CREDIT TRANSACTIONS (Case Digests) Held: Qualified No. Affirmed.
RP vs. Jose V. Bagtas, G.R. No. L-17474, October 25,
1962 (6 SCRA 262)
Facts: Jose V. Bagtas borrowed from the RP through
the Bureau of Animal Industry three bulls, a Red Sindhi,
a Bhagnari, and a Sahiniwal, for a period of one year
from 8
May 1948 to 7 May 1949 for breeding purposes subject to
a government charge of breeding fee of 10% of the book
value of the bulls. Upon the expiration on 7 May 1949 of
the contract, the borrower asked for a renewal for
another period of one year. However, the Secretary of
Agriculture and Natural Resources approved a renewal
thereof of only one bull for another year from 8 May
1949 to 7 May 1950 and requested the return of the
other two.
On 25 March 1950 Jose V. Bagtas wrote to the
Director of Animal Industry that he would pay the value of
the three bulls. On 17 October 1950 he reiterated his
desire to buy them at a value with a deduction of
yearly depreciation to be approved by the Auditor
General. On 19 October 1950 the Director of Animal
Industry advised him that the book value of the three bulls
could not be reduced and that they either be returned or
their book value paid not later than 31 October 1950.
Jose V. Bagtas failed to pay the book value of the
three bulls or to return them. So, on 20 December 1950 in
the CFI of Manila, the RP commenced an action against him
praying that he be ordered to return the three bulls
loaned to him or to pay their book value in the total sum
of P3,241.45 and the unpaid breeding fee in the sum of
P499.62, both with interests, and costs.
Bagtas countered that because of the bad peace
and order situation in Cagayan Valley, and of the
pending appeal he had taken to the Secretary of
Agriculture and Natural Resources and the President of
the Philippines from the refusal by the Director of Animal
Industry to deduct from the book value of the bulls
corresponding yearly depreciation of 8% from the date
of acquisition, to which depreciation the Auditor
General did not object, he could not return the animals nor
pay their value and prayed for the dismissal of the
complaint.
The Court ruled in favor of the RP. The RP
moved ex parte for a writ of execution which was
granted. The surviving spouse of the now deceased Jose V.
Bagtas filed a motion praying for the quashal of the writ of
execution alleging that 2 bulls had already been returned
while the third bull died from gunshot wounds inflicted
during a Huks raid on Hacienda Felicidad Intal. The court
denied her motion.
Issue: Whether a bailee in commodatum is absolved of
the obligation to return the thing if it is lost due to force
majeure
Ratio: The loan by the appellee to the late defendant Jose
V. Bagtas of the three bulls for breeding purposes for a
period of one year from 8 May 1948 to 7 May 1949,
later on renewed for another year as regards one bull, was
subject to the payment by the borrower of breeding fee of
10% of the book value of the bulls. The appellant contends
that the contract was commodatum and that, for that
reason, as the appellee retained ownership or title to the
bull it should suffer its loss due to force majeure A contract
of commodatum is essentially gratuitous. If the breeding
fee were considered a compensation, then the contract
would be a lease of the bull. Under article 1671 of the
Civil Code, the lessee would be subject to the
responsibilities of a possessor in bad faith, because she
had continued possession of the bull after the expiry of the
contract. And even if the contract be commodatum, still
the appellant is liable, because article 1942 of the Civil
Code provides that a bailee in a contract of commodatum
is liable for loss of the thing, even if it should be through a
fortuitous event: (2) If he keeps it longer than the period
stipulated or (3) If the thing loaned has been delivered
with appraisal of its value, unless there is a stipulation
exempting the bailee from responsibility in case of a
fortuitous event.
The original period of the loan was from 8 May
1948 to 7 May 1949. The loan of one bull was renewed for
another period of one year to end on 8 May 1950. But the
appellant kept and used the bull until November 1953
when during a Huk raid it was killed by stray bullets.
Furthermore, when lent and delivered to the deceased
husband of the appellant, the bulls had each an appraised
book value, to wit: the Sindhi, at P1,176.46; the Bhagnari,
at P1,320.56 and the Sahiniwal; at P744.46. It was not
stipulated that in case of loss of the bull due to fortuitous
event the late husband of the appellant would be exempt
from liability.
Special proceedings for the administration and
settlement of the estate of the deceased Jos V. Bagtas
having been instituted in the Court of First Instance of
Rizal (Q-
200), the money judgment rendered in favor of the
appellee cannot be enforced by means of a writ of
execution but must be presented to the probate court
for payment by the appellant, the administratrix
appointed by the court.
RP (Bureau of Lands) vs. CA, Heirs of Domingo
Baloy, G.R. No. L-46145, November 26, 1986. (146
SCRA 15)
Facts: Domingo Baloy is the owner of a parcel of land
whose title to the land dates back to Spanish times.. On
November 26, 1902 pursuant to the executive order
of the President of the U.S., the area was declared
within the U.S. Naval Reservation. Under Act 627 as
amended by Act 1138, a period was fixed within which
1
persons affected thereby could file their application, (that
is within 6 months from July 8, 1905) otherwise the said
lands or interests therein will be conclusively adjudged to
be public lands and all claims on the part of private
individuals for such lands or interests therein not to
presented will be forever barred. The U.S. Navy did
occupy the land for some time as a recreation area. After
the U.S. Navy abandoned the land, Baloy came in and
asserted title once again, only to be troubled by first
Crispiniano Blanco who however in due time,
quitclaimed in favor of applicants, and then by private
oppositors now, apparently originally tenants of Blanco.
Baloy filed an application for land registration, but this was
denied. CA reversed.
Issue: Whether possession of land not in the concept of
owner is a commodatum.
Held: Yes. Affirmed.
Ratio: Private land could be deemed to have become
public land only by virtue of a judicial declaration after
due notice and hearing. It runs contrary therefore to the
contention of petitioners that failure to present claims set
forth under Sec. 2 of Act 627 made the land ipso facto
public without any need of judicial pronouncement.
Petitioner in making such declaration relied on Sec. 4 of
Act 627 alone. But in construing a statute the entire
provisions of the law must be considered in order to
establish the correct interpretation as intended by the
law-making body. Act 627 by its terms is not self-
executory and requires implementation by the Court of
Land Registration. Act 627, to the extent that it creates a
forfeiture, is a penal statute in derogation of private
rights, so it must be strictly construed so as to
safeguard private respondents' rights. Significantly,
petitioner does not even allege the existence of any
judgment of the Land Registration court with respect to
the land in question. Without a judgment or order
declaring the land to be public, its private character and
the possessory information title over it must be respected.
Since no such order has been rendered by the Land
Registration Court it necessarily follows that it never
became public land thru the operation of Act 627. To
assume otherwise is to deprive private respondents of
their property without due process of law. In fact it can be
presumed that the notice required by law to be given by
publication and by personal service did not include the
name of Domingo Baloy and the subject land, and hence
he and his land were never brought within the operation
of Act
627 as amended. The procedure laid down in Sec. 3 is a
requirement of due process. "Due process requires that
the statutes under which it is attempted to deprive a
citizen of private property without or against his consent
must, as in expropriation cases, be strictly complied with,
because such statutes are in derogation of general rights."
(Arriete vs. Director of Public Works, 58 Phil. 507, 508,
511).
The finding of respondent court that during
the interim of 57 years from November 26, 1902 to
December 17, 1959 (when the U.S. Navy possessed the
area) the possessory rights of Baloy or heirs were merely
suspended and not lost by prescription, is supported by
Exhibit "U," a communication or letter No. 1108-63, dated
June 24, 1963, which contains an official statement of the
position of the Republic of the Philippines with regard to
the status of the land in question. Said letter recognizes
the fact that Domingo Baloy and/or his heirs have been
in continuous possession of said land since
1894 as attested by an "Informacion Possessoria" Title,
which was granted by the Spanish Government. Hence, the
disputed property is private land and this possession was
interrupted only by the occupation of the land by the U.S.
Navy in 1945 for recreational purposes. The U.S. Navy
eventually abandoned the premises. The heirs of the late
Domingo P. Baloy, are now in actual possession, and this
has been so since the abandonment by the U.S. Navy. A
new recreation area is now being used by the U.S. Navy
personnel and this place is remote from the land in
question.
Clearly, the occupancy of the U.S. Navy was not in
the concept of owner. It partakes of the character of a
commodatum. It cannot therefore militate against the title
of Domingo Baloy and his successors-in-interest. One's
ownership of a thing may be lost by prescription by reason
of another's possession if such possession be under claim
of ownership, not where the possession is only intended to
be transient, as in the case of the U.S. Navy's occupation of
the land concerned, in which case the owner is not
divested of his title, although it cannot be exercised in the
meantime.
Margarota Quintos & Angel A. Ansaldo vs. Beck,
G.R. No. 46240, November 3,
1939 (69 Phil 108)
Facts: The defendant was a tenant of the plaintiff and
occupied the latter's house on M. H. del Pilar street, No.
1175. On January 14, 1936, upon the novation of the
contract of lease between the plaintiff and the defendant,
the former gratuitously granted to the latter the use of the
furniture, subject to the condition that the defendant
would return them to the plaintiff upon the latter's
demand. The plaintiff sold the property to Maria Lopez
and Rosario Lopez, and on September 14, 1936, these
three notified the defendant of the conveyance, giving him
60 days to vacate the premises under one of the clauses of
the contract of lease. Thereafter, the plaintiff required the
defendant to return all the furniture transferred to him for
his use. The defendant answered that she may call for
them in the house where they are found. On November 5,
1936, the defendant, through another person, wrote to the
plaintiff reiterating that she may call for the furniture in
the ground floor of the house. On the 7th of the same
month, the defendant wrote another letter to the plaintiff
2
informing her that he could not give up the three gas
heaters and the four electric lamps because he would use
them until the 15th of the same month when the lease is
due to expire. The plaintiff refused to get the furniture in
view of the fact that the defendant had declined to deliver
all of them. On November 15th, before vacating the
house, the defendant deposited with the Sheriff all the
furniture belonging to the plaintiff and they are now on
deposit in the warehouse situated at No. 1521, Rizal
Avenue in the custody of the said sheriff.
The plaintiff filed suit for the return of the
furniture. The lower court ordered the return of the
furniture which were already in the possession of the
sheriff at the plaintiffs expense and the payment of any
fees for the deposit of the furniture to be share pro rata
between the parties.
Issue: Whether a bailee in commodatum is obligated to
return the thing loaned at the premises of the bailor.
Held: Yes. Reversed.
Ratio: The contract entered into between the parties is
one of commodatum, because under it the plaintiff
gratuitously granted the use of the furniture to the
defendant, reserving for herself the ownership thereof; by
this contract the defendant bound himself to return the
furniture to the plaintiff, upon the latter's demand.
The obligation voluntarily assumed by the defendant to
return the furniture upon the plaintiff's demand, means
that he should return all of them to the plaintiff at the
latter's residence or house. The defendant did not comply
with this obligation when he merely placed them at the
disposal of the plaintiff, retaining for his benefit the three
gas heaters and the four electric lamps. The provisions of
article 1169 of the Civil Code cited by counsel for the
parties are not squarely applicable. The trial court,
therefore, erred when it came to the legal conclusion
that the plaintiff failed to comply with her obligation to get
the furniture when they were offered to her.
As the defendant had voluntarily undertaken to
return all the furniture to the plaintiff, upon the latter's
demand, the Court could not legally compel her to bear
the expenses occasioned by the deposit of the furniture at
the defendant's behest. The latter, as bailee, was not
entitled to place the furniture on deposit; nor was the
plaintiff under a duty to accept the offer to return the
furniture, because the defendant wanted to retain the
three gas heaters and the four electric lamps.
As to the value of the furniture, we do not
believe that the plaintiff is entitled to the payment thereof
by the defendant in case of his inability to return some of
the furniture, because under paragraph 6 of the
stipulation of facts, the defendant has neither agreed to
nor admitted the correctness of the said value. Should the
defendant fail to deliver some of the furniture, the value
thereof should be later determined by the trial court
through evidence which the parties may desire to present.
The costs in both instances should be borne by the
defendant because the plaintiff is the prevailing party
(section 487 of the Code of Civil Procedure). The
defendant was the one who breached the contract of
commodatum, and without any reason he refused to return
and deliver all the furniture upon the plaintiff's demand.
In these circumstances, it is just and equitable that he
pay the legal expenses and other judicial costs which
the plaintiff would not have otherwise defrayed.
The Consolidated Bank & Trust Corp (Solidbank)
vs. CA, Continental Cement
Corp, Gregory T. Lim & Spouse, G.R. No. 114286, April
19, 2001. (356 SCRA 671)
Facts: On July 13, 1982, respondents Continental Cement
Corporation (hereinafter, respondent Corporation) and
Gregory T. Lim (hereinafter, respondent Lim) obtained
from petitioner Consolidated Bank and Trust
Corporation Letter of Credit No. DOM-
23277 in the amount of P1,068,150. On the same date,
respondent Corporation paid a marginal deposit of
P320,445 to petitioner. The letter of credit was used to
purchase around five hundred thousand liters of bunker
fuel oil from Petrophil Corporation, which the latter
delivered directly to respondent Corporation in its
Bulacan plant. In relation to the same transaction, a trust
receipt for the amount of P1,001,520.93 was executed
by respondent Corporation, with respondent Lim as
signatory.
Claiming that respondents failed to turn over
the goods covered by the trust receipt or the proceeds
thereof, petitioner filed a complaint for sum of money with
application for preliminary attachment before the RTC of
Manila. In answer to the complaint, respondents averred
that the transaction between them was a simple loan and
not a trust receipt transaction, and that the amount
claimed by petitioner did not take into account payments
already made by them. Respondent Lim also denied any
personal liability in the subject transactions. In a
Supplemental Answer, respondents prayed for
reimbursement of alleged overpayment to petitioner of the
amount of P490,228.90.
The trial court dismissed the complaint and
granted the respondents counterclaim. CA partially
modified the decision with respect to the award of the
counterclaim.
Issue: Whether a provision of a floating interest rate which
has no reference rate is valid.
Held: No. Affirmed.
3

Ratio: There is no error in setting aside the floating rate
of interest in the trust receipt. The provision on interest
states: I, WE jointly and severally agree to any increase
or decrease in the interest rate which may occur after July
1, 1981, when the Central Bank floated the interest rate,
and to pay additionally the penalty of 1% per month
until the amount/s or installment/s due and unpaid under
the trust receipt on the reverse side hereof is/are fully
paid.
The foregoing stipulation is invalid, there being
no reference rate set either by it or by the Central Bank,
leaving the determination thereof at the sole will and
control of petitioner. While it may be acceptable, for
practical reasons given the fluctuating economic
conditions, for banks to stipulate that interest rates on a
loan not be fixed and instead be made dependent upon
prevailing market conditions, there should always be a
reference rate upon which to peg such variable interest
rates. An example of such a valid variable interest rate
was found in Polotan, Sr. v. Court of Appeals. In that
case, the contractual provision stating that if there
occurs any change in the prevailing market rates, the
new interest rate shall be the guiding rate in
computing the interest due on the outstanding obligation
without need of serving notice to the Cardholder other
than the required posting on the monthly statement
served to the Cardholder was considered valid. The
aforequoted provision was upheld notwithstanding that it
may partake of the nature of an escalation clause, because
at the same time it provides for the decrease in the interest
rate in case the prevailing market rates dictate its
reduction. In other words, unlike the stipulation subject
of the instant case, the interest rate involved in the Polotan
case is designed to be based on the prevailing market
rate. On the other hand, a stipulation ostensibly
signifying an agreement to any increase or decrease in
the interest rate, without more, cannot be accepted by
this Court as valid for it leaves solely to the creditor the
determination of what interest rate to charge against an
outstanding loan.
Petitioner has also failed to convince us that its
transaction with respondent Corporation is really a trust
receipt transaction instead of merely a simple loan, as
found by the lower court and the Court of Appeals. The
recent case of Colinares v. Court of Appeals appears to be
foursquare with the facts obtaining in the case at bar.
There, we found that inasmuch as the debtor received
the goods subject of the trust receipt before the trust
receipt itself was entered into, the transaction in question
was a simple loan and not a trust receipt agreement. Prior
to the date of execution of the trust receipt, ownership over
the goods was already transferred to the debtor. This
situation is inconsistent with what normally obtains in a
pure trust receipt transaction, wherein the goods belong
in ownership to the bank and are only released to the
importer in trust after the loan is granted.
In the case at bar, as in Colinares, the delivery to
respondent Corporation of the goods subject of the trust
receipt occurred long before the trust receipt itself
was executed. More specifically, delivery of the bunker
fuel oil to respondent Corporations Bulacan plant
commenced on July 7, 1982 and was completed by July 19,
1982. Further, the oil was used up by respondent
Corporation in its normal operations by August, 1982. On
the other hand, the subject trust receipt was only
executed nearly two months after full delivery of the oil
was made to respondent Corporation, or on September 2,
1982.
The danger in characterizing a simple loan as a
trust receipt transaction was explained in Colinares, to wit:
The Trust Receipts Law does not seek to enforce payment
of the loan, rather it punishes the dishonesty and abuse of
confidence in the handling of money or goods to the
prejudice of another regardless of whether the latter is the
owner. Here, it is crystal clear that on the part of
Petitioners there was neither dishonesty nor abuse of
confidence in the handling of money to the prejudice of
PBC. Petitioners continually endeavored to meet their
obligations, as shown by several receipts issued by PBC
acknowledging payment of the loan. The Information
charges Petitioners with intent to defraud and
misappropriating the money for their personal use. The
mala prohibita nature of the alleged offense
notwithstanding, intent as a state of mind was not proved
to be present in Petitioners situation. Petitioners
employed no artifice in dealing with PBC and never did
they evade payment of their obligation nor attempt to
abscond. Instead, Petitioners sought favorable terms
precisely to meet their obligation.
Also noteworthy is the fact that Petitioners are
not importers acquiring the goods for re-sale, contrary to
the express provision embodied in the trust receipt. They
are contractors who obtained the fungible goods for their
construction project. At no time did title over the
construction materials pass to the bank, but directly to the
Petitioners from CM Builders Centre. This impresses
upon the trust receipt in question vagueness and
ambiguity, which should not be the basis for criminal
prosecution in the event of violation of its provisions.
The practice of banks of making borrowers sign
trust receipts to facilitate collection of loans and place
them under the threats of criminal prosecution should
they be unable to pay it may be unjust and inequitable, if
not reprehensible. Such agreements are contracts of
adhesion which borrowers have no option but to sign lest
their loan be disapproved. The resort to this scheme
leaves poor and hapless borrowers at the mercy of banks,
and is prone to misinterpretation, as had happened in this
case. Eventually, PBC showed its true colors and
admitted that it was only after collection of the money,
as manifested by its Affidavit of Desistance.
Oscar D. Ramos & Luz Agudo vs. CA, Adelaida Ramos &
Lazaro E. Meneses, G.R. No. 42108, December 29, 1989
(180 SCRA 635)
4
Facts: Sometime in January, 1959, private respondent
Adelaida Ramos borrowed from her brother, petitioner
Oscar D. Ramos, the amounts of P5,000.00 and P9,000.00
in connection with her business transaction with one
Flor Ramiro, Fred Naboa and Atty. Ruperto Sarandi
involving the recovery of a parcel of land in Tenejeros,
Malabon. The said amount was used to finance the trip to
Hawaii of Ramiro, Naboa and Atty. Sarandi. As security for
said loan, private respondent Adelaida Ramos executed in
favor of petitioners two (2) deeds of conditional sale dated
May 27, 1959 and August 30, 1959, of her rights, shares,
interests and participation respectively over Lot No. 4033
covered by Original Certificate of Title No. 5125
registered in the name of their parents, Valente Ramos
and Margarita Denoga, now deceased, and Lot No. 4221
covered by Transfer Certificate of Title No. 10788 then
registered in the names of Socorro Ramos, Josefina Ramos
and Adelaida Ramos.
Upon the failure of said private respondent as
vendor a retro to exercise her right of repurchase within
the redemption period, aforenamed petitioner filed a
petition for consolidation and approval of the conditional
sale of Lot No. 4033 in Special Proceedings No. 5174,
entitled "Intestate Estate of the late Margarita Denoga,"
and a petition for

5
approval of the pacto de retro sale of Lot No. 4221 in the be sales with pacto de retro; however, since the same
former Court of First Instance of Tarlac acting as a were actually executed in consideration of the aforesaid
cadastral court. The probate court and cadastral court loans said contracts are indubitably equitable
granted the petitions. mortgages. The rule is firmly settled that whenever it is
Private respondents had been and remained in clearly shown that a deed of sale with pacto de retro,
possession of these properties until sometime in 1964 regular on its face, is given as security for a loan, it must be
when petitioner took possession thereof. regarded as an equitable mortgage.
On February 28, 1968, private respondent filed
Civil Case No. 4168 with the then Court of First Instance of
Tarlac for declaration of nullity of orders, reformation of
instrument, recovery of possession with preliminary
injunction and damages. The complaint therein alleged
that the deeds of conditional sale, dated May 27, 1959 and
August 30, 1959, are mere mortgages and were vitiated by
misrepresentation, fraud and undue influence and that the
orders dated January 22, 1960 and April 18, 1960,
respectively issued by the probate and cadastral courts,
were null and void for lack of jurisdiction. The court
ruled that the contract between the parties is a loan
secured by a real estate mortgage, and set aside the
titles issued in favor of the petitioner. CA affirmed.

Issue: Whether a loan contract which is made to appear

as a conditional sale can be interpreted as an equitable
mortgage.

Held: Yes. Affirmed.

Ratio: Several undisputed circumstances persuade this

Court that the questioned deeds should be construed as
equitable mortgages: (1) plaintiff vendor remained in
possession until 1964 of the properties she allegedly sold
in 1959 to defendants; (2) the sums representing the
alleged purchase price were actually advanced to plaintiff
by way of loans; and (3) the properties allegedly
purchased by defendant Oscar Ramos and his wife have
never been declared for taxation purposes in their names.
Such a conclusion is buttressed by the other circumstances
catalogued by respondent court especially the undisputed
fact that the two deeds were executed by reason of the
loan extended by petitioner Oscar Ramos to private
respondent Adelaida Ramos and that the purchase price
stated therein was the amount of the loan itself.
The above-stated circumstances are more than
sufficient to show that the true intention of the parties is
that the transaction shall secure the payment of said debt
and, therefore, shall be presumed to be an equitable
mortgage under Paragraph 6 of Article
1602 herein before quoted. Settled is the rule that to create
the presumption enunciated by Article 1602, the
existence of one circumstance is enough. The said
article expressly provides therefor "in any of the following
cases," hence the existence of any of the circumstances
enumerated therein, not a concurrence nor an
overwhelming number of such circumstances, suffices to
give rise to the presumption that the contract with the
right of repurchase is an equitable mortgage.
On the faces thereof, the contracts purport to
6
 Article 1602 of the Civil Code is designed
primarily to curtail the evils brought about by contracts of Held: No. Affirmed.
sale with right of repurchase, such as the circumvention of
the laws against usury and pactum commissorium. In the Ratio: The parties themselves admit that the bank had
present case before us, to rule otherwise would been paying them interest and that even now the bank
contravene the legislative intent to accord the vendor a owes them interest which should have been paid to them
retro maximum safeguards for the protection of his legal before it was declared in a state of liquidation. This fact
rights under the true agreement of the parties. undoubtedly destroys the character which they would
impress upon their deposits on current account, and
In re Liquidation of the Mercantile Bank of China. nullifies their contention that
Gopoco Grocery (Gopoco) et al. vs. Pacific Coast
Biscuit Co., et al., G.R. No. 43697 and 44200, March
31, 1938 (65
Phil 443)

Facts: The Bank Commissioner, on petition, found, after

an investigation, that the Mercantile Bank of China could
not continue operating as such without running the risk
of suffering losses and prejudicing its depositors and
customers. With the requisite approval of the
corresponding authorities, he took charge of all the
assets thereof. The CFI of Manila declared the said bank
in liquidation; approved all the acts theretofore executed
by the commissioner; prohibited the officers and agents of
the bank from interfering with said commissioner in the
possession of the assets thereof, its documents, deeds,
vouchers, books of account, papers, memorandums, notes,
bonds, bonds and accounts, obligations or securities and
its real and personal properties; required its creditors and
all those who had any claim against it, to present the same
in writing before the commissioner within ninety days;
and ordered the publication, as was in fact done, of the
order containing all these provisions, for two consecutive
weeks in two newspapers of general circulation in the City
of Manila, at the expense of the aforesaid bank. After these
publications, and within the period of ninety days, the
following creditors, among others, presented their claims:
Tiong Chui Gion, Gopoco Grocery, Tan Locko, Woo & Lo &
Co., Sy Guan Huat, and La Bella Tondea.
To better resolve not only these claims but also
the many others which were presented against the bank,
the lower court, on July 15, 1932, appointed Fulgencio
Borromeo as commissioner and referee to receive the
evidence which the interested parties may desire to
present; and the commissioner and referee thus named,
after qualifying for the office and receiving the evidence
presented to him, resolved the aforesaid six claims by
recommending that the same be considered as an
ordinary credit only, and not as a preferred credit as the
interested parties wanted, because they were at the same
time debtors of the bank. The lower court approved all the
recommendations of the commissioner and referee.
Not agreeable to the decision of the lower
court, each of the interested parties appealed therefrom.

Issue: Whether bank deposits are considered preferred

credits.

7
the same be considered as irregular deposits, because the appellants claim should be earned by their deposits after
payment of interest only takes place in the case of loans. said date and until the full amounts thereof are paid to
On the other hand, as we stated with respect to the them. And with respect to the question of set-off, this
claim of Tan Tiong Tick (In re Liquidation of Mercantile should be deemed made, of course, as of the date when the
Bank of China, G. R. No. 43682), the provisions of the Code Mercantile Bank of China was declared in a state of
of Commerce, and not those of the Civil Code, are, liquidation, that is, on December 4, 1931, for then there
applicable to cases of the nature of those at bar, which was already a reciprocal concurrence of debts, with
have to do with parties who are both merchants. (Articles respect to said bank and the appellants.
303 and 309, Code of Commerce.) We there said, and it is
not amiss to repeat now, that the so-called current account
and savings deposits have lost their character of deposits,
properly so-called, and are converted into simple
commercial loans because, in cases of such deposits, the
bank has made use thereof in the ordinary course of its
transactions as an institution engaged in the banking
business, not because it so wishes, but precisely because
of the authority deemed to have been granted to it by the
appellants to enable them to collect the interest which
they had been and they are now collecting, and by virtue
further of the authority granted to it by section 125 of the
Corporation Law (Act No. 1459), as amended by Acts Nos.
2003 and 3610 and section 9 of the Banking Law (Act No.
3154), without considering of course the provisions of
article 1768 of the Civil Code. Wherefore, it is held that the
deposits on current account of the appellants in the bank
under liquidation, with the right on their part to collect
interest, have not created and could not create a juridical
relation between them except that of creditors and debtor,
they being the creditors and the bank the debtor.
The question of set-off raised by them cannot be
resolved except in the same way that we resolved a like
question in the said case, G. R. No. 43672, entitled "In re
Liquidation of Mercantile Bank of China. Tan Tiong Tick,
claimant." It is proper that set- offs be made, inasmuch as
the appellants and the bank being reciprocally debtors
and creditors, the same is only just and according to law
(art. 1195, Civil Code), particularly as none of the
appellants falls within the exceptions mentioned in section
58 of the Insolvency Law (Act No. 1956) which states, (i)n
all cases of mutual debts and mutual credits between the
parties, the account between them shall be stated, and one
debt set off against the other, and the balance only shall be
allowed and paid. But no set-off or counterclaim shall be
allowed of a claim in its nature not provable against
the estate: Provided, That no set-off or counterclaim shall
be allowed in favor of any debtor to the insolvent of a
claim purchased by or transferred to such debtor within
thirty days immediately preceding the filing, or after the
filing of the petition by or against the insolvent.
The question of whether they are entitled to
interest should be resolved in the same way that we
resolved the case of the claimant Tan Tiong Tick. The
circumstances in these two cases are certainly the same
as those in the said case with reference to the said
question. the Mercantile Bank of China owes to each of the
appellants the interest claimed by them, corresponding to
the year ending December 4, 1931, the date it was
declared in a state of liquidation, but not those which the
8
 parties do not bargain on equal footing, the weaker
partys participation being reduced to the alternative to
United Coconut Planters Banks vs. Sps. Samuel and take it or leave it. Such a contract is a veritable trap for
Odette Beluso, G.R. No. the weaker party whom the courts of justice must protect
159912, August 17, 2007 (530 SCRA 567) against abuse and imposition.
The provision stating that interest rate shall be at
Facts: On April 16, 1996, UCPB granted spouses Beluso a the rate indicative of DBD retail rate or as determined by
Promissory Notes Line under a Credit Agreement whereby the Branch Head is indeed dependent solely on the
the latter could avail from the former credit of up to a will of
maximum amount of P1.2 million for 1 year. A real estate
mortgage was executed as an additional security. The
credit agreement was subsequently amended to increase
the amount to a maximum of P2.35 million and to
extend the term to Feb. 28, 1998. The spouses Beluso
fully availed of the credit at varying times and upon
execution of promissory notes, although they would later
deny the receipt of P350,000. UCPB applied interest rates
on the different promissory notes ranging from 18% to
34%. The spouses Beluso were able to pay the total
sum of P763,692 up to Feb. 28, 1998. They were
unable to pay afterwards. Their loans were still being
charged interest at varying rates from 28% to 33%.
On September 2, 1998, UCPB demanded the
payment of the total obligation of P2,932,543 plus 25%
attys fees. On December 28 1998, UCPB foreclosed the
properties mortgaged by the spouses Beluso due to the
non-payment of their debt which had ballooned to
P3,784,603.
On February 9, 1999, the spouses Beluso filed a
Petition for Annulment, Accounting and Damages against
UCPB with the RTC of Makati City. RTC ruled in favor of
the spouses Beluso, although they were still made to pay
P1,560,308 to the bank. CA affirmed.

Issue: Whether a provision that sets the interest at the

rate indicative of DBD retail rate or as determined by the
Branch Head is void.

Held: Yes. Modified.

Ratio: The promissory notes stated that the interest

thereon shall be at the rate indicative of DBD retail rate or
as determined by the Branch Head.
In the case of PNB vs. CA (196 SCRA 536), in order
that obligations arising from contracts may have the force
of law between the parties, there must be a mutuality
between the parties based on their essential equality. A
contract containing a condition which makes its
fulfillment dependent exclusively upon the uncontrolled
will of one of the contracting parties, is void. Hence,
even assuming that the loan agreement between the PNB
and the private respondent gave PNB a license to
increase the interest rate at will during the term of the
loan, that license would have been null and void for
being violative of the principle of mutuality essential in
contracts. It would have invested the loan agreement
with the character of a contract of adhesion, where the

9
UCPB. Under such provision, UCPB has 2 choices on a full disclosure of such cost with a view of preventing the
what interest rate shall be: (1) a rate indicative of the uninformed use of credit to the detriment of the national
DBD retail rate; or (2) a rate as determined by the branch economy. Moreover, while the spouses Beluso indeed
head. As UCPB is given this choice, the rate should be agreed to renew the credit line, the offending provisions
categorically determined in both choices. If either of these are found in the promissory notes themselves, not in the
2 choices presents an opportunity for UCPB to fix the rate credit line. In fixing the interest rates in the promissory
at will, the bank can easily choose such an option, thus notes to cover the renewed credit line, UCPB still reserved
making the entire interest rate provision violative of the to itself the same two options (1) a rate indicative of the
principle of mutuality of contracts. DBD retail rate; or (2) a rate as determined by the Branch
Not just one, but rather both, of these choices are Head.
dependent solely on the will of UCPB. Clearly, a rate as
determined by the Branch Head gives the latter
unfettered discretion on what the rate may be. The
Branch Head may choose any rate he or she desires. As
regards the rate indicative of the DBD retail rate, the
same cannot be considered as valid for being akin to a
prevailing rate or prime rate allowed by this Court in
Polotan vs CA (296 SCRA 247). The interest rate in Polotan
reads: The Cardholder agrees to pay interest per annum at
3% plus the prime rate of Security Bank and Trust
Company. In this provision in Polotan, there is a fixed
margin over the reference rate: 3%. Thus, the parties
can easily determine the interest rate by applying simple
arithmetic. On the other hand, the provision in the case
at bar does not specify any margin above or below the
DBD retail rate. UCPB can peg the interest at any
percentage above or below the DBD retail rate, again
giving it unfettered discretion in determining the interest
rate.
The stipulation in the promissory notes subjecting
the interest rate to review does not render the imposition
by UCPB of interest rates on the obligations of the
spouses Beluso valid. It should be pointed out that the
authority to review the interest rate was given UCPB
alone as the lender. Moreover, UCPB may apply the
considerations enumerated in this provision as it wishes.
As worded in the above provision, UCPB may give as
much weight as it desires to each of the following
considerations: (1) the prevailing financial and
monetary condition; (2) the rate of interest and charges
which other banks or financial institutions charge or
offer to charge for similar accommodations; and/or (3)
the resulting profitability to the LENDER (UCPB) after due
consideration of all dealings with the BORROWER (the
spouses Beluso). Again, as in the case of the interest rate
provision, there is no fixed margin above or below these
considerations.
The interest rate provisions in the case at bar are
illegal not only because of the provisions of the Civil Code
on mutuality of contracts, but also, as shall be discussed
later, because they violate the Truth in Lending Act. Not
disclosing the true finance charges in connection with the
extensions of credit is, furthermore, a form of deception
which we cannot countenance. It is against the policy of
the State as stated in the Truth in Lending Act: Sec. 2.
Declaration of Policy. It is hereby declared to be the
policy of the State to protect its citizens from a lack of
awareness of the true cost of credit to the user by assuring
10
 As for the claim of UCPB that, in lieu of the banks UCPBs contention that this action to recover the
interest rate, legal interest rate should apply, the court penalty for the violation of the Truth in Lending Act has
upheld this claim. The excess amount in such a demand already prescribed is likewise without merit. The penalty
does not nullify the demand itself, which is valid with for the violation of the act is P100 or an amount equal to
respect to the proper amount. A contrary ruling would twice the finance charge required by such creditor in
put commercial transactions in disarray, as validity of connection with such transaction, whichever is greater,
demands would be dependent on the exactness of the except that such liability shall not exceed P2,000.00 on
computations thereof, which are too often contested. any credit transaction. As this penalty depends on the
There being a valid demand on the part of UCPB, albeit finance charge required of the borrower, the borrowers
excessive, the spouses Beluso are considered in default cause of action would only accrue when such finance
with respect to the proper amount and, therefore, the charge is required. In the case at bar, the date of the
interests and the penalties began to run at that point. As demand for payment of the finance charge is 2 September
regards the award of 12% legal interest in favor of 1998, while the foreclosure
petitioner, the RTC actually recognized that said legal
interest should be imposed, thus: There being no valid
stipulation as to interest, the legal rate of interest shall be
charged. It seems that the RTC inadvertently overlooked
its non-inclusion in its computation.
The contract stipulation providing the
compounding of interest is likewise upheld because it was
neither nullified by the lower court nor assailed by the
spouses Beluso.
The penalty imposed by UCPB, ranging from
30.41% to 36% was held to be iniquitous. It was reduced
to 12% per annum.
Since both parties were compelled to litigate and
both parties were legally entitled to attys fees, their claims
are set off and neither are given any award for such.
The foreclosure is valid because there was a valid
demand on the spouses Beluso, although excessive, and
the spouses Beluso were in default. The proceeds of the
foreclosure sale should be applied to the extent of the
amounts to which UCPB is rightfully entitled. The grounds
for the proper annulment of the foreclosure sale are not
present in this case such as (1) fraud, collusion, accident,
mutual mistake, breach of trust or misconduct by the
purchase; (2) sale had not been fairly and regularly
conducts; or (3) the price was inadequate and the
inadequacy was so great as to shock the conscience of the
court.
The fine of P26,000 issued against UCPB for
violation of RA 3765 of the Truth in Lending Act is
affirmed. Even though the spouses Beluso did not
categorically charge UCPB of violating such Act in their
complaint, the allegations in the complaint, much more
than the title thereof, are controlling. The allegation that
the promissory notes grant UCPB the power to unilaterally
fix the interest rates certainly also means that the
promissory notes do not contain a clear statement in
writing of (6) the finance charge expressed in terms of
pesos and centavos; and (7) the percentage that the
finance charge bears to the amount to be financed
expressed as a simple annual rate on the outstanding
unpaid balance of the obligation. Furthermore, the
spouses Belusos prayer for such other reliefs just and
equitable in the premises should be deemed to include
the civil penalty provided for in Section 6(a) of the Truth in
Lending Act.
11
was made on 28 December 1998. The filing of the case on of interests from the loaned amount, and the like. The
9 February 1999 is therefore within the one-year law thereby seeks to protect debtors by permitting them
prescriptive period. to fully appreciate the true cost of their loan, to enable
UCPB argues that a violation of the Truth in them to give full consent to the contract, and to properly
Lending Act, being a criminal offense, cannot be inferred evaluate their options in arriving at business decisions.
nor implied from the allegations made in the complaint. Upholding UCPBs claim of substantial compliance would
As can be gleaned from Section 6(a) and (c) of the Truth in defeat these purposes of the Truth in Lending Act. The
Lending Act, the violation of the said Act gives rise to both belated discovery of the true cost of credit will too often
criminal and civil liabilities. Section 6(c) considers a not be able to reverse the ill effects of an already
criminal offense the willful violation of the Act, imposing consummated business decision.
the penalty therefor of fine, imprisonment or both. There was no forum shopping when the spouses
Section 6(a), on the other hand, clearly provides for a civil Beluso first filed an action for injunction which was
cause of action for failure to disclose any information of dismissed due to improper venue and later filed an
the required information to any person in violation of the action for
Act. In the case at bar, therefore, the civil action to recover
the penalty under Section 6(a) of the Truth in Lending Act
had been jointly instituted with (1) the action to declare
the interests in the promissory notes void, and (2) the
action to declare the foreclosure void. This joinder is
allowed under Rule 2, Section 5 of the Rules of Court.
Petitioner further posits that it is the
Metropolitan Trial Court which has jurisdiction to try and
adjudicate the alleged violation of the Truth in Lending
Act, considering that the present action allegedly involved
a single credit transaction as there was only one
Promissory Note Line. We disagree. We have already
ruled that the action to recover the penalty under Section
6(a) of the Truth in Lending Act had been jointly instituted
with (1) the action to declare the interests in the
promissory notes void, and (2) the action to declare the
foreclosure void. There had been no question that the
above actions belong to the jurisdiction of the RTC.
Furthermore, opening a credit line does not create a credit
transaction of loan or mutuum, since the former is
merely a preparatory contract to the contract of loan or
mutuum. Under such credit line, the bank is merely
obliged, for the considerations specified therefor, to lend
to the other party amounts not exceeding the limit
provided. The credit transaction thus occurred not
when the credit line was opened, but rather when the
credit line was availed of. In the case at bar, the
violation of the Truth in Lending Act allegedly occurred
not when the parties executed the Credit Agreement,
where no interest rate was mentioned, but when the
parties executed the promissory notes, where the allegedly
offending interest rate was stipulated.
UCPB further argues that since the spouses Beluso
were duly given copies of the subject promissory notes
after their execution, then they were duly notified of the
terms thereof, in substantial compliance with the Truth
in Lending Act. Once more, we disagree. Section 4 of
the Truth in Lending Act clearly provides that the
disclosure statement must be furnished prior to the
consummation of the transaction. The rationale of this
provision is to protect users of credit from a lack of
awareness of the true cost thereof, proceeding from the
experience that banks are able to conceal such true cost
by hidden charges, uncertainty of interest rates, deduction
12
annulment. Even assuming there was forum shopping, that the applicable rate of interest is 12% per annum.
the rule that the later action should be dismissed is not Petitioner argues that the applicable law is Article
absolute. The more appropriate case may prevail. 2209 of the Civil Code, not the Central Bank Circular No.
416. Said Article 2209 provides that if the obligation
consists in the payment of a sum of money, and the
Pilipinas Bank vs. CA & Lilia R. Echaus, G.R. No.
debtor incurs in delay, the indemnity for damages, there
97873, August 12, 1993 (225
being no stipulation to the contrary, shall be the payment
SCRA 268)
of the interest
Facts: The petitioner and Greatland Realty Corporation
(Greatland) executed a "Dacion en Pago," wherein
Greatland conveyed to petitioner several parcels of land in
consideration of the sum of P7,776,335.69. Greatland
assigned P2,300,000.00 out of the total consideration of
the Dacion en Pago, in favor of private respondent.
Notwithstanding her demand for payment, petitioner, in
bad faith, refused and failed to pay the said amount
assigned to her. Private respondent sued.
Petitioner, while admitting the execution of the
Dacion en Pago, claimed: (1) that its former president
had no authority to enter into such agreement; (2)
that it never ratified the same; and (3) that assuming
arguendo that the agreement was binding, the conditions
stipulated therein were never fulfilled.
Trial court ruled in favor of private
respondent. The case was appealed. A motion for
execution pending appeal was filed and approved by the
lower court. The CA modified the execution pending
appeal by deferring the execution of the award for moral,
exemplary and nominal damages to await the final
judgment of the main case. The SC affirmed the CA.
The CA eventually ruled in favor of private
respondent. The decision awarded interest at the legal
rate from the date when the demand was first made.
The decision became final and executory.
The petitioner sought for payment of interest at
the rate of 6% per annum only. The private respondent
sought for interest at the rate of 12% per annum pursuant
to CB Circular No. 416. The court ruled that the proper
interest rate was 12%. A clarification was sought with the
CA which ruled that the proper interest rate was 12%.

Issue: Whether an obligation arising from a contract of

sale is such a forbearance that would merit an award for
interest of 12% per annum.

Held: No. Reversed.

Ratio: The Court of Appeals was of the theory that the

action in Civil Case No. 239-A filed by private respondent
against petitioner "involves forbearance of money, as the
principal award to plaintiff-appellee (private respondent)
in the amount of P2,300,000.00 was the overdue debt of
defendant-appellant to her since July 1981. The case is, in
effect, a simple collection of the money due to plaintiff-
appellee, as the unpaid creditor from the defendant bank,
the debtor" (Resolution, p. 3; Rollo, p. 33). Applying
Central Bank Circular No. 416, the Court of Appeals held
13
agreed upon, and in the absence of stipulation, the legal The Reforminas claim that the legal interest should be
interest, which is six per cent per annum. 12% per annum pursuant to CB Circular No. 416. Shell
In Reformina v. Tomol, Jr., 139 SCRA 260 [1985], and Michael, Inc. claim that that the interest should be
the Court held that the judgments spoken of and referred 6% as stated in Art. 2209 NCC in relation to Art. 2210 and
to in Circular No. 416 are "judgments in litigation 2211 NCC. The CFI ruled that the interest rate should be at
involving loans or forbearance of any money, goods or 6%.
credits. Any other kind of monetary judgment which has
nothing to do with nor involving loans or forbearance of Issue: Whether the legal interest rate for a judgment
any money, goods or credits does not fall within the involving damages to property is
coverage of the said law for it is not, within the ambit of 12%.
the authority granted to the Central Bank."
Reformina was affirmed in Philippine Virginia
Tobacco Administration v. Tensuan, 188 SCRA 628 [1990],
which emphasized that the "judgments" contemplated in
Circular No. 417 "are judgments involving said loans or
forbearance only and not in judgments in litigation that
have nothing to do with loans . . ."
We held that Circular No. 416 does not apply to
judgments involving damages (Reformina v. Tomol, Jr.,
supra; Philippine Virginia Tobacco Administration v.
Tensuan, supra) and compensation in expropriation
proceedings (National Power Corporation v. Angas, 208
SCRA 542 [1992]). We also held that Circular No. 416
applies to judgments involving the payment of
unliquidated cash advances to an employee by his
employer (Villarica v. Court of Appeals, 123 SCRA 259
[1983]) and the return of money paid by a buyer of a
leasehold right but which contract was voided due to
the fault of the seller (Buisier v. Court of Appeals, 154
SCRA 438 [1987]).
What then is the nature of the judgment ordering
petitioner to pay private respondent the amount of
P2,300,000.00?
The said amount was a portion of the
P7,776,335.69 which petitioner was obligated to pay
Greatland as consideration for the sale of several parcels
of land by Greatland to petitioner. The amount of
P2,300,000.00 was assigned by Greatland in favor of
private respondent. The said obligation therefore arose
from a contract of purchase and sale and not from a
contract of loan or mutuum. Hence, what is applicable is
the rate of
6% per annum as provided in Article 2209 of the Civil
Code of the Philippines and not the rate of 12% per
annum as provided in Circular No. 416.

Pacita F. Reformina & Heirs of Francisco Reformina

vs. Honorable Valeriano P. Tomol, Jr., CFI Judge, Br XI,
Cebu City, Shell Refining Company (Phils.), Inc. &
Michael, Inc., G.R. No. L-59096, October 11, 1985 (139
SCRA 260)

Facts: The Reforminas lost a boat and its equipment as a

result of a fire. They sued Shell and Michael, Inc. The CFI
ruled in their favor and awarded legal interest from the
filing of the complaint. The CA modified the decision,
but still granted legal interest. The decision became
final, and the case was remanded to the CFI for execution.
14
Held: No. Affirmed. restrict the parties' freedom to stipulate. So viewed, Sec.
1-a cannot include a provision on interest to be allowed
in judgments, which is not the subject of contractual
Ratio: Central Bank Circular No. 416 which took effect on
stipulations and therefore cannot logically be made subject
July 29, 1974 was issued and promulgated by the
to interest ceiling, which is all that Sec. 1-a covers. Note
Monetary Board pursuant to the authority granted to the
that Central Bank Circular 416 itself invokes as the basis
Central Bank by P.D. No. 116, which amended Act No. 2655,
for its issuance Sec. 1, rather than Sec. 1-a, of the Usury
otherwise known as the Usury Law. The said law states
Law.
that the Monetary Board is hereby authorized to prescribe
By purpose and operative effect, Sec. 1 of the
the maximum rate or rates of interest for the loan or
Usury Law is different from Sec. 1- a. This section
renewal thereof or the forbearance of any money, goods
envisages two situations: (a) a loan or forbearance of
or credits, and to change such rate or rates whenever
money, goods or
warranted by prevailing economic and social conditions:
Provided, That such changes shall not be made oftener
than once every twelve months.
Acting pursuant to this grant of authority, the
Monetary Board increased the rate of legal interest from
that of six (6%) percent per annum originally allowed
under Section
1 of Act No. 2655 to twelve (12%) percent per annum.
Act No. 2655 deals with interest on (1) loans;
(2) forbearances of any money, goods, or credits; and
(3) rate allowed in judgments. The judgments spoken
of and referred to are judgments in litigations involving
loans or forbearance of any money, goods or credits. Any
other kind of monetary judgment which has nothing to do
with, nor involving loans or forbearance of any money,
goods or credits does not fall within the coverage of the
said law for it is not within the ambit of the authority
granted to the Central Bank. The Monetary Board may not
tread on forbidden grounds. It cannot rewrite other laws.
That function is vested solely with the legislative
authority. It is axiomatic in legal hermeneutics that
statutes should be construed as a whole and not as a
series of disconnected articles and phrases. In the absence
of a clear contrary intention, words and phrases in
statutes should not be interpreted in isolation from one
another. A word or phrase in a statute is always used in
association with other words or phrases and its meaning
may thus be modified or restricted by the latter. Another
formidable argument against the tenability of petitioners'
stand are the whereases of PD No. 116 which brought
about the grant of authority to the Central Bank.
The decision herein sought to be executed is one
rendered in an Action for Damages for injury to persons
and loss of property and does not involve any loan, much
less forbearances of any money, goods or credits. As
correctly argued by the private respondents, the law
applicable to the said case is Article 2209 NCC.

Plana, concurring& dissenting: The Usury Law does not

empower the Central Bank to fix the specific rate of
interest to be charged for loans. It merely grants the power
to prescribe the maximum interest rate, leaving it to the
contracting parties to determine within the allowable
limit what precisely the interest rate will be. In other
words, the provision presupposes that the parties to the
loan agreement are free to fix the interest rate, the
ceiling prescribed by the Central Bank operating merely to
15
credit, where the parties agreed on the payment of
interest but failed to fix the rate thereof; and (b) a Held: No. Reversed.
litigation that has ended in a final judgment for the
payment of money. In either case, the role of Section 1 is to Ratio: In the case of Chinese Grocer's Association, et al.
fix the specific rate of interest or legal interest (6%) to be vs. American Apothecaries, 65
charged. It also impliedly delegates to the Central Bank the Phil. 395, the Supreme Court has held that the appellant is
power to modify the said interest rate. Thus, the interest not entitled to charge interest on the amounts of his
rate shall be 6% per annum or "such rate as may be claims. Upon this point a distinction must be made
prescribed by the Monetary Board of the Central Bank. between the interest which the deposits should earn
The authority to change the legal interest that has from their existence until the bank ceased to
been delegated to the Central Bank under the quoted
Section 1 is absolute and unqualified. It is true that Section
1 says that the rate of interest shall be 6% per annum or
"such rate as may be prescribed by the Monetary Board of
the Central Bank... in accordance with the authority
hereby granted." But neither in the said section nor in any
other section of the law is there a guideline or limitation
imposed on the Central Bank. The determination of what
the applicable interest rate shall be, as distinguished from
interest rate ceiling, is completely left to the judgment of
the Central Bank. In short, there is a total abdication
of legislative power, which renders the delegation void.

The Overseas Bank of Manila vs. CA & Tony Tapia, in

his capacity as atty-in-fact of
Enrique Michel de Champourcin, G.R. No. L-49353, June
11, 1981 (105 SCRA 49)

Facts: Tapia, in behalf of Enrique de Champourcin,

instituted an action against the Overseas Bank of Manila
to enforce collection of the proceeds of a time deposit
for which TOBM had issued a certificate for P100,000.00,
with an interest rate of 4 1/2% per annum. The lower
court ruled for Tapia. TOBM appealed.
During the pendency of the appeal, TOBM was
excluded by the Central Bank under Monetary Board
Resolution No. 1263 from inter-bank clearing, and its
operations were suspended by a Central Bank resolution.
In another resolution, the Central Bank forbade TOBM to
do business preparatory to its forcible liquidation. These
Resolutions were, however, annulled and set aside by the
Supreme Court in its decision in Ramos vs. Central Bank,
L-29350, promulgated October 4, 1971. To assure
maximum protection to its depositors, creditors and the
public interest, the rehabilitation, normalization and
stabilization thereof was also ordered by the Supreme
Court. Nevetheless, the CB resolution suspending TOBM's
business operations had actually been implemented
starting 2 August 1968, before it was annulled, and that as
of this writing TOBM has yet to resume operations in
accordance with the aforesaid program of rehabilitation
approved by this Honorable Supreme Court.
The CA affirmed the lower court decision in toto.

Issue: Whether a person who has deposited money to a

bank whose operations have been suspended by the
Central Bank is entitled to the payment of interest.

16
operate, and that which they may earn from the time the authority under the law, it would be, to put it tritely,
bank's operations were stopped until the date of payment "squeezing blood out of turnip" for Us to grant private
of the deposits. As to the first class, we hold that it should respondent's demand.
be paid because such interest has been earned in the Parenthetically, We may add for the guidance of
ordinary course of the bank's business and before the those who might be concerned, and so that unnecessary
latter has been declared in a state of liquidation. Moreover, litigations may be avoided from further clogging the
the bank being authorized by law to make use of the dockets of the courts, that in the light of the
deposits, with the limitation stated, to invest the same in considerations expounded in the above opinion, the
its business and other operations, it may be presumed that same formula that exempts petitioner from the payment of
it bound itself to pay interest to the depositors as in fact it interest to its depositors during the whole period of factual
paid interest prior to the dates of the said claims. As to the stoppage of its operations by orders of the Central Bank,
interest which may be charged from the date the bank modified in effect by the decision as well as the approval of
ceased to do business because it was declared in a state a formula of rehabilitation by
of liquidation, we hold that the said interest should not be
paid.
It is a matter of common knowledge, which We
take judicial notice of, that what enables a bank to pay
stipulated interest on money deposited with it is that thru
the other aspects of its operation it is able to generate
funds to cover the payment of such interest. Unless a bank
can lend money, engage in international transactions,
acquire foreclosed mortgaged properties or their proceeds
and generally engage in other banking and financing
activities from which it can derive income, it is
inconceivable how it can carry on as a depository
obligated to pay stipulated interest. Conventional wisdom
dictates this inexorable fair and just conclusion. And it
can be said that all who deposit money in banks are
aware of such a simple economic proposition.
Consequently, it should be deemed read into every
contract of deposit with a bank that the obligation to pay
interest on the deposit ceases the moment the operation
of the bank is completely suspended by the duly
constituted authority, the Central Bank.
We consider it of trivial consequence that the
stoppage of the bank's operation by the Central Bank has
been subsequently declared illegal by the Supreme Court,
for before the Court's order, the bank had no alternative
under the law than to obey the orders of the Central Bank.
Whatever be the juridical significance of the subsequent
action of the Supreme Court, the stubborn fact remained
that the petitioner was totally crippled from then on from
earning the income needed to meet its obligations to its
depositors. If such a situation cannot, strictly speaking, be
legally denominated as "force majeure", as maintained by
private respondent, We hold it is a matter of simple equity
that it be treated as such.
As We have explained earlier, the complete factual
suspension of petitioner's operation as a bank disabled
it to commit itself to the payment of such interest.
Hopefully, petitioner may be able to resume operations
and recover its standing as a normal bank. But it is almost
vain to expect that within the forseeable future, it would
be in a position to pay in full even at least the
deposits themselves, not to mention the interest
thereon. In justice and equity, having been subjected to
what the Supreme Court has found to be an unfortunate
excess or abuse by the Central Bank of the exercise of its
17
this court, should be, as a matter of consistency, applicable
or followed in respect to all other obligations of petitioner
which could not be paid during the period of its actual
complete closure.
The Overseas Bank of Manila vs. Vicente Cordero,
G.R. No. L-33582, March 30,
1982 (113 SCRA 303)
OBM vs. CA and Tony Tapia.
To solve the impasse, COMBANK and the Central
Bank agreed to abide by any clarificatory ruling the
Supreme Court may render on the matter. The
Supreme Court ruled that the bank is not liable for
interest on the Central Bank loans and advances during
the period of its closure. Central Bank moved to
reconsider.

Facts: Respondent Cordero made a time deposit of

P80,000 with The Overseas Bank of Manila. However, due
to its distressed financial condition, petitioner was unable
to pay Cordero his said time deposit together with the
interest. Cordero filed a case. TOBM raised as a defense
the suspension of its operations by order of the Central
Bank. The lower court ruled for Cordero on the issues of
the payment of the principal and interest, but did not
award attorneys fees. CA affirmed. The principal amount
of the deposit was later paid, leaving only the interest and
attorneys fees unpaid.

Issue: Whether attorneys fees can be awarded against a

bank which did not pay a depositor due to the suspension
of its operations.

Held: No. Modified.

Ratio: Neither can respondent Cordero recover attorney's

fees. The trial court found that herein petitioner's refusal
to pay was not due to a wilful and dishonest refusal to
comply with its obligation but to restrictions imposed by
the Central Bank. Since respondent did not appeal from
this decision, he is now barred from contesting the same.

Emerito M. Ramos vs. Central Bank of the

Philippines, Commercial Bank of
Manila, G.R. No. L-29352, July 22, 1985 (137 SCRA 685)

Facts: The operations of Overseas Bank of Manila were

suspended by the Central Bank. During the suspension of
its operations, the Central Bank loaned some funds to the
TOBM. The suspension order was later set aside by the
Supreme Court, and the rehabilitation of TOBM was
ordered. The rehabilitation program did not succeed.
And so, the Central Bank called for bidders to recapitalize
OBM. It was at this point that the Investment and
Underwriting Corporation of the Philippines (IUCP)
acquired controlling interest in OBM. IUCP specifically
agreed to pay the 6% interest on the aforestated liabilities
to the Central Bank.
In 1981, OBM reopened business under its
new corporate name, Commercial Bank of Manila
(COMBANK). On April 13, 1981, COMBANK paid
Central Bank partial interests from August 1, 1968 to
January 7, 1981 on the P63M advances of the Central
Bank to OBM. However, it refused further payment of
interest when the Supreme Court rendered its decision in
18
Issue: Whether a bank is obligated to pay the Central not be paid during the period of its complete closure" (p.
Bank for loans it gives to the bank during its period of 62) is prefaced by the term "parenthetically."
closure. Moreover, interest payment on the loans and
advances made by the Central Bank was the subject of
explicit agreement between the parties at a time when the
Held: No. Affirmed.
OBM had already been closed, the rehabilitation plan
already agreed upon and, in fact, was one of the terms and
Ratio: In the Tapia ruling (105 SCRA 49, June 11, 1981), conditions for the resumption of normal banking
the Court held that "the obligation to pay interest on the operations of OBM (now COMBANK). Significantly, too, as
deposit ceases the moment the operation of the bank is brought out during the hearing, held on October 23,
completely suspended by the duly constituted authority, 1984, the interest due has been determined and the
the Central Bank," and that "for the guidance of those who moneys therefor held in escrow.
might be concerned, and so that unnecessary litigations
may be avoided from further clogging the dockets of the
courts, that in the light of the considerations expounded in
the above opinion, the same formula that exempts
petitioner from the payment of interest to its depositors
during the whole period of factual stoppage of its
operations by orders of the Central Bank, modified in
effect by the decision as well as the approval of a formula
of rehabilitation by this Court, should be, as a matter of
consistency, applicable or followed in respect to all other
obligations of petitioner which could not be paid during
the period of its actual complete closure."
The Tapia ruling is fully applicable to the non-
payment of interest, during the period of the bank's
forcible closure, on loans and advances made by
respondent Central Bank. Respondent Central Bank itself
when it was then managing the Overseas Bank of Manila
(now Commercial Bank of Manila) under a holding trust
agreement. It should be further noted that the respondent
Central Bank when called upon to deal with commercial
banks and extend to them emergency loans and advances,
deals with them not as an ordinary creditor engaged in
business, but as the ultimate monetary authority of
government charged with the supervision and
preservation of the banking system.
The Court's Resolution of October 19, 1982
manifestly redounds to the benefit of another government
institution, the GSIS, which has acquired 99.93% of the
outstanding capital stock of the COMBANK and to the
preservation of the banking system.

Aquino,dissenting: Court has no jurisdiction.

Melencio-Herrera, dissenting: I agree with the Solicitor

General that loans and advances made by the Central Bank
to the then Overseas Bank of Manila (OBM) cannot be
treated in the same manner as deposits made by
ordinary depositors. The Tapia ruling, to my mind, is
doctrinal only insofar as it holds that payment of interest
on deposits ceases the moment the operation of the bank
is completely suspended by the Central Bank, but not
when it applies said ruling to interest on loans and
advances made by the Central Bank, that point not having
been in issue since the Central Bank was not a party
therein. As a matter of fact, the paragraph extending its
application "to all other obligations of OBM which could

19
 nor COMBANK will be affected, one way or the other,
Plana, dissenting: Ramos vs. Central Bank was decided by any ruling of the Supreme Court on the issue at bar.
by this Court way back on October 4, 1971 on the issue But certainly, the Central Bank and the Philippine
of the validity of the OBM closure. The case did not involve Government stand to lose some P47 million in interests
any question as to the liability of OBM for interest on should the Supreme Court hold that COMBANK is not
deposits or any other obligation. Surprisingly, however, liable to pay interest on CB pre-1968 loans and advances
on February 17, 1982 more than 10 years after the from which OBM has unquestionably benefited.
entry of judgment in Ramos vs. Central Bank
COMBANK filed a motion to intervene in said case as well
as a motion praying for a clarificatory ruling on the
liability of OBM to pay interest on Central Bank loans and
advances.
In a Minute Resolution dated October 19, 1982,
this Court ruled that OBM is not liable to pay interest on
Central Bank loans and advances during the period of its
closure. The motion of the Central Bank under
consideration seeks a reconsideration of that ruling.
There are cogent reasons why OBM (now
COMBANK) should be held liable for the payment of
interests on CB loans and advances. (a) The loans and
advances in question were granted by the Central Bank to
OBM before the latter's closure in 1968 to enable it to
meet its obligations to its depositors whose money
(deposits) it had been able to use in the generation of
income. (b) For the period during which OBM
stopped banking operations, it collected interests on
loans granted by it to its clients. (Actually, the Central
Bank closure order was limited only to normal banking
operations; it did not prohibit the collection of OBM
receivables, including interests due.) If OBM thus collected
interests on loans granted by it, why should it not pay
interest on loans and advances given to it by the Central
Bank to meet its liquidity problems? Is it not enough that
OBM has already been exempted from the payment of
interests on bank deposits? (c) Money does not come
gratuitously to the Central Bank. It has cost. This is now of
common knowledge because the JOBO bills and the high
interests rates they carry are familiar to all. But even
before the advent of JOBO bills, the Central Bank was
borrowing money locally and/or from external sources
and paying interests on borrowed funds. By all relevant
standards, it is only fair and proper that the Central Bank
should be allowed to recover its investment and the cost
thereof. (d) I do not think that the liability or non-
liability of the OBM (COMBANK) for interest payment
on CB loans and advances would either prejudice or
benefit the GSIS, the government instrumentality which
owns 99.93% of the outstanding capital stock of
COMBANK. When the GSIS bought the controlling interest
in COMBANK, the vendor (IUCP/Herdis Group) together
with the Emerito Ramos Group placed in escrow with the
INTERBANK the amount of P47.2 million to answer for
the interest liability of COMBANK in case the Supreme
Court rules that the latter is liable therefor. On the other
hand, however, should the Supreme Court decide that
COMBANK is not liable, the amount held in escrow would
be returned to the IUCP/Herdis Group and the Emerito
Ramos Group. It is therefore clear that neither the GSIS

20
Bank of the Philippine Islands, Inc. vs. Sps. Norman the debtor incident to the extension of credit." The
and Angelina Yu and Tuanson lender may provide for a penalty clause so long as the
Builders Corporation represented by Norman Yu, amount or rate of the charge and the conditions under
G.R. No. 184122, January 20, which it is to be paid are disclosed to the borrower
2010 (610 SCRA 412) before he enters into the credit agreement. In this case,
although BPI failed to state the penalty charges in the
disclosure statement, the promissory note that the Yus
Facts: Spouses Yu, doing business as Tuanson Trading and
signed, on the same date as the disclosure statement,
Tuanson Builders Corporation, borrowed various sums
contained a penalty clause that said: "I/We jointly and
totaling P75 million from Far East Bank and Trust
severally, promise to further pay a late payment
Company. For collateral, they executed real estate
charge on any overdue amount herein at the rate of 3%
mortgages over several of their properties including
per month." The promissory note is an acknowledgment
certain lands in Legazpi City owned by Tuanson Trading.
Unable to pay their loans, they requested a loan
restructuring which the bank, now merged with BPI,
granted. By this time, the balance of the loan was P33.4
million. Despite the restructuring, the Yus still had
difficulty paying the loan. The Yus asked BPI to release
some of the mortgaged lands since their total appraised
value far exceeded the amount of the remaining debt.
When BPI ignored their request, they withheld payment of
their amortizations. Thus, BPI extrajudicially foreclosed
the mortgaged properties. The Yus countered by filing an
annulment case of the foreclosure sale against BPI and the
winning bidder, Magnacraft Development Corporation.
The Yus and Magnacraft were able to reach a
compromise agreement that affirmed Magnacrafts
ownership of three (3) of the ten (10) lots that were
auctioned. The court, therefore, dismissed the case
against Magnacraft, without prejudice to any case being
filed against BPI.
The Yus filed a case against BPI for excessive
penalty charges, attorneys fees, and foreclosure expenses
that the bank caused to be incorporated in the price of the
auctioned properties. In the alternative, the Yus claimed
that BPI is in estoppel to claim more than the amount
stated in the published notices, therefore, they must
turnover the excess bid amounts worth over P6 million.
Initially, the RTC, in a partial summary judgment, reduced
the penalty charges from 36% to 12% and the
attorneys fees from
25% to 10%. Upon motion for reconsideration of the Yus
on the ground that the penalty charges were violative of
the Truth in Lending Act (R.A. 3765) as BPI did not
disclose the rate of penalties for late amortizations, the
court deleted the penalty charges and reduced Attorneys
Fees to 1%. CA affirmed.

Issue: Whether a penalty rate contained in the promissory

note is sufficient disclosure to charge the borrower a
penalty. Whether attorneys fees can be reduced to 1%.

Held: Yes. Yes. Affirmed with modification on the penalty.

Ratio: Penalty charge, which is liquidated damages

resulting from a breach, falls under item (6) of Section 4 of
R.A. 3765 (Truth in Lending Act) or finance charge. A
finance charge "represents the amount to be paid by

21
of a debt and commitment to repay it on the date and following reasons: (1) attorneys fee is not essential to
under the conditions that the parties agreed on. It is a valid the cost of borrowing, but a mere incident of collection;
contract absent proof of acts which might have vitiated (2) 1% is just and adequate because BPI had already
consent. charged foreclosure expenses; (3) attorneys fee of
The question is whether or not the reference to 10% of the total amount due is onerous considering
the penalty charges in the promissory note constitutes the rote effort that goes into extrajudicial foreclosures.
substantial compliance with the disclosure requirement of
the Truth in Lending Act. The RTC and CA relied on the Asian Construction and Development Corporation
ruling in New Sampaguita as authority that the non- vs. Cathay Pacific Steel
disclosure of the penalty charge renders its imposition Corporation (Capasco), G.R. No. 167942, June 29, 2010
illegal. But New Sampaguita is not attended by the same ()
circumstances. What New Sampaguita disallowed, because
it was not mentioned either in the disclosure statement or Facts: On several occasions between June and July of
in the promissory note, was the unilateral increase in 1997, Asian Construction and
the rates of penalty charges that the creditor imposed Development Corp. purchased from Cathay Pacific Steel
on the borrower. Here, however, it is not shown that BPI Corp. various reinforcing steel
increased the rate of penalty charge that it collected from
the Yus.
The ruling that is more in point is that laid down
in The Consolidated Bank and Trust Corporation v.
Court of Appeals, a case cited in New Sampaguita.
The Consolidated Bank ruling declared valid the penalty
charges that were stipulated in the promissory notes.
What the Court disallowed in that case was the collection
of a handling charge that the promissory notes did not
contain.
The Court has affirmed that financial charges are
amply disclosed if stated in the promissory note in the
case of Development Bank of the Philippines v. Arcilla, Jr.
The Court there said, "Under Circular 158 of the
Central Bank, the lender is required to include the
information required by R.A. 3765 in the contract covering
the credit transaction or any other document to be
acknowledged and signed by the borrower. In addition,
the contract or document shall specify additional charges,
if any, which will be collected in case certain stipulations
in the contract are not met by the debtor." In this case,
the promissory notes signed by the Yus contained data,
including penalty charges, required by the Truth in
Lending Act. They cannot avoid liability based on a rigid
interpretation of the Truth in Lending Act that contravenes
its goal.
Nonetheless, the courts have authority to
reduce penalty charges when these are unreasonable
and iniquitous. Considering that BPI had already
received over P2.7 million in interest and that it seeks to
impose the penalty charge of 3% per month or 36% per
annum on the total amount dueprincipal plus interest,
with interest not paid when due added to and becoming
part of the principal and also bearing interest at the same
rate
the Court finds the ruling of the RTC in its original
decision reasonable and fair. Thus, the penalty charge of
12% per annum or 1% per month is imposed.
As for the award of attorneys fee, it being part
of a partys liquidated damages, the same may likewise be
equitably reduced. The CA correctly affirmed the RTC
Order to reduce it from 10% to 1% based on the
22
bars worth P2,650,916.40 covered by a total of 12
invoices. On November 21, 1997, ACDC made a partial
payment of P2,159,211.49, and on March 2, 1998, another
partial payment of P250,000, leaving a balance of
P214,704.91. Capasco sent two demand letters dated
May 12, 1998, and August 10, 1998, respectively, but no
payment was made by ACDC. On November 24, 1998,
Capasco filed a complaint for a sum of money and
damages.
The trial court ruled for Capasco and held ACDC
liable to pay for the balance of their account with interest
and with an additional 2% interest per month and to pay
attorneys fees. The CA affirmed with some modifications
on the amount of the balance and the attorneys fees which
was set at 10%.
invoice, petitioner did not only bind itself to pay the stated
selling price, it also bound itself to pay (1) interest of
24% per annum on overdue accounts and (2) 25% of the
unpaid invoice for attorneys fees. Thus, the lower courts
did not err in using the invoices as basis for the award
of interest.
In the present case, the invoices stipulate for 25%
of the overdue accounts as attorneys fees. The overdue
account in this case amounts to P241,704.91, 25% of
which is P60,426.23. This amount is not excessive or
unconscionable, hence, the court sustained the amount
of attorneys fees as stipulated by the parties.

Issue: Whether an interest rate of 24% per annum as

penalty stated in the sales invoice is a valid stipulation.
Whether a 25% attorneys fees as penalty in the sales
invoice is a valid stipulation.

Held: Yes. Yes. Affirmed with modification of the

attorneys fees.

Ratio: Article 1306 of the Civil Code provides that the

contracting parties may establish such stipulations,
clauses, terms and conditions as they may deem
convenient, provided they are not contrary to law, morals,
good customs, public order, or public policy.
In the present case, the sales invoices expressly
stipulated the payment of interest and attorneys fees in
case of overdue accounts and collection suits, to wit:
Interest at
24% per annum is to be charged to all accounts overdue
plus 25% additional on unpaid invoice for attorneys fees
aside from court cost, the parties expressly submit
themselves to the venue of the courts in Rizal, in case of
legal proceeding. The sales invoices are in the nature of
contracts of adhesion. The court has repeatedly held that
contracts of adhesion are as binding as ordinary
contracts. Those who adhere to the contract are in
reality free to reject it entirely and if they adhere, they give
their consent. It is true that in some occasions the Court
struck down such contracts as void when the weaker
party is imposed upon in dealing with the dominant party
and is reduced to the alternative of accepting the contract
or leaving it, completely deprived of the opportunity to
bargain on equal footing. Considering that petitioner is
not a small time construction company, having such
construction projects as the MRT III and the Mauban
Power Plant, petitioner is presumed to have full
knowledge and to have acted with due care or, at the very
least, to have been aware of the terms and conditions of
the contract. Petitioner was free to contract the
services of another supplier if respondents terms
were not acceptable. By contracting with respondent
for the supply of the reinforcing steel bars and not
interposing any objection to the stipulations in the sales
23
 that in Medel, the defendant-spouses were never able to
Jocelyn M. Toledo vs. Marilou M. Hyden, G.R. No. pay their indebtedness from the very beginning and when
172139, December 8, 2010 () their obligations ballooned into a staggering sum, the
creditors filed a collection case against them. In this case,
Facts: Jocelyn M. Toledo, who was then the Vice- there was no urgency of the need for money on the part of
President of the College Assurance Plan (CAP) Phils., Inc., Jocelyn, the debtor, which compelled her to enter into said
obtained several loans from respondent Marilou M. Hyden loan transactions. She used the money from the loans to
amounting to P290,000 with between 6-7% interest per make advance payments for prospective clients of
month. From August 15, 1993 up to December 31, 1997, educational plans offered by her employer. In this way,
Jocelyn had been religiously paying Marilou the her sales production would increase, thereby entitling
stipulated monthly interest by issuing checks and her to 50% rebate on her sales. This is the reason why
depositing sums of money in the bank account of the she did not mind the 6% to 7% monthly interest.
latter. However, the total principal amount of P290,000.00 Notably
remained unpaid. Thus, in April 1998, Marilou visited
Jocelyn in her office at CAP in Cebu City and asked Jocelyn
and the other employees who were likewise indebted to
her to acknowledge their debts. A document entitled
"Acknowledgment of Debt" for the amount of P290,000.00
was signed by Jocelyn with two of her subordinates as
witnesses. The said amount represents the principal
consolidated amount of the aforementioned previous
debts due on December
25, 1998. Also on said occasion, Jocelyn issued five checks
to Marilou representing renewal payment of her five
previous loans. The first check that was about to be due
was recalled by Jocelyn and replaced by five (5) checks
with staggered amounts. After honoring three (3) of
these (5) replacement checks, Jocelyn ordered the stop
payment on the remaining checks. She then filed a
complaint against Marilou regarding the loan.
The lower court ruled in favor of Marilou and
ordered the payment of the loaned amount plus interest of
12% per annum or 1% per month. CA affirmed.

Issue: Whether 6%-7% interest rate per month can be

validly contracted.

Held: Yes. Affirmed.

Ratio: In view of Central Bank Circular No. 905 s. 1982,

which suspended the Usury Law ceiling on interest
effective January 1, 1983, parties to a loan agreement have
wide latitude to stipulate interest rates. Nevertheless, such
stipulated interest rates may be declared as illegal if the
same is unconscionable. There is certainly nothing in
said circular which 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. In fact, in Medel v. Court of Appeals, we annulled
a stipulated 5.5% per month or 66% per annum
interest with additional service charge of 2% per annum
and penalty charge of 1% per month on a P500,000.00
loan for being excessive, iniquitous, unconscionable and
exorbitant.
In this case, however, we cannot consider the
disputed 6% to 7% monthly interest rate to be
iniquitous or unconscionable vis--vis the
principle laid down in Medel. Noteworthy is the fact
24
too, a business transaction of this nature between Jocelyn obtained a loan secured by a real estate mortgage from
and Marilou continued for more than five years. Jocelyn petitioner BANCO FILIPINO in the sum of Forty-one
religiously paid the agreed amount of interest until she Thousand Three Hundred (P41,300.00) Pesos, payable and
ordered for stop payment on some of the checks issued to to be amortized within fifteen (15) years at twelve (12%)
Marilou. The checks were in fact sufficiently funded when per cent interest annually. Hence, the LOAN still had
she ordered the stop payment and then filed a case more than 730 days to run by January 2, 1976, the date
questioning the imposition of a 6% to 7% interest when CIRCULAR No. 494 was issued by the Central Bank.
rate for being allegedly iniquitous or unconscionable Stamped on the promissory note evidencing the
and, hence, contrary to morals. loan is an Escalation Clause, reading as follows: I/We
It was clearly shown that before Jocelyn availed of hereby authorize Banco Filipino to correspondingly
said loans, she knew fully well that the same carried with it increase the interest rate stipulated in this contract
an interest rate of 6% to 7% per month, yet she did not without advance notice to me/us
complain. In fact, when she availed of said loans, an
advance interest of 6% to 7% was already deducted from
the loan amount, yet she never uttered a word of protest.
After years of benefiting from the proceeds of the loans
bearing an interest rate of
6% to 7% per month and paying for the same, Jocelyn
cannot now go to court to have the said interest rate
annulled on the ground that it is excessive, iniquitous,
unconscionable, exorbitant, and absolutely revolting to the
conscience of man. "This is so because among the maxims
of equity are (1) he who seeks equity must do equity, and
(2) he who comes into equity must come with clean hands.
The latter is a frequently stated maxim which is also
expressed in the principle that he who has done
inequity shall not have equity. It signifies that a litigant
may be denied relief by a court of equity on the ground
that his conduct has been inequitable, unfair and
dishonest, or fraudulent, or deceitful as to the controversy
in issue."
We are convinced that Jocelyn did not come to
court for equitable relief with equity or with clean hands.
It is patently clear from the above summary of the facts
that the conduct of Jocelyn can by no means be
characterized as nobly fair, just, and reasonable. This
Court likewise notes certain acts of Jocelyn before filing
the case with the RTC. In September 1998, she requested
Marilou not to deposit her checks as she can cover the
checks only the following month. On the next month,
Jocelyn again requested for another extension of one
month. It turned out that she was only sweet-talking
Marilou into believing that she had no money at that
time. But as testified by Serapio Romarate, an
employee of the Bank of Commerce where Jocelyn is one
of their clients, there was an available balance of
P276,203.03 in the latters account and yet she ordered
for the stop payments of the seven checks which can
actually be covered by the available funds in said account.
She then caught Marilou by surprise when she
surreptitiously filed a case for declaration of nullity of the
document and for damages.

Banco Filipino Savings and Mortgage Bank vs. Judge

Miguel Navarro, CFI Manila, Br. XXXI & Florante del
Valle, G.R. No. L-46591, July 28, 1987 (152 SCRA 346)

Facts: On May 20, 1975, respondent Florante del Valle

25
in the event a law should be enacted increasing the It is clear from the stipulation between the
lawful rates of interest that may be charged on this parties that the interest rate may be increased "in the
particular kind of loan." event a law should be enacted increasing the lawful rate of
The Escalation Clause is based upon Central interest that may be charged on this particular kind of
Bank CIRCULAR No. 494 issued on January 2, 1976, the loan." The Escalation Clause was dependent on an increase
pertinent portion of which reads: "3. The maximum rate of of rate made by "law" alone.
interest, including commissions, premiums, fees and other CIRCULAR No. 494, although it has the effect of
charges on loans with maturity of more than seven law, is not a law. Although a circular duly issued is not
hundred thirty (730) days, by banking institutions, strictly a statute or a law, it has, however, the force and
including thrift banks and rural banks, or by financial effect of law. An administrative regulation adopted
intermediaries authorized to engage in quasi- banking pursuant to law has the force and effect of
functions shall be nineteen per cent (19%) per annum.
CIRCULAR No. 494 was issued pursuant to
the authority granted to the Monetary Board by
Presidential Decree No. 116 which states The Monetary
Board is hereby authorized to prescribe the maximum rate
or rates of interest for the loan or renewal thereof or the
forbearance of any money, goods or credits, and to
change such rate or rates whenever warranted by
prevailing economic and social conditions: Provided, that
such changes shall not be made oftener than once every
twelve months.
On the strength of CIRCULAR No. 494 BANCO FILIPINO
gave notice to the
BORROWER on June 30, 1976 of the increase of interest
rate on the LOAN from 12% to
17% per annum effective on March 1, 1976.
Contending that CIRCULAR No. 494 is not the
law contemplated in the Escalation Clause of the
promissory note, the BORROWER filed suit against
BANCO FILIPINO for "Declaratory Relief" with
respondent Court, praying that the Escalation Clause be
declared null and void and that BANCO FILIPINO be
ordered to desist from enforcing the increased rate of
interest on the BORROWER's real estate loan.
The lower court nullified the Escalation Clause
and ordered BANCO FILIPINO to desist from enforcing the
increased rate of interest on the BORROWER's loan. It
reasoned out that P.D. No. 116 does not expressly grant
the Central Bank authority to maximize interest rates
with retroactive effect and that BANCO FlLIPINO cannot
legally impose a higher rate of interest before the
expiration of the 15-year period in which the loan is to be
paid other than the 12% per annum in force at the time
of the execution of the loan.

Issue: Whether an escalation clause that bases the

increase in the interest rate on changes in the law can be
used to increase the interest rate based on a Central Bank
Circular.

Held: No. Affirmed.

