Escolar Documentos
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DECISION
REYES, R.T. , J : p
PARTIES may not impugn the effectivity of a contract, after much bene t has
been gained to the prejudice of another. They are bound by the obligations they
expressly set out to do.
Before Us is a petition for review on certiorari of the Decision 1 of the Court of
Appeals (CA) which a rmed with modi cation that of the Regional Trial Court (RTC) in
Cebu City, 2 holding petitioner Marlou Velasquez liable under his letter of undertaking to
respondent Solidbank Corporation.
The Facts
Petitioner is engaged in the export business operating under the name
Wilderness Trading. Respondent is a domestic banking corporation organized under
Philippine laws.
The case arose out of a business transaction for the sale of dried sea cucumber
for export to South Korea between Wilderness Trading, as seller, and Goldwell Trading
of Pusan, South Korea, as buyer. To facilitate payment of the products, Goldwell
Trading opened a letter of credit in favor of Wilderness Trading in the amount of
US$87,500.00 3 with the Bank of Seoul, Pusan, Korea.
On November 12, 1992, petitioner applied for credit accommodation with
respondent bank for pre-shipment nancing. The credit accommodation was granted.
Petitioner was successful in his rst two export transactions both drawn on the letter
of credit. The third export shipment, however, yielded a different result.
On February 22, 1993, petitioner submitted to respondent the necessary
documents for his third shipment. Wanting to be paid the value of the shipment in
advance, petitioner negotiated for a documentary sight draft to be drawn on the letter
of credit, chargeable to the account of Bank of Seoul. The sight draft represented the
value of the shipment in the amount of US$59,640.00. 4
As a condition for the issuance of the sight draft, petitioner executed a letter of
undertaking in favor of respondent. Under the terms of the letter of undertaking,
petitioner promised that the draft will be accepted and paid by Bank of Seoul according
to its tenor. Petitioner also held himself liable if the sight draft was not accepted. The
letter of undertaking provided:
Feb. 22, 1993
SOLIDBANK CORPORATION
32 Borromeo Street
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Cebu City
2) LATE SHIPMENT.
3) QUANTITY SHIPPED @ US$14.00 OVERDRAWN BY 0.06 TON.
(1) to pay the plaintiff the principal sum of P1,495, 115.16 plus interest at
20% per annum counted from February 22, 1993 up to the time the
entire amount shall have been fully paid;
(2) to pay attorney's fees equivalent to 10% of the total amount due the
plaintiff; and
SO ORDERED. 1 1
The RTC ratiocinated:
This court is not convinced with the defendant's argument that because
of plaintiff's failure to protest the dishonor of the sight draft, his liability is
extinguished because his liability remains under the letter of undertaking which
he signed and without which plaintiff would not have advanced or credited to
him the amount.
Section 152 of the Negotiable Instruments Law under which defendant
claims extinguishment of his liability to plaintiff is not a bar to the ling of other
appropriate remedies which the aggrieved party may pursue to vindicate his
rights and in this instant case, plaintiff wants his right vindicated by virtue of
the letter of undertaking which defendant signed. By the letter of undertaking,
defendant bound himself to pay on demand all damages including attorney's
fees which plaintiff may suffer arising by reason of or on account of
negotiating the above draft because of the following discrepancies or any other
discrepancy or reasons whatsoever and further to pay on demand full amount
of any unpaid balance with interest at the prevailing rate. He should be bound to
the ful llment of what he expressly obligated himself to do and perform in the
letter of undertaking without which, plaintiff would not have advance (sic) and
credited to him the amount in the draft. He should not enrich himself at the
expense of plaintiff. 1 2 (Emphasis added)
Disagreeing, petitioner elevated the matter to the CA.
On June 27, 2002, the CA a rmed with modi cation the RTC decision, disposing
as follows:
WHEREFORE, premises considered, the assailed Decision is hereby
AFFIRMED with MODIFICATION. Defendant-appellant Marlou L. Velasquez is
hereby ordered to pay plaintiff-appellee Solidbank Corporation, the following: (1)
the principal amount of One Million Four Hundred Ninety-Five Thousand One
Hundred Fifteen and Sixteen Centavos (P1,495,115.16) plus interest at twelve
percent (12%) per annum from February 22, 1993 until fully paid, (2) attorney's
fees equivalent to ve percent (5%) of the total amount due, and (3) costs of the
suit.
SO ORDERED. 1 3
In ruling against petitioner, the CA opined:
I.
THE COURT OF APPEALS RULED THAT PETITIONER IS LIABLE ON THE
ACCESSORY CONTRACT, THE LETTER OF UNDERTAKING, DESPITE THE
FACT THAT PETITIONER WAS ALREADY RELEASED FROM LIABILITY
UNDER THE SIGHT DRAFT, THE PRINCIPAL CONTRACT, UNDER THE
PROVISIONS OF THE NEGOTIABLE INSTRUMENTS LAW AND THE CIVIL
CODE.
II.
THE COURT OF APPEALS HELD PETITIONER LIABLE UNDER THE
ACCESSORY CONTRACT, THE LETTER OF UNDERTAKING, DESPITE THE
FACT THAT THERE WAS NO PROOF WHATSOEVER THAT PETITIONER
VIOLATED EITHER THE PRINCIPAL CONTRACT, THE SIGHT DRAFT, OR
EVEN THE LETTER OF UNDERTAKING. 1 8 (Underscoring supplied)
The main issue is whether or not petitioner should be held liable to respondent
under the sight draft or the letter of undertaking. There is no dispute that petitioner duly
signed and executed these documents. It is likewise admitted that the sight draft was
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dishonored by non-acceptance by the Bank of Seoul.
Our Ruling
The petition is without merit.
Petitioner is not liable under the
sight draft but he is liable under
his letter of undertaking; liability
under the letter of undertaking
was not extinguished by non-
protest of the dishonor of the
sight draft.
Petitioner argues that he cannot be held liable under either the sight draft or the
letter of undertaking. He claims that the failure of respondent to protest the dishonor of
the sight draft under Section 152 of the NIL discharged him from liability under the
negotiable instrument. It is also contended that his liability under the letter of
undertaking is that of a mere guarantor; that the letter of undertaking is only an
accessory contract to the sight draft. Since he was discharged from liability under the
sight draft, he cannot be held liable under the letter of undertaking.
