherently wrong with
escalation clauses which are valid stipulations in commercial contracts to maintain fiscal stability

and to retain the value of money in long term contracts. Hence, such stipulations are not void per
se.
Nevertheless, an escalation clause "which grants the creditor an unbridled right to adjust the
interest independently and upwardly, completely depriving the debtor of the right to assent to an
important modification in the agreement" is void. A stipulation of such nature violates the
principle of mutuality of contracts.
the validity of the escalation clause did not give petitioner the unbridled right to unilaterally
adjust interest rates. The adjustment should have still been subjected to the mutual agreement of
the contracting parties. In light of the absence of consent on the part of respondents to the
modifications in the interest rates, the adjusted rates cannot bind them notwithstanding the
inclusion of a de-escalation clause in the loan agreement.
While a ceiling on interest rates under the Usury Law was already lifted under Central Bank
Circular No. 905, nothing therein "grants lenders carte blanche authority to raise interest rates to
levels which will either enslave their borrowers or lead to a hemorrhaging of their assets."
Here, the escalation clause in the promissory notes authorizing the respondent to adjust the rate of
interest on the basis of a law or regulation issued by the Central Bank of the Philippines, should
be read together with the statement after the first paragraph where no rate of interest was fixed as
it would be based on prevailing market rates. While the latter is not strictly an escalation clause,
its clear import was that interest rates would vary as determined by prevailing market rates.
Evidently, the parties intended the interest on petitioners loan, including any upward or
downward adjustment, to be determined by the prevailing market rates and not dictated by
respondents policy.
We hold that the escalation clause is still void because it grants respondent the power to impose an
increased rate of interest without a written notice to petitioners and their written consent.
Respondents monthly telephone calls to petitioners advising them of the prevailing interest rates
would not suffice. A detailed billing statement based on the new imposed interest with
corresponding computation of the total debt should have been provided by the respondent to
enable petitioners to make an informed decision. An appropriate form must also be signed by the
petitioners to indicate their conformity to the new rates. Compliance with these requisites is
essential to preserve the mutuality of contracts. For indeed, one-sided impositions do not have the
force of law between the parties, because such impositions are not based on the parties essential
equality.

MEDIDA CASE:
Whether or not a mortgagor, whose property has been extrajudicially foreclosed and sold at the
corresponding foreclosure sale, may validly execute a mortgage contract over the same property
in favor of a third party during the period of redemption.
Thus, a redemptioner is defined as a creditor having a lien by attachment, judgment or mortgage
on the property sold, or on some part thereof, subsequent to the judgment under which the
property was sold.
Of course, while in extrajudicial foreclosure the sale contemplated is not under a judgment but the
proceeding pursuant to which the mortgaged property was sold, a subsequent mortgage could
nevertheless be legally constituted thereafter with the subsequent mortgagee becoming and
acquiring the rights of a redemptioner, aside from his right against the mortgagor.
The mortgagor remains as the absolute owner of the property during the redemption period and
has the free disposal of his property, there would be compliance with the requisites of Article 2085
of the Civil Code for the constitution of another mortgage on the property. To hold otherwise
would create the inequitable situation wherein the mortgagor would be deprived of the
opportunity, which may be his last recourse, to raise funds wherewith to timely redeem his
property through another mortgage thereon.
In the case at bar, the real estate mortgage in favor of petitioner bank was executed by respondent
spouses during the period of redemption. We reiterate that during said period it cannot be said that
the mortgagor is no longer the owner of the foreclosed property since the rule up to now is that the
right of a purchaser at a foreclosure sale is merely inchoate until after the period of redemption
has expired without the right being exercised.
The title to land sold under mortgage foreclosure remains in the mortgagor or his grantee
until the expiration of the redemption period and conveyance by the master's deed. To
repeat, the rule has always been that it is only upon the expiration of the redemption period,
without the judgment debtor having made use of his right of redemption, that the ownership of the
land sold becomes consolidated in the purchaser.
Therefore, what actually is effected where redemption is seasonably exercised by the judgment or
mortgage debtor is not the recovery of ownership of his land, which ownership he never lost, but
the elimination from his title thereto of the lien created by the levy on attachment or judgment or
the registration of a mortgage thereon. To the effect that the redemption of property sold under a
foreclosure sale defeats the inchoate right of the purchaser and restores the property to the same

condition as if no sale had been attempted. Further, it does not give to the mortgagor a new title,
but merely restores to him the title freed of the encumbrance of the lien foreclosed.
PABLO GARCIA CASE:
1. Whether or not the second mortgage to Garcia was valid; Whether or not the sale of the
subject property to Villar was valid.
This Court would like to address the validity of the second mortgage to Garcia and the sale of the
subject property to Villar. Both are valid under the terms and conditions of the Deed of Real
Estate Mortgage executed by Galas and Villar.
While it is true that the annotation of the first mortgage to Villar on Galass TCT contained a
restriction on further encumbrances without the mortgagees prior consent, this restriction was
nowhere to be found in the Deed of Real Estate Mortgage. If it were the intention of the parties to
impose such restriction, they would have and should have stipulated such in the Deed of Real
Estate Mortgage itself. Neither did this Deed proscribe the sale or alienation of the subject
property during the life of the mortgages. Nowhere was it stated in the Deed that Galas could not
opt to sell the subject property to Villar, or to any other person. Such stipulation would have been
void anyway, as it is not allowed under Article 2130: A stipulation forbidding the owner from
alienating the immovable mortgaged shall be void.
Galas was free to mortgage the subject property even without Villars consent as the restriction that
the mortgagees consent was necessary in case of a subsequent encumbrance was absent in the
Deed of Real Estate Mortgage. In the same vein, the sale of the subject property to Villar was
valid as it found nothing in the records that would show that Galas violated the Deed of Real
Estate Mortgage prior to the sale.
2. Whether or not the sale of the subject property to Villar was in violation of the prohibition
on pactum commissorium
Villars purchase of the subject property did not violate the prohibition on pactum commissorium.
The power of attorney provision above did not provide that the ownership over the subject
property would automatically pass to Villar upon Galass failure to pay the loan on time. What it
granted was the mere appointment of Villar as attorney-in-fact, with authority to sell or otherwise
dispose of the subject property, and to apply the proceeds to the payment of the loan.
This provision is customary in mortgage contracts, and is in conformity with Article 2087 of the
Civil Code, which reads:

Art. 2087. It is also of the essence of these contracts that when the principal obligation becomes
due, the things in which the pledge or mortgage consists may be alienated for the payment to the
creditor.
In the case at bar, Galass decision to eventually sell the subject property to Villar for an additional
P1,500,000.00 was well within the scope of her rights as the owner of the subject property. The
subject property was transferred to Villar by virtue of another and separate contract, which is the
Deed of Sale.
RULE ON PACTUM COMMISORIUM:
Art. 2088. 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 following are the elements of pactum commissorium:
(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.
3. Whether or not Garcias action for foreclosure of mortgage on the subject property can
prosper.
The second mortgage, of which Garcia is the mortgagee, has not yet been discharged, we find that
said mortgage subsists and is still enforceable. However, Villar, in buying the subject property
with notice that it was mortgaged, only undertook to pay such mortgage or allow the subject
property to be sold upon failure of the mortgage creditor to obtain payment from the principal
debtor once the debt matures. Villar did not obligate herself to replace the debtor in the principal
obligation, and could not do so in law without the creditors consent. Article 1293 of the Civil
Code provides:
Art. 1293. Novation which consists in substituting a new debtor in the place of the original one,
may be made even without the knowledge or against the will of the latter, but not without the
consent of the creditor. Payment by the new debtor gives him the rights mentioned in articles 1236
and 1237.
Therefore, the obligation to pay the mortgage indebtedness remains with the original debtors
Galas and Pingol.

The spirit of the Civil Code is to let the obligation of the debtor to pay the debt stand although the
property mortgaged to secure the payment of said debt may have been transferred to a third
person.
Garcia has no cause of action against Villar in the absence of evidence to show that the second
mortgage executed in favor of Garcia has been violated by his debtors, Galas and Pingol.
DBP V. PRUDENTIAL BANK
In a trust receipt transaction, the goods are released by the entruster (who owns or holds absolute
title or security interests over the said goods) to the entrustee on the latters execution and delivery
to the entruster of a trust receipt. The trust receipt evidences the absolute title or security interest
of the entruster over the goods. As a consequence of the release of the goods and the execution of
the trust receipt, a two-fold obligation is imposed on the entrustee, namely: (1) to hold the
designated goods, documents or instruments in trust for the purpose of selling or otherwise
disposing of them and (2) to turn over to the entruster either the proceeds thereof to the extent of
the amount owing to the entruster or as appears in the trust receipt, or the goods, documents or
instruments themselves if they are unsold or not otherwise disposed of, in accordance with the
terms and conditions specified in the trust receipt.
In the case of goods, they may also be released for other purposes substantially equivalent to (a)
their sale or the procurement of their sale; or (b) their manufacture or processing with the purpose
of ultimate sale, in which case the entruster retains his title over the said goods whether in their
original or processed form until the entrustee has complied fully with his obligation under the
trust receipt; or (c) the loading, unloading, shipment or transshipment or otherwise dealing with
them in a manner preliminary or necessary to their sale.
Thus, in a trust receipt transaction, the release of the goods to the entrustee, on his execution of a
trust receipt, is essentially for the purpose of their sale or is necessarily connected with their
ultimate or subsequent sale.
The various agreements between Prudential Bank and Litex commonly denominated as trust
receipts were valid. In this case, The articles were owned by Prudential Bank and they were only
held by Litex in trust. While it was allowed to sell the items, Litex had no authority to dispose of
them or any part thereof or their proceeds through conditional sale, pledge or any other means.
Article 2085 (2) of the Civil Code requires that, in a contract of pledge or mortgage, it is
essential that the pledgor or mortgagor should be the absolute owner of the thing pledged or
mortgaged.
Article 2085 (3) further mandates that the person constituting the pledge or mortgage must have
the free disposal of his property, and in the absence thereof, that he be legally authorized for the
purpose.

Litex had neither absolute ownership, free disposal nor the authority to freely dispose of the
articles. Litex could not have subjected them to a chattel mortgage. Their inclusion in the
mortgage was void and had no legal effect. There being no valid mortgage, there could also be no
valid foreclosure or valid auction sale. Thus, DBP could not be considered either as a mortgagee
or as a purchaser in good faith.

No one can transfer a right to another greater than what he himself has. Nemo dat quod non habet.
Hence, Litex could not transfer a right that it did not have over the disputed items. DBP merely
stepped into the shoes of Litex as trustee of the imported articles with an obligation to pay their
value or to return them on Prudential Banks demand. By its failure to pay or return them despite
Prudential Banks repeated demands and by selling them to Lyon without Prudential Banks
knowledge and conformity, DBP became a trustee ex maleficio.