Ratio: Undoubtedly, the escalation clause is valid. 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.
26
law. That administrative rules and regulations have the authority to the Monetary Board "to prescribe
force of law can no longer be questioned. maximum rates of interest for the loan or renewal thereof
The distinction between a law and an or the forbearance of any money, goods or credits, and to
administrative regulation is recognized in the Monetary change such rate or rates whenever warranted by
Board guidelines quoted in the letter to the BORROWER of prevailing economic and social conditions. In one section,
Ms. Paderes of September 24, 1976 (supra). According the Monetary Board could prescribe the maximum rate of
to the guidelines, for a loan's interest to be subject to interest for loans secured by mortgage upon registered
the increases provided in CIRCULAR No. 494, there must real estate or by any document conveying such real
be an Escalation Clause allowing the increase "in the event estate or an interest therein and, in another separate
that any law or Central Bank regulation is promulgated section, the Monetary Board was also granted authority
increasing the maximum interest rate for loans." The to fix the maximum interest rate for loans secured by
guidelines thus presuppose that a Central Bank regulation types of security other than registered real property.
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."
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. Paragraph 7 of CIRCULAR No. 494
specifically directs that "loans or renewals continue to
be governed by the Usury Law, as amended." So do
Circular No.
586 of the Central Bank, which superseded Circular
No. 494, and Circular No. 705, which superseded
Circular No. 586. The Usury Law, as amended by Acts
Nos. 3291,
3998 and 4070, became effective on May 1, 1916. It
provided for the maximum yearly interest of 12% for
loans secured by a mortgage upon registered real estate
(Section 2), and a maximum annual interest of 14% for
loans covered by security other than mortgage upon
registered real estate (Section 3). Significant is the
separate treatment of registered real estate loans and
other loans not secured by mortgage upon registered real
estate. It appears clear in the Usury Law that the policy is
to make interest rates for loans guaranteed by registered
real estate lower than those for loans guaranteed by
properties other than registered realty.
On January 29, 1973, P.D. No. 116 was
promulgated amending the Usury Law. The Decree gave
27
 Apparent then is that the separate treatment for
the two classes of loans was maintained. Yet, CIRCULAR
No. 494 makes no distinction as to the types of loans that it
is applicable to unlike Circular No. 586 dated January 1,
1978 and Circular No. 705 dated December 1, 1979, which
fix the effective rate of interest on loan transactions with
maturities of more than 730 days to not exceeding 19% per
annum (Circular No. 586) and not exceeding 21% per
annum (Circular No. 705) "on both secured and
unsecured loans as defined by the Usury Law, as
amended."
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.
rate of my mortgage loan be from 18% to 21%".
On July 4, 1984, private respondent paid PNB
P360,000.00. On July 18, 1984, private respondent
reiterated in writing his request that "the increase in the
rate of interest from 18% be fixed at 21% or 24%. On
July 26, 1984, private respondent made an additional
payment of P100,000.
On August 10, 1984, PNB informed private
respondent that "we can not give due course to your
request for preferential interest rate in view of the
following reasons:

Philippine National Bank vs. CA & Ambrosio Padilla,

G.R. No. 88880, April 30,
1991 (196 SCRA 535)

Facts: In July 1982, the private respondent applied for,

and was granted by petitioner PNB, a credit line of 321.8
million, secured by a real estate mortgage, for a term of
two (2) years, with 18% interest per annum. Private
respondent executed in favor of the PNB a Credit
Agreement, two (2) promissory notes in the amount of
P900,000.00 each, and a Real Estate Mortgage Contract.
The Promissory Notes, in turn, uniformly authorized the
PNB to increase the stipulated 18% interest per annum
"within the limits allowed by law at any time
depending on whatever policy it [PNB] may adopt in
the future; Provided, that, the interest rate on this
note shall be correspondingly decreased in the event
that the applicable maximum interest rate is reduced
by law or by the Monetary Board." The Real Estate
Mortgage Contract likewise provided that the rate of
interest shall be subject during the life of this contract to
such an increase within the rate allowed by law, as the
Board of Directors of the MORTGAGEE may prescribe
for its debtors.
Four (4) months advance interest and incidental
expenses/charges were deducted from the loan, the net
proceeds of which were released to the private
respondent by crediting or transferring the amount to his
current account with the bank.
On June 20, 1984, PNB informed the private
respondent that (1) his credit line of P1.8 million "will
expire on July 4, 1984,"(2) "if renewal of the line for
another year is intended, please submit soonest possible
your request," and (3) the "present policy of the Bank
requires at least 30% reduction of principal before your
line can be renewed." Complying, private respondent on
June 25, 1984, paid PNB P540,000 (30% of P1.8 million)
and requested that "the balance of P1,260,000.00 be
renewed for another period of two (2) years under the
same arrangement" and that "the increase of the interest
28
Existing Loan Policies of the bank requires 32% for loan of whenever warranted by prevailing economic and social
more than one year; our present cost of funds has conditions, it expressly provides that "such changes
substantially increased." shall not be made oftener than once every twelve
On August 17, 1984, private respondent further months."
paid PNB P150,000.00. In a letter dated August 24, In this case, PNB, over the objection of the private
1984 to PNB, private respondent announced that he respondent, and without authority from the Monetary
would "continue making further payments, and instead of Board, within a period of only four (4) months,
a 'loan of more than one year,' I shall pay the said loan increased the 18% interest rate on the private
before the lapse of one year or before July 4, 1985. . . . I respondent's loan obligation three (3) times: (a) to
reiterate my request that the increase of my rate of 32% in July 1984; (b) to 41% in October 1984; and (c) to
interest from 18% 'be fixed at 21% or 24%.'". On 48% in November 1984. Those increases were null and
September 12, 1984, private respondent paid PNB void, for if the Monetary Board itself was not authorized to
P160,000.00. make
In letters dated September 12, 1984 and
September 13, 1984, PNB informed private respondent
that "the interest rate on your outstanding line/loan is
hereby adjusted from 32% p.a. to 41% p.a. (35% prime
rate + 6%) effective September 6, 1984;" and further
explained "why we can not grant your request for a lower
rate of 21% or 24%."
In a letter dated September 24, 1984 to PNB,
private respondent registered his protest against the
increase of interest rate from 18% to 32% on July 4,
1984 and from
32% to 41% on September 6, 1984. On October 15, 1984,
private respondent reiterated his request that the interest
rate should not be increased from 18% to 32% and from
32% to 41%. He also attached (as payment) a check for
P140,000.00.
Like rubbing salt on the private respondent's
wound, the petitioner informed private respondent on
October 29, 1984, that "the interest rate on your
outstanding line/loan is hereby adjusted from 41% p.a. to
48% p.a. (42% prime rate plus 6% spread) effective 25
October 1984."
In November 1984, private respondent paid
PNB P50,000.00 thus reducing his principal loan
obligation to P300,000.00.
On December 18, 1984, private respondent filed in the
Regional Trial Court of
Manila a complaint against PNB to question the unilateral
increase in the interest rates.
On March 31, 1985, the private respondent paid
the P300,000 balance of his obligation to PNB.
The trial court rendered judgment on April 14,
1986, dismissing the complaint because the increases of
interest were properly made. CA reversed.

Issue: Whether a bank may unilaterally change or

increase the interest rate stipulated therein at will and as
often as it pleased.

Held: No. Affirmed

Ratio: In the first place, although Section 2, PD. No. 116 of

January 29, 1973, authorizes the Monetary Board to
prescribe the maximum rate or rates of interest for
loans or renewal thereof and to change such rate or rates
29
such changes oftener than once a year, even less so may stipulated in writing." The debtor herein never agreed in
a bank which is subordinate to the Board. writing to pay the interest increases fixed by the PNB
Secondly, as pointed out by the Court of Appeals, beyond 24% per annum, hence, he is not bound to pay a
while the private respondent- debtor did agree in the Deed higher rate than that.
of Real Estate Mortgage that the interest rate may be
increased during the life of the contract "to such increase Development Bank of the Philippines & Privatization
within the rate allowed by law, as the Board of Directors of and Management Office (formerly Asset Privatization
the MORTGAGEE may prescribe" or "within the limits Trust) vs. CA, Philippine United Foundry & Machinery
allowed by law", no law was ever passed in July to Shop & Philippine Iron Manufacturing Co., Inc., G.R.
November 1984 increasing the interest rates on loans or No. 138703, June
renewals thereof to 32%, 41% and 48% (per annum), and 30, 2006 (494 SCRA 25)
no documents were executed and delivered by the debtor
to effectuate the increases.
The PNB relied on its own Board Resolution No.
681 (Exh. 10), PNB Circular No. 40-79-84 (Exh. 13), and
PNB Circular No. 40-129-84 (Exh. 15), but those resolution
and circulars are neither laws nor resolutions of the
Monetary Board. CB Circular No.
905, Series of 1982 (Exh. 11) removed the Usury Law
ceiling on interest rates, but it did not authorize the PNB,
or any bank for that matter, to unilaterally and
successively increase the agreed interest rates from 18%
to 48% within a span of four (4) months, in violation of
PD. 116 which limits such changes to "once every twelve
months."
Besides violating PD. 116, the unilateral action of
the PNB in increasing the interest rate on the private
respondent's loan, violated the mutuality of contracts
ordained in Article 1308 of the Civil Code. In order that
obligations arising from contracts may have the force of
law between the parties, there must be mutuality between
the parties based on their essential equality. A contract
containing a condition which makes its fulfillment
dependent exclusively upon the uncontrolled will of one
of the contracting parties, is void (Garcia vs. Rita Legarda,
Inc., 21 SCRA 555). Hence, even assuming that the P1.8
million loan agreement between the PNB and the private
respondent gave the PNB a license (although in fact there
was none) to increase the interest rate at will during the
term of the loan, that license would have been null and
void for being violative of the principle of mutuality
essential in contracts. It would have invested the loan
agreement with the character of a contract of adhesion,
where the parties do not bargain on equal footing, the
weaker party's (the debtor) participation being reduced to
the alternative "to take it or leave it" (Qua vs. Law Union &
Rock Insurance Co., 95 Phil. 85). Such a contract is a
veritable trap for the weaker party whom the courts of
justice must protect against abuse and imposition.
PNB'S successive increases of the interest rate on
the private respondent's loan, over the latter's protest,
were arbitrary as they violated an express provision of the
Credit Agreement (Exh. 1) Section 9.01 that its terms
"may be amended only by an instrument in writing signed
by the party to be bound as burdened by such
amendment." The increases imposed by PNB also
contravene Art. 1956 of the Civil Code which provides that
"no interest shall be due unless it has been expressly
30
Facts: Sometime in March 1968, the Development remitted to DBP approximately P5,300,000 to repay their
Bank of the Philippines (DBP) granted to respondents original debt. Additionally, respondents assert that since
Philippine United Foundry and Machineries Corporation the loans were procured for the Self-Reliant Defense
and Philippine Iron Manufacturing Company, Inc. an Posture Program of the Armed Forces of the Philippines
industrial loan in the amount of P2,500,000 consisting of (AFP), the latters breach of its commitment to purchase
P500,000 in cash and P2,000,000 in DBP Progress Bonds. military armaments and equipment from
The loan was evidenced by a promissory note dated June respondents amounts to a failure of consideration
26, 1968 and secured by a mortgage executed by that would justify the annulment of the mortgage
respondents over their present and future properties such on respondents? properties.
as buildings, permanent improvements, various The RTC issued a TRO and Writ of Preliminary Injunction.
machineries and equipment for manufacture. It then ruled against
Subsequently, DBP granted to respondents DBP. CA affirmed.
another loan in the form of a five-year revolving guarantee
amounting to P1,700,000 which was reflected in the
amended mortgage contract. According to respondents,
the loan guarantee was extended to them when they
encountered difficulty in negotiating the DBP Progress
Bonds. Respondents were only able to sell the bonds in
1972 or about five years from its issuance for an amount
that was 25% less than its face value.
On September 10, 1975, the outstanding accounts
of respondents with DBP were restructured in view of
their failure to pay. Thus, the outstanding principal
balance of the loans and advances amounting to
P4,655,992.35 were consolidated into a single account.
The restructured loan was evidenced by a new promissory
note dated November 12, 1975 payable within seven
years, with partial payments on the principal to be made
beginning on the third year plus a 12% interest per annum
payable every month.
Notwithstanding the restructuring, respondents
were still unable to comply with the terms and
conditions of the new promissory notes. As a result,
respondents requested DBP to refinance the matured
obligation. The request was granted by DBP, pursuant to
which three foreign currency denominated loans sourced
from DBPs own foreign borrowings were extended to
respondents on various dates between 1980 and 1981.
Sometime in October 1985, DBP initiated
foreclosure proceedings upon its computation that
respondents loans were in arrears by P62,954,473.68.
According to DBP, this figure already took into
account the intermittent payments made by
respondents between 1968 and 1981 in the
aggregate amount of P5,150,827.71. However, the
foreclosure proceedings were suspended on twelve
separate occasions from October 1985 to December 1986
upon the representations of respondents that a financial
rehabilitation fund arising from a contract with the
military was forthcoming. On December 23, 1986, before
DBP could proceed with the foreclosure proceedings,
respondents instituted the present suit for injunction.
Respondents cause of action arose from their
claim that DBP was collecting from them an
unconscionable if not unlawful or usurious obligation of
P62,954,473.68 as of September 30, 1985, out of a mere
P6,200,000 loan. Primarily, respondents contended that
the amount claimed by DBP is erroneous since they have
31
Issue: Whether a foreign currency denominated loan shall The alleged lingering financial woes of a debtor per se
be paid at the exchange rate prevailing at the time of the cannot be equated with the presence of undue influence.
payment. Corollarily, the threat to foreclose the mortgage
would not in itself vitiate consent as it is a threat to
enforce a just or legal claim through competent
Held: Yes. Modified.
authority. It bears emphasis that the foreclosure of
mortgaged properties in case of default in payment of a
Ratio: As correctly pointed out by PMO, the original loans debtor is a legal remedy given by law to a creditor.
alluded to by respondents had been refinanced and In the event of default by the mortgage debtor in the
restructured in order to extend their maturity dates. performance of the principal obligation, the mortgagee
Refinancing is an exchange of an old debt for a new debt, undeniably has the right to cause the sale at public auction
as by negotiating a different interest rate or term or by of the mortgaged property for payment of the proceeds to
repaying the existing loan with money acquired from a the mortgagee.
new loan. On the other hand, restructuring, as applied to
a debt, implies not only a postponement of the maturity
but also a modification of the essential terms of the debt
(e.g., conversion of debt into bonds or into equity, or a
change in or amendment of collateral security) in order to
make the account of the debtor current.
The reason respondents seek to be excused from
fulfilling their obligation under the second batch of
promissory notes is that first, they allegedly had "no
choice" but to sign the documents in order to have the loan
restructured and thus avert the foreclosure of their
properties, and second, they never received any proceeds
from the same. This reasoning cannot be sustained.
Respondents allegation that they had no "choice" but to
sign is tantamount to saying that DBP exerted undue
influence upon them. The Court is mindful that the law
grants an aggrieved party the right to obtain the
annulment of a contract on account of factors such as
mistake, violence, intimidation, undue influence and fraud
which vitiate consent. However, the fact that the
representatives were "forced" to sign the promissory
notes and mortgage contracts in order to have
respondents original loans restructured and to prevent
the foreclosure of their properties does not amount to
vitiated consent. The financial condition of respondents
may have motivated them to contract with DBP, but
undue influence cannot be attributed to DBP simply
because the latter had lent money. The concept of undue
influence is defined as follows: There is undue influence
when a person takes improper advantage of his power
over the will of another, depriving the latter of a
reasonable freedom of choice. The following
circumstances shall be considered: the confidential, family,
spiritual and other relations between the parties or the
fact that the person alleged to have been unduly influenced
was suffering from mental weakness, or was ignorant or in
financial distress.
While respondents were purportedly financially
distressed, there is no clear showing that those acting on
their behalf had been deprived of their free agency
when they executed the promissory notes representing
respondents refinanced obligations to DBP. For undue
influence to be present, the influence exerted must have so
overpowered or subjugated the mind of a contracting
party as to destroy the latters free agency, making
such party express the will of another rather than its own.
32
 It is likewise of no moment that respondents of her husband Zacarias Rivera, mortgaged to the
never physically received the proceeds of the foreign defendant Asia Mercantile Corporation Lot No. 551 of the
currency loans. When the loan was refinanced and Piedad estate subdivision for P50,000.00, payable within a
restructured, the proceeds were understandably not period of thirty days with interest at the rate of 12% per
actually given by DBP to respondents since the annum. Paragraph 4, of the contract provides that upon
transaction was but a renewal of the first or original loan failure of the mortgagor to pay the indebtedness and the
and the supposed proceeds were applied as payment for interest when due, the mortgage shall become due and
the latter. demandable, and without necessity of demand the
It also bears emphasis that the second set of mortgagee may immediately foreclose the mortgage,
promissory notes executed by respondents must govern judicially or extrajudicially, and for this purpose the
the contractual relation of the parties for they mortgagor appoints the mortgagee as his attorney-in-fact
unequivocally express the terms and conditions of the to sell the properties and to sign
parties loan agreement, which are binding and conclusive
between them. Parties are free to enter into
stipulations, clauses, terms and conditions they may
deem convenient; that is, as long as these are not contrary
to law, morals, good customs, public order or public policy.
As a rule, a court in such a case has no alternative but to
enforce the contractual stipulations in the manner they
have been agreed upon and written. Courts, whether trial
or appellate, generally have no power to relieve parties
from obligations voluntarily assumed simply because their
contract turned out to be disastrous or unwise
investments. Thus, respondents cannot be absolved from
their loan obligations on the basis of the failure of the
AFP to fulfill its commitment under the manufacturing
agreement entered by them allegedly upon the prompting
of certain AFP and DBP officials. While it is true that the
DBP representatives appear to have been aware that the
proceeds from the sale to the AFP were supposed to be
applied to the loan, the records are bereft of any proof that
would show that DBP was a party to the contract itself or
that DBP would condone respondents credit if the
contract did not materialize. Even assuming that the AFP
defaulted in its obligations under the manufacturing
agreement, respondents cause of action lies with the AFP,
and not with DBP or PMO. The loan contract of
respondents is separate and distinct from their
manufacturing agreement with the AFP.
Again, as a rule, courts cannot intervene to save
parties from disadvantageous provisions of their contracts
if they consented to the same freely and voluntarily. Thus,
respondents cannot now protest against the fact that
the loans were denominated in foreign currency and
were to be paid in its peso equivalent after they had
already given their consent to such terms. There is no
legal impediment to having obligations or transactions
paid in a foreign currency as long as the parties
agree to such an arrangement. In fact, obligations in
foreign currency may be discharged in Philippine currency
based on the prevailing rate at the time of payment.

Emma R. Geniza, Aurelio Geniza, Lorenzo Rivera,

Catalina Carreon Rivera & Zacarias Rivera vs. Henry
Sy & Asia Mercantile Corporation, G.R. No. L-17165,
July 31, 1962 (5 SCRA 754)

Facts: On July 8, 1959, Catalina Carreon, with the consent

33
all documents and perform any act requisite and provisions of Articles 1227 and 1229 of the Civil Code of
necessary to accomplish said purpose. It was further the Philippines. We do not agree with counsel for
expressly agreed that in case of foreclosure the plaintiffs-appellants that the contract was a usurious
mortgagor binds himself to pay the mortgagee 30% of the contract there being no allegation of fact that the
sum owing and unpaid as attorney's fees and liquidated mortgagee's intention was to exact a usurious interest, nor
damages, exclusive of costs and expenses of the sale. On evidence to that effect. Neither is there any allegation or
the same date another mortgage was executed by claim that the mortgage is contra bonos mores, so that we
plaintiffs Emma R. Geniza, Aurelio Geniza and Lorenzo may assume that he demanded the insertion of the
Rivera over two parcels of registered land for the sum of iniquitous clause or 30% damages to cover a usurious
P50,000.00, and with the same conditions as the mortgage deal. Under these circumstances we cannot sustain the
executed by the spouses Catalina Carreon and Zacarias claim of the plaintiffs-appellants that the agreement was
Rivera. a usurious one; so that we hold that the trial court was
The mortgagors in both mortgage contracts fully justified in considering the provision only as an
defaulted in the payment of their respective obligations.
The mortgage executed by Catalina Carreon Rivera and
Zacarias Rivera was foreclosed extra-judicially and the
proceeds of the sale of the land amounting to P68,567.57
was disposed of by the mortgagee.
Plaintiffs brought this action to obtain a judicial
declaration that the stipulation in the deeds of mortgage
fixing the amount of 30% as attorney's fees and
liquidated damages is excessive, unconscionable and
iniquitous and that the same should be reduced to P200.00
(or 1%). The complainants also asked for P5,000.00 as
attorney's fees for bringing this action. The defendants set
up the defense that the complaint states no cause of
action; that the mortgage executed by Emma R. Geniza and
Aurelio Geniza has not yet been foreclosed; that the
mortgagors are estopped from alleging that the stipulation
regarding liquidated damages and attorney's fees is
excessive and unreasonable.
CFI dismissed the action of plaintiffs Emma Geniza
and Aurelio Geniza as premature and ordered the
defendant Asia Mercantile Corporation to return to
plaintiff Catalina C. Rivera the sum of P13,567.57 which
represents the excess of the total obligations of the
mortgagor. It is against the above judgment that the
plaintiffs have prosecuted the appeal to this Court,
claiming that the lower court erred in not reducing the
liquidated damages and the attorney's fees to not more
than P500.00 and in not declaring the stipulation exacting
attorney's fees and liquidated damages as a usurious
stipulation, by reason of which plaintiffs (appellants
herein) should be entitled to attorney's fees amounting
to P5,000.00.

Issue: Whether the reduction of a 30% stipulated attys

fees and litigation damages to 5%
by a lower court judge is justified.

Held: Yes. Affirmed.

Ratio: In reducing the 30 per cent attorney's fees and

liquidated damages from 30 per cent to 5 per cent, the
judge below appears to be fully justified. As the loan was
for a period of thirty days only, damages amounting to 30
per cent of the loan of P50,000.00 would appear to be
iniquitous and subject to reduction in accordance with the
34
iniquitous clause subject to reduction. We also find the
reduced liquidated damages and attorney's fees to be fair
and we find no reason for disturbing the discretion of the
court below in this respect.
Dominador Nicolas & Olimpia Matias vs. Vicenta
Matias, Amado Cornejo, Jr., Jose
Policarpio, & Matilde Manuel, G.R. No. L-8093, October
29, 1955 (97 Phil 795)
chose the latter alternative and, accordingly, rendered
judgment "ordering defendants to pay plaintiffs the
amount of P2,000, Philippine currency, with interest at
six per cent (6%) a year, from June 29, 1945, up to the
date when it is actually paid."
Issue: Whether a stipulation that makes the loan payable
after liberation will cause the application of the currency at
that time. (Peso for Peso)

Facts: By an instrument dated June 29, 1944, Vicenta Held: Yes. Reversed.
Matias Vda. de Cornejo, and her son, Amado Cornejo, Jr.,
mortgaged to the spouses Dominador Nicolas and Olimpia
Matias, four (4) parcels of land, situated in San Roque,
municipality of Gapan, Province of Nueva Ecija, to
guarantee the payment of the sum of P30,000 then lent
by the mortgagees to the mortgagors and received by
the latter, in Japanese military notes one (1) year after
the expiration of five (5) years from said date, with
interest thereon, at the rate of six per cent (6%) per
annum. On July 15, 1944, said mortgagors offered to pay
the debt, with interest for five (5) years, but the
mortgagees rejected the offer. Whereupon, in August,
1944, the mortgagors deposited judicially the sum of
P39,000 representing the principal (P30,000), plus
interest for five (5) years, at the stipulated rate
and instituted Civil Case No. 156 of the Court of First
Instance of Nueva Ecija for the purpose of compelling the
mortgagees to accept said amount and to discharge the
mortgage. Although holding that the mortgagees were not
justified in rejecting the tender of payment made by the
mortgagors, said court rendered judgment, on August 12,
1946, declaring the consignation invalid for failure of the
mortgagors to give previous notice thereof, and sentencing
the mortgagors to pay the mortgagees the sum of P2,000
as the equivalent in Philippine currency, pursuant to the
Ballantyne schedule, of P30,000 in Japanese military notes
with interest, at the legal rate, from June 29, 1944.
The CA held the consignation valid and the obligation
guaranteed by the mortgage fully discharged. The
mortgagees, however, brought the case, for review by
writ of certiorari, to this Court, which held that the
mortgagors could not, without the mortgagees' consent,
accelerate the date of maturity of the obligation in
question, which is payable after the fifth year from June
29, 1944; that the mortgagees cannot be compelled to
accept payment prior to the expiration of said fifth year;
and that the judicial consignation made by the mortgagors
is, consequently, invalid, except as regards the amount
corresponding to the interest for one (1) year from June
29, 1944.
Soon thereafter, or on August 22, 1951, the
mortgagees instituted the present action for foreclosure of
said mortgage. The only issue raised in the lower court
was whether the sum of P30,000, lent by the
mortgagees in Japanese war notes, should be paid by the
mortgagors in Philippine currency, peso for peso, or in
accordance with the Ballantyne schedule. The lower court
35
 1945, and thereupon Ang Lam presented a claim against
Ratio: In Cruz vs. Del Rosario (G. R. No. L-4859) decided her estate for the full amount of the indebtedness.
on July 24, 1951, it was held that if according to the Judgment having been rendered thereon for P1,000, the
stipulation of the parties, the money to be paid by the equivalent thereof according to the Ballantyne Conversion
debtor to the creditor, or by the vendor with pacto to the Table, Ang Lam has prosecuted this appeal, contending
creditor to redeem the property mortgaged, or sold, shall that as the currency in which the indebtedness was to
be due and payable after liberation as agreed upon by the be paid was not agreed upon or stipulated in the
parties in the present case, it shall be paid in legal tender contract of loan, this should be in the legal tender on
or Philippine currency at par value or at the rate of one December 25, 1945, or one year
Philippine peso for each peso in Japanese military notes;
but if it shall be due and payable before liberation it shall
be paid after the liberation in Philippine currency in
accordance with the Ballentyne schedule. This ruling
was reiterated in Arevalo vs. Barreto (89 Phil. 633)
decided on July 31, 1951. To the same effect was the
conclusion reached in the case of Wilson vs.
Berkenkotter (49 Off. Gaz., p. 1401). The foregoing view
has been consistently applied by this Court in a
number of other cases, among which the following may
be mentioned: Ilusorio vs. Busuego, 84 Phil., 630; Roo
vs. Gomez, 46 Off. Gaz., Supp. No. 11, 339; Gomez vs. Tabia,
47 Off. Gaz., 641, Ponce de Leon vs. Syjuco, 90 Phil., 311;
Garcia vs. De los Santos, 49 Off. Gaz., 4830. What is
more, the strong dissents written in some of the cases
cited indicated that adherence to said view was effected
upon thorough consideration of the different aspects
thereof, that said doctrine is now in the nature of stare
decisis and that the issue is now close as regards this
Court.
It is thus settled that the contracting parties are
free to stipulate on the currency in which their respective
obligations shall be settled, and that whenever,
pursuant to the terms of an agreement, an obligation
assumed during the Japanese occupation is not payable
until after liberation of the Philippines, the parties to the
agreement are deemed to have intended that the amount
stated in the contract be paid in such currency as may be
legal tender at the time when the obligation becomes due.
This is, precisely, the situation obtaining in the case at bar.
The deed of mortgage in question provides that the
obligation of the mortgagees shall be paid one year after
the expiration of five (5) years from June
29, 1944, which is the date of said instrument. In
other words, the obligation is not payable until June 29,
1949. Thus, the obligation became due after liberation.
The obligation involved in the present case must be
satisfied, peso for peso, in Philippine currency.

Padilla&Paras,dissenting.

In the matter of the intestate estate of Eugenia

Peregrina, deceased. Ang Lam vs. Hilario Peregrina,
G.R. No. L-4871, January 26, 1953 (92 Phil 506)

Facts: On December 26, 1944, Eugenia Peregrina

borrowed P100,000, Philippine currency prevailing on
that date, from Ang Lam, promising to pay it within a
period of one year therefrom. Peregrina died on April 1,
36
from the date of the loan, because both parties had
elected to subject their rights to a contingency, i.e., the
change in the intrinsic value and purchasing power of the
currency.
Issue: Whether a stipulation that makes the loan payable
within the 1-year period when the liberation occurred will
cause the application of the currency at the time prior to
the liberation. (Ballantyne scale)
Held: Yes. Affirmed.
and such amount shall bear interest at the highest rate
permitted by law from the date of default until full
payment thereof plus liquidated damages at the rate of
two (2%) percent per month compounded quarterly on
the unpaid balance and accrued interests together with
all the penalties, fees, expenses or charges thereon until
the unpaid balance is fully paid, plus attorneys fees
equivalent to twenty-five (25%) percent of the sum sought
to be recovered, which in no case shall be less than
Twenty Thousand Pesos ( P20,000.00) if the services of a
lawyer were hired.

Ratio: The loan was payable within one year from

December 26, 1944. It could be paid the following day, or
any day before liberation, in Japanese military notes, had
the debtor chosen to do so. It is incorrect to assume that
the parties intended to subject their rights and obligations
under the contract to a contingency, a change in the
currency, without evidence of said intent. While perhaps
they could be presumed to be bound by the fluctuations in
the value of the currency they contracted in, it may not be
presumed that they intended to gamble on a change
therein, in the absence of an agreement, express or
implied, to that effect. If it is unfair and unjust that the loan
be decreased or completely wiped out because of a change
in the currency; it is also unfair and unjust that the loan be
paid in the same amount in which it was contracted and at
the restored currency, because then the lender would be
unduly enriched at the expense of the debtor. The fair and
just rule to apply is, therefore, for the debtor to pay the
actual value or worth of the loan at the time it was
contracted in the currency in existence at the time of
payment.

First Metro Investment Corp. vs. Este del Sol Mountain

Reserve, Inc., Valentin S. Daez, Jr., Manuel Q. Salientes,
Ma. Rocio A. De Vega, Alexander G. Asuncion, Alberto
M. Ladores, Vicente M. De Vera, Jr., and Felipe B. Sese,
G.R. No. 141811, November 15, 2001 (369 SCRA 99)

Facts: On January 31, 1978, petitioner FMIC granted

respondent Este del Sol a loan of Seven Million Three
Hundred Eighty-Five Thousand Five Hundred Pesos
(P7,385,500.00) to finance the construction and
development of the Este del Sol Mountain Reserve, a
sports/resort complex project located at Barrio Puray,
Montalban, Rizal. Under the terms of the Loan Agreement,
the proceeds of the loan were to be released on staggered
basis. Interest on the loan was pegged at sixteen (16%)
percent per annum based on the diminishing balance. The
loan was payable in thirty-six (36) equal and consecutive
monthly amortizations to commence at the beginning of
the thirteenth month from the date of the first release in
accordance with the Schedule of Amortization. In case of
default, an acceleration clause was, among others,
provided and the amount due was made subject to a
twenty (20%) percent one-time penalty on the amount due
37
 Este del Sol executed several documents as the time the contract was made and entered into, govern
security, including a Real Estate Mortgage and Suretyship it. More significantly, Central Bank Circular No. 905 did
Agreement. They also executed an Underwriting not repeal nor in any way amend the Usury Law but
Agreement whereby petitioner FMIC shall underwrite on a simply suspended the latters effectivity. The illegality of
best-efforts basis the public offering of One Hundred usury is wholly the creature of legislation. A Central Bank
Twenty Thousand (120,000) common shares of Circular cannot repeal a law. Only a law can repeal
respondent Este del Sols capital stock for a one-time another law. Thus, retroactive application of a Central
underwriting fee of Two Hundred Thousand Pesos Bank Circular cannot, and should not, be presumed.
(P200,000.00).
Since respondent Este del Sol failed to meet the
schedule of repayment in accordance with a revised
Schedule of Amortization, it appeared to have incurred a
total obligation of P12,679,630.98. Accordingly, petitioner
FMIC caused the extrajudicial foreclosure of the real estate
mortgage on June 23, 1980. At the public auction,
petitioner FMIC was the highest bidder of the mortgaged
properties for Nine Million Pesos (P9,000,000.00).
Failing to secure from the individual respondents,
as sureties, the payment of the alleged deficiency balance,
a collection case was filed for the payment of
P6,863,297.73 plus interest thereon at twenty-one (21%)
percent per annum from June 24, 1980 until fully paid,
and twenty-five (25%) percent thereof as and for
attorneys fees and costs.
The lower court ruled for the creditor FMIC. CA
reversed. The appellate court found and declared that the
fees provided for in the Underwriting and Consultancy
Agreements were mere subterfuges to camouflage the
excessively usurious interest charged by the petitioner
FMIC on the loan of respondent Este del Sol; and that the
stipulated penalties, liquidated damages and attorneys
fees were excessive, iniquitous, unconscionable and
revolting to the conscience, and declared that in lieu
thereof, the stipulated one time twenty (20%) percent
penalty on the amount due and ten (10%) percent of the
amount due as attorneys fees would be reasonable and
suffice to compensate petitioner FMIC for those items.
Thus, the appellate court dismissed the complaint as
against the individual respondents sureties and ordered
petitioner FMIC to pay or reimburse respondent Este del
Sol the amount of P971,000 representing the difference
between what is due to the petitioner and what is due to
respondent Este del Sol, based on the following
computation.

Issue: Whether a contract that has usurious interest rate

shall be deemed as having no interest at all.

Held: Yes. Affirmed.

Ratio: First, there is no merit to petitioner FMICs

contention that Central Bank Circular No. 905 which took
effect on January 1, 1983 and removed the ceiling on
interest rates for secured and unsecured loans, regardless
of maturity, should be applied retroactively to a contract
executed on January 31, 1978, as in the case at bar, that
is, while the Usury Law was in full force and effect. It is
an elementary rule of contracts that the laws, in force at
38
 Second, when a contract between two (2) parties Underwriting, Supervision and Consultancy fees were
is evidenced by a written instrument, such document is deducted and apparently paid, thus, reverting back to
ordinarily the best evidence of the terms of the contract. petitioner FMIC the total amount of One Million Seven
Courts only need to rely on the face of written contracts to Hundred Thirty Thousand Pesos (P1,730,000.00) as part of
determine the intention of the parties. However, this rule the amount loaned to respondent Este del Sol.
is not without exception. The form of the contract is e) Petitioner FMIC was in fact unable to organize an
not conclusive for the law will not permit a usurious loan underwriting/selling syndicate to sell any share of stock of
to hide itself behind a legal form. Parol evidence is respondent Este del Sol and much less to supervise such a
admissible to show that a written document though legal syndicate, thus failing to comply with its obligation under
in form was in fact a device to cover usury. If from a the Underwriting Agreement. Besides, there was really no
construction of the whole transaction it becomes need for an Underwriting Agreement since respondent
apparent that there exists a corrupt intention to violate Este del Sol had its own licensed marketing arm to sell its
the Usury Law, the courts should and will permit no shares and all its shares have been sold through its
scheme, however ingenious, to becloud the crime of usury. marketing arm.
In the instant case, several facts and
circumstances taken altogether show that the
Underwriting and Consultancy Agreements were simply
cloaks or devices to cover an illegal scheme employed by
petitioner FMIC to conceal and collect excessively usurious
interest, and these are:
a) The Underwriting and Consultancy
Agreements are both dated January 31,
1978 which is the same date of the Loan Agreement.
Furthermore, under the Underwriting Agreement payment
of the supervision and consultancy fees was set for a
period of four (4) years to coincide ultimately with the
term of the Loan Agreement. This fact means that all the
said agreements which were executed simultaneously
were set to mature or shall remain effective during the
same period of time.
b) The Loan Agreement dated January 31,
1978 stipulated for the execution and delivery of an
underwriting agreement and specifically mentioned that
such underwriting agreement is a condition precedent for
petitioner FMIC to extend the loan to respondent Este del
Sol, indicating and as admitted by petitioner FMICs
employees, that such Underwriting Agreement is part and
parcel of the Loan Agreement.
c) Respondent Este del Sol was billed by petitioner
on February 28, 1978 One Million Three Hundred
Thirty Thousand Pesos (P1,330,000.00) as consultancy
fee despite the clear provision in the Consultancy
Agreement that the said agreement is for Three Hundred
Thirty-Two Thousand Five Hundred Pesos (P332,500.00)
per annum for four (4) years and that only the first year
consultancy fee shall be due upon signing of the said
consultancy agreement.
d) The Underwriting, Supervision and Consultancy
fees in the amounts of Two Hundred Thousand Pesos
(P200,000.00), Two Hundred Thousand Pesos
(P200,000.00) and One Million Three Hundred Thirty
Thousand Pesos (P1,330,000.00), respectively, were
billed by petitioner to respondent Este del Sol on
February 22, 1978, that is, on the same occasion of the
first partial release of the loan in the amount of Two
Million Three Hundred Eighty-Two Thousand Five
Hundred Pesos (P2,382,500.00). It is from this first partial
release of the loan that the said corresponding bills for
39
 f) Petitioner FMIC failed to comply with its obligation she be reimbursed the usurious interests charged and
under the Consultancy Agreement, aside from the fact paid. She also asked for damages, attorney's fees and costs
that there was no need for a Consultancy Agreement, of suit.
since respondent Este del Sols officers appeared to be The lower court dismissed the suit, but granted
more competent to be consultants in the development of the counterclaim ordering the refund of P13,980 and the
the projected sports/resort complex. payment of attorneys fees. A notice of appeal was
All the foregoing established facts and filed through mail. A motion for execution was filed
circumstances clearly belie the contention of petitioner claiming that there was no valid appeal. The court denied
FMIC that the Loan, Underwriting and Consultancy the appeal and ordered the execution. A petition for
Agreements are separate and independent transactions. certiorari before the CA was filed, but it was dismissed.
The Underwriting and Consultancy Agreements which
were executed and delivered contemporaneously with the
Loan Agreement on January 31, 1978 were exacted by
petitioner FMIC as essential conditions for the grant of the
loan. 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
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. 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.

Wilfredo Verdejo vs CA, Judge Sofronio G. Sayo, RTC Br

III, Pasay City & Herminia Patimo, et al., G.R. No. 77735,
January 29, 1988 (157 SCRA 743)

Facts: On 20 December 1984, the herein petitioner filed a

complaint against the private respondent Herminia Patinio
and one John Doe before the Regional Trial Court of Pasay
City, docketed therein as Civil Case No. 2546-P, for
collection of a sum of money amounting to P60,500.00,
which said Herminia Patinio had allegedly borrowed from
him but failed to pay when it became due, notwithstanding
demands.
Answering, Herminia Patinio admitted having
obtained loans from the petitioner but claimed that the
amount borrowed by her was very much less than the
amount demanded in the complaint, which amount she
had already paid or settled, and that the petitioner had
exacted or charged interest on the loan ranging from 10%
to 12% per month, which is exorbitant and in gross
violation of the Usury Law. Wherefore she prayed that
40
Issue: Whether only the usurious portion of the interest guarantee checks was that each time a check matures the
shall be reimbursed and not the legal or lawful portion of defendant would exchange it with cash. Although,
the interest. admittedly, defendant made several payments, the same
were not enough and she always defaulted whenever her
loans matured. As of August 16, 1991, the total unpaid
Held: Yes. Reversed.
amount, including accrued interest, penalties and
attorneys fees, was P2,807,784.20. A case was filed with
Ratio: The case involves an alleged violation of the Usury the RTC. The lower court ruled that the defendant
Law, where the petitioner was found by the trial court to should pay the debt, but also ruled that the amount of
have charged and collected usurious interests from the interest was unconscionable, iniquitous, and in violation
private respondent on loans which were first obtained on of Act No.
15 February 1982, later renewed, and finally culminated 2655. In so doing, the court pronounced Section I, Central
with the execution by private respondent of the Deed Bank Circular No. 905, series
of Sale with Right of Repurchase on 17 November 1983.
This Court has ruled in one case that with the
promulgation of Central Bank Circular No. 905, series of
1982, usury has become "legally inexistent" as the lender
and the borrower can agree on any interest that may be
charged on the loan. This Circular was also given
retroactive effect. But, whether or not this Circular should
also be given retroactive effect and applied in this case is
yet to be determined by the appellate court at the proper
time.
Moreover, it appears that the computation of the
amount considered as usurious interest is incorrect. The
trial court merely added the amounts paid by the private
respondent to the petitioner and, thereafter, deducted
therefrom the amounts given as loan to the private
respondent and considered the excess amount usurious,
without apparently considering the lawful interest that
may be collected on said loans. Only usurious interests
may be reimbursed.
In the instant case, the notice of appeal was sent
by special delivery, instead of registered mail. Considering
that said notice of appeal was sent within the period for
perfection of appeals by the petitioner who, not being a
lawyer, is not well versed in the finer points of the law,
and, hence, committed an honest mistake; and that the
petitioner appears to have a good and valid cause of
action, we find that there was substantial compliance with
the rules.

Restituta M. Imperial vs. Alex A. Jaucian, G.R. No.

149004, April 14, 2004 (427
SCRA 517)

Facts: Imperial obtained from Jaucian six (6) separate

loans worth P320,000 for which the former executed in
favor of the latter six (6) separate promissory notes and
issued several checks as guarantee for payment. When
the said loans became overdue and unpaid, especially
when the defendants checks were dishonored, plaintiff
made repeated oral and written demands for payment.
The face value of each promissory notes is bigger than the
amount released to defendant because said face value
already included the interest from date of note to date
of maturity of 16% per month. The arrangement
between plaintiff and defendant regarding these

41
of 1982 to be of no force and legal effect, it having been
promulgated by the Monetary Board of the Central Bank of
the Philippines with grave abuse of discretion amounting
to excess of jurisdiction. The lower court reduced the
interest rate to 28% per annum. CA affirmed.
Issue: Whether the court can reduce usurious interest rate
to a lower interest rate of its discretion.
attorneys fees is different from that mentioned in and
regulated by the Rules of Court. Rather, the attorneys
fees here are in the nature of liquidated damages and the
stipulation therefor is aptly called a penal clause. So
long as the stipulation does not contravene the law,
morals, public order or public policy, it is binding upon
the obligor. It is the litigant, not

Held: Yes. Affirmed.

Ratio: The trial court, as affirmed by the CA, reduced the

interest rate from 16 percent to
1.167 percent per month or 14 percent per annum; and the
stipulated penalty charge, from
5 percent to 1.167 percent per month or 14 percent
per annum. Petitioner alleges that absent any written
stipulation between the parties, the lower courts should
have imposed the rate of 12 percent per annum only.
The records show that there was a written
agreement between the parties for the payment of interest
on the subject loans at the rate of 16 percent per month.
As decreed by the lower courts, this rate must be
equitably reduced for being iniquitous, unconscionable
and exorbitant. While the Usury Law ceiling on interest
rates was lifted by C.B. Circular No. 905, nothing in the
said circular grants lenders carte blanche authority to
raise interest rates to levels which will either enslave their
borrowers or lead to a hemorrhaging of their assets.
In Medel v. CA, the Court found the stipulated
interest rate of 5.5 percent per month, or 66 percent per
annum, unconscionable. In the present case, the rate is
even more iniquitous and unconscionable, as it amounts to
192 percent per annum. When the agreed rate is
iniquitous or unconscionable, it is considered contrary
to morals, if not against the law. Such stipulation is void.
Since the stipulation on the interest rate is void, it
is as if there were no express contract thereon. Hence,
courts may reduce the interest rate as reason and
equity demand. We find no justification to reverse or
modify the rate imposed by the two lower courts.
As for the issue of penalties and attorneys fees, in
exercising the power to determine what is iniquitous and
unconscionable, courts must consider the circumstances of
each case. What may be iniquitous and unconscionable in
one may be totally just and equitable in another. In the
present case, iniquitous and unconscionable was the
parties stipulated penalty charge of 5 percent per month
or 60 percent per annum, in addition to regular interests
and attorneys fees. Also, there was partial performance
by petitioner when she remitted P116,540 as partial
payment of her principal obligation of P320,000. Under
the circumstances, the trial court was justified in reducing
the stipulated penalty charge to the more equitable rate of
14 percent per annum.
The Promissory Note carried a stipulation for
attorneys fees of 25 percent of the principal amount and
accrued interests. Strictly speaking, this covenant on
42
the counsel, who is the judgment creditor entitled to Issue: Whether the charging of 3% interest and penalty
enforce the judgment by execution. charges by a credit card company is usurious. Whether
Nevertheless, it appears that petitioners failure to the court can reduce a usurious interest rate and penalty
comply fully with her obligation was not motivated by ill charge to whatever rate is reasonable and equitable.
will or malice. The twenty-nine partial payments she made
were a manifestation of her good faith. Again, Article 1229 Held: Yes. Yes. Modified.
of the Civil Code specifically empowers the judge to reduce
the civil penalty equitably, when the principal obligation
has been partly or irregularly complied with. Upon this
premise, we hold that the RTCs reduction of attorneys
fees -- from 25 percent to 10 percent of the total amount
due and payable -- is reasonable.
Petitioner contends that the case against her
should have been dismissed, because her husband was not
included in the proceedings before the RTC. We are not
persuaded. The husbands non-joinder does not
warrant dismissal, as it is merely a formal
requirement that may be cured by amendment. Since
petitioner alleges that her husband has already passed
away, such an amendment has thus become moot.

Ileana DR. Macalinao vs. Bank of the Philippine

Islands, G.R. No. 175490, September 17, 2009

Facts: Macalinao was an approved cardholder of BPI

Mastercard. She made some purchases through the use of
the said credit card and defaulted in paying for said
purchases. She subsequently received a letter dated
January 5, 2004 from BPI, demanding payment of the
amount of PhP 141,518.34. Under the Terms and
Conditions Governing the Issuance and Use of the BPI
Credit and BPI Mastercard, the charges or balance thereof
remaining unpaid after the payment due date indicated
on the monthly Statement of Accounts shall bear interest
at the rate of 3% per month and an additional penalty fee
equivalent to another 3% of the amount due for every
month or a fraction of a months delay.
For failure of Macalinao to settle her obligations,
BPI filed with the MeTC of Makati City a complaint for a
sum of money against her and her husband, Danilo SJ.
Macalinao. In said complaint, BPI prayed for the
payment of the amount of PhP
154,608.78 plus 3.25% finance charges and late payment
charges equivalent to 6% of the amount due from
February 29, 2004 and an amount equivalent to 25% of the
total amount due as attorneys fees, and of the cost of suit.
The Macalinao failed to file an Answer. In its decision, the
MeTC ruled for BPI and ordered the Macalinaos to pay the
amount of P141,518.34 plus interest and penalty charges
of 2% per month. Macalinao appealed to the RTC, but the
RTC affirmed the decision in toto. The Macalinaos filed a
petition for review with the CA, but the CA affirmed with
modifications the RTC Decision by ordering the payment
of the principal amount of P126, 706.70 plus interest and
penalty charges of 3% per month from date of demand
unti fully paid. The Motion for Reconsideration was
denied, hence this case that was filed by Macalinao.

43
Ratio: The Interest Rate and Penalty Charge of 3% Mariano Aquino vs. Tomas Deala, G.R. No. 43304,
Per Month or 36% Per Annum Should Be Reduced to October 21, 1936 (63 Phil 582)
2% Per Month or 24% Per Annum. In its Complaint,
respondent BPI originally imposed the interest and Facts: The defendant approached Mariano Aquino, the
penalty charges at the rate of 9.25% per month or plaintiff's father, to solicit a P4,000 loan secured by the
111% per annum. This was declared as unconscionable real property on which a house of strong materials was
by the lower courts for being clearly excessive, and was built. Mariano Aquino acceded on condition that the
thus reduced to 2% per month or 24% per annum. On transaction be evidenced by a deed of sale with a 4 year
appeal, the CA modified the rate of interest and penalty right of repurchase, obligation to build a house, and
charge and increased them to 3% per month or 36% per obligation to lease the property from Mariano Aquino for
annum based on the Terms and Conditions Governing the the sum of P40 per month. The instrument was later
Issuance and Use of the BPI Credit Card, which governs the novated, the only alteration being the price and the rent
transaction between petitioner Macalinao and respondent P4,500 and P45, respectively. It was novated again to
BPI. change the price and rent to P5,200 and P52, respectively.
Indeed, in the Terms and Conditions Governing Then again to P6,600 and P49.50 and extending the period
the Issuance and Use of the BPI Credit Card, there was a or repurchase to April 20, 1933.
stipulation on the 3% interest rate. Nevertheless, it
should be noted that this is not the first time that this
Court has considered the interest rate of 36% per annum
as excessive and unconscionable as held in Chua vs.
Timan. Since the stipulation on the interest rate is void, it
is as if there was no express contract thereon. Hence,
courts may reduce the interest rate as reason and equity
demand.
The same is true with respect to the penalty
charge. Notably, under the Terms and Conditions
Governing the Issuance and Use of the BPI Credit Card,
it was also stated therein that respondent BPI shall
impose an additional penalty charge of 3% per month.
Pertinently, Article 1229 of the Civil Code states that the
judge shall equitably reduce the penalty when the
principal obligation has been partly or irregularly
complied with by the debtor. Even if there has been no
performance, the penalty may also be reduced by the
courts if it is iniquitous or unconscionable. In exercising
this power to determine what is iniquitous and
unconscionable, courts must consider the circumstances of
each case since what may be iniquitous and
unconscionable in one may be totally just and equitable in
another.
Thus, under the circumstances, the Court finds it
equitable to reduce the interest rate pegged by the CA at
1.5% monthly to 1% monthly and penalty charge fixed by
the CA at 1.5% monthly to 1% monthly or a total of 2% per
month or 24% per annum in line with the prevailing
jurisprudence and in accordance with Art. 1229 of the Civil
Code.
Significantly, the CA correctly used the beginning
balance of PhP 94,843.70 as basis for the re-computation
of the interest considering that this was the first
amount which appeared on the Statement of Account of
petitioner Macalinao. There is no other amount on which
the re-computation could be based, as can be gathered
from the evidence on record. The principal amount to be
paid should be P112, 309,52.

Antonio F. Aquino, special administrator of the

testate estate of the deceased
44
 The defendant was able to get permission from
the Department of Engineering and Public Works to build
a 2-storey house, and he completed the building of the
house in 2 years.
Mariano Aquino, sometime in 1933, had the
consolidation of the property registered with the registry
of deeds, and a transfer certificate of title was issued to
him. He died sometime later. His son, as special
administrator, instituted the ejectment proceeding. The
municipal court ordered the defendant to vacate the
property. The CFI affirmed.
therefore, the creditor required the debtor to amplify it by
constructing another additional house on the lot given
as security. Had it been the intention of the parties to
make this new house a part of the subject matter of the
said sale, a stipulation regarding payment of additional
rent would have been inserted in the contract inasmuch as
a rental of P40 a month was fixed for the use and
occupation of the house already existing on the property
which is the subject matter of the contract. It is

Issue: Whether a contract of deposit which has a

stipulation for the payment of interest is actually a loan.

Held: Yes. Reversed. Case dismissed

Ratio: The subsequent conduct of the parties and other

circumstances of the case warrant the conclusion that the
true intention of the parties was the granting of a loan in a
certain amount to the defendant, with interest at 12 per
cent per annum which, in view of the defendant's
precarious situation, was later reduced to 9 per cent so
that he could build another house on the vacant part of
the lot in question, the loan being secured by said lot, the
house already built thereon at the time of the execution of
the contract and that which the defendant intended to
build with the money received from Mariano Aquino. If
the words "sale with right of repurchase", "price",
"repurchase", "right of redemption", "lease", "rent",
"purchaser", "vendor", and other similar words used
according to custom in the deed Exhibit 1, the other
stipulations contained therein and the other circumstances
of the case are incompatible with the idea that it was
the intention of the assignor to transfer the ownership of
the property in question to the purchaser at a certain
price, the vendor reserving for himself only the right to
repurchase it within a certain period.
Let us begin with the stipulations of the original
contract Exhibit 1. Those contained in paragraphs 5, 6, 10
and 11 thereof are, in our opinion, incompatible with the
theory that the contract was one of purchase and sale
as claimed by the plaintiff. We should not lose sight of
the fact that between an absolute sale and a sale with right
of repurchase, no difference exists except that in the latter
the ownership of the purchaser is subject to the resolutory
condition that the vendor exercises his right of repurchase
with the time agreed upon.
Under paragraph 5, the so-called vendor found
himself to construct a two-story house of strong
materials within six months on the vacant part of the lot
referred to in the contract. It is not explained why the
vendor should have to assume said obligation and spend
the money received from the purchaser in compliance
therewith when such obligation is an act of ownership and
the performance thereof devolved upon the purchaser-
owner, not upon the vendor-lessees. It is stated in
their contract that the security offered is insufficient and,
45
true that under paragraph 10 this sum of P40 was for P5,200, the rent was likewise increased to P52 in order to
the rent not only of the house already existing but also continue maintaining the rate of interest at 12 per cent. It
of that which the defendant undertook to construct, but was only when said contract was novated for the last time
this part of the contract is clearly fictitious, because if the on April 20, 1931, and the so-called selling price was
rent of P40 covered the two houses, it is not explained why increased to P6,600 that the rent was reduced to P49.50 a
the lessee should agree to pay rent for the occupation of month because Mariano Aquino had acceded to reduce the
an inexistent house which he himself was to construct rate of interest to 9 per cent. The new house on the lot in
with his own money and how the lessor should accept rent question had just been finished about June 23, 1928, and it
of only P40 for two houses of strong materials, one of is strange that the fluctuations of the amount of the rent
which consists of two stories. had nothing to do with the construction of said new house
Paragraph 6 and paragraph 10, subparagraph (d) but with the successive increases of the so-called selling
imposed upon the vendor the obligation to insure against price, or the amount of the loan. In other words, the rent
fire the buildings constructed on the property which is went up or down not because of the improvement or
the subject matter of the contract, for not less than
P3,000, the payment of the premiums thereof being to
the account of said vendor who was obliged to indorse the
policy immediately to the purchaser and to pay, also for
his own account and responsibility, the land tax and any
other taxes imposed or that might thereafter be imposed
upon the property. When a property is insured, the
indemnity, in case of loss, is paid to the owner because the
insurable interest is his. This being so, the correlative
obligation to pay for the insurance premiums should
devolve upon the owner and not upon the lessee or
vendor with right of repurchase who, with the
exception of his right of redemption, should have
considered all other juridical relations with the property
sold extinguished after the contract. The same is true with
respect to the payment of the land tax. This lien should
have been shouldered by the owner and not by the lessee.
Under paragraph 10, subparagraph (e), the
expenses for the conservation of the property should
likewise be for the account of the defendant. However,
these expenses are ordinarily for the account of the lessor
(article 1554, Civil Code).
It appears that Mariano Aquino desired to obtain a
net income of 12 per cent per annum from his investment
and for this reason he caused the defendant to assume
the obligation to pay not only the land tax and insurance of
the property but also the expenses for its conservation. If
Mariano Aquino had assumed these obligations which
strictly belong to the owner of the property, instead of
imposing them upon the defendant, he would not have
been able to realize said net income of 12 per cent per
annum on his capital, because he would have had to
deduct therefrom the sum represented by the insurance,
the land tax and the expenses for the conservation of the
property. On the other hand, had he assumed such
obligations and compensated these liens by charging
interest in excess of 12 per cent he would have openly
violated the Usury Law.
When the alleged sale price was increased to
P4,500 in the first novation of the contract on December
26, 1926, the rent of the property was increased to P45, in
spite of the fact that said property had suffered no change,
in order to maintain the rate of interest at 12 per cent.
When the contract was novated for the second time on
May 31, 1927, by increasing the so-called selling price to
46
amplification of the leased property but because of the 1741). The same thing happens with the contract of
increase of the amount of the loan and the rate of the depositum. Although it would seem that article 1760
interest agreed upon by the parties. of the Civil Code indirectly authorizes the constitution
The term of the right of redemption, under the of an onerous deposit, when there is an express
original deed, was supposed to expire and it expired on stipulation to that effect, this court has repeatedly
September 25, 1930. However, the so-called purchaser, far held that the deposit should be considered a loan
from having the consolidation of his ownership when it contains a stipulation for payment of
registered in the registry of deeds, executed Exhibit 5, on interest. (Garcia Gavieres vs. Pardo de Tavera, 1 Phil., 71;
April 20, 1931, "extending" the already expired original Barretto vs. Reyes, 10 Phil.,
term of four years stipulated in Exhibit 1 to April 20, 1933. 489; In re Guardianship of the minors Tamboco, 36
This shows that, notwithstanding the form of the contract, Phil., 939, 941.) In order not to multiply the examples,
Mariano Aquino always considered the transaction as a we shall cite the cases of use and habitation wherein the
simple loan. The affirmation made in paragraph 3 of the usuary
deed Exhibit 5 that "as the term of the contract had
expired on September 25, 1930, the same remaining in
status quo, etc." excludes every idea that the parties
intended to enter into a contract of sale. In fact, once the
period for the right have been exercised, it could not be
said, if the contract were on of sale with pacto de retro,
that "the contract has remained in status quo", because
failure to exercise the right of redemption, in such
contract, automatically produces the effect of
consolidating the ownership of the purchaser without the
necessity of any other act on his part, the fact on which his
ownership was temporarily conditioned not having been
realized.
In Padilla vs. Linsangan (19 Phil., 65), we stated
that "the court will not construe an instrument to be one of
a sale con pacto de retro, with the stringent and onerous
effects that follow, unless the terms of the instrument and
all the circumstances positively require it. Whenever,
under the terms of the writing, any other construction can
fairly and reasonably be made, such construction will be
adopted. Sales with a right to repurchase, as defined by
the Civil Code, are not favored, and the contract will be
construed as a mere loan unless the court can see that,
if enforced according to its terms, it is not an
unconscionable one."
It may be contended that "the contracting parties
may establish any agreements, terms and conditions that
may deem advisable, provided they are not contrary to
law, morals, or public order." (Art. 1255, Civil Code.)
However, we do not declare herein the nullity of the
agreements contained in Exhibit 1 and in its various
novations. None of said agreements is contrary to law,
morals, or public order, and all of them should therefore be
maintained out of respect to the will of the contracting
parties. The validity of these agreements, however, is one
thing, while the juridical qualification of the contract
resulting therefrom is very distinctly another. Such
agreements, in our opinion, change the status of the sale
with pacto de retro and give rise to juridical relations of a
different nature. Similar thereto is a contract of
commodatum wherein payment of compensation by
the person acquiring the use of the thing is stipulated.
This stipulation is valid but the commodatum,
although so termed, ceases to exist and it converted
into another contract with different effects (art.
47
who consumes all the fruits of the thing subject to use, and
the person having the right of habitation who occupies the
whole house, are considered usufructuaries (art. 527).
Angel Javellana vs. Jose Lim, et al., G.R. No. 4015, August 24,
1908(11Phil141)
be sued for or sentenced to pay the amount of capital and
interest together with his co-debtor.
Bank of the Philippine Islands vs. IAC & Rizaldy T.
Zshornack, G.R. No. L-66826, August 19, 1988 (164
SCRA 630)

Facts: The defendants received from the plaintiff the sum Facts: Rizaldy Zshornack and his wife, Shirley Gorospe,
of P2,686.58 as a deposit without interest sometime in maintained in COMTRUST, Quezon City Branch, a dollar
1897 which was to be returned, jointly and severally, in savings account and a peso current account.
1898. When the obligation became due, the defendants
begged the plaintiff for an extension of time for the
payment thereof, binding themselves to pay interest at
the rate of 15 per cent on the amount of their
indebtedness, to which the plaintiff acceded. On May 15,
1902, the debtors paid interest of P1,000 and then made no
other payments.
The plaintiff filed a case. CFI found the defendants liable
jointly and severally.

Issue: Whether a contract denominated as a deposit but

which did not require the return of exactly the same coins
and which eventually provided for the payment of interest
is actually a loan.

Held: Yes. Affirmed.

Ratio: They did not engage to return the same coins

received and of which the amount deposited consisted,
and they could have accomplished the return agreed upon
by the delivery of a sum equal to the one received by
them. For this reason it must be understood that the
debtors were lawfully authorized to make use of the
amount deposited, which they have done, as subsequently
shown when asking for an extension of the time for the
return thereof, inasmuch as, acknowledging that they have
subjected the lender, their creditor, to losses and damages
for not complying with what had been stipulated, and
being conscious that they had used, for their own profit
and gain, the money that they received apparently as a
deposit, they engaged to pay interest to the creditor from
the date named until the time when the refund should
be made. Such conduct on the part of the debtors is
unquestionable evidence that the transaction entered into
between the interested parties was not a deposit, but a real
contract of loan.
It may be inferred that there was no renewal of
the contract of deposit converted into a loan, because, as
has already been stated, the defendants received said
amount by virtue of a real loan contract under the name of
a deposit, since the so-called bails were forthwith
authorized to dispose of the amount deposited. This they
have done, as has been clearly shown. The original joint
obligation contracted by the defendant debtors still
exists, and it has not been shown or proven in the
proceedings that the creditor had released Jose Lim from
complying with his obligation in order that he should not
48
 On October 27, 1975, an application for a dollar Jr., possesses a personality distinct and separate from
draft was accomplished by Virgilio V. Garcia, Assistant Rizaldy Zshornack. Payment made to Ernesto cannot be
Branch Manager of COMTRUST Quezon City, payable to a considered payment to Rizaldy. As to the second
certain Leovigilda D. Dizon in the amount of $1,000.00. In explanation, even if we assume that there was such an
the application, Garcia indicated that the amount was to agreement, the evidence do not show that the
be charged to Dollar Savings Acct. No. 25-4109, the withdrawal was made pursuant to it. Instead, the
savings account of the Zshornacks; the charges for record reveals that the amount withdrawn was used to
commission, documentary stamp tax and others totalling finance a dollar draft in favor of Leovigilda D. Dizon, and
P17.46 were to be charged to Current Acct. No. 210-465- not to fund the current account of the Zshornacks. There
29, again, the current account of the Zshornacks. There is no proof whatsoever that peso Current Account No.
was no indication of the name of the purchaser of the 210-465-29 was ever
dollar draft.
On the same date, October 27, 1975, COMTRUST,
under the signature of Virgilio V. Garcia, issued a check
payable to the order of Leovigilda D. Dizon in the sum
of US$1,000 drawn on the Chase Manhattan Bank, New
York, with an indication that it was to be charged to Dollar
Savings Acct. No. 25-4109.
When Zshornack noticed the withdrawal of
US$1,000.00 from his account, he demanded an
explanation from the bank. In answer, COMTRUST claimed
that the peso value of the withdrawal was given to Atty.
Ernesto Zshornack, Jr., brother of Rizaldy, on October
27,1975 when he (Ernesto) encashed with COMTRUST a
cashier's check for P8,450.00 issued by the Manila Banking
Corporation payable to Ernesto.
In its desperate attempt to justify its act of
withdrawing from its depositor's savings account, the
bank has adopted inconsistent theories. First, it still
maintains that the peso value of the amount withdrawn
was given to Atty. Ernesto Zshornack, Jr. when the latter
encashed the Manilabank Cashier's Check. At the same
time, the bank claims that the withdrawal was made
pursuant to an agreement where Zshornack allegedly
authorized the bank to withdraw from his dollar
savings account such amount which, when converted to
pesos, would be needed to fund his peso current account.
Zshornack also entrusted to COMTRUST, thru
Garcia, US$3,000.00 cash (popularly known as
greenbacks) for safekeeping. Despite demand, the bank
refused to return the money. COMTRUST averred that
the US$3,000 was credited to Zshornack's peso current
account at prevailing conversion rates.
BPI later absorbed COMTRUST. Zshornack filed
a case against BPI. The trial court ruled for Zshornack.

Issue: Whether money that is given to the bank for

safekeeping is a deposit.

Ratio: Yes. Modified.

Ratio: The explanations of the bank are unavailing. With

regard to the first explanation, petitioner bank has not
shown how the transaction involving the cashier's check is
related to the transaction involving the dollar draft in
favor of Dizon financed by the withdrawal from Rizaldy's
dollar account. The two transactions appear entirely
independent of each other. Moreover, Ernesto Zshornack,
49
credited with the peso equivalent of the US$1,000.00 uncle. In the months of March, April, and May, 1920,
withdrawn on October 27, 1975 from Dollar Savings Silvestra Baron placed a quantity of palay in the
Account No. 25-4109. defendant's mill; and this, in connection with some that
The arrangement between the bank and she took over from Guillermo Baron, amounted to 1,012
Zshoranck is that contract defined under Article 1962, cavans and 24 kilos. During approximately the same period
New Civil Code -- A deposit is constituted from the Guillermo Baron placed other 1,865 cavans and 43 kilos of
moment a person receives a thing belonging to another, palay in the mill. No compensation has ever been received
with the obligation of safely keeping it and of returning by Silvestra Baron upon account of the palay thus placed
the same. If the safekeeping of the thing delivered is not with the defendant. As against the palay delivered by
the principal purpose of the contract, there is no deposit Guillermo Baron, he has received from the defendant
but some other contract. advancements amounting to P2,800; but apart from this he
Note that the object of the contract between has not been compensated. Both the plaintiffs claim that
Zshornack and COMTRUST was foreign exchange. Hence, the palay which was delivered by them to the defendant
the transaction was covered by Central Bank Circular No. was sold to the defendant; while the defendant, on the
20, Restrictions on Gold and Foreign Exchange other hand, claims that the palay was deposited
Transactions, promulgated on December 9,
1949, which was in force at the time the parties entered
into the transaction involved in this case. The circular
requires all persons to sell to the Central Bank all
foreign exchange received within one business day
following such receipt. This was modified by CB Circular
No. 281 which limited the restriction to Philippine
residents.
The document and the subsequent acts of the
parties show that they intended the bank to safekeep the
foreign exchange, and return it later to Zshornack, who
alleged in his complaint that he is a Philippine resident.
The parties did not intend to sell the US dollars to the
Central Bank within one business day from receipt.
Otherwise, the contract of depositum would never have
been entered into at all. Since the mere safekeeping of
the greenbacks, without selling them to the Central Bank
within one business day from receipt, is a transaction
which is not authorized by CB Circular No. 20, it must be
considered as one which falls under the general class of
prohibited transactions. Hence, pursuant to Article 5 of the
Civil Code, it is void, having been executed against the
provisions of a mandatory/prohibitory law. More
importantly, it affords neither of the parties a cause of
action against the other.
We thus rule that Zshornack cannot recover under the
second cause of action.

Silvestra Baron vs. Pablo David; Guillermo Baron vs.

Pablo David, G.R. Nos. 26948
& 26949, October 8, 1927 (51 Phil 1)

Facts: Prior to January 17,1921, the defendant Pablo

David had been engaged in running a rice mill in the
municipality of Magalang, in the Province of Pampanga, a
mill which was well patronized by the rice growers of the
vicinity and almost constantly running. On the date stated,
a fire occurred that destroyed the mill and its contents,
and it was some time before the mill could be rebuilt and
put in operation again. Silvestra Baron, the plaintiff in the
first action, is an aunt of the defendant; while
Guillermo Baron, the plaintiff in the other action, is his

50
subject to future withdrawal by the depositors or subject
to some future sale which was never effected. He
therefore supposes himself to be relieved from all
responsibility by virtue of the fire of January 17, 1921,
already mentioned.
The plaintiffs further say that their palay was
delivered to the defendant at his special request, coupled
with a promise on his part to pay for the same at the
highest price per cavan at which palay would sell during
the year 1920; and they say that in August of that year the
defendant promised to pay them severally the price of
P8.40 per cavan, which was about the top of the market
for the season, provided they would wait for payment until
December.
A case was filed against the defendant. The court
ruled that the alleged promise to pay at the highest price
was not made, but gave judgment in favor of the plaintiffs
for the recovery of the sums of P5,238.51 and P5,734.60.
Both parties appealed.
commodatum; and of course by appropriating the thing,
the bailee becomes responsible for its value. In this
connection we wholly reject the defendant's pretense that
the palay delivered by the plaintiffs or any part of it was
actually consumed in the fire of January, 1921. Nor is the
liability of the defendant in any wise affected by the
circumstance that, by a custom prevailing among rice
millers in this country, persons placing palay with them
without special agreement as to price are at liberty to
withdraw it later, proper allowance being made for storage
and shrinkage, a thing that is sometimes done, though
rarely.

Issue: Whether the deposit of things with the object of

allowing the depositary to use them is actually a loan.

Held: Yes. Affirmed with modifications.

Ratio: It should be stated that the palay in question was

placed by the plaintiffs in the defendant's mill with the
understanding that the defendant was at liberty to convert
it into rice and dispose of it at his pleasure. The mill
was actively running during the entire season, and as
palay was daily coming in from many customers and as
rice was being constantly shipped by the defendant to
Manila, or other rice markets, it was impossible to keep the
plaintiffs' palay segregated. In fact the defendant admits
that the plaintiffs' palay was mixed with that of others. In
view of the nature of the defendant's activities and the
way in which the palay was handled in the defendant's
mill, it is quite certain that all of the plaintiffs' palay,
which was put in before June 1,1920, had been milled and
disposed of long prior to the fire of January 17, 1921.
Furthermore, the proof shows that when the fire occurred
there could not have been more than about 360 cavans of
palay in the mill, none of which by any reasonable
probability could have been any part of the palay
delivered by the plaintiffs. Considering the fact that the
defendant had thus milled and doubtless sold the plaintiffs'
palay prior to the date of the fire, it results that he is bound
to account for its value, and his liability was not
extinguished by the occurrence of the fire.
Even supposing that the palay may have been
delivered in the character of deposit, subject to future
sale or withdrawal at plaintiffs' election, nevertheless if it
was understood that the defendant might mill the palay
and he has in fact appropriated it to his own use, he is of
course bound to account for its value. Under article 1768
of the Civil Code, when the depositary has permission
to make use of the thing deposited, the contract loses
the character of mere deposit and becomes a loan or a
51
 In view of what has been said it becomes understanding and agreement that he would pay them for
necessary to discover the price which the defendant the palay the highest market price for the season, and to
should be required to pay for the plaintiffs' palay. Upon the making of the second contract about the first of
this point the trial judge fixed upon P6.15 per cavan; and August, in which they had a settlement, and that the
although we are not exactly in agreement with him as to defendant then agreed to pay them P8.40 per cavan, such
the propriety of the method by which he arrived at this payment to be made on December first. The defendant
figure, we are nevertheless of the opinion that, all things denied the making of either one of those contracts, and
considered, the result is approximately correct. The offered no other evidence on that question. That is to say,
plaintiffs made demand upon the defendant for settlement we have the evidence of both Silvestra Baron and
in the early part of August; and, so far as we are able to Guillermo Baron to the making of those contracts, which is
judge from the proof, the price of P6.15 per cavan, fixed by denied by the defendant only. Plaintiffs' evidence is also
the trial court, is about the price at which the defendant corroborated by the usual and customary manner in
should be required to settle as of that date. It was the which the growers sell their palay. That is to say, it is their
date of the demand of the plaintiffs for settlement that custom to sell the palay at or
determined the price to be paid by the defendant, and this
is true whether the palay was delivered in the character of
sale with price undetermined or in the character of
deposit subject to use by the defendant. It results that
the plaintiffs are respectively entitled to recover the value
of the palay which they had placed with the defendant
during the period referred to, with interest from the
date of the filing of their several complaints.
As already stated, the trial court found that at the time of
the fire there were about
360 cavans of palay in the mill and that this palay was
destroyed. His Honor assumed that this was part of the
palay delivered by the plaintiffs, and he held that the
defendant should be credited with said amount. His Honor
therefore deducted from the claims of the plaintiffs their
respective proportionate shares of this amount of palay.
We are unable to see the propriety of this feature of the
decision. There were many customers of the defendant's
rice mill who had placed their palay with the defendant
under the same conditions as the plaintiffs, and nothing
can be more certain than that the palay which was
burned did not belong to the plaintiffs. That palay
without a doubt had long been sold and marketed.
The defendant is, however, entitled to an award
for his cross-complaint arising from the wrongful
attachment of his mill by plaintiff Guillermo Baron. The
ground used by the plaintiff was clearly unjustified, and
it caused the defendant damages resulting from the
closure of his mill for several months and the loss of good
will of his customers.

John, dissenting and concurring: The amount of palay is

not in dispute, and the defendant admits that it was
delivered to his mill, but he claims that he kept it on
deposit and as bailee without hire for the plaintiffs and at
their own risk, and that the mill was burned down, and
that at the time of the fire, plaintiffs' palay was in the mill.
The lower court found as a fact that there was no merit in
that defense, and that there was but little, if any, palay in
the mill at the time of the fire and that in truth and in fact
that defense was based upon perjured testimony. Both
plaintiffs testified to the making of the respective
contracts as alleged in their complaint; to wit, that they
delivered the palay to the defendant with the express
52
about the time it is delivered at the mill and as soon as it is payment, and the costs. The plaintiff asked that the
made ready for market in the form of rice. Yet, strange as interest run from November 21, 1905, because on that
it may seem, both the lower court and this court have date, his counsel demanded of the defendants, Bonnevie
found as a fact that upon the question of the alleged and Arandez, their partnership having been dissolved,
contracts, the evidence for the defendant is true and that they settle the accounts in this matter.
entitled to more weight than the evidence of both plaintiffs The lower court ruled in favor of the plaintiff.
which is false. In the very nature of things, if defendant's
evidence upon that point is true, it stands to reason that, Issue: Whether a deposit which is converted to another
following the custom of growers, the plaintiffs would contract loses its nature as a deposit.
have sold their palay during the period of high prices,
and would not have waited until it dropped from P8.50
per cavan to P6.15 per cavan about the first of August.
Upon that question, both the weight and the credibility of
the evidence is with the plaintiffs, and they should have
judgment for the full amount of their palay on the basis
of P8.40 per cavan. For such reason, I vigorously dissent
from the majority opinion.
I frankly concede that the attachment was
wrongful, and that it should never have been levied. The
majority opinion also allowed the defendant P1,400 "for
injury to the goodwill of his business." The very fact that
after a delay of about four years, both of the plaintiffs
were compelled to bring their respective actions
against the defendant to recover from him on a just and
meritorious claim, as found by this court and the lower
court, and the further fact that after such long delay, the
defendant has sought to defeat the actions by a sham and
manufactured defense, as found by this and the lower
court, would arouse the suspicion of any customers the
defendant ever had, and shake their confidence in his
business honor and integrity, and destroy any goodwill
which he ever did have. Under such conditions, it would
be strange that the defendant would have any customers
left. He is not entitled to any compensation for the
loss of goodwill, and P5,000 should be the very limit
of the amount of his damages for the wrongful
attachment, and upon that point I vigorously dissent. In all
other respects, I agree with the majority opinion.

Vicente Delgado vs. Pedro Bonnevie & Francisco

Arandez, G.R. No. 7097, October
23, 1912 (23 Phil 308)

Facts: Pedro Bonnevie and Francisco Arandez formed a

regular general partnership for engaging in the business
of threshing paddy. Vicente Delgado undertook to
deliver to them paddy for this purpose to be cleaned and
returned to him as rice, with the agreement of paying them
10 centimos for each cavan and to have returned in rice
one-half the amount received as paddy. Receipts were
given out to evidence the transaction.
On February 6, 1909, Vicente Delgado appeared in
the Court of First Instance of Ambos Camarines with said
receipts, demanding return of the said 2,003 and a half
cavanes of paddy, or in the absence thereof, of the price of
said article at the rate of 3 persons the cavan or 6,009
pesos and 50 centimos, with interest thereon at 6 per cent
a year reckoning from November 21, 1905, until complete
53
 who continues to be the owner of the thing which is merely
Held: No. Affirmed. held in trust by the depositary or lessee.
In strict law, the deposit, when it is of fungible
Ratio: It is true that, according to article 950 of the Code goods received by weight, number, or measurement,
of Commerce, actions arising from bills of exchange, drafts, becomes a mutual loan, by reason of the authorization
notes, checks, securities, dividends, coupons, and the which the depositary may have from the depositor to
amounts of the amortization of obligations issued in make use of the goods deposited. (Civil Code,
accordance with said code, shall extinguish three years 1768, and Code of Commerce, 309.) But in the present
after they have fallen due; but it is also true that as the case neither was there authorization of the depositor nor
receipts in question are not documents of any of the did the depositaries intend to make use of the rice for
kinds enumerated in said article, the actions arising their own consumption or profit; they were merely
therefrom do not extinguish three years from their date released from the obligation of
(that, after all, they do not fall due). It is true that
paragraph 2 of article 950 also mentions, besides those
already stated, "other instruments of draft or exchange;"
but it is also true that the receipts in this case are not
documents of draft or exchange, they are not drafts payable
to order, but they are, as the appellants acknowledge,
simple promises to pay, or rather mere documents
evidencing the receipt of some cavanes of paddy for the
purpose already stated, which is nothing more than
purely for industrial, and not for mercantile exchange.
The contract whereby one person receives from another a
quantity of unhulled rice to return it hulled, for a fixed
compensation or remuneration, is an industrial, not a
commercial act; it is, as the appellants say, a hire of
services without mercantile character, for there is
nothing mercantile about it, just as there is nothing
mercantile about the operation of washing clothes.
Neither are articles 309 of the Code of Commerce
and 1955 and 1962 of the Civil Code applicable. It is
acknowledged that the obligation of the appellants arose
primarily out of the contract of deposit, but this deposit
was later converted into a contract of hire of services, and
this is true. But it is also true that, after the object of the
hire of services had been fulfilled, the rice in every way
remained as a deposit in the possession of the appellants
for them to return to the depositor at any time they might
be required to do so, and nothing has relieved them of this
obligation; neither the dissolution of the partnership that
united them, nor the revolutionary movement of a
political character that seems to have occurred in 1898,
nor the fact that they may at some time have lost
possession of the rice.
Under title of deposit or hire of services, the
possession of the appellants can in no way amount to
prescription, for the thing received on deposit or for hire of
services could not prescribe, since for every prescription
of ownership the possession must be in the capacity of
an owner, public, peaceful, and uninterrupted (Civil Code,
1941); and the appellants could not possess the rice in the
capacity of owners, taking for granted that the depositor
or lessor never could have believed that he had
transferred to them ownership of the thing deposited or
leased, but merely the care of the thing on deposit and the
use or profit thereof; which is expressed in legal terms by
saying that the possession of the depositary or of the
lessee is not adverse to that of the depositor or lessor,
54
returning the same thing and contracted in lieu thereof the the fire and answerable for the damage occasioned
obligation of delivering something similar to the half of it, thereby. These antagonistic views presently culminated in
being bound by no fixed terms, the opposite of what the litigation now before us.
happens in a mutual loan, to make the delivery or return A case was filed by the lessee to rescind the
when and how it might please the depositor. contract and to recover a sum of money as damages by
reason of the failure of the defendant to comply with
certain obligations incumbent upon him under the
Nicolas Lizares vs. Rosendo Hernaez & Enrica Alunan
contract. The trial court rescinded the contract, found
Viuda de Lizares, G.R. No.
the lessor liable for damages, and found the lessee
14977, March 30, 1920 (40 Phil 981)
indebted for rent. The
Facts: The plaintiff, Nicolas Lizares, and the defendant,
Rosendo Hernaez, entered into a contract, whereby the
former became the lessee of the two haciendas Panaogao
and Matagoy No. 2. Among the improvements existing
upon the hacienda Panaogao, and which the plaintiff was
entitled to use, was a large iron-roofed camarin,
containing furnaces, boilers, mills, engines, and other
apparatus for the manufacture of sugar.
At about 7 p. m., on March 16, 1918, a fire of
unknown origin occurred at this sugar mill, which
destroyed the camarin and greatly damaged the
sugar-milling apparatus. Upon the actual occasion of the
fire in question the plaintiff was absent on business in
the city of Iloilo, having left Amando Ereeta in charge of
the hacienda. The latter had left the camarin at about 5 pm
on the date referred to; and when the fire occurred, he was
at the corral where the carabaos were kept, a short
distance away from the camarin. Instead of hastening to
the fire at once, after the alarm was given, he remained a
little while in the corral in order to get the animals into
a place of safety. Felipe Beldua, apparently next in
authority to Amando Ereeta, and who was engaged in the
sugar-boiling department, had left the camarin at
about 4 pm in order to get something to eat. As he
was returning to the camarin, and while yet a short
distance away, he discerned the flames rising from a pile of
bagasse at the north side of the camarin. He was the first
person to see the fire and at once gave alarm. It should be
noted that the fire did not originate in that part of the
bagasse which was lying in closest proximity to the
stoking-stands but a little distance away where it was
unnoticed by the stokers.
When Felipe Beldua left the camarin, two of his
assistants remained on duty, and the evidence shows that
other employees, such as the stokers, machine-cleaners,
and sugar boilers, were busy at work. The stoker Lucas
Bendado was on duty at the cabcacan immediately in front
of the opening of the furnaces at the time the fire occurred.
Amando Ereneta, who was first in charge of the camarin at
the time, was employed by the plaintiff to look after the
animals, and his duties were not such as to require him to
be continually inside the camarin.
Soon after the fire the plaintiff informed the
defendant of the calamity and made demand upon him for
the reconstruction of the camarin. The defendant refused
to recognize the existence of any obligation on his part to
reconstruct the camarin, insisting that the plaintiff, being
the lessee, and not himself, as lessor, was responsible for
55
trial court found that the fire which destroyed the camarin
was of unknown and accidental origin and that no fault or
negligence was attributable to the plaintiff in regard
either to the conditions antecedent to the fire or the
manner in which the flames were resisted. He was,
therefore, of the opinion that the loss caused by the fire
was due to casus fortuitus, for the consequences of which
no one was responsible.
Issue: Whether a loss of a thing under lease which could
not have been prevented should be borne by the lessee.
Whether the loss of a thing deposited which could not
have been prevented should be borne by depositary.
we find nothing to the contrary in the Spanish Civil
Code. Article 1183 declares that when a thing is lost
while in the possession of the debtor it shall be
presumed that the loss occurred by his fault and not by
fortuitous event in the absence of proof to the
contrary. But where it is found, and the fact is
indisputable, this is equivalent to a finding that the
fire was not attributable to the fault of the defendant
and negatives every idea of negligence on its part with
reference to the origin of the fire. This was casus
fortuitus such as to exempt the defendant from
liability. Article 1183

Held: No. No. Affirmed, but award for damages reversed.