For its part, respondent counters that petitioner's liability springs from the letter
of undertaking, independently of the sight draft. It would not have advanced the amount
without the letter of undertaking. According to respondent, the letter of undertaking is
an independent agreement and not merely an accessory contract. To permit petitioner
to escape liability under the letter of undertaking would result in unjust enrichment.
Petitioner's liability under the letter of undertaking is independent from his
liability under the sight draft. He may be held liable under either the sight draft or the
letter of undertaking or both.
Admittedly, petitioner was discharged from liability under the sight draft when
respondent failed to protest it for non-acceptance by the Bank of Seoul. A sight draft
made payable outside the Philippines is a foreign bill of exchange. 1 9 When a foreign bill
is dishonored by non-acceptance or non-payment, protest is necessary to hold the
drawer and indorsers liable. Verily, respondent's failure to protest the non-acceptance
of the sight draft resulted in the discharge of petitioner from liability under the
instrument.
Section 152 of the NIL is explicit:
Section 152. In what cases protest necessary . — Where a foreign bill
appearing on its face to be such is dishonored by non-acceptance, it must be
duly protested for non-acceptance, and where such a bill which has not been
previously dishonored by non-acceptance, is dishonored by non-payment, it
must be duly protested for non-payment. If it is not so protested, the drawer and
indorsers are discharged. Where a bill does not appear on its face to be a
foreign bill, protest thereof in case of dishonor is unnecessary. (Emphasis
added)
Petitioner, however, can still be made liable under the letter of undertaking. It
bears stressing that it is a separate contract from the sight draft. The liability of
petitioner under the letter of undertaking is direct and primary. It is independent from
his liability under the sight draft. Liability subsists on it even if the sight draft was
dishonored for non-acceptance or non-payment.
Respondent agreed to purchase the draft and credit petitioner its value upon the
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undertaking that he will reimburse the amount in case the sight draft is dishonored. The
bank would certainly not have agreed to grant petitioner an advance export payment
were it not for the letter of undertaking. The consideration for the letter of undertaking
was petitioner's promise to pay respondent the value of the sight draft if it was
dishonored for any reason by the Bank of Seoul.
We cannot accept petitioner's thesis that he is only a mere guarantor under the
letter of credit. Petitioner cannot be both the primary debtor and the guarantor of his
own debt. This is inconsistent with the very purpose of a guarantee which is for the
creditor to proceed against a third person if the debtor defaults in his obligation.
Certainly, to accept such an argument would make a mockery of commercial
transactions.
Petitioner bound himself liable to respondent under the letter of undertaking if
the sight draft is not accepted. He also warranted that the sight draft is genuine; will be
paid by the issuing bank in accordance with its tenor; and that he will be held liable for
the full amount of the draft upon demand, without necessity of proceeding against the
drawee bank. 2 0 Petitioner breached his undertaking when the Bank of Seoul
dishonored the sight draft and Goldwell Trading ordered a stop payment order on it for
discrepancies in the export documents.
Petitioner is liable without need for
respondent to establish collateral
facts such as violations of the letter
of credit.
It is also argued that petitioner cannot be held liable under the letter of
undertaking because respondent failed to prove that he violated any of the provisions in
the letter of credit or that sixty (60) of the seventy-one (71) bags shipped to Goldwell
Trading contained soil instead of dried sea cucumber.
We cannot agree. Respondent need not prove that petitioner violated the
provisions of the letter of credit in order to be held liable under the letter of
undertaking. Parties are bound to ful ll what has been expressly stipulated in the
contract. 2 1 Petitioner's liability under the letter of undertaking is clear. He is liable to
respondent if the sight draft is not accepted by the Bank of Seoul. Mere non-
acceptance of the sight draft is su cient for liability to attach. Here, the sight draft was
dishonored for non-acceptance. The non-acceptance of the sight draft triggered
petitioner's liability under the letter of undertaking.
Records also show that the Bank of Seoul found discrepancies in the documents
submitted by petitioner. Goldwell Trading issued a stop payment order because the
products shipped were defective. It found that most of the bags shipped contained soil
instead of dried sea cucumber. If petitioner disputes the nding of Goldwell Trading, he
can le a case against said company but he cannot dispute his liability under either the
sight draft or the letter of undertaking.
As We see it, this is a straightforward case of collection of sum of money on the
basis of a letter of undertaking. Respondent advanced the export payment to petitioner
on the understanding that the draft will be honored and paid. The draft was dishonored.
Justice and equity dictate that petitioner be held liable to respondent bank.
WHEREFORE, the petition is DENIED for lack of merit. The Decision of the Court
of Appeals dated June 27, 2002 is hereby AFFIRMED.
SO ORDERED.
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Austria-Martinez, * Tinga, ** Chico-Nazario and Nachura, JJ., concur.
Footnotes
1. Rollo, pp. 38-55. Penned by Associate Justice Andres B. Reyes, Jr., with Associate Justices
Josefina Guevara-Salonga and Mario L. Guariña, III. concurring.
2. Id. at 115-121.
3. Irrevocable Letter of Credit No. M2073210NS00040, opened on October 6, 1992.
4. Rollo, p. 70.
5. Id.
6. Annex "Q".
7. Rollo, pp. 81-82. Demand letters dated March 9, 1993, March 23, 1993, and April 7, 1993.
8. Docketed as Civil Case No. CEB-14080, RTC, Branch 8, Cebu City.
9. Rollo, pp. 100-109.
10. Id. at 115-121.
Sec. 129. Inland and Foreign Bills of Exchange. — An inland bill of exchange is a bill which is,
or on its face purports to be, both drawn and payable within the Philippines. Any other
bill is foreign bill. Unless the contrary appears on the face of the bill, the holder may treat
is as an inland bill.
20. Rollo, pp. 61-62.
21. New Civil Code, Art. 1315 provides: "Contracts are perfected by mere consent, and from that
moment the parties are bound not only to the ful llment of what has been expressly
stipulated but also to all the consequences which, according to their nature, may be in
keeping with good faith, usage and law."
* Vice Associate Justice Consuelo Ynares-Santiago, Chairperson, who is on o cial leave per
Special Order No. 497 dated March 14, 2008.
** Designated as additional member per Special Order No. 497 dated Mach 14, 2008.
SYLLABUS
DECISION
LABRADOR , J : p
Appeal against an order of the Court of First Instance of Manila, Hon. Bienvenido
A. Tan, presiding, dismissing the complaint as against Plaridel Surety and Insurance
Company.
SYLLABUS
DECISION
CONCEPCION , J : p
"(a) Ordering the defendant Eliseo Barbosa to pay to the Court, for the
benefit of the plaintiff within a period of ninety (90) days from receipt by the
defendant hereof, the sum of P2,889.53, with interest at the rate of 12% per
annum computed on the basis of the amounts of the installments mentioned in
the mortgage and of the dates they respectively fell due, until fully paid; the sum
of P200 by way of attorney's fees, plus costs; and (b) Upon failure of the
defendant to pay as aforesaid, ordering the land described in the complaint and
subject of the mortgage to be sold at public auction in accordance with law in
order to realize the amount of the judgment debt and costs."
Although originally forwarded to the Court of Appeals, the same has certi ed the
record to this Court in view of the fact that the issues raised in the appeal involve
merely questions of law.
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Plaintiff, Southern Motors, Inc., brought this action against Eliseo Barbosa, to
foreclose a real estate mortgage, constituted by the latter in favor of the former, as
security for the payment of the sum of P2,889.53 due to said plaintiff from one Alfredo
Brillantes, who had failed to settle his obligation in accordance with the terms and
conditions of the corresponding deed of mortgage. Defendant Eliseo Barbosa led an
answer admitting the allegations of the complaint and alleging, by way of "special and
affirmative" defense:
"That the defendant herein has executed the deed of mortgage Annex A for
the only purpose of guaranteeing — as surety and/or guarantor — the payment of
the above mentioned debt of Mr. Alfredo Brillantes in favor of the plaintiff.
"That the plaintiff until now has no right action against the herein
defendant on the ground that said plaintiff, without motive whatsoever, did not
intent or intent to exhaust all recourses to collect from the true debtor Mr. Alfredo
Brillantes the debt contracted by the latter in favor of said plaintiff, and did not
resort nor intends to resort all the legal remedies against the true debtor Mr.
Alfredo Brillantes, notwithstanding the fact that said Mr. Alfredo Brillantes is
solvent and has many properties within the Province of Iloilo."
Thereupon, plaintiff moved for summary judgment which a branch of the Court of
First Instance of Iloilo, presided over by Hon. Roman Ibañez, Judge, denied upon the
ground that it "is premature". Plaintiff moved for a reconsideration of the order to this
effect. Soon later, he led, also, another motion praying that the case be transferred to
another branch of said court, because that of Judge Ibañez would be busy trying
cadastral cases, and had adopted the "policy of refraining from entertaining any other
civil cases and all incidents related thereto, until after said cadastral cases shall have
been nally disposed of." With the express authority of Judge Ibañez, the case was
referred to the branch of said court, presided over by Hon. Querube C. Makalintal,
Judge, for action, upon said motion for reconsideration. Thereafter, Judge Makalintal
rendered the aforementioned decision, from which the defendant has appealed. He
maintains, in his brief, that:
"1. The trial court erred in hearing plaintiff-appellee's 'motion for
reconsideration' dated June 9, 1951, notwithstanding the fact that defendant-
appellant was not served with a copy thereof nor served with notice of the hearing
thereof.
2. "The trial court erred in rendering a 'judgment on the pleadings' in
appellee's favor when no issue was at all submitted to it for resolution, to the
prejudice of the substantial rights of appellant.
3. "The court a quo erred in depriving defendant-appellant of his
property rights without due process of law."
The rst assignment of error is based upon an erroneous predicate, for, contrary
to defendant's assertion, his counsel in the lower court, Atty. Manuel F. Zamora, through
an employee of his of ce, by the name of Agripino Aguilar, was actually served on June
9, 1951, with copy of plaintiff's motion for reconsideration, with notice to the effect that
said motion would be submitted for the consideration and approval of the lower court,
on Saturday, June 16, 1951, at 8:00 a.m., or soon thereafter as counsel may be heard.
The second assignment of error is, likewise, untenable. It is not true that there
was no issue submitted for determination by the lower court when it rendered the
decision appealed from.
It will be recalled that each one of the allegations made in plaintiff's complaint
were expressly admitted in defendant's answer, in which he merely alleged, as "special
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and af rmative" defense, that plaintiff is not entitled to foreclose the mortgage
constituted in its favor by the defendant, because the property of Alfredo Brillantes, the
principal debtors, had not been exhausted as yet, and were not sought to be exhausted,
for the satisfaction of plaintiff's credit. Thus, there was no question of fact left for
determination. The only issue set up by the pleadings was the suf ciency of said
af rmative defense. And such was the only point discussed by the defendant in his
opposition to plaintiff's motion for a summary judgment, referring, evidently, to a
judgment on the pleadings.
Plaintiff's motion for reconsideration of the order of Judge Roman Ibañez
refusing to render said judgment, upon the ground that it was premature, revived said
issue of suf ciency of the aforementioned af rmative defense, apart from calling for a
reexamination of the question posed by said order of Judge Ibañez, namely, whether it
was proper, under the circumstances, to render a judgment on the pleadings. In other
words, said motion for reconsideration had the effect of placing before then Judge
Makalintal, for resolution, the following issues, to wit: (1) whether a summary judgment
or a judgment on the pleadings was in order, considering the allegations of plaintiff's
complaint and those of defendant's answer; and (2) whether the mortgage in question
could be foreclosed although plaintiff had not exhausted, and did not intend to exhaust,
the properties of his principal debtor, Alfredo Brillantes.
The third assignment of error is predicated upon the alleged lack of notice of the
hearing of plaintiff's motion for reconsideration. As stated in our discussion of the rst
assignment of error, this pretense is refuted by the record. Moreover, it is obvious that
defendant's affirmative defense is devoid of merit for:
1. The deed of mortgage executed by him specifically provides:
"That if said Mr. Alfredo Brillantes or herein mortgagor, his heirs, executors,
administrators and assigns shall well and truly perform the full obligations above-
stated according to the terms thereof, then this mortgage shall be null and void,
otherwise it shall remain in full force and effect, in which event herein mortgagor
authorizes and empowers herein mortgagee-company to take any of the following
actions to enforce said payment;.