Ratio: It must be admitted that when a loss of the leased

property occurs, there is a presumption against the lessee,
which makes him responsible, in the absence of proof that
the loss happened without his fault. But the question
whether there has been fault on his part must be
determined in relation with other provisions of the Civil
Code as well as in the light of the general principles of
jurisprudence. Under article 1561 of the Civil Code the
lessee of lands is not responsible for a loss resulting
from inevitable cause; and in article 1106 the general rule
is declared that, in the absence of express provision to the
contrary, no one is liable for events which cannot be
foreseen or which, if foreseen, are inevitable.
As applied to the case before us we are of the
opinion that when the trial court found that reasonable
precautions had been taken by the lessee to prevent fires,
but that nevertheless fire did occur, of inscrutable origin,
which destroyed, the camarin in spite of all that could be
done to prevent it, this is equivalent to a finding that
the lessee was without fault and that the loss was in fact
due to an inevitable cause. In other words the
presumpting against the lessee is overcome by proving
that the usual and proper care was used to protect the
leased property from fire.
Upon principle the responsibility of the lessee
for the property leased is substantially the same as
that of a person who has possession of movable
property belonging to another, as in the case of
bailment. It is a well known fact in legal history that
the doctrines of English law applicable to the bailment
of chattels are in great part identical with those
developed by the civil law of Rome, of which indeed
the English doctrines may be considered mere
emanations. In bailment ordinary care and diligence
are required of the bailee and he is not liable for the
inevitable loss or destruction of the chattel, not
attributable to his fault. If while the bailment
continues, the chattel is destroyed, or stolen, or
perishes, without negligence on the bailee's part, the
loss, as in other hirings, falls upon the owner, in
accordance with the maxim res perit domino. Upon
this point the civil and common law are agreed; and
56
must be construed in relation with the next preceding a fire broke out in said warehouse which at that time
article (1182), which says that the obligation to contained thousands of cavanes of palay, the exact number
deliver a thing is extinguished when the thing is being disputed, and 568 cavanes outside. 1,052 cavanes
destroyed without the fault of the debtor. of palay stored in the warehouse were saved, and that the
We now pass to the consideration of a special 568 cavanes of palay outside of the warehouse were all
clause found in the contract of lease (paragraph 4, [b] ), saved.
declaring that the lessee shall be obliged, upon his own Of the 1,052 cavanes saved from the warehouse,
account and risk, to make all repairs upon the 170 were distributed by way of remuneration among those
improvements existing on the haciendas which were the who helped to save them. The remaining 882 cavanes of
subject of the lease, and to bear the expense of the same palay were hulled and sold, yielding the net sum of
without right to reimbursement. P2,238.98.
The obligation fixed upon the lessee by the
special provision of the contract is also limited to repairs
(composiciones). From an examination of the two
provisions it is evident that the two different Spanish
words used in the sense of repairs (reparaciones,
composiciones) are exactly equivalent; and it is seen that
the obligation imposed by the code on the lessor is
transferred by the contract to the lessee. In both cases,
however, the obligation is limited to the making of repairs,
which is a very different thing from reconstruction in case
of total loss. The Spanish terms "reparaciones" and
"composiciones," like the English word "repairs" in its
ordinary acceptation, must be understood to apply to the
restoration of things after injury or partial destruction,
without complete loss of identity in the thing repaired. (34
Cyc., 1336, 1337.)
In subsection (d) of paragraph 4 of the contract it
is declared to be the duty of the lessee to maintain the
improvements on the haciendas in good condition and to
deliver them in the same state to the lessor upon the
termination of the lease. This is merely a statement of the
obligation imposed by law generally upon all lessees; and
the duty thus defined is to be understood as subject to
the limitations and exceptions recognized by law. There
is nothing in this provision which deprives the lessee of
the defense arising from the destruction of the property
without his fault.
It results in our opinion that there was no positive
duty on the part of either the lessor or lessee to
reconstruct the camarin after it had been totally destroyed
by fire; neither can therefore be held liable to the other for
any damages which may supposedly have resulted from
the failure to reconstruct. The judgment of the trial
court must therefore be modified by eliminating the item
of P1,736.01, which was awarded to the plaintiff as
damages for the failure of the defendant to promptly
reconstruct the camarin.

La Sociedad Dalisay vs. Januario de los Reyes, G.R. No.

32465, December 20, 1930 (55 Phil 452)

Facts: The entity known as "Dalisay" is an industrial

partnership legally existing, located in the municipality of
Santa Rosa, Laguna, P. I. Prior to May 20, 1923, said
partnership received in its warehouse located at the place
mentioned, certain lots of palay belonging to several
persons. Early on the morning of that day, May 20, 1923,
57
 On October 3, 1924, Ramon Bartolazo brought judgment appealed from is affirmed without express
an action against the "Sociedad Dalisay" for the return pronouncement of costs. So ordered.
of 1,158 cavanes of palay and 27 cavanes of rice or the
value thereof, amounting to P6,073.50, plus P1,500 as AnicetaPalaciovs.DionisioSudario,G.R.No.2980,January
damages, and the costs. The Dalisay denied the charge. 2,1907(7Phil275)
On February 18, 1926, the "Dalisay" brought an action
against Januario de los Reyes in the same court for the Facts: The plaintiff made an arrangement for the
return of the goods or, in default thereof, for the payment pasturing of eighty-one head of cattle, in return for which
of their cash value. In this latter case, Domingo Zavalla she was to give one-half of the calves that might be born
filed a third- party claim against the plaintiff entity and and was to
the defendant Januario de los Reyes, praying that the
"Dalisay" be ordered to deliver to him the palay
belonging to him according to the books of said entity, or,
in lieu thereof, its value at P5 per cavan, with legal
interest and that Januario de los Reyes be ordered to
render an account of the palay sold, and to deliver to him
the balance according to the account to be rendered.
The trial court failed to find that the fire was
intentional, or was caused by the negligence of the
officials of the plaintiff company, and from these findings
no appeal proper in form has been taken, for which
reason, they must be accepted as indisputable.
Nonetheless, the Dalisay was ordered to deliver to the
depositors their proportionate share of the palay which
was stored in the warehouse at the time of the fire.

Issue: Whether a depositary is liable for the loss of the

deposit due to fire which broke out without any fault or
negligence on its part.

Held: No. Modified.

Ratio: It is contended that the appellant has not alleged

that the palay burned was destroyed without negligence
on its part. The fact is, the appellant in its special defense
alleged that the palay was burned. There was no need to
make such an allegation for the presumption is that every
person is deemed innocent of crime or wrong, and that he
takes ordinary care of his own concerns.
As to the trial court not having found the fire in
question to be intentional, or the result of negligence on
the appellant's part, the evidence supports the said court's
finding, in that it does not show sufficiently that the fire
was intentional or was due to negligence on the part of the
"Dalisay" partnership, or of the manager Perlas.
Wherefore, the judgment appealed from is
modified absolving the appellant company from
distributing or returning to the appellees any quantity
of palay, or the value thereof, except that saved from the
fire, amounting to P2,238.98, which sum is to be
distributed by said company among the depositors
mentioned in the dispositive part of the judgment, in
proportion to the amount of palay which each of them had
in the warehouse at the time of the fire; and this
distribution shall be made as soon as Januario de los
Reyes delivers to said appellant partnership, without any
deduction, the aforesaid sum of P2,238.98, comprising the
net proceeds of the palay saved. In all other respects the
58
pay the defendant one-half peso for each calf branded. On bank by the military authorities by virtue of such order,
demand for the whole, forty- eight head of cattle were was confiscated and turned over to the Government.
afterwards returned to her and this action is brought to The plaintiff filed this case to recover the
recover the remaining thirty-three. confiscated money from the estate of Fr. de la Pea. The
It is claimed as a defense that the thirty-three lower court ruled for the plaintiff.
cows either died of disease or were drowned in a flood.
As to this point, on which the trial court has made no Issue: Whether the depositary is liable for unforeseeable
specific finding, the proof is conflicting in many and inevitable events that lead to the loss of the thing
particulars and indicates that at least some of these deposited.
cattle were living at the time of the surrender of the
forty-eight head. The defendant's witnesses swore that of
the cows that perished, six die from overfeeding, and they
failed to make clear the happening of any flood sufficient
to destroy the others. The lower court ruled for the
plaintiff.

Issue: Whether the depositary has the burden of

explaining the loss of the thing deposited.

Held: Yes. Affirmed.

Ratio: If we consider the contract as one of deposit, then

under article 1183 of the Civil
Code, the burden of explanation of the loss rested upon
the depositary and under article
1769 the fault is presumed to be his. The defendant has not
succeeded in showing that the loss occurred either without
fault on his part or by reason of caso fortuito.
If, however, the contract be not one strictly of
deposit but one according to local custom for the pasturing
of cattle, the obligations of the parties remain the same.

The Roman Catholic Bishop of Jaro vs. Gregorio de la

Pea, administrator of the estate of Fr. Agustin de la
Pea, G.R. No. 6913, November 21, 1913 (26 Phil 144)

Facts: The plaintiff is the trustee of a charitable bequest

made for the construction of a leper hospital, and Father
Agustin de la Pea was the duly authorized
representative of the plaintiff to receive the legacy. The
defendant is the administrator of the estate of Father De
la Pea. In the year 1898, the books of Father de la Pea,
as trustee, showed that he had on hand as such trustee the
sum of P6,641, collected by him for the charitable
purposes aforesaid. In the same year, he deposited in his
personal account P19,000 in the Hongkong and Shanghai
Bank at Iloilo. Shortly thereafter and during the war of the
revolution, Father dela Pea was arrested by the
military authorities as a political prisoner, and while
thus detained made an order on said bank in favor of
the United States Army officer under whose charge he then
was so for the sum thus deposited in said bank. The arrest
of Father de la Pea and the confiscation of the funds in
the bank were the result of the claim of the military
authorities that he was an insurgent and that the funds
thus deposited had been collected by him for
revolutionary purposes. The money was taken from the
59
 showed that in 1898 he had in his possession as trustee or
Held: No. Reversed. agent the sum of P6,641 belonging to the plaintiff as the
head of the church. This money was then clothed with all
Ratio: The branch of the law know in England and the immunities and protection with which the law seeks to
America as the law of the trusts had no exact counterpart invest trust funds. But when De la Pea mixed this trust
in the Roman law and is more has none under the fund with his own and deposited the whole in the bank to
Spanish law, In this jurisdiction, therefore, Father dela his personal account or credit, he, by this act, stamped on
Pea's liability is determined by those portions of the Civil the said funds his own private marks and unclothed it of all
Code which relate to obligations (Book 4, Title 1.) the protection it had. If this money had been deposited in
Although the Civil Code states that a "person the name of De la Pea as trustee of agent of
obliged to give something is also bound to preserve it
with the diligence pertaining to a good father of a
family" (art.
1094), it also provides, following the principle of the
Roman law, major casus est, cui humana infirmitas
resistere non potest, that "no one shall be liable for events
which could not be foreseen, or which having been
foreseen were inevitable, with the exceptions of the cases
expressly mentioned in the law of those in which the
obligation so declares." (Art. 1105).
By placing the money in the bank and mixing it
with his personal funds, De la Pea did not thereby
assume an obligation different from that under which he
would have lain if such deposit had not been made, nor
did he thereby make himself liable to repay the money at
all hazards. If the money had been forcibly taken from his
pocket or from his house by the military forces of one of
the combatants during a state of war, it is clear that under
the provisions of the Civil Code he would have been
exempt from responsibility. The fact that he placed the
trust fund in the bank in his personal account does not add
to his responsibility. Such deposit did not make him a
debtor who must respond at all the hazards.
We do not enter into a discussion for the purpose
of determining whether he acted more or less negligently
by depositing the money in the bank than he would if had
left it in his home: or whether he was more or less
negligent by depositing the money in his personal account
than he would have been if had deposited it in a
separate account as trustee. We regard such discussion as
substantially fruitless, inasmuch as the precise question is
not one of the negligence. There was no law prohibiting
him from depositing it as he did and there was no law
which changed his responsibility by reason of the deposit.
While it may be true that one who is under obligation to do
or give a things is duty-bound, when he sees events
approaching the results of which will be dangerous to his
trust, to take all reasonable means and measures to
escape or, if unavoidable, to temper the effects of those
events, we do not feel constrained to hold that, in choosing
between two means equally legal, he is culpably negligent
in selecting one whereas he would not have been if he had
selected the other.

Trent, dissenting: Technically speaking, whether Father De

la Pea was a trustee or an agent of the plaintiff his books
showed that in 1898 he had in his possessions as trustee or
agent or a trustee or an agent of the plaintiff his books
60
the plaintiff, I think that it may be presumed that the Sergio Aguirre, and the Pugaos then rented Safety Deposit
military authorities would not have confiscated it for the Box No. 1448 of private respondent Security Bank and
reason that they were looking for insurgent funds only. Trust Company, a domestic banking corporation. For this
Again, the plaintiff had no reason to suppose that De la purpose, both signed a contract of lease which contains
Pea would attempt to strip the fund of its identity, not the condition that the bank is not a depositary of the
had he said or done anything which tended to relieve De la contents of the safe and it has neither the possession nor
Pea from the legal responsibility which pertains to the control of the same and that the bank has no interest
care and custody of trust funds. whatsoever in said contents, except herein expressly
The Supreme Court of the United States in United States provided, and it assumes absolutely no liability in
vs. Thomas (82 U.S., connection therewith.
337), at page 343, said: "Trustees are only bound to After the execution of the contract, two (2) renter's keys
exercise the same care and solicitude with regard to their were given to the renters
own. Equity will not exact more of them. They are not one to Aguirre (for the petitioner) and the other to the
liable for a loss by theft without their fault. But this Pugaos. A guard key remained in the possession of the
exemption ceases when they mix the trust money with respondent Bank. The safety deposit box has two (2)
their own, whereby it loses its identity, and they become keyholes, one for the guard key and the other for the
mere debtors." renter's key, and can be opened only with the
If De la Pea, after depositing the trust fund in his
personal account, had used this money for speculative
purposes, such as the buying and selling of sugar or other
products of the country, thereby becoming a debtor,
there would have been no doubt as to the liability of his
estate. Whether he used this money for that purpose the
record is silent, but it will be noted that a considerable
length of time intervened from the time of the deposit
until the funds were confiscated by the military
authorities. In fact, the record shows that De la Pea
deposited on June 27, 1898, P5,259, on June 28 of that
year P3,280, and on August 5 of the same year P6,000.
The record also shows that these funds were
withdrawn and again deposited all together on the 29th of
May, 1900, this last deposit amounting to P18,970. These
facts strongly indicate that De la Pea had as a matter of
fact been using the money in violation of the trust imposed
in him.

CA Agro-Industrial Development Corporation vs. CA

& Security Bank and Trust
Company, G.R. No. 90027, March 3, 1993 (219 SCRA
426)

Facts: On 3 July 1979, petitioner (through its President,

Sergio Aguirre) and the spouses Ramon and Paula Pugao
entered into an agreement whereby the former purchased
from the latter two (2) parcels of land for a consideration
of P350,625.00. Of this amount, P75,725.00 was paid as
downpayment while the balance was covered by three (3)
postdated checks. Among the terms and conditions of the
agreement embodied in a Memorandum of True and
Actual Agreement of Sale of Land were that the titles to
the lots shall be transferred to the petitioner upon full
payment of the purchase price and that the owner's copies
of the certificates of titles thereto, Transfer Certificates of
Title (TCT) Nos. 284655 and 292434, shall be deposited
in a safety deposit box of any bank. The same could be
withdrawn only upon the joint signatures of a
representative of the petitioner and the Pugaos upon full
payment of the purchase price. Petitioner, through
61
use of both keys. Petitioner claims that the certificates of
title were placed inside the said box.
Thereafter, a certain Mrs. Margarita Ramos
offered to buy from the petitioner the two (2) lots at a
price of P225.00 per square meter which, as petitioner
alleged in its complaint, translates to a profit of P100.00
per square meter or a total of P280,500.00 for the entire
property. Mrs. Ramos demanded the execution of a deed of
sale which necessarily entailed the production of the
certificates of title. In view thereof, Aguirre, accompanied
by the Pugaos, then proceeded to the respondent Bank on 4
October 1979 to open the safety deposit box and get the
certificates of title. However, when opened in the presence
of the Bank's representative, the box yielded no such
certificates. Because of the delay in the reconstitution of
the title, Mrs. Ramos withdrew her earlier offer to
purchase the lots; as a consequence thereof, the petitioner
allegedly failed to realize the expected profit of
P280,500.00.
A complaint for damages was filed.
American jurisprudence. We agree with the petitioner
that under the latter, the prevailing rule is that the relation
between a bank renting out safe- deposit boxes and its
customer with respect to the contents of the box is that of
a bailor and bailee, the bailment being for hire and mutual
benefit.
There is, however, some support for the view that
the relationship in question might be more properly
characterized as that of landlord and tenant, or lessor and
lessee. It has also been suggested that it should be
characterized as that of licensor and licensee. The relation
between a bank, safe-deposit company, or storage
company, and the renter of a safe-deposit box therein, is
often described as contractual, express or implied, oral or

It was dismissed by the trial court.

CA
affirmed.

Issue: Whether the rental of a safety deposit box is a

contract of deposit.

Held: Yes. Affirmed.

Ratio: We agree with the petitioner's contention that the

contract for the rent of the safety deposit box is not an
ordinary contract of lease as defined in Article 1643 of the
Civil Code. However, We do not fully subscribe to its
view that the same is a contract of deposit that is to be
strictly governed by the provisions in the Civil Code on
deposit. The contract in the case at bar is a special kind of
deposit. It cannot be characterized as an ordinary contract
of lease under Article 1643 because the full and
absolute possession and control of the safety deposit box
was not given to the renters the petitioner and the
Pugaos. The guard key of the box remained with the
respondent Bank; without this key, neither of the renters
could open the box. On the other hand, the respondent
Bank could not likewise open the box without the renter's
key. In this case, the said key had a duplicate which was
made so that both renters could have access to the box.
Neither could Article 1975, also relied upon by
the respondent Court, be invoked as an argument against
the deposit theory. Obviously, the first paragraph of
such provision cannot apply to a depositary of
certificates, bonds, securities or instruments which earn
interest if such documents are kept in a rented safety
deposit box. It is clear that the depositary cannot open the
box without the renter being present.
We observe, however, that the deposit theory
itself does not altogether find unanimous support even in
62
written, in whole or in part. But there is apparently no Bank cooperates by presenting and using this guard
jurisdiction in which any rule other than that applicable key. Clearly then, to the extent above stated, the
to bailments governs questions of the liability and foregoing conditions in the contract in question are void
rights of the parties in respect of loss of the contents of and ineffective.
safe-deposit boxes. The petition is, nonetheless, dismissed on
In the context of our laws which authorize grounds quite different from those relied upon by the
banking institutions to rent out safety deposit boxes, it is Court of Appeals. In the instant case, the respondent
clear that in this jurisdiction, the prevailing rule in the Bank's exoneration cannot, contrary to the holding of the
United States has been adopted. Section 72 of the General Court of Appeals, be based on or proceed from a
Banking Act pertinently provides that banks may receive characterization of the impugned contract as a contract of
in custody funds, documents, and valuable objects, and lease, but rather on the fact that no competent proof
rent safety deposit boxes for the safeguarding of such was presented to show that respondent Bank was aware
effects. The banks shall perform the services of the agreement between the petitioner and the Pugaos
permitted under subsections (a), (b) and (c) of this section to the effect that the certificates of title were withdrawable
as depositories or as agents. from the safety deposit box only upon both parties' joint
Note that the primary function is still found within signatures, and that no evidence was submitted to
the parameters of a contract of deposit, i.e., the receiving reveal that the loss of the
in custody of funds, documents and other valuable objects
for safekeeping. The renting out of the safety deposit
boxes is not independent from, but related to or in
conjunction with, this principal function. A contract of
deposit may be entered into orally or in writing and,
pursuant to Article 1306 of the Civil Code, the parties
thereto may establish such stipulations, clauses, terms and
conditions as they may deem convenient, provided they
are not contrary to law, morals, good customs, public
order or public policy. The depositary's responsibility for
the safekeeping of the objects deposited in the case at bar
is governed by Title I, Book IV of the Civil Code.
Accordingly, the depositary would be liable if, in
performing its obligation, it is found guilty of fraud,
negligence, delay or contravention of the tenor of the
agreement. In the absence of any stipulation prescribing
the degree of diligence required, that of a good father of
a family is to be observed. Hence, any stipulation
exempting the depositary from any liability arising from
the loss of the thing deposited on account of fraud,
negligence or delay would be void for being contrary to law
and public policy.
In the instant case, petitioner maintains that
conditions 13 and 14 of the questioned contract of lease
of the safety deposit box are void as they are contrary to
law and public policy. We find Ourselves in agreement
with this proposition for indeed, said provisions are
inconsistent with the respondent Bank's responsibility
as a depositary under Section 72(a) of the General
Banking Act. Both exempt the latter from any liability
except as contemplated in condition 8 thereof which limits
its duty to exercise reasonable diligence only with respect
to who shall be admitted to any rented safe.
Furthermore, condition 13 stands on a wrong premise and
is contrary to the actual practice of the Bank. It is not
correct to assert that the Bank has neither the possession
nor control of the contents of the box since in fact, the
safety deposit box itself is located in its premises and is
under its absolute control; moreover, the respondent Bank
keeps the guard key to the said box. As stated earlier,
renters cannot open their respective boxes unless the
63
certificates of title was due to the fraud or negligence of
the respondent Bank. This in turn flows from this Court's
determination that the contract involved was one of
deposit. Since both the petitioner and the Pugaos agreed
that each should have one (1) renter's key, it was
obvious that either of them could ask the Bank for access
to the safety deposit box and, with the use of such key and
the Bank's own guard key, could open the said box, without
the other renter being present.
Elcoxvs.Hill,98US218(1878)
valuables, unless such loss shall occur by the hand or
through the negligence of the landlord, clerk or servant
employed by him.
For purpose of safekeeping the valuables of
guests, the hotel had a very large vault which was in
plain sight at the counter. The coat room was only
intended for the reception of ordinary valises, coats,
umbrellas, and not for valuables or jewelry.
Evidence showing that hotel employee William
Drum had stolen the jewelries was objected to and
excluded during the trial.

Facts: Elcox and Larter were manufacturing jewelers,

doing business at Newark, New Jersey. Larter left home
for a tour through several Western cities, with some
$6,300 worth of jewelry which was contained in 2 bags
or satchels one a large leather bag containing $5,300
worth of solid gold jewelry and the other a small satchel
containing
$1,000 worth of jewelry. The smaller bag was not locked
and had no key.
On arriving at the hotel, Larter asked for a room,
but one could not be assigned to him for some 3-4 hours.
During the time he was waiting, he placed his bags in the
coat room and received a check therefore. Between 12-2, a
room was assigned to him, and his baggage was taken from
the coat room and carried up to the room. When coming
down for dinner, Larter gave the key to his room to the
bellboy and directed him to go up and bring down his
bags to the coat room again. He then received a coat
room check after dinner. He saw the bags in the coat
room 2 or 3 times after that before he went to bed
around 10pm. The boy in charge of the coat room,
William Drum, voluntarily told him that his bags were
perfectly safe.
The next day, Larter asked for his bags, but only
the small one could be found. The jewelry inside had been
stolen. Larter did not inform the hotel of the contents of
the bags, and he did not ask to have the bags placed in the
safe. At the top of the page of the register where he wrote
his name on entering the hotel were printed the words:
Money, jewels, and valuable property must be placed
in the safe in the office, otherwise the proprietor will
not be responsible for any loss. On the door of his
room and every other room were a printed notice
saying that All guests of the house are cautioned
against leaving money, jewels, or valuables of any
description in their rooms, as the proprietor will not
be responsible for them if stolen. Money or valuables,
properly labelled, must be deposited in the safe at
the office. Furthermore, the statute of the State of
Illinois entitled An Act for the protection of innkeepers
provides that hotels shall keep notices posted at
conspicuous places in the hotel that guests and
customers must leave their money, jewelry, and other
valuables with the landlord, agent or clerk for safekeeping
and that hotels that comply with these requirements shall
not be liable for the loss of such money, jewelry or
64
Issue: Whether a hotel is liable for the loss of valuables of the availability of hotel safety deposit boxes for her
which were not made known to it and which were not valuables, but saw no such notice. Mr. Ippolito also
properly deposited to it as stated in the notices posted in testified he did not see any notice of the availability of
conspicuous places. safety deposit boxes posted in the room; however, he
admitted that if such notice was posted, he may have
overlooked it. Despite not seeing a notice in the room,
Held: No. Judgment affirmed.
Mr. Ippolito testified he was aware that Innkeeper
provided safety deposit boxes, but he chose not to
Ratio: There can be but little doubt that the goods of the request a box from the Innkeeper because he felt that the
plaintiffs were stolen from them while one of them was at less anybody knew what he had, the better.
the hotel of the defendant, in the city of Chicago. They
insist thereupon that their loss shall be made good; but
it does not follow, because they met with a loss, that they
can recover the amount from him.
The defendant contends that he is exempt from
liability for money, jewels, and the like, unless his guest
who lost them complied with the statute of Illinois on that
subject. Where a safe for the keeping of such articles is
provided by the hotelkeeper, and the notice given as
required by the statute, a loser failing to take the benefit of
the protection thus furnished him must bear his own loss.
To this rule the statute makes one exception. If the loss
occurs 'by the hand or through the negligence of the
landlord, or by a clerk or servant employed by him in such
hotel or inn,' the liability remains.
It is settled by the authorities that where the loss
is occasioned by the personal negligence of the guest
himself, the liability of the innkeeper does not exist. The
court refused to receive evidence that William Drum
had admitted that he had stolen the jewelry in
question. If he was guilty of the offence, the fact should
have been established by due proof. If he were on trial
himself, his admission would be competent, but upon no
principle could he admit away the rights of another person.

Ippolito vs. Hospitality Management, South Carolina C.A.,

No.3586,2003

Facts: While traveling from Florida to Connecticut, Mr.

and Mrs. Ipppolito stopped in Walterboro, South Carolina
and paid for a room at a Holiday Inn. At the hotel, Mr.
Ippolito signed a registration card on which was written,
The management is not responsible for any valuables
not secured in safety deposit boxes provided at the
front office. In addition to the language on the
registration card, notice that the hotel had safety deposit
boxes available for guests valuables was also printed on
the pouch that enclosed the key-card to the Ippolitos
room.
After bringing their luggage to the room, the
Ippolitos walked to a nearby restaurant, and they
returned approximately forty minutes later. Upon their
return, they noticed that pieces of their luggage, which
contained jewelry valued at over $500,000 and
approximately $8,000 in cash, were missing.
The Ippolitos sued the hotel. At trial, Mrs.
Ippolito testified that, prior to the disappearance of their
belongings, she looked around the hotel room for notice

65
 The hotel provided the testimony of its
employees and a security expert on its security
procedures and its dedication to adhering to those
procedures, particularly for providing guests with notice
of the availability of safety deposit boxes. On cross-
examination of the security expert, he was asked about
past security problems at Innkeepers hotel in which
Innkeepers employees spied on guests through
peepholes. The expert replied that he was not aware of
those prior incidents.
The jury awarded the Ippolitos $350,000 in
actual damages. However, the jury found that the
Ippolitos were forty percent comparatively negligent,
and reduced the award to $210,000.
646)
Facts: On March 31, 1959, the Court of First Instance of
Manila, in its Civil Case No.
36525, rendered a decision ordering the City of Baguio to
pay the National Power Corporation various sums of
money totalling P240,000.00 representing the unpaid
electric charges, and rentals for the lease of two electric
generators, etc. The aforesaid decision having become
final, the court of Manila granted on June 4, 1959, the
National

Issue: Whether the hotel is liable for losses when the

guests were unable to see posted notices that valuables
must be deposited.

Held: Yes. Affirmed.

Ratio: The Ippolitos testified that neither of them saw any

conspicuously posted notice in their room indicating that
the hotel had safety deposit boxes available in which they
could store their valuables. Although testimony from
Officer Sadler, as well as several of Innkeepers current
and former employees, contradicts this evidence, the
existence of conflicting evidence precludes us from
finding as a matter of law that Innkeeper complied
with the statute. The jury implicitly found that Innkeeper
failed to comply with the statutes notice requirements.
Thus, Innkeeper cannot avail itself of the statutes
protection from liability, regardless of whether its
actions contributed to the Ippolitos loss.
Because we find the Innkeeper offered evidence
concerning the quality of its security, we cannot say as a
matter of law that the trial court erred in admitting
evidence contradicting this testimony. We find no
evidence in the record indicating that Innkeeper suffered
any prejudice from the Ippolitos two questions
concerning Booths knowledge of the peephole incidents
or his negative responses.

Concurring Opinion: In arguing its post trial motions,

Innkeeper urged the court to consider Mr. Ippolitos
actual knowledge of the availability of safety deposit
boxes. However, to fall within the protections of the
Innkeepers Statute, the notice innkeepers post must
inform guests that they are required to place their
jewels and money in the innkeepers safe. Here, Mr.
Ippolito only admitted to knowing that Innkeeper had a
safe available; he did not admit to knowing he was
required to place his money and jewelry in that safe.

National Power Corporation vs. Judge Jesus de Veyra,

CFI Baguio City & City of
Baguio, G.R. No. L-15763, December 22, 1961 (3 SCRA
66
Power Corporation's motion for execution. A writ was court's jurisdiction by issuing the writ of preliminary
issued, addressed to the Sheriff of Baguio City to levy injunction and assuming cognizance of the complaint
execution on the property of above respondent Baguio City presented before it.
to satisfy the judgment. Such Sheriff, in compliance with The reason advanced by the respondent court of
the writ, garnished on June 8, 1959, the amount of Baguio City that it should grant relief when "there is
P239,589.80 out of the cash deposits of Baguio City in the apparently an illegal service of the writ" (the property
possession of the Baguio Branch of the Philippine National garnished being allegedly exempt from execution) may
Bank. not be upheld, there being a better procedure to follow,
Whereupon on June 12, 1959, Baguio City filed i.e., a resort to the Manila court, wherein the remedy may
against herein petitioner National Power Corporation, the be obtained, it being the court under whose authority
Philippine National Bank and the said Sheriff, in the the illegal levy had been made.
Court of First Instance of Baguio City, a complaint (Civil
Case No. 866) praying that all the acts of said defendants
relative to the garnishment of the cash deposits with
the defendant Philippine National Bank, be declared
illegal, that said defendants be permanently restrained
from performing acts in furtherance of the said
garnishment, and that they be ordered to pay damages.
On the same date, June 12, 1959, above respondent
court of Baguio City issued a preliminary mandatory
injunction ordering above petitioner corporation, the
Philippine National Bank, the Sheriff and others acting in
their behalf to restore and maintain the status quo of
respondent corporation's bank deposits.
Petition for certiorari was filed.

Issue: Whether property which has been levied upon in

a garnishment proceedings by one court, may be subject
to the jurisdiction of another court in an independent suit
impugning the legality of said garnishment.

Held: No. Petition Granted.

Ratio: The garnishment of property to satisfy a writ of

execution "operates as an attachment and fastens upon
the property a lien by which the property is brought
under the jurisdiction of the court issuing the writ." It is
brought into custodia legis, under the sole control of such
court. Property is in the custody of the court when it has
been seized by an officer either under a writ of attachment
on mesne process or under a writ of execution. A court
which has control of such property, exercises exclusive
jurisdiction over same. No court, except one having a
supervisory control or superior jurisdiction in the
premises, has a right to interfere with and change that
possession.
We have followed and applied this principle of
procedure. Thereby conflict of power is avoided between
different courts of coordinate jurisdiction. We have
invariably held that no court has authority to interfere by
injunction with the judgments or decrees of a court of
concurrent or coordinate jurisdiction having equal power
to grant the relief sought by injunction.
The property involved in Civil Case No. 866, is
property in custodia legis of the Court of First Instance of
Manila, it having been garnished to satisfy a writ of
execution duly issued by the said court. Respondent
Baguio court should not have interfered with the Manila
67
Needless to say, an effective ordering of legal
relationships in civil society is possible only when each Held: No. Reversed.
court is granted exclusive jurisdiction over the property
brought to it. To allow coordinate courts to interfere with Ratio: We think the court below erred in proceeding with
each other's judgments or decrees by injunctions, would the case against the guarantor while the proceedings
obviously lead to confusion and might seriously hinder were suspended as to the principal. The guaranty in the
the proper administration of justice. present case was for a future debt of unknown amount
and even regarding the guaranty as an
Romulo Machetti vs. Hospicio de San Jose & Fidelity
& Surety Company of the
Philippine Islands, G.R. No. L-16666, April 10, 1922 (43
Phil 297)

Facts: Romulo Machetti, by a written agreement,

undertook to construct a building on Calle Rosario in the
city of Manila for the Hospicio de San Jose, the contract
price being P64,000. One of the conditions of the
agreement was that the contractor should obtain the
"guarantee" of the Fidelity and Surety Company of the
Philippine Islands to the amount of P12,800 and the
following endorsement in the English language appears
upon the contract: "For value received we hereby
guarantee compliance with the terms and conditions as
outlined in the above contract.
Machetti constructed the building under the
supervision of architects representing the Hospicio de San
Jose and, as the work progressed, payments were made to
him from time to time upon the recommendation of the
architects, until the entire contract price, with the
exception of the sum of P4,978.08, was paid. Subsequently
it was found that the work had not been carried out in
accordance with the specifications which formed part of
the contract and that the workmanship was not of the
standard required, and the Hospicio de San Jose therefore
refused to pay the balance of the contract price. Machetti
thereupon brought this action. Hospicio de San Jose
answered the complaint and presented a counterclaim for
damages for the partial noncompliance with the terms of
the agreement above mentioned, in the total sum of
P71,350. After issue was thus joined, Machetti, on petition
of his creditors, was declared insolvent, and an order was
entered suspending the proceeding in the present case in
accordance with section 60 of the Insolvency Law, Act No.
1956.
The Hospicio de San Jose on January 29, 1919,
filed a motion asking that the Fidelity and Surety Company
be made cross-defendant to the exclusion of Machetti and
that the proceedings be continued as to said company, but
still remain suspended as to Machetti. This motion was
granted, and Hospicio filed a complaint against the
Fidelity and Surety Company asking for a judgment for
P12,800 against the company upon its guaranty. After
trial, the Court of First Instance rendered judgment
against the Fidelity and Surety Company.

Issue: Whether a guarantor can be held liable for an

obligation of a debtor who is under insolvency
proceedings
68
ordinary fianza under the Civil Code, the surety cannot be This sum of money was made payable, first, P40,000 in
held responsible until the debt is liquidated. cash upon the execution of the document of compromise,
But in this instance the guarantor's case is even and the balance in three several payments of P20,000 at
stronger than that of an ordinary surety. The contract of the end of one year, two years, and three years
guaranty is written in the English language and the respectively. To this contract the appellant Enrique
terms employed must of course be given the signification Echaus affixed his name as guarantor. The first payment of
which ordinarily attaches to them in that language. In P40,000 was made on July 11, 1924, the date when the
English the term "guarantor" implies an undertaking of contract of compromise was executed; and of this amount
guaranty, as distinguished from suretyship. It is very true the plaintiff Fabiola Severino received the sum of P10,000.
that notwithstanding the use of the words "guarantee" or Of the remaining P60,000, all as yet unpaid, Fabiola
"guaranty" circumstances may be shown which convert Severino is entitled to the sum of P20,000.
the contract into one of suretyship but such circumstances
do not exist in the present case: on the contrary it appears
affirmatively that the contract is the guarantor's separate
undertaking in which the principal does not join, that it
rests on a separate consideration moving from the
principal and that although it is written in continuation of
the contract for the construction of the building, it is a
collateral undertaking separate and distinct from the
latter. All of these circumstances are distinguishing
features of contracts of guaranty.
Now, while a surety undertakes to pay if the
principal does not pay, the guarantor only binds himself to
pay if the principal cannot pay. The one is the insurer of
the debt, the other an insurer of the solvency of the debtor.
This latter liability is what the Fidelity and Surety
Company assumed in the present case. The undertaking is
perhaps not exactly that of a fianza under the Civil Code,
but it is a perfectly valid contract and must be given the
legal effect it ordinarily carries. The Fidelity and Surety
Company having bound itself to pay only in the event its
principal, Machetti, cannot pay it follows that it cannot be
compelled to pay until it is shown that Machetti is unable
to pay. Such inability may be proven by the return of a
writ of execution unsatisfied or by other means , but is
not sufficiently established by the mere fact that he has
been declared insolvent in insolvency proceedings under
our statutes, in which the extent of the insolvent's
inability to pay is not determined until the final liquidation
of his estate.

Fabiola Severino, accompanied by her husband

Ricardo Vergara vs. Guillermo
Severino, et al., G.R. No. 34642, September 24, 1931
(56 Phil 185)

Facts: The plaintiff Fabiola Severino is the recognized

natural daughter of Melecio Severino, deceased, former
resident of Occidental Negros. Upon the death of
Melecio Severino a number of years ago, he left
considerable property and litigation ensued between his
widow, Felicitas Villanueva, and Fabiola Severino, on the
one part, and other heirs of the deceased on the other part.
In order to make an end of this litigation a compromise
was effected by which Guillermo Severino, a son of
Melecio Severino, took over the property pertaining to the
estate of his father at the same time agreeing to pay
P100,000 to Felicitas Villanueva and Fabiola Severino.
69
 It appears that at the time the compromise
agreement was executed Fabiola Severino had not yet Consuelo P. Piczon, Ruber O. Piczon & Aida P.
been judicially recognized as the natural daughter of Alcantara vs. Esteban Piczon & Sosing-Lobos & Co., Inc.,
Melecio Severino, and it was stipulated that the last G.R. No. L-29139, November 15, 1974 (61 SCRA 67)
P20,000 corresponding to Fabiola and the last P5,000
corresponding to Felicitas Villanueva should be retained Facts: Esteban Piczon, as President, of Sosing-Lobos & Co,
on deposit until the definite status of Fabiola Severino as Inc., as controlling stockholder, and as guarantor for the
natural daughter of Melecio Severino should be same, took out a loan for P12,500 to be used as surety
established. The judicial decree to this effect was entered cash deposit for registration with the SEC of the
in the Court of First Instance of Occidental Negros on June incorporation papers relative to the Sosing-Lobos and
16, 1925. Co., Inc. The amount was to be returned as soon as
This action was instituted in the Court of First the
Instance of the Province of Iloilo by Fabiola Severino,
with whom is joined her husband Ricardo Vergara, for the
purpose of recovering the sum of P20,000 from
Guillermo Severino and Enrique Echaus, the latter in
the character of guarantor for the former. The proof
shows that the money claimed in this action has never
been paid and is still owing to the plaintiff; and the only
defense worth noting in this decision is the assertion on
the part of Enrique Echaus that he received nothing for
affixing his signature as guarantor to the contract which is
the subject of suit and that in effect the contract was
lacking in consideration as to him. Upon hearing the
cause, the trial court gave judgment in favor of the
plaintiff's to recover the sum of P20,000 with lawful
interest, but it was declared that execution of this
judgment should issue first against the property of
Guillermo Severino, and if no property should be found
belonging to said defendant sufficient to satisfy the
judgment in whole or in part, execution for the remainder
should be issued against the property of Enrique Echaus as
guarantor. Guillermo did not appeal. Echaus appealed.

Issue: Whether a separate consideration from the

principal contract is necessary for the existence of a
guarantee

Held: No. Affirmed.

Ratio: A guarantor or surety is bound by the same

consideration that makes the contract effective between
the principal parties thereto. The compromise and
dismissal of a lawsuit is recognized in law as a valuable
consideration; and the dismissal of the action which
Felicitas Villanueva and Fabiola Severino had
instituted against Guillermo Severino was an adequate
consideration to support the promise on the part of
Guillermo Severino to pay the sums of money stipulated in
the contract which is the subject of this action. The
promise of the appellant Echaus as guarantor is therefore
binding. It is never necessary that a guarantor or surety
should receive any part of the benefit, if such there be,
accruing to his principal. But the true consideration of this
contract was the detriment suffered by the plaintiffs in the
former action in dismissing that proceeding, and it is
immaterial that no benefit may have accrued either to the
principal or his guarantor.
70
incorporation papers are duly registered and the Issue: Whether a subsidiary contract of guarantee must
Certificate of Incorporation is issued. The amount was be phrased in a certain formal manner. Whether
not returned. A case was filed. Sosing-Lobos & Co, Inc. acceptance is necessary for the perfection of a contract of
and Esteban Piczon, as guarantor, were found liable. guarantee.

Issue: Whether a person who is expressly designated as a Held: No. No. Affirmed.
guarantor can be held as a surety.

Held: No. Affirmed with modifications.

Ratio: Under the terms of the contract, Esteban Piczon

expressly bound himself only as a guarantor, and there are
no circumstances in the record from which it can be
deduced that his liability could be that of a surety. A
guaranty must be express, and it would be violative of the
law to consider a party to be bound as a surety when the
very word in the agreement is guarantor. Piczon bound
himself as an insurer.

Macondray & Company, Inc. vs Perfecto Pion, et al.,

G.R. No. L-13817, August 31,
1961 (2 SCRA 1110)

Facts: Upon representation and undertaking made by

Ruperto K. Kangleon, then a member of the Senate, in a
letter addressed to the plaintiff dated 30 January 1954,
that he would guarantee payment of his co-defendants'
obligation, should they fail to pay on the due date, the
plaintiff sold on credit and delivered to the defendants
Perfecto Pion and Conrado Piring, known in the
theater and entertainment business as "Tugak" and
"Pugak," respectively, and transacting business under a
common name known as "All Stars Productions," 127 rolls
of cinematographic films, F. G. release positive type. The
guarantee is phrased as follows: for which by their
guaranty I pledge payment. The principal debtors failed
to pay the amount owed by them on the due date. Upon
extensive investigations made by the plaintiff as to
whether the principal debtors have any property, real or
personal, which may be levied upon for the satisfaction of
their obligation, it has found that they have none.
Kangleon could not point to the plaintiff any property of
the principal debtors leviable for execution sufficient to
satisfy the obligation. The creditors filed a case to hold the
debtor and Kangleon jointly and severally liable.
Kangleon answered the plaintiff's complaint setting up the
defense that the letter he had written to the plaintiff was
only to introduce his co-defendants. Assuming that there
was an intent on his part to guarantee payment of his co-
defendant's obligation, the said letter was but an offer to
act as guarantor of his co-defendants which was not
accepted. The court ruled against the debtors and the
guarantor. The guarantor appealed. During the time
this appeal was pending in this Court the appellant died.
His heirs or their legal representative were directed to
appear in substitution for the deceased appellant.

71
Ratio: The appellant contends that although in the Had the appellant meant otherwise, he would have
stipulation of facts entered into by and between him and immediately denied that he ever guaranteed payment of
the appellee, he had admitted the liability of his co- the principal debtors' obligation. This he did not do.
defendants, who were declared in default, under the The appellant's very letter constitutes his
principle of res inter alios acta, that an admission by a undertaking of guaranty. "Contracts shall be obligatory
third person can not bind another, his admission cannot in whatever form they may have been entered into,
bind the defendants in default, and no judgment against provided all the essential requisites for their validity are
them may be rendered on the basis of the stipulation of present." A contract of guaranty is not a formal contract
facts referred to. Since the appellee had not established a and shall be valid in whatever form it may be, provided
case against the defendants in default, the principal that it complies with the statute of frauds.
debtors, it cannot directly hold liable the appellant, the The appellant insists that he should have been
guarantor, whose obligation is only subsidiary to that of notified by the appellee of the acceptance of his offer of
the former. guaranty. In the first place, his letter already constitutes
The appellant proceeds from the wrong premise his
that the case was submitted to the Court solely on the
stipulation of facts entered into by and between him and
the appellee. The records show that when the case was
called for trial on 30 August 1956, after the appellant's co-
defendants had been declared in default, the appellee
presented its evidence, testimonial and documentary,
against them, and thereby established their primary
liability.
The appellant claims that the letter is merely a
letter of introduction and does not constitute an offer of
guaranty. A cursory reading of the letter belies his
assertion. While in his opening sentence he says that "This
will introduce to you the bearers, Messrs. Conrado Piring
and Perfecto Pion," who "wish to place an order for"
cinematographic films, yet in the later part he says that
"for which by their guaranty I pledge payment." This can
only mean that he undertakes to guarantee payment of
the principal debtors' obligation should they fail to pay.
The appellant is a responsible man and may be presumed
to mean what he says. At that time, he was occupying the
exalted position of member of the Senate and his plighted
word given to another would immediately be accepted. It
is not, therefore, odd that upon receipt of the appellant's
letter, the appellee readily sold on credit to the principal
debtors, the defendants in default, the cinematographic
films in question.
That the appellant really meant to guarantee
payment of the principal debtors' obligation should they
default, is patent in his answer to the appellee's letter
dated 27
May 1954, reminding him that on 30 January he requested
it "to give Messrs. Conrado Piring and Perfecto Pion, of
"All Stars Productions', certain rolls of negative and
positive films, the cost of which was payable in three
months time and payment of which you guaranteed; that
the ''films were delivered and billed at P6,985.00 on Feb.
9th, last;" and that "the amount has not been paid (and)
we have difficulty locating the above gentlemen as they
cannot be found in their offices," and requesting the
appellant to send a check for the amount. In his answer to
the foregoing letter, dated 31 May 1954, he acknowledged
receipt of the appellee's letter of the 27th of the same
month and informed it that the principal debtors were
"being contacted to invite their attention to your letter."
72
undertaking of guaranty. In the second place, the contract
entered into by and between the appellee and the
defendants in default is the principal contract and the
contract entered into by and between the appellant and
the appellee is subsidiary to the principal contract. Since
the principal contract had already been perfected, the
subsidiary contract of guaranty became binding upon
effectivity of the principal contract. Hence no notice of
acceptance by the appellee to the appellant is necessary for
its validity.
Pacific Tobacco Corp. vs. Ricardo D. Lorenzana &
Visayan Surety & Insurance Corp. Visayan Surety &
Insurance Corp, cross claimant & 3 rd party, vs.
Ricardo D. Lorenzana, cross defendant, Calixto D.
Lorenzana, Jose M. Lorenzana & Benigno C. Gutierrez,
3rd party defendants, G.R. No. L-8086, October 31,
1957 (102 Phil 234)
defense that the bond could not be held liable for damages
and attorney's fees, that plaintiff Philippine Tobacco
Corporation was barred from presenting this action
against the surety due to laches, waiver of claim and
estoppel.
Ricardo D. Lorenzana denied the allegation of
the complaint that he refused or failed to pay the
plaintiff. He set up the defense that the agreement
was partially modified when plaintiffs agreed and allowed
him to sell the tobacco products not only in the City of
Manila and Rizal province but throughout the island of
Luzon. By virtue of such modifications, he sold plaintiff's
products in places as far as the northern provinces on
credit basis. On August 2, 1952, when defendant arrived
from his trip from the Ilocos regions, plaintiff terminated
his services on the ground that the corporation was
losing

Facts: Pacific Tobacco Corporation is engaged in the

business of manufacturing and distributing cigarettes,
cigars and other tobacco products. On January 16, 1952,
Ricardo D. Lorenzana and said corporation entered into a
distributorship agreement. The agreement stipulated
that to guarantee the faithful performance on his part of
the terms and conditions of this contract, the distributor
shall post a surety bond in favor of the company in the
amount of P8,000 signed by him and a reputable surety
company acceptable to the company P3,000 to answer
for the faithful settlement of the distributors account and
P5,000 for the return of a company truck. In
accordance thereto, Lorenzana put up a bond in the
amount of P3,000 with Visayan Surety & Insurance Corp
as surety.
On various occasions in 1952, the Philippine
Tobacco Corporation delivered to Lorenzana for
distribution cigarettes, cigars and other tobacco products
amounting to P15,645.64, but out of this amount the latter
paid and was only credited with P13,559.33, leaving a
balance of P2,086.31. Upon demand by the corporation,
Lorenzana proposed to settle his pending obligation by
giving P100 a month, which amount was later reduced to
P25, to which arrangement the company apparently
agreed and Lorenzana actually made installments
amounting to P250. As he failed to make any further
payment, the Philippine Tobacco Corporation filed a
complaint with the Court of First Instance of Manila on
October 30, 1953, against Ricardo D. Lorenzana and the
Visayan Surety & Insurance Corporation for the recovery
of the sum of P2,086.31, with legal interest.
Defendant Visayan Surety & Insurance
Corporation answered this complaint, which it later
modified with leave of Court by filing an amended answer
with cross-claim against Ricardo D. Lorenzana and third
party complaint against Calixto D. Lorenzana, Jose
Lorenzana and Benigno C. Gutierrez, denying the material
allegations of the complaint and setting the affirmative
73
without giving him an advance notice of 30 days in But even granting arguendo that the merchandise
accordance with the agreement. Since the plaintiff took thus delivered and presumably received at San Fernando,
the delivery truck which he was using in the distribution of La Union, was actually sold and distributed therein, this
plaintiff's products, he was prevented from going back to may not be considered as a deviation from the terms of
the provinces to collect from his customers their accounts. the agreement, for such widening of the territory to be
He made several payments in small amounts to settle his covered by the agent or distributor was not prohibited by
remaining obligation which were accepted, but in the agreement itself, nor does the record show that
November, 1953, plaintiff refused to receive the same. such expansion of the territory was due to instructions
At the hearing, defendant Lorenzana failed to from the plaintiff. While it is true that the contract states
appear. The court ruled that although on one occasion that the distributor is willing to sell and distribute the
plaintiff shipped cigarettes to defendant Lorenzana products of the company in Manila and Rizal, this
addressed at San Fernando, La Union, this fact alone would specification serves more as a manifestation that
not release the surety from liability, for there was nothing Lorenzana entered into the agreement
in the contract that expressly prohibited defendant
Lorenzana from selling cigarettes outside Manila and Rizal.
The lower Court opined that what was guaranteed by the
Visayan Surety & Insurance Corporation was the faithful
delivery by defendant Lorenzana of the price of the
cigarettes to plaintiff within the time fixed in the contract
and as the sending of some cigarettes to San Fernando,
La Union, caused the surety no injury, said deviation
will not relieve the surety from its liability under the
bond. The court thus ordered defendants Ricardo D.
Lorenzana and the Visayan Surety
& Insurance Corporation to pay, jointly and severally, to
the plaintiff Pacific Tobacco Corporation the sum of
P2,086.31, with legal interest from the date of the filing of
the complaint, plus P500 as attorney's fees and costs.
3 rd party defendants were ordered to indemnify the
Visayan Surety & Insurance Corporation for the amount
which the latter would actually pay plaintiff in case
defendant Ricardo D. Lorenzana should fail to make the
payment himself.

Issue: Whether the delivery by the company of its

products to defendant Lorenzana in a place other than that
mentioned in the agreement constitutes an alteration of
said agreement that would release the surety from its
liability under the bond.

Held: No. Affirmed.

Ratio: It appears on record that cigarettes valued at

P1,870 were transported to Ricardo Lorenzana, c/o Mrs.
Justo de Leon at San Fernando, Pampanga. Defendant
surety tried to capitalize on this single act but it failed to
present evidence that these goods were actually sold and
distributed in said place. It would have been possible for
the distributor to take a sojourn in that place and the
company, knowing where he could be reached, sent the
merchandise to him. Defendant Lorenzana also alleged
in his answer that plaintiff allowed him to sell the
latter's products even as far as the northern provinces
but this defendant was not able to substantiate such claim
due to his failure to appear and testify to this effect at the
trial, despite the fact that he was duly represented by
counsel.
74
with the understanding that his sphere of activity would A material alteration of a contract is such a
be for these places. But certainly nowhere in the same change in the terms of the agreement as either imposes
agreement appears a restriction against his acceptance of some new obligation on the party promising or takes away
additional territories, if he so desired. some obligation already imposed. A change in the form of
Appellant surety argues that the bond guarantees the contract which does not affect one or the other of
only the payment of cigarettes, cigars or other tobacco these results is immaterial, and will not discharge the
products that were delivered to and distributed by surety. It cannot be denied that the obligation of the
Lorenzana in Manila and Rizal and at no other place. To principal remained the same to settle his accounts to
adopt this line of reasoning would be to harness a the company at the specified time. The addition or
pliant argument to suit appellant's purpose. The diminution of the territories covered by his previous
agreement required the distributor to post a bond for assignment will not alter or affect that duty to make
P8,000, "P3,000 of which bond shall answer for the faithful payments on time. Apart from the fact that the alteration
settlement of the account of the distributor with the in the instant case, if there was any, is not material
Company". The bond put up by Lorenzana in the amount
of P3,000, undertaken by the Visayan Surety & Insurance
Corporation, therefore, was only to secure the prompt
and faithful payment of the accounts of the distributor to
the company. The mention of Manila and Rizal in said
agreement was designed more as a declaration or
identification of the places wherein the distributor was
expressly authorized and assigned to sell the cigar,
cigarettes and tobacco products of the plaintiff, which is
no obstacle to the distributor's acceptance or taking
motu propio of additional territories in order to better
fulfill his obligation to sell monthly for the Company not
less than P20,000 worth of cigarettes and other tobacco
products and could by no means alter his liability to turn
over to the company payments therefor, and that is
precisely his obligation secured by the bond.
Appellant, maintaining that the alleged
modification of the agreement released the surety from its
liability, invokes the rule of strictissimi juris under which,
it is claimed, surety bonds must be strictly construed and
cannot be extended beyond their terms. Although We
might acknowledge that a surety is a favorite of the law
and his contract strictissimi juris, this rule has no bearing
on the case at bar. Anyway, it commonly refers to an
accommodation surety and should not be extended to
favor a compensated surety, as is appellant in the instant
case. The rationale of this doctrine is reasonable; an
accommodation surety acts without motive of pecuniary
gain and, hence, should be protected against unjust
pecuniary impoverishment by imposing on the principal
duties akin to those of a fiduciary. This cannot be said of a
compensated corporate surety which is a business
association organized for the purpose of assuming
classified risks in large numbers, for profit and on an
impersonal basis, through the medium of standardized
written contractual forms drawn by its own
representatives with the primary aim of protecting its own
interests.
The law does not have the same solicitude for
corporations engaged in giving indemnity bonds for profit
as it does for individual surety who voluntarily undertakes
to answer for the obligations of another. Although calling
themselves sureties, such corporations are in fact insurers,
and in determining their rights and liabilities the rules
peculiar to suretyship do not apply.
75
as to relieve the surety from its liability under the bond, Facts: Rosa V. Reyes filed a case against Felicisimo V. Reyes
there is not even an iota of proof that such deviation and others and was able to get a writ of preliminary
caused the surety any loss or injury or that such delivery attachment. For the dissolution of the attachments, the
caused the distributor's failure to pay his accounts. defendants put up a bond issued by Imperial Insurance,
Inc., as surety. Rosa won the case. The decision became
final. A writ of execution was issued which remained
Southern Motors, Inc. vs. Eliseo Barbosa, G.R. No. L-
unsatisfied. Rosa filed a motion for recovery on the surety
9306, May 25, 1956 (99 Phil
bonds. This motion was granted. In the meantime, the
263)
surety moved for reconsideration of the order granting
Facts: Mr. Alfredo Brillantes owed P2,889.53 to Southern
Motors, Inc. To secure this obligation, Eliseo Barbosa
acted as guarantor or surety by mortgaging his land. Mr.
Brillantes failed to pay his obligations. Southern
Motors sought to foreclose the mortgage executed by
Barbosa. Southern Motors moved for summary judgment,
but this was denied by the lower court judge. The case
was transferred to another judge which ruled against
Barbosa by ordering him to pay the debt or face
foreclosure.

Issue: Whether a mortgagor who secures a loan has the

right to excussion.

Held: No. Affirmed.

Ratio: The right of guarantors, under Article 2058 of the

Civil Code of the Philippines, to demand exhaustion of the
property of the principal debtor, exists only when a pledge
or a mortgage has not been given as special security for
the payment of the principal obligation. Guarantees,
without any such pledge or mortgage, are governed by
Title XV of said Code, whereas pledges and mortgages
fall under Title XVI of the same Code. Art. 2087 CC states
that 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. Art. 2126 CC further states that
the mortgage directly and immediately subjects the
property upon which it is imposed, whoever the
possessor may be, to the fulfillment of the obligation
for whose security it was constituted. It has been held
already stated in Saavedra vs. Price, 68 Phil., 688 that a
mortgagor is not entitled to the exhaustion of the property
of the principal debtor. Although an ordinary personal
guarantor not a mortgagor or pledgor may demand
the aforementioned exhaustion, the creditor may, prior
thereto, secure a judgment against said guarantor, who
shall be entitled, however, to a deferment of the execution
of said judgment against him until after the properties of
the principal debtor shall have been exhausted to satisfy
the obligation involved in the case.

The Imperial Insurance, Inc. vs. Hon. Walfrido de los

Angeles, Judge of CFI Rizal, QC Br IV, Rosa V. Reyes,
Pedro V. Reyes & Consolacion V. Reyes, G.R. No. L-
28030, January 18, 1982 (111 SCRA 24)

76
plaintiffs' motion to recover on the counterbond, and upon
denial thereof, filed a petition for certiorari with the Court
of Appeals. The petition was dismissed.
Issue: Whether a bonding company issuing a counterbond
to lift an attachment is a guarantor. Whether the wording
of a guarantee can turn it into a surety.
the Revised Rules of Court. The petitioner surety as
solidary obligor is liable just the same.
Jose M. Arroyo, guardian of Tito Jocsing, an
imbecile vs. Florentino Hilario
Jungsay, et al., G.R. No. 10168, July 22, 1916 (34 Phil
589)

Held: Yes. Yes. Affirmed.

Ratio: Counterbonds to lift an attachment may be charged

only after notice and summary hearing in the same action.
The records show that the notice and hearing requirement
was substantially complied with in the instant case.
The petitioner asserts that the Court of Appeals
gravely erred in holding that the plaintiff who obtained
judgment against the defendant may legally choose "to
go directly" after the surety in a counterbond without
prior exhaustion of the defendant's properties. This
contention is likewise not meritorious.
Although the counterbond contemplated in the
aforequoted Sec. 17, Rule 57, of the Rules of Court is an
ordinary guaranty where the sureties assume a
subsidiary liability, the rule cannot apply to a counterbond
where the surety bound itself "jointly and severally" (in
solidum) with the defendant as in the present case. The
counterbond executed by the deceased defendant
Felicisimo V. Reyes, as principal, and the petitioner, The
Imperial Insurance, Inc., as solidary guarantor to lift the
attachment in Civil Case No. Q-5213 is in the following
terms: hereby JOINTLY AND SEVERALLY, bind ourselves.
Clearly, the petitioner, the Imperial Insurance, Inc.,
had bound itself solidarily with the principal.
To recover against the petitioner surety on its
counterbonds it is not necessary to file a separate action.
Recovery and execution may be had in the same Civil Case.
The counterbonds merely stand in place of the properties
so released. They are mere replacements of the
properties formerly attached, and just as the latter may
be levied upon after final judgment in the case in order to
realize the amount adjudged so is the liability of the
counter sureties ascertainable after the judgment has
become final.
Under the law and under their own terms, the
counterbonds are only conditioned upon the rendition of
the judgment. As held by this Court in the aforecited case
of Luzon Steel Corporation vs. Sia:" where under the rule
and the bond the undertaking is to pay the judgment, the
liability of the surety or sureties attaches upon the
rendition of the judgment, and the issue of an execution
and its return nulla bona is not, and should not be a
condition to the right to resort to the bond." Thus, it
matters not whether the Provincial Sheriff of Bulacan, in
making the return of the writ of execution served or did
not serve a copy thereof with notice of attachment on the
administratrix of the intestate estate of Felicisimo V. Reyes
and filed a copy of said writ with the Office of the Clerk of
Court with notice in accordance with Sec. 7 (f), Rule 57 of
77
Facts: Jungsay is a guardian of Tito Jocsing, an imbecile,
who absconded with the funds of his ward. His
guardianship was secured by a bond. The new guardian,
Jose Arroyo, filed a case against Jungsay and the
bondsmen. The court ruled in favor of Arroyo and
awarded P6,000. The bondsmen appealed claiming that
they should be credited with P4,400 or the alleged value of
certain properties belonging to the absconding guardian all
of which are in the exclusive possession of 3rd parties
under claim of ownership.
Issue: Whether a surety is entitled to the right of
excussion when he points out properties of the debtor
which are insufficient, not salable, and encumbered.
Held: No. Remanded.
Ratio: There is merit in appellant's contention that there
exists a controversy in the complaint and answer as to
whether or not appellee had actually paid appellant's
obligation to the Philippine National Bank, a matter which
should be decided in the affirmative before appellee, as
surety, can claim reimbursement from appellant, the
principal debtor. The affidavit of plaintiff's comptroller
Pedro R Mendiola, supporting the motion for summary
judgment, simply relates to the amount of the loan in
question

Held: No. Affirmed.

Ratio: The surety who desires to avail himself of the right

of excussion must demand it in limine, 'on the institution
of proceedings against him.' He must, moreover, point out
to the creditor property of the principal debtor, not
incumbered, subject to seizure; and must furnish a
sufficient sum to have the excussion carried into effect. A
plea which does not meet these requirements must be
disregarded.
The property pointed out by the sureties is not
sufficient to pay the indebtedness; it is not salable; it is
so incumbered that third parties have, as we have
indicated, full possession under claim of ownership
without leaving to the absconding guardian a fractional or
reversionary interest without determining first whether
the claim of one or more of the occupants is well
founded. In all these respects the sureties have failed to
meet the requirements of article 1832 of the Civil Code.

General Indemnity Co., Inc. vs. Estanislao Alvarez,

G.R. No. L-9434, March 29,
1957 (100 Phil 1059)

Facts: Estanislao Alvarez took out a loan from the

Philippine National Bank which was guaranteed by an
indemnity bond issued by General Indemnity Co., Inc., for
which Alvarez, as counter-guaranty, executed a mortgage
on his share in a parcel of land.
Alvarez failed to pay, and PNB deducted the
amount of his loan from the deposit account of General
Indemnity Co, Inc. General Indemnity filed this case to
recover its payment of Alvarezs debt. Alvarez denied
having knowledge of any payment made by the plaintiff.
The court, in a summary judgment, ruled in favor of the
plaintiff.

Issue: Whether the guarantor may file a collection

action against the principal debtor even before the
guarantor has paid the debt.

78
 and appellant's failure to pay the same to appellee inspite The 1979 letter of credit was negotiated.
sarah jane
of repeated demands, but does not touch on the alleged Metrobank paid Planters Products the amount of
D:20140108141753+08'00'1/8/2014 1:17:53 AM P815,600.00 which payment was covered by a Bill of
payment made by appellee to the bank. The plaintiff
-------------------------------------------- Exchange in favor of the former, drawn on and
likewise contends that it is immaterial to its cause of
Art. 2071. The guarantor, even before having paid, accepted by UTEFS. Pursuant to the above
action against appellant whether or not it had actually paid
may proceed against the principal debtor: commercial transaction, UTEFS executed and delivered to
the Philippine National Bank, citing Art. 2071 of the New
(1) When he is sued for the payment; Metrobank a Trust Receipt whereby the former
Civil Code to the effect that a guarantor may proceed
(2) In case of insolvency of the principal debtor; acknowledged receipt in trust from the latter of the
against the principal debtor, even before having paid,
(3) When the debtor has bound himself to relieve him aforementioned goods from Planters Products which
when the debt has become demandable. The last
from the guaranty within a specified period, and this
paragraph of this same article, however, provides that in amounted to P815,600.00. Being the entrustee, the
period has
suchexpired;
instance, the only action the guarantor can file former agreed to deliver to Metrobank the entrusted goods
(4) When against thethedebt
debtor hasis tobecome demandable,
obtain release from theby guaranty, in the event of non-sale or, if sold, the proceeds of the sale
reason or of the expiration of the period for
to demand a security that shall protect him payment; (5) from any thereof, on or before September 2, 1979.
After the lapse of ten
proceeding byyears, when the and
the creditor principal
from the danger of
obligation
insolvency of the debtor ." An actionunless
has no fixed period for its maturity, by theit guarantor
be of against
such nature that it cannot be extinguished
the principal debtor for payment, before the
except former
within ahasperiod
paid longer than ten
the creditor, years;
is premature.
(6) If there are reasonable grounds
The judgment appealed from to fear that
is the
hereby set aside
principal debtor intends to abscond;
and the lower court is ordered to set anew this case for
(7) If the principal
trial on thedebtor is in of
sole issue imminent
whetherdanger
or not ofappellee General
becoming Indemnity Co, Inc., had already paid the loan in question to
insolvent.
the Philippine
In all these cases, theNational
action of Bank.
the guarantor is to
obtain release from the guaranty, or to demand a
securityJacinto
that shallUy protect
Dio &him from any
Norberto Uy proceedings
vs CA & Metropolitan
by the creditor and from the
Bank & Trust Co., G.R. No. danger of insolvency of
the debtor.
89775, November 26, 1992 (216 SCRA 9)

Facts: In 1977, Uy Tiam Enterprises and Freight

Services (UTEFS), thru its representative Uy Tiam,
applied for and obtained credit accommodations,
from Metrobank in the sum of P700,000. To secure
the aforementioned credit accommodations, Norberto Uy
and Jacinto Uy Dio executed separate Continuing
Suretyships. Under the aforesaid agreements, Norberto Uy
agreed to pay Metrobank any indebtedness of UTEFS up to
the aggregate sum of P300,000.00 while Jacinto Uy Dio
agreed to be bound up to the aggregate sum of
P800,000.00.
Having paid the obligation under the above letter
of credit in 1977, UTEFS, through Uy Tiam, obtained
another credit accommodation from Metrobank in
1978, which credit accommodation was fully settled
before an irrevocable letter of credit was applied for and
obtained by the abovementioned business entity in 1979.
The Irrevocable Letter of Credit No. SN-Loc-309,
dated March 30, 1979, in the sum of P815,600.00,
covered UTEFS' purchase of '8,000 Bags Planters Urea
and 4,000
Bags Planters 21-0-0.' It was applied for and
obtained by UTEFS without the participation of
Norberto Uy and Jacinto Uy Dio as they did not sign the
document denominated as 'Commercial Letter of Credit
and Application.' Also, they were not asked to execute any
suretyship to guarantee its payment. Neither did
Metrobank nor UTEFS inform them that the 1979 Letter of
Credit has been opened and that the Continuing
Suretyships separately executed in February, 1977 shall
guarantee its payment.
79
 However, UTEFS did not acquiesce to the right to recall the guaranty is expressly reserved. Hence,
obligatory stipulations in the trust receipt. As a where the contract of guaranty states that the same is to
consequence, METROBANK sent letters to the said secure advances to be made "from time to time" the
principal obligor and its sureties, Norberto Uy and Jacinto guaranty will be construed to be a continuing one.
Uy Dio, demanding payment of the amount due. Informed In other jurisdictions, it has been held that the use
of the amount due, UTEFS made partial payments to the of particular words and expressions such as payment of
Bank which were accepted by the latter. "any debt," "any indebtedness," "any deficiency," or "any
Answering one of the demand letters, Dio, thru sum," or the guaranty of "any transaction" or money to be
counsel, denied his liability for the amount demanded furnished the principal debtor
and requested Metrobank to send him copies of
documents showing the source of his liability. In its reply,
the bank informed him that the source of his liability is the
Continuing Suretyship which he executed on February 25,
1977. As a rejoinder, Dio maintained that he cannot be
held liable for the 1979 credit accommodation because it
is a new obligation contracted without his participation.
Besides, the 1977 credit accommodation which he
guaranteed has been fully paid.
Having sent the last demand letter to UTEFS, Dio
and Uy and finding resort to extrajudicial remedies to be
futile, Metrobank filed a complaint for collection of a sum
of money (P613,339.32, as of January 31, 1982, inclusive
of interest, commission penalty and bank charges) with a
prayer for the issuance of a writ of preliminary
attachment, against Uy Tiam, representative of UTEFS and
impleaded Dio and Uy as parties- defendants. The case
against Uy Tiam was later dismissed because he could
not be found.
After trial, the court ruled that the sureties were not liable.
CA reversed.

Issue: Whether a surety under a continuing suretyship

agreement is liable for subsequent obligations which were
entered into without his knowledge.

Held: Yes. Affirmed.

Ratio: Under the Civil Code, 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 a 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. It is prospective in its operation and is
generally intended to provide security with respect to
future transactions within certain limits, and contemplates
a succession of liabilities, for which, as they accrue, the
guarantor becomes liable. Otherwise stated, a continuing
guaranty is one which covers all transactions, including
those arising in the future, which are within the
description or contemplation of the contract of guaranty,
until the expiration or termination thereof. A guaranty
shall be construed as continuing when by the terms
thereof it is evident that the object is to give a standing
credit to the principal debtor to be used from time to time
either indefinitely or until a certain period, especially if the
80
"at any time," or "on such time" that the principal to leave the Philippines for 15 days only and requested
debtor may require, have been construed to indicate a information whether the court had any objection thereto.
continuing guaranty. By an order dated July 11, 1955, the court required
The stipulations unequivocally reveal that the Haragan to file a bond of P4,000 "to answer for his return
suretyship agreements in the case at bar are continuing in to the Philippines and the prosecution of this case against
nature. Petitioners do not deny this; in fact, they candidly him, with the understanding that upon his failure to
admitted it. Neither have they denied the fact that they had return, said bond will answer pro tanto for any judgment
not revoked the suretyship agreements. that may be rendered against him". Thereupon, or on July
Petitioners maintain, however, that their 12, 1955, Haragan submitted a bond, subscribed by
Continuing Suretyship Agreements cannot be made him and the Associated Insurance & Surety Co., as
applicable to the 1979 obligation because the latter was principal and surety. Haragan was allowed by the court
not yet in existence when the agreements were executed to leave the country. Haragan was unable to return to the
in 1977; under Article 2052 of the Civil Code, a guaranty Philippines because the Philippine Consulate in Hongkong
"cannot exist without a valid obligation." We cannot agree. had advised Haragan of a communication from our
First of all, the succeeding article provides that "[a] Department
guaranty may also be given as security for future debts,
the amount of which is not yet known." Secondly.
Article 2052 speaks about a valid obligations, as
distinguished from a void obligation, and not an existing or
current obligation. This distinction is made clearer in the
second paragraph of Article 2052 which reads:
"Nevertheless, a guaranty may be constituted to
guarantee the performance of a voidable or an
unenforceable contract. It may also guarantee a natural
obligation."
The limit of the petitioners' respective liabilities
must be determined from the suretyship agreement each
had signed. It is undoubtedly true that the law looks upon
the contract of suretyship with a jealous eye, and the rule
is settled that the obligation of the surety cannot be
extended by implication beyond its specified limits. To the
extent, and in the manner, and under the circumstances
pointed out in his obligation, he is bound, and no farther.
Indeed, the Continuing Suretyship Agreements signed by
petitioner Dio and petitioner Uy fix the aggregate
amount of their liability, at any given time, at P800,000.00
and P300,000.00, respectively. The law is clear that a
guarantor may bind himself for less, but not for more
than the principal debtor, both as regards the amount
and the onerous nature of the conditions. In the case at
bar, both agreements provide for liability for interest
and expenses. Thus, by express mandate of the
Continuing Suretyship Agreements which they had
signed, petitioners separately bound themselves to pay
interests, expenses, attorney's fees and costs. The last two
items are pegged at not less than ten percent (10%) of the
amount due.

Allen McConn vs. Paul Haragan, et al., Associated

Insurance & Surety Co., Inc., G.R. No. L-16550, January
31, 1962 (4 SCRA 251)

Facts: Pending hearing of Civil Case No. 24790 of the

Court of First Instance of Manila, entitled "Morris McConn
vs. Paul Haragan", which was scheduled to take place on
September 16, 1955 the Bureau of Immigration advised
said court that defendant Paul Haragan had applied for an
immigration clearance and a re-entry permit to enable him
81
of Foreign Affairs banning him from returning to the
Philippines. In due course, thereafter, or on February 19,
1959, the court rendered judgment, which, inter alia,
sentenced Haragan to pay to plaintiff the sum of P5,500,
with 6% interest thereon from December 8, 1954, until full
payment, plus P1,000 as attorney's fees and costs. After
this judgment had become final and executory, plaintiff
moved for the execution of the aforementioned bond to
satisfy said judgment against Haragan. The surety
company objected thereto upon several grounds and, after
due hearing, the lower court issued an order dated
October 13, 1959, releasing said company from liability
under the bond aforementioned and denying plaintiff's
motion.
et al., G.R. No. 42829, September 30, 1935 (62 Phil
211)
Facts: Jesus R. Roa became indebted to the Philippine
Theatrical Enterprises, Inc., in the sum of P28,400 payable
in 71 equal monthly installments at the rate of P400 a
month. On that same date the Philippine Theatrical
Enterprises, Inc., assigned all its rights and interest in that
contract to the Radio Corporation of the Philippines. The
loan carried an acceleration clause which states that in
case the vendee-mortgagor fails to make any of

Issue: Whether a surety is liable for an obligation that has

become impossible without its fault and due to
government decree.

Held: No. Affirmed.

Ratio: A careful reading of the surety bond, Exhibit F,

indicates that the surety's principal commitment is 'to
guarantee that he (Haragan) will return to the Philippines
on or before September 16, 1955'. In the last paragraph
of said surety bond, Exhibit F, it appears that said bond
was executed in favor of the Republic of the Philippines or
its duly authorized representatives to guarantee 'that the
herein principal (Haragan) will return to the Philippines
on or before September 16, 1955 and that should he fail
to do so, said bond will answer pro tanto for any
judgment that may be rendered against him.' As the
terms of the bond so state, it appears clearly that the bond
will only answer for the judgment which may be rendered
against defendant, should he (defendant Haragan) fail to
return to the Philippines. In other words, if defendant
Haragan should return to the Philippines on or before
September 16, 1955, said bond will not answer for the
judgment. It is now the contention of the Associated
Insurance that since it was the Republic of Philippines
(obligee under the bond) who rendered the return of
defendant Haragan to the Philippines impossible, said
surety company is thereby released from its obligation,
and cites in support thereof Articles 1266 and 2076 of the
New Civil Code. Upon a consideration of this contention,
the Court finds it tenable and well grounded, for as the
surety company has so well stated 'where the principal
obligation (of returning to the Philippines) has been
extinguished by the action of the obligee, Philippine
Government, in preventing such return, the accessory
obligation of the surety is likewise extinguished and the
bond released of its liability.'
The debtor in obligation to do shall also be
released when the prestation becomes legally or physically
impossible without the fault of the obligor.

Radio Corporation of the Philippines vs. Jesus R. Roa,

82
the payments as hereinbefore provided, the whole amount
remaining unpaid under this mortgage shall immediately
become due and payable and this mortgage on the
property herein mentioned as well as the Luzon Surety
Bond may be foreclosed by the vendor- mortgagee.
Roa sought an extension in the payment of the
loan from February to April which Radio Corp approved.
When Roa failed to pay, a case was filed. The court ruled in
favor of Radio Corp and held Roa and his sureties jointly
and severally liable.
Issue: Whether an extension granted without the consent
of the guarantors extinguishes the guarantors liability not
only as to the installments due at that time, but also as to
the whole amount of their obligation.
proved prejudicial to the surety or not. The rule stated
is quite independent of the event, and the fact that the
principal is insolvent or that the extension granted
promised to be beneficial to the surety would give no right
to the creditor to change the terms of the contract without
the knowledge or consent of the surety. Nor does it matter
for how short a period the time of payment may be
extended. The principle is the same whether the time is
long or short. The creditor must be in such a situation that
when the surety comes to be substituted in his place by
paying the debt, he

Held: Yes. Reversed.

Ratio: Art. 1851 states that an extension granted to the

debtor by the creditors, without the consent of the
guarantor, extinguishes the latter's liability. This court
has held that mere delay in suing for the collection of the
debt does not release the sureties.
The stipulation in the contract under
consideration, copied above, is to the effect that upon
failure to pay any installment when due the other
installments ipso facto become due and payable. In view
of the fact that under the express provision of the contract,
quoted above, the whole unpaid balance automatically
becomes due and payable upon failure to pay one
installment, the act of the plaintiff in extending the
payment of the installment corresponding to February,
1932, to April, 1932, without the consent of the
guarantors, constituted in fact an extension of the payment
of the whole amount of the indebtedness, as by that
extension the plaintiff could not have filed an action for
the collection of the whole amount until after April, 1932.
Therefore appellants' contention that after default of the
payment of one installment the act of the herein creditor
in extending the time of payment discharges them as
guarantors in conformity with articles
1851 and 1852 of the Civil Code is correct.
It is a familiar rule that if a creditor, by positive
contract with the principal debtor, and without the consent
of the surety, extends the time of payment, he thereby
discharges the surety. The time of payment may be quite
as important a consideration of the surety as the amount
he has promised conditionally to pay. Again, a surety
has the right, on payment of the debt, to be subrogated to
all the rights of the creditor, and to proceed at once to
collect it from the principal; but if the creditor has tied his
own hands from proceeding promptly, by extending the
time of collection, the hands of the surety will equally be
bound; and before they are loosed, by the expiration of the
extended credit, the principal debtor may have become
insolvent and the right of subrogation rendered worthless.
It should be observed, however, that it is really
unimportant whether the extension given has actually
83
may have an immediate right of action against the Manager of PAGRICO and in his personal and individual
principal. The suspension of the right to sue for a month, capacity; Mr. Liu signed both as President of PACOCO
or even a day, is as effectual to release the surety as a year and in his individual and personal capacity. Under both
or two years. indemnity agreements, the indemnitors bound themselves
Plaintiff's contention that the enforcement of the jointly and severally to R & B Surety to pay an annual
accelerating clause is potestative on the part of the premium of P5,103.05 and for the faithful compliance of
obligee, and not self-executing, is clearly untenable from a the terms and conditions set forth in said surety bond for a
simple reading of the clause copied above. What is period beginning until the same is cancelled and/or
potestative on the part of the obligee is the foreclosure of discharged.
the mortgage and not the accelerating clause.
Plaintiff-appellee contends that there was no
consideration for the extension granted the principal
debtor. Article 1277 of the Civil Code provides that "even
though the consideration should not be expressed in the
contract, it shall be presumed that a consideration exists
and that it is licit, unless the debtor proves the contrary."
It was incumbent upon the plaintiff to prove that there
was no valid consideration for the extension granted.