"(a) Foreclose, judicially or extrajudicially, the chattel mortgage above
referred to and/or also this mortgage, applying the proceeds of the purchase price
at public sale of the real property herein mortgaged to any deficiency or difference
between the purchase price of said chattel at public auction and the amount of
P2,889.53, together with its interest hereby secured; or
"(b) Simply foreclose this mortgage judicially in accordance with the
provisions of section 2, Rule 70, Rules of Court, or extra- judicially under the
provisions of Act No. 3135 and Act No. 4118, to satisfy the full amount of
P2,889.53, together with its interest of 12 per cent per annum."
2. The right of guarantors, under Article 2058 of the Civil Code of the
Philippines, to demand exhaustion of the property of the principal debtor, exists only
when a pledge or a mortgage has not been given as special security for the payment of
the principal obligation. Guarantees, without any such pledge or mortgage, are
governed by Title XV of said Code, whereas pledges and mortgages fall under Title XVI
of the same Code, in which the following provisions, among others, are found:
ART. 2087. "It is also of the essence of these contracts that when the
principal obligation becomes due, the things in which the pledge or mortgage
consists may be alienated for the payment to the creditor."
ART. 2126. "The mortgage directly and immediately subjects the
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property upon which it is imposed, whoever the possessor may be, to the
fulfillment of the obligation for whose security it was constituted."
3. It has been held already (Saavedra vs. Price, 68 Phil., 688), that a
mortgagor is not entitled to the exhaustion of the property of the principal debtor.
EN BANC
SYLLABUS
DECISION
Direct appeal from two orders, dated 19 May and 5 June 1965, issued by the Court of First
Instance of Manila (Judge Francisco Arca presiding), in its Civil Case No. 54913, entitled
Luzon Steel Corporation, plaintiff, vs. Metal Manufacturing of the Philippines, Inc., and Jose
O. Sia, defendants, whereby the court aforesaid quashed a writ of execution issued against
the Times Surety & Insurance Co., Inc., and cancelled the undertaking of said surety
company.
The essential and uncontroverted facts of the case may be summarized as follows:
Luzon Steel Corporation has sued Metal Manufacturing of the Philippines and Jose O. Sia,
the former's manager, for breach of contract and damages. It obtained a writ of
preliminary attachment of the properties of the defendants, but the attachment was lifted
upon a P25,000.00 counter-bond executed by the defendant Sia, as principal, and the
Times Surety & Insurance., Inc. (hereinafter designated as the surety), as solidary
guarantor, in the following terms:
"'WHEREFORE, we JOSE O. SIA, as principal, and the TIMES SURETY &
INSURANCE CO., INC., as Surety, in consideration of the dissolution of
attachment, hereby jointly and severally bind ourselves in the sum of Twenty Five
Thousand Pesos (P25,000.00), Philippine currency, to answer for the payment to
the plaintiff of any judgment it may recover in the action in accordance with
Section 12, Rule 59, of the Rules of Court. (pp. 32, 45, Rec. on Appeal.)"
Issues having been joined, plaintiff and defendant (without intervention of the surety)
entered into a compromise whereby defendant Sia agreed to settle the plaintiff's claim in
the following manner:
"1. That the Defendant shall settle with the Plaintiff the amount of TWENTY
FIVE THOUSAND (P25,000.00) PESOS, in the following manner: FIVE HUNDRED
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(P500.00) PESOS, monthly for the first six (6) months to be paid at the end of
every month and to commence in January, 1965, and within one month after
paying the last installment of P500.00, the balance of P22,000.00 shall be paid in
lump sum, without interest. It is understood that failure of the Defendant to pay
one or any installment will make the whole obligation immediately due and
demandable and that a writ of execution will be issued immediately against
Defendants bond."
The compromise was submitted to the court and the latter approved it, rendered judgment
in conformity therewith, and directed the parties to comply with the same (Record on
Appeal, page 22).
Defendant having failed to comply, plaintiff moved for and obtained a writ of execution
against defendant and the joint and several counter-bond. The surety, however, moved to
quash the writ of execution against it, averring that it was not a party to the compromise,
and that the writ was issued without giving the surety notice and hearing. The court,
overruling the plaintiff's opposition, set aside the writ of execution, and later cancelled the
counter-bond, and denied the motion for reconsideration. Hence this appeal.
Main issues posed are (1) whether the judgment upon the compromise discharged the
surety from its obligation under its attachment counterbond and (2) whether the writ of
execution could be issued against the surety without previous exhaustion of the debtor's
properties.
Both questions can be solved by bearing in mind that we are dealing with a counterbond
filed to discharge a levy on attachment. Rule 57, Section 12, specifies that an attachment
may be discharged upon the making of a cash deposit or filing a counterbond "in an
amount equal to the value of the property attached as determined by the judge"; that upon
the filing of the counterbond "the property attached . . . shall be delivered to the party
making the deposit or giving the counterbond, or the person appearing on his behalf, the
deposit or counterbond of aforesaid standing in place of the property so released".
The italicized expressions constitute the key to the entire problem. Whether the judgment
be rendered after trial on the merits or upon compromise, such judgment undoubtedly may
be made effective upon the property released; and since the counterbond merely stands in
the place of such property, there is no reason why the judgment should not be made
effective against the counterbond regardless of the manner how the judgment was
obtained.
Squarely on the point, and rebutting the appellee's apprehension that the compromise
could be the result of a collusion between the parties to injure the surety, is our decision in
Anzures vs. Alto Surety & Insurance Co., Inc., et al., 92 Phil. 742, where this Court, through
former Chief Justice Paras, ruled as follows:
"Under Section 12, Rule 59, of the Rules of Court, the bond filed, as in this case, for
the discharge of an attachment is 'to secure the payment to the plaintiff of any
judgment he may recover in the action,' and stands 'in place of the property so
released'. It follows that the order of cancellation issued by the respondent judge
is erroneous. Indeed, judgment had already been rendered by the Court of First
Instance of Manila in civil case No. 11748, sentencing Benjamin Aguilar to pay
the sum of P3,500.00 to the petitioner; and it is not pretended that said judgment
is a nullity. There is no point in the contention of the respondent Surety Company
that the compromise was entered into without its knowledge and consent, thus
becoming as to it essentially fraudulent. The Surety is not a party to civil case No.
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11748 and, therefore, need not be served with notice of the petition for judgment.
As against the conjecture of said respondent that the parties may easily connive
by means of a compromise to prejudice it, there is also the likelihood that the
same end may be attained by parties acting in bad faith through a simulated trial.
At any rate, it is within the power of the Surety Company to protect itself against a
risk of the kind.
Wherefore, the order of the respondent Judge cancelling the bond in question is
set aside. So ordered with costs against the respondent Alto Surety & Insurance
Co., Inc."
The lower court and the appellee herein appear to have relied on doctrines of this Court
concerning the liability of sureties in bonds filed by a plaintiff for the issuance of writs of
attachment, without discriminating between such bonds and those filed by a defendant for
the lifting of writs of attachment already issued and levied. This confusion is hardly
excusable considering that this Court has already called attention to the difference
between these kinds of bonds. Thus, in Cajefe vs. Judge Fernandez, et al., L-15709, 19
October 1960, this Court pointed out that —
"The diverse rule in Section 17 of Rule 59 for counterbonds posted to obtain the
lifting of a writ of attachment is due to these bonds being security for the
payment of any judgment that the attaching party may obtain; they are thus mere
replacements of the property 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 countersureties ascertainable after the
judgment has become final. This situation does not obtain in the case of
injunction counterbonds, since the sureties in the latter case merely undertake 'to
pay all damages that the plaintiff may suffer by reason of the continuance . . . of
the acts complained of' (Rule 60, Section 6) and not to secure payment of the
judgment recovered." 1
It was, therefore, error on the part of the court below to have ordered the surety bond
cancelled, on the theory that the parties' compromise discharged the obligation of the
surety.
As declared by us in Mercado vs. Macapayag, 69 Phil. 403, 405- 406, in passing upon the
liability of counter sureties in replevin who bound themselves to answer solidarily for the
obligations of the defendants to the plaintiffs in a fixed amount of P912.04, to secure
payment of the amount that said plaintiff be adjudged to recover from the defendants, 2
"the liability of the sureties was fixed and conditioned on the finality of the
judgment rendered regardless of whether the decision was based on the consent
of the parties or on the merits. A judgment entered on a stipulation is nonetheless
a judgment of the court because consented to by the parties. "But the surety in the
present case insists (and the court below so ruled) that the execution issued
against it was invalid because the writ issued against its principal, Jose O. Sia, et
al., defendants below, had not been returned unsatisfied; and the surety invoked
in its favor Section 17 of Rule 57 of the Revised Rules of Court (old Rule 59),
couched in the following terms:
"SEC. 17 When execution returned unsatisfied recovery had upon bond.—If
the execution be returned unsatisfied in whole or in part, the surety or sureties on
any counterbond given pursuant to the provisions of this rule to secure the
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payment of the judgment shall become charged on such counterbond, and bound
to pay to the judgment creditor upon demand, the amount due under the
judgment, which amount may be recovered from such surety or sureties after
notice and summary hearing in the same action."
The surety's contention is untenable. The counterbond contemplated in the rule is evidently
an ordinary guaranty where the sureties assume a subsidiary liability. This is not the case
here, because the surety in the present case bound itself "jointly and severally" (in solidum)
with the defendant; and it is prescribed in Article 2059, paragraph 2, of the Civil Code of
the Philippines that excussion (previous exhaustion of the property of the debtor) shall not
take place "if he (the guarantor) has bound himself solidarily with the debtor". The rule
heretofore quoted can not be construed as requiring that an execution against the debtor
be first returned unsatisfied even if the bond were a solidary one; for a procedural rule may
not amend the substantive law expressed in the Civil Code, and further would nullify the
express stipulation of the parties that the surety's obligation should be solidary with that
of the defendant.
A second reason against the stand of the surety and of the court below is that even if the
surety's undertaking were not solidary with that of the principal debtor, still he may not
demand exhaustion of the property of the latter, unless he can point out sufficient leviable
property of the debtor within Philippine territory. There is no record that the appellee
surety has done so. Says Article 2060 of the Civil Code of the Philippines:
"ART. 2060. In order that the guarantor may make use of the benefit of
excussion, he must set it up against the creditor upon the latter's demand for
payment from him, and point out to the creditor available property of the debtor
within Philippine territory, sufficient to cover the amount of the debt."
A third reason against the thesis of appellee is that, under the rule and its own terms, the
counter-bond is only conditioned upon the rendition of the judgment. Payment under the
bond is not made to depend upon the re-delivery or availability of the property previously
attached, as it was under Section 440 of the old Code of Civil Procedure. 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. 3
It is true that under Section 17 recovery from the surety or sureties should be "after notice
and summary hearing in the same action." But this requirement has been substantially
complied with from the time the surety was allowed to move for the quashal of the writ of
execution and for the cancellation of their obligation.
WHEREFORE, the orders appealed from are reversed, and the court of origin is ordered to
proceed with the execution against the surety appellee, Times Surety & Insurance Co., Inc.
Costs against said appellee.
Dizon, Makalintal, Zaldivar, Sanchez, Fernando, Capistrano, and Barredo, JJ., concur.
Teehankee, Concepcion, C.J. and Castro, JJ., took no part.
Footnotes
1. See concurring opinion, Alliance Insurance & Surety Co. vs. Piccio, ante.
2. Note the similarity in conditions of this replevin bond with that of appellee surety in the
case at bar (v. ante. page 2).
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3. See Anzures vs. Alto Surety and Mercado vs. Macapayag, ante; 7 C.J.S., page 510; 6 Am.
Jur. 2d, page 938, Section 530.
SYNOPSIS
Petitioner signed as co-maker in a loan. A promissory note was executed whereby she
acknowledged her joint and several (solidary) liability with the principal, that the creditor
may demand payment in case of default, and that she fully understood the contents
thereof. Petitioner, when informed that the debtors defaulted, requested that creditor try
to collect from her principal first and offered to settle the obligation in case the creditor
fails to collect. She also offered a parcel of land to settle the obligation which the creditor
refused. Thereafter, a complaint was filed against petitioner to the exclusion of the
principal debtors. Again petitioner offered to pay but the amount offered was way below
the amount computed. The trial court dismissed the complaint and ruled that the
complaint against the petitioner amounted to a discharge of a prior party, that the offer to
pay made by petitioner who is secondarily liable to the instrument discharged petitioner.