Joseph Cochingyan, Jr. & Jose K. Villanueva vs. R&B

Surety & Insurance Co., Inc., G.R. No. L-47369, June 30,
1987 (151 SCRA 339)

Facts: In November 1963, Pacific Agricultural Suppliers,

Inc. (PAGRICO) applied for and was granted an increase
in its line of credit from P400,000.00 to P800,000.00
with the Philippine National Bank (PNB). To secure PNB's
approval, PAGRICO had to give a good and sufficient bond
in the amount of P400,000.00, representing the increment
in its line of credit, to secure its faithful compliance with
the terms and conditions under which its line of credit
was increased. In compliance with this requirement,
PAGRICO submitted Surety Bond No. 4765, issued by the
respondent R & B Surety and Insurance Co., Inc. in the
specified amount in favor of the PNB. Under the terms
of the Surety Bond, PAGRICO and R & B Surety bound
themselves jointly and severally to comply with the "terms
and conditions of the advance line of credit established by
the PNB. PNB had the right under the Surety Bond to
proceed directly against R & B Surety without the
necessity of first exhausting the assets of the principal
obligor, PAGRICO. The Surety Bond also provided that R
& B Surety's liability was not to be limited to the
principal sum of P400,000.00, but would also include
"accrued interest" on the said amount "plus all expenses,
charges or other legal costs incident to collection of the
obligation under the Surety Bond.
In consideration of R & B Surety's issuance of
the Surety Bond, two identical indemnity agreements
were entered into with R & B Surety: (a) one agreement
dated 23
December 1963 was executed by the Catholic Church Mart
(CCM) and by petitioner Joseph Cochingyan, Jr.; the latter
signed not only as President of CCM but also in his
personal and individual capacity; and (b) another
agreement dated 24 December 1963 was executed by
PAGRICO, Pacific Copra Export Inc. (PACOCO), Jose K.
Villanueva and Liu Tua Beh; Mr. Villanueva signed both as
84
 When PAGRICO failed to comply with its Principal same time. In both objective and subjective novation, a
Obligation to the PNB, the PNB demanded payment from R dual purpose is achieved an obligation is extinguished
& B Surety of the sum of P400,000.00, the full amount of and a new one is created in lieu thereof.
the Principal Obligation. R & B Surety made a series of If objective novation is to take place, it is
payments to PNB by virtue of that demand totalling imperative that the new obligation expressly declare that
P70,000.00 evidenced by detailed vouchers and receipts. the old obligation is thereby extinguished, or that the
R & B Surety in turn sent formal demand letters to new obligation be on every point incompatible with the old
petitioners Joseph Cohingyan, Jr. and Jose K. Villanueva for one. Novation is never presumed: it must be established
reimbursement of the payments made by it to the PNB and either by the discharge of the old debt by the express
for a discharge of its liability to the PNB under the Surety terms of the
Bond. When petitioners failed to heed its demand, R & B
Surety brought suit against Joseph Cochingyan, Jr., Jose K.
Villanueva and Liu Tua Beh in the Court of First Instance of
Manila.
The defendants raised the defense that the
indemnity agreement did not express the true intent of
the parties, that they signed the indemnity agreement
for the sake of complying with the formalities only, that
they were assured to remain as strangers to the
transaction, that R & B Surety was estopped from
enforcing its claim against them, that the Principal
Obligation of PAGRICO to the PNB secured by the
Surety Bond had already been assumed by CCM by
virtue of a Trust Agreement entered into with the PNB,
where CCM represented by Joseph Cochingyan, Jr.
undertook to pay the Principal Obligation of PAGRICO to
the PNB, that his obligation under the Indemnity
Agreement was thereby extinguished by novation arising
from the change of debtor under the Principal Obligation,
and that the case was premature since PNB has not yet
proceeded against R & B Surety.
The court ruled in favor of R & B Surety.

Issue: Whether a surety agreement is extinguished

when another person is included to assume the debt.
Whether a mere delay in proceeding against the
principal will extinguish the surety. Whether the
indemnity parties are liable to pay the full amount even
though the surety has only made partial payments.

Held: No. No. Yes. Affirmed.

Ratio: We are unable to sustain petitioners' claim that the

Surety Bond and their respective obligations under the
Indemnity Agreements were extinguished by novation
brought about by the subsequent execution of the Trust
Agreement. Novation is the extinguishment of an
obligation by the substitution or change of the obligation
by a subsequent one which terminates it, either by
changing its object or principal conditions, or by
substituting a new debtor in place of the old one, or by
subrogating a third person to the rights of the creditor.
Novation through a change of the object or principal
conditions of an existing obligation is referred to as
objective (or real) novation. Novation by the change of
either the person of the debtor or of the creditor is
described as subjective (or personal) novation. Novation
may also be both objective and subjective (mixed) at the
85
new agreement, or by the acts of the parties whose PNB's undertaking under the Trust Agreement "to
intention to dissolve the old obligation as a consideration hold in abeyance any action to enforce its claims" against
of the emergence of the new one must be clearly R & B Surety did not extend the maturity of R & B Surety's
discernible. obligation under the Surety Bond. The Principal Obligation
Again, if subjective novation by a change in the had in fact already matured, along with that of R & B
person of the debtor is to occur, it is not enough that the Surety, by the time the Trust Agreement was entered into.
juridical relation between the parties to the original Petitioners' obligations under the Indemnity Agreements
contract is extended to a third person. It is essential that had, in turn, already similarly matured, for those
the old debtor be released from the obligation, and the obligations were to mature "as soon as [R & B Surety]
third person or new debtor take his place in the new became liable to make payment of any sum under the
relation. If the old debtor is not released. no novation terms of the [Surety Bond] whether the said sum or
occurs and the third person who has assumed the sums or part thereof have been actually paid or not." Thus,
obligation of the debtor becomes merely a co-debtor or the situation was that precisely envisaged in Article 2079
surety or a co-surety. which states that the mere failure on the part of the
Applying the above principles to the instant creditor to demand payment after the debt has become
case, it is at once evident that the Trust Agreement does due does not of itself constitute
not expressly terminate the obligation of R & B Surety
under the Surety Bond. On the contrary, the Trust
Agreement expressly provides for the continuing
subsistence of that obligation by stipulating that "[the
Trust Agreement] shall not in any manner release" R & B
Surety from its obligation under the Surety Bond.
Neither can the petitioners anchor their defense
on implied novation. Absent an unequivocal declaration of
extinguishment of a pre-existing obligation, a showing of
complete incompatibility between the old and the new
obligation (and nothing else) would sustain a finding of
novation by implication. But where, as in this case, the
parties to the new obligation expressly recognize the
continuing existence and validity of the old one, where, in
other words, the parties expressly negated the lapsing of
the old obligation, there can be no novation. The issue of
implied novation is not reached at all.
What the trust agreement did was, at most,
merely to bring in another person or persons the
Trustor[s] to assume the same obligation that R & B
Surety was bound to perform under the Surety Bond. It is
not unusual in business for a stranger to a contract to
assume obligations thereunder; a contract of suretyship
or guarantee is the classical example. The precise legal
effect is the increase of the number of persons liable to the
obligee, and not the extinguishment of the liability of the
first debtor.
The Indemnity Agreement speaks of the several
indemnitors applying jointly and severally to the R & B
Surety to become surety upon a surety bond demanded by
and in favor of PNB in the sum of P400.000 for the faithful
compliance of the terms and conditions set forth in said
surety bond. This part of the Agreement suggests that
the indemnitors (including the petitioners) would become
co-sureties on the Security Bond in favor of PNB. The
record, however, is bereft of any indication that the
petitioners- indemnitors ever in fact became co-sureties of
R & B Surety vis-a-vis the PNB. The petitioners, so far as
the record goes, remained simply indemnitors bound to
R & B Surety but not to PNB, such that PNB could not
have directly demanded payment of the Principal
Obligation from the petitioners.
86
any extension of time referred to herein. The theory not entitled to claim exemption from the effects of the
behind Article 2079 is that an extension of time given to controverted ordinance.
the principal debtor by the creditor without the surety's
consent would deprive the surety of his right to pay the Issue: Whether a surety company is in the nature of an
creditor and to be immediately subrogated to the creditor's insurance company that is exempt from local government
remedies against the principal debtor upon the original fees and permits.
maturity date. The surety is said to be entitled to protect
himself against the contingency of the principal debtor Held: Yes. Reversed partially.
or the indemnitors becoming insolvent during the
extended period. The underlying rationale is not present
in the instant case. Mere delay or negligence in
proceeding against the principal will not discharge a
surety unless there is between the creditor and the
principal debtor a valid and binding agreement therefor,
one which tends to prejudice [the surety] or to deprive it
of the power of obtaining indemnity by presenting a
legal objection for the time, to the prosecution of an action
on the original security.
In the instant case, there was nothing to
prevent the petitioners from tendering payment, if they
were so minded, to PNB of the matured obligation on
behalf of R & B Surety and thereupon becoming
subrogated to such remedies as R & B Surety may have
against PAGRICO.
The petitioners lose sight of the fact that the
Indemnity Agreements are contracts of indemnification
not only against actual loss but against liability as well.
While in a contract of indemnity against loss an
indemnitor will not be liable until the person to be
indemnified makes payment or sustains loss, in a contract
of indemnity against liability, as in this case, the
indemnitor's liability arises as soon as the liability of the
person to be indemnified has arisen without regard to
whether or not he has suffered actual loss. Accordingly, R
& B Surety was entitled to proceed against petitioners not
only for the partial payments already made but for the full
amount owed by PAGRICO to the PNB.

Luzon Surety Co., Inc. vs. The City of Bacolod, Romeo

Guanzon, in his capacity as Mayor, and Porfirio T. de
Leon, in his capacity as Treasurer, G.R. No. L-23618,
August 31, 1970 (34 SCRA 509)

Facts: On July 1, 1962, the city council of the City of

Bacolod approved Ordinance 158, series of 1962 which
required Luzon Surety Co., Inc. to pay a fixed annual
license fee of P300 and to apply for and obtain from the
City Mayor a permit. Luzon Surety paid the fees under
protest, and it then filed with the CFI of Negros Occidental
an action assailing the legality and constitutionality of the
ordinance. The law allegedly violated is RA 2264 which
prohibits cities from taxing insurance companies. The
officers of the City of Bacolod countered that the Act 326
or the Charter of the City of Bacolod grants the city council
the power to enact ordinances intended to regulate and fix
the amounts of permit and license fees.
The court adjudged Luzon Surety as a surety
company and not an insurance company and, therefore, as
87
Ratio: Under the Insurance Act, insurance company shall Arrieta and Nenita B. Arrieta, Leopoldo G. Halili and
include all corporations, associations, partnerships, or Pablito Bermundo as sureties, executed a Continuing
individuals engaged as principals in the insurance Suretyship Agreement in favor of Atok Finance as creditor.
business, excepting fraternal and benevolent orders Under this Agreement, Sanyu Trading and the individual
and societies. Corporations formed or organized to private respondents who were officers and stockholders
save any person or persons from loss, damage, or liability of Sanyu Chemical jointly and severally unconditionally
arising from any unknown or future or contingent event, guarantee to ATOK FINANCE CORPORATION the full,
or to indemnify or to compensate any person or persons faithful and prompt payment and discharge of any and all
or other corporation for any such loss, damage, or liability indebtedness of Sanyu Chemical to the Creditor. The word
or to guarantee the contractual obligations or debts of 'indebtedness' is used herein in its most comprehensive
others, shall be known as Insurance Corporations. sense and includes any and all advances, debts, obligations
According to American Jurisprudence (The Cyclopedia of and liabilities of Principal or any one or more of them,
Insurance Law), a class of contracts written by guaranty or heretofore, now or hereafter made, incurred or created,
surety companies, and generally designated as guaranty, whether voluntary or involuntary and however
insurance, comprises principally contract, credit,
fidelity, title, bond, and security guaranty generally.
Contracts of this kind are now almost universally
regarded as those of insurance where the underwriter
engages in the business for profit, especially since the
terms of the contracts usually closely resemble the
essential elements of an insurance contract. In American
Surety Co. of New York vs. Folk Insurance Commissioner
(135
SW 778), the Supreme Court of Tennessee ruled that
American Surety Company was authorized to conduct the
business of guaranteeing the fidelity of persons holding
places of public and private trust, the performance of
contracts other than insurance policies, and executing or
guaranteeing bonds and undertaking required or
permitted in all actions or proceedings or by law
allowed. These contracts are contracts of insurance
and the making of them is insurance business.
Luzon Surety, which is the holder of a Certificate
of Authority as a fire, marine, earthquake, typhoon, tidal
wave, riot, flood, civil commotion, war, civil war,
revolutions, rebellions, military or usurped power, use &
occupancy, storm, bombardment, invasion, insurrection,
motor car, burglary, accident, and fidelity insurance
company, and which is authorized to become a surety
upon official recognizances, stipulations, bonds and
undertakings, is engaged in the insurance business and is
an insurance company.
As to the P20 annual permit fee, the company was
correctly adjudged liable. The authority of the City of
Bacolod to require persons and entities engaged in or
conducting any business within its jurisdictional territory
to obtain permits and pay the corresponding permit fees is
specifically granted by Commonwealth Act 326.

Atok Finance Corporation vs. CA, Sanyu Chemical

Corporation, Danilo E. Arrieta, Nenita B. Arrieta,
Pablito Bermundo & Leopoldo Halili, G.R. No. 80078,
May 18,
1993 (222 SCRA 232)

Facts: Sanyu Chemical Corporation, as principal, and

Sanyu Trading Corporation along with individual private
stockholders of Sanyu Chemical, namely, spouses Danilo E.
88
arising, whether direct or acquired by the Creditor by absolute and literal manner and carried to the limit of its
assignment or succession, whether due or not due, logic. This is clear from Article 2052 of the Civil Code itself
absolute or contingent, liquidated or unliquidated, which states that a guaranty cannot exist without a valid
determined or undetermined and whether the Principal obligation. Nevertheless, a guaranty may be constituted to
may be liable individually or jointly with others, or guarantee the performance of a voidable or an
whether recovery upon such indebtedness may be or unenforceable contract. It may also guarantee a natural
hereafter become barred by any statute of limitations, or obligation. Moreover, Article 2053 of the Civil Code states
whether such indebtedness may be or otherwise become that a guaranty may also be given as security for future
unenforceable. debts, the amount of which is not yet known; there can
On 27 November 1981, Sanyu Chemical be no claim against the guarantor until the debt is
assigned its trade receivables outstanding as of 27 liquidated. A conditional obligation may also be secured .
November 1981 with a total face value of P125,871.00, The
to Atok Finance in consideration of receipt from Atok
Finance of the amount of P105,000.00. The assigned
receivables carried a standard term of thirty (30) days;
it appeared, however, that the standard commercial
practice was to grant an extension of up to one
hundred twenty (120) days without penalties. Later,
additional trade receivables were assigned by Sanyu
Chemical to Atok Finance with a total face value of
P100,378.45.
On 13 January 1984, Atok Finance commenced
action against Sanyu Chemical, the Arrieta spouses,
Pablito Bermundo and Leopoldo Halili before the Regional
Trial Court of Manila to collect the sum of P120,240.00
plus penalty charges amounting to P0.03 for every peso
due and payable for each month starting from 1
September 1983. Atok Finance alleged that Sanyu
Chemical had failed to collect and remit the amounts due
under the trade receivables.
Sanyu Chemical and the individual private
respondents sought dismissal of Atok's claim upon the
ground that such claim had prescribed under Article
1629 of the Civil Code and for lack of cause of action. The
private respondents contended that the Continuing
Suretyship Agreement, being an accessory contract, was
null and void since, at the time of its execution, Sanyu
Chemical had no pre-existing obligation due to Atok
Finance.
The court ruled for Atok Finance. The appeal
was dismissed at first due to the failure to file the
appellants brief. The dismissal was set aside through a
petition for relief, and the decision of the lower court was
reversed.

Issue: Whether a suretyship is valid and binding even

before the principal obligation is born.

Held: Yes. Reversed.

Ratio: It is true that 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." This legal proposition is not,
however, like most legal principles, to be read in an
89
Court of Appeals apparently overlooked our caselaw Article 1629 of the Civil Code invoked by private
interpreting Articles 2052 and 2053 of the Civil Code. In respondents and accepted by the Court of Appeals is not,
National Rice and Corn Corporation (NARIC) v. Jose A. in the case at bar, material. The liability of Sanyu
Fojas and Alto Surety Co., Inc., the court ruled that Article Chemical to Atok Finance rests not on the breach of the
1825 of the Civil Code of 1889, in force in 1948, expressly warranty of solvency; the liability of Sanyu Chemical was
recognized that 'a guaranty may also be given as security not ex lege (ex Article 1629) but rather excontractu.
for future debts the amount of which is not yet known.' In Under the Deed of Assignment, the effect of non-payment
Rizal Commercial Banking Corporation v. Arro, it can be by the original trade debtors was a breach of warranty of
clearly seen that the surety agreement was executed to solvency by Sanyu Chemical, resulting in turn in the
guarantee future debts which Daicor may incur with assumption of solidary liability by the assignor under
petitioner, as is legally allowable under the Civil Code. the receivables assigned. In other words, the assignor
It is clear to us that the Rizal Commercial Banking Sanyu Chemical becomes a solidary debtor under the
Corporation and the NARIC cases rejected the distinction terms of the receivables covered
which the Court of Appeals in the case at bar sought to
make with respect to Article 2053, that is, that the
"future debts" referred to in that Article relate to "debts
already existing at the time of the constitution of the
agreement but the amount [of which] is unknown," and
not to debts not yet incurred and existing at that time. Of
course, a surety is not bound under any particular
principal obligation until that principal obligation is born.
But there is no theoretical or doctrinal difficulty inherent
in saying that the suretyship agreement itself is valid
and binding even before the principal obligation
intended to be secured thereby is born, any more than
there would be in saying that obligations which are subject
to a condition precedent are valid and binding before the
occurrence of the condition precedent.
Comprehensive or continuing surety agreements
are in fact quite commonplace in present day financial
and commercial practice. A bank or a financing
company which anticipates entering into a series of credit
transactions with a particular company, commonly
requires the projected principal debtor to execute a
continuing surety agreement along with its sureties. By
executing such an agreement, the principal places itself in
a position to enter into the projected series of transactions
with its creditor; with such 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.
The contention of Sanyu Chemical was that Atok
Finance had no cause of action under the Deed of
Assignment for the reason that Sanyu Chemical's warranty
of the debtors' solvency had ceased. It may be stressed as
a preliminary matter that the Deed of Assignment was
valid and binding upon Sanyu Chemical. Assignment of
receivables is a commonplace commercial transaction
today. It is an activity or operation that permits the
assignee to monetize or realize the value of the receivables
before the maturity thereof. In other words, Sanyu
Chemical received from Atok Finance the value of its trade
receivables it had assigned; Sanyu Chemical obviously
benefitted from the assignment. The payments due in the
first instance from the trade debtors of Sanyu Chemical
would represent the return of the investment which Atok
Finance had made when it paid Sanyu Chemical the
transfer value of such receivables.
90
and transferred by virtue of the Deed of Assignment. And
because assignor Sanyu Chemical became, under the
terms of the Deed of Assignment, solidary obligor under
each of the assigned receivables, the other private
respondents (the Arrieta spouses, Pablito Bermundo and
Leopoldo Halili), became solidarily liable for that
obligation of Sanyu Chemical, by virtue of the operation of
the Continuing Suretyship Agreement. Put a little
differently, the obligations of individual private
respondent officers and stockholders of Sanyu Chemical
under the Continuing Suretyship Agreement, were
activated by the resulting obligations of Sanyu Chemical
as solidary obligor under each of the assigned receivables
by virtue of the operation of the Deed of Assignment. That
solidary liability of Sanyu Chemical is not subject to the
limiting period set out in Article
1629 of the Civil Code.
comprehensive surety agreement was admittedly in full
force and effect. The loan was, therefore, covered by the
said agreement, and private respondent, even if he did not
sign the promisory note, is liable by virtue of the surety
agreement. The only condition that would make him liable
thereunder is that the Borrower "is or may become liable
as maker, endorser, acceptor or otherwise". There is no
doubt that Daicor is liable on the promissory note
evidencing the indebtedness.
The surety agreement which was earlier signed
by Enrique Go, Sr. and private respondent, is an
accessory obligation, it being dependent upon a principal
one which, in this case is the loan obtained by Daicor
as evidenced by a promissory note. What

Rizal Commercial Banking Corporation vs. Hon. Jose

P. Arro, Judge of the CFI of
Davao & Residoro Chua, G.R. No. L-49401, July 30, 1982
(115 SCRA 777)

Facts: Residoro Chua and Enrique Go, Sr. jointly executed

a comprehensive surety agreement to guaranty any
existing or future obligation of Davao Agricultural
Industries Corporation (DAICOR) with petitioner bank.
Thereafter, a promissory note in the amount of
P100,000.00 was issued in favor of petitioner bank
which was signed solely by Enrique Go, Sr. in his
personal capacity and in behalf of DAICOR . When
despite repeated demands the note was not fully paid,
petitioner bank filed a complaint against Daicor,
respondent Chua and Enrique Go, Sr. The trial court,
sustaining the private respondent, dismissed the
complaint on the ground that it states no cause of
action as against him since he did not sign the subject
promissory note, which is a necessary corollary to the
comprehensive surety agreement as evidence of
indebtedness, and without which the said agreement
served no purpose.

Issue: Whether a surety who guarantees any existing or

future obligation can be held liable for a promissory note
subsequently executed without his signature.

Held: Yes. Reversed.

Ratio: The agreement was executed obviously to

induce petitioner to grant any application for a loan
Daicor may desire to obtain from petitioner bank. The
guaranty is a continuing one which shall remain in full
force and effect until the bank is notified of its termination.
At the time the loan of P100,000.00 was obtained from
petitioner by Daicor, for the purpose of having an
additional capital for buying and selling coco-shell
charcoal and importation of activated carbon, the
91
obviously induced petitioner bank to grant the loan was
the surety agreement whereby Go and Chua bound
themselves solidarily to guaranty the punctual payment
of the loan at maturity. By terms that are unequivocal, it
can be clearly seen that the surety agreement was
executed to guarantee future debts which Daicor may
incur with petitioner, as is legally allowable under the
Civil Code. Thus, Article 2053 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.
The records of the case were reconstituted upon petition.
The court ruled for the bank, holding the spouses
solidarily liable for the liability. Upon appeal, the IAC
modified the decision by holding Roberto Regal liable
only to the extent of the monthly credit limit granted
to Celia Regala, i.e., at P2,000.00 a month and only for the
advances made during the one year period of the card's
effectivity.
Issue: Whether a guarantors undertaking which makes
him liable jointly and severally can be construed as being a
contract of surety.

Pacific Banking Corporation vs. Hon. Intermediate

Appellate Court & Roberto
Regala, Jr., G.R. No. 72275, November 13, 1991 (203
SCRA 496)

Facts: On October 24, 1975, defendant Celia Syjuco

Regala applied for and obtained from the Pacific Banking
Corp. the issuance and use of Pacificard credit card. On
the same date, the defendant-appellant Robert Regala, Jr.,
spouse of defendant Celia Regala, executed a 'Guarantor's
Undertaking' in favor of the bank whereby the latter
agreed
'jointly and severally of Celia Aurora Syjuco Regala, to pay
the Pacific Banking Corporation upon demand, any and
all indebtedness, obligations, charges or liabilities due
and incurred by said Celia Aurora Syjuco Regala with the
use of the Pacificard, or renewals thereof, issued in her
favor by the Pacific Banking Corporation'. It was also
agreed that any changes of or novation in the terms and
conditions in connection with the issuance or use of the
Pacificard, or any extension of time to pay such
obligations, charges or liabilities shall not in any manner
release Robert Regala from responsibility hereunder, it
being understood that he fully agrees to such charges,
novation or extension, and that this understanding is a
continuing one and shall subsist and bind him until the
liabilities of the said Celia Syjuco Regala have been fully
satisfied or paid.
Celia Regala, as such Pacificard holder, had
purchased goods and/or services on credit under her
Pacificard, for which the plaintiff advanced the cost
amounting to P92,803.98. In view of defendant Celia
Regala's failure to settle her account for the purchases
made thru the use of the Pacificard, a written demand was
sent to the latter and also to the defendant Roberto Regala,
Jr. under his 'Guarantor's Undertaking. A complaint was
subsequently filed in Court for the repeated failure to
settle their obligation. Celia Regala was declared in
default for her failure to file her answer within the
reglementary period. Roberto Regala, Jr., on the other
hand, filed his Answer with Counterclaim admitting his
execution of the 'Guarantor's Understanding, but with
the understanding that his liability would be limited to
P2,000.00 per month.' After all evidence were presented,
a fire struck the City Hall of Manila, including the court.
92
Held: Yes. Reversed. 1987 (149 SCRA 226)

Ratio: The undertaking signed by Roberto Regala, Facts: Dr. Marylou J. Perlas, called up the Vizconde, a long-
Jr. although denominated "Guarantor's Undertaking," time friend and former high school classmate, asking her
was in substance a contract of surety. As distinguished to sell Perlas' 8-carat diamond ring. Shortly afterwards,
from a contract of guaranty where the guarantor binds Perlas delivered the ring to Vizconde to be sold on
himself to the creditor to fulfill the obligation of the commission for P85,000.00. Vizconde signed a receipt for
principal debtor only in case the latter should fail to do so, the ring.
in a contract of suretyship, the surety binds himself About a week and a half later, Vizconde
solidarily with the principal debtor. returned the ring to Perlas, who had asked for it
We need not look elsewhere to determine the because she needed to show it to a cousin. However,
nature and extent of private respondent Roberto Regala, Vizconde afterwards
Jr.'s undertaking. As a surety he bound himself jointly and
severally with the debtor Celia Regala "to pay the Pacific
Banking Corporation upon demand, any and all
indebtedness, obligations, charges or liabilities due and
incurred by said Celia Syjuco Regala with the use of
Pacificard or renewals thereof issued in (her) favor by
Pacific Banking Corporation."
It is true that under Article 2054 of the Civil Code,
"(A) guarantor may bind himself for less, but not for
more than the principal debtor, both as regards the
amount and the onerous nature of the conditions. It is
likewise not disputed by the parties that the credit limit
granted to Celia Regala was P2,000.00 per month and that
Celia Regala succeeded in using the card beyond the
original period of its effectivity, October 29,
1979. We do not agree however, that Roberto Jr.'s
liability should be limited to that extent. Private
respondent Roberto Regala, Jr., as surety of his wife,
expressly bound himself up to the extent of the debtor's
(Celia) indebtedness likewise expressly waiving any
"discharge in case of any change or novation of the
terms and conditions in connection with the issuance of
the Pacificard credit card." Roberto, in fact, made his
commitment as a surety a continuing one, binding upon
himself until all the liabilities of Celia Regala have been
fully paid. All these were clear under the "Guarantor's
Undertaking' Roberto signed.
Private respondent Roberto Regala, Jr. had been
made aware by the terms of the undertaking of future
changes in the terms and conditions governing the
issuance of the credit card to his wife and that
notwithstanding, he voluntarily agreed to be bound as a
surety. As in guaranty, a surety may secure additional and
future debts of the principal debtor the amount of which is
not yet known.
A guarantor or surety does not incur liability
unless the principal debtor is held liable. It is in this sense
that a surety, although solidarily liable with the principal
debtor, is different from the debtor. It does not mean,
however, that the surety cannot be held liable to the same
extent as the principal debtor. The nature and extent of the
liabilities of a guarantor or a surety is determined by the
clauses in the contract of suretyship.

Corazon J. Vizconde vs. Intermediate Appellate Court

& People of the Philippines, G.R. No. 74231, April 10,
93
called on Perlas at the latter's home, with another lady, General, despite having argued for affirmance of
Pilar A. Pagulayan, who claimed to have a "sure buyer" for Vizconde's conviction in the Court of Appeals, now
the ring. Perlas was initially hesitant to do so, but she recommends that she be acquitted, but nonetheless held
eventually parted with the ring so that it could be civilly liable.
examined privately by Pagulayan's buyer when the latter
gave her a postdated check for the price (P85,000.00) and, Issue: Whether a surety can be held liable for estafa.
together with Vizconde, signed a receipt prepared by
Perlas. The receipt made Pagulayan principally liable Held: No. Reversed.
while Vizconde jointly and severally guaranteed the
obligation.
After Pagulayan's postdated check matured,
Perlas deposited it to her account at Manila Bank. It was
dishonored for the reason, "No arrangement," stated in
the debit advice. Perlas then called up Vizconde to inform
her about the dishonor of the check. The latter suggested
that Perlas redeposit the check while she (Vizconde)
followed up the sale of the ring. Perlas re-deposited the
check, but again it was dishonored because drawn
against insufficient funds. So Perlas took the matter to
counsel, who sent separate letters of demand to Vizconde
and Pagulayan for return of the ring or payment of
P85,000.00. After nine days, Vizconde and Pagulayan
called on Perlas. Pagulayan paid Perlas P5,000.00 against
the value of the ring. She also gave into Perlas'
keeping three certificates of title to real estate to
guarantee delivery of the balance of such value. A
receipt for the money and the titles was typed and signed
by Perlas, which she also made the two sign.
Vizconde and Pagulayan having allegedly reneged
on a promise to complete payment for the ring on the
very next day, Perlas filed with the Quezon City Fiscal's
office a complaint against them for estafa. This
notwithstanding, Pagulayan still paid Perlas various sums
totalling P25,000.00 which together with the P5,000.00
earlier paid, left a balance of P55,000.00 still owing.
After trial, both accused were convicted and each
sentenced to serve an indeterminate prison term of from
eight (8) years, four (4) months and one (1) day to ten
(10) years and two (2) months of prision mayor, with the
accessory penalties provided by law, and jointly and
severally to indemnify the offended party in the sum of
P55,000.00 for the unaccounted balance of the value of
the ring with legal interest from April 22,
1975, the further sum of P30,000.00 as and for moral
damages and the sum of P10,000.00 for attorney's fees.
Both accused appealed to the Court of Appeals,
but as Pilar A. Pagulayan had evaded promulgation of
sentence in the Trial Court and had appealed only through
counsel, the Appellate Court vacated her appeal as
ineffectual. On Vizconde's part, the Court of Appeals
affirmed the judgment of the Trial Court in all respects
except the penalty of imprisonment, which it increased to
a term of from ten (10) years and one (1) day of prision
mayor to twelve (12) years ten (10) months and twenty-
one (21) days of reclusion temporal. A motion for
reconsideration was denied. Vizconde thereafter filed the
present petition for review on certiorari.
Required to comment on the petition, the Solicitor
94
Ratio: Nothing in the language of the receipt, or in the inconsistent with what Vizconde has asserted to be an
proven circumstances attending its execution can logically innocent desire to help her friend dispose of the ring;
be considered as evidencing the creation of an agency nor do they exclude every reasonable hypothesis other
between Perlas, as principal, and Vizconde, as agent, for than complicity in a premeditated swindle.
the sale of the former's ring. True, reference to what may The conflict in the recitals of the two receipts
be taken for an agency agreement appears in the clause ". . insofar as concerns Vizconde's part in the transaction
. which I agree to sell . . . on commission basis" in the main involving Perlas' ring is obvious and cannot be ignored.
text of that document. But it is clear that if any agency was Neither, as the Court sees it, should these writings be read
established, it was one between Perlas and Pagulayan together in an attempt to reconcile what they contain,
only, this being the only logical conclusion from the use of since the later receipt was made under circumstances
the singular "I" in said clause, in conjunction with the fact which leave no little doubt of its truth and integrity. What
that the part of the receipt in which the clause appears is clear from the first receipt is that the ring was entrusted
bears only the signature of Pagulayan. To warrant
anything more than a mere conjecture that the receipt
also constituted Vizconde the agent of Perlas for the same
purpose of selling the ring, the cited clause should at
least have used the plural "we," or the text of the
receipt containing that clause should also have carried
Vizconde's signature. As the Solicitor General correctly
puts it, the joint and several undertaking assumed by
Vizconde in a separate writing below the main body of the
receipt merely guaranteed the civil obligation of Pagulayan
to pay Perlas the value of the ring in the event of her
(Pagulayan's) failure to return said article. It cannot, in any
sense, be construed as assuming any criminal
responsibility consequent upon the failure of Pagulayan to
return the ring or deliver its value. It is fundamental that
criminal responsibility is personal and that in the
absence of conspiracy, one cannot be held criminally
liable for the act or default of another.
Thus, the theory that by standing as surety for
Pagulayan, Vizconde assumed an obligation more than
merely civil in character, and staked her very liberty on
Pagulayan's fidelity to her trust is utterly unacceptable; it
strikes at the very essence of guaranty (or suretyship) as
creating purely civil obligations on the part of the
guarantor or surety. To render Vizconde criminally liable
for the misappropriation of the ring, more than her
mere guarantee is necessary. At the least, she must be
shown to have acted in concert and conspiracy with
Pagulayan, either in obtaining possession of the ring, or in
undertaking to return the same or delivery its value, or
in the misappropriation or conversion of the same.
Now, the information charges conspiracy
between Vizconde and Pagulayan, but no adequate proof
thereof has been presented. It is of course true that direct
proof of conspiracy is not essential to convict an alleged
conspirator, and that conspiracy may be established by
evidence of acts done in pursuance of a common unlawful
purpose. Here, however, the circumstances from which a
reasonable inference of conspiracy might arise, such as
the fact that Vizconde and the complainant were friends
of long standing and former classmates, that it was
Vizconde who introduced Pagulayan to Perlas, that
Vizconde was present on the two occasions when the ring
was entrusted to Pagulayan and when part payment of
P5,000.00 was made, and that she signed the receipts on
those occasions are, at best, inconclusive. They are not
95
to Pilar A. Pagulayan to be sold on commission; there is no COMPANY or its representatives shall or may pay or
mention therein that it was simultaneously delivered to cause to be paid or become liable to pay, on account of
and received by Vizconde for the same purpose or, or arising from the execution of the above mentioned
therefore, that Vizconde was constituted, or agreed to act Bond."
as, agent jointly with Pagulayan for the sale of the ring. On June 25, 1954, the surety advised the Secretary
What Vizconde solely undertook was to guarantee the of Education that it was withdrawing and cancelling its
obligation of Pagulayan to return the ring or deliver its bond. Copies of the letter were sent to the Bureau of
value; and that guarantee created only a civil obligation, Private Schools and to the Central Luzon Educational
without more, upon default of the principal. The second Foundation, Inc.
receipt, on the other hand, would make out Vizconde an It appears that on the date of execution of the
agent for the sale of the ring. The undisputed fact that bond, the Foundation was indebted to two of its teachers
the first receipt was executed simultaneously with the for salaries, to wit: to Remedios Laoag, in the sum of
delivery of the ring to Pagulayan compellingly argues for P685.64, and to H.B. Arandia, in the sum of P820.00, or a
accepting it as a more trustworthy memorial of the real total of P1,505.64. Demand for the above
agreement and transaction of the parties than the second
receipt which was executed at a later date and after the
supervention of events rendering it expedient or desirable
to vary the terms of that agreement or transaction.
Upon the evidence, appellant Corazon J. Vizconde
was a mere guarantor, a solidary one to be sure, of the
obligation assumed by Pilar A. Pagulayan to complainant
Marylou J. Perlas for the return of the latter's ring or the
delivery of its value. Whatever liability was incurred by
Pagulayan for defaulting on such obligation and this is
not inquired into that of Vizconde consequent upon
such default was merely civil, not criminal. It was,
therefore, error to convict her of estafa.

General Insurance and Surety Corporation vs.

Republic of the Philippines & Central Luzon
Educational Foundation, G.R. No. L-13873, January
31, 1963 (7
SCRA 4)

Facts: Department of Education required the Central

Luzon Educational Foundation, Inc., operating the Sison
& Aruego Colleges, of Urdaneta, Pangasinan, Philippines
an institution of learning to file a bond to guarantee the
adequate and efficient administration of said school or
college and the observance of all regulations prescribed by
the Secretary of Education and compliance with all
obligations, including the payment of the salaries of all its
teachers and employees, past, present, and future, and the
payment of all other obligations incurred by, or in behalf
of said school. Thus, Central Luzon Educational
Foundation, Inc. and the General Insurance and Surety
Corporation posted in favor of the Department of
Education a bond which holds them jointly and severally
liable.
On the same day, May 15, 1954, the Central Luzon
Educational Foundation, Inc., Teofilo Sison and Jose M.
Aruego executed an indemnity agreement binding
themselves jointly and severally to indemnify the surety of
"any damages, prejudices, loss, costs, payments, advances
and expenses of whatever kind and nature, including
attorney's fees and legal costs, which the COMPANY may,
at any time sustain or incur, as well as to reimburse to said
COMPANY all sums and amounts of money which the
96
amount having been refused, the Solicitor General, in
behalf of the Republic of the Philippines, filed a complaint
for the forfeiture of the bond, in the Court of First Instance
of Manila on July 11, 1956. The CFI rendered judgment
holding the principal and the surety jointly and severally
liable to the Government in the sum of P10,000.00 with
legal interest from the date of filing of the complaint, until
the sum is fully paid and ordering the principal to
reimburse the surety whatever amount it may be
compelled to pay to the Government by reason of the
judgment, with costs against both principal and the surety.
The CA affirmed with modifications.
Supermart, its owner-proprietor, See Hong & Judge
Benjamin K. Gorospe, Presiding Judge, CFI of
Misamis Oriental, Br. 1, G.R. No. L-45848, November 9,
1977 (80 SCRA 262)
Facts: See Hong, the proprietor of Ororama Supermart in
Cagayan de Oro City, sued the spouses Ernesto Ong and
Conching Ong in the CFI of Misamis Oriental for the
collection of the sum of P58,400 plus litigation expenses
and attorneys fees. See Hong asked for a

Issue: Whether the whole bond can be executed upon

even though the actual liability is a smaller amount.

Held: Yes. Affirmed.

Ratio: It must be remembered that, by the terms of the

bond, the surety guaranteed to the Government
"compliance (by the Foundation) with all obligations,
including the payment of the salaries of its teachers and
employees, past, present and future, and the payment of all
other obligations incurred by, or in behalf of said school."
Now, it is not disputed that even before the execution of
the bond, the Foundation was already indebted to two of
its teachers for past salaries. From the moment, therefore,
the bond was executed, the right of the Government to
proceed against the bond accrued because since then,
there has been violation of the terms of the bond
regarding payment of past salaries of teachers at the Sison
and Aruego Colleges. The fact that the action was filed only
on July 11, 1956 does not militate against this position
because actions based on written contracts prescribe in
ten years.
There is no provision that the bond will be
cancelled unless the surety is notified of any claim and so
no condition precedent has to be complied with by the
Government before it can bring an action. Indeed, the
provision of the bond in the NARIC and Santos cases that it
would be cancelled ten days after its expiration unless
notice of claim was given was inserted precisely because,
without such a provision, the surety's liability for
obligations arising while the bond was in force would
subsist even after its expiration.
There is nothing against public policy in forfeiting
the bond for the full amount. The bond is penal in nature.
Article 1226 of the Code states that in obligation with a
penal clause, the penalty shall substitute the indemnity for
damages and the payment of interests in case of non-
compliance, if there is no stipulation to the contrary, and
the party to whom payment is to be made is entitled to
recover the sum stipulated without need of proving
damages because one of the primary purposes of a penalty
clause is to avoid such necessity.

Towers Assurance Corporation vs. Ororama

97
writ of preliminary attachment which was granted. The a Memorandum of Agreement was executed by and
deputy sheriff attached the properties of the Ong spouses between Slobec Realty and Development, Inc., represented
in Valencia, Bukidnon and in Cagayan de Oro City. To lift by its President Santiago Rivera and the Castillo family. In
the attachment, the Ong spouses filed a counterbond in the this agreement, Santiago Rivera obliged himself to pay the
amount of P58,400 with Towers Assurance Corporation as Castillo family the sum of P70,000.00 immediately after
surety. In that undertaking, the Ong spouses and Towers the execution of the agreement and to pay the additional
Assurance Corporation bound themselves to pay solidarily amount of P400,000.00 after the property has been
to See Hong the sum of P58,400. converted into a subdivision. Rivera,
The lower court ruled for See Hong and ordered
not only the Ong spouses but also their surety, Towers
Assurance Corporation to pay solidarily to See Hong the
sum of P58,400. A writ of execution was issued. Towers
Assurance Corporation filed a petition for certiorari where
it assailed the decision and the writ of execution.

Issue: Whether the surety in an attachment counterbond

is entitled to be heard before it can be held liable.

Held: Yes. Reversed.

Ratio: Under Section 17, Rule 47, in order that the

judgment creditor might recover from the surety on the
counterbond, it is necessary (1) that execution be first
issued against the principal debtor and that such execution
was returned unsatisfied in whole or in part; (2) that the
creditor made a demand upon the surety for the
satisfaction of the judgment; and (3) that the surety be
given notice and a summary hearing in the same action as
to his liability for the judgment under his counterbond.
The first requisite mentioned above is not
applicable to this case because Towers Assurance
Corporation assumed a solidary liability for the
satisfaction of the judgment. A surety is not entitled to
the exhaustion of the properties of the principal debtor.
But certainly, the surety is entitled to be heard before an
execution can be issued against him since he is not a party
in the case involving his principal. Notice and hearing
constitute the essence of procedural due process.

Buenaflor C. Umali, Mauricia M. Vda. De Castillo,

Victoria M. Castillo, Bertilla C. Rada, Marietta C.
Abaez, Leovina C. Jalbuena & Santiago M. Rivera vs.
CA, Bormaheco Inc., & Philippine Machinery Parts
Manufacturing Co., Inc., G.R. No.
89561, September 13, 1990 (189 SCRA 529)

Facts: Santiago Rivera is the nephew of Mauricia Meer

Vda. de Castillo. The Castillo family are the owners of a
parcel of land located in Lucena City which was given
as security for a loan from the Development Banks of the
Philippines. For their failure to pay the amortization,
foreclosure of the said property was about to be initiated.
This problem was made known to Santiago Rivera, who
proposed to them the conversion into subdivision of the
four (4) parcels of land adjacent to the mortgaged
property to raise the necessary fund. The idea was
accepted by the Castillo family and to carry out the project,
98
armed with the agreement, approached Mr. Modesto Castillo requesting her and her children to vacate the
Cervantes, President of defendant Bormaheco, and subject property, who (Mrs. Castillo) in turn sent her reply
proposed to purchase from Bormaheco two (2) tractors expressing her refusal to comply with his demands.
Model D-7 and D-8. Subsequently, a Sales Agreement was On September 29, 1976, the heirs of the late
executed on December 28, 1970. On January Felipe Castillo, particularly plaintiff Buenaflor M. Castillo
23, 1971, Bormaheco, Inc. and Slobec Realty and Umali as the appointed administratrix of the properties in
Development, Inc., represented by its President, Santiago question filed an action for annulment of title before the
Rivera, executed a Sales Agreement over one unit of then Court of First Instance of Quezon and docketed
Caterpillar Tractor D-7. As shown by the contract, the thereat as Civil Case No. 8085. Thereafter, they filed an
price was P230,000.00 of which P50,000.00 was to Amended Complaint on January 10,1980. On July 20,
constitute a down payment, and the balance of 1983, plaintiffs filed their Second Amended Complaint,
P180,000.00 payable in eighteen monthly installments. On impleading Santiago M. Rivera as a party plaintiff. They
the same date, Slobec, through Rivera, executed in favor of contended that all
Bormaheco a Chattel Mortgage over the said equipment
as security for the payment of the aforesaid balance of
P180,000.00. As further security of the aforementioned
unpaid balance, Slobec obtained from Insurance
Corporation of the Phil. a Surety Bond, with ICP
(Insurance Corporation of the Phil.) as surety and Slobec
as principal, in favor of Bormaheco. The aforesaid surety
bond was in turn secured by an Agreement of Counter-
Guaranty with Real Estate Mortgage executed by Rivera as
president of Slobec and Mauricia Meer Vda. de Castillo,
Buenaflor Castillo Umali, Bertilla Castillo Rada, Victoria
Castillo, Marietta Castillo and Leovina Castillo Jalbuena, as
mortgagors and Insurance Corporation of the Philippines
(ICP) as mortgagee. In this agreement, ICP guaranteed the
obligation of Slobec with Bormaheco in the amount of
P180,000.00. In giving the bond, ICP required that the
Castillos mortgage to them the properties in question,
namely, four parcels of land covered by TCTs in
the name of the aforementioned mortgagors, namely
TCT Nos. 13114, 13115, 13116 and 13117 all of the
Register of Deeds for Lucena City.
For violation of the terms and conditions of the
Counter-Guaranty, the properties of the Castillos were
foreclosed by ICP. As the highest bidder with a bid of
P285,212.00, a Certificate of Sale was issued by the
Provincial Sheriff of Lucena City and Transfer Certificates
of Title over the subject parcels of land were issued by the
Register of Deeds of Lucena City in favor of ICP. The
mortgagors had one (1 ) year from the date of the
registration of the certificate of sale, that is, until October
1,1974, to redeem the property, but they failed to do so.
Consequently, ICP consolidated its ownership over the
subject parcels of land through the requisite affidavit
of consolidation of ownership dated October 29, 1974.
Pursuant thereto, a Deed of Sale of Real Estate covering
the subject properties was issued in favor of ICP.
On April 10, 1975, Insurance Corporation of the
Phil. (ICP) sold to Phil. Machinery Parts Manufacturing Co.
(PM Parts) the four (4) parcels of land and by virtue of
said conveyance, PM Parts transferred unto itself the titles
over the lots in dispute so that said parcels of land are
now covered by TCT Nos. T-24846, T-24847, T-24848
and T-24849. Thereafter, PM Parts, through its
President, Mr. Modesto Cervantes, sent a letter dated
August 9,1976 addressed to plaintiff Mrs. Mauricia Meer
99
the aforementioned transactions starting with the
Agreement of Counter-Guaranty with Real Estate
Mortgage, Certificate of Sale and the Deeds of Authority to
Sell, Sale and the Affidavit of Consolidation of Ownership
as well as the Deed of Sale are void for being entered into
in fraud and without the consent and approval of the
Court of First Instance of Quezon, (Branch IX) before
whom the administration proceedings has been pending.
The court declared the counter-guaranty, sales
agreement, chattel mortgage, Certificate of Sale void for
being fictitious, spurious, and without consideration. CA
reversed.
recognized Bormaheco as an agent of ICP. Such payment to
the agent of ICP is, therefore, binding on Rivera. He is
now estopped from questioning the validity of the
suretyship contract.
The surety bond was dated October 24, 1970.
However, an annotation on the upper part thereof states:
"NOTE: EFFECTIVITY DATE OF THIS BOND SHALL BE ON
JANUARY 22, 1971." On the other hand, the Sales
Agreement dated January 23,
1971 provides that the balance of P180,000.00 shall be
payable in eighteen (18) monthly

Issue: Whether a surety who was not given a timely notice

can be relieved of its liability. Whether a surety can be
liable for a shorter period of time than the principal.

Held: Yes. Yes. Affirmed with modifications.

Ratio: There is absolute simulation, which renders the

contract null and void, when the parties do not intend to
be bound at all by the same. The basic characteristic of
this type of simulation of contract is the fact that the
apparent contract is not really desired or intended to
either produce legal effects or in any way alter the
juridical situation of the parties. The subsequent act of
Rivera in receiving and making use of the tractor subject
matter of the Sales Agreement and Chattel Mortgage, and
the simultaneous issuance of a surety bond in favor of
Bormaheco, concomitant with the execution of the
Agreement of Counter-Guaranty with Chattel/Real Estate
Mortgage, conduce to the conclusion that petitioners had
every intention to be bound by these contracts. The
occurrence of these series of transactions between
petitioners and private respondents is a strong indication
that the parties actually intended, or at least expected, to
exact fulfillment of their respective obligations from one
another.
Neither will an allegation of fraud prosper in this
case where petitioners failed to show that they were
induced to enter into a contract through the insidious
words and machinations of private respondents without
which the former would not have executed such contract.
To set aside a document solemnly executed and
voluntarily delivered, the proof of fraud must be clear and
convincing. We are not persuaded that such quantum of
proof exists in the case at bar.
The fact that it was Bormaheco which paid the
premium for the surety bond issued by ICP does not per
se affect the validity of the bond. Petitioners themselves
admit in their present petition that Rivera executed a Deed
of Sale with Right of Repurchase of his car in favor of
Bormaheco and agreed that a part of the proceeds thereof
shall be used to pay the premium for the bond. In effect,
Bormaheco accepted the payment of the premium as an
agent of ICP. The execution of the deed of sale with a right
of repurchase in favor of Bormaheco under such
circumstances sufficiently establishes the fact that Rivera
100
installments. The Promissory Note executed by Slobec unauthorized extension thereof. This is an exception to
on even date in favor of the general rule that the obligation of the surety continues
Bormaheco further provides that the obligation shall be for the same period as that of the principal debtor.
payable on or before February 23, It is possible that the period of suretyship may be
1971 up to July 23, 1972, and that non-payment of any of shorter than that of the principal obligation, as where the
the installments when due shall make the entire obligation principal debtor is required to make payment by
immediately due and demandable. It is basic that liability installments. In the case at bar, the surety bond issued by
on a bond is contractual in nature and is ordinarily ICP was to expire on January 22, 1972, twelve (12) months
restricted to the obligation expressly assumed therein. We from its effectivity date whereas Slobec's installment
have repeatedly held that the extent of a surety's liability payment was to end on July 23, 1972. Therefore, while ICP
is determined only by the clause of the contract' of guaranteed the payment by Slobec of the balance of
suretyship as well as the conditions stated in the bond. It P180,000 00, such guaranty was valid only for and within
cannot be extended by implication beyond the terms the twelve (12) months from the date of effectivity of the
contract. surety bond, or until January 22, 1972. Thereafter, from
Fundamental likewise is the rule that, except January
where required by the provisions of the contract, a 23, 1972 up to July 23, 1972, the liability of Slobec became
demand or notice of default is not required to fix the an unsecured obligation. The
surety's liability. Hence, where the contract of suretyship
stipulates that notice of the principal's default be given to
the surety, generally the failure to comply with the
condition will prevent recovery from the surety. There are
certain instances, however, when failure to comply with
the condition will not extinguish the surety's liability, such
as a failure to give notice of slight defaults, which are
waived by the obligee; or on mere suspicion of possible
default; or where, if a default exists, there is excuse
or provision in the suretyship contract exempting the
surety or liability therefor, or where the surety already
has knowledge or is chargeable with knowledge of the
default.
In the case at bar, the suretyship contract
expressly provides that ICP shall not be liable for any
claim not filed in writing within thirty (30) days from the
expiration of the bond. In its decision dated May 25, 1987,
the court a quo categorically stated that "(n)o evidence
was presented to show that Bormaheco demanded
payment from ICP nor was there any action taken by
Bormaheco on the bond posted by ICP to guarantee
the payment of plaintiffs obligation. There is nothing in
the records of the proceedings to show that ICP
indemnified Bormaheco for the failure of the plaintiffs to
pay their obligation." The failure, therefore, of Bormaheco
to notify ICP in writing about Slobec's supposed default
released ICP from liability under its surety bond.
Consequently, ICP could not validly foreclose that real
estate mortgage executed by petitioners in its favor since
it never incurred any liability under the surety bond. It
cannot claim exemption from the required written notice
since its case does not fall under any of the exceptions
herein before enumerated.
The liability of a surety is measured by the terms
of his contract, and, while he is liable to the full extent
thereof, such liability is strictly limited to that assumed
by its terms. While ordinarily the termination of a
surety's liability is governed by the provisions of the
contract of suretyship, where the obligation of a surety
is, under the terms of the bond, to terminate at a
specified time, his obligation cannot be enlarged by an
101
default of Slobec during this period cannot be a valid basis modified the trial court's decision by exonerating private
for the exercise of the right to foreclose by ICP since its respondent Phoenix from liability under its surety bond.
surety contract had already been terminated. Besides, the
liability of ICP was extinguished when Bormaheco failed to Issue: Whether the increase in the indebtedness of the
file a written claim against it within thirty (30) days from principal without the knowledge of the surety is such a
the expiration of the surety bond. Consequently, the material alteration that will completely discharge the
foreclosure of the mortgage, after the expiration of the surety from all liability.
surety bond under which ICP as surety has not incurred
any liability, should be declared null and void. Held: Yes. Affirmed.
Lastly, it has been held that where the guarantor
holds property of the principal as collateral surety for his
personal indemnity, to which he may resort only after
payment by himself, until he has paid something as such
guarantor neither he nor the creditor can resort to such
collaterals. The Agreement of Counter-Guaranty with
Chattel/Real Estate Mortgage states that it is being issued
for and in consideration of the obligations assumed by the
Mortgagee-Surety Company under the terms and
conditions of ICP Bond No.
14010 in behalf of Slobec Realty Development Corporation
and in favor of Bormaheco, Inc. There is no doubt that
said Agreement of Counter-Guaranty is issued for the
personal indemnity of ICP. Considering that the fact of
payment by ICP has never been established, it follows,
pursuant to the doctrine above adverted to, that ICP
cannot foreclose on the subject properties.

Philippine National Bank vs CA & the Philippine

Phoenix Surety & Insurance, Inc., G.R. No. L-30937,
January 21, 1987 (147 SCRA 273)

Facts: Marino P. Rubin obtained from the Binalbagan

Branch of petitioner Philippine National Bank a 1954-
1955 sugar crop loan in the amount of P40,200.00,
secured by a chattel mortgage executed by Rubin as
debtor-mortgagor and Jose A. Campos as mortgagor. As
additional security, private respondent Philippine Phoenix
Surety and Insurance, Inc. issued Surety Bond No. 88 for
P10,000.00 in favor of petitioner Bank. Liability under
said bond was to expire one (1) year from the date
thereof, unless within ten (10) days from its expiration,
the surety is notified of any existing obligations
thereunder. Three months later, petitioner Bank
increased the loan from P40,200.00 to P56,800.00,
without the knowledge and consent of private respondent
Phoenix.
When Rubin failed to liquidate said loan,
petitioner Bank demanded of private respondent Phoenix
that it make good its undertaking as surety for Rubin up to
the stated amount of P10,000.00. Private respondent
Phoenix denied liability, resulting in petitioner instituting
a collection case against Rubin, his guarantors and
sureties, including private respondent Phoenix.
The trial court ruled in favor of petitioner Bank,
ordering, among others, private respondent Phoenix to
pay petitioner the sum of P10,000 upon failure of the
principal debtor Rubin and his guarantors to pay the
judgment amount. On appeal, the Court of Appeals
102
 said royalty of P50,000, but the latter has refused and
Ratio: The discharge of private respondent Phoenix from refuses to make payment; and PNB also made demand on
liability under Surety Bond No. Plaridel Surety & Insurance for said payment, but the
88 is correct. Contrary to petitioner's thinking, the contract latter refused and refuses to make payment.
in question is not a continuing chattel mortgage for which A complaint was filed by PNB against
consent and knowledge of the surety is unnecessary for Macapanga Producers Inc. and Plaridel Surety and
an increase in the amount of the principal obligation. The Insurance Co. Plaridel Surety & Insurance moved to
contract of chattel mortgage itself fixed the credits, loans, dismiss the complaint for failure to state cause of action,
overdrafts, etc. and other valuable consideration received alleging that it is a guarantor and as such is responsible
thereunder at Forty Thousand Two Hundred Pesos only if Macapanga Producers has no property or assets
[P40,200.00]. The undertaking under said contract was to pay its obligation as lessee. Plaintiff opposed the
"for the purpose of securing their payment including motion calling attention to the provision of the
the interest thereon, the cost of collection and other performance bond in
obligations owing by the Debtor-Mortgagor to the
mortgagee, whether direct or indirect, principal or
secondary as appears in the accounts, books and records
of the mortgagee. Applying the principle of ejusdem
generis, the term "other obligations" must be limited to
such as are of the same nature as interest and costs of
collection. The term cannot be enlarged to include future
additional advances to debtor-mortgagor, much less be
interpreted as a previous authorization from the surety to
increase the principal amount fixed in the contract. The
increase in the indebtedness from P40,200.00 to
P56,800.00 is material and prejudicial to private
respondent Phoenix. While the liability of private
respondent under the bond is limited to P10,000.00, the
increase in the amount of the debt proportionally
decreased the probability of the principal debtor being
able to liquidate the debt; thus, increasing the risk
undertaken by the surety to answer for the failure of the
debtor to pay. "A material alteration of the principal
contract, effected by the creditor and principal debtor
without the knowledge and consent of the surety,
completely discharges the surety from all liability in the
contract of suretyship."

Philippine National Bank vs. Macapanga Producers

Inc., Plaridel Surety & Insurance Co., G.R. No. L-8349,
May 23, 1956 (99 Phil 180)

Facts: On December 26, 1952, Luzon Sugar Company

leased a sugar mill located at Calumpit, Bulacan to
Macapanga Producers beginning with the crop year 1952-
53 at a minimum annual royalty of P50,000, which shall be
a lien on the sugar produced by the lessee and shall be
paid before sale or removal of sugar from warehouse.
Macapanga Producers, as principal, and Plaridel Surety
& Insurance, as surety, executed and delivered to PNB a
performance bond in the amount of P50,000 for the full
and faithful compliance by Macapanga Producers of all
terms and conditions of the lease. On December 21,
1953, Luzon Sugar assigned to PNB the payment due
from Macapanga Producers in the sum of P50,000,
representing royalty for the lease of the sugar mill for the
crop year 1952-53. PNB notified Macapanga Producers
and Plaridel Surety & Insurance of said assignment. PNB
had demanded from Macapanga Producers payment of
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which Macapanga Producers and Plaridel Surety &
Insurance, the former as principal and the latter as surety,
agreed to be held and firmly bound unto Luzon Sugar in
the penal sum of P50,000, "for the payment of which, well
and truly be made, we bind ourselves, our heirs, executors,
administrators, successors, and assigns, jointly and
severally." Plaintiff contended that, as Plaridel Surety &
Insurance bound itself solidarily with Macapanga
Producers, it became a surety in accordance with Article
2047, par. 2 of the Civil Code.
The trial court dismissed the complaint against
Plaridel Surety & Insurance and subsequently denied a
motion to reconsider the order of dismissal.
Surety Company.
As early as 1933, Laureano Marquez had agreed
to pay Fortunato Resurreccion's indebtedness of P5,000 to
the Luzon Surety Company by way of satisfaction of his
own indebtedness to Fortunato Resurreccion in the same
amount. Laureano Marquez signed a document where he
bound himself as follows: "In the event an action is
presented by the Luzon Surety Company against Fortunato
Resurreccion for the recovery of the said indebtedness
and the interests thereon, I, Laureano Marquez,
obligate myself to

Issue: Whether assignment of a payment without the

knowledge or consent of the surety is a material alteration
that could extinguish the surety.

Held: No. Reversed.

Ratio: An assignment without knowledge or consent of

the surety is not a material alteration of the contract,
sufficient to discharge the surety (Stearns Law of
Suretyship, Elder, fifth edition, p. 113.) There is, besides,
no allegation in the complaint, or provision in the deed of
assignment, or any change therein that makes the
obligation of Plaridel Surety & Insurance more onerous
than that stated in the performance bond. Such
assignment did not, therefore, release the Plaridel Surety
& Insurance from its obligation under the surety bond.
It is lastly contended that as plaintiff or the
lessor had a lien in the sugar produced, and failed to
proceed against it or enforce such lien, Plaridel Surety
& Insurance was released thereby. There is no allegation
to this effect in the complaint, that lessor or plaintiff ever
had possession or control of the sugar, or ever waived or
released the lien thereon. Appellee cannot raise the issue
in a motion to dismiss.

Norberto L. Dilag, as administrator of the intestate

estate of Laureano Marquez, vs. The Legal Heirs of
Fortunato Resurreccion, et al., G.R. No. 48941, May 6,
1946 (76
Phil 650)

Facts: Before the year 1936, Laureano Marquez was

indebted to Fortunato Resurreccion in the sum of P5,000
as the balance of the purchase price of a parcel of land
which the former had bought and received from the latter.
Fortunato Resurreccion, in turn, was indebted to the
Luzon Surety Company in the same amount, which was
secured by a mortgage on three parcels of land, one of
which was that bought by Laureano Marquez from him.
The formal deed of sale from Resurreccion to Marquez
was to have been executed after Marquez shall have fully
paid the purchase price and after Resurreccion shall have
secured the cancellation of the mortgage by the Luzon
104
indemnify Fortunato Ressurreccion for all the damages he unilateral contract in the sense that only the promissor
may suffer in case the parcels of land mortgaged to the or maker signs it. But these do not mean that the signer
Luzon Surety Company are sold at public auction, is the only party to that contract and the only one entitled
including the fees of the attorneys of Fortunato to sue thereon. The obligee is as much a party to the
Ressurrecion as well as in the action that Fortunato contract as the obligor, for there can be no obligor without
Resurreccion in the suit brought by the Luzon Surety an obligee; and as a matter of course it is the obligee who
Company as well as in the action that Fortunato has the right to sue on and enforce the obligation.
Resurreccion may bring against me in relation to this The petitioner assails the judgment against him
agreement." insofar as it authorizes the sale at public auction of five
Laureano Marquez failed to pay the indebteness parcels of land which were not specifically described in
of Fortunato Resurreccion to the Luzon Surety Company, the mortgage deed. Those five parcels are said to have
and the latter foreclosed judicially the mortgaged executed been acquired by Laureano Marquez
in its favor by Fortunato Resurreccion.
On April 25, 1936, pending the foreclosure sale of
the Company, Laureano Marquez executed and delivered
to Fortunato Resurreccion another document. Since
Laureano Marquez again did not fulfill his promise, the
mortgaged properties were sold at public auction and
were totally lost by Fortunato Resurreccion.
Resurreccion commenced the present action against
Laureano Marquez to recover the value of the lost
properties amounting to P16,500, with legal interest
thereon from the date of the filing of the complaint, plus
P2,000 as indemnity for the rents of the lands sold and
P1,000 as attorney's fees, and to foreclose the mortgage
embodied in said instrument. The CFI ruled for the
plaintiff. The CA affirmed.

Issue: Whether a property that is subsequently acquired

can be the subject of a mortgage.

Held: No. Affirmed with modifications.

Ratio: The petitioner contends that Fortunato

Resurreccion cannot be granted damages caused by the
loss of two of the three parcels of land mortgaged to
the Luzon Surety Company because they did not belong to
Fortunato Resurreccion but to Emiliana Resurreccion and
the children of Vicente Platon. He contends that it was
only the said owners of those lands who could have
brought the present action. This contention runs counter
to the provision of section 3 of Rule 3 of the Rules of Court,
which says that a party with whom or in whose name a
contract has been made for the benefit of another may sue
or be sued without joining the party for whose benefit the
action is presented or defended. We do not think that
the word "contract" used in section 3 of Rule 3 refers
exclusively to a bilateral contract. It obviously refers to
any contract bilateral or unilateral enforcible in
court. The rule in question refers to a suit by or against "a
party with whom or in whose name a contract has been
made for the benefit of another. Article
1254 of the Civil Code says that a contract exists from the
moment one or more persons consent to be bound with
respect to another or others to deliver something or to
render some service. A deed of sale or mortgage is usually
a unilateral contract in the sense that only the vendor or
mortgagor signs it. Likewise a promissor note is a
105
subsequent to the execution of the document. In the fifth favor of Atlantic to secure payment of the unpaid
clause of said document Laureano Marquez stipulated that balance of the sale price of the lumber concession
inasmuch as the five parcels of land described in the amounting to the sum of $450,000.00. Both deeds
fourth clause were not sufficient to cover all his contained the following provision extending the mortgage
obligations in favor of Fortunato Resurreccion, he also lien to properties to be subsequently acquired referred
constituted a mortgage in favor of the latter and his to hereafter as "after acquired properties" by the
assignees on any other property he then might have and on mortgagor: "All property of every nature and description
those he might acquire in the future. taken in exchange or replacement, and all buildings,
Did such a stipulation constitute a valid mortgage machinery, fixtures, tools, equipment and other property
on the five other parcels of land which Laureano Marquez which the Mortgagor may hereafter acquire, construct,
subsequently acquired? We do not think so. In the first install, attach, or use in, to, upon, or in connection with
place, Laureano Marquez could not legally mortgage any the
property he did not yet own. In the second place, in
order that a mortgage may be validly constituted, the
instrument by which it is created must be recorded in the
registry of deeds and insofar as the additional five parcels
of land are concerned, the registration of the document
did not affect and could not have affected them because
they were not specifically described therein.
The contention of the respondents that after the
institution of the present action notice of lis pendens was
filed in the registry of deeds affecting the said five
additional parcels of land, merely serves to emphasize the
fact that there was no mortgage thereon; otherwise there
would have been no necessity for any notice of lis pendens.

Peoples Bank & Trust Co. & Atlantic, Gulf & Pacific
Co. of Manila vs. Dahican Lumber Company, Dahican
American Lumber Corporation, & Connell Bros. Co.
(Phil), G.R. No. L-17500, May 16, 1967 (20 SCRA 84)

Facts: On September 8, 1948, Atlantic Gulf & Pacific

Company of Manila, a West Virginia corporation licensed
to do business in the Philippines, sold and assigned all its
right in the Dahican lumber concession to Dahican
Lumber Company (Dalco) for the total sum of
$500,000.00 of which only the amount of $50,000.00 was
paid. Thereafter, to develop the concession, DALCO
obtained various loans from the People's Bank & Trust
Company (Bank) amounting, as of July 13, 1950, to
P200,000.00. In addition, DALCO obtained, through the
Bank, a loan of $250,000.00 from the Export-Import Bank
of Washington D.C., evidenced by five promissory notes
of $50,000.00 each, maturing on different dates, executed
by both DALCO and the Dahican American Lumber
Corporation (Damco), a foreign corporation and a
stockholder of DALCO, all payable to the BANK or its order.
As security for the payment of the
abovementioned loans, DALCO executed in favor of the
Bank the latter acting for itself and as trustee for the
Export, Import Bank of Washington D. C. a deed of
mortgage covering five parcels of land situated in the
province of Camarines Norte, together with all the
buildings and other improvements existing thereon and all
the personal properties of the mortgagor located in its
place of business in the municipalities of Mambulao and
Capalonga, Camarines Norte. On the same date, DALCO
executed a second mortgage on the same properties in
106
premises, shall immediately be and become subject to sought to be foreclosed and which plaintiffs claimed were
the lien of this mortgage in the same manner and to the covered by their lien. In its order of March 18, 1953 the
same extent as if now included therein, and the Mortgagor Court granted the motion, as well as plaintiffs' motion to
shall from time to time during the existence of this set aside the order discharging the Receiver.
mortgage furnish the Mortgagee with an accurate Consequently, Evans was reinstated.
inventory of such substituted and subsequently acquired Upon motion of all the parties, the Court ordered
property." the sale of all the machineries, equipment and supplies of
Both mortgages were registered in the Office of DALCO, and the same were subsequently sold for a total
the Register of Deeds of Camarines Norte. In addition consideration of P175,000.00 which was deposited in
thereto DALCO and DAMCO pledged to the BANK 7,296 court pending final determination of the action. By a
shares of stock of DALCO and 9,286 shares of DAMCO to similar agreement one half (P87,500.00) of this
secure the same obligations. amount was considered as representing the proceeds
Upon DALCO's and DAMCO's failure to pay the obtained from the sale of the "undebated
fifth promissory note upon its maturity, the BANK paid
the same to the Export-Import Bank of Washington D.C.
and the latter assigned to the former its credit and
the first mortgage securing it. Subsequently, the BANK
gave DALCO and DAMCO up to April 1, 1953 to pay the
overdue promissory note.
After July 13, 1950 the date of execution of the
mortgages mentioned above 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 quoted heretofore
regarding "after acquired properties", the BANK requested
DALCO to submit complete lists of said properties but the
latter failed to do so. In connection with these
purchases, there appeared in the books of DALCO as due
to Connell Bros. Company (Philippines) a domestic
corporation who was acting as the general purchasing
agent of DALCO the sum of P452,860.55 and to DAMCO,
the sum of P2,151,678.34.
On December 16, 1952, the Board of Directors of
DALCO in a special meeting called for the purpose, passed
a resolution agreeing to rescind the alleged sales of
equipment, spare parts and supplies by CONNELL and
DAMCO to it. Thereafter, the corresponding agreements
of rescission of sale were executed between DALCO and
DAMCO, on the one hand, and between DALCO and
CONNELL, on the other.
On January 23, 1953, the BANK, in its own behalf
and that of ATLANTIC, demanded that said agreements be
cancelled but CONNELL and DAMCO refused to do so. As a
result, on February 12, 1953, ATLANTIC and the BANK,
commenced foreclosure proceedings in the Court of
First Instance of Camarines Norte against DALCO and
DAMCO. On the same date they filed an ex-parte
application for the appointment of a Receiver and/or for
the issuance of a writ of preliminary injunction to restrain
DALCO from removing its properties. The court granted
both remedies and appointed George U. Evans as Receiver.
Upon defendants' motion, however, the court, in its order
of February 21, 1953, discharged the Receiver.
CONNELL filed a motion for intervention alleging
that it was the owner and possessor of some of the
equipments, spare parts and supplies which DALCO had
acquired subsequent to the execution of the mortgages
107
properties" (those not claimed by DAMCO and CONNELL),
and the other half as representing those obtained from the
sale of the "after acquired properties".
The court ruled against DALCO and ordered a
proportionate sharing among the creditors of the proceeds
of the sale of DALCOs properties. All parties appealed.
Issue: Whether mortgage of after-acquired properties is
valid. Whether financiers have a superior lien over
mortgagors.
operation of Art. 415, paragraph 5 and Art. 2127 of the
new Civil Code. It is not disputed in the case at bar that
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

Held: Yes. No. Modified.

Ratio: 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. As the language thus used leaves no
room for doubt as to the intention of the parties, We see
no useful purpose in discussing the matter extensively.
Suffice it to say that the stipulation referred to
is common, and We might say logical, in all cases where
the properties given as collateral are perishable or subject
to inevitable wear and tear or were intended to be sold,
or to be used thus becoming subject to the
inevitable wear and tear but with the
understanding express or implied that they shall be
replaced with others to be thereafter acquired by the
mortgagor. 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. Indeed, if such
properties were of the nature already referred to, it
would be poor judgment on the part of the creditor who
does not see to it that a similar provision is included in the
contract.
Conceding, on the other hand, that it is the law in
this jurisdiction that, to affect third persons, a chattel
mortgage must be registered and must describe the
mortgaged chattels or personal properties sufficiently to
enable the parties and any other person to identify them,
We say that such law does not apply to this case.
Article 415 does not define real property but enumerates
what are considered as such, among them being
machinery, receptacles, instruments or replacements
intended by the owner of the tenement for an industry or
works which may be carried on in a building or on a piece
of land, and shall tend directly to meet the needs of the
said industry or works. On the strength of the above-
quoted legal provisions, the lower court held that
inasmuch as "the chattels were placed in the real
properties mortgaged to plaintiffs, they came within the
108
 did not have to be registered a second time as chattel the validity of the mortgages in relation thereto, that said
mortgages in order to bind the proceeds should be awarded exclusively to the plaintiffs in
"after acquired properties" and affect third parties. payment of the money obligations secured by the
Now to the question of whether or not DAMCO mortgages under foreclosure.
and CONNELL have rights over the "after acquired
properties" superior to the mortgage lien constituted Luzon Lumber & Hardware Company, Inc. vs. Manuel
thereon in favor of plaintiffs. It is defendants' contention Quiambao, Virginia Santiago, & Rehabilitation Finance
that in relation to said properties they are "unpaid sellers"; Corporation, G.R. No. L-5638, March 30, 1954 (94 Phil
that as such they had not only a superior lien on the 663)
"after acquired properties" but also the right to rescind the
sales thereof to DALCO. This contention it is obvious
would have validity only if it were true that DAMCO and
CONNELL were the suppliers or vendors of the "after
acquired properties". According to the record, plaintiffs
did not know their exact identity and description prior
to the filing of the case at bar because DALCO, in
violation of its obligation under the mortgages, had
failed and refused therefore to submit a complete list
thereof. The report of the auditors and its annexes
show that neither DAMCO nor CONNELL had supplied
any of the goods of which they respectively claimed to be
the unpaid seller; that all items were supplied by different
parties, neither of whom appeared to be DAMCO or
CONNELL; that, in fact, CONNELL collected a 5 per cent
service charge on the net value of all items it claims to
have sold to DALCO and which, in truth, it had
purchased for DALCO as the latter's general agent; that
CONNELL had to issue its own invoices in addition to
those of the real suppliers in order to collect and justify
such service charge.
Taking into account the above circumstances
together with the fact that DAMCO was a stockholder and
CONNELL was not only a stockholder but the general
agent of DALCO, their claim to be the suppliers of the
"after acquired properties" would seem to be
preposterous. The most that can be claimed on the basis of
the evidence is that DAMCO and CONNELL probably
financed some of the purchases. But if DALCO still owes
them any amount in this connection, it is clear that, as
financiers, they can not claim any right over the "after
acquired properties" superior to the lien constituted
thereon by virtue of the deeds of mortgage under
foreclosure. Indeed, the execution of the rescission of sales
mentioned heretofore appears to be but a desperate
attempt to better or improve DAMCO and CONNELL's
position by enabling them to assume the role of "unpaid
suppliers" and thus claim a vendor's lien over the
"after acquired properties". The attempt, of course, is
utterly ineffectual, not only because they are not the
"unpaid sellers" they claim to be but also because there is
abundant evidence in the record showing that both
DAMCO and CONNELL had known and admitted from
the beginning that the "after acquired properties" of
DALCO were meant to be included in the first and second
mortgages under foreclosure.
As regard the proceeds obtained from the sale of
the "after acquired properties" and the "undebated
properties", it is clear, in view of our opinion sustaining
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Facts: Manuel Quiambao and his wife Virginia Santiago, under refection credit mentioned in paragraphs 3 and 5.
owners of three lots in the province of Tarlac covered by Refectionary credit is primarily an indebtedness
Certificates of Title Nos. 22607, 4217 and 4218, incurred in the repair or reconstruction of something and
mortgaged the said lots on July 20, 1948, in favor of the does not ordinarily include an entirely new work, but
Rehabilitation Finance Corporation (RFC) to secure the that Spanish jurisprudence appears to have sanctioned in
payment of a loan in the amount of P37,000 which sum certain cases this broader view to include a new work or
was to be spent for the construction of two buildings, one construction. The word "refaccionario" from which come
for a hotel and the other for residence. The mortgage was the English translation of "refectionary" is derived from
registered on September 13th of the same year. The two the Latin verb "refacio", "refacere",
buildings were subsequently constructed on the lot
covered by Certificate of Title No.
22607. Upon violation of the terms of the mortgage, the
RFC foreclosed the same and, in the auction sale, said RFC,
as highest bidder, was awarded the mortgaged properties
for the total sum of P31,000 followed by the issuance of
the corresponding Transfer Certificates of Title. The hotel
and residence buildings were valued at P18,000 and
P4,000, respectively.
In the edification of the two buildings, the spouses
bought on credit construction materials valued at about
P7,000 from the plaintiff Luzon Lumber & Hardware Co.
Said building materials were furnished by the lumber
company between October 1948 and March 1949. Only
P3,500 of this amount was paid, leaving an unpaid balance
of P3,456.50. To recover this balance including interests
and attorney's fees the lumber company filed this suit
against the spouses, the complaint being later amended so
as to include the RFC as party defendant. According to the
RFC said amendment was made about a week after the
auction sale of the foreclosed properties.
After hearing, the Court of First Instance of
Tarlac rendered judgment ordering the defendant
spouses Manuel and Virginia to pay to the plaintiff
lumber company the sum of P3,456.49 with legal interests
and in default of such payment by them, the RFC was
ordered to pay to plaintiff out of the proceeds of the sale of
the hotel and the house, the said sum of P3,456.49
together with the corresponding legal interests thereon.
The RFC is appealing from that decision.

Issue: Whether a registered mortgage is preferred over a

refectionary credit on construction materials.

Held: Yes. Reversed.

Ratio: Art. 2242 (claims, mortgages & liens that

constitute encumbrance over specific immovable
property) and 2253 (effectivity of law & non-impairment
of vested rights clause) of the New Civil Code may not be
applied in the instant case for the reason that the credit of
the plaintiff is not a new right or one declared for the first
time, a condition required by Article 2253 of the new Civil
Code for its enforcement and application, because said
right was already provided for by article 1923 of the old
Civil Code particularly paragraphs 3 and 5. The
question now to be decided is whether the furnishing
of lumber and building materials by the plaintiff for the
construction of the two buildings of the spouses falls
110
meaning "rehacer" which implies the idea of that the credit of the plaintiff herein might be made to fall
reconstruction or repair for reason of destruction or under article 1922 of the old Civil Code (preferred
deterioration. As already said, that was the original idea of encumbrances over personal property). But we believe
the word "refectionary". The liberal interpretation of the that the two buildings in question constructed partly with
refectionary credit to include new construction is upheld building materials furnished by the plaintiff may not be
in the ENCICLOPEDIA JURIDICA ESPAOLA. And this considered as personal property under article 1922. Once
view is shared by our Code Commission which prepared said building materials were used in the construction and
the new Civil Code. In its Report on the proposed Civil had become part of the building, they lost their
Code of the Philippines (now our new Civil Code) which classification as personal property and become real
went into effect in 1950, referring to article 2242 of property. It is true that in the case of Unson vs. Orquije,
the new Code, it said that the new encumbrances in et al., 50 Phil., 160, this Tribunal applied the provision
said article are Nos. 2, 3, 6, 7 and 9, meaning to say that of article 1922, paragraph 1, referring to the purchase
paragraph 4 referring to claims of furnishers of materials
used in the construction, reconstruction or repair of
building which as invoked by the plaintiff and applied by
the trial court is not a new provision, clearly implying that
it was already provided for in article 1923, paragraphs 3
and 5 under refectionary credits. This liberal view and
interpretation of refectionary credit is in consonance
with principles of justice and fairness, for there seems
to be no valid reason why one furnishing material for
purposes of repair or reconstruction should be given
preference while another furnishing material on new
construction is not given the same consideration.
With respect to the holding of the trial court that
in point of time the credit of the plaintiff enjoys priority
over that of the RFC for the reason that according to said
court the lien of the plaintiff vested when the materials
were furnished while the mortgage credit of the RFC
vested only when the buildings were constructed, we must
not forget that according to the facts of the case the loan of
P37,000 was given to the spouses to construct the two
buildings, and that under the terms of the deed of
mortgage, not only the lots but also all the improvements
now existing or which may hereafter be constructed on the
mortgaged property are included. In other words, the
mortgage in favor of the defendant RFC not only enjoyed
the presumption provided by law that a mortgage includes
all improvements on the land mortgaged when the
obligation falls due, but there was an express stipulation
to include all buildings and improvements thereafter to be
constructed on the mortgaged premises. This lien on all
improvements vested on the day and hour the mortgage
was registered - about one month before plaintiff began
furnishing materials for construction. One of the purposes
of the creation of the RFC was to finance the construction
and reconstruction of buildings for purposes of
rehabilitation. We may even take judicial notice of the fact
that the security of the loans from the RFC is based mainly
on the buildings and constructions themselves, and that to
assure that the loans are spent for the said construction,
the money is sometimes given on the installment basis,
that is, so much money is released by the RFC as the
construction progresses. This is to show the intimate
relation between an RFC loan and the construction
financed by it, for purposes of security.
In the discussion of this case among the members
of this Tribunal, there was a suggestion, even a contention
111
price of personal property in the possession of the debtor from Metropolitan Bank and Trust Company a loan of
(machinery and grinder sold to the Capiz Central and P600,000.00, the payment of which was secured by
installed in its building), the reason being that said another real estate mortgage executed by spouses Marcial
machinery and grinder did not lose their form and See and Lilian Tan in favor of said bank over the same
substance and they preserved their identity. Besides, they realty.
could easily be removed from the building of the Central. In December 1980, the three (3) loans with an
May the same thing be said in the present case as aggregate amount of P1,000,000.00 were re-structured
regards the building materials which went into the and consolidated into one (1) loan and Ajax Marketing
construction of the hotel and the house? The answer can and Development Corporation, represented by Antonio
be given only in the negative. Said materials had already Tan as Board Chairman/President and in his personal
become part of the two buildings either as posts, frames, capacity as solidary co-obligor, and Elisa Tan as Vice-
floor, partition, roof, etc. They have lost their form and President/Treasurer and in her personal capacity as
identity and had become part of the buildings which are solidary co-obligor, executed a Promissory Note.
real property.
There is another circumstance in this case which
greatly weakens plaintiff's claim. While as already stated,
appellant RFC's mortgage which included the two
buildings in question was recorded in September 1948,
thus serving as notice to third parties including the
plaintiff, the latter began furnishing building materials for
the construction of the two buildings only in October 1948,
that is the month following, and what is more, the
evidence fails to show that it was ever recorded in the
Registry of Deeds, so that said refection credit comes not
under paragraph 3 of article 1923 of the old Civil Code,
as does the RFC mortgage, but under paragraph 5 of the
same article under unregistered and unrecorded refection
credits.