The Court of Appeals, reversing the trial court, ruled that petitioner is solidarily liable with
the principal debtors and may be sued for the entire obligation. Hence, this recourse. aTEScI
The Supreme Court held that it is a cardinal rule in interpretations of contracts that if the
terms of a contract are clear and leave no doubt upon the intention of the parties, the literal
meaning of its stipulation shall control. Hence, where petitioner expressly binds herself to
be jointly and severally or solidarily liable with the principal maker of the note, her liability is
that of a surety and is bound equally and absolutely with the principal.
Having entered into a contract with full knowledge of its terms and conditions, petitioner is
estopped to assert that she did so in ignorance of their legal effect.
The obligee is entitled to demand fulfillment of the obligation or performance stipulated,
hence, an offer to pay obligation in an amount less or different from that due does not
discharge liability. SECIcT
SYLLABUS
3. ID.; ID.; ID.; ID.; CASE AT BAR. — In the case at bar, petitioner expressly bound herself
to be jointly and severally or solidarily liable with the principal maker of the note. The terms
of the contract are clear, explicit and unequivocal that petitioner's liability is that of a
surety. Her pretension that the terms "jointly and severally or solidarily liable" contained in
the second paragraph of her contract are technical and legal terms which could not be
easily understood by an ordinary layman like her is diametrically opposed to her
manifestation in the contract that she "fully understood the contents" of the promissory
note and that she is "fully aware" of her solidary liability with the principal maker. Petitioner
admits that she voluntary affixed her signature thereto; ergo, she cannot now be heard to
claim otherwise. Any reference to the existence of fraud is unavailing. Fraud must be
established by clear and convincing evidence, mere preponderance of evidence not even
being adequate. Petitioner's attempt to prove fraud must, therefore, fail as it was
evidenced only by her own uncorroborated and, expectedly, self-serving allegations.
4. ID.; ID.; PARTY IS ESTOPPED TO ASSERT MISAPPREHENSION OF LEGAL EFFECT OF
UNDERTAKING WHERE SHE ENTERED INTO IT WITH FULL KNOWLEDGE OF ITS TERMS
AND CONDITIONS. — Having entered into the contracts with full knowledge of its terms
and conditions, petitioner is estopped to assert that she did so under a misapprehension
or in ignorance of their legal effect, or as to the legal effect of the undertaking. The rule
that ignorance of the contents of an instrument does not ordinarily affect the liability of
one who signs it also applies to contracts of suretyship. And the mistake of a surety as to
the legal effect of her obligation is ordinarily no reason for relieving her of liability.
CScaDH
11. ID.; ID.; ID.; ID.; RATIONALE BEHIND. — The underlying principle therefor is that
suretyship is a direct contract to pay the debt of another. A surety is liable as much as his
principal is liable, and absolutely liable as soon as default is made, without any demand
upon the principal whatsoever or any notice of default. As an original promisor and debtor
from the beginning, he is held ordinarily to know every default of his principal.TIDcEH
12. ID.; ID.; ID.; CREDITOR, NOT REQUIRED TO EXHAUST REMEDIES AGAINST THE
PRINCIPAL BEFORE HE CAN PROCEED AGAINST THE SURETY. — A creditor's right to
proceed against the surety exists independently of his right to proceed against the
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principal. Under Article 1216 of the Civil Code, the creditor may proceed against any one of
the solidary debtors or some or all of them simultaneously. The rule, therefore, is that if the
obligation is joint and several, the creditor has the right to proceed even against the surety
alone. Since, generally, it is not necessary for a creditor to proceed against the principal in
order to hold the surety liable, where, by the terms of the contract, the obligation of the
surety is the same as that of the principal, then as soon as the principal in order to hold the
surety liable, where, by the terms of the contract, the obligation of the surety is the same
as that of the principal, then as soon as the principal is in default, the surety is likewise in
default, and may be sued immediately and before any proceedings are had against the
principal. Perforce, in accordance with the rule that, in the absence of statute or agreement
otherwise, a surety is primarily liable, and with the rule that his proper remedy is to pay the
debt and pursue the principal for reimbursement, the surety cannot at law, unless
permitted by statute and in the absence of any agreement limiting the application of the
security, require the creditor or obligee, before proceeding against the surety, to resort to
and exhaust his remedies against the principal, particularly where both principal and surety
are equally bound.
13. ID.; ID.; ID.; ID.; REASON. — Where a creditor refrains from proceeding against the
principal, the surety is not exonerated. In other words, mere want of diligence or
forbearance does not affect the creditor's rights vis-a-vis the surety, unless the surety
requires him by appropriate notice to sue on the obligation. Such gratuitous indulgence of
the principal does not discharge the surety whether given at the principal's request or
without it, and whether it is yielded by the creditor through sympathy or from an inclination
to favor the principal, or is only the result of passiveness. The neglect of the creditor to sue
the principal at the time the debt falls due does not discharge the surety, even if such delay
continues until the principal becomes insolvent. And, in the absence of proof of resultant
injury, a surety is not discharged by the creditor's mere statement that the creditor will not
look to the surety, or that he need not trouble himself. The consequences of the delay, such
as the subsequent insolvency of the principal, or the fact that the remedies against the
principal may be lost by lapse of time, are immaterial. The raison d' etre for the rule is that
there is nothing to prevent the creditor from proceeding against the principal at any time.
At any rate, if the surety is dissatisfied with the degree of activity displayed by the creditor
in the pursuit of his principal, he may pay the debt himself and become subrogated to all
the right and remedies of the creditor.
14. ID.; ID.; ID.; EXTENSION DISCHARGING SURETY, CONSTRUED. — It may not be
amiss to add that leniency shown to a debtor in default, by delay permitted by the creditor
without change in the time when the debt might be demanded, does not constitute an
extension of the time of payment, which would release the surety. In order to constitute an
extension discharging the surety, it should appear that the extension was for a definite
period, pursuant to an enforceable agreement between the principal and the creditor, and
that it was made without the consent of the surety or with a reservation of rights with
respect to him. The contract must be one which precludes the creditor from, or at least
hinders him in, enforcing the principal contract within the period during which he could
otherwise have enforced it, and which precludes the surety from paying the debt.
15. ID.; ID.; ID.; ID.; CASE AT BAR. — None of these elements are present in the instant
case. Verily, the mere fact that respondent corporation gave the principal debtors an
extended period of time within which to comply with their obligation did not effectively
absolve herein petitioner from the consequences of her undertaking. Besides, the burden
is on the surety, herein petitioner, to show that she has been discharged by some act of the
creditor, herein respondent corporation, failing in which we cannot grant the relief prayed
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for. EHSITc
16. ID.; ID.; ID.; DELAY IN DISCHARGING SURETY; THERE MUST BE ACTUAL OFFER OF
PAYMENT. — Respondent corporation cannot be faulted for not immediately demanding
payment from petitioner. It was petitioner who initially requested that the creditor try to
collect from her principal first, and she offered to pay only in case the creditor fails to
collect. The delay, if any, was occasioned by the fact that respondent corporation merely
acquiesced to the request of petitioner. At any rate, there was here no actual offer of
payment to speak of but only a commitment to pay if the principal does not pay.
17. ID.; ID.; DEBTOR OF A THING CANNOT COMPEL THE CREDITOR TO RECEIVE A
DIFFERENT ONE; CASE AT BAR. — Petitioner made a second attempt to settle the
obligation by offering a parcel of land which she owned. Respondent corporation was
acting well within its rights when it refused to accept the offer. The debtor of a thing
cannot compel the creditor to receive a different one, although the latter may be of the
same value, or more valuable than that which is due. The obligee is entitled to demand
fulfillment of the obligation or performance as stipulated. A change of the object of the
obligation would constitute novation requiring the express consent of the parties.
18. ID.; ID.; A PERSON ENTERING INTO A CONTRACT HAS A RIGHT TO INSIST ON ITS
PERFORMANCE IN ALL PARTICULARS. — After the complaint was filed against her,
petitioner reiterated her offer to pay the outstanding balance of the obligation in the
amount of P30,000.00 but the same was likewise rejected. Again, respondent corporation
cannot be blamed for refusing the amount being offered because it fell way below the
amount it had computed, based on the stipulated interests and penalty charges, as owing
and due from herein petitioner. A debt shall be understood to have been paid unless the
thing or service in which the obligation consists has been completely delivered or
rendered, as the case may be. In other words, the prestation must be fulfilled completely. A
person entering into a contract has a right to insist on its performance in all particulars.
Petitioner cannot compel respondent corporation to accept the amount she is willing to
pay because the moment the latter accept the performance, knowing its incompleteness
or irregularity, and without expressing any protest or objection, then the obligation shall be
deemed fully complied with. Precisely, this is what respondent corporation wanted to
avoid when it continually refused to settle with petitioner at less than what was actually
due under their contract. ATHCac
DECISION
REGALADO , J : p
Where a party signs a promissory note as a co-maker and binds herself to be jointly and
severally liable with the principal debtor in case the latter defaults in the payment of the
loan, is such undertaking of the former deemed to be that of a surety as an insurer of the
debt, or of a guarantor who warrants the solvency of the debtor? cdasia
Pursuant to a promissory note dated March 13, 1990, private respondent M.B. Lending
Corporation extended a loan to the spouses Osmeña and Merlyn Azarraga, together with
petitioner Estrella Palmares, in the amount of P30,000.00 payable on or before May 12,
1990, with compounded interest at the rate of 6% per annum to be computed every 30
days from the date thereof. 1 On four occasions after the execution of the promissory note
and even after the loan matured, petitioner and the Azarraga spouses were able to pay a
total of P16,300.00, thereby leaving a balance of P13,700.00. No payments were made
after the last payment on September 26, 1991. 2
Consequently, on the basis of petitioner's solidary liability under the promissory note,
respondent corporation filed a complaint 3 against petitioner Palmares as the lone party-
defendant, to the exclusion of the principal debtors, allegedly by reason of the insolvency
of the latter.
In her Amended Answer with Counterclaim, 4 petitioner alleged that sometime in August
1990, immediately after the loan matured, she offered to settle the obligation with
respondent corporation but the latter informed her that they would try to collect from the
spouses Azarraga and that she need not worry about it; that there has already been a
partial payment in the amount of P17,010.00; that the interest of 6% per month
compounded at the same rate per month, as well as the penalty charges of 3% per month,
are usurious and unconscionable; and that while she agrees to be liable on the note but
only upon default of the principal debtor, respondent corporation acted in bad faith in
suing her alone without including the Azarragas when they were the only ones who
benefited from the proceeds of the loan.
During the pre-trial conference, the parties submitted the following issues for the
resolution of the trial court: (1) what the rate of interest, penalty and damages should be;
(2) whether the liability of the defendant (herein petitioner) is primary or subsidiary; and (3)
whether the defendant Estrella Palmares is only a guarantor with a subsidiary liability and
not a co-maker with primary liability. 5
Thereafter, the parties agreed to submit the case for decision based on the pleadings filed
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and the memoranda to be submitted by them. On November 26, 1992, the Regional Trial
Court of Iloilo City, Branch 23, rendered judgment dismissing the complaint without
prejudice to the filing of a separate action for a sum of money against the spouses
Osmeña and Merlyn Azarraga who are primarily liable on the instrument. 6 This was based
on the findings of the court a quo that the filing of the complaint against herein petitioner
Estrella Palmares, to the exclusion of the Azarraga spouses, amounted to a discharge of a
prior party; that the offer made by petitioner to pay the obligation is considered a valid
tender of payment sufficient to discharge a person's secondary liability on the instrument;
that petitioner, as co-maker, is only secondary liable on the instrument; and that the
promissory note is a contract of adhesion.
Respondent Court of Appeals, however, reversed the decision of the trial court, and
rendered judgment declaring herein petitioner Palmares liable to pay respondent
corporation:
1. The sum of P13,700.00 representing the outstanding balance still due
and owing with interest at six percent (6%) per month computed from
the date the loan was contracted until fully paid;
2. The sum equivalent to the stipulated penalty of three percent (3%) per
month, of the outstanding balance;
3. Attorney's fees at 25% of the total amount due per stipulations;
4. Plus costs of suit. 7
Contrary to the findings of the trial court, respondent appellate court declared that
petitioner Palmares is a surety since she bound herself to be jointly and severally or
solidarity liable with the principal debtors, the Azarraga spouses, when she signed as a co-
maker. As such, petitioner is primarily liable on the note and hence may be sued by the
creditor corporation for the entire obligation. It also adverted to the fact that petitioner
admitted her liability in her Answer although she claims that the Azarraga spouses should
have been impleaded. Respondent court ordered the imposition of the stipulated 6%
interest and 3% penalty charges on the ground that the Usury Law is no longer enforceable
pursuant to Central Bank Circular No. 905. Finally, it rationalized that even if the promissory
note were to be considered as a contract of adhesion, the same is not entirely prohibited
because the one who adheres to the contract is free to reject it entirely; if he adheres, he
gives his consent.