Ajax Marketing & Development Corporation, Antonio

Tan, Elisa Tan Yee, & Sps. Marcial See & Lilian Tan vs.
CA, Metropolitan Bank & Trust Company, & the Sheriff
of Manila, G.R. No. L-118585, September 14, 1995 (248
SCRA 222)

Facts: Ylang-Ylang Merchandising Company, a partnership

between Angelita Rodriguez and Antonio Tan, obtained a
loan in the amount of P250,000.00 from the Metropolitan
Bank and Trust Company, and to secure payment of the
same, spouses Marcial See and Lilian Tan constituted a
real estate mortgage in favor of said bank over their
property in the District of Paco, Manila. The mortgage was
annotated at the back of the title.
Subsequently, after the partnership had changed
its name to Ajax Marketing Company albeit without
changing its composition, it obtained a loan in the sum of
P150,000.00 from Metropolitan Bank and Trust Company.
Again to secure the loan, spouses Marcial See and Lilian
Tan executed in favor of said bank a second real estate
mortgage over the same property.
On February 19, 1979, the partnership (Ajax
Marketing Company) was converted into a corporation
denominated as Ajax Marketing and Development
Corporation, with the original partners (Angelita
Rodriguez and Antonio Tan) as incorporators and three (3)
additional incorporators, namely, Elisa Tan, the wife of
Antonio Tan, and Jose San Diego and Tessie San Diego.
Ajax Marketing and Development Corporation obtained
112
 Due to non-payment, the bank extrajudicially
foreclosed the mortgaged property. A case was filed with
the trial court whereby the debtors contended that a
novation occurred when their three (3) loans which are all
secured by the same real estate property were
consolidated into a single loan of P1 million under a
Promissory Note, thereby extinguishing their monetary
obligations and releasing the mortgaged property from
liability. The trial court upheld the foreclosure. The CA
affirmed.
Issue: Whether a real estate mortgage can cover future
debts.
that petitioners agreed to apply the real estate property
to secure obligations that they may thereafter obtain
including their renewals or extensions with the principals
fixed at P600,000.00, P150,000.00, and P250,000.00. The
promissory note merely restructured and renewed the
three previous loans to expediently make the loans
current. There was no change in the object of the prior
obligations. The consolidation of the three loans, contrary
to petitioners' contention, did not release the mortgaged
real estate property from any liability because the
mortgage annotations all remained uncancelled, thus
indicating the continuing subsistence of the real estate-
mortgages.

Held: Yes. Affirmed.

Ratio: Basic principles on novation need to be stressed at

the outset. Novation is the extinguishment of an obligation
by the substitution or change of the obligation by a
subsequent one which extinguishes or modifies the first,
either by changing the object or principal conditions, or, by
substituting another in place of the debtor, or by
subrogating a third person in the rights of the creditor.
Novation, unlike other modes of extinction of obligations,
is a juridical act with a dual function, namely, it
extinguishes an obligation and creates a new one in lieu of
the old. It can be objective, subjective, or mixed. Objective
novation occurs when there is a change of the object or
principal conditions of an existing obligation while
subjective novation occurs when there is a change of
either the person of the debtor, or of the creditor in an
existing obligation. When the change of the object or
principal conditions of an obligation occurs at the
same time with the change of either in the person of the
debtor or creditor a mixed novation occurs.
The well settled rule is that novation is never
presumed. Novation will not be allowed unless it is
clearly shown by express agreement, or by acts of equal
import. Thus, to effect an objective novation it is
imperative that the new obligation expressly declare that
the old obligation is thereby extinguished, or that the
new obligation be on every point incompatible with the
new one. In the same vein, to effect a subjective novation
by a change in the person of the debtor it is necessary that
the old debtor be released expressly from the obligation,
and the third person or new debtor assumes his place in
the relation. There is no novation without such release as
the third person who has assumed the debtor's obligation
becomes merely a co-debtor or surety.
The attendant facts herein do not make a case of
novation. There is nothing in the records to show the
unequivocal intent of the parties to novate the three loan
agreements through the execution of a promissory note.
The provisions of the promissory note yield no indication
of the extinguishment of, or an incompatibility with, the
three loan agreements secured by the real estate
mortgages.
The provisions of the real estate mortgage show
113
 Neither can it be validly contended that there was was executed without any consideration. But there is a
a change or substitution in the persons of either the legal presumption of sufficient cause or consideration
creditor (Metrobank) or more specifically the debtors supporting a contract, even if such cause is not stated
(petitioners) upon the consolidation of the loans. The therein. This presumption appellants cannot overcome by
bare fact of petitioner's conversion from a partnership to a a simple assertion of lack of consideration. Especially may
corporation, without sufficient evidence, either testimonial not the presumption be so lightly set aside when the
or documentary, that they were expressly released from contract itself states that consideration was given, and the
their obligations, did not make petitioner AJAX, with its same has been reduced into a public instrument with all
new corporate personality, a third person or new debtor due formalities and solemnities as in this case.
within the context of a subjective novation. If at all,
petitioner AJAX only became a co-debtor or surety.
Without express release of the debtor from the
obligation, any third party who may thereafter assume
the obligation shall be considered merely as co-debtor or
surety. Novation arising from a purported change in the
person of the debtor must be clear and express because,
to repeat, it is never presumed. Clearly then, from the
aforediscussed points, neither objective nor subjective
novation occurred here.
An action to foreclose a mortgage is usually
limited to the amount mentioned in the mortgage, but
where on the four corners of the mortgage contracts, as in
this case, the intent of the contracting parties is manifest
that the mortgaged property shall also answer for future
loans or advancements then the same is not improper as it
is valid and binding between the parties.

Paz Samanilla vs. Cenen A. Cajucom, et al., G.R. No. L-

13683, March 28, 1960 (107
Phil 432)

Facts: The Cajucoms had executed in Samanillas favor, on

December 20, 1955, a real estate mortgage over their
rights and participation on the parcel of land covered by
Original Certificate of Title No. O-966 to secure a loan of
P10,000. Sometime in February, 1956, the Cajucoms
borrowed the title from her on the excuse that they
needed it to segregate from the land the portion claimed
by other persons. Thereafter, Samanilla asked for the
return of the title so that she could register her mortgage,
but the Cajucoms refused.
Samanilla filed a petition against the Cajucoms.
They opposed the petition, claiming that the mortgage in
question was void ab initio for want of consideration, and
that the issues should be litigated in an ordinary civil
action. The court found the petition well-taken and
ordered the Cajucoms to surrender their title either to
the Register of Deeds or to the Court. From this order, the
Cajucoms appealed.

Issue: Whether a mortgage which has not been registered

is valid.

Held: Yes. Affirmed.

Ratio: The appeal has no merit. Appellants' sole objection

to the registration of the deed of mortgage is that the same
114
 Appellants assert that they cannot be compelled register of deeds, in lieu thereof, to register the certified
to surrender their title for registration of the mortgage in complete copy of said document which he then and there
question until they are given an opportunity to show its presented with a view to the annotation of the mortgage in
invalidity in an ordinary civil action, because registration his favor on the certificates of title to be issued in the name
is an essential element of a real estate mortgage and the of Feliciano Basa, Jr.
surrender of their title would complete this requirement The register of deeds refused to accede to said
of registration. The argument is fallacious, for a mortgage, request of Attorney Gonzalez on the ground that
whether registered or not, is binding between the parties, Attorneys Javier & Javier, representing Feliciano Basa
registration being necessary only to make the same Jr., refused to grant him authority to annotate said
valid against third persons (Art. 2125, New Civil Code). In mortgage on the certificates of title to be issued in the
other words, registration only operates as a notice of the name of Basa, and that since a mortgage is presumed
mortgage to others, but neither adds to its validity nor to be a voluntary transaction
convert an invalid mortgage into a valid one between the
parties. Appellants still have the right to show that the
mortgage in question is invalid for lack of consideration
in an ordinary action and there ask for the avoidance of
the deed and the cancellation of its registration. But until
such action is filed and decided, it would be too dangerous
to the rights of the mortgagee to deny registration of her
mortgage, because her rights can so easily be defeated by
a transfer or conveyance of the mortgaged property to an
innocent third person.
If the purpose of registration is merely to give
notice, the questions regarding the effect or invalidity of
instruments are expected to be decided after, not
before, registration. It must follow as a necessary
consequence that registration must first be allowed and
validity or effect litigated afterwards.

Antonio Gonzalez vs. Feliciano Basa, Jr. & Pilar

Lopez de Basa, G.R. No. 48695, September 30, 1942
(73 Phil 704)

Facts: In the matter of the estate of the deceased Amalia

Arcega y Alfonso Vda. de Basa, Pilar Lopez de Basa, as
administratrix; Feliciano Basa, Jr., as sole and universal
heir, and Antonio Gonzalez, as creditor and attorney of the
estate, presented to the court a project of partition jointly
signed by them and asked that it be approved. The said
document consists of several clauses. Clause 2 contains an
inventory of the properties left by the deceased, and clause
3 contains a list of all the obligations of the estate. The
adjudication is contained in clause 4. Said project of
partition was approved by the court.
Thereafter Feliciano Basa, Jr., thru his present
attorney Mr. Benedicto M. Javier, procured from the clerk
of court a certified copy of said project of partition in a
modified or mutilated form in that page 22 thereof was
omitted at the express request of Attorney Javier. That
certified copy, together with the owner's duplicates of the
certificates of title covering the real properties
adjudicated to Feliciano Basa, Jr., was presented to
the register of deeds of Manila for registration with a view
to the issuance of the corresponding transfer certificates of
title in the name of Feliciano Basa, Jr., free from the
mortgage lien in favor of Antonio Gonzalez. The latter,
upon learning thereof, objected to the registration of the
project of partition as thus mutilated and requested the
115
between the parties he had no authority to make such
annotation without the consent of both parties. The
matter was brought to the CFI which ruled to instruct
the register of deeds of Manila to register a certain project
of partition in its entirety and not in a mutilated form as
requested by the appellants.
Issue: Whether the mortgagee is entitled to register the
mortgage as a matter of right.
Held: Yes. Affirmed.
him without annotating the mortgage thereon. Is the
register of deeds authorized to comply with such request?
No reasonable person would so contend; and yet that is
what the register of deeds of Manila proposes to do in the
present case.
Agricultural Credit Cooperative Association of
Hinigaran vs. Estanislao Yulo
Yusay, et al., G.R. No. L-13313, April 28, 1960 (107 Phil
791)

Ratio: In deciding to comply with the request of the

appellants for the registration of the project of partition as
mutilated, over the objection of the appellee, who
tendered a complete, certified true copy of the same
document, the register of deeds of Manila impliedly
conceded to them the right to repudiate and annul an
obligation evidenced by said document against the will of
the obligee and without judicial intervention. That is
obviously wrong. It is precisely his duty to see to it that a
document presented for registration is regular and in due
form. The mutilated certified copy was irregular on its face
and should have been rejected by him. In fact his authority
in the premises goes no farther than this. He has no
authority to inquire into the intrinsic validity of a
document based upon proofs aliunde. If he had no
authority to inquire into the truth of appellants' allegation
as to lack of consideration for the mortgage in question,
much less was he authorized to assume the truth of such
allegation without any investigation. The project of
partition in question, having been signed by the parties
and approved by the court, is presumed to be valid and
is acceptable for registration in its entirety. Neither of
the parties may alter it without the consent of the other
and the approval of the court.
The reasoning of the register of deeds that,
inasmuch as a mortgage is a voluntary transaction, he had
no authority to register it without the consent of both
parties, is fallacious. He confuses the execution of a
mortgage with its registration. It is the execution of the
mortgage that is voluntary. Once a mortgage has been
signed in due form, the mortgagee is entitled to its
registration as a matter of right. By executing the
mortgage the mortgagor is understood to have given his
consent to its registration, and he cannot be permitted to
revoke it unilaterally. The validity and fulfillment of
contracts cannot be left to the will of one of the contracting
parties (article 1256 of the Civil Code). In the last analysis,
the case is as if Feliciano Basa, Jr., had presented to the
register of deeds a certified complete copy of the
project of partition with the request that the register
of deeds take into consideration only the rights, and ignore
the obligations, evidenced by said document. It is the same
as if a buyer of real property who mortgaged the property
bought to secure the payment of the purchase price, had
presented the combined deed of sale and mortgage to the
register of deeds with the request to transfer the title to
116
Facts: Rafaela Yulo executed in favor of the cooperative a annotation of the mortgage, did not pass on its invalidity
mortgage for P33,626.29, due from her, her mother, or effect. As the mortgage is admittedly an act of the
sisters, brothers, and others, which amount she assumed registered owner, all that the judge below did and could
to pay to the cooperative. A motion was presented to the do, as a registration court, is to order its registration and
court by the cooperative demanding the surrender of the annotation on the certificate of title covering the land
owner's duplicate certificate of title that it may annotate mortgaged. By said order the court did not pass upon the
said mortgage at the back of the certificate. Estanislao effect or validity of the mortgage - these can only be
Yusay, a part owner of the lot, opposed the petition on the determined in an ordinary case before the courts, not
ground that he is owner of a part of the property in before a court acting merely as a registration court, which
question; that the granting of the motion would operate to did not have the jurisdiction to pass upon the alleged
his prejudice, as he has not participated in the mortgage effect or invalidity.
cited in the motion; that Rafaela Yulo is dead; that the
motion is not verified and movant's rights have lapsed by
prescription. Finally it is argued that his opposition raises
a controversial matter which the court has no jurisdiction
to pass upon.
The existence of the mortgage is not disrupted,
and neither is the fact that the mortgagor Rafaela Yulo is
part owner of the lot. The oppositors do not dispute that
she is such a part owner, and their main objection to the
petition is that as part owners of the property, the
annotation of the mortgage on the common title will affect
their rights.
The matter was brought to the CFI, and it
ordered the Register of Deeds to register the mortgage.

Issue: Whether the validity or effectivity of a mortgage

may be determined during its registration

Held: No. Affirmed.

Ratio: In his Brief before this Court, counsel for

appellants argue that the mortgage sought to be
registered was not recorded before the closing of the
intestate proceedings of the deceased mortgagor, but was
so recorded only four months after the termination of said
proceedings, so that the claim of movant has been reduced
to the character of a mere money claim, not a mortgage,
hence the mortgage may not be registered.
In the first place, the proceeding to register the
mortgage does not purport to determine the supposed
invalidity of the mortgage or its effect. Registration is a
mere ministerial act by which a deed, contract or
instrument is sought to be inscribed in the records of the
Office of the Register of Deeds and annotated at the back
of the certificate of title covering the land subject of the
deed
The registration of a lease or mortgage, or the
entry of a memorial of a lease or mortgage on the
register, is not a declaration by the state that such an
instrument is a valid and subsisting interest in land; it is
merely a declaration that the record of the title appears to
be burdened with the lease or mortgage described,
according to the priority set forth in the certificate. The
mere fact that a lease or mortgage was registered does
not stop any party to it from setting up that it now has no
force or effect.
The court below, in ordering the registration and
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 Ratio: We agree. Banks cannot merely rely on
Winifreda Ursal vs. CA, the Rural Bank of Larena certificates of title in ascertaining the status of
(Siquijor), Inc., & Sps. Jesus mortgaged properties; as their business is impressed
Moneset & Cristita Moneset, G.R. No. 142411, October with public interest, they are expected to exercise
14, 2005 (473 SCRA 52) more care and prudence in their dealings than
private individuals. Indeed, the rule that persons dealing
Facts: Jesus and Cristita Moneset (Monesets) are the with registered lands can rely solely on the certificate of
registered owners of a 333-square meter land together title does not apply to banks.
with a house thereon situated at Sitio Laguna, Basak, Cebu
City. On January 9, 1985, they executed a "Contract to Sell
Lot & House" in favor of petitioner Winifreda Ursal.
Ursal paid the down payment and took
possession of the property. She immediately built a
concrete perimeter fence and an artesian well, and
planted fruit bearing trees and flowering plants thereon
which all amounted to P50,000.00. After paying six
monthly installments, petitioner stopped paying due to the
Monesets' failure to deliver to her the transfer certificate
of title of the property as per their agreement; and
because of the failure of the Monesets to turn over said
title, petitioner failed to have the contract of sale
annotated thereon.
Unknown to Ursal, the Monesets executed on
November 5, 1985 an absolute deed of sale in favor of Dr.
Rafael Canora, Jr. over the said property for P14,000.00.
On September 15, 1986, the Monesets executed another
sale, this time with pacto de retro with Restituto
Bundalo. On the same day, Bundalo, as attorney-in-fact of
the Monesets, executed a real estate mortgage over said
property with Rural Bank of Larena located in Siquijor for
the amount of P100,000.00. The special power of attorney
made by the Monesets in favor of Bundalo as well as the
real estate mortgage was then annotated on the title on
September 16, 1986. For the failure of the Monesets to pay
the loan, the Bank served a notice of extrajudicial
foreclosure dated January 27, 1988 on Bundalo.
Ursal filed an action for declaration of non-
effectivity of mortgage and damages against the Monesets,
Bundalo and the Bank. She claimed that the defendants
committed fraud and/or bad faith in mortgaging the
property she earlier bought from the Monesets with a
bank located in another island, Siquijor; and the Bank
acted in bad faith since it granted the real estate
mortgage in spite of its knowledge that the property
was in the possession of petitioner.
The trial court ruled that Ursal was more credible
than the Monesets and that the Monesets are liable for
damages, fraud, and breach of contract. As to the real
estate mortgage, the trial court held that the same was
valid and that the bank was under no obligation to look
beyond the title. CA affirmed.

Issue: Whether the bank, as mortgagee, can rely solely on

the certificate of title and had no obligation to look beyond
the title.

Held: No. Affirmed with modifications.

118
 Respondent is not an ordinary mortgagee; it is a At most, the vendee in the contract to sell was entitled
mortgagee-bank. As such, unlike private individuals, it is only to damages.
expected to exercise greater care and prudence in its Petitioner attributes her decision to stop paying
dealings, including those involving registered lands. A installments to the failure of the Monesets to comply with
banking institution is expected to exercise due diligence their agreement to deliver the transfer certificate of title
before entering into a mortgage contract. The after the down payment of P50,000.00. On this point, the
ascertainment of the status or condition of a property trial court was correct in holding that for such failure, the
offered to it as security for a loan must be a standard and Monesets are liable to pay damages pursuant to Art. 1169
indispensable part of its operations. of the Civil Code on reciprocal obligations. The vendors'
Our agreement with petitioner on this point of breach of the contract, notwithstanding, ownership still
law, notwithstanding, we are constrained to refrain from remained with the Monesets and petitioner cannot
granting the prayers of her petition. The reason is that, justify her failure to complete the payment.
the contract between petitioner and the Monesets being
one of "Contract to Sell Lot and House," petitioner, under
the circumstances, never acquired ownership over the
property and her rights were limited to demand for
specific performance from the Monesets, which at this
juncture however is no longer feasible as the property
had already been sold to other persons.
A contract to sell is a bilateral contract whereby
the prospective seller, while expressly reserving the
ownership of the subject property despite delivery thereof
to the prospective buyer, binds himself to sell the said
property exclusively to the prospective buyer upon
fulfillment of the condition agreed upon, that is, full
payment of the purchase price. In such contract, the
prospective seller expressly reserves the transfer of title to
the prospective buyer, until the happening of an event,
which in this case is the full payment of the purchase
price. What the seller agrees or obligates himself to do
is to fulfill his promise to sell the subject property when
the entire amount of the purchase price is delivered to
him. Stated differently, the full payment of the purchase
price partakes of a suspensive condition, the non-
fulfillment of which prevents the obligation to sell from
arising and thus, ownership is retained by the prospective
seller without further remedies by the prospective buyer.
It is different from contracts of sale, since ownership in
contracts to sell is reserved by the vendor and is not to
pass to the vendee until full payment of the purchase
price, while in contracts of sale, title to the property
passess to the vendee upon the delivery of the thing sold.
In contracts of sale the vendor loses ownership over the
property and cannot recover it unless and until the
contract is resolved or rescinded, while in contracts to sell,
title is retained by the vendor until full payment of the
price. In contracts to sell, full payment is a positive
suspensive condition while in contracts of sale, non-
payment is a negative resolutory condition.
Since the contract in this case is a contract to sell,
the ownership of the property remained with the
Monesets even after petitioner has paid the down payment
and took possession of the property. In Flancia vs. CA,
where the vendee in the contract to sell also took
possession of the property, this Court held that the
subsequent mortgage constituted by the owner over said
property in favor of another person was valid since the
vendee retained absolute ownership over the property.
119
 In Pangilinan vs CA, the vendees contended that passed to another person by virtue of a deed of absolute
their failure to pay the balance of the total contract price sale.
was because the vendor reneged on its obligation to
improve the subdivision and its facilities. In said case, the Teotimo Rivera vs. Timoteo Pea, Rehabilitation
Court held that the vendees were barred by laches from Finance Corporation & Register of Deeds Tarlac, G.R.
asking for specific performance eight years from the date of No. L-11781, March 24, 1961 (1 SCRA 747)
last installment.
The legal adage finds application in the case at Facts: Timoteo Pea was the registered owner of 2 lots
bar. Tempus enim modus tollendi obligations et actiones, of the barrios of Pacalcal and Anupul, respectively,
quia tempus currit contra desides et sui juris municipality of Bamban, province of Tarlac, and covered
contemptores-For time is a means of dissipating by TCTs. Timoteo Pea executed in favor of petitioner
obligations and actions, because time runs against the Rivera a contract of lease over said two (2)
slothful and careless of their own rights.
In this case, petitioner instituted an action for
"Declaration of Non-Effectivity of Mortgage with Damages"
four years from the date of her last installment and only as
a reaction to the foreclosure proceedings instituted by
respondent Bank. After the Monesets failed to deliver the
TCT, petitioner merely stopped paying installments and
did not institute an action for specific performance,
neither did she consign payment of the remaining balance
as proof of her willingness and readiness to comply with
her part of the obligation. As held in San Lorenzo
Development Corp vs. CA, the perfected contract to sell
imposed on the vendee the obligation to pay the
balance of the purchase price. There being an obligation
to pay the price, the vendee should have made the
proper tender of payment and consignation of the price in
court as required by law. Consignation of the amounts due
in court is essential in order to extinguish the vendee's
obligation to pay the balance of the purchase price.
Since there is no indication in the records that petitioner
even attempted to make the proper consignation of the
amounts due, the obligation on the part of the Monesets
to transfer ownership never acquired obligatory force.
In other words, petitioner did not acquire
ownership over the subject property as she did not pay in
full the equal price of the contract to sell. Further, the
Monesets' breach did not entitle petitioner to any
preferential treatment over the property especially when
such property has been sold to other persons.
Petitioner's rights were limited to asking for
specific performance and damages from the Monesets.
Specific performance, however, is no longer feasible at this
point as explained above. This being the case, it follows
that petitioner never had any cause of action against
respondent Bank. Having no cause of action against the
bank and not being an owner of the subject property,
petitioner is not entitled to redeem the subject property.
Indeed, it is the Monesets who first breached their
obligation towards petitioner and are guilty of fraud
against her. It cannot be denied however that petitioner is
also not without fault. She sat on her rights and never
consigned the full amount of the property. She therefore
cannot ask to be declared the owner of the property, this
late, especially since the same has already passed hands
several times, neither can she question the mortgage
constituted on the property years after title has already
120
parcels of land, for the period from September 14, 1956 to commitments in favor of said corporation, it is clear that
September 15,1960, as evidenced by a public document appellant has no valid adverse claim which may be
in the Pampango dialect. This contract was merely a ordered registered and that, accordingly, the lower court
renewal of a previous contract of lease over the same has not erred in denying his petition, regardless of the
parcels of land, between the same parties. The owner's language or dialect in which the deed of lease in question
duplicates of the aforementioned transfer certificates of is written and of the inaccuracy of the number therein
title are in the possession of the Rehabilitation Finance given of one of the transfer certificates of title involved in
Corporation, to whom said lands were mortgaged by this incident.
Timoteo Pea on October 26, 1955, to guarantee the
payment of a P25,000.00 loan, which mortgage is duly
annotated on the aforementioned transfer certificates of
title; and that, in order to protect his rights over the
parcels of land aforementioned, petitioner Rivera desires
to have said rights registered in the office of the register of
deeds of Tarlac and annotated in the certificates of title
above referred to, for which reason he prayed that the
Rehabilitation Finance Corporation be ordered to
surrender to said register of deeds the owner's duplicates
of the aforementioned transfer certificates of title and that
said register of deeds be directed to register the original of
the contract of lease, and to make the corresponding
annotations in said transfer certificates of title, upon
presentation of said original of the contract of lease and
payment of the corresponding fees.
The Rehabilitation Finance Corporation objected
to said petition upon the ground that, pursuant to the deed
of mortgage executed in its favor by Timoteo Pea, the
lands above referred to shall not be encumbered in any
manner without the written consent of the mortgagee;
that the consent of the corporation to the contract of lease
had never been sought. The corporation had granted the
loan guaranteed by said mortgage for the development of
the property in question, to be undertaken by the
mortgagor; and, as a matter of policy, the corporation does
not allow, therefore, the leasing of mortgaged property.
The lower court denied the petition because the
deed of lease sought to be registered is in the Pampango
dialect and that it does not bear the correct number of the
title covering the leased property.

Issue: Whether a subsequent encumbrance may be

registered when a previous encumbrance disallows it.

Held: No. Affirmed.

Ratio: One of the conditions of the contract executed by

Timoteo Pea in favor of the Rehabilitation Finance
Corporation is that the property thus mortgaged thereto
shall not be encumbered in any manner whatsoever
without the written consent of the mortgagee. Such
consent has never been sought. Had it been requested, the
consent would have been denied or refused, as a matter of
policy, by the mortgagee, the loan guaranteed by said
mortgage having been granted for the development of the
mortgaged property, which should, therefore, be cultivated
by the mortgagor himself.
Inasmuch as appellant's rights were derived from
Timoteo Pea and is bound, therefore, by his
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 Felisa Boyano. The title carried no annotation, defect or
Philippine National Bank vs. CA & Chu Kim Kit flaw that would have aroused suspicion as to its
represented by Chu Tong U, G.R. No. 43972, July 24, authenticity. "The certificate of title was in the name of the
1990 (187 SCRA 735) mortgagor when the land was mortgaged to the PNB. Such
being the case, petitioner PNB had the right to rely on
Facts: Chu Kim Kit, a Chinese national and son of what appeared on the certificate of title, and in the
defendant Boyano, is the absolute owner of a commercial absence of anything to excite suspicion, it was under no
lot and building on Rizal Avenue, Tacloban City, registered obligation to look beyond the certificate and investigate
in his name. Chu Kim Kit went to mainland China, and he the title of the mortgagor appearing on the face of the
was prevented from returning to the Philippines when the certificate."
Communists took over mainland China. Through letters,
he requested Chu Tong U to take care of his
aforementioned property. Although Boyano was aware
that her son was still alive, she executed an affidavit
on May 21, 1963, alleging that he had died and
adjudicating to herself, as his sole heir, the above-
described property. By means of said affidavit of
adjudication, she was able to obtain a Transfer Certificate
of Title over the land in her name. She thereafter
mortgaged the property to the Philippine National Bank,
Tacloban Branch, to secure a loan of P25,000. She was
also about to dispose of the property.
Chu Kim Kit, represented by his uncle, Chu Tong
U, filed a case against Felisa Boyano for cancellation of
the latter's Certificate of Title. Boyano admitted that
Chu Kim Kit was still alive but she alleged that she
signed the affidavit of adjudication without having read
its contents, the same being written in English which she
does not understand.
The trial court ruled that the TCT of Boyano were

null and void. CA affirmed. Issue: Whether a mortgagee

may rely on the correctness of the certificate of title. Held:

Yes. Reversed.

Ratio: The records show that Chu Kim Kit entrusted his
Transfer Certificate of Title No. T-1412 to his mother,
Felisa Boyano, before he left for mainland China and
allowed his mother to administer the property, and to
enjoy its fruits in his absence. Those acts of his enabled
Felisa Boyano to cause the cancellation of TCT No. T-1412
and to obtain TCT No. T-1439 in her name. That Felisa
Boyano was administering his property may also have
created the impression in the mind of third persons that
she was the owner of the property and could dispose of it.
It is plain to see that by his own acts of confidence in
Felisa Boyano, the private respondent was partly to
blame for the commission of the fraud against himself by
his mother. As between him and the petitioner which was
totally innocent and free from negligence or wrongdoing
in the transaction, the latter is entitled to the protection of
the law.
There is no question that the petitioner PNB is a
mortgagee in good faith and for value. At the time the
mortgage was constituted on the property on October 30,
1963, it was covered by TCT No. T-1439 in the name of
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 Where there was nothing in the certificate of title DBP made a counter-offer of P25,500.00 which was
to indicate any cloud or vice in the ownership of the accepted by respondent spouses. The parties further
property, or any encumbrance thereon, the purchaser is agreed that payment was to be made within six months
not required to explore farther than what the Torrens thereafter for it to be considered as cash payment. On
Title upon its face indicates in quest for any hidden July 20, 1981, a deed of absolute sale was executed. Said
defect or inchoate right that may subsequently defeat his document contained a waiver of the seller's warranty against
right thereto. If the rule were otherwise, the efficacy and eviction.
conclusiveness of the certificate of title which the Thereafter, the spouses Mangubat applied for an
Torrens System seeks to insure would entirely be futile and industrial tree planting loan with DBP. The latter
nugatory. required the former to submit a certification from the
Where innocent third persons relying on the Bureau of Forest Development that the land is alienable
correctness of the certificate of title issued, acquire rights and disposable. However, on October 29, 1981, said
over the property, the court cannot disregard such rights office issued a certificate attesting to the fact that the said
and order the total cancellation of the certificate for that property was classified as timberland, hence not subject to
would impair public confidence in the certificate of title; disposition. The loan application of respondent spouses
otherwise everyone dealing with property registered
under the torrens system would have to inquire in every
instance as to whether the title had been regularly or
irregularly issued by the court. Indeed, this is contrary to
the evident purpose of the law. Every person dealing with
registered land may safely rely on the correctness of the
certificate of title issued therefor and the law will in no
way oblige him to go behind the certificate to determine
the condition of the property. Stated differently, an
innocent purchaser for value relying on a torrens title
issued is protected. A mortgagee has the right to rely on
what appears in the certificate of title and, in the absence
of anything to excite suspicion, he is under no obligation to
look beyond the certificate and investigate the title of the
mortgagor appearing on the face of said certificate.
The right or lien of an innocent mortgagee for
value upon the land mortgaged must be respected and
protected, even if the mortgagor obtained his title through
fraud. The remedy of the persons prejudiced is to bring an
action for damages against those who caused the fraud,
and if the latter are insolvent, an action against the
Treasurer of the Philippines may be filed for recovery of
damages against the Assurance Fund.

Development Bank of the Philippines vs. CA,

Celebrada Mangubat & Abner
Mangubat, G.R. No. 110053, October 16, 1995 (249
SCRA 331)

Facts: A land, covered by a tax declaration, was

originally owned by one Presentacion
Cordovez, who, on February 9, 1937, donated it to
Luciano Sarmiento. On June 8, 1964
Luciano Sarmiento sold the land to Pacifico Chica. On
April 27, 1965, Pacifico Chica mortgaged the land to DBP
to secure a loan of P6,000.00. However, he defaulted in
the payment of the loan, hence DBP caused the
extrajudicial foreclosure of the mortgage. In the auction
sale held on September 9, 1970, DBP acquired the
property as the highest bidder and was issued a
certificate of sale on September 17, 1970 by the sheriff. On
October 14, 1980, spouses Celebrada and Abner
Mangubat offered to buy the property for P18,599.99.
123
was, nevertheless, eventually approved by DBP in the sum as a loan is bound to pay to the creditor an equal
of P140,000.00, despite the aforesaid certification of the amount of the same kind and quality.
bureau, on the understanding of the parties that DBP The fact that the annulment of the sale will also
would work for the release of the land by the former result in the invalidity of the mortgage does not have an
Ministry of Natural Resources. To secure payment of the effect on the validity and efficacy of the principal
loan, respondent spouses executed a real estate mortgage obligation, for even an obligation that is unsupported by
over the land on March 17, 1982, which document was any security of the debtor may also be enforced by means
registered in the Registry of` Deeds pursuant to Act No. of an ordinary action. Where a mortgage is not valid, as
3344. The loan was then released to the spouses where it is executed by one who is not the owner of the
Mangubat on a staggered basis. After a substantial sum of property, or the consideration of the contract is simulated
P118,540.00 had been received by private respondent, or false, the principal obligation which it guarantees is not
they asked for the release of the remaining amount of the thereby rendered
loan. It does not appear that their request was acted
upon by DBP, ostensibly because the release of the land
from the then Ministry of Natural Resources had not been
obtained.
The spouses Mangubat then filed a complaint
against DBP seeking the annulment of the subject deed of
absolute sale on the ground that the object thereof was
verified to be timberland and, therefore, is in law an
inalienable part of the public domain. They also alleged
that DBP acted fraudulently and in bad faith by
misrepresenting itself as the absolute owner of the land
and in incorporating the waiver of warranty against
eviction in the deed of sale.
In its answer, DBP contended that it was actually
the absolute owner of the land, having purchased it for
value at an auction sale pursuant to an extrajudicial
foreclosure of mortgage; that there was neither malice nor
fraud in the sale of the land under the terms mutually
agreed upon by the parties; that assuming arguendo that
there was a flaw in its title, DBP cannot be held liable for
anything inasmuch as respondent spouses had full
knowledge of the extent and nature of DBP's rights, title
and interest over the land.
The trial court rendered judgment annulling the
subject deed of absolute sale and ordering DBP to return
the P25,500.00 purchase price, plus interest; to reimburse
to respondent spouses the taxes paid by them, the cost of
the relocation survey, incidental expenses and other
damages in the amount of P50,000.00; and to further pay
them attorney's fees and litigation expenses in the amount
of P10,000.00, and the costs of suit. Upon appeal, the CA
rendered judgment modifying the disposition of the lower
court by deleting the award for damages, attorney's fees,
litigation expenses and the costs, but affirming the same in
all its other aspects.

Issue: Whether a loan contract which is secured by a void

mortgage is still valid.

Held: Yes. Affirmed with Modifications.

Ratio: In its legal context, the contract of loan executed

between the parties is entirely different and discrete from
the deed of sale they entered into. The annulment of the
sale will not have an effect on the existence and
demandability of the loan. One who has received money
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null and void. That obligation matures and becomes to occupy the house and lot prompting Chua and Ng to file
demandable in accordance with the stipulations a petition for writ of possession. Such writ was issued.
pertaining to it. The spouses Carpo then filed a complaint for
Under the foregoing circumstances, what is lost is the annulment of real estate mortgage and the
only the right to foreclose the mortgage as a special consequent foreclosure proceedings. They consigned the
remedy for satisfying or settling the indebtedness which is amount of P257, 197.26 with the court. A TRO was
the principal obligation. In case of nullity, the mortgage issued. The RTC suspended the enforcement of the writ
deed remains as evidence or proof of a personal obligation of possession pending the final disposition of the
of the debtor, and the amount due to the creditor may be complaint. Chua and Ng questioned this suspension
enforced in an ordinary personal action. order before the CA. During the pendency of the case
Considering that neither party questioned the before the CA, the court handling the complaint for
legality and correctness of the judgment of the court a annulment dismissed the case on the ground
quo, as affirmed by respondent court, ordering the
annulment of the deed of absolute sale, such decreed
nullification of the document has already achieved finality.
We only need, therefore, to dwell on the effects of that
declaration of nullity.
With respect to the right of a party to recover the
amount given as consideration, this has been passed upon
in the case of Leather Manufacturers National Bank vs.
Merchants National Bank where it was held that: "What
money is paid upon the representation of the receiver that
he has either a certain title in property transferred in
consideration of the payment or a certain authority to
receive the money paid, when in fact he has no such title
or authority, then, although there be no fraud or
intentional misrepresentation on his part, yet there is no
consideration for the payment, the money remains, in
equity and good conscience, the property of the payer and
may be recovered back by him." Therefore, the
purchaser is entitled to recover the money paid by him
where the contract is set aside by reason of the mutual
material mistake of the parties as to the identity or
quantity of the land sold. And where a purchaser recovers
the purchase money from a vendor who fails or refuses to
deliver the title" he is entitled as a general rule to interest
on the money paid from the time of Payment. A contract
which the law denounces as void is necessarily no contract
whatever, and the acts of the parties in an effort to create
one can in no wise bring about a change of their legal
status. The parties and the subject matter of the contract
remain in all particulars just as they did before any act
was performed in relation thereto.

Spouses David B. Carpo & Rechilda S. Carpo vs.

Eleanor Chua & Elma Dy Ng, G.R. Nos. 150773 &
153599, September 30, 2005 (471 SCRA 471)

Facts: The spouses Carpo borrowed from Chua and Ng the

amount of P175,000 payable within 6 months with an
interest of 6% per month. To secure the loan, they
mortgaged their residential house and lot in Camarines
Sur. They failed to pay the loan. Consequently, the
property was extrajudicially foreclosed and sold at an
auction sale to Chua and Ng. Upon failure to exercise their
right of redemption, a certificate of sale was issued and
TCTs were issued in the name of the winning bidders.
Despite such developments, the spouses Carpo continued
125
that it was filed out of time and was barred by laches. A
petition was filed assailing the dismissal of the complaint.
The CA eventually reversed the suspension order on the
ground that it was the ministerial duty of the lower court
to issue the writ of possession when title over the
mortgaged property had been consolidated in the
mortgagee.
Issue: Whether a mortgage can be nullified on the
ground that the interest of the loan which is secured by
the mortgage is usurious.
the stipulated interest is evinced by its subsequent rulings,
cited above, in all of which the main obligation was upheld
and the offending interest rate merely corrected. Hence, it
is clear and settled that the principal loan obligation
still stands and remains valid. By the same token, since the
mortgage contract derives its vitality from the validity of
the principal obligation, the invalid stipulation on interest
rate is similarly insufficient to render void the ancillary
mortgage contract.

Held: No. Affirmed.

Ratio: There is no need to unsettle the principle affirmed

in Medel and like cases. From that perspective, it is
apparent that the stipulated interest in the subject loan is
excessive, iniquitous, unconscionable and exorbitant.
Pursuant to the freedom of contract principle embodied in
Article 1306 of the Civil Code, contracting parties may
establish such stipulations, clauses, terms and conditions
as they may deem convenient, provided they are not
contrary to law, morals, good customs, public order, or
public policy. In the ordinary course, the codal provision
may be invoked to annul the excessive stipulated
interest.
In the case at bar, the stipulated interest rate is
6% per month, or 72% per annum. By the standards set
in the above-cited cases, this stipulation is similarly
invalid. However, the RTC refused to apply the principle
cited and employed in Medel on the ground that Medel
did not pertain to the annulment of a real estate mortgage,
as it was a case for annulment of the loan contract itself.
The question thus sensibly arises whether the invalidity of
the stipulation on interest carries with it the invalidity of
the principal obligation. The question is crucial to the
present petition even if the subject thereof is not the
annulment of the loan contract but that of the mortgage
contract. The consideration of the mortgage contract is the
same as that of the principal contract from which it
receives life, and without which it cannot exist as an
independent contract. Being a mere accessory contract, the
validity of the mortgage contract would depend on the
validity of the loan secured by it. Notably in Medel, the
Court did not invalidate the entire loan obligation despite
the inequitability of the stipulated interest, but instead
reduced the rate of interest to the more reasonable rate of
12% per annum. The same remedial approach to the
wrongful interest rates involved was employed or affirmed
by the Court in Solangon, Imperial, Ruiz, Cuaton, and
Arrofo. The Courts ultimate affirmation in the cases
cited of the validity of the principal loan obligation side by
side with the invalidation of the interest rates thereupon is
congruent with the rule that a usurious loan transaction is
not a complete nullity but defective only with respect to the
agreed interest.
The Courts wholehearted affirmation of the rule
that the principal obligation subsists despite the nullity of
126
 The petition for certiorari and mandamus (Art. 1727 of the Civil Code.) The fact that the agent has
questioning the suspension order was proper since the also bound himself to pay the debt does not relieve from
said order was interlocutory in nature and since the case liability the principal for whose benefit the debt was
involved the performance of a ministerial duty. incurred. The individual liability of the agent constitutes in
the present case a further security in favor of the creditor
and does not affect or preclude the liability of the
Gonzalo Tuason vs. Dolores Orozco, G.R. No. 2344,
principal. In the present case the latter's liability was
February10,1906(5Phil596)
further guaranteed by a mortgage upon his property. The
law does not provide that the agent can not bind himself
Facts: On November 19, 1888, Juan de Vargas y Amaya, personally to the fulfillment of an obligation incurred by
the defendant's husband, executed a power of attorney to him in the name and on behalf of his principal. On the
Enrique Grupe, authorizing him to dispose of all his contrary, it
property, and particularly of a certain house and lot
known as No. 24 Calle Nueva, Malate, in the city of
Manila, for the price at which it was actually sold. He
was also authorized to mortgage the house for the
purpose of securing the payment of any amount advanced
to his wife, Dolores Orozco de Rivero.
On the 21st of January, 1890, Enrique Grupe and
Dolores Orozco de Rivero obtained a loan from the plaintiff
secured by a mortgage on the property referred to in the
power of attorney. In the caption of the instrument
evidencing the debt it is stated the Grupe and Dolores
Orozco appeared as the parties of the first part and
Gonzalo Tuason, the plaintiff, as the party of the second
part; that Grupe acted for himself and also in behalf of
Juan Vargas by virtue of the power granted him by latter,
and that Dolores Orozco appeared merely for the purpose
of complying with the requirements contained in the
power of attorney. This instrument was duly recorded
in the Registry of Property, and it appears therefrom that
Enrique Grupe, as attorney in fact for Vargas, received
from the plaintiff a loan of 2,200 pesos and delivered the
same to the defendant. To secure its payment, he
mortgaged the property of his principal with defendant's
consent as required in the power of attorney.
The loan was not paid. The creditor filed suit and won in
the lower court.

Issue: Whether validity of the mortgage can be affected by

the circumstances on how the money from the loan was
received by the mortgagor.

Held: No. Affirmed.

Ratio: The fact that the defendant received the money

from her husband's agent and not from the creditor does
not affect the validity of the mortgage in view of the
conditions contained in the power of attorney under which
the mortgage was created. Nowhere does it appear in this
power that the money was to be delivered to her by the
creditor himself and not through the agent or any other
person. The important thing was that she should have
received the money. This we think is fully established by
the record.
A debt thus incurred by the agent is binding
directly upon the principal, provided the former acted, as
in the present case, within the scope of his authority.
127
provides that such act on the part of an agent would be the subject property because he had prior possession as
valid. (Art. 1725 of the Civil assignee of the said "Assignment of Real Estate Mortgage"
Code.) executed by Presentacion Quimbo in his favor, and with
the consent of Mauricia Albaytar, the sister of the deceased
The appellant's final contention is that in order to
Josefa Albaytar Arizapa, after the demise of the spouses
render judgment against the mortgaged property it would
Julio Arizapa and Josefa Albaytar.
be necessary that the minor children of Juan de Vargas be
Evelyn Banua and her husband filed a case
made parties defendant in this action, they having an
against Lagrosa. Lagrosa, in turn, filed a case against
interest in the property. Under article 154 of the Civil
Cesar Orolfo. The case filed by Evelyn Banua was ruled in
Code, which was in force at the time of the death of
her favor. The case filed by Lagrosa was ruled in his favor.
Vargas, the defendant had the parental authority over her
The case was consolidated in the CA,
children and consequently the legal representation of their
persons and property. (Arts. 155 and 159 of the Civil
Code.) It can not be said, therefore, that they were not
properly represented at the trial. Furthermore this
action was brought against the defendant in her
capacity as administratrix of the estate of the deceased
Vargas. She did not deny in her answer that she was such
administratrix.
Vargas having incurred this debt during his
marriage, the same should not be paid out of property
belonging to the defendant exclusively but from that
pertaining to the conjugal partnership. This fact should be
borne in mind in case the proceeds of the mortgaged
property be not sufficient to pay the debt and interest
thereon. The judgment of the court below should be
modified in so far as it holds the defendant personally
liable for the payment of the debt.

Ruben Lagrosa vs. CA, Spouses Romulo & Evelyn A.

Banua, & Cesar Orolfo, G.R. Nos. 115981-82, August 12,
1999 (312 SCRA 298)

Facts: Involved in this case is the possession of sixty-

five (65) square meters of residential lot located in Paco,
Manila, originally owned by the City of Manila which, in
due course, following its land and housing program for
the under-privileged, awarded it to one Julio Arizapa who
constructed a house and upholstery shop thereon. The
award was in the nature of a "Contract to Sell" payable
monthly for a period of twenty (20) years. Before Julio
Arizapa could pay for the lot, he died, leaving behind his
wife and children. His wife died the following year. The
surviving children, including Evelyn Arizapa Banua,
executed a Deed of Extrajudicial Partition adjudicating
unto themselves the lot and a Renunciation in favor of
Evelyn. Cesar Orolfo is the caretaker of the same subject
property as authorized and appointed by Evelyn Banua, in
whose name TCT No.
197603 covering the said property is registered. The title
of Evelyn Banua to the subject property is evidenced by a
Deed of Sale executed by the City of Manila in her favor
and by a TCT.
Ruben Lagrosa claims to be the lawful possessor
of the subject property by virtue of the "Deed of
Assignment of Real Estate Mortgage" executed in his favor
by Presentacion Quimbo on the basis of a "Contract of Real
Estate Mortgage" executed by Julio Arizapa in favor of
the latter. Lagrosa posits that he cannot be evicted from
128
and the court affirmed the ruling in favor of Evelyn
Banua and reversed the ruling in favor of Cesar Orolfo.
Issue: Whether a mortgage executed by a person who is
not the owner of the property is valid.
7 of Rule 86 and Section 5 of Rule 87 of the Rules of Court.
Thus, the mortgagee does not acquire title to the
mortgaged real estate unless and until he purchases the
same at public auction and the property is not redeemed
within the period provided for by the Rules of Court.

Held: No. Affirmed.

Ratio: The Deed of Real Estate Mortgage" executed by

Julio Arizapa is null and void, the property mortgaged by
Julio Arizapa being owned by the City of Manila under
Transfer Certificate of Title No. 91120. For a person
to validly constitute a valid mortgage on real estate, he
must be the absolute owner thereof as required by
Article
2085 of the Civil Code of the Philippines. Since the
mortgage to Presentacion Quimbo of the lot is null and
void, the assignment by Presentacon Quimbo of her rights
as mortgage to Lagrosa is likewise void. Even if the
mortgage is valid as insisted by herein petitioner, it is
well-settled that a mere mortgagee has no right to eject
the occupants of the property mortgaged. This is so,
because a mortgage passes no title to the mortgagee.
Indeed, by mortgaging a piece of property, a debtor merely
subjects it to a lien but ownership thereof is not parted
with. Thus, a mortgage is regarded as nothing more than
a mere lien, encumbrance, or security for a debt, and
passes no title or estate to the mortgagee and gives him no
right or claim to the possession of the property.
Petitioner Lagrosa now contends that what was
mortgaged by Julio Arizapa in favor of Presentacion
Quimbo was "his right as an awardee over the homelot in
question, and not the homelot itself." Petitioner would
have this Court uphold the validity and legality of the
mortgage over the "right as an awardee" rather than the
homelot itself. The agreement between the City of Manila
and Julio Arizapa was in the nature of a "contract to sell,"
the price for the lot being payable on installment for a
period of twenty (20) years which could yet prevent,
such as by the non-fulfillment of the condition, the
obligation to convey title from acquiring any obligatory
force. Hence, there is no "right" as awardee to speak of,
and there is no alienable interest in the property to deal
with.
As to Lagrosa's prior possession of the subject
property, their stay in the property as correctly found by
the respondent Court of Appeals was by mere tolerance or
permission. It is well-settled that "a person who occupies
the land of another at the latter's tolerance or permission,
without any contract between them is necessarily bound
by an implied promise that he will vacate upon demand,
failing which, a summary action for ejectment is the
proper remedy against him. By Lagrosa's own admission,
he is merely an assignee of the rights of the mortgage of
the lot and that, consequently, the respondent Court of
Appeals correctly ruled that the only right of action of
Lagrosa as such assignee of the mortgagee, where the
mortgagor is already dead, is that provided for in Section
129
Luis Castro, Jr., Marissa Castro, Ramon Castro, Mary be included in the foreclosure proceedings.
Ann Castro, Catherine Castro & Antonio Castro vs. CA &
Union Bank of the Philippines, G.R. No. 97401, Held: No. Reversed.
December 6, 1995 (250 SCRA 661)
Ratio: Art. 2127 NCC provides that the mortgage
Facts: On 15 August 1974, Cabanatuan City Colleges extends to the natural accessions, to the improvements,
obtained a loan from the Bancom Development growing fruits, and the rents or income not yet received
Corporation. In order to secure the indebtedness, the when the obligation becomes due, and to the amount of
college mortgaged to Bancom two parcels of land covered the indemnity granted or owing to the
by TCT No. T-45816 and No. T-45817 located in
Cabanatuan City. The parcels were both within the school
site. While the mortgage was subsisting, the college board
of directors agreed to lease to petitioners a 1,000-
square- meter portion of the encumbered property on
which the latter, eventually, built a residential house.
Bancom, the mortgagee, was duly advised of the matter.
The school defaulted in the due payment of the
loan. In time, Bancom extrajudicially foreclosed on the
mortgage, and the mortgaged property was sold at public
auction on 22 August 1979 with Bancom coming out to be
the only bidder. A certificate of sale was accordingly
executed by the provincial sheriff in favor of Bancom.
Subsequently, the latter assigned its credit to herein
private respondent Union Bank of the Philippines. On 10
October 1984, following the expiration of the redemption
period without the college having exercised its right of
redemption, private respondent consolidated title to the
property. On 08 May 1985, private respondent filed
with the Regional Trial Court of Nueva Ecija, Branch
XXVIII in Cabanatuan City, an ex-parte motion for the
issuance of a writ of possession not only over the
land and school buildings but also the residential house
constructed by petitioners. On 10 May 1985, the lower
court granted the motion and direct issuance of the
corresponding writ. The ex- officio provincial sheriff, in
implementing the writ, thereby also sought the vacation
of the premises by petitioners. When the latter refused,
private respondent filed an ex-parte motion for a special
order directing the physical ouster of the occupants.
On 23 May 1986, petitioners formally entered
their appearance in the proceedings to oppose the ex-
parte motion. Petitioners averred that, being the
owners of the residential house which they themselves
had built on the foreclosed property with the prior
knowledge of the mortgagee, they could not be ousted
simply on the basis of a petition for a writ of possession
under Act No. 3135. The court, nevertheless, issued an
order granting private respondent's motion, and it
directed Atty. Luis T. Castro representation of petitioners,
to deliver "all the keys to all the room premises" found
on the property foreclosed and authorized, in the event
petitioners would refuse to surrender the keys, private
respondent "to the premises in question and do what is
best for the preservation properties belonging to the
Cabanatuan City Colleges." Upon appeal, the CA affirmed.

Issue: Whether a house subsequently built by a lessee on

mortgaged land with the knowledge of the mortgagee can
130
proprietor from the insurers of the property mortgaged, or During the public auction, L & R Corp., as the sole bidder,
in virtue of expropriation for public use, with the bought the land. When L & R Corp attempted to have
declarations, amplifications and limitations established by their Certificate of Sale recorded, it discovered the prior
law, whether the estate remains in the possession of the sale of the land to PWHAS for the first time. L & R Corp.
mortgagor, or passes into the hands of a third person. wrote a letter to the Register of Deeds requesting the
This article extends the effects of the real estate cancellation of the annotation of the sale on the ground
mortgage to accessions and accessories found on the that the contract of mortgage prohibited such sale. 7
hypothecated property when the secured obligation months after the foreclosure sale, PWHAS, for the account
becomes due. The law is predicated on an assumption that of the spouses Litonjua, tendered payment of
the ownership of such accessions and accessories also
belongs to the mortgagor as the owner of the principal.
The provision has thus been seen by the Court, in a long
line of cases beginning in 1909 with Bischoff vs. Pomar, to
mean that all improvements subsequently introduced or
owned by the mortgagor on the encumbered property are
deemed to form part of the mortgage. That the
improvements are to be considered so incorporated only if
so owned by the mortgagor is a rule that can hardly be
debated since a contract of security, whether real or
personal, needs as an indispensable element thereof the
ownership by the pledgor or mortgagor of the property
pledged or mortgaged. The rationale should be clear
enough in the event of default on the secured
obligation, the foreclosure sale of the property would
naturally be the next step that can expectedly follow. A
sale would result in the transmission of title to the buyer
which is feasible only if the seller can be in a position to
convey ownership of the thing sold (Article 1458, Civil
Code). It is to say, in the instant case, that a foreclosure
would be ineffective unless the mortgagor has title to the
property to be foreclosed.
It may not be amiss to state, in passing, that in
respect of the lease on the foreclosed property, the buyer
at the foreclosure sale merely succeeds to the rights and
obligations of the pledgor-mortgagor subject, however, to
the provisions of Article 1676 of the Civil Code, on its
possible termination.

Sps. Reynaldo K. Litonjua & Erlinda P. Litonjua & Phil.

White House Auto Supply, Inc. vs. L & R Corporation,
Vicente M. Coloyan in his capacity as Acting Registrar
of the Register of Deeds of Quezon City thru Deputy
Sheriff Roberto R. Garcia, G.R. No. 130722, December
9, 1999 (320 SCRA 405)

Facts: The spouses Litonjua obtained loans from the L &

R Corp. in the aggregate sum of P400,000. The loans
were secured by a mortgage constituted by the spouses
upon their 2 parcels of land and the improvements
thereon located in Cubao, Quezon City. The mortgage
provided that the mortgagor cannot sell the mortgaged
property without getting the consent of the mortgagee
and that the mortgagee shall have the right of first refusal.
The spouses Litonjua then sold the property to
Phil. White House Auto Supply, Inc. The sale was
annotated at the back of the certificate of title.
The spouses Litonjua defaulted on their loan, so L
& R Corp. started extrajudicial foreclosure of the property.
131
the full redemption price to L & R Corp in the form of a foreclosure suit against the mortgagor without the
Chinabank managers check. L necessity of either notifying the purchaser or including
& R Corp refused to accept the payment. Hence, PWHAS him as a defendant. At the same time, the purchaser of the
was compelled to redeem the mortgaged properties mortgaged property was deemed not to have lost his
through the ex-officio sheriff who, in turn, issued a equitable right of redemption.
Certificate of Redemption. In Bonnevie v. Court of Appeals, where a
Due to the refusal of L & R Corp to return their similar provision appeared in the subject contract of
owners duplicate certificate of title, the spouses Litonjua mortgage, the petitioners therein, to whom the mortgaged
asked the Register of Deeds to annotate their Certificate property were sold without the written consent of the
of Redemption as an adverse claim on the titles. The mortgagee, were held as without the right to
Register of Deeds refused to do so, hence the spouses
Litonjua filed a petition against L & R Corp for the
surrender of the title.
While the case was pending, L & R Corp. executed
an Affidavit of Consolidation of Ownership. The Register
of Deeds then issued it a TCT, free of any lien and
encumbrance. L & R Corp then informed all tenants of the
property to pay the rentals to it. Upon learning of this, the
spouses Litonjua filed an adverse claim and a notice of lis
pendens with the Register of Deeds. In the process, they
learned that the prior sale of the properties to PWHAS was
not annotated on the titles. A complaint for quieting of
title, annulment of title & damages was filed. The lower
court dismissed the complaint. CA reversed at first, but set
aside its decision in an amended decision.

Issue: Whether a mortgage contract may provide that the

mortgagor cannot sell the mortgaged property without
first obtaining the consent of the mortgagee. Whether a
mortgage contract may provide for a right of first refusal in
favor of the mortgagee.

Held: No. Yes. Affirmed with modifications.

Ratio: In the case of Philippine Industrial Co. v. El Hogar

Filipino and Vallejo, a stipulation prohibiting the
mortgagor from entering into second or subsequent
mortgages was held valid. This is clearly not the same as
that contained in paragraph 8 of the subject Deed of Real
Estate Mortgage which also forbids any subsequent sale
without the written consent of the mortgagee. Yet, in
Arancillo v. Rehabilitation Finance Corporation, the case
of Philippine Industrial Co., supra, was erroneously cited
to have held a mortgage contract against the
encumbrance, sale or disposal of the property mortgaged
without the consent of the mortgagee is valid. No similar
prohibition forbidding the owner of mortgaged property
from (subsequently) mortgaging the immovable
mortgaged is found in our laws, making the ruling in
Philippine Industrial Co., supra, perfectly valid. On the
other hand, to extend such a ruling to include subsequent
sales or alienation runs counter not only to Philippine
Industrial Co., itself, but also to Article 2130 of the New
Civil Code.
Meanwhile in De la Paz v. Macondray &; Co.,
Inc., it was held that while an agreement of such nature
does not nullify the subsequent sale made by the
mortgagor, the mortgagee is authorized to bring the
132
redeem the said property. No consent having been secured In other words, stipulations like those covered by
from the mortgagee to the sale with assumption of paragraph 8 of the subject Deed of Real Estate Mortgage
mortgage by petitioners therein, the latter were not validly circumvent the law, specifically, Article 2130 of the New
substituted as debtors. It was further held that since their Civil Code. Being contrary to law, paragraph 8 of the
rights were never recorded, the mortgagee was charged subject Deed of Real Estate Mortgage is not binding upon
with the obligation to recognize the right of redemption the parties. Accordingly, the sale made by the spouses
only of the original mortgagors-vendors. Without Litonjua to PWHAS, notwithstanding the lack of prior
discussing the validity of the stipulation in question, the written consent of L & R Corporation, is valid.
same was, in effect, upheld. While petitioners question the validity of
On the other hand, in Tambunting v. paragraph 8 of their mortgage contract, they appear to be
RehabilitationFinance Corporation, the validity of a similar silent insofar as paragraph 9 thereof is concerned. Said
provision was specifically raised and discussed and found paragraph 9 grants upon L & R Corporation the right of
as invalid. It was there ratiocinated that the provision can first refusal over the mortgaged property in the event the
only be construed as directed against subsequent mortgagor decides to sell the same. We see nothing wrong
mortgages or encumbrance, not to an alienation of the in this provision.
immovable itself. For while covenants prohibiting the
owner from constituting a later mortgage over property
registered under the Torrens Act have been held to be
legally permissible (Phil. Industrial Co. v. El Hogar
Filipino, et al., 45 Phil. 336, 341-342; Bank of the
Philippines v. Ty Camco Sobrino, 57 Phil. 801),
stipulations "forbidding the owner from alienating the
immovable mortgaged" are expressly declared void by law
(Art. 2130, Civil Code).
Earlier, in PNB v. Mallorca, it was reiterated that a
real mortgage is merely an encumbrance; it does not
extinguish the title of the debtor, whose right to dispose
a principal attribute of ownership is not thereby lost.
Thus, a mortgagor had every right to sell his mortgaged
property, which right the mortgagee cannot oppose.
Insofar as the validity of the questioned
stipulation prohibiting the mortgagor from selling his
mortgaged property without the consent of the mortgagee
is concerned, therefore, the ruling in the Tambunting case
is still the controlling law. Indeed, we are fully in accord
with the pronouncement therein that such a stipulation
violates Article
2130 of the New Civil Code. Both the lower court and the
Court of Appeals in its Amended Decision rationalize that
since paragraph 8 of the subject Deed of Real Estate
Mortgage contains no absolute prohibition against the sale
of the property mortgaged but only requires the
mortgagor to obtain the prior written consent of the
mortgagee before any such sale, Article 2130 is not
violated thereby. This observation takes a narrow and
technical view of the stipulation in question without taking
into consideration the end result of requiring such prior
written consent. True, the provision does not absolutely
prohibit the mortgagor from selling his mortgaged
property; but what it does not outrightly prohibit, it
nevertheless achieves. For all intents and purposes, the
stipulation practically gives the mortgagee the sole
prerogative to prevent any sale of the mortgaged property
to a third party. The mortgagee can simply withhold its
consent and thereby, prevent the mortgagor from
selling the property. This creates an unconscionable
advantage for the mortgagee and amounts to a virtual
prohibition on the owner to sell his mortgaged property.
133
The right of first refusal has long been recognized as valid the sale is, indeed, valid, the same is rescissible because it
in our jurisdiction. The consideration for the loan- ignored L & R Corporation's right of first refusal.
mortgage includes the consideration for the right of
first refusal. L & R Corporation is, in effect, stating that it Vitug, concurring & dissenting: What I find quite difficult to
consents to lend out money to the spouses Litonjua accept, with all due respect, is the pre-emptive and
provided that in case they decide to sell the property peremptory pronouncement in the ponencia that the sale
mortgaged to it, then L & R Corporation shall be given the between the Litonjuas and PWHAS is rescissible because it
right to match the offered purchase price and to buy the ignored the "right of first refusal" of L
property at that price. Thus, while the spouses Litonjua & R Corporation. I must stress that a right of first
had every right to sell their mortgaged property to PWHAS refusal is not a perfected contract. Neither does it
without securing the prior written consent of L & R qualify as an option under the second paragraph of
Corporation, they had the obligation under paragraph 9, Article 1479, which
which is a perfectly valid provision, to notify the latter of
their intention to sell the property and give it priority over
other buyers. It is only upon failure of L & R
Corporation to exercise its right of first refusal could the
spouses Litonjua validly sell the subject properties to
others, under the same terms and conditions offered to L &
R Corporation.
What then is the status of the sale made to
PWHAS in violation of L & R Corporation's contractual
right of first refusal? The Contract of Sale was not voidable
but rescissible. Under Article 1380 to 1381(3) of the Civil
Code, a contract otherwise valid may nonetheless be
subsequently rescinded by reason of injury to third
persons, like creditors. The status of creditors could be
validly accorded by the Bonnevies for they had substantial
interest that were prejudiced by the sale of the subject
property to the Contract of Lease. In the case at bar,
PWHAS cannot claim ignorance of the right of first refusal
granted to L & R Corporation over the subject properties
since the Deed of Real Estate Mortgage containing such a
provision was duly registered with the Register of Deeds.
As such, PWHAS is presumed to have been notified thereof
by registration, which equates to notice to the whole world.
We note that L & R Corporation had always
expressed its willingness to buy the mortgaged properties
on equal terms as PWHAS. Indeed, in its Answer to the
Complaint filed, L & R Corporation expressed that it was
ready, willing and able to purchase the subject properties
at the same purchase price of P430,000.00, and was
agreeable to pay the difference between such purchase
price and the redemption price of P249,918.77, computed
as of August 13, 1981, the expiration of the one-year
period to redeem. That it did not duly exercise its right of
first refusal at the opportune time cannot be taken against
it, precisely because it was not notified by the spouses
Litonjua of their intention to sell the subject property and
thereby, to give it priority over other buyers.
All things considered, what then are the relative
rights and obligations of the parties? To recapitulate:, the
sale between the spouses Litonjua and PWHAS is valid,
notwithstanding the absence of L & R Corporation's prior
written consent thereto. Inasmuch as the sale to PWHAS
was valid, its offer to redeem and its tender of the
redemption price, as successor-in-interest of the spouses
Litonjua, within the one-year period should have been
accepted as valid by the L & R Corporation. However, while
134
itself must be supported by a consideration separate and the parties extended it to July 12, 1961 by an annotation to
distinct from the price itself, nor an offer which Article this effect on the left margin of the instrument. Lanuza's
1319 of the Code requires to be definitive and certain both wife, who did not sign the deed, this time signed her name
as to object and cause of the contemplated agreement. below the annotation.
Even while the object in a "right of first refusal" might be It appears that after the execution of this
determinate, the exercise of the right, nevertheless, would instrument, Lanuza and his wife mortgaged the same
still be dependent not only on the grantor's eventual house in favor of Martin de Leon to secure the payment of
intention to enter into a binding juridical relation but P2,720 within one year. This mortgage was executed on
also on terms, including the price, that obviously are yet to October 4, 1961 and recorded in the Office of the
be fixed. It would be absurd to suggest that a right of first Register of Deeds of Manila on November 8, 1961 under
refusal can be the proper subject of an action for specific the provisions of Act No. 3344.
performance but, of course, neither would it be correct
to say that a breach of such right would be totally
inconsequential. A grantor who unjustly discards his own
affirmation violates the basic dogma in human relations so
well expressed as in Article 19 of the Civil Code to the
effect that every person is expected to act with justice, give
another his due and observe honesty and good faith. When
ignored, the legal feasibility of an action for damages is a
matter now long settled.
Most importantly, a rescissory action in
consonance with Article 1380, in relation to Article 1381,
paragraph (3), of the New Civil Code so invoked (by
citing Guzman, Bocaling & Co. vs. Bonnevie) as the
authority for the rescission of the sale between the
Litonjua spouses and PWHAS is here off the mark
unfortunately. An action for rescission under said
provisions of the Code is merely subsidiary and relates to
the specific instance when a debtor, in an attempt to
defraud his creditor, enters into a contract with another
that deprives the creditor to recover his just claim and
leaves him with no other legal means, than by rescission,
to obtain reparation. Hence, the rescission is only to the
extent necessary to cover the damages caused
pursuant to Article 1384 of the Civil Code. Verily, the
case and factual settings in the instant controversy (for
"Quieting of Title, Annulment of Title and Damages with
Preliminary Injunction") initiated by the Litonjua spouses
and PWHAS against herein respondents is neither the
occasion nor the proper forum for such an issue to be
considered.

In Re: Petition for Consolidation of Title in the

Vendees of a House and the Rights to a Lot. Maria
Bautista Vda. de Reyes, et al., Rodolfo Lanuza vs.
Martin de Leon, G.R. No. L-22331, June 6, 1967 (20
SCRA 369)

Facts: Rodolfo Lanuza and his wife Belen were the owners
of a two-story house built on a lot of the Maria Guizon
Subdivision in Tondo, Manila, which the spouses leased
from the Consolidated Asiatic Co. On January 12, 1961,
Lanuza executed a document entitled "Deed of Sale with
Right to Repurchase" whereby he conveyed to Maria
Bautista Vda. de Reyes and Aurelia R. Navarro the house,
together with the leasehold rights to the lot, a television
set and a refrigerator in consideration of the sum of
P3,000. When the original period of redemption expired,
135
 As the Lanuzas failed to pay their obligation, De
Leon filed a petition for the extrajudicial foreclosure of the
mortgage. On the other hand, Reyes and Navarro followed
suit by filing in the Court of First Instance of Manila a
petition for the consolidation of ownership of the house
on the ground that the period of redemption expired on
July 12,
1961 without the vendees exercising their right of
repurchase. The petition for consolidation of ownership
was filed on October 19. On October 23, the house was
sold to De Leon as the only bidder at the sheriff's sale. De
Leon immediately took possession of the house, secured a
discharge of the mortgage on the house in favor of a rural
bank by paying P2,000 and, on October 29, intervened in
court and asked for the dismissal of the petition filed by
Reyes and Navarro on the ground that the unrecorded
pacto de retro sale could not affect his rights as a third
party.
The court ruled for Reyes and Navarro.
considered. We refer to the nature of the so-called "Deed
of Sale with Right to Repurchase" and the claim that it is
in reality an equitable mortgage. Circumstances are
clearly present that indicate the existence of the equitable
mortgage. The price is grossly inadequate. There was no
transmission of ownership to the vendees. There was a
delay in the filing of a petition for consolidation. Under
these circumstances we cannot but conclude that the
deed in question is in reality a mortgage. This conclusion is
of far-reaching consequences because it means not only
that this action for consolidation of ownership is
improper as

Issue: Whether an unrecorded prior sale of a property is

preferred over a recorded subsequent mortgage. Whether
a recorded subsequent mortgage is preferred over a prior
equitable mortgage.

Held: Yes. Yes. Reversed.

Ratio: We are in accord with the trial court's ruling that a

conveyance of real property of the conjugal partnership
made by the husband without the consent of his wife is
merely voidable. This is clear from article 173 of the Civil
Code which gives the wife ten years within which to bring
an action for annulment. As such it can be ratified as
Lanuza's wife in effect did in this case when she gave her
conformity to the extension of the period of redemption
by signing the annotation on the margin of the deed. We
may add that actions for the annulment of voidable
contracts can be brought only by those who are bound
under it, either principally or subsidiarily (Art. 1397), so
that if there was anyone who could have questioned the
sale on this ground it was Lanuza's wife alone.
We also agree with the lower court that between
an unrecorded sale of a prior date and a recorded
mortgage of a later date the former is preferred to the
latter for the reason that if the original owner had
parted with his ownership of the thing sold then he no
longer had the ownership and free disposal of that thing
so as to be able to mortgage it again. Registration of the
mortgage under Act No. 3344 would, in such case, be of
no moment since it is understood to be without prejudice
to the better right of third parties. Nor would it avail the
mortgagee any to assert that he is in actual possession of
the property for the execution of the conveyance in a public
instrument earlier was equivalent to the delivery of the
thing sold to the vendee.
But there is one aspect of this case which leads us
to a different conclusion. It is a point which neither the
parties nor the trial court appear to have sufficiently
136
De Leon claims, but, what is more, that between the Carolina P. Ramirez, Ferdinand P. Ramirez, Francis P.
unrecorded deed of Reyes and Navarro which we hold to Ramirez, Frederic P. Ramirez, & the Intestate Estate of
be an equitable mortgage, and the registered mortgage of Francisco Ramirez, Jr. vs. CA, Hon. Juan A. Bigornia, Jr.,
De Leon, the latter must be preferred. Preference of in his capacity as Presiding Judge of the RTC of Iligan,
mortgage credits is determined by the priority of Isabela, Br. 18
registration of the mortgages, following the maxim "Prior & Sps. Loreto Claravall & Victoria H. Claravall, G.R. No.
tempore potior jure" 133841, August 15, 2003 (409 SCRA 133)
(Hewhoisfirstintimeispreferredinright."). Under Article
2125 of the Civil Code the equitable mortgage, while valid
between Reyes and Navarro, on the one hand, and the
Lanuzas, on the other, as the immediate parties thereto,
cannot prevail over the registered mortgage of De Leon.

Maria T. Guanzon vs. Hon. Manuel Argel, Presiding

Judge of CFI of Antique, Juan, Ernesto, Estrella,
Bartolome, Honorato, all surnamed Dumaraog, G.R. No.
L-27706, June 16, 1970 (33 SCRA 474)

Facts: Ines Flores executed a document entitled pacto de

retro over a parcel of rice land situated in Inabasan, San
Jose, Antique in favor of Maria Guanzon. When Ines
Flores was unable to pay, Maria Guanzon consolidated her
title over the property. The children of Ines Flores, the
Dumaraogs, filed an action for the redemption of the
land claiming that the purported pacto de retro sale was
actually an equitable mortgage.
After trial, the court declared the document
involved to be one of equitable mortgage and ordered
Guanzon to execute an instrument of reconveyance in
favor of the Dumaraogs upon the payment of P1,500.
Guanzon then filed this petition.

Issue: Whether an equitable mortgagees title over the

mortgaged property will be consolidated if the debtor fails
to pay the loan.

Held: No. Affirmed.

Ratio: If the Dumaraogs fail to pay the P1,500 within

the specified 20 days, Guanzon would be entitled to have
execution issue to collect the said amount from the
properties of the Dumaraogs whereupon the deed of
reconveyance would be executed by Guanzon. In no way
can the judgment be construed to mean that should the
Dumaraogs fail to pay the money within the specified
period then the property would be conveyed by the sheriff
to Guanzon. Any interpretation in that sense would
contradict the declaration made in the same judgment
that the contract between the parties was in fact a
mortgage and not a pacto de retro sale. The only right of
a mortgagee in case of non-payment of a debt secured
by mortgage would be to foreclose the mortgage and have
the encumbered property sold to satisfy the outstanding
indebtedness. The mortgagors default does not operate
to vest in the mortgagee the ownership of the encumbered
property, for any such effect is against public policy.

137
Facts: On Dec. 29, 1965, spouses Loreto Claravall and public policy and, therefore, void. Before perfect title over a
Victoria Claravall executed a deed of sale in favor of mortgaged property may thus be secured by the
the spouses Francisco Ramirez, Jr. and Carolina mortgagee, he must, in case of non-payment of the debt,
Ramirez covering a parcel of land, including foreclose the mortgage first and thereafter purchase the
improvements thereon, situated in Ilagan, Isabela. On mortgaged property at the foreclosure sale. In fine, the
even date, another instrument was executed granting the ownership of the property was not vested to the spouses
spouses Claravall an option to repurchase the property Ramirez upon private respondents failure to pay their
within a period of two years from December 29, 1965 but indebtedness, the registration of the property in the
not earlier nor later than the month of December, 1967. formers names notwithstanding, absent any showing that
At the expiration of the two-year period, the Claravalls they foreclosed the mortgage and purchased the property
failed to redeem the property, prompting them to file a at a foreclosure sale.
complaint against the spouses Francisco Ramirez, Jr. and
Carolina Ramirez to compel the latter to sell the property
back to them. After trial, judgment was rendered in favor
of the spouses Ramirez which was, on appeal, affirmed by
the Court of Appeals. On review, however, this Court,
finding that the Deed of Absolute Sale with option to
repurchase executed by private respondents in favor of
the spouses Ramirez was one of equitable mortgage,
reversed the decision of the appellate court by
Decision of October 15, 1990. The decision of this Court
having become final and executory, possession of the
property was turned over to private respondents after
they settled their obligation to the spouses Ramirez.
Following the death of Francisco Ramirez, Jr., the
spouses Claravall filed a complaint for accounting and
damages against the intestate estate of Francisco Ramirez,
his widow and children. A motion to dismiss was filed
alleging, among other things, that the Ramirezes, as
registered owners of the lot prior to its redemption,
were entitled to collect rentals for the lot. The
resolution of the motion to dismiss was deferred. The
Ramirezes filed a petition for certiorari which was denied.

Issue: Whether the mortgagees of an equitable mortgage

who have been registered as the owners of the mortgaged
property can collect rent and other fruits from the said
property.

Held: No. Affirmed.

Ratio: The flaw in petitioners argument stems from

their submission that the spouses Ramirez, as vendees,
were the owners of the property after it was registered in
their names following the execution of the deed of sale
in their favor. The declaration, however, by this Court in
the first case that the deed of sale with option to
repurchase entered into by the spouses Ramirez and
private respondents was an equitable mortgage
necessarily takes the deed out of the ambit of the law on
sales and puts into operation the law on mortgage. It is a
well-established doctrine that the mortgagors default
does not operate to vest the mortgagee the ownership of
the encumbered property and the act of the mortgagee in
registering the mortgaged property in his own name upon
the mortgagors failure to redeem the property
amounts to pactum commissorium, a forfeiture clause
declared by this Court as contrary to good morals and
138
 whether the contract entered into by Vicente Perez was
Lucia Perez, et al. vs. Domingo Cortes, et al., G.R. No. one of mortgage or one of sale, on the hypothesis that
3821, February 16, 1910 (15 he could dispose of the property, while it is not possible to
Phil 211) decide the question by the language of the document, in
justice it must be assumed that the debtor assumed a
Facts: Liberato Perez, by virtue of the possession he lesser obligation and that in accord with the creditor
enjoyed as owner for more than sixty years, without he bound himself to execute a mortgage which
counting that of his ancestors, lawfully acquired by means
of extraordinary prescription, under the provisions of
article 1959 of the Civil Code, the ownership of about
30 hectares of land. His two daughters, Lucia and
Eduvigis Perez, inherited such land from him. The
daughters transferred of the land to Dominga Bolado
who, in turn, transferred the said half to her daughter,
Inocenta Perez.
In 1903, Domingo Cortes and his wife Dominga
Ubaldo, usurped and unlawfully retained the land last
described, and still retain it without possessing any right
thereto. The Perezes filed suit. Impugning the right of the
plaintiffs, the defendants alleged that they were and still
are the owners of the part or portion of land claimed, for
the reason that Pedro Olang had acquired it in 1895 from
its lawful owner and possessor, Vicente Perez, and that
Dominga Ubaldo inherited it upon the death of her
husband. The court ruled for the Perezes.

Issue: Whether a person who is not the owner of a

property can mortgage the property. Whether the parties
are presumed to have entered a contract of mortgage
when the terms of the contract are doubtful. Whether
mortgagee can automatically appropriate and dispose of
the property mortgaged upon default.

Held: No. Yes. No. Affirmed

Ratio: It may be true that Vicente Perez owed Pedro Olang

100 pesos in the year 1895, but it can not be admitted that
he gave the said land as security; it did not belong to him,
nor could he in any manner dispose of it without the
knowledge or consent of its lawful owner, and, seeing that
he died before his mother, he could not have succeeded
her in the enjoyment of the said portion of land.
Dominga Ubaldo rests her claim on a document
where Vicente Perez declared to have mortgaged to Pedro
Olang for the sum of 100 pesos a parcel of land owned by
him situated in the barrio of Looc, with a description of
its boundaries, on the condition that he would continue
to work it and obtain the benefits therefrom, but if it
were not redeemed within a period of three years, the
land would then become the property of the creditor.
The document is a private one, and could not
therefore be entered in the register.
The contract entered into by means of the said
document is one of loan with mortgage; not one of sale
under pacto de retro, because beyond the word rescate
(redemption), said document does not contain any word to
show that the agreement was a sale a retro.
However, even if there were a doubt as to
139
involves a greater reciprocity of interests than a contract
of sale under pacto de retro, in spite of the fact that both
the latter and that of mortgage involve a valuable
consideration in accordance with the provisions of article
1289 of the Civil Code.
Further, when the obligation became due, the
creditor would be entitled to have the mortgaged
property sold to satisfy the debt, but not to appropriate or
dispose of it.
Juan Dalay vs. Bernardo Aquiatin & Proceso Maximo,
G.R. No. 20132, September
22, 1923 (47 Phil 951)
Held: Yes. Reversed.
Ratio: Is this stipulation violative of the provisions of
article 1859 of the Civil Code? Two things are prohibited
by this article, to wit, (a) the appropriation by the
creditor of the properties pledged or mortgaged; and (b)
the disposition thereof by the same creditor. The
stipulation above set forth does not authorize either one
or the other. Of course it is clear that it does not
authorize the creditor to dispose of the properties
mortgaged.

Facts: Ciriaco Villarin, being the owner of six parcels of

land, executed a document in favor of Eugenio Gomez,
acknowledging a debt, one of whose clauses is as follows:
if I cannot pay the aforesaid amount, when the date
agreed upon comes, the same shall be paid with the
lands given as security, the lot and house and lands
described in the aforesaid seven documents.
As the period so stipulated elapsed without
Ciriaco Villarin having paid the debt, Eugenio Gomez,
believing himself entitled to do so, executed a document
in favor of Juan Dalay transferring the properties used as
security in consideration of the amount of P2,300. By
virtue of this conveyance, Juan Dalay, on the same date
it was executed, entered upon the possession of these
lands and is now still in possession thereof.
On October 10, 1917, Ciriaco Villarin, in an
affidavit, acknowledged that the title to, and possession of,
the aforesaid lands had been transferred in a real and
absolute sale to Eugenio Gomez.
Fifteen days later, that is, on October 25, 1917,
Ciriaco Villarin contracted a debt in favor of Bernardino
Aquiatin. Villarin was unable to pay, so Aquiatin filed
suit. He won and the judgment became final.
Execution was issued and levied upon the six parcels
aforementioned.
Juan Dalay brought this action against
Bernardino Aquiatin and the deputy sheriff, Proceso
Maximo, to have himself declared owner of said lands,
to forever prohibit the defendants, their agents and other
persons acting in their behalf, from performing any act
tending to carry out the attachment and execution sale of
said realties, and to recover the costs.
After trial, the court found that the plaintiff had no
cause of action for the reason that he was not, nor could
he have been, the owner of the properties given to him
as security of the debt, and dismissed the complaint,
ordering the execution to be carried out upon the lands in
question, and sentencing the plaintiff to pay the costs.

Issue: Whether a provision which provides that if a loan is

not paid upon a date agreed, the loan shall be paid with the
lands given as security is valid.

140
Neither do we find that it authorizes him to appropriate the undersigned should be declared invalid, as being contrary
same. What it says is merely a promise to pay the debt to the spirit, if not the letter, of article 1859 of the Civil
with such properties, if at its maturity it is not satisfied. Code, as well as directly contrary to the general
It is merely a promise made by the debtor to assign the principles of jurisprudence applicable to the relation of
property given as security in payment of the debt, which mortgagor and mortgagee. If a stipulation of this kind is
promise is accepted by the creditor. There is no doubt valid, every mortgage in which such stipulation is
that a debtor may make an assignment of his properties in inserted will become self-executing, and the debtor,
payment of a debt. (Art. 1175, Civil Code.) And the upon making default in the payment of the debt, will be
assignment is not made unlawful by the fact that said bound to transfer the property in satisfaction of the
properties are mortgaged, because the title thereto mortgage, with the result that the right of redemption is
remains in the debtor; nor is a promise to make such an lost from the mere fact that the debtor is unable to pay at
assignment in violation of the law. We are, therefore, of the date stipulated.
the opinion that this case does not come under the
provisions of article 1859 of the Civil Code, and therefore
said article is not applicable to the stipulation in question.
Upon the expiration of the period for the payment
of the debt without the same having been paid, Eugenio
Gomez did not wait nor require Ciriaco Villarin to make
a formal assignment of the mortgaged property in
payment of the debt, and transferred the same to Juan
Dalay in the document Exhibit C. And in doing so, Eugenio
Gomez did not dispose of property merely mortgaged,
but of property promised to be assigned in payment of
the debt which had not been paid at the expiration of the
period fixed for its payment.
Gomez had not, by virtue alone of the promise of
assignment of said property, any real right thereon, but
he did have a personal action against Villarin to compel
him to execute the proper deed of assignment. For this
reason the conveyance made by Gomez in favor of Dalay
was defective, it having been made in advance of the actual
assignment of said property in his favor. This transfer,
however, is not void per se inasmuch as Villarin consented
to the said property passing to Gomez in payment of the
debt after the expiration of the period for payment, if the
debt was not paid. There is no question as to the
concurrence of the other elements of this contract made in
favor of Dalay, the defect consisting in Villarin not having
previously executed the deed of assignment he had
promised. This defect, which would have been a ground
for annulling this transfer made by Gomez in favor of
Dalay, had Villarin brought the proper action, was cured
by the act of said Villarin in executing the document
wherein he acknowledged that the title to, and possession
of, said lands were transferred to Gomez as in a real and
absolute sale. This confirmation, valid and effective under
the provisions of article 1311 of the Civil Code, gave full
effect to the transfer of these properties made by Gomez in
favor of Dalay.
The allegation of the defendant Aquiatin that this
sale in favor of Dalay is simulated and fraudulent cannot
be held proven. It does not appear that when he executed
the document, Ciriaco Villarin was indebted to anybody
with the exception of Gomez, nor that he owed anything
to anybody when he executed the affidavit which cured the
defect of the transfer in favor of Dalay.

Street, dissenting: Said stipulation in the opinion of the

141
 There is a maxim long recognized by the equity at maturity, a petition for extrajudicial foreclosure of
courts of England and America to the effect that "Once a mortgage was filed. The Cruzes instituted an action
mortgage, always a mortgage." This means that if an against the Tambuntings for annulment of mortgage and
instrument is in its origin a mortgage, it will be treated damages with prayer for a writ of preliminary injunction.
as such by the courts until it is satisfied or foreclosed A TRO was issued by the court. When the TRO lapsed,
by some legal process; and the courts will not recognize a the mortgage properties were sold at a public auction to
stipulation inserted in the instrument creating the Aurora Tambunting and Antonio Tambunting for
mortgage which is intended to vest the property in the P9,400.00. Thereafter, mortgagee-vendee Antonio
creditor upon failure of the debtor to pay the mortgage Tambunting sold and transferred his 1/2 share in the
debt. Nor will they recognize any waiver of the equity of property to his wife Aurora Tambunting. On 31 January
redemption inserted in the contract. This doctrine is based 1969, Aurora Tambunting executed an Affidavit of
upon a recognition of the inequality of the position of Consolidation of Title, for the issuance of a new title in
the debtor and creditor respectively. It recognizes the her name. A TCT was issued in her name.
fact that the creditor necessarily has a power over his
debtor which may be exercised inequitably, and that the
debtor is liable to yield to the exertions of such power. The
doctrine embodied in the maxim referred to protects the
debtor absolutely from the consequences of his inferiority
and of his own act done through infirmity of will.
Opposed as I am to the doctrine stated by the
court with reference to the legality of the stipulation
above referred to, I also differ from the court with respect
to the effect of the affidavit. The admission in the said
affidavit on the part of Villarin was merely a recognition of
the validity of the stipulation in question and such an
admission could not impress validity upon a stipulation of
the character referred to.
It is not to be denied that a mortgagor of
property may transfer the mortgaged property to the
creditor in satisfaction of the mortgage debt after the
mortgage has fallen due. But such a transfer implies the
independent exercise of the power vested in the
mortgagor, as owner, and the affidavit in question is
nothing more than the recognition of a situation which was
supposed by the debtor to be an accomplished fact, namely,
that the property in question had passed to the creditor
upon the debtor's failure to pay the debt when due. No
legal efficacy can be conceded to such an admission.

Aurora Tambunting, Antonio Tambunting, Jose P.

Tambunting & the Acting Provincial Sheriff for the
Province of Rizal vs. CA, Damaso R. Cruz & Monica
Andres, G.R. No. L-48278, November 8, 1988 (167 SCRA
16)

Facts: Spouses Damaso R. Cruz and Monica Andres

obtained a loan from spouses Antonio and Aurora
Tambunting in the amount of P3,600.00. The Tambuntings
are engaged in the lending-pawnshop business using the
name and style "Agencia de Tambunting", with Jose P.
Tambunting as Manager. The loan was evidenced by a
promissory note executed by the Cruzes, payable
within four (4) months from 16
December 1959, with interest at 12% per annum. As
security for payment of the loan, a Deed of Real Estate
Mortgage was executed by the Cruzes in favor of the
Tambuntings over a parcel of land belonging to the Cruzes.
Due to debtors' failure to pay the loan obligation
142
 The court eventually upheld the loan and the
mortgage, but voided the foreclosure sale. CA affirmed.
Issue: Whether a deviation from the publication
requirement will make the foreclosure sale voidable.
Whether the mortgagor is entitled to an accounting of
the fruits of the mortgaged property which was
improperly foreclosed.
Held: Yes. Yes. Affirmed.
court and the Court of Appeals.
As for the petition for accounting of fruits and
rentals, the Cruzes were entitled to such accounting and
the Court of Appeals was the proper forum for such
petition. The petition for accounting did not really seek
a modification of the judgments of the trial court and the
Court of Appeals. The remedy sought (accounting and
offsetting of accounts) was a direct clear-cut consequence
of an equally clear-cut decision which, in effect, held that
the Cruzes were never divested of their ownership over
the property in

Ratio: Sec. 3 of Act No. 3135 provides that Notice shall be

given by posting notices of the sale for not less than
twenty (20) days in at least three public places of the
municipality or City where the property is situated, and if
such property is worth more than four hundred pesos,
such notice shall also be published once a week for at least
three consecutive weeks in a newspaper of general
circulation in the municipality or city. The rule is that
statutory provisions governing publication of notice of
mortgage foreclosure sales must be strictly complied with,
and that even slight deviations therefrom will invalidate
the notice and render the sale at least voidable. Where
required by the statute or by the terms of the foreclosure
decree, public notice of the place and time of the mortgage
foreclosure sale must be given, a statute requiring it being
held applicable to subsequent sales as well as to the first
advertised sale of the property. It has been held that
failure to advertise a mortgage foreclosure sale in
compliance with statutory requirements constitutes a
jurisdictional defect invalidating the sale and that a
substantial error or omission in a notice of sale will render
the notice insufficient and vitiate the sale.
One issue of a newspaper of general circulation is
not substantial compliance with the required publication
of once (1) a week for at least three (3) consecutive weeks.
Petitioners claim the publisher's affidavit of publication is
merely a customary proof, hence, it should not be
considered as the sole evidence of publication. This may
be so in the presence of equally convincing evidence. In the
case at bar, however, there is no such other proof of
publication. To show compliance, the published notices
and certificate of posting by the sheriff of the notice of
sale of 26 January 1968 should have been presented.
They do not appear in the record. Neither can the sale
be considered as an adjournment of an earlier sale
under Sec. 24 of Rule 39 of the Rules of Court. As
correctly posed by the Court of Appeals, why was there
one (1) publication of the notice of sale scheduled on 26
January 1968? The presumption of compliance with
official duty has been rebutted by the failure to present
proof of posting and publication of the notice of sale of 26
January 1968.
At this juncture, it should be carefully stressed
that, while the foreclosure or auction sale of 26 January
1968 is null and void, the real estate mortgage as well as
the Cruzes' loan obligation to the Tambuntings remain
valid and effective as ruled in the decisions of the trial
143
question. In other words, the accounting sought and
granted is merely an incident of the declared respondents'
right of ownership under the Civil Code.
The petition for accounting is based on the
rationale underlying a related rule in the Rules of Court
Sec. 34, Rule 39. What clearly appears from this
provision is the right of the debtor to demand for an
accounting of the rents and profits received by a
creditor during the period of redemption. Thus, while the
Rules of Court allow the purchaser in an execution sale to
receive the rentals if the purchased property is occupied
by tenants, he is, however, accountable to the judgment
debtor or mortgagor, as the case may be, for the amounts
so received and the same will be duly credited against the
redemption price when said debtor or mortgagor effects
the redemption.
publication thereof in a newspaper of general circulation.
We take judicial notice of the fact that newspaper
publications have more far-reaching effects than posting
on bulletin boards in public places. There is a greater
probability that an announcement or notice published in a
newspaper of general circulation which is distributed
nationwide, shall have a readership of more people than
that posted in a public bulletin board, no matter how
strategic its location may be, which caters only to a limited
few. Hence the publication of

Langkaan Realty Development, Inc. vs. United Coconut

Planters Bank & CA, G.R. No. 139437, December 8,
2000 (347 SCRA 542)

Facts: Langkaan Realty was the registered owner of

631,693 square meter parcel of land located at Langkaan,
Dasmarias, Cavite. Langkaan Realty executed a real
estate mortgage over the property in favor of UCPB for a
loan obtained by Guimaras Agricultural Development, Inc.
in the amount of P3,000,000. Langkaan and Guimaras
agreed to share in the total loan proceeds obtained from
UCPB. Another P2,000,000 loan was secured by
Guimaras from UCPB which was secured by the real
estate mortgage. Guimaras defaulted on its loan. UCPB
foreclosed the mortgage and bought the property during
the auction sale in 1986. There was no redemption, so
UCPB consolidated its title.
In 1989, Langkaan wrote UCPB to buy back the
foreclosed property for P4,000,000, but UCPB refused
claiming the market price of the property is now
P6,500,000. Langkaan then filed a complaint for
annulment of extrajudicial foreclosure and sale. The
complaint was dismissed. CA affirmed.

Issue: Whether an irregularity in the posting

requirement will invalidate a foreclosure sale. Whether
the holding of the foreclosure sale at the wrong venue
without any opposition will invalidate the foreclosure sale.

Held: No. No. Affirmed.

Ratio: Even if it were true that the Notice of Sale was not
posted in three public places as required, this would not
invalidate the foreclosure conducted. As explained in
Olizon vs. Court of Appeals, 238 SCRA 148, 155-156
Furthermore, unlike the situation in previous cases where
the foreclosure sales were annulled by reason of failure to
comply with the notice requirement under Section 3 of Act
3135, as amended, what is allegedly lacking here is the
posting of the notice in three public places, and not the
144
the notice of sale in the newspaper of general circulation venue under Section 2 of Act 3135.
alone is more than sufficient compliance with the notice- We agree with the petitioner that under the terms
posting requirement of the law. By such publication, a of the contract, the extra-judicial foreclosure sale could be
reasonably wide publicity had been effected such that held at Trece Martires, the capital of the province which
those interested might attend the public sale, and the has territorial jurisdiction over the foreclosed property.
purpose of the law had been thereby subserved. The object The stipulation of the parties in the real estate mortgage
of a notice of sale is to inform the public of the nature and contract is clear, and therefore, should be respected
condition of the property to be sold, and of the time, absent any showing that such stipulation is contrary to
place and terms of the sale. Notices are given for the law, morals, good customs, public policy or public order. A
purpose of securing bidders and to prevent a sacrifice of contract is the law between the parties. However, since the
the property. If these objects are attained, immaterial stipulation of the parties lack qualifying or restrictive
errors and mistakes will not affect the sufficiency of the words to indicate the exclusivity of the agreed forum, the
notice; but if mistakes or omissions occur in the notices of stipulated place is considered only as an additional,
sale which are calculated to deter or mislead bidders, to not a limiting venue.
depreciate the value of the property, or to prevent it from
bringing a fair price, such mistakes or omissions will be
fatal to the validity of the notice, and also to the sale made
pursuant thereto. In the case at bench, this objective was
attained considering that there was sufficient publicity of
the sale through the Record Newsweekly.
In ascertaining whether or not the venue of the
extra-judicial foreclosure sale was improperly laid, it is
imperative to consult Act No. 3135, as amended, the law
applicable to such a sale. Section 2 provides that the
sale cannot be made legally outside of the province
which the property sold is situated; and in case the place
within said province in which the sale is to be made is the
subject of stipulation, such sale shall be made in said place
or in the municipal building of the municipality in
which the property or part thereof is situated. The
mortgage contract specifically provided that the auction
sale shall be held at the capital of the province, if the
property is within the territorial jurisdiction of the
province concerned, or shall be held in the city, if the
property is within the territorial jurisdiction of the city
concerned.
The foreclosed property is located in Dasmarinas,
a municipality in Cavite. Dasmarinas is within the
territorial jurisdiction of the province of Cavite, but not
within that of the provincial capital, Trece Martires City,
nor of any other city in Cavite. The territorial
jurisdiction of Dasmarinas is covered by the RTC
of Imus, another municipality in Cavite. The petitioner
contends that the extra-judicial foreclosure sale should
have been held in Trece Martires City, the capital of Cavite,
following the above- quoted stipulation in the real estate
mortgage contract; or, in the alternative, Section 2 of Act
3135 should have been applied, and the sale conducted at
the municipal building of Dasmarinas where the property
is situated. On the other hand, the private respondent
argues that the extra-judicial foreclosure sale was
properly held at the main entrance of the Office of the
Clerk of Court and Ex-officio Sheriff of the RTC of Imus
which has territorial jurisdiction over Dasmarinas, as
provided in the Supreme Court Administrative Order No.
7 (1983) issued pursuant to Section 18 of B.P. Blg.
129. The private respondent further contends that
Section 18 of B.P. Blg. 129 repealed the provision on
145
Therefore, the stipulated venue and that provided under have waived its right to object to the venue of the sale, and
Act 3135 can be applied alternatively. Now, applying Act cannot belatedly raise its objection in this petition filed
3135, the venue of the sale should be at the municipal before us.
building of Dasmarinas since the foreclosed property is
located in the municipality of Dasmarinas. Spouses Guillermo Agbada & Maxima Agbada vs. Inter-
We cannot sustain the contention of the private Urban Developers, Inc. & RTC Br. 105, QC, G.R. No.
respondent that the proper venue for the sale of the 144029, September 19, 2002 (389 SCRA 430)
Dasmarinas property is the RTC of Imus which has
territorial jurisdiction thereon as provided under SC Facts: On 21 February 1991 petitioner-spouses Guillermo
Administrative Order No. 7 issued pursuant to Section 18 Agbada and Maxima Agbada borrowed P1,500,000.00
of B.P. Blg. 129, which allegedly repealed the venue from respondent Inter-Urban Developers, Inc. through its
provision under Section president, Simeon L. Ong Tiam. To secure the loan, the
2 of Act 3135. Section 18 of B.P. Blg. 129 provides for the parties concurrently executed a
power of the Supreme Court to define the territorial
jurisdiction of the Regional Trial Courts. Pursuant
thereto, the Supreme Court issued Administrative Order
No. 7, placing the municipalities of Imus, Dasmarinas and
Kawit within the territorial jurisdiction of the RTC of Imus.
On the other hand, Section 2 of Act 3135 refers to the
venue of an extra-judicial foreclosure sale. t is difficult to
fathom how a general law such as B.P. Blg. 129 can repeal
a special law like Act 3135. Aside from involving two
entirely different legal concepts such as jurisdiction (B.P.
Blg. 129) and venue (Section 2 of Act 3135), this
proposition goes against a basic rule in statutory
construction that the enactment of a later legislation
which is a general law cannot be construed to have
repealed a special law. Much less can the private
respondent invoke Supreme Court administrative
issuances as having amended or repealed Section 2 of
Act 3135. A statute is superior to an administrative
issuance, and the former cannot be repealed or amended
by the latter.
Notwithstanding the foregoing, however, this
Court finds the extra-judicial foreclosure sale held at the
RTC of Imus to be valid and legal. Well-known is the basic
legal principle that venue is waivable. Failure of any party
to object to the impropriety of venue is deemed a waiver
of his right to do so. In the case at bar, we find that
such waiver was exercised by the petitioner. An extra-
judicial foreclosure sale is an action in rem, and thus
requires only notice by publication and posting to bind
the parties interested in the foreclosed property. No
personal notice is necessary. As such, the due publication
and posting of the extra-judicial foreclosure sale of the
Dasmarinas property binds the petitioner, and failure of
the latter to object to the venue of the sale constitutes
waiver. From 1986 to April 1989, despite knowledge of
the foreclosure sale of their property, Langkaan did not
take any step to question the propriety of the venue of
the sale. It was only on May 30, 1989 that the petitioner
filed a Complaint for Annulment of the foreclosure sale,
and only after its offer to repurchase the foreclosed
property, the title to which had been consolidated in the
name of private respondent UCPB, had been rejected by
the bank. Nowhere can it be found that the petitioner
objected to or opposed the holding of the sale at the RTC
of Imus. By neglecting to do so, Langkaan is deemed to
146
Deed of Real Estate Mortgage over a parcel of land Developers, Inc. the opportunity to cross-examine
and the improvements thereon situated in Tandang Sora, whatever such evidence would tend to establish. Equally
Quezon City owned by the spouses. The loan was payable significant, the low purchase price could have worked in
within six (6) months from 21 February 1991 at three the petitioner-spouses' favor if they promptly exercised
percent (3%) interest per month, otherwise, failure to their equity of redemption. As held in Tarnate v. Court
discharge the loan within the stipulated period would of Appeals, "[a]nent the contention that the property has
entitle Inter- Urban Developers, Inc. to foreclose the been sold at an extremely low price, suffice it to say that, if
mortgage judicially or extra-judicially. The spouses failed correct, it would have, in fact, favored an easy redemption
to pay the loan within the six-month period despite of the property. That remedy could have well been availed
several out-of-court demands made by respondent Inter- of but petitioners did not."
Urban Developers, Inc.
On 10 December 1993 Inter-Urban Developers,
Inc. filed with the Regional Trial Court of Quezon City,
Branch 105, a complaint for foreclosure of real estate
mortgage. On 2 March 1994, without assistance of counsel,
the spouses filed their unverified answer admitting that
they had borrowed the amount of P1,500,000.00 from
respondent and had executed the real estate mortgage to
secure the loan but alleging that it was payable within
five (5) years and at twelve percent (12%) interest per
annum. Pre-trial was set, but reset several times on
account of the spouses Agbada. Guillermo Agbada
submitted a
1-page handwritten letter admitting his liability to pay
Inter-Urban Developers, Inc. A motion for summary
judgment was filed supported by an affidavit of the
treasurer who witnessed the transaction. The spouses
Agbada, this time represented by a lawyer, attempted to
submit an amended answer that denied any obligation to
the interest. The judge disallowed the amended answer
and promulgated a summary judgment against the
spouses Agbada.
The spouses Agbada did not appeal the summary
judgment nor did they pay the judgment debt. A decree of
foreclosure was issued and a foreclosure sale was held
with Inter-Urban Developers, Inc. winning the bidding.
The court confirmed the sale over the opposition of the
spouses Agbada that the purchase price of the property
was below the appraised value as stated in an appraisal
report. After the sale became final, Inter-Urban
Developers, Inc. prayed for a writ of possession. The
spouses Agbada filed other dilatory motions which were
denied. They then filed a petition for annulment of the
summary judgment on the ground that violated their right
to due process. The petition was dismissed.

Issue: Whether a foreclosure sale can be reversed because

the purchase price of the property is below its appraised
value.

Held: No. Affirmed.

Ratio: There is no merit in the spouses claim that the

purchase price of the mortgaged real property was way
below its appraised value. To begin with, they
deliberately withheld the presentation of their own
evidence which might have proved this matter and thus
unfortunately deprived respondent Inter-Urban
147
 The instant case is not unprecedented. In Tarnate property was sold in an auction sale. On February 16,
v. Court of Appeals involving a case of foreclosure of real 1923, the sheriff filed a motion to confirm the sale to
estate mortgage that was resolved by means of summary Lopez, which was set down for hearing on March 9, 1923,
judgment where neither the existence of the loans and the and due notice was given to all the parties in interest. At a
mortgage deeds nor the fact of default on the due hearing on that date, the court made an order duly
repayments was disputed, we rejected as genuine issue confirming the sale.
the contention of petitioners therein that they were On April 5, 1923, Gonzalez filed a motion for
misled by respondent bank to believe that the loans were reconsideration. The court, in consideration of the
long-term accommodations since the loan documents disparity between the real value of the land and the price
admittedly executed by the parties clearly contradicted at the auction sale, set aside the confirmation and ordered
petitioners asseverations and the parties must have a resale to give defendant Gonzalez a
realized that when the terms of the agreement were
unequivocally reduced in writing, they could hardly be
controverted by oral evidence to the contrary. Similarly,
in Heirs of Amparo del Rosario v. Santos, where we
rejected the alteration of the conditions imposed in the
deed of sale, this Court ruled that appellants therein could
not be allowed to introduce evidence of conditions
allegedly agreed upon by them other than those stipulated
in the deed of sale because when they reduced their
agreement in writing, it is presumed that they have made
the writing the only repository and memorial of truth, and
whatever is not found in the writing must be understood to
have been waived and abandoned.

Philippine National Bank vs. Manuel Ernesto

Gonzalez. Saturnino Lopez, G.R. No.
21026, February 13, 1924 (45 Phil 693)

Facts: On November 23, 1921, the Philippine National

Bank commenced a suit against Manuel Ernesto Gonzalez
to foreclose a real mortgage made to secure a promissory
note for P15,000. On March 17, 1922, the plaintiff bank
filed an amended complaint against the same defendant,
in which the original was reproduced, to foreclose a
second mortgage for P15,000 upon the same land
described in the original complaint. The defendant was
duly served in both proceeding with both the original and
amended complaints, and made defaults in both cases. On
April 21, 1922, the bank filed a motion for default. August
8, 1922, the court declared the defendant in default, and
set the case for hearing on August 23, 1922, at which time
the bank appeared and presented proofs of all the facts
alleged in its original and amended complaints. August 28,
1922, the court rendered judgment in favor of the bank
and against the defendant, requiring him within three
months from that date to pay the plaintiff the amount of
the two mortgage in question, with the interest and
costs, and that in default thereof, execution should be
issued for the sale of the property to satisfy the judgment.
On December 7, 1922, and for want of any
payment, the plaintiff moved the court for an execution,
and on January 11, 1923, an execution was issued for the
sale of the real property described in the mortgages to
satisfy the amount of the judgment. On August 28,
1922, the total of the judgment in the first cause of
action, including the interest, was P17,313.59, and in the
second mortgage, on the same date, it was P17,755. The
148
greater opportunity in order to obtain a better price. The extrajudicially the mortgaged property, pursuant to
complainant and the buyer appealed. Republic Act No. 3135, as amended. Conformably to this
stipulation, upon breach of the conditions of the mortgage,
DBP foreclosed extrajudicially the mortgage on December
Issue: Whether the court can set aside the foreclosure sale
10, 1952, and the Provincial Sheriff of Pangasinan posted
of a mortgaged property due to the disparity between the
the requisite notice of the sale at public auction of the
selling price at the auction and the actual value of the
mortgaged property. The property was sold at public
property.
auction on June 10,
1957 to DBP, being the highest bidder. Because the
Held: No. Reversed. proceeds of the sale were not sufficient to satisfy the
balance of appellant's indebtedness, appellee sued the
Ratio: In Graffam and Doble vs. Burgess (117 US 180), a appellants for the deficiency. The trial court found for
judicial sale of real estate will not be set aside for appellee and ordered the appellants to pay the
inadequacy of price, unless the inadequacy be so great as
to shock the conscience, or unless there be additional
circumstances against its fairness.
If the inadequacy of price paid for the purchase of
real estate at a sale on an execution be so gross as to shock
the conscience, or if in addition to gross inadequacy the
purchaser has been guilty of fairness or has taken any
undue advantage, or if the owner of the property or the
party interested in it has been for any other reason misled
or surprised, then the sale will be regarded as fraudulent
and void, and the party injured will be permitted to
redeem the property sold.
In Warner, Barnes & Co. vs. Santos (14 Phil., 446),
a judicial sale of real estate in an action to foreclose will
not be set aside for inadequacy of price, unless the
inadequacy be so great as to shock the conscience or unless
the inadequacy be so great as to shock the conscience or
unless there be additional circumstances against its
fairness.
It is by no means a matter of discretion with the
court to rescind a sale which it has once confirmed, nor is
the sale to be rescinded for mere inadequacy of price, or
for an increase of price alone, irregularity, and the like.
Some special ground must be laid such as fraud and
collusion, accident mutual mistake, breach of trust, or
misconduct upon the part of the purchaser, or other party
connected with the sale, which has worked injustice to the
party complaining and was unknown to him at the time the
sale was confirmed.
In the instant case there is no claim or pretense
that there was any fraud or collusion, or that in any way
Gonzalez was misled or deceived. The bank was personally
represented at the sale, and there is no showing whatever
that, if the property was resold, it would sell for a centavo
more than the P15,000.

Development Bank of the Philippines vs. Jovencio A.

Zaragoza & Avelina E. Zaragoza, G.R. No. L-23493,
August 23, 1978 (84 SCRA 668)

Facts: The Zaragozas obtained a P30,000 loan from DBP

which was secured by a real estate mortgage. It was
stipulated that upon failure of the Zaragozas to pay the
amortization due, according to the terms and conditions
thereof, DBP shall have the authority to foreclose
149
deficiency, with interest thereon at the legal rate until
fully paid plus the sum equivalent to 10% of the amount
due as attorney's fees and cost of suit.
Issue: Whether the mortgagee who purchased the
foreclosed property can still hold the mortgagor liable for
any deficiency from the foreclosure sale. Whether the
mortgagor can be held liable for the payment of interest
until the completion of the foreclosure.
Held: Yes. Yes. Affirmed.
balance of the price. Any agreement to the contrary shall
be void.' (Article 1484, paragraph 3, ibid.). It is then clear
that absence of a similar provision in Act No. 3135, as
amended, it can not be concluded that the creditor loses
his right given him under the Mortgage Law and
recognized in the Rules of Court, to take action for the
recovery of any unpaid balance on the principal obligation,
simply because he has chosen to foreclose his mortgage
extrajudicially pursuant to a special power of attorney
given him by the mortgagor in the mortgage contract. As
stated by this Court in Medina vs. Philippine National Bank
(56 Phil. 651), a case analogous to the one

Ratio: In Philippine Bank of Commerce v. Tomas de Vera,

this Court ruled that in extrajudicial foreclosure of
mortgage where the proceeds of the sale is insufficient
to cover the debt, the mortgagee is entitled to claim the
deficiency from the debtor. A reading of the provisions
of Act No. 3135, as amended (re extrajudicial foreclosure)
discuss nothing, it is true, as to the mortgagee's right to
recover such deficiency. But neither do we find, provision
thereunder which expressly or impliedly prohibits such
recovery. Article 2131 of the new Civil Code, on the
contrary, expressly provides that
'The form, extent and consequences of a mortgage,
both as to its constitution, modification and
extinguishment, and as to other matters not included in
this Chapter, shall be governed by the provisions of the
Mortgage Law and of the Land Registration Law.' Under
the Mortgage Law, which is still in force, the mortgagee
has the right to claim for the deficiency resulting from
the price obtained in the sale of the real property at
public auction and standing obligation at the time of the
foreclosure proceedings. (See Soriano v. Enriquez, 24
Phil. 584; Banco de Islas Filipinas v. Concepcion e Hijos,
53
Phil. 86; Banco Nacional v. Barreto, 53 Phil. 101). Under
the Rules of Court (Sec. 6, Rule 70), 'Upon the sale of any
real property, under an order for a sale to satisfy a
mortgage or other incumbrance thereon, if there be a
balance due to the plaintiff after applying the proceeds of
the sale, the court, upon motion, should render a judgment
against the defendant for any such balance for which by
the record of the case, he may be personally liable to the
plaintiff.' It is true that this refers to a judicial foreclosure,
but the underlying principle is the same, that the mortgage
is but a security and not a satisfaction of indebtedness.
Let it be noted that when the legislature intends to
foreclose the right of a creditor to sue for any deficiency
resulting from the foreclosure of the security given to
guarantee the obligation, it so expressly provides. Thus, in
respect to pledges, Article 2115 of the Civil Code
expressly states: 'If the price of the sale is less (than
the amount of the principal obligation) neither shall
creditor be entitled to recover the deficiency,
notwithstanding stipulation to the contrary.' Likewise, in
the event of a foreclosure of a chattel mortgage on the
thing sold in installments 'he (the vendor shall have no
further action against the purchaser to recover an paid
150
at bar, the step taken by the mortgagee-bank in resorting approved for P495,000.
to extra-judicial foreclosure under Act 3135, was merely The loan was not paid. RFC foreclosed the
to find a proceeding for the sale, and its action can not be mortgage properties and was able to purchase most of
taken to mean a waiver of its right to demand the payment them, including the Soriano land, during the auction
of the whole debt.' sale at very deflated prices. Francisco Soriano, through
The Zaragozas argue that since the appellee held Teofila Soriano del Rosario, offered to repurchase the
in abeyance the sale of the property for a period of four Soriano lot for P14,000. The offer was rejected, and
(4) years, they alone should suffer the consequences of they were told to participate in the public sale of the land
such delay. It was further contended that the debtor's to be conducted by the RFC. Ponce de Leon did not offer to
liability in judicial foreclosures is limited to the amount redeem the foreclosed properties.
due at the time of the foreclosure and, therefore, such The RFC scheduled a public sale of the Soriano land on
should also apply to extrajudicial foreclosures. By way of February 20, 1956. On
refutation, DBP explained that the seemingly long interval February 18, 1956, Ponce de Leon instituted this action.
between the date of issuance of the Sheriff's Notice of Sale A preliminary injunction was
and the date of sale was due to the numerous transfers
made of the date of the sale upon requests of the
Zaragozas themselves. Under such circumstances, the
Zaragozas cannot take advantage of the delay which was
their own making, to the prejudice of the other party.
Apart from this consideration, it must be noted that a
foreclosure of mortgage means the termination of all
rights of the mortgagor in the property covered by the
mortgage. It denotes the procedure adopted by the
mortgagee to terminate the rights of the mortgagor on the
property and includes the sale itself. In judicial
foreclosures, the "foreclosure" is not complete until the
Sheriff's Certificate executed, acknowledges and recorded.
In the absence of a Certificate of Sale, no title passes by
the foreclosure proceedings to the vendee. It is only
when the foreclosure proceedings completed and the
mortgaged property sold to the purchaser that all interests
of the mortgagor are cut off from the property. This
principle is applicable to extrajudicial foreclosures.
Consequently, in the case at bar, prior to the completion of
foreclosure, the mortgagor is, therefore, liable for the
interest on the mortgage.

Jose L. Ponce de Leon vs. Rehabilitation Finance

Corporation, Rosalina Soriano, Teofila Soriano &
Rev. Fr. Eugenio R. Soriano, G.R. No. L-24571,
December 18,
1970 (36 SCRA 289)

Facts: Jose Ponce De Leon & Francisco Soriano (father of

the Sorianos) obtained a P10,000 loan from PNB,
mortgaging a parcel of land situated in Paraaque, Rizal in
the name of Francisco Soriano as security for the loan.
Ponce de Leon gave P2,000 to Soriano from the
proceeds of the loan. The loan was subsequently
increased to P17,500, and an amendment to the real estate
mortgage was executed.
Ponce de Leon filed with the RFC a loan
application for putting up a sawmill in the amount of
P800,000 offering as security certain parcels of land,
among which, was the parcel which Ponce de Leon and
Soriano mortgaged to the PNB. The application stated
that the properties offered for security for the RFC loan
are encumbered to the PNB. The application was
151
issued due to the failure of RFC to attend the hearing. A judicial foreclosure of their real estate mortgage under
notice of lis pendens was caused to be recorded by Ponce Act 3135. On July 28, 1981, the aforecited house and lots of
de Leon. the plaintiff- spouses were sold at public auction with the
Francisco Soriano then wrote a letter to the defendant bank as the highest bidder. Thereafter, the
President of RFC asking that he be allowed to redeem the Certificate of Sale was executed. The ownership of the
property. RFC allowed him to redeem the property for subject house and lots was consolidated in favor of the
not less than its appraised value of P59,647.05, payable defendant bank by virtue of the final deed of sale. On
20% down and the balance in 10 years with 6% interest. December 19, 1984, the defendant bank sold the
aforementioned real estates to
Soriano did not redeem the lot. He then filed a 3 rd
party complaint. Due to his death, he was substituted by
his children. The children claimed that the mortgaged
property was conjugal property which was half-owned by
them, and they did not consent to the mortgage.
The lower court sustained the RFC, but ruled that
the mortgage over of Soriano lot was void.

Issue: Whether a mortgagor of a bank loan can redeem the

foreclosed property by paying the amount the property
was purchased at public auction and not the amount fixed
by the court in its order.

Held: No. Affirmed with modifications.

Ratio: Section 78 of RA 337 provides that in the event of

foreclosure, the mortgagor or debtor whose real property
has been sold at public auction for payment of an
obligation to any bank, banking or credit institution, shall
have the right to redeem the property by paying the
amount fixed by the court in the order of execution, not
the amount for which it had been purchased by the buyer
at public auction. RA 337 applies, not Act 3135. Act
3135 was promulgated to regulate the sale of property
under special powers inserted in or annexed to real estate
mortgages. RA 337, otherwise known as the General
Banking Act, regulates mortgages where banks are
involved. RA 337 has the effect of amending Sec. 6 of Act
No. 3135, insofar as the redemption price is concerned,
when the mortgagee is a bank or a banking or credit
institution.
The whole of the Soriano property should be
foreclosed since the Sorianos failed to prove the conjugal
nature of the property.

Sta. Ignacia Rural Bank, Inc. vs. CA & Sps. Conrado

Pablo & Juanita Gonzales, G.R. No. 97872, March 1,
1994 (230 SCRA 513)

Facts: On January 14, 1980, the defendants Sta. Ignacia

Rural Bank, Inc. extended to the plaintiff-spouses Conrado
Pablo and Juanita Gonzales a loan totalling P12,109.75. As
a security, the plaintiff-spouses executed in favor of the
defendant bank a Real Estate Mortgage over their
residential house and two (2) lots covered by Free
Patent Title located at Poblacion Norte, Mayantoc, Tarlac.
The plaintiff-spouses defaulted in the payment of their
obligation, as a result of which, the defendant bank filed
with the Provincial Sheriff of Tarlac a petition for extra-
152
defendant-spouses Alberto Lucas and Nelia Rico for
P47,500.00, and Transfer Certificates of Title over the
house and lots were subsequently issued in the name of
said defendant-spouses.
Hence, the complaint for the repurchase of the
subject house and lots, annullment of title and damages
filed on March 20, 1986 by the plaintiff-spouses. The
lower court dismissed the complaint. The CA reversed.
Issue: Whether the owner of a homestead has 5 more
years to repurchase his land after the 2 year redemption
period has lapsed.
statutes which have been mortgaged to banks or banking
institutions
i.e., to resolutely and unqualifiedly apply the 5-year
period provided for in Section
119 of C.A. No. 141 and, as categorically stated in Paras
and Belisario, to reckon the commencement of the said
period from the expiration of the one-year period of
redemption allowed in extrajudicial foreclosure. If such be
the case in foreclosure sales of lands mortgaged to banks
other than rural banks, then, by reason of the express
policy

Held: Yes. Affirmed.

Ratio: It is well-known that the homestead laws were

designed to distribute disposable agricultural lots of the
State to land-destitute citizens for their home and
cultivation. Pursuant to such benevolent intention the
State prohibits the sale or encumbrance of the homestead
(Section 116) within five years after the grant of the
patent. After that five- year period the law impliedly
permits alienation of the homestead, but in line with the
primordial purpose to favor with the homesteader and his
family the statute provides that such alienation or
conveyance (Section 117) shall be subject to the right of
repurchase by the homesteader, his widow or heirs within
five years. This Section 117 is undoubtedly a complement
of Section 116. It aims to preserve and keep in the family of
the homesteader that portion of public land which the
State had gratuitously given to him. It would, therefore, be
in keeping with this fundamental idea to hold, as we hold,
that the right to repurchase exists not only when the
original homesteader makes the conveyance, but also
when it is made by his widows or heirs. This construction
is clearly deducible from the terms of the statute.
Because of such underlying policy and reason, the
right to repurchase under Section 119 cannot be waived
by the party entitled thereto, and applies with equal force
to both voluntary and involuntary conveyances. And, as
early as 1951, in Cassion vs. Banco Nacional Filipino, this
Court declared that such right is available in foreclosure
sales of lands covered by homestead or free patent.
Consistently therewith, We have ruled in a number of
cases that said Section 119 prevails over statutes which
provide for a shorter period of redemption in extrajudicial
foreclosure sales. We thus have consistent
pronouncements in Paras vs. Court of Appeals, Oliva vs.
Lamadrid, Belisario vs. Intermediate Appellate Court and
Philippine National Bank vs. De los Reyes. These cases,
with the exception of Oliva, involved the question of which
between the five (5) year repurchase period provided in
Section 119 of C.A. No. 141 or the one (1) year
redemption period under Act No. 3135 should prevail.
While Oliva is the only case, among those cited, that
involves the Rural Banks' Act, the other cases reveal the
clear intent of the law on redemption in foreclosure sales
of properties acquired under the free patent or homestead
153
behind the Rural Banks' Act, and following the rationale of to Section 119 of the Public Land Act (C.A. No. 141). If the
Our ruling in Oliva, it is with greater reason that the 2- land is mortgaged to parties other than rural banks, the
year redemption period in Section 5 of the Rural Banks' mortgagor may redeem the property within one (1) year
Act should yield to the period prescribed in Section 119 of from the registration of the certificate of sale pursuant to
C.A. No. 141. Moreover, if this Court is to be consistent Act No. 3135. If he fails to do so, he or his heirs may
with Paras and Belisario, the 5-year repurchase period repurchase the property within five (5) years from the
under C.A. No. 141 should begin to run only from the expiration of the redemption period also pursuant to
expiration of the 2-year period under the Rural Banks' Act. Section 119 of the Public Land Act.
Furthermore, We wish to stress here that We are Following the doctrine enunciated in the Rural
unable to read in Section 5 of R.A. No. 720, as amended, Bank of Davao City case, it is clear from a perusal of the
any legislative intent to modify or repeal Section 199 of factual antecedents at bar that the plea for repurchase was
the Public Land Act. Each speaks of and deals with a not time-barred at the time it was made. When the
different right. Specifically, the former merely liberalized certificate of sale in favor of petitioner
the duration of an existing right of redemption in
extrajudicial foreclosure sales by extending the period of
one (1) year fixed in Act No. 3135, as amended by Act No.
4118, to two (2) years insofar as lands acquired under
free patent and homestead statutes are concerned. the
second speaks of the right to repurchase and prescribes
the period within which it may be exercised. These two
(2) rights are by no means synonymous. Under Act No.
3135, the purchaser in a foreclosure sale has, during the
redemption period, only an inchoate right and not the
absolute right to the property with all the accompanying
incidents. He only becomes an absolute owner of the
property if it is not redeemed during the redemption
period. Upon the other hand, the right to repurchase is
based on the assumption that the person under obligation
to reconvey the property has the full title to the property
because it was voluntarily conveyed to him or that he had
consolidated his title thereto by reason of redemptioner's
failure to reason of a redemptioner's failure to exercise his
right of redemption.
As a consequence of the inchoate character of the
right during the redemption period, Act No. 3135 allows
the purchaser at the foreclosure sale to take possession of
the property only upon the filing of a bond in an amount
equivalent to the use of the property for a period of twelve
(12) months, indemnify the mortgagor in case it be shown
that the sale was made without violating the
mortgage or without complying with the
requirements of the Act. That bond is not required after
the purchaser has consolidated his title to the property
following the mortgagor's failure to exercise his right of
redemption for in such a case, the former has become the
absolute owner thereof.
Thus, the rules on redemption in the case of an
extrajudicial foreclosure of land acquired under free
patent or homestead statutes may be summarized as
follows: If the land is mortgaged to a rural bank under R.A.
No. 720, as amended, the mortgagor may redeem the
property within two (2) years from the date of foreclosure
or from the registration of the sheriff's certificate of sale
at such foreclosure if the property is not covered or is
covered, respectively, by a Torrens title. If the mortgagor
fails to exercise such right, he or his heirs may still
repurchase the property within five (5) years from the
expiration of the two (2) year redemption period pursuant
154
was registered with the Register of Deeds on November 5,
1981, private respondents had two years, reckoned from
said date, within which to redeem the property from
petitioner, and another five years, under Commonwealth
Act no. 141, counted from the expiration of the redemption
period, to effect repurchase which private respondents
precisely did when the suit below was initiated on March
20, 1986.
Spouses Antonio S. Pahang & Lolita T. Pahang vs. Hon.
Augustine A. Vestil, Presiding Judge of RTC- Br. 56,
Mandaue City, Deputy Sheriff, RTC Br. 56 &
Metropolitan Bank & Trust Company, G.R. No.
148595, July 12, 2004 (434 SCRA
139)
suspension of the proceedings before the court. The
petitioners averred that the filing of their complaint within
the period to redeem the foreclosed property was
equivalent to an offer to redeem the same, and had the
effect of preserving such right. They also asserted that
the respondent acted in bad faith in procuring the title
over the property despite the pendency of their complaint.
On March 28, 2000, the RTC of Mandaue City,
Branch 56, rendered a decision granting the petition and
ordering the issuance of a writ of possession in favor of
the

Facts: On January 5, 1996, the petitioners, Spouses

Antonio and Lolita Pahang, received a short-term loan of
P1,500,000.00 from MBTC payable on December 27, 1996.
The loan was covered by Non-Negotiable Promissory Note
and was, likewise, secured by a real estate mortgage on a
parcel of land. As the petitioners failed to pay the loan, the
interest and the penalties due thereon, the respondent
foreclosed the real estate mortgage extrajudicially. As a
consequence, the mortgaged property was sold at public
auction on January 8, 1998 to the respondent bank as the
highest bidder. A certificate of sale was executed on
January 14, 1998 and was registered with the Register of
Deeds of Mandaue City on January 27, 1998.
On December 29, 1998, the respondent wrote the
petitioners that the one-year redemption period of the
property would expire on January 27, 1999. Instead of
redeeming the property, the petitioners filed, on January
19, 1999, a complaint for annulment of extrajudicial sale
against the respondent bank and the Sheriff in the
Regional Trial Court of Cebu (Mandaue City), Branch 56.
Therein, the petitioners alleged that the respondent
bloated their obligation of P1,500,000.00 to P2,403,770.73
by including excessive past due interest, penalty charges,
attorneys fees and sheriffs expense. They claimed that
such exorbitant charges were made to frustrate their
chance to pay the loan, and to ensure that the respondent
bank would be the highest bidder during the auction sale.
They also asserted that the respondent failed to remit to
the Sheriff the purchase price of the property and was,
likewise, guilty of fraud, collusion, breach of trust or
misconduct in the conduct of the auction sale of their
property.
After the expiration of the one-year
redemption period, the respondent consolidated its
ownership over the foreclosed property. Consequently,
TCT No. 44668 was issued by the Register of Deeds in its
name. On July 23, 1999, the respondent filed a Petition for
Writ of Possession before the RTC of Mandaue City. The
petitioners, citing the ruling of this Court in Belisario v.
The Intermediate Appellate Court, opposed the petition
on the ground that the core issue in their complaint
constituted a prejudicial question, which warranted a
155
respondent. A petition for certiorari for the nullification of discretion when it merely complied with its ministerial
the decision was filed before the CA. CA affirmed. duty to issue the said writ of possession.

Issue: Whether the period to redeem is suspended upon Manuel D. Medida, Deputy Sheriff of the Province of
the filing of an action to enforce the right to redeem. Cebu, City Savings Bank (formerly Cebu City Saving &
Loan Assoc, Inc.) & Teotimo Abellana vs. CA & Sps.
Andres Dolino & Pascuala Dolino, G.R. No.98334, May
Held: No. Affirmed.
8, 1992 (208 SCRA 887)
Ratio: A prejudicial question is one that arises in a
case the resolution of which is a logical antecedent of
the issue involved therein, and the cognizance of which
pertains to another tribunal. It generally comes into play
in a situation where a civil action and a criminal action
are both pending and there exists in the former an issue
that must be preemptively resolved before the criminal
action may proceed, because howsoever the issue raised
in the civil action is resolved would be determinative juris
et de jure of the guilt or innocence of the accused in the
criminal case. The rationale behind the principle of
prejudicial question is to avoid two conflicting decisions.
In the present case, the complaint of the
petitioners for Annulment of Extrajudicial Sale is a civil
action and the respondents petition for the issuance of a
writ of possession is but an incident in the land
registration case and, therefore, no prejudicial question
can arise from the existence of the two actions.
Our ruling in Belisario has no application in this
case because in the said case, no prejudicial question was
involved. We merely held therein that the filing of an
action to enforce redemption within the period of
redemption is equivalent to a formal offer to redeem,
and should the Court allow the redemption, the
redemptioner should then pay the amount already
determined. In fine, the filing of an action by the
redemptioner to enforce his right to redeem does not
suspend the running of the statutory period to redeem
the property, nor bar the purchaser at public auction
from procuring a writ of possession after the statutory
period of redemption had lapsed, without prejudice to the
final outcome of such complaint to enforce the right of
redemption.
The remedy of the petitioners from the assailed
decision of the RTC in LRC Case No. 3 was to appeal by
writ of error to the Court of Appeals. However, instead of
appealing by writ of error, the petitioners filed their
petition for certiorari. Certiorari is not proper where the
aggrieved party has a plain, speedy and adequate remedy
at law. Moreover, the error of the trial court in granting the
respondent bank a writ of possession, if at all, was an
error of judgment correctible only by an ordinary
appeal. It bears stressing that the proceedings in a
petition and/or motion for the issuance of a writ of
possession, after the lapse of the statutory period for
redemption, is summary in nature. The trial court is
mandated to issue a writ of possession upon a finding of
the lapse of the statutory period for redemption without
the redemptioner having redeemed the property. It
cannot be validly argued that the trial court abused its
156
Facts: On October 10, 1974 plaintiff spouses, alarmed of the redemption period without his credit having been
losing their right of redemption over a parcel of land to the discharged, it is illogical to hold that during that same
purchaser of the aforesaid lot at the foreclosure sale of the period of twelve months the mortgagor was "divested" of
previous mortgage in favor of Cebu City Development his ownership, since the absurd result would be that the
Bank, went to Teotimo Abellana, president of defendant land will consequently be without an owner although it
Association, to obtain a loan of P30,000.00. Prior thereto remains registered in the name of the mortgagor. That is
or on October 3, 1974, their son Teofredo Dolino filed a why the discussion in said case carefully and felicitously
similar loan application for Twenty- Five Thousand states that what is divested from the mortgagor is only his
(P25,000.00) Pesos with lot No. 4731 offered as security. "full right as owner thereof to dispose (of) and sell the
When the loan became due and demandable lands," in effect, merely
without plaintiff paying the same, defendant association
caused the extrajudicial foreclosure of the mortgage.
After the posting and publication requirements were
complied with, the land was sold at public auction. No
redemption having been effected, a new TCT was issued
in favor of the association.
The spouses Dolino filed a case for the annulment
of the sale at public auction, as well as the corresponding
certificate of sale issued pursuant thereto by assailing the
validity of the extrajudicial foreclosure sale of their
property, claiming that the same was held in violation of
Act No. 3135.
The lower court rendered judgment upholding the
validity of the loan and the real estate mortgage, but
annulling the extrajudicial foreclosure sale inasmuch as
the same failed to comply with the notice requirements in
Act No. 3135. Not satisfied, the spouses Dolino interposed
a partial appeal with respect to the portions in the
decision declaring that the mortgage executed is valid.
CA modified the decision of the lower court and
declared the mortgage null and void.

Issue: Whether 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.

Held: Yes. Reversed.

Ratio: The CA declared the real estate mortgage in

question null and void for the reason that the mortgagor
spouses, at the time when the said mortgage was executed,
were no longer the owners of the lot, having supposedly
lost the same when the lot was sold to a purchaser in the
foreclosure sale under the prior mortgage. This holding
cannot be sustained. Preliminarily, the issue of
ownership of the mortgaged property was never alleged
in the complaint nor was the same raised during the trial,
hence that issue should not have been taken cognizance of
by the Court of Appeals. An issue which was neither
averred in the complaint nor ventilated during the trial in
the court below cannot be raised for the first time on
appeal as it would be offensive to the basic rule of fair
play, justice and due process.
If, as admitted, the purchaser at the foreclosure
sale merely acquired an inchoate right to the property
which could ripen into ownership only upon the lapse of
157
clarifying that the mortgagor does not have the ownership of the land sold becomes consolidated in the
unconditional power to absolutely sell the land since the purchaser.
same is encumbered by a lien of a third person which, if Parenthetically, therefore, what actually is
unsatisfied, could result in a consolidation of ownership effected where redemption is seasonably exercised by
in the lienholder but only after the lapse of the period the judgment or mortgage debtor is not the recovery
of redemption. Even on that score, it may plausibly be of ownership of his land, which ownership he never lost,
argued that what is delimited is not the mortgagor's jus but the elimination from his title thereto of the lien
disponendi, as an attribute of ownership, but merely the created by the levy on attachment or judgment or the
rights conferred by such act of disposal which may registration of a mortgage thereon. The American rule is
correspondingly be restricted. similarly to the effect that the redemption of property sold
At any rate, even the foregoing considerations and under a foreclosure sale defeats the inchoate right of the
arguments would have no application in the case at bar purchaser and restores the property to the same
and need not here be resolved since what is presently condition as if no sale had been attempted. Further, it
involved is a mortgage, not a sale, to petitioner bank. Such
mortgage does not involve a transfer, cession or
conveyance of the property but only constitutes a lien
thereon. There is no obstacle to the legal creation of
such a lien even after the auction sale of the property
but during the redemption period, since no distinction is
made between a mortgage constituted over the property
before or after the auction sale thereof.
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. In either case,
what bears attention is that since 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.
Coming back to the present controversy, it is
undisputed that 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
158
does not give to the mortgagor a new title, but merely
restores to him the title freed of the encumbrance of the Held: Yes. Affirmed.
lien foreclosed.
Ratio: In order to effect a redemption, the judgment
Estanislao Bodiongan vs. CA & Lea Simeon, G.R. No. debtor must pay the purchaser the redemption price
114418, September 21, 1995 (248 SCRA 496) composed of the following: (1) the price which the
purchaser paid for the property; (2) interest of 1% per
Facts: On October 4, 1982, respondent Lea Simeon month on the purchase price; (3) the amount of any
obtained from petitioner Estanislao Bodiongan and his
wife a loan of P219,117.39 secured by a mortgage on three
(3) parcels of land with a four-storey hotel building
and personal properties located at Gango, Ozamiz City.
Private respondent failed to pay the loan. Petitioner thus
instituted against her a case for collection of sum of money
or foreclosure of mortgage. A judgment was issued
against the private respondent. The decision was
affirmed by the CA and later became final and executory.
Private respondent again failed to pay the judgment debt
hence, the mortgaged properties were foreclosed and
sold on execution. At the auction sale, petitioner
submitted to the sheriff a written bid of P309,000.00 and
at the same time reserved in said bid a deficiency claim of
P439,710.57. The properties were awarded to petitioner
as sole bidder and a certificate of sale was issued in his
name and registered with the Register of Deeds of Ozamiz
City.
Petitioner then took possession of the properties
after filing, per order of the trial court, a guaranty bond of
P350,000.00 to answer for any damage thereon during the
redemption period.
On January 8, 1988, private respondent offered to
redeem her properties and tendered to the Provincial
Sheriff a check in the amount of P337,580.00. This
amount was based on a tentative computation by the
sheriff. The check was received by petitioner on the
same day after which the sheriff issued a certificate of
redemption to private respondent also on the same day.
On January 11, 1988, petitioner, claiming
additional interest at 38% per annum, moved to correct
the computation of the redemption price and to suspend
the issuance of a writ of possession pending computation.
The motion was denied by the trial court. On July 8, 1988,
the trial court issued the said writ and private respondent
took possession of her properties.
Petitioner filed a case for annulment of
redemption and confirmation of the foreclosure sale on
the ground of insufficiency of the redemption price. On
October 7,
1988, petitioner consigned the redemption money with
the court. The trial court dismissed the complaint but
reduced the 12% interest rate on the purchase price to
6% and ordered petitioner to refund private respondent
the excess 6%. The CA affirmed except for the refund of
the 6%.

Issue: Whether the redemption price should be the

purchase price at the auction sale and not the amount
stated in the judgment.
159
assessments or taxes which the purchaser may have paid price is not substantial, we are inclined to give private
on the property after the purchase; and (4) interest of respondent the opportunity to complete the redemption
1% per month on such assessments and taxes. The of her properties within fifteen days from the time this
redemption price must be for the full amount, otherwise decision becomes final.
the offer to redeem will be ineffectual. And if the tender is
for less than the entire amount, the purchaser may justly Development Bank of the Philippines vs. West
refuse acceptance thereof. In the instant case, the Negros College, Inc., G.R. No.
redemption price covers the purchase price of 152359, October 28, 2002 (391 SCRA 330)
P309,000.00 plus 1% interest thereon per month for
twelve months at P37,080.00. Petitioner does not claim Facts: On December 12, 1967, Bacolod Medical Center
ant taxes or assessments he may have paid on the (BMC) obtained a loan from the
property after his purchase. He, however, add Development Bank of the Philippines (DBP) in the amount
P5,000.00 to the price to cover the attorney's fees of P2,400,000.00 secured by
awarded him by the trial court.
In the redemption of property sold at an
extrajudicial foreclosure sale, the amount payable is no
longer the judgment debt but the purchase price at the
auction sale. In other words, the attorney's fees awarded
by the trial court should not have been added to the
redemption price because the amount payable is no
longer the judgment debt, but that which is stated in
Section 30 of Rule 39. The redemption price for the
mortgaged properties in this case should therefore be
P346,080.00, not P531,080.00.
Private respondent's tender was P337,580.00
which is still short by P8,500.00. The Provincial Sheriff
declared that private respondent ordered him to deduct
from the redemption price the value of certain personal
properties in the hotel. During petitioner's possession of
the lots, he sold some of the furniture, water pump and
electrical installations in the hotel and appropriated the
proceeds to himself without private respondent's
knowledge and approval. Petitioner does not deny the
fact that he sold the personal properties and appropriated
the proceeds of P13,500.00 to himself. He has expressly
admitted this in his written bid to the sheriff. He,
however, cannot be considered in estoppel because the
deduction for the loss of the personal properties was not
authorized under Section 30 of Rule 39. In the first place,
the sheriff should not have issued the certificate of
redemption without a final determination of the amount
of the redemption price. This unauthorized deduction of
the value of private respondent's personal properties and
the sheriff's over zealousness in issuing the certificate of
redemption are aggravated by the fact that private
respondent later sought for and was actually compensated
for the said loss.
Indeed, if we were to allow the deduction of the
value of private respondent's personal properties from the
redemption price, this will amount to double
compensation and unjust enrichment at the expense of
petitioner. On the other hand, it would be highly unjust to
deprive private respondent of her right to redeem by a
strict application of the Rules of Court. It must be
remembered that the policy of the law is to aid rather
than defeat the right of redemption. Inasmuch as in the
instant case tender of the redemption price was timely
made and in good faith, and the deficiency in said
160
a mortgage on two (2) parcels of land. The mortgage was of DBP on November 12, 1991 to get the deposit in the
expressly constituted subject to the provisions of Republic amount of P358,128.58 and bring with him the owners
Act No. 85 (R.A. 85) creating the Rehabilitation Finance duplicate copies of the TCTs covering the subject
Corporation, a predecessor agency of DBP. For failure of properties.
BMC to pay the loan, DBP instituted on January 30, 1989 DBP responded that West Negros has no
an extrajudicial foreclosure of mortgage under Act 3135. personality to enter into the picture and that whatever
On August 24, 1989, the mortgaged properties were sold transaction may have been entered between BMC and
at public auction with DBP emerging as the highest and West Negros does not bind DBP. DBP further objected to
only bidder for the sum of P4,090,117.36. On August 25, the issuance of the certificate of redemption and argued
1989, the Ex-Officio Provincial Sheriff of Bacolod City that the redemption price must be based on the charter of
executed the certificate of sale in favor of DBP. On July the DBP requiring payment of the amount owed as of the
11, 1990, the sale was registered in the Registry of date of the foreclosure sale with interest on the total
Deeds and annotated on the TCTs of the mortgaged indebtedness at the rate agreed upon in the obligation. It
properties. also refused to hand over
Prior to the expiration of the redemption period
on July 11, 1991, BMC and the Bacolod branch office of
DBP agreed to peg the redemption price at P21,500,000.00
representing the compromise settlement of the
outstanding account subject to the approval of DBPs
head office. BMC further resolved to pay an installment
of 20% of the compromise amount, or P4,300,000.00, on
or before August 31, 1991. After several extensions of the
deadline to pay the installment, BMC finally settled the
amount in three (3) separate payments.
In the meantime, on July 10, 1991, in the course of
paying the 20% installment, BMC and West Negros
executed a Deed of Assignment which assigned to the
latter BMCs interests in the foreclosed properties and
vested upon West Negros the right to redeem them. While
acknowledging that redemption should be based on the
outstanding loan obligation of BMC to DBP, West Negros
demanded the reduction of the redemption price from
P21,500,000.00 to P12,768,432.90 allegedly because of
excessive interest charges. On October 27, 1991, the head
office of DBP rejected the compromise amount of
P21,500,000.00 since the amount was way below the re-
appraised value of the foreclosed parcels of land which
stood at P28,895,500.00 as of May 31, 1991.
On November 8, 1991, West Negros requested
the Ex-Officio Provincial Sheriff to issue the certificate of
redemption in view of the payment to DBP of
P4,300,000.00 representing 20% of the compromise
amount, with one percent (1%) interest thereon
including other expenses defrayed by DBP at the
extrajudicial sale. The computation of the redemption
price made by West Negros was based on Section 30,
Rule 39 of the Rules of Court and Act 3135. The Ex-
Officio Provincial Sheriff concurred with West Negros
basis for the redemption price but responded that the
amount paid was still short of P358,128.58. In a letter of
even date to the DBP, the Ex-Officio Provincial Sheriff
informed DBP of the request for a certificate of
redemption and the amount pegged for the full
redemption of the foreclosed properties based on Section
30, Rule 39 of the Rules of Court, and requested the
surrender of the TCTs covering the redeemed properties.
On November 12, 1991, West Negros settled the deficit
of P358,128.58. The Sheriff then requested the Manager
161
the TCTs of the foreclosed properties and caused the and accessories which the respondent CMI had purchased
registration of its adverse claim thereon. from the petitioner. On November
This prompted West Negros to file a petition 3, 1981, the respondent judge ordered the attachment of
against DBP. The trial court found merit in the petition and CMI's properties. On November
ordered DBP to surrender the TCTs and, in case of failure 26, 1981, notice of the attachment of real properties
to turn them over, instructed the Register of Deeds to of the CMI was served on the
issue new certificates of title for the foreclosed properties. Register of Deeds of Makati.
Because DBP manifested that it was not relinquishing the
documents, new TCTs were issued in the name of West
Negros. CA affirmed.

Issue: Whether the redemption price of a property

foreclosed by DBP is the amount owed to DBP.

Held: Yes. Reversed.

Ratio: In Development Bank of the Philippines v. Jimenez

this Court clarified the proper applications of Sec. 31 of CA
459 and Sec. 30, Rule 39 of the Rules of Court when we
held that "Section 31 of Commonwealth Act No. 459, and
not Section 26, Rule 39, of the Rules of Court, is applicable
in case of redemption of real estate mortgaged to the DBP
to secure a loan. As such, the redemption price to be paid
by the mortgagor or debtor to the DBP is 'all the amount
he owes the latter on the date of the sale, with interest on
the total indebtedness at the rate agreed upon, and
not merely the amount paid for by the purchaser at the
public auction, pursuant to Section 26, Rule 39, of the
Rules of Court." Clearly the redemption of properties
mortgaged with the Development Bank of the Philippines
and foreclosed either judicially or extrajudicially is
governed by special laws which provide for the payment
of all the amounts owed by the debtor. This special
protection given to a government lending institution is not
accorded to judgment creditors in ordinary civil actions.

Top Rate International Services, Inc. vs. IAC & Rodrigo

Tan, doing business under the name and style Astro
Automotive Supply, G.R. No. L-67496, July 7, 1986
(142
SCRA 467)

Facts: Rodrigo Tan filed a complaint against Consolidated

Mines Inc. and Jose Marino Olondriz, the president of said
corporation, for the payment of the purchase price of
certain heavy equipment, parts and accessories sold to
Consolidated Mines, Inc. with a total cost of P271,372.20.
In said complaint, plaintiff asked that a writ of
preliminary attachment be issued against defendants on
the ground that said defendants were guilty of fraud in
securing said equipment. A writ of preliminary
attachment was issued, and the sheriff levied on the
properties of the defendant, although there were already
prior encumbrances on these properties.
Polaris Motor Supply, Co. also brought suit against
Consolidated Mines, Inc. for the collection of P71,855.20.
The amount represents the price of the heavy equipment
162
 On May 31, 1981, several banks, constituting the We, therefore, hold that the appellate court did not
Consortium Banks, filed a third party claim with the commit any error in ruling that there was no over-levy on
sheriff, alleging that they were the mortgagees of the real the disputed properties. What was actually attached by
and personal properties of the CMI. They, therefore, respondents was Consolidated Mines' right or equity of
asked that the properties be released from attachment. redemption, an incorporeal and
The petitioner filed a motion to quash the third party
claim which was denied. The court ruled that the
Consortium Banks, as mortgagees of the real and
personal properties of the CMI had a superior lien on the
properties and that the petitioner could validly levy only
on the mortgagor's (CMI's) equity of redemption after the
sale of the mortgaged properties.
The personal properties were foreclosed by the
Consortium Banks to which the properties were sold as
the highest bidder and the certificate of sale issued.
The petitioner then asked that it be allowed to exercise its
right of redemption. But the Consortium Banks opposed
the motion on the ground that there was an equity in
redemption only in case of foreclosure sale of real
properties but not in the case of chattels.
In the meantime, an insolvency court authorized
the sale of CMI properties to Top Rate International as
assignee of the El Grande Development Corp. On the basis
of the sale to it, Top Rate International filed a third party
claim with the sheriff. It asked that the properties be
discharged from attachment.
After hearing on the matter, one trial court
ordered the lifting and setting aside of the levy on
attachment on the properties while the other trial court
issued the same order maintaining, however, the levy on
attachment on the properties. An appeal was made. The
IAC ordered the levy on the 2 properties maintained.

Issue: Whether the sheriff should levy only on the right or

equity of redemption and not on the property itself.

Held: Yes. Affirmed.

Ratio: Equity of redemption is the right of the mortgagor

to redeem the mortgaged property after his default in the
performance of the conditions of the mortgage but before
the sale of the property or the confirmation of the sale,
whereas the right of redemption means the right of the
mortgagor to repurchase the property even after
confirmation of the sale, in cases of foreclosure by
banks, within one year from the registration of the sale.
When herein private respondents prayed for the
attachment of the properties to secure their respective
claims against Consolidated Mines, Inc., the properties
had already been mortgaged to the consortium of twelve
banks to secure an obligation of US$62,062,720.66. Thus,
like subsequent mortgagees, the respondents' liens on
such properties became inferior to that of the banks,
which claims in the event of foreclosure proceedings, must
first be satisfied. The appellate court, therefore, was
correct in holding that in reality, what was attached by
the respondents was merely Consolidated Mines' right or
equity of redemption.
163
intangible right, the value of which can neither be the sheriffs certificate of foreclosure sale. Where the
quantified nor equated with the actual value of the foreclosure is judicially effected, however, no equivalent
properties upon which it may be exercised. right of redemption exists. The law declares that a judicial
foreclosure sale, when confirmed by an order of the court,
shall operate to divest the rights of all the parties to the
Spouses Ricardo Rosales & Erlinda Sibug vs. Spouses
action and to vest their rights in the purchaser, subject to
Alfonso & Lourdes Suba, the
such rights of redemption as may be allowed by law.
City Sheriff of Manila, G.R. No. 137792, August 12, 2003
Such rights exceptionally allowed by law (i.e., even after
(408 SCRA 664)
the confirmation by an order of the court) are those
granted by the charter of the Philippine National Bank
Facts: A judgment was rendered declaring a sale as an (Act Nos. 2747 and 2938), and the General Banking Act
equitable mortgage and ordering the debtors, spouses (R.A.337). These laws confer on the mortgagor,
Rosales and Sibut to pay the amount of the debt to
Macaspac and Jiao within 90 days. The decision became
final. The debtors failed to pay the debt, so the creditor
filed a motion for execution. The trial court ordered the
sale of the property to satisfy the judgment. An auction
sale was held, and the spouses Suba gave the highest bid.
The trial court confirmed the sale and issued a final
deed of sale to the winning bidder. The register of deeds
issued new TCTs. The new owners then filed a motion for
the issuance of a writ of possession which was granted. A
petition was filed questioning the issuance of the writ
before the CA which was denied.

Issue: Whether a judgment debtor has a right to redeem

property which was judicially sold to satisfy the judgment.

Held: No. Affirmed.

Ratio: The decision of the trial court, which is final and

executory, declared the transaction between petitioners
and Macaspac an equitable mortgage. In Matanguihan
vs. Court of Appeals, this Court defined an equitable
mortgage as one which although lacking in some
formality, or form or words, or other requisites demanded
by a statute, nevertheless reveals the intention of the
parties to charge real property as security for a debt, and
contains nothing impossible or contrary to law. An
equitable mortgage is not different from a real estate
mortgage, and the lien created thereby ought not to
be defeated by requiring compliance with the formalities
necessary to the validity of a voluntary real estate
mortgage. Since the parties transaction is an equitable
mortgage and that the trial court ordered its foreclosure,
execution of judgment is governed by Sections
2 and 3, Rule 68 of the 1997 Rules of Civil Procedure, as
amended.
The right of redemption in relation to a
mortgageunderstood in the sense of a prerogative to
re-acquire mortgaged property after registration of the
foreclosure sale exists only in the case of the
extrajudicial foreclosure of the mortgage. No such right is
recognized in a judicial foreclosure except only where
the mortgagee is the Philippine National bank or a bank
or a banking institution. Where a mortgage is foreclosed
extrajudicially, Act 3135 grants to the mortgagor the right
of redemption within one (1) year from the registration of
164
his successors in interest or any judgment creditor of the favor and became final; and at the ensuing foreclosure sale,
mortgagor, the right to redeem the property sold on the lots were acquired by Ponce himself as highest bidder.
foreclosureafter confirmation by the court of the Ponce then moved for confirmation of the foreclosure
foreclosure sale which right may be exercised within a sale, but the Court confirmed the sale of only two lots,
period of one (1) year, counted from the date of refusing to do so as regards the two which had been
registration of the certificate of sale in the Registry of subject of the execution sale in Limpin's favor.
Property. It was to resolve the resulting dispute that Ponce
But, to repeat, no such right of redemption exists instituted a special civil action in the Intermediate
in case of judicial foreclosure of a mortgage if the Appellate Court, impleading Limpin and Sarmiento as
mortgagee is not the PNB or a bank or banking indispensable parties respondents. That Court rendered
institution. In such a case, the foreclosure sale, when judgment on February 28, 1985 in Ponce's favor;
confirmed by an order of the court, x x x shall operate to Limpin and Sarmiento appealed; this Court denied their
divest the rights of all the parties to the action and to vest appeal.
their rights in the purchaser. There then exists only
what is known as the equity of redemption. This is
simply the right of the defendant mortgagor to extinguish
the mortgage and retain ownership of the property by
paying the secured debt within the 90-day period after the
judgment becomes final, in accordance with Rule 68, or
even after the foreclosure sale but prior to its
confirmation.
Clearly, as a general rule, there is no right of
redemption in a judicial foreclosure of mortgage. The only
exemption is when the mortgagee is the Philippine
National Bank or a bank or a banking institution. Since
the mortgagee in this case is not one of those mentioned,
no right of redemption exists in favor of petitioners.
They merely have an equity of redemption, which, to
reiterate, is simply their right, as mortgagor, to extinguish
the mortgage and retain ownership of the property by
paying the secured debt prior to the confirmation of the
foreclosure sale. However, instead of exercising this
equity of redemption, petitioners chose to delay the
proceedings by filing several manifestations with the trial
court. Thus, they only have themselves to blame for the
consequent loss of their property.

Gregorio Y. Limpin & Rogelio M. Sarmiento vs. IAC &

Guillermo Ponce, G.R. No. L-70987, September 29,
1988 (166 SCRA 87)

Facts: The proceedings concern two (2) lots which,

together with two (2) others, were originally mortgaged in
1973 to herein private respondent Ponce by their former
owners, the Spouses Jose and Marcelina Aquino. These two
lots were afterwards sold in 1978 by the same Aquino
Spouses to Butuan Bay Wood Export Corporation. Against
this corporation, herein petitioner Limpin obtained a
money judgment in 1979; and to satisfy the judgment, the
two lots were levied on and sold at public auction in
1980, Limpin being the highest bidder. Limpin later sold
the lots to his co-petitioner, Sarmiento.
Earlier however or a day before levy was made
on the two lots in execution of the judgment against
Butuan Bay Wood Export Corporation Ponce had
initiated judicial proceedings for the foreclosure of the
mortgage over said two (2) lots (together with the two (2)
others mortgaged to him). Judgment was rendered in his
165
 It was not until March 11, 1988 nine months or Property.
so after entry of the judgment recognizing his equity of But, to repeat, no such right of redemption exists
redemption as successor-in-interest of the original in case of judicial foreclosure of a mortgage if the
mortgagors mortgagee is not the PNB or a bank or banking institution.
that Sarmiento finally bestirred himself to attempt to In such a case, the foreclosure sale, "when confirmed by an
exercise his unforeclosed equity of redemption. On that order of the court . . . shall operate to divest the rights of
day he filed a motion with the Court presided over by Hon. all the parties to the action and to vest their rights in the
Judge Antonio Solano, manifesting that he would exercise purchaser." There then exists only what is known as the
the right and asked the Court to fix the redemption price. equity of redemption. This is simply the right of the
The Court opined that "this should be the subject of the defendant mortgagor to extinguish the mortgage and
agreement between Ponce and Sarmiento." Sarmiento retain ownership of the property by paying the secured
then wrote to Ponce on March 23, 1988 offering "P2.6 debt within the 90-day period after the judgment becomes
million as redemption price for the two lots originally
covered by TCTs Nos. 92836 and 92837, now 307100 and
307124." Ponce's answer, dated March 25, 1988, rejected
the offer and averred that the period within which
Sarmiento could have exercised such right had lapsed.
Sarmiento filed a motion in court to fix the redemption
price which was opposed by Ponce. The court ruled
for Sarmiento. Ponce filed a Motion for Clarification
with the Supreme Court.

Issue: Whether redemption may still be made after

confirmation of a judicial foreclosure.

Held: No. Equity of redemption has already lapsed.

Ratio: The equity of redemption is, to be sure, different

from and should not be confused with the right of
redemption. The right of redemption in relation to a
mortgage understood in the sense of a prerogative
to re-acquire mortgaged property after registration of
the foreclosure sale exists only in the case of the
extrajudicial foreclosure of the mortgage. No such right is
recognized in a judicial foreclosure except only where the
mortgagee is the Philippine National Bank or a bank
or banking institution. Where a mortgage is foreclosed
extrajudicially, Act 3135 grants to the mortgagor the right
of redemption within one (1) year from the registration of
the sheriffs certificate of foreclosure sale. Where the
foreclosure is judicially effected, however, no equivalent
right of redemption exists. The law declares that a
judicial foreclosure sale, "when confirmed by an order of
the court, shall operate to divest the rights of all the
parties to the action and to vest their rights in the
purchaser, subject to such rights of redemption as may
be allowed by law." Such rights exceptionally "allowed by
law" (i.e., even after confirmation by an order of the court)
are those granted by the charter of the Philippine National
Bank (Acts No. 2747 and 2938), and the General Banking
Act (R.A.
337). These laws confer on the mortgagor, his
successors in interest or any judgment creditor of the
mortgagor, the right to redeem the property sold on
foreclosure after confirmation by the court of the
foreclosure sale which right may be exercised within a
period of one (1) year, counted from the date of
registration of the certificate of sale in the Registry of
166
final, in accordance with Rule 68, or even after the reasonable period of time after learning of the order of
foreclosure sale but prior to its confirmation. confirmation (the record shows he did learn of it within
The mortgagors equity of redemption may be exercised three [3] days after its issuance), he might perhaps have
by him even beyond the given the Court some reason to consider his bid on
90-day period "from the date of service of the order," and equitable grounds. He did not. He let nine (9) months pass,
even after the foreclosure sale itself, provided it be before to repeat, in carrying out improper (and contumacious)
the order of confirmation of the sale. After such order stratagems to negate the judgments against him, before
of confirmation, no redemption can be effected any longer. making any such move.
It is this same equity of redemption that is conferred by
law on the mortgagor's successors-in-interest, or third Ramon Herrera, et al. vs. Hon. Francisco Arellano, et
persons acquiring rights over the mortgaged property al., G.R. No. L-8164, October
subsequent, and therefore subordinate, to the 27, 1955 (97 Phil 776)
mortgagee's lien. If these subsequent or junior lien-
holders be not joined in the foreclosure action, the
judgment in the mortgagor's favor is ineffective as to them,
of course. In that case, they retain what is known as the
"unforeclosed equity of redemption," and a separate
foreclosure proceeding should be brought to require them
to redeem from the first mortgagee, or the party acquiring
title to the mortgaged property at the foreclosure sale,
within 90 days, under penalty of losing that prerogative
to redeem. In the case at bar, however, there is no
occasion to speak of any "unforeclosed equity of
redemption" in Sarmiento's favor since he was properly
impleaded in the judicial proceeding where his and
Ponce's rights over the mortgaged property were
ventilated and specifically adjudicated.
Under the circumstances obtaining in this case,
the plain intendment of the Intermediate Appellate Court
was to give to Sarmiento, not the unforeclosed equity of
redemption pertaining to a stranger to the foreclosure
suit, but the same equity of redemption possessed by the
mortgagor himself. The judgment cannot be construed
as contemplating or requiring the institution of a
separate suit by Ponce to compel Sarmiento to exercise
his unforeclosed equity of redemption, or as granting
Sarmiento the option to redeem at any time that he pleases,
subject only to prescription. This would give rise to that
multiplicity of proceedings which the law eschews. The
judgment plainly intended that Sarmiento exercise his
option to redeem, as successor of the mortgagor.
The rejection by this Court of Sarmiento's and
Limpin's appeal in its own Decision of January 30, 1987,
which imported nothing less than a total affirmance of the
Decision of the Appellate Court, should therefore have
sufficiently alerted Sarmiento that confirmation could
come at any time after this Court's Decision became
final, with or without any action from Ponce. He cannot,
in the circumstances, claim unfair surprise. He should,
upon being notified of this Court's Decision, have taken
steps to redeem the properties in question or, at the very
least, served the Trial Court and Ponce with notice of his
intention to exercise his equity of redemption. There was
certainly time enough to do this the order confirming
the foreclosure sale issuing only on June 17, 1987 had
he not occupied himself with the fruitless maneuverings to
re-litigate the issues already recounted. Indeed, had he
made an attempt to redeem, even belatedly but within a
167
 present time is unreasonable and oppressive and should
Facts: In September of 1920, Ramon Herrera, in his not be prolonged a minute longer."
capacity as judicial guardian of his minor children Ricardo, The mortgagee then filed a motion for execution
Arturo, Dulcelina, and Cristeto Herrera, borrowed P7,000 which was granted. A writ of execution was issued. In
from Siuliong & Co., payable with 12 per cent annual compliance therewith, on September 8, 1953, the
interest. Between 1920 and 1930, he also borrowed Provincial Sheriff of Negros Occidental sold, at public
various other sums of money, and upon liquidation auction, the mortgaged properties to the mortgagee, Cu
made on June 31, Unjieng o& Sons, Inc. On motion of the latter, the court
1930, the total sum due was ascertained to be P14,176.26 confirmed this sale by an order dated October 9, 1953.
after deducting payments made. While these acts of the The mortgagors filed 2 motions for reconsideration which
guardian appeared to be unauthorized by the Court, the were denied. Hence, this case.
wards, upon attaining majority, by public document,
confirmed the previous arrangements and manifested
their entire agreement to the liquidation of their accounts,
and compromised the case by promising to pay Siuliong &
Co., Inc., the acknowledged balance of P14,176.26. By a
separate notarial instrument, the spouses Ramon
Herrera and Rosa Gallo compromised the pending civil
case filed against them by Siuliong & Co., Inc., by
acknowledging an indebtedness in favor of the latter,
promising to pay said sum, jointly and in solidum, and
guaranteeing payment by mortgage of their 1/4 interest in
the Hacienda San Roque, the house on Lot 91 of the
Manapla Cadastre, plus the parcels of land. Both
mortgage credits were assigned by the creditor Siuliong &
Co., Inc. to Francisco Cu Unjieng, by public instrument.
Hacienda San Roque was later leased by the mortgagors to
Ricardo Herrera and Lope Ilustre without the consent of
the creditor. Siuliong & Co., Inc. gave notice of its
intention to foreclose on the properties. Apparently, the
sale was not carried out, for on August 28, 1936, the
lawyers of the mortgagee wrote the debtors complaining
that the land taxes of the mortgaged property had not
been paid and the mortgagee had been forced to disburse
the same. Once again, on July 12, 1937, the mortgagees
demanded satisfaction of the indebtedness, but attempts to
settle and compromise were useless.
The mortgagors filed a case for an accounting
and to set aside an extrajudicial foreclosure. An answer
was filed with a counterclaim for nonpayment and breach
of the obligations and prayed for judgment thereon with
interest and attorneys' fees, and for a decree of judicial
foreclosure. The case was dismissed, but no decision was
made on the defendants claims. Upon motion by the
parties, the court granted a reopening of the case, but no
decision was rendered. The lower court, on petition, later
decided in favor of the defendants and gave the
mortgagors 90 days to pay, otherwise the mortgaged
properties will be sold at a public auction. The
mortgagors appealed, from this decision, to the Court of
Appeals. CA affirmed the indebtedness, but reversed the
order decreeing the sale of mortgaged properties. The CA
ruled that no action lies to enforce the indebtedness until
the moratiorium law expires or is lifted.
On May 18, 1953 this Court rendered its decision
in the case of Rutter vs. Esteban (93 Phil., 63), declaring
that "the continued operation and enforcement of
Republic Act No. 342 (the Moratorium Law) at the

168
Issue: Whether an order executing a judgment which
neither contains an order requiring the mortgagors to pay
their obligation to the mortgagees nor grants said
mortgagors the
90-day period within which to pay the mortgaged debt
is valid. Whether the 90 day period for payment should
be counted from the date of service of the order directing
the mortgagors to pay their obligation.
Held: No. Yes. Reversed.
aforementioned De Leon case.
Spouses Rempson Samson & Milagros Samson, &
Rempson Realty & Development Corporation vs. Judge
Mauricio M. Rivera, in his capacity as Presiding Judge
of the RTC of Antipolo City, Br. 73, Atty. Joselito
Malibago-Santos, in her capacity as Ex- Officio Sheriff,
RTC of Antipolo City, & Lenjul Realty Corporation,
G.R. No.
154344, May 20, 2004 (428 SCRA 759)

Ratio: Invoking our decision in Rutter vs. Esteban (93 Phil.,

63), it must be noted that the
90-day period granted the mortgage debtor within which
to pay the amount of the mortgage is in Section 2 of Rule
70 of the Rules of Court, and it is to be counted 'from the
date of the service of the order,' not from the date thereof.
The order referred to in the rule is the order requiring
the debtor to pay the judgment within 90 days. This 90-
day period given in the rule is not a procedural
requirement merely; it is a substantive right granted to
the mortgage debtor as the last opportunity to pay the
debt and save his mortgaged property from final
disposition at the foreclosure sale. It is one of the two
steps necessary to destroy what is law is known as the
mortgagor's 'equity of redemption,' the other being the
sale. It may not be omitted. As the writ of execution or the
order allowing the sale of the mortgaged property was
issued without granting the mortgage debtor said 90-day
period, the order for the sale of the property would be a
denial of a substantial right and void. It is true that the
original judgment of this Court required payment within
90 days, but this same judgment was expressly held in
abeyance; therefor, the 90-day period never began to run.
Neither was it effective while the moratorium was in force.
The order of execution that was held in abeyance did not
ipso facto become effective upon the lifting of the
moratorium. A new order of the court become necessary
to revive the order of payment, and this new order may not
suppress or deny the 90-day period originally fixed and
required by the rules. The order complained of does not
grant this 90-day period, and, therefore, invalid.
In this case, the provision for payment of the
debt within 90 days found in the original decision of the
court of first instance was reversed by the Court of
Appeals. In other words, in the case at bar, respondent
Judge directed the execution of a judgment which neither
contained an order requiring the mortgagors to pay their
obligation to the mortgagees nor granted said mortgagors
any period within which to effect said payment. At any
rate, the 90-day period, prescribed in Section 2 of Rule 70
of the Rules of Court, should be counted "from the date of
service of the order" directing the mortgagors to pay their
obligation to the mortgagees and no such order
having, as yet, been issued, it follows that the orders
complained of, directing the sale of the mortgaged
property and denying the reconsideration prayed for by
petitioners herein, are "null and void," as held in the
169
Facts: Sps. Rempson and Samson incurred from FEBTC
a loan for P55M which was secured by a real estate
mortgage over 5 parcels of property. The spouses failed to
settle their obligation. FEBTC extrajudicially foreclosed
the properties. An auction sale was held which was won
by Lenjul Realty Corp. The sale was confirmed, and a
certificate of sale was issued.
Lenjul Realty filed a petition for the issuance of a
writ of possession. While the Petition was pending,
Spouses Samson and Rempson Corporation filed with the
Antipolo City RTC, an action for Annulment of Extra-
Judicial Foreclosure and/or Nullification of Sale and the
Certificates of Title. The judge then granted the prayer for
the issuance of a writ of possession. CA affirmed.
issuance of the Writ of Possession is unavailing. Their
reliance on Active Wood Products Co., Inc. v. Court of
Appeals is misplaced. In that case, the sole issue was
the consolidation of a civil case regarding the validity of
the mortgage and a land registration case for the issuance
of a writ of possession. It did not declare that the writ of
possession must be stayed until the questions on the
mortgage or the foreclosure sale were resolved.
Moreover, the issue of

Issue: Whether a writ of possession may be issued even

before the expiration of the redemption period. Whether
the issuance of a writ of possession may be stayed by
the filing of an action for the annulment of the foreclosure.

Held: Yes. No. Affirmed.

Ratio: The purchaser in a foreclosure sale may apply for a

writ of possession during the redemption period by filing
for that purpose an ex parte motion under oath, in the
corresponding registration or cadastral proceeding in the
case of a property with torrens title. Upon the filing of
such motion and the approval of the corresponding
bond, the court is expressly directed to issue the writ. This
Court has consistently held that the duty of the trial court
to grant a writ of possession is ministerial. Such writ
issues as a matter of course upon the filing of the
proper motion and the approval of the corresponding
bond. No discretion is left to the trial court. Any
question regarding the regularity and validity of the sale,
as well as the consequent cancellation of the writ, is to be
determined in a subsequent proceeding as outlined in
Section 8 of Act 3135. Such question cannot be raised to
oppose the issuance of the writ, since the proceeding is ex
parte. The recourse is available even before the
expiration of the redemption period provided by law
and the Rules of Court. The purchaser, who has a right to
possession that extends after the expiration of the
redemption period, becomes the absolute owner of the
property when no redemption is made. Hence, at any
time following the consolidation of ownership and the
issuance of a new transfer certificate of title in the name of
the purchaser, he or she is even more entitled to
possession of the property. In such a case, the bond
required under Section 7 of Act 3135 is no longer
necessary, since possession becomes an absolute right of
the purchaser as the confirmed owner.
This Court has long settled that a pending action
for annulment of mortgage or foreclosure does not stay
the issuance of a writ of possession. Therefore, the
contention of petitioners that the RTC should have
consolidated Civil Case No. 01-6219 with LR Case No. 01-
2698 and resolved the annulment case prior to the
170
consolidation in the present case has become moot, respondents against petitioner DBP. It seeks to declare
considering that the trial court has already granted it. the sale of the property to Torrefranca void and to order
The Court of Appeals correctly declared that petitioner DBP to respect respondents right of pre-
petitioners pursued the wrong remedy. A special civil emption; and maintain the status quo between the
action for certiorari could be availed of only if the lower parties. Upon the other hand, Civil Case No. 6097 is a
tribunal has acted without or in excess of jurisdiction, petition for the issuance of a writ of possession filed by
or with grave abuse of discretion amounting to lack or petitioner DBP, being the purchaser of the lot
excess of jurisdiction; and if there is no appeal or any
other plain, speedy, and adequate remedy in the ordinary
course of law. A party may petition for the setting aside of
a foreclosure sale and for the cancellation of a writ of
possession in the same proceedings where the writ of
possession was requested. In petitioners case, the filing
of the Petition is no longer necessary because the
pendency of Civil Case No. 01-
6219 (which was consolidated with the present case)
already challenged the foreclosure sale

Development Bank of the Philippines vs. Spouses

Wilfredo Gatal & Azucena Gatal, G.R. No. 138567,
March 4, 2005 (452 SCRA 697)

Facts: Spouses Gatal obtained a P1.5M loan from the DBP

which was secured by a real estate mortgage over a
commercial lot. For failure to pay their loan, DBP
foreclosed. The property was offered for sale at an auction,
but no one was able to meet the bid price ceiling. DBP
offered the property for negotiated sale. The spouses
Gatal submitted a bid, but another bidder, Torrefranca,
submitted a higher bid. The spouses Gatal offered to
match the higher bid, but this was denied because
Torrefranca was already considered a preferred bidder.
The spouses Gatal filed a case for injunction. A
writ of preliminary injunction was issued. DBP, on the
other hand, filed a petition for the issuance of a writ of
possession which was granted. The spouses Gatal filed a
motion to dismiss the petition of DBP and to quash the
writ of possession on the ground that there is another case
pending with the same subject matter and issues. The
petition of DBP was dismissed and the writ of possession
was recalled. DBP filed a petition for certiorari with the
CA, but this was dismissed.

Issue: Whether a separate action should be filed for a writ

of possession to issue.

Held: No. Reversed.

Ratio: For litis pendentia to lie as a ground for a motion to

dismiss, the following requisites must be present: (1) that
the parties to the action are the same; (2) that there is
substantial identity in the causes of action and reliefs
sought; and (3) that the result of the first action is
determinative of the second in any event and regardless
of which party is successful. It is undisputed that both
cases involve the same parties and the same property.
Civil Case No. 5996 is an action for injunction filed by
171
at the public auction. Clearly, the rights asserted and the accounting. When private respondent dishonored the
reliefs sought by the parties in both cases are not identical. request, petitioner sued the former for accounting,
Thus, respondents claim of litis pendentia is unavailing. alleging that the two deeds did not express their true
In Tan Soo Huat vs. Ongwico, we ruled that once intent, the transaction being one of an equitable mortgage
a mortgaged estate is extrajudicially sold, and is not and not an absolute sale.
redeemed within the reglementary period, no separate The trial court ordered the instruments reformed
and independent action is necessary to obtain possession in the sense that the true agreement is one whereby
of the property. The purchaser at the public auction has private respondent, in consideration of the use of
only to file a petition for issuance of a writ of possession petitioner's properties until reimbursement, would
pursuant to Section 33 of Rule 39 of the Rules of Court. assume the latter's debts. The Court of Appeals affirmed
To give effect to the right of possession, the purchaser the decision, with the modification that petitioner "has
must invoke the aid of the court and ask for a writ or the right to reimburse"
possession without need of bringing a separate
independent suit for this purpose. Records show that title
to the property has been consolidated to petitioner DBP.
Thus, its petition for a writ of possession is in order.
Obviously, the RTC (Branch 47) erred when it
granted respondents motion to dismiss and recalled the
writ of possession it earlier issued. Where, as here, the
title is consolidated in the name of the mortgagee, the writ
of possession becomes a matter of right on the part of the
mortgagee, and it is a ministerial duty on the part of the
trial court to issue the same. The pendency of a separate
civil suit questioning the validity of the sale of the
mortgaged property cannot bar the issuance of the writ of
possession. The rule equally applies to separate civil suits
questioning the validity of the mortgage or its foreclosure
and the validity of the public auction sale.

Jose P. Dizon vs. Alfredo G. Gaborro (Substituted by

Pacita de Guzman Gaborro, as Judicial Administratrix
of the Estate of Alfredo G. Gaborro) & Development
Bank of the Philippines, G.R. No. L-36821, June 22,
1978 (83 SCRA 688)

Facts: Petitioner Dizon was the owner of 3 parcels of land.

He constituted a first mortgage lien in favor of the
Development Bank of the Philippines in order to secure a
loan in the sum of P38,000.00 and a second mortgage lien
in favor of the Philippine National Bank to secure his
indebtedness to said bank in the amount of
P93,831.91. Dizon himself executed the deed of sale in
favor of DBP.
After his properties were extrajudicially
foreclosed by DBP, but before the expiration of the
redemption period, petitioner Dizon met respondent
Gaborro. Petitioner executed a "Deed of Sale with
Assumption of Mortgage" in favor of the private
respondent, who in turn executed on the same day an
"Option to Purchase Real Estate" in favor of petitioner.
Thereafter, private respondent made several payments to
the mortgagees (DBP and PNB), took possession of,
cultivated, and paid taxes, on the land. Petitioner Dizon
also executed a document entitled Assignment of Right of
Redemption and Assumption of Obligation.
Two years later, petitioner offered to reimburse
what private respondent had paid to the mortgagee
without, however, tendering any cash, and demanded an
172
respondent at 8% per annum, which right shall be
exercised within one year from the finality of decision.
Issue: Whether a contract denominated as a sale which is
actually a contract for the use of land in the nature of an
antichresis can be reformed to convey the true intention of
the parties.
Held: Yes. Affirmed.
title and ownership of the properties by virtue of the Deed
of Sale With Assumption of Mortgage earlier executed
between them which We have ruled out as an absolute
sale. The only legal effect of this Option Deed is the grant
to petitioner the right to recover the properties upon
reimbursing respondent Gaborro of the total sums of
money that the latter may have paid to DBP and PNB
on account of the mortgage debts, the said right to be
exercised within the stipulated 5 years period.

Ratio: A judgment debtor, whose property is levied on

execution, may transfer his right of redemption to any one
whom he may desire. The right to redeem land sold under
execution within 12 months is a property right and may
be sold voluntarily by its owner and may also be attached
and sold under execution. Upon foreclosure and sale, the
purchaser is entitled to a certificate of sale executed by the
sheriff. (Section 27, Revised Rules of Court) After the
termination of the period of redemption and no
redemption having been made, the purchaser is entitled to
a deed of conveyance and to the possession of the
properties. (Section 35, Revised Rules of Court). The
weight of authority is to the effect that the purchaser of
land sold at public auction under a writ of execution only
has an inchoate right in the property, subject to be
defeated and terminated within the period of 12 months
from the date of sale, by a redemption on the part of the
owner. Therefore, the judgment debtor in possession of
the property is entitled to remain therein during the
period allowed for redemption.
In the case before Us, after the extrajudicial
foreclosure and sale of his properties, petitioner Dizon
retained the right to redeem the lands, the possession, use
and enjoyment of the same during the period of
redemption. And these are the only rights that Dizon
could legally transfer, cede and convey unto respondent
Gaborro under the instrument captioned Deed of Sale
with Assumption of Mortgage, likewise the same rights
that said respondent could acquire in consideration of the
latter's promise to pay and assume the loan of petitioner
Dizon with DBP and PNB.
Such an instrument cannot be legally considered
a real and unconditional sale of the parcels of land, firstly,
because there was absolutely no money consideration
therefor, as admittedly stipulated, the sum of P131,831.91
mentioned in the document as the consideration "receipt
of which was acknowledged" was not actually paid; and
secondly, because the properties had already been
previously sold by the sheriff at the foreclosure sale,
thereby divesting the petitioner of his full right as owner
thereof to dispose and sell the lands.
In legal consequence thereby, respondent
Gaborro as transferee of these certain limited rights or
interests, cannot grant to petitioner Dizon more than said
rights, such as the option to purchase the lands as
stipulated in the document called Option to Purchase Real
Estate. This is necessarily so for the reason that
respondent Gaborro did not purchase or acquire the full
173
 In the light of the foreclosure proceedings and (108 Phil 927)
sale of the properties, a legal point of primary importance
here, as well as other relevant facts and circumstances, Facts: On August 8, 1938, Perfecto Adrid and his wife
We agree with the findings of the trial and appellate Carmen Silangcruz, then owners of a lot in San Francisco
courts that the true intention of the parties is that Malabon Estate Subdivision, situated in General Trias,
respondent Gaborro would assume and pay the Cavite, executed a document entitled "Sale with Right to
indebtedness of petitioner Dizon to DBP and PNB, and in Repurchase", purporting to sell the lot to Eugenio Morga
consideration therefor, respondent Gaborro was given the for the sum of P2,000 with the right to repurchase the
possession, the enjoyment and use of the lands until same within two years for the same sum of P2,000, plus
petitioner can reimburse fully the respondent the 12% interest per annum. The vendors never repurchased
amounts paid by the latter to DBP and PNB, to accomplish the lot. But in 1956, Perfecto Adrid and his son, brought
the following ends: (a) payment of the bank obligations; the present action against the administratrix of the
(b) make the lands productive for the benefit of the deceased Eugenio Morga to recover the same lot and
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 innominate
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 when, there having been a meeting of the
minds of the parties to a contract, their true intention is
not expressed in the instrument purporting to embody the
agreement, and one of the parties 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 terms and
stipulations used therein.
On the issue of the accounting of the fruits,
harvests and other income received from the three parcels
of land from October 6, 1959 up to the present, prayed and
demanded by Dizon of Gaborro or the Judicial
Administratrix of the latter's estate, We hold that in
fairness and equity and in the interests of justice that since
We have ruled out the obligation of petitioner Dizon to
reimburse respondent Gaborro of any interests and land
taxes that have accrued or been paid by the latter on the
loans of Dizon with DBP and PNB, petitioner Dizon in turn
is not entitled to an accounting of the fruits, harvests and
other income received by respondent Gaborro from the
lands, for certainly, petitioner cannot have both benefits
and the two may be said to offset each other.

Perfecto Adrid, et al. vs. Rosario Morga, etc., and

Mamerto Morga, et al., G.R. No. L-13299, July 25, 1960
174
asking for accounting of all the produce of the lot since
1938, this on the theory that the original contract of sale
with pacto de retro was by acts of the parties to the said
contract, converted into one of antichresis. The lower
court upheld the pacto de retro sale.
Issue: Whether a pacto de retro sale or an equitable
mortgage is converted into an antichresis because the
vendee or mortgagee took possession of the land.
Held: No. Reversed.
Tavera-Luna, Inc., obtained a loan of P1,000,000 from El
Hogar Filipino, Inc., for the purpose of constructing the
Crystal Arcade building on its premises at Escolta, Manila.
To secure this loan, the corporation executed a first
mortgage on said premises and on the building proposed
to be erected thereon. On February 11, 1932, Tavera-
Luna, Inc., secured from El Hogar Filipino an additional
loan of P300,000 with the same security executed for the
original loan. The Tavera-Luna, Inc., thereafter, defaulted
in the payment of the monthly amortizations on the loan;
whereupon, El Hogar Filipino foreclosed the mortgage
and proceeded with the

Ratio: The intention of the parties was merely for

Perfecto and his wife Carmen to borrow the sum of
P2,000 from Eugenio Morga, Lot No. 550 being given as
security. In other words, we have here a clear case of
equitable mortgage. Otherwise, there would be no reason
for the agreement made for the payment of 12% interest
per annum. This interest must refer to the use of P2,000
by the alleged vendors until the same shall have been paid
to Eugenio. The parties to the contract must have
contemplated the lot remaining in the possession of the
vendors inasmuch as it was considered a mere
security. However, after the execution of the contract, the
creditor, Morga according to the contention of the
plaintiff, decided to take possession of the land, pending
payment of the loan, finding it financially advantageous
to receive the products thereof, valued at P300.00 a
year, in lieu of the payment of interest at 12% a year,
which would only be P240.00. But this did not convert, as
contended by plaintiffs, the contract from a sale with pacto
de retro to that of antichresis.
The contention of plaintiffs that although the
original contract was one of sale with right to
repurchase, it was converted into one of antichresis just
because the vendee took possession of the land, is
clearly untenable. There is nothing in the document,
Exhibit A, nor in the acts of the parties subsequent to
its execution to show that the parties had entered into a
contract of antichresis. In the case of Alojado vs. Lim
Siongco,
51 Phil., 339, 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.

Carlos Pardo de Tavera & Carmen Pardo de

Tavera Manzano vs. El Hogar
Filipino, Inc., Tavera-Luna Inc., Vicente Madrigal,
G.R. No. 45963, October 12,
1939 (68 Phil 712)

Facts: On January 17, 1931, defendant corporation,

175
of extra-judicial sale of the Crystal Arcade building. One
day before the expiration of the period of redemption,
Carlos Y. Pardo de Tavera and Carmen Pardo de Tavera
Manzano, in their capacity as stockholders of the
Tavera-Luna, Inc., instituted the present action against
Tavera-Luna, Inc., and El Hogar Filipino, Inc., to annul the
two secured loans as well as the extra-judicial sale. The
complaint was dismissed.
Issue: Whether stipulations in a contract of anthichresis
for the extrajudicial foreclosure of the security may be
allowed.
the properties now in question were levied upon as
personalty by the sheriff. No third party claim was filed
for such properties at the time of the sales thereof as is
borne out by the record made by the plaintiff herein.
Indeed the bidder, which was the plaintiff in that action,
and the defendant herein having consummated the sale,
proceeded to take possession of the machinery and other
properties described in the corresponding certificates of
sale executed in its favor by the sheriff of Davao.

Held: Yes. Affirmed.

Ratio: 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 loans, 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.
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.

Davao Saw Mill Co., Inc. vs. Aproniano G. Castillo &

Davao Light & Power Co., Inc., G.R. No. 40411, August
7, 1935 (61 Phil 709)

Facts: The Davao Saw Mill Co., Inc. is the holder of a

lumber concession from the Government of the Philippine
Islands. However, the land upon which the business was
conducted belonged to another person. On the land, the
sawmill company erected a building which housed the
machinery used by it. Some of the implements thus used
were clearly personal property. The conflict concerns
machines which were placed and mounted on foundations
of cement. The contract between the sawmill company
and the owner of the land explicity provides that all
improvements and buildings introduced to and erected on
the land will pass to the owner upon the expiration of the
lease, except machineries and accessories.
In another action, wherein the Davao Light &
Power Co., Inc., was the plaintiff and the Davao Saw Mill
Co., Inc., was the defendant, a judgment was rendered in
favor of the plaintiff in that action against the defendant
in that action; a writ of execution issued thereon, and
176
 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.
One of such persons is the appellee by assignment from
the original mortgagees.
Davao Saw Mill Co., Inc. filed a case against Davao
Light & Power Co., Inc. to recover the properties
executed upon on the claim that such properties were
real properties that were attached to the land and are
exempt from execution. The lower court ruled that the
properties were personal properties and dismissed the
case.
installed, and any and all replacements, substitutions,
additions, increases and accretions to the above
properties. PBCom granted a second loan of P3.356M to
Evertex which was secured by a Chattel Mortgage over
personal properties enumerated in a list attached thereto.
After the date of the execution of the 2 nd
mortgage, Evertex purchased various marchineries and
equipment.
Due to business reverses, Evertex filed for
insolvency, and the court declared it insolvent. Upon
failure of Evertex to pay, PBCom commenced extrajudicial
foreclosure

Issue: Whether machineries which are immobilized by a

tenant are real properties.

Held: No. Affirmed.

Ratio: In the first place, it must again be pointed out that

the appellant should have registered its protest before or
at the time of the sale of this property. It must further be
pointed out that while not conclusive, the characterization
of the property as chattels by the appellant is indicative of
intention and impresses upon the property the character
determined by the parties. In this connection the decision
of this court in the case of Standard Oil Co. of New York vs.
Jaramillo ([1923], 44 Phil., 630), whether obiter dicta or
not, furnishes the key to such a situation.
It is machinery which is involved in this case;
moreover, machinery not intended by the owner of any
building or land for use in connection therewith, but
intended by a lessee for use in a building erected on the
land by the latter to be returned to the lessee on the
expiration or abandonment of the lease. A similar
question arose in Puerto Rico, and on appeal being taken
to the United States Supreme Court, it was held that
machinery which is movable in its nature only becomes
immobilized when placed in a plant by the owner of the
property or plant, but not when so placed by a tenant, a
usufructuary, or any person having only a temporary right,
unless such person acted as the agent of the owner.

Ruby L. Tsai vs. CA, Ever Textile Mills, Inc. &

Mamerto R. Villaluz, G.R. No.
120098, October 2, 2001
Philippine Bank of Communications vs. CA, Ever
Textile Mills & Mamerto R. Villaluz, G.R. No. 120109,
October 2, 2001 (366 SCRA 324)

Facts: Ever Textile Mills obtained a P3M loan from

PBCom. As security for the loan, Evertex executed a
deed of Real and Chattel Mortgage over the lot where
its factory stands and the chattels located therein as
enumerated in a schedule attached to the mortgage
contract. The mortgage covered the land, all buildings and
improvements now existing or hereafter to exist,
machineries and equipment situated, located, or
177
under Act 3135. The properties were sold in public
auction, and PBCom was the highest bidder. PBCom
consolidated its ownership over the properties and sold
these to Tsai.
Evertex filed a complaint for annulment of sale
and reconveyance on the ground that the extrajudicial
foreclosure was a violation of the Insolvency Law. The
RTC found the lease and sale of the properties illegal and
irregular. CA affirmed.
Issue: Whether properties acquired after the execution
of the chattel mortgage are covered by the chattel
mortgage. Whether immovables can be treated as
movables for purposes of executing a chattel mortgage.
only the property described therein and not like or
substituted property thereafter acquired by the
mortgagor and placed in the same depository as the
property originally mortgaged, anything in the
mortgage to the contrary notwithstanding. And, since
the disputed machineries were acquired in 1981 and could
not have been involved in the 1975 or 1979 chattel
mortgages, it was consequently an error on the part of
the Sheriff to include subject machineries with the
properties enumerated in said chattel mortgages.

Held: No. Yes. Affirmed.

Ratio: Petitioners contend that the nature of the disputed

machineries, i.e., that they were heavy, bolted or
cemented on the real property mortgaged by EVERTEX
to PBCom, make them ipso facto immovable under Article
415 (3) and (5) of the New Civil Code. This assertion,
however, does not settle the issue. Mere nuts and bolts
do not foreclose the controversy. We have to look at the
parties intent. While it is true that the controverted
properties appear to be immobile, a perusal of the
contract of Real and Chattel Mortgage executed by the
parties herein gives us a contrary indication. In the case
at bar, both the trial and the appellate courts reached the
same finding that the true intention of PBCOM and the
owner, EVERTEX, is to treat machinery and equipment as
chattels. Too, assuming arguendo that the properties
in question are immovable by nature, nothing detracts
the parties from treating it as chattels to secure an
obligation under the principle of estoppel. As far back as
Navarro v. Pineda, 9 SCRA 631 (1963), an immovable may
be considered a personal property if there is a stipulation
as when it is used as security in the payment of an
obligation where a chattel mortgage is executed over it,
as in the case at bar.
In the instant case, the parties herein: (1)
executed a contract styled as Real Estate Mortgage and
Chattel Mortgage, instead of just Real Estate Mortgage if
indeed their intention is to treat all properties included
therein as immovable, and (2) attached to the said
contract a separate LIST OF MACHINERIES &
EQUIPMENT. These facts, taken together, evince the
conclusion that the parties intention is to treat these units
of machinery as chattels. A fortiori, the contested after-
acquired properties, which are of the same description as
the units enumerated under the title LIST OF
MACHINERIES & EQUIPMENT, must also be treated as
chattels.
Inasmuch as the subject mortgages were
intended by the parties to involve chattels, insofar as
equipment and machinery were concerned, the Chattel
Mortgage Law applies, which provides in Section 7 thereof
that: a chattel mortgage shall be deemed to cover
178
 As the auction sale of the subject properties to
PBCom is void, no valid title passed in its favor.
Consequently, the sale thereof to Tsai is also a nullity
under the elementary principle of nemo dat quod non
habet, one cannot give what one does not have.
ACME Shoe Rubber & Plastic Corporation & Chua Pac
vs. CA, Producers Bank of the Philippines & Regional
Sheriff of Caloocan City, G.R. No. 103576, August 22,
1996 (260 SCRA 714)
encumbering the real property covered thereby; and in
antichresis, by a written instrument granting to the
creditor the right to receive the fruits of an immovable
property with the obligation to apply such fruits to the
payment of interest, if owing, and thereafter to the
principal of his credit upon the essential condition
that if the principal obligation becomes due and the debtor
defaults, then the property encumbered can be alienated
for the payment of the obligation, but that should

Facts: Chua Pac, the president and general manager of

ACME executed, for and in behalf of the company, a
chattel mortgage in favor of Producers Bank of the
Philippines. The mortgage stood by way of security for
petitioner's corporate loan of three million pesos
(P3,000,000). The mortgage provided that it shall stand
as security for said obligations and any and all other
obligations of the MORTGAGOR to the MORTGAGEE
of whatever kind and nature, whether such obligations
have been contracted before, during or after the
constitution of this mortgage.
In due time, ACME was able to pay the loan.
Subsequently, in 1981, the company obtained from the
bank additional financial accommodations totaling
P2.7M. These borrowings were also paid on due date. In
January 1984, the bank yet again extended to the
corporation a loan of P1M, but this was not paid. The
bank thereupon applied for an extrajudicial foreclosure of
the chattel mortgage. ACME was prompted to file an
action for injunction.
The court dismissed the action and ordered
the foreclosure of the chattel mortgage. CA affirmed.
The petition before the SC was originally denied
for having been insufficient in form and substance. Its
motion for reconsideration was denied, but its 2 nd
motion for reconsideration was granted and the petition
was reinstated.

Issue: Whether a clause in a chattel mortgage that

purports to likewise extend its coverage to obligations
yet to be contracted or incurred is valid and effective.

Held: No. Reversed.

Ratio: Contracts of security are either personal or real. In

contracts of personal security, such as a guaranty or a
suretyship, the faithful performance of the obligation by
the principal debtor is secured by the personal
commitment of another (the guarantor or surety). In
contracts of real security, such as a pledge, a mortgage or
an antichresis, that fulfillment is secured by an
encumbrance of property - in pledge, the placing of
movable property in the possession of the creditor; in
chattel mortgage, by the execution of the corresponding
deed substantially in the form prescribed by law; in real
estate mortgage, by the execution of a public instrument
179
the obligation be duly paid, then the contract is entered into an agreement whereby the Jacas may
automatically extinguished proceeding from the accessory secure, by way of advances, either cash or materials,
character of the agreement. As the law so puts it, once the foodstuffs, and or equipment from the company. The
obligation is complied with, then the contract of security payment of such account was to be made either in cash
becomes, ipso facto, null and void. and/or by the Jacas turning over all the logs that they
While a pledge, real estate mortgage, or produce in the aforesaid concession to the company.
antichresis may exceptionally secure after-incurred While the aforesaid business relationship between the
obligations so long as these future debts are parties was subsisting, the company made Urbano Jaca
accurately described, a chattel mortgage, however, can execute in its favor a chattel mortgage, a copy of which
only cover obligations existing at the time the instrument, however, was never furnished to the
mortgage is constituted. Although a promise expressed Jacas. Urbano Jaca executed assignments of letters of
in a chattel mortgage to include debts that are yet to be credit in favor of the company, in order that the latter
contracted can be a binding commitment that can be may be able to use, as it did use, the said letters of credit
compelled upon, the security itself, however, does not for bank negotiations of the former in
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 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.

Urbano Jaca & Bonifacio Jaca vs. Davao Lumber

Company & Honorable Manases
Reyes, as Judge of the CFI of Davao, G.R. No. L-25771,
March 29, 1982 (113 SCRA
107)

Facts: Urbano Jaca is a licensee of a logging concession in

Davao, together with Bonifacio Jaca. They are engaged in
the logging business of producing timber and logs for
export and/or domestic purposes. Davao Lumber
Company is a business corporation with which plaintiffs
had business dealings covering the sale and/or
exportation of their logs. Sometime in 1954, the parties
180
the exportation of logs. The business relationship of the submitted by Estanislao R. Lagman, the commissioner
parties continued from 1954 up to August 1963. appointed by the court. This report was assailed by the
The Jacas made repeated demands on the petitioners as null and void in a motion to strike out the
company for a formal accounting of their business report from the records of the case.
relationship from 1954 up to August, 1963, but the The reasons stated in the order of execution
company failed and refused, and still fails and refuses, to pending appeal are not well founded. The first reason
effect such formal accounting, asserting that it had no stated in the order was the consistent refusal of petitioner
time as yet to examine into all the details of the accounting. to deliver the mortgaged chattels to the receiver. The
Sometime on October 30, records disclose that respondent Davao Lumber Company
1963, much to their surprise, the Jacas received letters of is not even entitled to the appointment of a receiver. It
demand from the company in which they were requested is an established rule
to pay their allegedly overdue accounts.
The Jacas filed this case in order to compel the
company to have a formal accounting between them.
Davao Lumber Company filed its Answer with
Affirmative Defenses and Counterclaim. In its
counterclaim, the Davao Lumber Company alleged that
Plaintiffs Urbano Jaca and Bonifacio Jaca are the ones
indebted to the defendant in the sum of P756,236.52 and
P91,651.97, respectively. The company also alleged that
Urbano Jaca executed a chattel mortgage in favor of the
defendant to secure the payment of any and all obligations
contracted by him in favor of the defendant covering
several chattels valued at P532,000.
The lower court dismissed the complaint and
granted the counterclaim. A motion pending appeal was
granted. The Jacas are questioning the execution

Issue: Whether a chattel mortgage that secures any and

all obligations hereinbefore and hereinafter contracted is
void.

Held: Yes. Reversed.

Ratio: As provided in Sec. 2, Rule 39 of the New Rules of

Court, the existence of good reasons is what confers
discretionary power on a court of first instance to issue a
writ of execution pending appeal. The reasons allowing
execution must constitute superior circumstances
demanding urgency which will outweigh the injury or
damage should the losing party secure a reversal of the
judgment on appeal. The decision in Civil Case No.
4189 requires petitioners to pay the enormous amount of
P867,887.52. Clearly, premature execution of said decision
will result in irreparable damage to petitioners as the
collection of said amount may be enforced through the
seizure of money and/or sale of properties used in the
logging business of petitioners. In other words, execution
of the decision in Civil Case No. 4189 may result in the
termination of petitioner's business. Thus, any damage to
the petitioners brought about by the premature execution
of the decision will be justified only upon a finding that
the appeal is being taken only for the purpose of delay
and of rendering the judgment nugatory. The facts of
record show that the petitioner's appeal is not frivolous
and not intended for delay. The findings of the respondent
judge that the petitioners are indebted to the respondent
Davao Lumber Company are based solely on the report
181
that the applicant for receivership must have an actual The lower court granted the claims, and set an
and existing interest in the property for which a receiver order of preference. Some of the claimants appealed the
is sought to be appointed. The Davao Lumber Company's order of preference.
proof of interest in the property is the deed of chattel
mortgage executed by Urbano Jaca in favor of the Davao Issue: Whether the failure to present the document of
Lumber Company on January 24, 1961. This deed of Chattel Mortgage will prevent the mortgagee from getting
chattel mortgage is void because it provides that the preference. Whether a chattel mortgage is valid between
security stated therein is for the payment of any and the parties even though it was not notarized and it
all obligations herein before contracted and which contained no affidavit of good faith.
may hereafter be contracted by the Mortgagor in favor
of the Mortgagee. In the case of Belgian Catholic
Missionaries vs. Magallanes Press this Court held that 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. Where the statute provides that the
parties to a chattel mortgage must make oath that
the debt is a just debt, honestly due and owing
from the mortgagor to the mortgagee, it is obvious
that a valid mortgage cannot be made to secure a debt
to be thereafter contracted.
The second reason stated was the fact that petitioner
Urbano Jaca violated Article
319 of the Revised Penal Code by selling to a certain
Teodoro Alagon some of the mortgaged properties. As
already discussed, the deed of chattel mortgage executed
by Urbano Jaca in favor of the Davao Lumber Company is
void. Hence, petitioner Urbano Jaca could not have violated
Article 319 of the Revised Penal Code. Moreover, the
respondent Davao Lumber Company has not
successfully refuted the allegation of the petitioners that
the sale of the wrecker to Teodoro Alagon, was exclusively
negotiated by the lumber company's managing partner,
Tian Se, and that the latter caused Urbano Jaca to sign the
deed of sale because he was the owner of the wrecker.
The third reason stated is the fact that petitioners
have no properties and assets to satisfy the judgment. The
basis of respondent judge's conclusion that petitioners do
not have sufficient assets is an unsubstantiated allegation
in the motion for execution pending appeal of respondent
lumber company.

Aleko E. Lilius, for himself and as guardian ad litem of

his minor child, Brita Marianne Lilius, and Sonja Maria
Lilius vs. Manila Railroad Company, Laura Lindley
Shuman, Manila Wine Merchants, Ltd., BPI & Manila
Motor Co., Inc., and W. H. Waterous, M. Marfori, John R.
Mcfie, Jr., Erlanger & Galinger, Inc., Philippine
Education Co., Inc. Hamilton Brown Shoe Co., Estrella
Del Norte & Eastern & Philippine Shipping Agencies,
Ltd., G.R. No. 42551, September 4, 1935 (62 Phil 56)

Facts: There was a train accident. A case was filed

involving 28 claimants. Among the claimants were the
doctors who treated victims, the victims, the owners of
damaged goods, and the creditors. One creditor, the
Manila Motor Co., Inc., executed a Chattel Mortgage
which, however, was not registered.
182
 appears in a public document. If the Manila Motor Co.,
Held: Yes. Yes. Affirmed. Inc., desired to rely upon a public document in the form of
a mortgage as establishing its preference in this case, it
Ratio: Manila Motor Co., Inc. has not proven that its should have offered that document in evidence, so that the
credit is evidenced by a public document within the court might satisfy itself as to its nature and
meaning of article 1924 of the Civil Code. The only unquestionably fix the date of its execution. There is
evidence offered by the Manila Motor Co., Inc., in support nothing either in the judgment relied upon or in the
of its claim of preference against the fund of Aleko E. Lilius evidence to show the date of said mortgage. The burden
was a certified copy of its judgment against him in civil was upon the claimant to prove that it actually had a
case No. public instrument within the meaning of article 1924 of
41159 of the Court of First Instance of Manila, together the Civil Code. It is essential that the nature and the date
with a certified copy of the writ of execution and the of the document be established by competent evidence
garnishment issued by virtue of said judgment. These before the court can allow a preference as against the
documents appear in the record. The alleged public other parties to this proceeding. Inasmuch as
document evidencing its claim was not offered in evidence
and counsel of the Manila Motor Co., Inc., merely stated at
the hearing in the lower court that its judgment was based
on a public document dated May 10, 1931. There is no
explanation as to why it was not presented as evidence.
Manila Motor Co., Inc. merely assume that its credit is
evidenced by a public document dated May 10, 1931,
because the court, in its judgment in said civil case No.
41159, refers to a mortgage appearing in the evidence in
that case as the basis of its judgment, without mentioning
the date of the execution of that exhibit. This reference in
said judgment to a mortgage is not competent or
satisfactory evidence as against third persons upon which
to base a finding that the Manila Motor Company's credit
is evidenced by a public document within the meaning of
article 1924 of the Civil Code. This court is not
authorized to make use of that judgment as a basis for its
findings of fact in this proceeding.
But even if the court is authorized to accept the
statement in that judgment as a basis for its finding of fact
in relation to this claim, still it would not establish the
claim of preference of the Manila Motor Co., Inc. Granting
that a mortgage existed between the Manila Motor Co.,
Inc., and Aleko E. Lilius, this does not warrant the
conclusion that the instrument evidencing that mortgage
is a public document entitled to preference under article
1924 of the Civil Code. Under section 5 of Act No. 1507 as
amended by Act No.
2496, a chattel mortgage does not have to be
acknowledged before a notary public. As against creditors
and subsequent encumbrancers, the law does require
an affidavit of good faith appended to the mortgage and
recorded with it. (See Giberson vs. A. N. Jureidini Bros., 44
Phil., 216, and Betita vs. Ganzon, 49 Phil., 87.) A chattel
mortgage may, however, be valid as between the
parties without such an affidavit of good faith. In 11
Corpus Juris, 482, the rule is expressly stated that as
between the parties and as to third persons who have no
rights against the mortgagor, no affidavit of good faith is
necessary. It will thus be seen that under the law, a valid
mortgage may exist between the parties without its being
evidenced by a public document. This court would not be
justified, merely from the reference by the lower court in
that case to a mortgage, in assuming that its date
183
the claimant failed to establish its preference, based on
a public document, the lower court properly held that its
claim against the said Aleko E. Lilius was based on the
final judgment in civil case No. 41159 of the Court of First
Instance of Manila of May 3, 1932. That court, therefore,
committed no error in holding that the claim of the Manila
Motor Co., Inc., was inferior in preference to those of the
appellees in this case.
Northern Motors, Inc. vs. Hon. Jorge R. Coquia,
etc., et al., Filinvest Credit
Corporation, G.R. No. L-40018, December 15, 1975 (68
SCRA 374)
of P2,000. To guarantee the payment of said sum, they
executed and delivered to the said Kilayko a chattel
mortgage covering machinery, crops and a number of
carabaos. To comply with their obligation, the
mortgagors had to deliver to the mortgagee (Kilayko) in
the city of Iloilo their entire crop of sugar for the years
1912-13. Finally, a liquidation was made and there was
found to be still due the mortgagee (Kilayko) the sum of
P650. The balance was sent to the mortgagee by a
representative of the mortgagors, Antonio Horrileno.
Upon delivery of

Facts: Northern Motors, Inc. has chattel mortgages over

several taxicabs owned by Manila Yellow Taxicab, Inc. It
foreclosed on these chattel mortgages. Honesto Ong, on
the other hand, is an assignee of an unsecured judgment
creditor of Manila Yellow Taxicab, Inc. and was able to levy
on the taxicabs.
Northern Motors is claiming to have a superior
lien over Honesto Ong. The Supreme Court agreed. There
is now a motion for reconsideration of the Supreme Court
decision.

Issue: Whether a chattel mortgage lien is superior to an

execution levy. Whether registration of a chattel
mortgage is an effective and binding notice to a
judgment creditor.

Held: Yes. Yes. MFR Denied.

Ratio: Ong has no right to levy upon the mortgaged

taxicabs. He could have levied only upon the mortgagors
equity of redemption. The essence of the chattel mortgage
is that the mortgaged chattels should answer for the
mortgage credit and not for the judgment credit of the
mortgagors unsecured creditor. The mortgagee is not
obligated to file an independent action for the
enforcement of his credit. To require him to do so would
be a nullification of his lien and would defeat the purpose
of the chattel mortgage which is to give him preference
over the mortgaged chattels fro the satisfaction of his
credit.
Ongs theory that Manila Yellow Taxicabs breach
of the chattel mortgage should not affect him because he
is not privy of such contract is untenable. The
registration of the chattel mortgage is an effective and
binding notice to him of its existence. The mortgage
creates a real right or a lien which, being recorded, follows
the chattel wherever it goes.

Jose Sison & Emilio Sison vs. F.M. Yap Tico &
Amando Avancea, provincial sheriff of Iloilo, G.R. No.
L-11583, February 8, 1918 (37 Phil 584)

Facts: The Sisons borrowed from Eugenio Kilayko the sum

184
the sum on or about May 14, 1914, Kilayko executed and actual, and the recording of the assignment, there being
delivered a cancellation of said mortgage. no law requiring the same, will not operate as constructive
It turns out Kilayko assigned and transferred notice to the debtor.
said mortgage to F.M. Yap Tico. The assignment and
transfer were duly registered upon the 14th day of Carson, concurring: I accept the ruling of the majority,
April, 1913, nearly one year after the transfer had been but I cannot give my assent to the dictum of the principal
made. The cancellation of said mortgage as above opinion to the effect that "if the law does not require a
indicated was duly registered on the 19th day of particular instrument to be recorded or registered, the
December, 1914. Neither Kilayko nor Yap Tico gave notice recording of the instrument will not be constructive notice
to the Sisons that said mortgage had been transferred. of its existence to any one." As I read them, none of the
Yap Tico proceeded to foreclose the mortgage. cases or
The sheriff attached and took possession of all the
property which said mortgage covered. This action was
brought for the purpose of recovering the property,
together with damages caused by said alleged illegal
attachment.
The lower court ruled for Yap Tico and relieved him of all
liability.

Issue: Whether the registration of the assignment of

chattel mortgage operates as notice to the mortgagors.

Held: No. Reversed.

Ratio: The question, whether or not the registration of the

assignment operated as notice, ipso facto, to the
mortgagors, we are inclined to answer in the negative,
for the reason that the law does not require such
assignments to be recorded. While such assignments may
be recorded, the law is permissible and not mandatory.
The filing and recording of an instrument in the office of
the registrar, when the law does not require such filing
and recording, does not constitute notice to the parties.
(Burck vs. Taylor, 152 U.S., 634; 5
Corpus Juris, 934.)
The debtor or party liable on contracts like the
one is question is not affected by the assignment until he
has notice thereof, and consequently he may set up
against the claim of the assignee any defense acquired
before notice that would avail him against the assignor had
there been no assignment, and payment by the debtor to
the assignor, or any compromise or release of the assigned
claim by the latter before notice will be valid against the
assignee and discharge the debtor. (Vanbuskirk vs.
Hartford Fire Insurance Co., 14 Conn. 141; Clodfelter vs.
Cox, 1 Sneed [Tenn.], 330; 60 Am. Dec., 157; Johnston vs.
Allen, 22 Fla., 224; Shields vs. Taylor & Tarpley, 25 Miss.,
13.)
It is generally held that if the law does not require
a particular instrument to be recorded or registered, the
recording of that instrument will not be constructive
notice of its existence to anyone. (Burck vs. Taylor, 152
U.S., 634; Stewart vs. Kirkland, 19 Ala.,
162; Lambert vs. Morgan, 110 Md., 1; Dial vs. Inland
Logging Co., 52 Wash., 81.)
It seems to be clear, then, that a debtor is
protected if he pays his creditor without actual notice
that the debt has been assigned. Such notice must be
185
authorities cited in the principal opinion support that indebtedness paid directly to the mortgagee, it seems
proposition. The ratio decidendi of all these cases and clear that Yap Tico is estopped from demanding
authorities would seem to be that if the law does not repayment, because his own conduct was such as to lull
authorize or require a particular instrument to be any suspicion on the part of the debtor that the
recorded or registered, the recording of that instrument mortgagee indebtedness had been assigned to him, and
will be constructive notice of its existence to anyone. The to justify the debtor in the belief that so far as he, Yap
distinction between the two propositions in this Tico, was concerned there was no reason to suspect the
jurisdiction is vital. Our statute, though it does not require existence of the assignment or to search the records in
the registry of transfers of chattel mortgages, expressly order to ascertain in the true nature of Yap Tico's relations
authorizes and provides for the registry of such transfers. with the mortgagee. In truth, Yap Tico's willful silence and
(Sec. 15, "The Chattel Mortgage Law," Act No. 1508.) failure to give actual notice of the assignment under all the
Our statute does not require the registry of transfer of circumstances fairly justifies the inference of an intent to
chattel mortgages, but it expressly authorizes and defraud the mortgage debtor, and to take advantage of his
provides for their registry in the public records, and the lack of knowledge of his indebtedness twice over.
reasoning of all the authorities clearly indicate that
when such a transfer is actually recorded in the
manner and form provided by law, all persons, who
thereafter acquire an interest in the mortgage or the
mortgaged property, are charged with constructive notice
of the transfer.
It affirmatively appears that the transfer of the
mortgage from the mortgagee to the defendant, Yap Tico,
was made soon after the date of the execution of the
mortgage. that although Yap Tico recorded the transfer of
the mortgage, he thereafter held himself out to the
plaintiff (the mortgagor) as the agent of the mortgagee,
and did in fact act as the agent of the mortgagee for the
purpose of collecting payments upon the mortgage
indebtedness, which payments, as it appears, were turned
over to his principal, the mortgagee, or credited in his
account with Yap Tico; that he continued to hold himself
out as the agent of the mortgagee throughout the entire
course of these transactions, and as such agent accepted
on behalf of his principal a number of shipments of sugar,
delivered by the mortgagor on account of his mortgage
indebtedness and in strict compliance with the terms of
the mortgage instrument; that the mortgagor had no
actual notice of the transfer of the mortgage until after he
had paid the total amount of the mortgage indebtedness,
the last payment being made to the mortgage himself,
in total ignorance of the transfer of the mortgagee's
interest therein to the defendant, Yap Tico; and that it was
not until after the mortgage indebtedness had been paid in
full the mortgagee that the defendant Yap Tico gave actual
notice of the assignment of the mortgage, and demanded
payment of the full amount of the indebtedness.
In the light of these facts, Yap Tico cannot be
heard to demand payment of the mortgage indebtedness
on the ground that he is entitled thereto as the registered
assignee of the mortgage, and that payment to the
mortgagee did not extinguish the debt. By his own conduct
he is stopped from setting up such a claim. Having held
himself out to be the agent of the mortgagee and accepted
payment of the greater part of the indebtedness after the
date of the assignment, in the name of and in behalf of the
mortgagee, it is inconceivable that he should be permitted
to enforce payment of the amounts thus collected a
second time. And even as to the balance of the
186
 So, the boat was twice sold: first privately by its
Street, concurring: The Chattel Mortgage Law was owner Sy Qui to the defendant Florentino E. Rivera on
adopted by the Philippine Commission from the laws January 4, 1915, and afterwards by the sheriff at public
relative to registration prevailing in the States of the auction in conformity with the order contained in the
American Union; and the problem presented in the judgment rendered by the justice of the peace court, on
present case if therefore one arising upon the January 23 of the same year, against the Chinaman Sy Qui
interpretation of an Act applying the principles of that and in behalf of the plaintiff, Fausto Rubiso. It is
system to these Islands. It may be well to explain in a word undeniable that the defendant Rivera acquired by
that, according to the common-law ideas, registration is purchase the pilot boat Valentina on behalf of the plaintiff
merely a species of notice. The act of registering a Rubiso; but it is no less true that the sale of the vessel by
document is never necessary in order to give it legal effect Sy Qui to Florentino E. Rivera, on January 4, 1915, was
between the parties. The purpose of the Legislature in entered in the
providing a system of registration is to afford means of
publicity so that persons dealing with property may
search the records and thereby acquire security against
instruments the execution of which has not been revealed.
It is sometimes stated in the decisions that the
recording of a conveyance is notice to all the world,
but this is too broad; and the more accurate statement
is that the record imparts constructive notice to such
persons only as would have been entitled to
protection against the conveyance in case it had not
been recorded, or, in other words, to such persons as
are under a legal obligation to search for it. The
operation of the record is prospective and not
retrospective. It is only a subsequent conveyance
which defeats a prior unrecorded conveyance, and
therefore only persons who acquire their rights
subsequently to the registration can be said to be
charged with notice of a recorded conveyance.
Of course, it would have been competent for the
Legislature to declare that the registration of the transfer
of a mortgage should operate as constructive notice to
prior parties as well as subsequent purchasers; but we
have never seen any enacted law in which a rule so
sweeping has been declared. In the absence of such a
provision it is apparent that registration should be
considered prospective in its operation, as indicated in
the authorities already cited.

Fausto Rubiso & Bonifacio Gelito vs. Florentino E.

Rivera, G.R. No. L-11407, October 30, 1917 (37 Phil 72)

Facts: Valentina, a pilot boat, belonged to Gelito & Co.,

Bonifacio Gelito being a copartner thereof to the extent of
two-thirds, and the Chinaman Sy Qui, to that of one- third
of the value of said vessel. Bonifacio Gelito sold his share
to his copartner Sy Qui, through an instrument which was
registered in the office of the Collector of Customs. Sy Qui,
in turn, sold the boat to Florentino Rivera through a
deed executed on January 4,
1915 which was registered in the Bureau of Customs on
March 17, 1915.
A case was filed against Sy Qui by his
creditor, Fausto Rubiso, to enforce payment of a certain
sum of money. Rubiso acquired the vessel at an auction
sale on January 23, 1915, and the sale was recorded on
January 27, 1915.
187
customs registry only on March 17, 1915, while its
sale in public auction to Fausto Rubiso on the 23rd of
January of the same year, 1915, was recorded in the office
of the Collector of Customs on the 27th of the same
month, and in the commercial registry on the 4th of
March, following; that is, the sale on behalf of the
defendant Rivera was prior to that made at public auction
to Rubiso, but the registration of this latter sale was prior
by many days to the sale made to the defendant.
The lower court judge ordered Rivera to give
the boat to Rubiso. Rivera appealed.
rights of the two purchases, whichever of them first
registered his acquisition of the vessel in the one entitled
to enjoy the protection of the law, which considers him the
absolute owner of the purchased boat, an this latter to be
free of all encumbrance and all claims by strangers for,
pursuant to article 582 of the said code, after the bill
of the judicial sale at auction has been executed and
recorded in the commercial registry, all the other liabilities
of the vessel in favor of the creditors shall be considered
canceled.

Issue: Whether a prior registrant has better rights than a

prior buyer over a pilot boat.

Held: Yes. Affirmed.

Ratio: Article 573 of the Code of Commerce provides that

merchant vessels constitute property which may be
acquired and transferred by any of the means recognized
by law. The acquisition of a vessel must be included in a
written instrument, which shall not produce any effect
with regard to third persons if not recorded in the
commercial registry. So, inscription in the commercial
registry was indispensable, in order that said acquisition
might affect and produce consequences with respect to
third persons.
The requisite of registration on the registry, of the
purchase of a vessel, is necessary and indispensable in
order that the purchaser's rights may be maintained
against a claim filed by a third person. Such registration is
required both by the Code of Commerce and by Act No.
1900. The amendment solely consisted in charging the
Insular Collector of Customs, as at present, with the
fulfillment of the duties of the commercial register
concerning the registering of vessels; so that the
registration of a bill of sale of a vessel shall be made in
the office of the Insular Collector of Customs, who, since
May
18, 1909, has been performing the duties of the
commercial register in place of this latter official.
In view of said legal provisions, it is undeniable
that the defendant Florentino E. Rivera's rights cannot
prevail over those acquired by Fausto Rubiso in the
ownership of the pilot boat Valentina, inasmuch as,
though the latter's acquisition of the vessel at public
auction, on January 23, 1915, was subsequent to its
purchase by the defendant Rivera, nevertheless said sale
at public auction was antecedently record in the office of
the Collector of Customs, on January 27, and entered in
the commercial registry. An unnecessary proceeding-on
March 4th; while the private and voluntary purchase made
by Rivera on a prior date was not recorded in the office of
the Collector of Customs until many days afterwards, that
is, not until March 17, 1915.
The legal rule set down in the Mercantile Code
subsists, inasmuch as the amendment solely refers to the
official who shall make the entry; but, with respect to the
188
 The purchaser at public auction, Fausto Rubiso, possession shall prevail over a prior mortgage registered
who was careful to record his acquisition, opportunely under the Chattel Mortgage Law only, without annotation
and on prior date, has, according to the law, a better thereof in the Motor Vehicles Office.
right than the defendant Rivera who subsequently
recorded his purchase. The latter is a third person, Held: Yes. Affirmed.
who was directly affected by the registration which the
plaintiff made of the acquisition.
Ships or vessels, whether moved by steam or by
sail, partake, to a certain extent, of the nature and
conditions of real property, on account of their value and
importance in the world commerce; and for this reason
the provisions of article 573 of the Code of Commerce
are nearly identical with article 1473 of the Civil Code.

Olaf N. Borlough vs. Fortune Enterprises, Inc. & CA,

G.R. No. L-9451, March 29,
1957 (100 Phil 1063)

Facts: United Car Exchange sold to the Fortune

Enterprises, Inc. a Chevrolet car. The same car was sold
by the Fortune Enterprises, Inc. to one Salvador Aguinaldo
on installments. To secure the payment of this note,
Aguinaldo executed a deed of chattel mortgage over said
car. The deed was duly registered in the office of the
Register of Deeds of Manila. When Aguinaldo failed to pay,
a demand letter was sent to him.
It appears that the said car found its way again
to United Car Exchange which sold the car in cash to Mr.
Borlough. Borlough took possession of the vehicle from
the time he purchased it.
Fortune Enterprises, Inc. brought action against
Salvador Aguinaldo to recover the balance of the
purchase price. Borlough filed a third-party complaint,
claiming the vehicle. Thereupon, Fortune Enterprises, Inc.
amended its complaint, including Borlough as a defendant
and alleging that he was in connivance with Salvador
Aguinaldo and was unlawfully hiding and concealing the
vehicle in order to evade seizure by judicial process.
The vehicle was seized by the sheriff of Manila on
August 4, 1952 and was later sold at public auction. The
Court of First Instance rendered judgment in favor of
Borlough, and against plaintiff, ordering the latter to pay
Borlough the sum of P4,000, with interest at 6 per cent per
annum, from the date of the seizure of the car on August 4,
1952, and in addition thereto, attorney's fees in the sum of
P1,000.
The CA rendered judgment ordering that Emil B.
Fajardo pay Borlough P4,000 plus attorney's fees and that
plaintiff pay to Borlough any amount received by it in
excess of its credits and judicial expenses. The reason for
the modification of the judgment is that the mortgage was
superior, being prior in point of time, to whatever rights
may have been acquired by Borlough by reason of his
possession and by the registration of his title in the Motor
Vehicles Office.

Issue: Whether the sale of a car subsequently registered

with the Motor Vehicles Office coupled with actual
189
Ratio: While the question can be resolved by the general of his obligation. So, the said truck was taken by GAMI'S
principles found in the Civil Code and expressly stated in agents while the same was in the possession of Esguerra's
Article 559, there is no need of resorting thereto (the driver, Carlito Padua.
general principles) in view of the express provisions of the Esguerra filed a complaint to recover the truck.
Revised Motor Vehicles Law, which expressly and The lower court dismissed the complaint. The CA
specifically regulate the registration, sale or transfer and affirmed the decision, but took exception at the failure of
mortgage of motor vehicles. It is to be noted that under GAMI to sell the truck at a public auction. Due to this
section 4(b) of the Revised Motor Vehicles Law the Chief failure, attorneys fees and damages were awarded to
of the Motor Vehicles Office is required to enter or Esguerra.
record, among other things, transfers of motor vehicles
"with a view of making and keeping the same and each all
of them as accessible as possible to and for persons and
officers properly interested in the same," and to issue such
reasonable regulations governing the search and
examination of the documents and records as will be
consistent with their availability to the public and their
safe and secure preservation."
The Revised Motor Vehicles Law is a special
legislation enacted to "amend and compile the laws
relative to motor vehicles," whereas the Chattel Mortgage
Law is a general law covering mortgages of all kinds of
personal property The former is the latest attempt to
assemble and compile the motor vehicle laws of the
Philippines, all the earlier laws on the subject having been
found to be very deficient in form as well as in substance
(Villar and De Vega Revised Motor Vehicles Law, p. 1); it
had been designed primarily to control the registration
and operation of motor vehicles (section 2, Act No. 3992).
The recording provisions of the Revised Motor
Vehicles Law, therefore, are merely complementary to
those of the Chattel Mortgage Law. A mortgage in order
to affect third persons should not only be registered in
the Chattel Mortgage Registry, but the same should
also be recorded in the Motor Vehicles Office as
required by section 5(e) of the Revised Motor Vehicles
Law. And the failure of the respondent mortgagee to
report the mortgage executed in its favor had the
effect of making said mortgage ineffective against
Borlough, who had his purchase registered in the said
Motor Vehicles Office.

Montelibano Esguerra vs. CA, G.A. Machineries, Inc.,

Jose Tino & Manuel Dore, G.R. No. 40062, May 3, 1989
G.A. Machineries, Inc. vs. CA & Montelibano
Esguerra, G.R. No. 40102, May 3,
1989 (173 SCRA 1)

Facts: A Ford-Trader cargo truck was sold by GAMI to

Hilario-Lagmay and Bonifacio Masilungan. Subsequently,
the right to the same was bought by Montelibano
Esguerra, the latter assuming the unpaid purchase price of
P20,454.74. In so doing, Esguerra executed in favor of
GAMI a promissory note and a chattel mortgage over the
said truck. On February 20, 1966, Esguerra having
defaulted in his obligation and GAMI having granted his
request for extension, a new chattel mortgage and a
new promissory note were executed.
Esguerra was unable to comply with the terms
190
 These remedies have been recognized as alternative,
Issue: Whether the mortgagee-vendor of personal not cumulative, that the exercise of one would bar the
property sold on installment is legally obligated to exercise of the others. It may also be stated that the
foreclose the chattel mortgage and sell the chattel subject established rule is to the effect that the foreclosure
thereof at public auction in case the mortgagor-vendee and actual sale of a mortgaged chattel bars further
defaults in the payment of the agreed installments. recovery by the vendor of any balance on the
purchaser's outstanding obligation not so satisfied by
Held: Yes. Affirmed with modifications. the sale.
It will be observed, however, that the award of
Ratio: Esguerra admitted that he is in arrears in the exemplary damages is apparently unwarranted, there
payments of his account. Consequently, the mortgagee, being no showing that the mortgagee acted in a wanton,
under the above cited provision of the mortgage contract fraudulent,
has the option to foreclose the mortgage either judicially
or extrajudicially and in case of foreclosure, it was
expressly agreed by the parties that the mortgagee may
take the property outside the municipality or city where
the mortgagee may conveniently sell the same.
Both the trial court and the Court of Appeals
found that there was no forcible taking of the cargo truck.
Esguerra consented to the repossession of the truck or at
least did not make any objection thereto. He simply
requested that he be given a chance to settle the
account, which was evidently granted as on the following
day, June 14, 1966, appellant sent his wife with P500.00
with which to partially settle his account.
However, the respondent appellate court did not
err in holding that while the mortgagee can take
possession of the chattel, such taking did not amount
to the foreclosure of the mortgage. Otherwise stated, the
taking of Esguerra's truck without proceeding to the sale
of the same at public auction, but instead, appropriating
the same in payment of Esguerra's indebtedness, is not
lawful. As clearly stated in the chattel mortgage contract,
the express purpose of the taking of the mortgaged
property is to sell the same and/or foreclose the mortgage
constituted thereon either judicially or extrajudicially and
thereby, liquidate the indebtedness in accordance with law.
More than that, even if such automatic appropriation of
the cargo truck in question can be inferred from or be
contemplated under the aforesaid mortgage contract,
such stipulation would be pactum commissorium which
is expressly prohibited by Article 2088 of the Civil
Code and therefore, null and void.
Having opted to foreclose the chattel
mortgage, respondent GAMI can no longer cancel the
sale. The three remedies of the vendor in case the
vendee defaults, in a contract of sale of personal
property the price of which is payable in installment
under Article 1484 of the Civil Code, are alternative
and cannot be exercised simultaneously or
cumulatively by the vendor-creditor. Should the
vendee or purchaser of a personal property default
in the payment of two or more of the agreed
installments, the vendor or seller has the option to
avail of any one of these three remedies - either to
exact fulfillment by the purchaser of the obligation, or
to cancel the sale, or to foreclose the mortgage on the
purchased personal property, if one was constituted.
191
reckless or oppressive manner. It will be recalled, that
under the chattel mortgage contract, the mortgagee is
expressly authorized to sell the mortgaged property and
the mortgagee had already commenced foreclosure of the
chattel mortgage, but the sale presumably could not be
immediately made because of the request of the
mortgagor himself to give him a chance to settle his
account.
constitute only a pro tanto satisfaction of the
monetary award made by the court, and the Bank is
entitled to collect the balance.
Alberta B. Cabral & Renato Cabral vs. Teodora
Evangelista, & Juan N. Evangelista, & George L.
Tunaya, G.R. No. L-26860, July 30, 1969 (28 SCRA
1000)

Philippine National Bank vs. Manila Investment &

Construction, Inc. & Cipriano S. Allas, G.R. No. L-27132,
April 29, 1971 (38 SCRA 462)

Facts: A decision was rendered against Manila Investment

& Construction, Inc. to pay PNB a sum of money. In case of
non-payment of the amount, the decision provided for the
sale at public auction of the personal properties covered by
a chattel mortgage and for the disposition of the proceeds
in accordance with law.
Instead of having the mortgaged personal
properties sold at public auction, the parties agreed to
have them sold at a private sale. The proceeds were
applied to the partial satisfaction of the judgment.
5 years after the finality of the decision, PNB
revived the case to seek for the payment of the deficiency
amount. The court ruled for PNB.

Issue: Whether a private sale of mortgaged chattels may

be agreed upon by the parties. Whether a chattel
mortgagee may collect on the deficiency.

Held: Yes. Yes. Affirmed.

Ratio: While the decision ordered a public auction, there

is nothing illegal, immoral or against public order in an
agreement to have the mortgaged chattels sold in a private
sale. This agreement was entered into freely and
voluntarily. This is in line with the provisions of the
substantive law giving the contracting parties full freedom
to contract provided their agreement is not contrary to
law, morals, good customs, public order or public policy
(Art. 1306). As the disposition of the mortgaged
personalties in a private sale was by agreement between
the parties, it is clear that they are now in estoppel to
question it except on the ground of fraud or duress.
As for the argument that the bank is not
entitled to a deficiency judgment based on Art. 2115
NCC, it is clear from Art. 2141 NCC that the
provisions on pledge shall apply to chattel mortgage
only insofar as they are not counter to any provisions
of the Chattel Mortgage Law, otherwise the provisions
of the latter will not apply. The provisions of the
Chattel Mortgage with regard to the effects of the
foreclosure of a chattel mortgage are precisely
contrary to the provisions of Art.
2115 NCC. It is clear, therefore, that the proceeds of
the sale of the mortgaged personal properties
192
Facts: George Tunaya executed in favor of the Cabrals a faith, and without the least indication of fraud.
chattel mortgage covering a Morrison English piano and Article 559 CC which provides that If the
a Frigidaire General Motors Electric Stove with 4 burners possessor of a movable lost or of which the owner has
and double oven as security for payment of a been unlawfully deprived, has acquired it in good faith at a
promissory note. The chattel mortgage deed was duly public sale, the owner canot obtain its return without
inscribed in the Chattel Mortgage Register. reimbursing the price therefore has no application in
Meanwhile, the Evangelista spouses obtained a this case because the chattels were acquired subject to
final money judgment against Tunaya. They caused the the existing mortgage lien. The record shows that the
levy in execution on personal properties of Tunaya, Evangelistas disposed of the mortgaged chattels to
including the piano and stove. The properties levied on other persons at a discounted rate and, therefore,
were sold at public auction. appropriated the same as if
Subsequently, 8 months after the maturity of
Tunayas promissory note and his having defaulted in the
payment thereof, the Cabrals filed a complaint against
Tunaya and the Evangelista spouses. The city court
rendered judgment in favor of the Cabrals as against
Tunaya, but dismissed the case as against the
Evangelista spouses. The CFI upheld the superior rights
of the Cabrals as mortgage creditors to the personal
properties, holding that the Evangelistas, being
subsequent judgment creditors in another case, have only
the right of redemption. Tunaya and the spouses
Evangelista were found jointly and solidarily liable to pay
the Cabrals.

Issue: Whether a mortgagees action to sell foreclosed

mortgaged chattels after 30 days from breach of contract
is barred by prescription. Whether a purchaser of
mortgaged chattels in an execution sale has a superior
right over the mortgagee. Whether a judgment creditor
who levies on mortgaged properties can be held solidarily
liable with the mortgagor.

Held: No. No. Yes. Affirmed.

Ratio: A proper reading of Sec 14 of the Chattel

Mortgage Law (Act No. 1508) will show that the 30 day
period is the minimum period after violation of the
mortgage condition for the mortgage creditor to cause the
sale at public auction of the mortgaged chattels, with at
least 10 days notice to the mortgagor and posting of public
notice of the time, place & purpose of such sale. It is a
period of grace for the mortgagor, who has no right of
redemption after the sale is held, to discharge the
mortgage obligation. The prescription period for recovery
of movables for foreclosure purposes is 8 years, and here
the Cabrals had timely filed their action within 8 months
from the mortgage debtors default.
The purchasers of mortgaged chattels at the
execution sale and the delivery of the chattels to them with
a certificate of sale did not give them a superior right to the
chattels. The rules of court precisely provides that the sale
conveys to the purchaser all the right which the debtor
had in such property on the day the execution or
attachment was levied. The right of those who so acquire
said properties should not and cannot be superior to that
of the creditor who has in his favor an instrument of
mortgage executed with the formalities of the law, in good
193
the chattels were of their absolute ownership, in complete was not liable to be taken upon an execution directed
derogation of the Cabrals superior mortgage lien and in against Sibal. The sheriff, however, under indemnity from
disregard of the demand to them prior to the filing of the Valdez, retained the property and sold it in due course at
complaint to pay or exercise the right of redemption. an execution sale, Valdez becoming purchaser at the
The Evangelistas, by their act of disposing the mortgaged price of P500. Pursuant to this sale Valdez now took
chattels, whose value were admittedly more than possession, and Tizon filed this case to recover
adequate to secure the mortgage obligation, have thus possession of the property. The case was dismissed.
practically nullified the mortgagees superior right to
foreclose the mortgage and collect the amount due them. Issue: Whether a first mortgagee loses his priority once he
Considering the long period that has elapsed when the opts to have the property mortgaged attached and
mortgagees tried to enforce their claim and the executed upon, instead of foreclosed.
Evanglistas adamant resistance thereof and unjust
refusal to recognize the clearly superior right to the
chattels, which were admittedly disposed of without
lawful right to other unknown persons obviously to defeat
the mortgagees right over the same, justice and equity
justify the judgment holding the Evangelistas solidarily
liable for the amount due.

Domiciano Tizon vs. Emiliano J. Valdez & Luis

Morales, sheriff of the Province of
Tarlac, G.R. No. 24797, March 16, 1926 (48 Phil 910)

Facts: A steam engine and boiler were originally owned

by Leon Sibal, Sr. who mortgaged the properties to Valdez.
On October 7, 1920, this mortgage was filed in the office of
the register of the Province of Tarlac and was thereupon
duly registered in the registry of chattel mortgages. On
May 18, 1921, Sibal again mortgaged the same chattels to
Domiciano Tizon whose mortgage was likewise duly
registered in the chattel mortgage registry of Tarlac in
June, 1921.
When the stipulated date of payment arrived,
Sibal defaulted in the making of payment, and Valdez
thereupon instituted a civil action to recover the
indebtedness, in connection with which he sued out a writ
of attachment and on June 24, 1921, caused the same to
be levied upon the property which is the subject of this
action. The property, however, was not retained by the
attaching officer for the reason that Tizon gave a
counterbond. The court ruled in favor of Valdez, and
Valdez caused an execution to be issued, which, on April
24, 1924, was levied upon the property now in question,
being the same property included in Valdez's chattel
mortgage.
Meanwhile Domiciano Tizon, proceeding under
his own mortgage, had caused the sheriff to sell the same
property in a foreclosure proceeding conducted in
conformity with the provisions of the Chattel Mortgage
Law (Act No. 1508, sec. 14). The sale in these
proceedings was effected on June 28, 1923, Tizon
becoming purchaser for the consideration of P1,000. As
purchaser at his own foreclosure sale, Tizon assumed
possession of the property, and it was found in his
possession when the sheriff levied upon it by virtue of the
execution issued in the civil case. At the time this levy was
made, or soon thereafter, Tizon filed a claim with the
sheriff, asserting that the property belonged to him and
194
 a first mortgagee in possession attacked by the second
Held: No. Affirmed. mortgagee after foreclosure of the second mortgage; and a
little reflection will show, we think, that the second
Ratio: It is the settled doctrine of this court that a chattel mortgagee cannot prevail. After a first mortgage is
mortgage, though written in the form of a conditional executed there remains in the mortgagor a mere right
sale defeasible upon performance of a condition of redemption, and only this right passes to the second
subsequent, is really no more than a mere security for a mortgagee by virtue of the second mortgage. As between
debt and creates only a lien in favor of the creditor. the first and second mortgagees, therefore, the second
(Bachrach Motor Co. vs. Summers, 42 Phil., 3.) At the same mortgagee has at most only the right to redeem, and even
time a writ of execution in this jurisdiction reaches both when the second mortgagee goes through the formality of
legal and equitable interests, with the result that the an extrajudicial foreclosure, the purchaser acquires no
equity of redemption of the mortgagor will pass to the more than the right of redemption from the first
purchaser at an execution sale. The better rule, we think, mortgagee.
and the rule which is certainly more in accord with other
doctrines here prevailing is that announced by the
Supreme Court of Ohio in Green vs. Bass (83 Ohio St., 378;
Ann. Cas. [1912], 828). It was there declared that the
owner of a senior mortgage does not, by recovering a
judgment on the note which it secures and causing
execution to be levied on the mortgaged chattels, waive the
priority of his lien.
It is suggested that the suing out of an
attachment by Valdez at the beginning of his civil action
to recover upon the debt secured by his mortgage
introduces a vital difference; and attention is directed to
the fact that upon suing out an attachment under section
426 of the Code of Civil Procedure the creditor is
required to make oath that he has no other sufficient
security for the claim sought to be enforced by the
action. The making of such affidavit shows an election on
the part of the creditor, so it is contended, to waive the
mortgage lien. This argument in our opinion is not valid
for two reasons, first, because the creditor is not
required to state peremptorily under oath that he has
no other security at all but only that he has no
other sufficient security; and, secondly, because this
court has held that the provision which prohibits the
issuance of an attachment when there is other
sufficient security has no application where the
attachment is levied upon the property constituting
the security in an action to recover the debt so
secured. (Pepperell vs. Taylor, 5 Phil., 636.) From
whatever angle the matter be viewed we can discover
no sound reason for holding that either the suing out
of the attachment or the subsequent sale of the
property under execution had the effect of destroying
the prior mortgage lien, that is, as between the parties
to this lawsuit. What Valdez may have obtained by
purchasing at the execution sale, and whether he obtained
anything at all, is a different question, and one that is really
not necessary to be here decided. It is enough to say that
the first mortgage in favor of Valdez continues to subsist
unaffected by what happened as a result of the civil action.
If anybody had been misled to his prejudice as a
consequence of the course pursued by Valdez, this would
have constituted a ground of estoppel; but nothing of the
sort appears.
We have before us then the simple situation of
195
 The remedy of the plaintiff in this case must
therefore be limited to the right to redeem by paying off
the debt secured by the first mortgage. But the action is not
directed to this end, and in the controversy over the
title the purchaser at the foreclosure sale under the
second mortgage must fail. Valdez, as first mortgagee, even
supposing that he acquired nothing by his purchase at his
own execution sale, is yet entitled to possession for the
purpose at least of foreclosing his first mortgage
(Bachrach Motor Co. vs. Summers, 42 Phil., 3), the lien of
which, as we have already demonstrated, still subsists; and
since Valdez is entitled to possession Tizon cannot
maintain an action to recover the property.
vehicle with the alternative prayer for the payment of a
sum of money. A writ of replevin was issued. The
vehicle was found in the possession of Roberto Reyes
from whom it was seized. Summons could not be served
to the Manahans, so the lower court dismissed the action
for failure to prosecute. The order was recalled, but
summons still could not be served on the Manahans.
So, the trial court dismissed the case and ordered that
the vehicle be returned to Reyes. The CA affirmed.

Johns, Dissenting: The majority opinion holds that Valdez

has two liens on the same property, one being an
attachment, and the other a chattel mortgage lien. That
might be true as between Valdez and Sibal, but it cannot
be true as between Valdez and Tizon. When Valdez made
his affidavit for an attachment, in legal effect, he said: My
debt is not secured by any lien. It was necessary for
him to do that to procure the attachment. Having
made that affidavit and procured the attachment
of the property upon which he had a chattel
mortgage lien, he ought to be legally estopped to now
claim or assert that he did not have a chattel mortgage
lien.
In the authority cited in the majority opinion,
there was no attachment, and the property was seized
for the first time on execution. That is a very different
case. Again, the property in dispute is personal property,
from which, after a sale, there is no redemption; another
important item that is overlooked in the majority opinion.
It should be borne in mind that the property
involved in this case is personal property, for which there
is no legal right of redemption from a sale when made, and
that this is not an action between a mortgagor and a
mortgagee. Upon such a state of facts, the majority opinion
does not cite the decision of any court which sustains
the legal principles which it lays down. Under it, at the
time the property was sold by Tizon on his chattel
mortgage, Valdez had two liens on the same property, one
under his chattel mortgage, and the other by his
attachment, which was secured by his affidavit to the
effect that he did not have a chattel mortgage lien. That is
not good law.

BA Finance Corporation vs. CA & Roberto Reyes, G.R.

No. 102998, July 5, 1996 (258 SCRA 102)

Facts: The spouses Reynaldo and Florencia Manahan

executed a promissory note binding themselves to pay
Carmasters, Inc. the amount of P83,080. To secure
payment, the Manahan spouses executed a deed of chattel
mortgage over a motor vehicle, a Ford Cortina.
When the Manahans failed to pay, demand
letters were sent which went unheeded. A complaint
for replevin was filed praying for the recovery of the
196
 be in, nor entitled to the possession of the property unless
Issue: Whether a mortgagee can maintain an action for and until the mortgagor defaults and the mortgagee
replevin against a possessor of the object of a chattel thereupon seeks to foreclose thereon. Since the
mortgage who is not a party to the mortgage, in the mortgagee's right of possession is conditioned upon the
absence of the mortgagor. actual fact of default which itself may be controverted, the
inclusion of other parties like the debtor or the
Held: No. Affirmed. mortgagor himself, may be required in order to allow a
full and conclusive determination of the case. When the
Ratio: Replevin, broadly understood, is both a form of mortgagee seeks a replevin in order to effect the
principal remedy and of a provisional relief. It may refer eventual foreclosure of the mortgage, it is not only the
either to the action itself, i.e., to regain the possession of
personal chattels being wrongfully detained from the
plaintiff by another, or to the provisional remedy that
would allow the plaintiff to retain the thing during the
pendency of the action and hold it pendente lite. The
action is primarily possessory in nature and generally
determines nothing more than the right of possession.
Replevin is so usually described as a mixed action, being
partly in rem and partly in personam. It is in rem
insofar as the recovery of specific property is concerned,
and in personam as regards to damages involved. As an
"action in rem," the gist of the replevin action is the right of
the plaintiff to obtain possession of specific personal
property by reason of his being the owner or of his having
a special interest therein. Consequently, the person in
possession of the property sought to be replevied is
ordinarily the proper and only necessary party defendant,
and the plaintiff is not required to so join as defendants
other persons claiming a right on the property but not in
possession thereof. Rule 60 of the Rules of Court allows an
application for the immediate possession of the property
but the plaintiff must show that he has a good legal
basis, i.e., a clear title thereto, for seeking such interim
possession.
Where the right of the plaintiff to the
possession of the specific property is so conceded or
evident, the action need only be maintained against him
who so possesses the property. In rem actio est per quam
rem nostram quae ab alio possidetur petimus, et semper
adversus eum est qui rem possidet. In Northern Motors,
Inc. vs. Herrera, there can be no question that persons
having a special right of property in the goods the
recovery of which is sought; such as a chattel
mortgagee, may maintain an action for replevin therefor.
Where the mortgage authorizes the mortgagee to take
possession of the property on default, he may maintain an
action to recover possession of the mortgaged chattels
from the mortgagor or from any person in whose hands
he may find them. In effect then, the mortgagee, upon the
mortgagor's default, is constituted an attorney-in-fact of
the mortgagor enabling such mortgagee to act for and in
behalf of the owner. Accordingly, that the defendant is not
privy to the chattel mortgage should be inconsequential.
By the fact that the object of replevin is traced to his
possession, one properly can be a defendant in an action
for replevin. It is here assumed that the plaintiffs right to
possess the thing is not or cannot be disputed.
A chattel mortgagee, unlike a pledgee, need not
197
existence of, but also the mortgagor's default on, the
chattel mortgage that, among other things, can properly
uphold the right to replevy the property. The burden to
establish a valid justification for that action lies with the
plaintiff. An adverse possessor, who is not the mortgagor,
cannot just be deprived of his possession, let alone be
bound by the terms of the chattel mortgage contract,
simply because the mortgagee brings up an action for
replevin.
mortgage, and that when the Vet Bros. Company, Inc. and
the spouses Simeon G. Toribio and Maximiana Escobar de
Toribio mortgaged to the RFC, the plaintiff's lien on the
chattels no longer existed. The court dismissed the case.
Issue: Whether a prior mortgagee who obtains a personal
judgment against the mortgagor waives his right to enforce
the mortgage securing the loan.

Jose Movido vs. Rehabilitation Finance Corporation

& The Provincial Sheriff of
Samar, G.R. No. L-11990, May 29, 1959 (105 Phil 886)

Facts: On 1 July 1946 the Vet Bros. & Company, Inc.

mortgaged to Jose S. Movido its rights, title, interest and
participation in a complete sawmill with all its
machineries, tools and equipment in good running
condition to secure the payment of a loan of P15,000. On
28 February 1947 the chattel mortgage was registered
in the Office of the Register of Deeds in and for the
province of Samar. On 28 July 1948 Jose S. Movido
brought an action against Vet Bros. & Company, Inc. to
recover a sum of money. On 7 February
1949 the parties thereto, assisted by their respective
counsel, entered into and submitted to the Court a
compromise agreement terminating their dispute and
renouncing their respective claims for damages and any
other claim in connection with the subject matter of the
case which was approved and the Court rendered
judgment in accordance therewith.
On 3 March 1949, by an instrument duly
executed, Vet Bros. & Company, Inc. and the spouses
Simeon G. Toribio and Maximiana Escobar de Toribio
mortgaged the real estate and chattels therein
enumerated and described in favor of the Rehabilitation
Finance Corporation to secure the payment of a loan of
P46,000. When Vet Bros. & Company, Inc. failed to pay,
Rehabilitation Finance Corp. moved for the sale of the
properties in a public auction. On 24 April 1953 Jose S.
Movido filed with the Sheriff a third party claim on the
chattels advertised for sale at public auction asserting a
prior and superior right in them because of his chattel
mortgage recorded before that of the Rehabilitation
Finance Corporation and by virtue of a judgment in his
favor rendered by the lower court. Despite such claim the
Sheriff proceeded to carry out the sale and on 11
June 1953, after the sale had been successively
postponed to 14 May and 28 May, sold the chattels,
except those expressly excluded from the public
auction sale, to the successful bidders.
Movido filed an action against RFC for having
unlawfully, fraudulently and maliciously disregarded his
third party claim on the chattels. The court rendered
judgment holding that the compromise agreement entered
into by and between the parties in the civil case and the
judgment rendered by the Court pursuant thereto
novated the plaintiff's credit secured by the chattel
198
Held: Yes. Affirmed. The case of Pascual, as cited by the respondent
court, is not applicable in this instant case because it was
a case of sale on installment, where after foreclosure of
Ratio: A mortgagee who sues and obtains a personal
the units the plaintiffs-guarantors who had likewise
judgment against a mortgagor upon his credit waives
executed a real estate mortgage of up to P50,000, cannot
thereby his right to enforce the mortgage securing it. By
be held answerable anymore for the deficiency. The
instituting the civil case and by securing a judgment in his
conclusion therefore reached by the lower court was
favor upon the compromise agreement, the appellant
erroneous because in the case at bar, the obligation
abandoned his mortgage lien on the chattels in question.
The rule in Tizon vs. Valdez, 48 Phil., 910 and Matienzo vs.
San Jose, G. R. No. 39510, 16 June 1934, relied upon by the
appellants, has been abandoned in Bachrach Motor
Company vs. Icarangal (68 Phil 287). Moreover, the
appellant secured a writ of execution of the judgment
rendered in the civil case on 26 June 1953 only or
fifteen days after the public auction sale had been carried
out.

Bicol Savings & Loan Association vs. Jaime Guinhawa &

The Honorary Presiding Judge of the CFI of Camarines
Sur (10 th Judicial District), Br. III, G.R. No. 62415,
August 20, 1990 (188 SCRA 642)

Facts: Victorio Depositario together with private

respondent Jaime Guinhawa, acting as solidary co-maker,
took a loan from petitioner Bicol Savings and Loan
Association (BISLA). To secure the payment of the
foregoing loan obligation, the principal borrower Victorio
Depositario put up as security a chattel mortgage which
was a Yamaha Motorcycle. Said motorcycle was eventually
foreclosed by reason of the failure of Depositario and
Guinhawa to pay the loan. As a result of the foreclosure,
there was a deficiency in the amount of P5,158.06 as of
July 31, 1981, and BISLA made a demand to pay the same.
BISLA filed a complaint for the recovery of a sum of
money constituting the deficiency after foreclosure of the
chattel mortgage.
The City Court ruled for BISLA. The CFI reversed.

Issue: Whether a creditor can collect the deficiency

amount after foreclosure of the chattel mortgage.

Held: Yes. Reversed.

Ratio: If in an extrajudicial foreclosure of a chattel

mortgage a deficiency exists, an independent civil action
may be instituted for the recovery of said deficiency. If the
mortgagee has foreclosed the mortgage judicially, he
may ask for the execution of the judgment against any
other property of the mortgagor for the payment of the
balance. To deny to the mortgagee the right to maintain an
action to recover the deficiency after foreclosure of the
chattel mortgage would be to overlook the fact that
the chattel mortgage is only given a security and not as
payment for the debt in case of failure of payment. (Bank
of the Philippine Islands v. Olutanga Lumber Co., 47 Phil.
20; Manila Trading & Supply Co. v. Tamaraw Plantation Co.,
47 Phil. 513.)
199
contracted by the principal debtor (Depositario) with a
solidary co-maker (private respondent herein), was one of
loan secured by a chattel mortgage, executed by the
principal debtor, and not a sale where the price is payable
on installments and where a chattel mortgage on the
thing sold was constituted by the buyer and, further,
the obligation to pay the installments having been
guaranteed by another.
Lorenzo Pascual & Leonila Torres vs. Universal
Motors Corporation, G.R. No. L-
27862, November 20, 1974 (61 SCRA 121)
Facts: On May 15, 1924, Alejo de la Flor recovered a
judgment against Tiburcia Buhayan. Under this
judgment, the sheriff levied execution on 4 carabaos
which were found in the possession of Simon Jacinto but
registered in the name of Tiburcia Buhayan.
Eulogio Betita presented a 3rd party claim
(terceria) alleging that the carabaos were already
mortgaged to him as evidenced by a document dated
May 6, 1924. The sheriff, nevertheless, proceeded with
the sale of the animals at public auction which were

Facts: A real estate mortgage was executed by spouses

Lorenzo Pascual and Leonila
Torres to secure the payment of an indebtedness of PDP
Transit, Inc. for the purchase of
5 units of Mercedes Benz trucks. The obligation is further
guaranteed by separate deeds of chattel mortgages on the
Mercedes Benz units. Upon failure to pay, Universal
Motors Corporation filed a complaint against PDP Transit,
Inc. before the CFI with a prayer for the issuance of a
writ of replevin to collect the balance and to repossess
all the units. UMC was able to repossess all the units and to
sell them in a public auction.
Spouses Pascual and Torres, the real estate
mortgagors, filed an action for the cancellation of the
mortgage they constituted on 2 parcels of land in favor
of UMC to guarantee the obligation of PDP. The court
ordered the cancellation of the mortgage. UMC appealed.

Issue: Whether a vendor in an installment sale has a right

to recover any deficiency from any additional security after
the foreclosure of the chattel mortgage.

Held: No. Affirmed.

Ratio: It is contended by UMC that what Article 1484 NCC

withholds from the vendor is the right to recover any
deficiency from the purchaser after the foreclosure of the
chattel mortgage and not a recourse to the additional
security put up by a third party to guarantee the
purchasers performance of his obligation. To sustain
this argument is to overlook the fact that if the
guarantor should be compelled to pay the balance of
the purchase price, the guarantor will in turn be entitled
to recover what she has paid from the debtor vendee; so
that ultimately, it will be the vendee who will be made to
bear the payment of the balance of the price, despite the
earlier foreclosure of the chattel mortgage given to him.
Thus, the protection given by Article 1484 would be
indirectly subverted and public policy overturned.

Eulogio Betita vs. Simeon Ganzon, Alejo de la Flor, &

Clemente Pedrea, G.R. No.
24137, March 29, 1926 (49 Phil 87)

200
purchased by Clemente Pedrea. The lower court ruled
that the mortgage was a preferred credit because it was a
prior document.
Issue: Whether a pledge whose date does not appear in a
public instrument is effective against 3rd persons.
Whether a pledge is effective when there has been no
actual delivery of the thing pledged.
19227, February 17, 1968 (22 SCRA 585)
Facts: Diosdado Yuliongsiu was the owner of two (2)
vessels, namely: the M/S Surigao and the M/S Don Dino,
and operated the FS-203 which was purchased by him
from the Philippine Shipping Commission, by installment
or on account. As of January or February, 1948,
Yuliongsiu had paid to the Philippine Shipping
Commission only the

Held: No. No. Reversed.

Ratio: The judgment must be reversed unless the

document abovequoted can be considered either a chattel
mortgage or else a pledge. That it is not a sufficient chattel
mortgage is evident; it does not meet the
requirements of section 5 of the Chattel Mortgage Law
(Act No-1508), has not been recorded and, considered as a
chattel mortgage, is consequently of no effect as against
third parties.
Neither did the document constitute a sufficient
pledge of the property valid against third parties. Article
1865 of the Civil Code provides that "no pledge shall be
effective as against third parties unless evidence of its
date appears in a public instrument." The document in
question is not in public, but it is suggested that its filing
with the sheriff in connection with the terceria gave it
the effect of a public instrument and served to fix the
date of the pledge, and that it therefore fulfills the
requirements of article 1865. Assuming, without
conceding, that the filing of the document with the
sheriff had that effect, it seems nevertheless obvious
that the pledge only became effective as against the
plaintiff in execution from the date of the filing and did not
rise superior to the execution attachment previously levied
(see Civil Code, article 1227).
The alleged pledge is also ineffective for another
reason, namely, that the plaintiff pledgee never had actual
possession of the property within the meaning of article
1863 of the Civil Code. But it is argued that at the time of
the levy the animals in question were in the possession of
one Simon Jacinto; that Jacinto was the plaintiff's tenant;
and that the tenant's possession was the possession of his
landlord. The evidence actually shows that Simon Jacinto
and Tiburcia Buhayan were living together as husband and
wife and had been so living for many years. It is, of
course, evident that the delivery of possession referred
to in article 1863 implies a change in the actual
possession of the property pledged and that a mere
symbolic delivery is not sufficient. In the present case
the animals in question were in the possession of Tiburcia
Buhayan and Simon Jacinto before the alleged pledge was
entered into and apparently remained with them until
the execution was levied, and there was no actual delivery
of possession to the plaintiff himself. There was therefore
in reality no change in possession.

Diosdado Yuliongsiu vs PNB (Cebu branch), G.R. No. L-

201
sum of P76,500 and the balance of the purchase price was pledged to the pledgor without invalidating the pledge. In
payable at P50,000 a year, due on or before the end of the such a case, the pledgor is regarded as holding the pledged
current year. property merely as trustee for the pledgee. Plaintiff-
Yuliongsiu obtained a loan from PNB. To appellant would also urge Us to rule that constructive
guarantee payment, he pledged his 2 boats and his equity delivery is insufficient to make pledge effective. He points
in the FS-203. The pledge document was duly registered to Betita v. Ganzon, 49 Phil. 87 which ruled that there has
with the office of the Collector of Customs. Yuliongsui to be actual delivery of the chattels pledged. But then
made partial payment, but failed to pay the balance. there is also Banco Espanol Filipino v. Peterson, 7 Phil. 409
PNB filed criminal charges against Yuliongsiu for ruling that symbolic delivery would suffice. An
estafa thru falsification of commercial documents, because examination of the peculiar nature of the things pledged in
plaintiff had, as last indorsee, deposited with defendant the two cases will
bank, from March 11 to March 31, 1948, seven Bank of the
Philippine Islands checks. However, in connivance with
one employee of defendant bank, Yuliongsiu was able to
withdraw the amount credited to him before the discovery
of the defraudation on April 2,
1948. Yuliongsiu was convicted and sentenced to
indemnify the bank. CA affirmed.
Meanwhile, together with the institution of the
criminal action, the bank took physical possession of the
three pledged vessels while they were at the Port of
Cebu. After the first not fell due and was not paid, the
branch manager, pursuant to the terms of the pledge
contract, executed a document of sale transferring the two
pledged vessels and the equity in FS-203 to the bank. The
FS-203 was subsequently surrendered by the bank to the
Philippine Shipping Commission which rescinded the
sale for failure to pay the remaining installments on the
purchase price thereof. The other two boats, the M/S
Surigao and the M/S Don Dino were sold by the bank to
third parties.
Yuliongsui filed an action to recover the 3 boats.
The lower court upheld the actions of the bank and the
validity of the pledge contract.

Issue: Whether a judicial admission that the contract is

a pledge is binding. Whether constructive delivery is
sufficient to make the pledge effective. Whether the
formalities required in mortgage is also required in
pledge. Whether the bank, as pledgee, can purchase the
thing pledged.

Held: Yes. Yes. No. Yes. Affirmed.

Ratio: The parties stipulated as a fact that the contract is a

pledge contract. Necessarily, this judicial admission binds
the plaintiff. Without any showing that this was made thru
palpable mistake, no amount of rationalization can offset it.
The defendant bank as pledgee was therefore
entitled to the actual possession of the vessels. While it is
true that plaintiff continued operating the vessels after the
pledge contract was entered into, his possession was
expressly made "subject to the order of the pledgee." The
provision of Art. 2110 of the present Civil Code being
new-cannot apply to the pledge contract here which was
entered into on June 30, 1947. On the other hand, there is
authority supporting the proposition that the pledgee can
temporarily entrust me physical possession of the chattels
202
readily dispel the apparent contradiction between the two mortgage upon certain specified real property, to secure
rulings. In Betita v. Ganzon, the objects pledged the payment of said debt. In addition to the securities
carabaos were easily capable of actual, manual delivery above stated as mortgaged and pledged, Reyes likewise
unto the pledgee. In Banco Espanol-Filipino v. Peterson, placed his other assets, present and future, as security.
the objects pledged goods contained in a warehouse The bank made further advances to Reyes, and Reyes,
were hardly capable of actual, manual delivery in the in turn, executed a pledge of certain specified items of
sense that it was impractical as a whole for the personal property. Therafter, to secure the debt to the
particular transaction and would have been an plaintiff, Reyes executed a second mortgage and pledge
unreasonable requirement. Thus, for purposes of on the same properties in favor of the plaintiff. Then all
showing the transfer of control to the pledgee, delivery of the properties referred to passed into the custody and
to him of the keys to the warehouse sufficed. In other control of the bank. Portions of the same were disposed of
words, the type of delivery will depend upon the nature from time to time, and proceeds were credited to the
and the peculiar circumstances of each case. The parties account of Reyes. The amounts applied to the account of
here agreed that the vessels be delivered by the "pledgor Reyes included
to the pledgor who shall hold said property subject to the
order of the pledgee." Considering the circumstances of
this case and the nature of the objects pledged, i.e.,
vessels used in maritime business, such delivery is
sufficient.
It is contended first that the cases holding that
the statutory requirements as to public sales with prior
notice in connection with foreclosure proceedings are
waivable, are no longer authoritative in view of the
passage of Act 3135, as amended; second, that the charter
of defendant bank does not allow it to buy the property
object of foreclosure in case of private sales; and third,
that the price obtained at the sale is unconscionable. There
is no merit in the claims. The rulings in Philippine
National Bank v. De Poli, 44
Phil. 763 and El Hogar Filipino v. Paredes, 45 Phil. 178 are
still authoritative despite the passage of Act 3135. This
law refers only, and is limited, to foreclosure of real
estate mortgages. So, whatever formalities there are in Act
3135 do not apply to pledge.
Regarding the bank's authority to be the
purchaser in the foreclosure sale, Sec. 33 of the Act 612,
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 plaintiffs case since the import thereof is that 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.

Congregacion de la Mision de San Vicente de Paul vs.

Francisco Reyes Y Mijares & El Banco Espaol-Filipino,
G.R. No. 5508, August 14, 1911 (19 Phil 524)

Facts: Francisco Reyes was indebted to the Banco

Espaol-Filipino in the sum of P84,415.38; to the
Hongkong & Shanghai Bank in the sum of P141,702; and
to the plaintiff in the sum of P45,286. Banco Espaol-
Filipino advanced Reyes the money to pay the Hongkong
& Shanghai Bank, thus becoming his creditor in the sum
total of P226,117.38. Reyes thereupon executed a first
203
an amount worth P96,781.75 which was paid by Reyes be run if the money received in the course thereof must
to the bank and obtained from assets and credits other instantly be withdrawn and paid to the discharge of
than those covered by the mortgage and pledge. From obligations wholly apart from the business itself. In the
time to time, the bank cashed checks for Reyes and paid meantime he must have something for the support and
drafts and other obligations in favor of third persons. The maintenance of his family. From these facts we can readily
plaintiff now contends that the first mortgage is wholly see that not every peso delivered to the bank by Reyes was
paid and satisfied, thus the mortgaged properties should necessarily to be applied to the payment of the mortgage
debt, even though said peso came by way of rents and
be released and the 2 nd mortgage should now be income from the property actually included by specific
equivalent to the 1st mortgage. The bank countered that description in the mortgage. Moreover, Reyes had a
the security is liable for any and all liabilities Reyes had large amount of property not
with the bank and that it did not apply all of the proceeds
to the secured debt, but also to the unsecured debt.
The lower court ruled for the plaintiff so far as
concerns the proceeds of the mortgaged property and the
excess obtained from the special pledges, but holds that
the P96,781.75 paid into the bank from independent
sources is not legally applicable to the satisfaction of the
mortgage debt. Plaintiff appealed the ruling on the sole
issue of the proceeds arising from independent sources.

Issue: Whether the proceeds from the sale of properties

that were not covered by a mortgage or pledge can be
applied to pay for a debt that has been secured by a
mortgage and pledge.

Held: No. Affirmed.

Ratio: The provision which obligates all of the debtors

property, present and future, to the payment of the
mortgage debt, and agreed to pay its proceeds into the
bank so long as that mortgage debt was not wholly
liquidated, is wholly without force or effect. The property
sought to be pledged is not described or identified. We do
not know, from the terms of the clause or from any other
source, that any of it really existed at the time of the
execution of the clause. As a pledge of personalty, it is
wholly ineffective, not only for indefiniteness but also for
the reason that the property pledged, if any, was not
delivered. As a mortgage of realty it is equally ineffective
for the reason that, to be valid under the provisions of the
Civil Code and the Mortgage Law, the mortgage must
describe the property mortgaged so that it is clearly
identified and identifiable.
This paragraph being entirely ineffective and
valueless as a mortgage or pledge, the agreement to pay
the proceeds of any portion of the property or credits
therein mentioned upon the mortgage debt would be
equally ineffective and valueless, as such an agreement is
purely subsidiary to the agreement of mortgage and
pledge, and is wholly dependent upon it. The latter failing
for illegality, or at least, invalidity, the dependent
agreement falls with it.
It is obvious that Reyes could not run a business
without using money to do so. If he were obliged to pay
upon said mortgage debt every dollar which came to him,
from whatever source, the provision permitting him to
continue in business would be farcical. A business can not
204
included in the bank's mortgage and pledge. This draw against? He could not draw against the original debt,
property was entirely unencumbered and was free to be as that was a debt and not a credit. He could not draw
used by him in his business conducted after the execution against the deposit, as that had been destroyed by its
of the mortgage and pledge to the bank. It is the admitted application to the debt. There is nothing which a check
evidence in the case that he actually did use substantially can be drawn against except a checking account.
all of said property in that way. As a result, such property, It is manifest, therefore, that no part of the
converted into cash or used as security, was delivered to personal property or the income therefrom, if any, could
the bank to that end. Witness to this fact not only said have been applied to relieve the real estate from its share
P96,781.75 but also the properties that were pledged. of the burden of the debt during the time included within
Here again we see moneys delivered to the bank which the scope of this action. On the other hand, a considerable
were not necessarily to be applied to the payment of the part of the charge imposed upon the personal property
debt secured by the mortgage and pledge of the bank. still remains unpaid, a portion of said property still
Desiring to continue his business, Reyes was confronted remaining in the hands of the bank unsold and
with a stern necessity. He must have money to run that
business and he must have a bank in which to put it.
If every dollar which he could muster and deposit in the
bank had to be applied to the payment of an old
obligation by the very fact of that deposit, his business was
in a sorry plight. The stipulation between him and the
bank that he should continue such business would,
under such conditions, lose all significance. It is thus clear
that it is at least possible that there was some money
delivered at different times to the bank which, strictly
speaking, was not intended to be used in reduction of said
original debt. It is, as we have seen, conceded that said
sum of P96,781.75 is composed of such moneys.
There was also the fact that at the time of the
delivery of said sum to the bank, the original debt with the
bank was not yet due. Reyes was under no legal obligation
to pay any part of the indebtedness secured by the
mortgage and pledge to the bank until June 4,
1905. But the bank had absolutely no right, before the
debt was due, to apply to its payment moneys deposited
by Reyes which had been obtained from other sources.
There was no agreement to which Reyes was a party that
he should apply all of his assets to the payment of the said
debt, especially before it was due.
The pledge executed by Reyes in favor of the bank
on his account current with the bank refers to a check and
deposit account, not just a current account. It was clearly
not the intention of Reyes, in delivering money to be
checked against; that it should go in satisfaction of the
original debt. If it were so applied, it could not be checked
against, as it legally ceased to exist as soon as applied to
such payment. It borders on the absurd to say that one
would deposit money to create a checking account with
the intention that said account should be instantly
destroyed by the application of the sum deposited to the
satisfaction of another obligation. Under such
circumstances no check account could possibly be created
till the obligation was fully paid. But this would defeat the
very object of the deposit. The purpose and intention of
Reyes and the bank were to provide means and facilities
by which Reyes could continue his business. To do this he
must have resources, banking facilities, must make
deposits and draw checks. But if, by the application of his
deposits instantly to the payment of an outside obligation,
it was impossible to create a check account, what would he
205
unused for the reduction of said debt. There has been the properties being mortgaged to it, but also by virtue of
realized from the personal property the sum of the said bonus being a civil fruit of the mortgaged lands.
P126,575.92. Its share of the burden was P138,117.38. The lower court rendered a judgment in favor of Bachrach
With-interest added, there would remain a considerable Motor Co., Inc. The Supreme Court affirmed the
balance due from the personal property. judgment of the lower court, holding that the bonus had
no immediate relation to the lands in question but merely
a remote and accidental one and, therefore, it was not a
The Bachrach Motor Co., Inc. vs. Mariano Lacson
civil fruit of the real properties mortgaged to PNB.
Ledesma, Talisay-Silay Milling
Talisay-Silay Milling Co., Inc., issued stock
Co, Inc., & PNB, G.R. No. 42462, August 31, 1937 (64
certificate No. 772 for 6,300 shares, as stock dividend,
Phil 681)
to Mariano Lacson Ledesma, which certificate was
ordered by
Facts: Bachrach Motor Co., Inc. obtained judgment in
a civil case against Mariano Lacson Ledesma. A writ of
execution of said judgment was issued. In compliance
with the writ, the sheriff attached all right, title to and
interest which Mariano Lacson Ledesma may have in any
bonus, dividend, shares of stock, money, or other property
which Ledesma is entitled to receive from the Talisay-Silay
Milling Co., Inc., by virtue of the fact that he has mortgaged
his land in favor of the PNB to guarantee the indebtedness
of the Talisay-Silay Milling Co., Inc., or which he is entitled
to receive from the Talisay- Silay Milling Co., Inc., on
account of being stockholder in that corporation or which
he is entitled to receive from that corporation for any other
cause or pretext whatsoever.
Bachrach Motor Co., Inc. then obtained another
judgment against Ledesma. A writ of execution of said
judgment was issued, thereby causing the attachment, sale
and adjudication to Bachrach Motor Co., Inc. of Ledesma's
right of redemption over certain mortgaged real
properties. These properties were mortgaged to PNB.
The instrument of mortgage also contained, as part of
the securities to ensure compliance with his obligation,
1,540 shares in Talisay-Silay Milling Co., Inc.
Central Talisay-Silay Milling Co. resolved to
grant a bonus or compensation to the owners of the real
properties mortgaged to answer for the debts contracted
by said central with the Philippine National Bank, for the
risk incurred by said properties upon being subjected to
said mortgage lien. Under the resolution, Ledesma was
allotted the sum of P19,911.11, which sum, however,
would not be payable until the month of January, 1930.
PNB brought action against Ledesma and his wife
for the recovery of a mortgage credit. PNB amended its
complaint to include Bachrach Motor Co., Inc. as party
defendant because they claim to have some right to
certain properties which are the subject matter of the
complaint. The lower court ruled for PNB against
Ledesma. The court granted PNB the authority to sell the
shares of stocks of Ledesma.
Bachrach Motor Co., Inc. brought an action against
the Talisay-Silay Milling Co., Inc., to recover from it the sum
of P13,850 against the bonus or dividend which, by virtue
of the resolution of December 22, 1923, said Central
Talisay-Silay Milling Co., Inc., had declared in favor of
Ledesma as one of the owners of the hacienda which had
been mortgaged to PNB. PNB intervened alleging that in
had a preferred right to said bonus, not only by virtue of
206
Mariano Lacson Ledesma to be delivered to Roman Lacson,
attorney for PNB. PNB then informed Talisay-Silay Milling
Co., Inc. that the 6,300 shares had been given to it by
Mariano Lacson Ledesma as pledge. Bachrach Motor Co.,
on the other hand, by virtue of an alias execution, attached
all right, title to and interest which Ledesma might have
in the bonus of P19, 911.11 which Ledesma is entitled
to receive from the Talisay-Silay Milling Co., Inc., by
virtue of the fact that such defendant has mortgaged his
lands in favor of PNB to guarantee the indebtedness of the
Talisay- Silay Milling Co. Inc.
PNB then foreclosed on the shares of stock of
Ledesma and bought these during the public auction.
Bachrach Motor Co., Inc. wants the sale declared null and
void. The lower court ruled for PNB.
deemed legally entered into and should produce all its
effects and consequences, provided it appears to have
been in some manner perfected and that the things
pledged have been delivered, and in a contrary case, and
even if the creditor has not received them or has not
retained them in his custody, provided that the contract of
pledge or chattel mortgage appears in a notarial document
and is inscribed in the registry of deeds of the province."
Therefore, this court holds that the pledge of the 6,300
stock dividends is valid

Issue: Whether a pledge that is not recorded in a dated

public instrument but has been delivered to the pledgee is
effective. Whether certificate of stocks can be pledged.

Held: Yes. Yes. Affirmed.

Ratio: It is true, according to article 1865 of the Civil Code,

that in order that a pledge may be effective as against
third persons, evidence of its date must appear in a
public instrument in addition to the delivery of the thing
pledged to the creditor. This provision has been
interpreted in the sense that for the contract to affect
third persons, it must appear in a public instrument in
addition to delivery of the thing pledged. It cannot be
denied, however, that section 4 of Act No. 1508,
otherwise known as the Chattel Mortgage Law, implicitly
modified article 1865 of the Civil Code in the sense that a
contract of pledge and that of chattel mortgage, to be
effective as against third persons, need not appear in
public instruments provided the thing pledged or
mortgaged be delivered or placed in the possession of the
creditor. In the case of Mahoney vs. Tuason (39 Phil., 952,
958), where this doctrine was laid down, it was
stated: "From the foregoing provisions of the above-cited
Act, it is inferred that the same does not entirely repeal the
provisions of the Civil Code, but only modify them in part
and amplify them in another, as may be seen from an
examination of, and comparison between, the provisions of
the Civil Code regarding pledge and the above-quoted
provisions of Act No. 1508. Article 1865 of the Civil Code
provides that no pledge shall be effective against a third
person unless evidence of its date appears in a public
instrument. The provision of this article has, undoubtedly,
been modified by section 4 of the Chattel Mortgage Law, in
so far as it provides that a chattel mortgage shall not be
valid against any person except the mortgagor, his
executors or administrators, unless the possession of the
property is delivered to and retained by the mortgagee
or unless the mortgage is recorded in the office of the
register of deeds of the province in which the mortgagor
resides. From the date the said Act No. 1508 was in force,
a contract of pledge or chattel mortgage should be
207
against the plaintiff for the reason that the certificate was
delivered to the creditor bank, notwithstanding the fact
that the contract does not appear in a public instrument.
The plaintiff further contends that the pledge
could not legally exist because the certificate was not the
shares themselves, making it understood that a certificate
of stock or of stock dividends can not be the subject
matter of the contract of pledge or of chattel mortgage.
Neither is this contention tenable. Certificates of stock or
of stock dividends, under the Corporation Law, are quasi
negotiable instruments in the sense that they may be
given in pledge or mortgage to secure an obligation.
Ocejo, Perez & Co. vs The International Banking
Corporation. Francisco Chua
Seco, as assignee, G.R. No. L-10658, February 14, 1918
(37 Phil 631)
amount of sugar in the warehouse did not exceed 1,800
piculs, whereas the amount which should have been there,
according to the contract, was 5,000 piculs. Upon
making this discovery, the bank's representative,
accompanied by a lawyer, went immediately to see Chua
Teng Chong, and the latter informed him that the rest of
the sugar covered by the pledge agreement was stored in
another warehouse (where Ocejo delivered). The bank's
representative immediately went to this warehouse and
upon arrival there found some
3,200 piculs of sugar, of which he took immediate
possession, closing the warehouse with the bank's
padlocks. An attempt was made by Ocejo, Perez & Co. to
recover the sugar, but to no avail.

Facts: On March 7, 1914, Chua Teng Chong of Manila,

executed and delivered to the International Banking
Corporation, a promissory note, payable one month after
date. Attached to this note was another private documents,
signed Chua Teng Chong, in which it was stated that he
had deposited with the bank, as security for the said
note, 5,000 piculs of sugar, which in said document were
said to be stored in a warehouse situated in Binondo,
Manila. It appears from the evidence, assuming that
sugar was in the warehouse on that date, that the bank
did not take possession of it when the document was
executed and delivered, and that Chua Teng Chong
continued to retain the sugar in his possession and
control. The bank made no effort to exercise any active
ownership over said merchandise until the 16th of April,
when it discovered that the amount of sugar stored in the
said warehouse was much less than P5,000 piculs
mentioned in the contract. The agreement between the
bank and Chua Teng Chong with respect to the alleged
pledge of the sugar was never recorded in a public
instrument.
On March 24, 1914, Ocejo, Perez & Co., entered
into a contract with Chua Teng Chong for the sale to him of
a lot of sugar. It was agreed that delivery should be made
in the month of April, the sugar to be weighed in the
buyer's warehouse. It appears that this sugar was brought
to Manila by a steamer in the month of April, and 5,000
piculs were delivered by plaintiff to Chua Teng Chong. The
delivery was completed April 16, 1914, and the sugar was
stored in the buyer's warehouse. On April 17, 1914,
Ocejo, Perez & Co. presented, for collection, its account for
the purchase price of the sugar, but the buyer refused to
make the payment, and up to the present time the sellers
have been to collect the purchase price of the merchandise
question.
On the same date as that on which the 5,000
piculs of sugar were delivered into the warehouse on
Muelle de la Industria, the bank sent an employee to
inspect the sugar described in the pledge agreement.
The bank's representative then discovered that the
208
 Chua Teng Chong was judicially declared to be
insolvent, and Francisco Chua Seco was appointed as
assignee of the insolvency. On the same date, and a few
minutes after insolvency proceedings were commenced,
Ocejo, Perez & Co. filed a complaint, naming the bank as
defendant, alleging that it was unlawfully holding the
sugar, and prayed for a writ of replevin. By agreement
of the parties, the sugar was sold and the proceeds of the
sale were deposited in the bank. Chua Seco, the assignee
of the insolvency, intervened in the case. The lower court
ruled for Ocejo, Perez & Co.
pledge cannot adversely affect third persons. Applying the
doctrine of the decision cited, It is evident that the pledge
asserted by the International Bank is inefficacious.
The seller also has no right in the property
because it did not file an action to rescind the contract.
Title had already passed to the buyer by the delivery of
the product to him, despite the nonpayment. Replevin is
not the proper remedy in this case, but rescission which
the seller failed to avail. The property is, thus, given to the
assignee in insolvency, while the seller is reserved the
right to file his claim in the insolvency proceeding.

Issue: Whether a pledge is valid over other properties of

the pledgor that are of the same kind which were not even
pledged.

Held: No. Reversed.

Ratio: It is evident that the sugar therein mentioned is

not the same as that here in dispute. An attempt was
made to pledge the lot of sugar deposited in warehouse
No.
1008, Calle Toneleros, Manila. The sugar in dispute has
never been in that warehouse, as the seller delivered it
into the bodega at No. 119, Muelle de la Industria. The
sugar here in question could not possibly have been the
subject matter of the contract of pledge which the
parties undertook to create by the private document dated
March 7, 1914, inasmuch as it was not at that time the
property of the defendant, and this constitutes an
indispensable requisite for the creation of a pledge. (Civil
Code, art. 1857.) It does not appear from the record that
any effort was made to pledge the sugar which is the
subject matter of this case. The bank took possession of
that sugar under the erroneous belief, based upon the
false statement of Chua Teng Chong, that it was a
part of the lot mentioned in the private document dated
March 7, 1914. But even if it were assumed that on the
afternoon of April 16, 1914, an attempt was made to
pledge the sugar and that delivery was made in
accordance with the agreement, the pledge so established
would be void as against third persons. Article 1865 of
the Civil Code provides that a pledge is without effect as
against third persons if the certainty of the date does
not appear by public instrument. In the case of Tec Bi &
Co. vs. Chartered Bank of India, Australia and China, 16
Off. Gaz., 908 decided February 5, 1916, this court held
that when the contract of pledge is not recorded in a
public instrument, it is void as against third persons;
that the seller of the thing pledged, seeking to recover the
purchase price thereof, is a third person within the
meaning of the article cited; and that the fact that the
person claiming as pledge has taken actual physical
possession of the thing sold will not prevent the pledge
from being declared void as against the seller. The court
held that the principle established by article 1865 of the
Civil Code is not adjective in its character, but that it
prescribes a condition without which the contract of
209
Involuntarty Insolvency of The Gulf Plantation Co. Estate of George Litton vs. Ciriaco B. Mendoza & CA,
Pacific Commercial Company, Philippine-American G.R. No. L-49120, June 30,
Drug Company & Standard Oil Company vs. PNB. H.B. 1988 (163 SCRA 246)
Hugnes, assignee, G.R. No. 24893, August 23, 1926 (49
Phil 236) Facts: Bernal spouses are engaged in the manufacture
of embroidery, garments and cotton materials. Sometime
Facts: Gulf Plantation Company, through its President, in September 1963, C.B.M. Products, with Mendoza as
executed to the PNB a pledge over public land, buildings, president, offered to sell to the Bernals textile cotton
hemp, carabaos, and boats. The pledge was contained in materials and, for this purpose,
a public instrument.
An insolvency petition was filed to have the Gulf
Plantation Company declared insolvent, and it was
declared insolvent. The court ordered the sheriff to take
possession of all the assets of the insolvent estate. The
assignee in insolvency filed a petition for authority to sell
at public auction all the properties of the insolvent estate.
The PNB also filed a petition to seek enforcement of the
pledge in its favor.
The lower court ruled for PNB.

Issue: Whether a pledge is effective even though the

pledgee had no possession over the thing pledged.
Whether immovables can be the subject of pledge.
Whether the pledge covers the increase in quantity of the
thing pledged.

Held: No. No. No. Reversed.

Ratio: It is very apparent from the language used in the

instrument that it was prepared on the customary blank
form of a pledge for the taking of properties under a
pledge. To make the instrument valid as a pledge, as to
the personal property therein described, it was the duty
of the bank to take the actual, physical possession of the
property, and to continue and remain in such possession,
and to make it valid against creditors or the assignee, the
bank must have been in such actual, physical possession at
the time the Plantation Company was declared insolvent.
Upon that question, there is no evidence in the record.
Without it, the instrument is void as a pledge, and the bank
would not have a preference, and would not now be
entitled to the possession of the property of the Plantation
Company, or to have it sold and the proceeds applied to
the satisfaction of its claim.
Again, in the very nature of things, a pledge or
chattel mortgage is confined and limited to personal
property, and it cannot be extended or made to apply to
real property.
It will also be noted that the pledge was executed
in 1918, and it is very probable that the one thousand
piculs of hemp have long since been sold. As to the twenty-
three carabaos, thirty-eight bullocks and eighteen horses,
there is no provision for the increase. Hence, the pledge, if
valid for any purpose, should be confined and limited to
the particular property described in the pledge, and would
not include any increase.

210
Mendoza introduced the Bernals to Alfonso Tan. Thus, the decision and approved the compromise agreement.
Bernals purchased on credit from Tan some cotton
materials, payment of which was guaranteed by Mendoza. Issue: Whether an assignor (Tan) can dispose or
Thereupon, Tan delivered the said cotton materials to alienate a pledged credit (credit of
the Bernals. Mendoza received checks from the Bernals Mendoza) without notice and consent of the assignee
with the understanding that the said check will remain (Litton Sr.).
in the possession of Mendoza until the cotton materials
are finally manufactured into garments after which time Held: No. Reversed.
Mendoza will sell the finished products for the Bernals.
Meanwhile, the said check matured without having been
cashed and Mendoza demanded the issuance of another
check in the same amount without a date.
On the other hand, Mendoza issued two (2) PNB
checks in favor of Tan. He informed the Bernals of the
same and told them that they are indebted to him and
asked the latter to sign an instrument whereby Mendoza
assigned the said amount to Insular Products Inc. Tan
had the two checks issued by Mendoza discounted in
a bank. However, the said checks were later returned to
Tan with the words stamped "stop payment" which
appears to have been ordered by Mendoza for failure of
the Bernals to deposit sufficient funds for the check that
the Bernals issued in favor of Mendoza.
Tan brought an action against Mendoza while the
Bernals brought an action for interpleader for not
knowing whom to pay. While both actions were pending
resolution by the trial court, Tan assigned in favor of
George Litton, Sr. his litigatious credit against Mendoza
duly submitted to the court with notice to the parties.
After due trial, the lower court ruled that the
said PNB checks were issued by Mendoza in favor of Tan
for a commission and held Mendoza liable as a drawer
whose liability is primary and not merely as an indorser.
CA affirmed.
Meanwhile, pending the resolution of the said
appeal, Mendoza entered into a compromise agreement
with Tan wherein the latter acknowledged that all his
claims against Mendoza had been settled and that by
reason of said settlement both parties mutually waive,
release and quit whatever claim, right or cause of action
one may have against the other, with a provision that the
said compromise agreement shall not in any way affect the
right of Tan to enforce by appropriate action his claims
against the Bernal spouses.
Mendoza filed a motion for reconsideration
praying that the decision be set aside, principally anchored
upon the ground that a compromise agreement was
entered into between him and Tan which in effect released
Mendoza from liability. Tan filed an opposition to this
motion claiming that the compromise agreement is null
and void as he was not properly represented by his
counsel of record and principally because of the deed of
assignment that he executed in favor of George Litton, Sr.
alleging that with such, he has no more right to
alienate said credit. While the case was still
pending reconsideration, Tan, the assignor, died leaving
no properties whatsoever to satisfy the claim of the
estate of the late George Litton, Sr. The CA set aside its
211
Ratio: The validity of the guaranty or pledge in favor of Josefina Rocco. On the same date, Detective Corporal
Litton has not been questioned. Our examination of the Oswaldo Mateo of the Manila Police also claims to have
deed of assignment shows that it fulfills the requisites of a gone to the pawnshop, showed Yu An Kiong the report of
valid pledge or mortgage. Although it is true that Tan may Serrano and left the latter a note asking him to hold the
validly alienate the litigatious credit as ruled by the jewelry and notify the police in case someone should
appellate court, citing Article 1634 of the Civil Code, redeem the same. The next day, on 10 July 1968, Yu An
said provision should not be taken to mean as a grant of Kiong permitted one Tomasa de Leon, exhibiting the
an absolute right on the part of the assignor Tan to appropriate pawnshop ticket, to redeem the jewelry.
indiscriminately dispose of the thing or the right given as
security. The Court rules that the said provision should be
read in consonance with Article 2097 of the same code.
Although the pledgee or the assignee, Litton, Sr. did not
ipso facto become the creditor of private respondent
Mendoza, the pledge being valid, the incorporeal right
assigned by Tan in favor of the former can only be
alienated by the latter with due notice to and consent of
Litton, Sr. or his duly authorized representative. To allow
the assignor to dispose of or alienate the security without
notice and consent of the assignee will render nugatory
the very purpose of a pledge or an assignment of credit.
Moreover, under Article 1634, the debtor has a
corresponding obligation to reimburse the assignee, Litton,
Sr. for the price he paid or for the value given as
consideration for the deed of assignment. Failing in this,
the alienation of the litigated credit made by Tan in favor
of private respondent by way of a compromise agreement
does not bind the assignee, petitioner herein.

Loreta Serrano vs CA & Long Life Pawnship, Inc., G.R.

No. 45125, April 22, 1991 (196 SCRA 107)

Facts: Sometime in early March 1968, Loreta Serrano

bought some pieces of jewelry from Niceta Ribaya.
Serrano, then in need of money, instructed her private
secretary, Josefine Rocco, to pawn the jewelry. Josefina
Rocco went to Long Life Pawnshop, Inc., pledged the
jewelry with its principal owner and General Manager,
Yu An Kiong, and then absconded with said amount and
the pawn ticket. The pawnshop ticket issued to Josefina
Rocco stipulated that it was redeemable "on presentation
by the bearer."
Three (3) months later, Gloria Duque and Amalia
Celeste informed Niceta Ribaya that a pawnshop ticket
issued by Long Life Pawnshop, Inc. was being offered for
sale. They told Niceta the ticket probably covered
jewelry once owned by the latter which jewelry had
been pawned by one Josefina Rocco. Suspecting that it was
the same jewelry she had sold to Serrano, Niceta informed
Serrano of this offer and suggested that Serrano go to the
Long Life pawnshop to check the matter out. Serrano
claims she went to the pawnshop, verified that indeed
her missing jewelry was pledged there and told Yu An
Kiong not to permit anyone to redeem the jewelry
because she was the lawful owner thereof. Petitioner
claims that Yu An Kiong agreed.
Serrano went to the Manila Police Department to
report the loss, and a complaint first for qualified theft and
later changed to estafa was subsequently filed against
212
 Serrano filed a complaint for damages against
Long Life Pawnshop, Inc. for failure to hold the
jewelry and for allowing its redemption without first
notifying petitioner or the police. The trial court ruled for
Serrrano. CA reversed.
Issue: Whether a pledgee has the duty to give notice to the
true owner of any attempt to redeem a stolen property
that was pledged.
Held: Yes. Reversed.
stated, represented the value of the bracelet and pawn
tickets and that it was understood that Lee would become
the absolute owner of the articles pledges if Cruz should
not return said sum of money within the period of sixty
days. One week thereafter, Cruz again presented
himself at the place of business of Lee and received the
further sum of P3,500, at the same time delivering two
pawn tickets of the Monte de Pieded. At the same time,
Cruz signed a further receipt containing a stipulation that
the sale of the articles pledged would become absolute
unless the amount stated in the receipt should be
returned within sixty days.

Ratio: Having been notified by petitioner and the police

that jewelry pawned to it was either stolen or involved in
an embezzlement of the proceeds of the pledge, private
respondent pawnbroker became duty bound to hold the
things pledged and to give notice to petitioner and the
police of any effort to redeem them. Such a duty was
imposed by Article 21 of the Civil Code. The circumstance
that the pawn ticket stated that the pawn was redeemable
by the bearer, did not dissolve that duty. The pawn ticket
was not a negotiable instrument under the Negotiable
Instruments Law nor a negotiable document of title under
Articles 1507 et seq. of the Civil Code. If the third person
Tomasa de Leon, who redeemed the things pledged a day
after petitioner and the police had notified Long Life,
claimed to be owner thereof, the prudent recourse of the
pawnbroker was to file an interpleader suit, impleading
both petitioner and Tomasa de Leon. The respondent
pawnbroker was, of course, entitled to demand payment
of the loan extended on the security of the pledge before
surrendering the jewelry, upon the assumption that it had
given the loan in good faith and was not a "fence"
for stolen articles and had not conspired with the
faithless Josefina Rocco or with Tomasa de Leon.
Respondent pawnbroker acted in reckless disregard of
that duty in the instant case and must bear the
consequences, without prejudice to its right to recover
damages from Josefina Rocco.

Cornelio Cruz & Ciriaca Serrano vs. Chua A.H. Lee, G.R.
No. 31018, November 6,
1929 (54 Phil 10)

Facts: Cornelio Cruz pledged valuable jewelry to two

different pawnshops in the City of Manila, namely, the
Monte de Piedad and Ildefonso Tambunting, receiving
therefor twelve pawn tickets showing the terms upon
which the articles pledged were held by the pledgees. On
the date stated, Cruz, being desirous of obtaining a further
loan upon the same and other jewels, presented himself to
Chua A. H. Lee and pledged to him six pawn tickets of the
Monte de Pieded and a bracelet set with seventeen
diamonds of different sizes. Upon receiving the bracelet
and the six tickets, Lee delivered to the plaintiff a sum of
money, for which the plaintiff executed a receipt containing
words to the effect that the amount of P3,020, therein
213
 The right of repurchasing the jewelry, which
was conceded to Cruz in the two receipts above
mentioned, was never exercised by him; and on
September 25, 1926, Lee filed a complaint against Cruz, in
which it was alleged that the receipts above mentioned
had been drawn in the form of a sale with stipulation for
repurchase in sixty days but that it was understood
between the parties that the transaction was a loan and
that the jewelry and pawn tickets held by Lee constituted a
mere security for the money advanced by him to Cruz.
The court ruled for Lee, and this was affirmed in the
Supreme Court. Execution was suspended pending the
outcome of this case.
Issue: Whether a pledgee is obligated to take care of the
thing pledged with the diligence of a good father of a
family. Whether a person who takes a pawn ticket in
pledge is bound to renew the ticket from time to time, by
the payment of interest, or premium, as required by the
pawnbroker, until the rights of the pledgor are finally
foreclosed.
Jose C. Locsin, Provincial
Sheriff of Occidental Negros, G.R. No. 30882, February
1, 1930 (54 Phil 361)
Facts: On September 15, 1925, Go Chulian executed a
mortgage on 2 parcels of land in favor of Genoveva
Gamboa de Jayme, in order to secure the payment of a
loan. The mortgage provides that if upon maturity the
mortgagor shall be unable to satisfy the amount owed, he
will authorize the mortgagee to take over the aforesaid
parcels of land, and to dispose of them after the
sugarcane crop has been harvested for milling in the
season of 1925-1926, the ownership of the aforesaid
lots being thus transferred to the

Held: Yes. Yes. Modified.

Ratio: It appears that all of the pawned jewelry was still

subject to redemption when civil case No. 30569 was first
called for trial and apparently the right of redemption on
only one piece of jewelry had been foreclosed by sale when
the decision was rendered.
Art. 1967 CC provides that the creditor must take
care of the thing given in pledge with the diligence of a
good father of a family; he shall be entitled to
recover any expenses incurred for its preservation and
shall be liable for its loss or deterioration, in accordance
with the provisions of this Code. In applying this
provision to the situation before us it must be borne in
mind that the ordinary pawn ticket is a document by
virtue of which the property in the thing pledged passes
from hand to hand by mere delivery of the ticket; and the
contract of the pledge is, therefore, absolvable to bearer. It
results that one who takes a pawn ticket in pledge
acquires domination over the pledge; and it is the holder
who must renew the pledge, if it is to be kept alive. Article
1867 contemplates that the pledgee may have to undergo
expenses in order to prevent the pledge from being lost;
and these expenses the pledgee is entitled to recover
from the pledgor. From this it follows that where, in a
case like this, the pledge is lost by the failure of the
pledgee to renew the loan, he is liable for the resulting
damage. Nor, in this case, was the duty of the pledgee
destroyed by the fact that the pledgee had obtained a
judgment for the debt of the pledgor which was secured by
the pledge. The duty to use the diligence of a good father
of the family in caring for the pledge subsists as long as the
pledged article remains in the power of the pledgee.

Tan Chun Tic vs. West Coast Life Insurance Co. &

214
mortgagee who shall then be the owner thereof in fee Velayo, G.R. No. L-21069, October 26, 1967 (21 SCRA
simple, dispensing with expensive lawsuits. 515)
On September 16, 1925, West Coast Life
Insurance Company filed a complaint against Go Chulian, Facts: Manila Surety & Fidelity Co., Inc., upon request of
Julio Gonzaga, and Francisco Sanchez for the recovery of a Rodolfo Velayo, executed a bond for P2,800.00 for the
sum of money. On the same day, the West Coast Life dissolution of a writ of attachment obtained by one
Insurance Company obtained from the court a writ of Jovita Granados in a suit against Rodolfo Velayo. Velayo
preliminary attachment of which the sheriff attached the 2 undertook to pay the surety company
parcels of land mentioned above.
On March 30, 1926, the date on which the
mortgage fell due, Genoveva de Jayme assigned and
transferred her rights and actions in the mortgage contract
to Tan Chun Tic. On March 7, 1927, Tan Chun Tic
presented to the registrar of deeds of Occidental Negros an
affidavit wherein he stated that the period granted to the
debtor in the said mortgage had already elapsed without
payment of its value. The registrar of deeds then cancelled
the certificates of title in the name of Go Chulian, and in
lieu thereof issued others in the name of Tan Chun Tic,
but preserved the annotation of the preliminary
attachment in favor of the West Coast Life Insurance
Company. Tan Chun Tic filed a complaint to seek the
annulment and cancellation of the preliminary attachment.
This was granted by the lower court.

Issue: Whether a pledge with a stipulation for pactum

commissorium is valid.

Held: No. Reversed.

Ratio: An agreement that the creditor may appropriate the

thing pledged as if it had been sold to him, merely because
the period for the payment of the loan had lapsed is void.
There can be no rational basis, having in mind the
precedents of our ancient law, to consider it lawful with
respect to the pledgee, who, in the absence of other
conditions which may have been validly stipulated,
cannot disregard, in the alienation of the property
pledged, the provisions of article 1872 conferring a right
to the creditor, which, even though he may renounce, does
also constitute a guaranty of the debtor which the latter
cannot lose simply by the will of the former or by a
stipulation which cannot be enforced in law."
The doctrines which recognize the right of owners
of mortgaged property to transmit freely the ownership
thereof to the mortgagee in payment of his credit, are not
applicable to the case at bar, where the additional
stipulation in question is entirely different from that which
the judge took into consideration as the ground of the
judgment appealed from. This being so, it is held that
the court below erred in upholding the validity of the
additional stipulation in question, and in ordering the
cancellation of the annotation of the preliminary
attachment upon said lots in favor of the defendant West
Coast Life Insurance Company.

Manila Surety & Fidelity Company, Inc. vs. Rodolfo R.

215
an annual premium of P112 to indemnify the Company for property sold in installments, and which originated in Act
any damage and loss of whatsoever kind and nature that it 4110 promulgated by the Philippine Legislature in 1933.
shall or may suffer, as well as reimburse the same for all
money it should pay or become liable to pay under the Zosimo D. Uy vs. Jose R. Zamora, The Allied
bond including costs and attorneys' fees. Finance, Inc., G.R. No. L-19482, March 31, 1965 (13
As "collateral security and by way of pledge" SCRA 508)
Velayo also delivered four pieces of jewelry to the Surety
Company "for the latter's further protection", with power
to sell the same in case the surety paid or become
obligated to pay any amount of money in connection with
said bond, applying the proceeds to the payment of any
amounts it paid or will be liable to pay, and turning the
balance, if any, to the persons entitled thereto, after
deducting legal expenses and costs.
Judgment having been rendered in favor of Jovita
Granados and against Rodolfo Velayo, and execution
having been returned unsatisfied, the surety company
was forced to pay P2,800.00 that it later sought to recoup
from Velayo; and upon the latter's failure to do so, the
surety caused the pledged jewelry to be sold, realizing
therefrom a net product of P235.00 only. Thereafter and
upon Velayo's failure to pay the balance, the surety
company brought suit in the Municipal Court. Velayo
countered with a claim that the sale of the pledged jewelry
extinguished any further liability on his part under Article
2115 of the 1950 Civil Code.
The municipal court disallowed Velayos claims
and rendered judgment against him. CFI affirmed.

Issue: Whether the auction sale of the thing pledged

extinguishes the principal obligation and disallows the
recovery of the deficiency.

Held: Yes. Reversed.

Ratio: The accessory character is of the essence of

pledge and mortgage. As stated in Article 2085 of the
1950 Civil Code, an essential requisite of these contracts
is that they be constituted to secure the fulfillment of a
principal obligation, which in the present case is Velayo's
undertaking to indemnify the surety company for any
disbursements made on account of its attachment
counterbond. Hence, the fact that the pledge is not the
principal agreement is of no significance nor is it an
obstacle to the application of Article 2115 of the Civil
Code. Article 2115, in its last portion, clearly establishes
that the extinction of the principal obligation supervenes
by operation of imperative law that the parties cannot
override. The provision is clear and unmistakable, and
its effect cannot be evaded. By electing to sell the articles
pledged, instead of suing on the principal obligation, the
creditor has waived any other remedy, and must abide by
the results of the sale. No deficiency is recoverable.
It is well to note that the rule of Article 2115 is by
no means unique. It is but an extension of the legal
prescription contained in Article 1484(3) of the same
Code, concerning the effect of a foreclosure of a chattel
mortgage constituted to secure the price of the personal
216
 Revised Motor Vehicles Law. There is no doubt that
Facts: Uy had a motor vehicle of Zamora attached in court. with respect to defendant Zamora and the intervenor
The writ of attachment was levied on the vehicle on Allied Finance, Inc., plaintiff Uy is a third person. We,
August 11, 1960. Subsequently, the Municipal Court therefore, hold that plaintiff's credit should first be paid.
rendered judgment for Uy. Zamora appealed.
While the case was thus pending appeal, the Allied Carried Lumber Company vs. Agricultural Credit
Finance, Inc. sought and was allowed to intervene. & Cooperative Financing
According to the intervenor, the motor vehicle, which was Administration (ACCFA), G.R. No. L-21836, April 22,
attached by the Sheriff, had previously been mortgaged to 1975 (63 SCRA 411)
it by defendant Zamora to secure the payment of a loan of
P3,060 and that at the time of the filing of the complaint in
intervention on December 19, 1960 there remained a
balance of P2,451.93 in its favor.
Meanwhile, Uy and Zamora submitted to the court
a compromise agreement wherein Zamora admitted
being indebted to Uy. Since the motor vehicle had
already been sold on order of the Court for P2,500 to
prevent depreciation, defendant Zamora agreed to have
plaintiff Uy's credit paid out of the proceeds of the sale.
The court found Zamora liable to both Uy and
Allied Finance, Inc. Since the proceeds of the sale of the
vehicle was not enough to cover the two debts, there is
now a controversy on who has preference.
In resolving the issue, the lower court held that
intervenor's claim could not be considered specially
preferred credit under Article 2241(4) of the Civil Code
because an unregistered chattel mortgage is void.
However, the court held that the same could be
considered a credit appearing in a public instrument
under Article 2244(14) so that it could be considered
preferred over plaintiff's attachment lien because of
priority of its date. Uy appealed.

Issue: Whether an unregistered chattel mortgage credit is

preferred to an attachment lien.

Held: No. Reversed.

Ratio: Considering the fact that the intervenor Allied

Finance, Inc. registered its mortgage only on August 24,
1960, or subsequent to the date of the writ of attachment
obtained by plaintiff Uy on August 11, 1960, the credit of
the intervenor cannot prevail over that of the plaintiff.
The lower court upheld intervenor's credit on the ground
that, being embodied in a public instrument of an earlier
date (June 20, 1960), it should take precedence over
plaintiff's lien by attachment (August 11, 1960),
pursuant to Article
2244 of the Civil Code. This is untenable, for the reason
that, as already stated, the credit of the intervenor cannot
be considered as preferred until the same has been
recorded in the Motor Vehicles Office. Thus, in Borlough v.
Fortune Enterprises, Inc., 53 O.G. 4070, it was held that a
mortgage of motor vehicles, in order to affect third
persons, should not only be registered in the Chattel
Mortgage Registry, but the same should also be recorded in
the Motor Vehicles Office (now the Land Transportation
Commission), as required in Section 5 (e) of the then
217
Facts: Sta Barbara Farmers Cooperative Marketing The lumber company has no lien on the ricemill
Association, Inc. (Facoma) purchased on credit from building as the lien is only on the warehouse.
Carried Lumber Company lumber and materials which There is no necessity of initiating a liquidation or
were used in the construction of Facoms warehouse. The insolvency proceeding in this case in order to assert a pro
company extended credit to the Facoma after having been rata satisfaction of the debt. In this case, there are no
informed by the ACCFAs General Manager in a telegram other creditors aside from the lumber company and
that a loan had been approved for the construction of the ACCFA.
Facomas warehouse.
Facoma made partial payments to Carried Lumber
Company, but was unable to pay the balance. The
company sued Facoma. In a decision dated September
26, 1960, based on compromise, the lower court ordered
Facoma to make monthly installment payments to the
company and the failure to pay any installment will
render the whole unpaid balance due. Since Facoma
failed to make the installments, the company enforced
the judgment and levied upon the Facomas lease rights,
warehouse and ricemill building.
ACCFA filed a 3rd party claim with the sheriff on
the ground that the properties had already been sold to
ACCFA on November 6, 1960. Facoma was granted
by ACCFA a loan for the construction of a warehouse. As
security for that loan, Facoma mortgaged to ACCFA its
lease rights over the land and the warehouse to be
constructed. This mortgage was recorded. When
Facoma defaulted, ACCFA extrajudicially foreclosed on
the properties and came out as the highest bidder.
The sheriff, nevertheless, proceeded with the
auction sale and the company came out as the highest
bidder. A certificate of sale was issued. Since no
redemption was made, a final deed of sale was issued.
The company sued ACCFA for the purpose of
asserting its preferential lien. ACCFA raised the defense
that the company waived its lien when it filed an
ordinary action to recover its claim instead of enforcing
its lien. After trial, the lower court held that the lumber
companys materialmans lien was superior to ACCFAs
mortgage lien.

Issue: Whether preferred credits on a specific

immovable property should be satisfied pro rata and
should be considered as concurrent. Whether an
insolvency proceeding is required in order to have a
concurrence of credits.

Held: Yes. No. Reversed.

Ratio: The lower court was mistaken in assuming that the

enumeration of 10 claims, mortgages and liens in Art.
2242 creates an order of preference. It is not correct to
say that the materialmans lien or refectionary credit of
the lumber company being listed as No. 4 in Art. 2242 is
superior to ACCFAs mortgage credit which is listed as No.
5. The enumeration is not in order of preference. The
article lists the credits which may concur with respect to
specific real properties and which would be satisfied pro
rata according to Art. 2249.
218
Magdalena C. De Barreto, et al. vs. Jose G. Villanueva, et As to the point made that the articles of the Civil
al., G.R. No. L-14938, January 28, 1961 (1 SCRA 288) Code on concurrence and preference of credits are
applicable only to the insolvent debtor, suffice it to say
that nothing in the law shows any such limitation. If we
Facts: Rosario Cruzado, for herself and as
are to interpret this portion of the Code as intended
administratrix of the intestate estate of her deceased
only for insolvency cases, then other creditor-debtor
husband Pedro Cruzado, obtained from Rehabilitation
relationships
Finance Corporation (RFC) an P11,000 loan which was
secured by a parcel of land owned by the spouses.
When she failed to pay installments on the loan, the
mortgage was foreclosed and the RFC acquired the
property. Upon application, the land was sold back to
Rosario conditionally for an amount payable in 7 years.
2 years later, Rosario was authorized by the
court to sell the land with the previous consent of RFC.
Pursuant to such authority and consent, Rosario sold the
land to Pura L. Villanueva with the condition that the latter
will now assume the obligation owed to RFC. Pura made
partial payments and was able to secure the land title in
her name. She then mortgaged the property to Magdalena
C. Barretto as security for a loan.
Pura failed to pay the remaining installments on
the unpaid balance for the sale of the property. A
complaint for recovery of the same was filed with a levy
in attachment upon the property in favor of the vendor
(Rosario Cruzado). After trial, the court ruled for the
vendor.
Pura also failed to pay Magdalena Baretto. An
action for foreclosure of mortgage impleading the
Cruzados was filed. A decision was promulgated against
Pura. The court ordered the issuance of a writ of
execution. The Cruzados filed their Vendors lien over the
property, and the court gave due course to the lien and
ordered its annotation. The court also decreed that
should the realty be sold at public auction, the Cruzados
shall be credited with their pro-rata share in the proceeds.
At the sale, the Barrettos were able to buy the property.
The Barrettos sought reconsideration of the order of the
court giving due course to the lien of the Cruzados
which the court denied. They appealed on this issue.

Issue: Whether an unregistered vendors lien shall be

satisfied pro-rata together with a mortgage lien.

Held: Yes then No. Affirmed. Reversed upon MFR.

Ratio: Art. 2242 NCC enumerates the claims that

constitute as encumbrance on specific immovable
property and lists as No. (2) the vendors lien and as No.
(5) the mortgage lien. Art. 2249 provides that if there
are 2 or more credits with respect to the same specific
real property or real rights, they shall be satisfied pro-
rata. The law does not make any distinction between
registered and unregistered vendors lien, which only goes
to show that any lien of that kind enjoys the preferred
credit status. Section 70 of the Land Registration Act
itself respects without reserve or qualification the
paramount rights of lien holders on real property.

219
where there are concurrence of credits would be left vendors since they lost their rights as owners of the
without any rules to govern them, and it would render property when they failed to pay RFC the purchase price.
purposeless the special laws on insolvency. What they sold to Pura was their rights, title, interest
and dominion to the property. They merely assigned
whatever rights or claims they might still have thereto.
Ratio of MFR: Under the system of the Civil Code,
The ownerhip of the property rested with RFC which was
only taxes enjoy an absolute preference. All the
the one that sold the property to Pura. The sale from
remaining classes of preferred creditors under Art. 2242
Cruzado to Villanueva, therefore, was not so much a sale of
enjoy no priority among themselves, but must be paid pro
the land as it was a quitclaim deed in favor of Villanueva.
rata, i.e. in proportion to the amount of the respective
credits. But in order to make this prorating fully
effective, the preferred creditors must necessarily be
convened, and the import of their claims ascertained. It is
thus apparent that the full application of Art. 2249 and
2242 demands that there must be first some proceeding
where the claims of all the preferred creditors may be
bindingly adjudicated, such as insolvency, the settlement
of decedents estate, or other liquidation proceedings of
similar import. This explains the rule of Art. 2243 NCC that
the claims or credits enumerated shall be considered as
mortgages or pledges of real or personal property or liens
within the purview of legal provisions governing insolvency.
Thus, it becomes evident that one preferred creditors 3 rd
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 was
enforcing a credit for taxes that enjoys absolute priority.
If none of the claims is for taxes, a dispute between 2
creditors will not enable the Court to ascertain the
pro rata dividend corresponding to each, because the
rights of the other creditors likewise enjoying preference
under Article 2242 cannot be ascertained.
In the absence of insolvency proceedings, the
conflict between the parties now before us must be
decided pursuant to the well established principle
concerning registered lands; that a purchaser in good
faith and for value takes registered property free from
liens and encumbrances other than statutory liens and
those recorded in the certificate of title. There being no
insolvency or liquidation, the claim of the unpaid vendor
did not acquire the character and rank of a statutory lien
co-equal to the mortgagees recorded encumbrance, and
must remain subordinate to the latter. The court is
understandably loathed to adopt a rule that would
undermine the faith and credit to be accorded to
registered Torrens titles and nullify the beneficent
objectives sought to be obtained by the Land Registration
Act. No argument is needed to stress that if a person
dealing with registered land were to be held to take in
every instance subject to all 14 preferred claims
enumerated in Art. 2242 NCC, even if the existence and
import thereof cannot be ascertained from the records, all
confidence in Torrens titles would be destroyed. Upon the
other hand, it does not appear excessively burdensome to
require the privileged creditors to cause their claims to be
recorded in the books of the Register of Deeds should they
desire to protect their rights even outside of insolvency or
liquidation proceedings.
The Cruzados also cannot be considered as unpaid
220
J.L. Bernardo Construction, represented by attorneys- insolvency proceedings.
in-fact Santiago R. Sugay, Edwin A. Sugay & Fernando The action filed by the petitioners in the trial
S.A. Erana, Santiago R. Sugay, Edwin A. Sugan & court does not partake of the nature of an insolvency
Fernando S.A. Erana vs CA & Mayor Jose L. Salonga, proceeding. It is basically for specific performance and
G.R. No. 105827, January damages. Thus, even if it is finally adjudicated that
31, 2000 (324 SCRA 24) petitioners actually stand in the position of unpaid
contractors and are entitle to invoke the contractors lien,
such lien cannot be enforced in the present action for
Facts: The municipal government of San Antonio,
there is no way of determining whether or not there exist
Nueva Ecija approved the construction of San Antonio
other preferred creditors with respect to such property.
Public Market to be funded by the Economic Support Fund
Secretariat (ESFS), a government agency working with the The fact that no 3 rd party claims have
USAID. The petitioners entered into a business venture
for the purpose of participating in the bidding for the
public market. The contract was awarded to them. Under
the Construction Agreement, the municipality agreed to
assume the expenses for the demolition, and clearing and
site filling and to provide cash equity.
Although the whole amount of the cash equity
became due, the municipality refused to pay despite
repeated demand and notwithstanding that the public
market was
98% complete. Furthermore, the petitioners advanced
the expenses for the demolition, clearing and site filling,
and they have not yet been reimbursed.
The petitioners filed a case. The court
granted a preliminary attachment. Although the usual
way of enforcing a lien is by a decree of sale of the
property and the application of the proceeds to the
payment of the debt secured by it, the court found it more
practical and reasonable to permit the petitioners to
operate the public market and to apply to their claims the
income derived therefrom, in the form of rentals and
goodwill from the prospective stallholders of the market.
The CA reversed the order of the lower court.

Issue: Whether a contractors lien can be enforced without

an insolvency proceeding.

Held: No. Affirmed.

Ratio: Art. 2241 and 2242 of the Civil Code enumerates

certain credits which enjoy preference with respect to
specific personal or real property of the debtor.
Specifically, the contractors lien is granted under the
third paragraph of Art. 2242. However, Art.
2242 only finds application when there is a concurrence
of credits, i.e. when the same specific property of the
debtor is subjected to the claims of several creditors and
the value of such property of the debtor is insufficient to
pay in full all the creditors. In such a situation, the
question of preference will arise, that is, there will be a
need to determine which of the creditors will be paid
ahead of the others. Fundamental tenets of due
process will dictate that this statutory lien should then
only be enforced in the context of some kind of a
proceeding where the claims of all the preferred
creditors may be bindingly adjudicated, such as

221
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.
Petitioners may only obtain possession and use of
the public market by means of a preliminary attachment
upon such property, in the event that they obtain a
favorable judgment in the trial court. Clearly, the trial
courts order granting possession and use of the public
market to the petitioners does not adhere to the
procedure for attachment laid out in the Rules of Court.
Ratio: DBP and PNB are mandated by law to foreclose
when an account has reached certain arrearages, thus
they were only fulfilling a duty when they foreclosed on
the properties.
In the absence of liquidation proceedings, the
claim of Remington cannot be enforced against DBP.
The ruling in the Barretto case applies to this case.
Although

Development Bank of the Philippines vs. CA &

Remington Industrial Sales
Corporation, G.R. No. 126200, August 16, 2001 (363
SCRA 307)

Facts: Marinduque Mining Industrial Corporation

obtained from the PNB various loan accommodations.
To secure the loans, the mining company executed
real estate mortgage and chattel mortgage in favor of PNB.
The mortgage covered all of the mining companys real
properties located at Surigao del Norte, Sipalay, Negros
Occidental, and Antipolo, including improvements.
The Mining Company executed in favor of PNB
and DBP a second Mortgage Trust Agreement over all its
real properties, including improvements. The mortgage
also covered all chattels, as well as assets of whatever
kind, nature and description which the mining company
may subsequently acquire in substitution or replenishment
or in addition to th properties covered by the previous
Deed of Real and Chattel Mortgage.
An amendment to the Mortgage Trust Agreement
was made in favor of PNB and DBP over all other real and
personal properties and other real rights subsequently
acquired.
The mining company failed to settle its loan
obligations, thus PNB and DBP
instituted extrajudicial foreclosure proceedings.
In the meantime, the mining company purchased
and caused to be delivered construction materials and
other merchandise from Remington Industrial Sales
Corporation. The purchases remained unpaid when
Remington filed a complaint for sum of money and
damages. The complaint was amended to include PNB
and DBP in view of the foreclosure by the latter of the
real and chattel mortgages on real and personal
properties, chattels, mining claims, machinery, equipment
and other assets of the mining company. Several other
amendments to the complaint were made to implead
other parties.
The lower court ruled for Remington. CA affirmed.

Issue: Whether an unpaid sellers lien on movables shall

be given preference in the absence of a liquidation
proceeding.

Held: No. Reversed.

222
Barretto involved specific immovable property, the ruling specially preferred credits, the residual value will form
therein should apply equally in this case where specific part of the free property of the insolvent.
movable property is involved. As the extrajudicial In contrast, Art. 2244 creates no liens on
foreclosure instituted by PNB and DBP is not the determinate property which follow such property. What
liquidation proceeding contemplated by the Civil Code, Art. 2244 creates is simply rights in favor of certain
Remington cannot claim its pro rata share from DBP. creditors to have the cash and other assets of the insolvent
applied in a certain sequence or order of priority. In this
sequence, certain taxes and assessments also figure but
RP, represented by the Bureau of Customs & BIR vs.
these do not have the same kind of overriding preference
Honorable E.L. Peralta, Presiding Judge of the CFI of
that Art. 2241 No. 1 and 2242 No. 1 create for taxes which
Manila, Branch XVII, Quality Tobacco Corp., Francisco
constitutes liens on the taxpayers property.
Candeleria, Federacion Obrero de la Industria
Tabaquera Y Otros Trabajadores de Filipinas
(FOITAF), USTC Employees Association Workers
Union-PTGWO, G.R. No. L-56568, May 20, 1987 (150
SCRA 37)

Facts: In the voluntary insolvency proceedings

commenced by Quality Tobacco Corp, the following claims
of creditors were filed: separation pay of workers; BIR
tobacco inspection fees; and BOC customs duties and
importation taxes which appear to be secured by surety
bonds. The trial court ruled that the separation pay of
workers were to be preferred over the claims of BOC and
BIR as provided by Art. 110 of the Labor Code. The Solgen
seeks the reversal of this judgment on the ground that Art.
110 does not apply since it speaks of wages which does not
include separation pay.

Issue: Whether separation pay claims of laborers is

preferred over BIR and BOC claims.

Held: Yes. Affirmed.

Ratio: Art. 110 of the Labor Code cannot be viewed in

isolation. Rather, Art. 110 must be read in relation to the
provisions of the Civil Code concerning the classification,
concurrence and preference of credits, which provisions
find particular application in insolvency proceedings,
where the claims of all creditors, preferred or non-
preferred, may be adjudicated in a binding manner.
Art. 2241 and 2242 NCC are special preferred
credits. These credits constitute liens or encumbrances
on specific movable or immovable property to which they
relate. These credits, except for taxes, are not preferred
one over another inter se. Non-tax liens or special
preferred credits which subsist in respect of specific
movable or immovable property are to be treated on an
equal basis and to be satisfied concurrently and
proportionately. Put succinctly, Art. 2241 & 2242 jointly
with Arts. 2246 to 2249 establish a 2-tier order of
preference. The first tier includes only taxes, duties and
fees due on specific movable or immovable property. All
other special preferred credits stand on the same 2nd tier
to be satisfied, pari passu and pro rata, out of any residual
value of the specific property to which such other credits
relate. If the value of the specific proerty involved is
greater than the sum total of the tax liens and other
223
 The claim of the BOC for unpaid customs duties No.
and taxes enjoys the status of specially preferred credit 6. In case there are no more inventory, the claim of the
under Art. 2241 No. 1, only in respect of the articles of unions will have to be satisfied out of the free property
importation which are still in the custody or subject under Art. 2244 as modified by Art. 110 LC.
to the control of the BOC. Unsatisfied claims of the BOC The BOC will have preference in importations still
which is No. 9 in the order of Art. 2244 will have to be paid in its custody. If there are no such importations or if such
out of the insolvents free property. importations are insufficient, it will only have 9 th priority
The claim of BIR for Tobacco Inspection Fees are by virtue of Art. 2244 No. 9. In respect of the free
imposed both as a regulatory measure and as a revenue- property, the unions will enjoy first priority and will be
raising measure. It follows that the claim of the BIR is a paid ahead of the claims of the BOC. The claims of the
tax lien upon all the properties and assets, movable and Union do not include the 10% claim for attorneys fees
immovable, of the insolvent as taxpayer under Art. 2241 which do not stand on the same footing as separation pay.
No.1 and 2242 No. 2.
Art. 110 LC does not purport to create a lien in
favor of workers or employees for unpaid wages. Claims
for unpaid wages do not therefore fall at all within the
category of specially preferred claims, except to the extent
that such claims of unpaid wages are already covered by
Art. 2241 No. 6 and 2242 No. 3. Under, Art. 2241 No. 6,
the claim for separation pay constitutes as liens attaching
to the processed leaf tobacco, cigars and cigarettes, and
other products produced or manufactured by the insolvent,
but not to other assets. The claims of the unions may be
given effect only after the BIRs claim.
Art. 110 LC did not sweep away the overriding
preference accorded to tax claims of the government or
any subdivision thereof. It cannot be assumed simpliciter
that the legislative authority, by using the words first
preference and any provision of law to the contrary
notwithstanding intended to disrupt the elaborate and
symmetrical structure set up in the Civil Code. Neither
can it be assumed casually that Art. 110 intended to
subsume the sovereign itself within the term other
creditors in stating that unpaid wages shall be paid in full
before other creditors may establish any claim to a share in
the assets of employer. Insistent considerations of public
policy prevent us from giving to other creditors a
linguistically unlimited scope that would embrace the
universe of creditors save only unpaid employees.
Art. 110, however, has an impact on the
provisions of the Civil Code. Bearing in mind the
overriding precedence given to taxes, duties and fees and
the fact that the Labor Code does not impress any lien on
the property of an employer, the use of the phrase first
preference in Art. 110 indicates that what Art. 110
intended to modify is the order of preference found in Art.
2244 which order relates, as we have seen, to properties of
the insolvent that are not burdened with liens or
encumbrances created or recognized by Art.
2241 and 2242. Art. 110 modified Art. 2244 in 2
respects: (a) by removing the 1-year limitation found in
Art. 2244, No. 2. And (b) by moving up claims for unpaid
wages of laborers or workers of the insolvent from 2nd
priority to 1st priority.
The BIR will have preference in the processed or
manufactured tobacco products. The remaining value will
be subject to a lien in favor of unions by virtue of Art. 2241

224
Cruz, dissenting: If the law had intended an exception, it
would have and could easily have provided for it. The
Labor Code was promulgated by President Marcos who
was aware of the usual preference of tax claims. So
informed, he would have reserved that primacy in the
above article if that was what he really wanted. The fact
that he did not is to me certain indication of his
intention, viz., that under the said article the claims of
laborers for unpaid wages shall have priority above all
else. It is axiomatic that the words of a statute are to be
given their normal and ordinary connotation. Moreover,
the Labor Code was promulgated later than the Civil Code,
the Insolvency Law, and the Internal Revenue Code. The
Labor Code prevails over these earlier statutes as it
represents the later expression of legislative will.
scheme of concurrence and preference of credit is to
raise the workers claim into first priority under Art. 2244
NCC. Not being an absolutely preferred credit, as taxes
under Art. 2241 (1) and 2242 (1), Dizons claims cannot
be paid ahead of other credits and outside of the
liquidation proceeding because the free property has not
yet been determined. Thus, Dizons adjudicated claims
should be submitted to the liquidators for processing. If
it is later adjudicated that the liquidation is improper,
then the NLRCs decision may be executed

Banco Filipino Savings & Mortgage Bank

(Represented by its liquidator, Ms. Carlota P.
Valenzuela) vs. NLRC, Labor Arbiter Evangeline
Lubaton, & Fortunato Dizon, Jr., G.R. No. 82135, August
20, 1990 (188 SCRA 700)

Facts: Banco Filipino Savings & Mortgage Bank was placed

under receivership and later ordered liquidated by the
Monetary Board of the Central Bank. Mr. Fortunato Dizon,
the EVP and COO of the bank, filed with the liquidator a
request for the payment to him of the cash equivalent of
his vacation and sick leave credits and
unexpended/unused reimbursable allowance. His claims
were not paid by the liquidator. Dizon then filed with
the labor arbiter a complaint against the bank for recovery
of unpaid salary, the cash equivalent of his accumulated
vacation and sick leaves, termination pay, damages and
attorneys fees. The liquidator moved for dismissal on
grounds of jurisdiction. The Labor Arbiter upheld her
jurisdiction and ruled for Dizon. The NLRC affirmed.

Issue: Whether labor claims against a bank under

liquidation are still under the jurisdiction of the NLRC.
Whether Art. 110 LC upgraded the laborers claim to an
absolutely preferred credit.

Held: Yes. No. Affirmed.

Ratio: There is nothing in Section 29 of the Central Bank

Act that suggests that the jurisdiction of the liquidation
court to adjudicate claims against the insolvent bank is
exclusive. On the other hand, Art. 217 LC explicitly
provides that labor arbiters have original and exclusive
jurisdiction over money claims of an employee against his
employer. The Court does not think that this jurisdiction
would be lost simply because a former employer has been
placed under liquidation.
Under normal circumstances, the decision of the
NLRC is immediately executory. The Court ruled that Art.
110 LC did not upgrade the workers claim as absolutely
preferred credit. The significance of Art. 110 in the
225
under normal procedure. If the contrary is proven, then binding adjudication instead of the piecemeal settlement
the banks liquidation shall proceed and Dizons which would result from the questioned decision in this
established claims should be treated as an ordinary case.
preferred credit enjoying first preference.

DBP vs. Hon. Labor Arbiter Ariel C. Santos, Phil.

Association of Free Labor Unions (PAFLU-RMC
Chapter) and its members, Michael Penalosa, et al.,
Samahang Diwang Manggagawa sa RMC-FFW Chapter,
and its members, Jaime Arada, et al., G.R. Nos. 78261-
62, March 8, 1989 (171 SCRA 138)

Facts: PAFLU-RMC and its members filed a labor case

against Riverside Mills Corporation. The labor arbiter
ruled for the complainants. Other laborers also filed cases
against the corporation which was also decided in their
favor. A notice of levy on execution of certain real
properties was annotated.
Meanwhile, DBP obtained a writ of possession
from the RTC on all the properties of RMC after having
extrajudicially foreclosed the same at public auction earlier
in 1983. DBP subsequently leased the properties to Egret
Trading and Manufacturing Corporation, Rasario Textile
Mills, and General Textile Mills.
The writ of possession prevented the scheduled
auction sale of RMC properties to execute the award for
the laborers. The laborers filed an incidental petition
with the NLRC to declare their preference over the levied
properties. The Labor Arbiter issued an order recognizing
and declaring the laborers first preference. The NLRC
set aside the decision and remanded the case for
further proceedings. The Labor Arbiter again affirmed
the preference of the laborers claims.

Issue: Whether a declaration of bankruptcy or a judicial

liquidation is required before the workers preference may
be enforced.

Held: Yes. Reversed.

Ratio: A declaration of bankruptcy or a judicial

liquidation must be present before the workers
preference may be enforced. Thus, Art. 110 of the Labor
Code and its implementing rule cannot be invoked in this
case absent a formal declaration of bankruptcy or a
liquidation order. Following the rule in Republic vs.
Peralta, to hold that Art. 110 is also applicable in
extrajudicial proceedings would be putting the worker in
a better position than the State which could not assert
its own preference in case of a judicial proceeding.
Therefore, Art. 110 must not be viewed in isolation and
must always be reckoned with the provisions of the Civil
Code.
The claims of all creditors, whether preferred or
non-preferred, the identification of the preferred ones and
the totality of the employers asset should be brought into
the picture. There can then be an authoritative, fair, and
226