Hence this petition for review on certiorari wherein it is asserted that:
A. The Court of Appeals erred in ruling that Palmares acted as surety and is
therefore solidarily liable to pay the promissory note.
1. The terms of the promissory note are vague. Its conflicting provisions do
not establish Palmares' solidary liability.
2. The promissory note contains provisions which establish the co-maker's
liability as that of a guarantor.
3. There is no sufficient basis for concluding that Palmares' liability is
solidary.
4. The promissory note is a contract of adhesion and should be construed
against M.B. Lending Corporation.
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5. Palmares cannot be compelled to pay the loan at this point.
B. Assuming that Palmares' liability is solidary, the Court of Appeals erred in
strictly imposing the interests and penalty charges on the outstanding balance of
the promissory note.
The foregoing contentions of petitioner are denied and contradicted in their material
points by respondent corporation. They are further refuted by accepted doctrines in the
American jurisdiction after which we patterned our statutory law on suretyship and
guaranty. This case then affords us the opportunity to make an extended exposition on the
ramifications of these two specialized contracts, for such guidance as may be taken
therefrom in similar local controversies in the future.
The basis of petitioner Palmares' liability under the promissory note is expressed in this
wise:
ATTENTION TO CO-MAKERS : PLEASE READ WELL
I, Mrs. Estrella Palmares, as the Co-maker of the above-quoted loan, have fully
understood the contents of this Promissory Note for Short-Term Loan:
That as Co-maker, I am fully aware that I shall be jointly and severally or solidarily
liable with the above principal maker of this note;
That in fact, I hereby agree that M.B. LENDING CORPORATION may demand
payment of the above loan from me in case the principal maker, Mrs. Merlyn
Azarraga defaults in the payment of the note subject to the same conditions
above-contained. 8
Petitioner contends that the provisions of the second and third paragraph are conflicting in
that while the second paragraph seems to define her liability as that of a surety which is
joint and solidary with the principal maker, on the other hand, under the third paragraph her
liability is actually that of a mere guarantor because she bound herself to fulfill the
obligation only in case the principal debtor should fail to do so, which is the essence of a
contract of guaranty. More simply stated, although the second paragraph says that she is
liable as a surety, the third paragraph defines the nature of her liability as that of a
guarantor. According to petitioner, these are two conflicting provisions in the promissory
note and the rule is that clauses in the contract should be interpreted in relation to one
another and not by parts. In other words, the second paragraph should not be taken in
isolation, but should be read in relation to the third paragraph.
In an attempt to reconcile the supposed conflict between the two provisions, petitioner
avers that she could be held liable only as a guarantor for several reasons. First, the words
"jointly and severally or solidarily liable" used in the second paragraph are technical and
legal terms which are not fully appreciated by an ordinary layman like herein petitioner, a
65-year old housewife who is likely to enter into such transactions without fully realizing
the nature and extent of her liability. On the contrary, the wordings used in the third
paragraph are easier to comprehend. Second, the law looks upon the contract of
suretyship with a jealous eye and the rule is that the obligation of the surety cannot be
extended by implication beyond specified limits, taking into consideration the peculiar
nature of a surety agreement which holds the surety liable despite the absence of any
direct consideration received from either the principal obligor or the creditor. Third, the
promissory note is a contract of adhesion since it was prepared by respondent M.B.
Lending Corporation. The note was brought to petitioner partially filled up, the contents
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thereof were never explained to her, and her only participation was to sign thereon. Thus,
any apparent ambiguity in the contract should be strictly construed against private
respondent pursuant to Art. 1377 of the Civil Code. 9
Petitioner accordingly concludes that her liability should be deemed restricted by the
clause in the third paragraph of the promissory note to be that of a guarantor. cdasia
Moreover, petitioner submits that she cannot as yet be compelled to pay the loan because
the principal debtors cannot be considered in default in the absence of a judicial or
extrajudicial demand. It is true that the complaint alleges the fact of demand, but the
purported demand letters were never attached to the pleadings filed by private respondent
before the trial court. And, while petitioner may have admitted in her Amended Answer that
she received a demand letter from respondent corporation sometime in 1990, the same
did not effectively put her or the principal debtors in default for the simple reason that the
latter subsequently made a partial payment on the loan in September, 1991, a fact which
was never controverted by herein private respondent.
Finally, it is argued that the Court of Appeals gravely erred in awarding the amount of
P2,745,483.39 in favor of private respondent when, in truth and in fact, the outstanding
balance of the loan is only P13,700.00. Where the interest charged on the loan is
exorbitant, iniquitous or unconscionable, and the obligation has been partially complied
with, the court may equitable reduce the penalty 1 0 on grounds of substantial justice. More
importantly, respondent corporation never refuted petitioner's allegation that immediately
after the loan matured, she informed said respondent of her desire to settle the obligation.
The court should, therefore, mitigate the damages to be paid since petitioner has shown a
sincere desire for a compromise. 1 1
After a judicious evaluation of the arguments of the parties, we are constrained to dismiss
the petition for lack of merit, but to except therefrom the issue anent the propriety of the
monetary award adjudged to herein respondent corporation.
At the outset, let it here be stressed that even assuming arguendo that the promissory
note executed between the parties is a contract of adhesion, it has been the consistent
holding of the Court that contracts of adhesion are not invalid per se and that on numerous
occasions the binding effects thereof have been upheld. The peculiar nature of such
contracts necessitate a close scrutiny of the factual milieu to which the provisions are
intended to apply. Hence, just as consistently and unhesitatingly, but without categorically
invalidating such contracts, the Court has construed obscurities and ambiguities in the
restrictive provisions of contracts of adhesion strictly albeit not unreasonably against the
drafter thereof when justified in light of the operative facts and surrounding
circumstances. 1 2 The factual scenario obtaining in the case before us warrants a liberal
application of the rule in favor of respondent corporation.
The Civil Code pertinently provides:
Art. 2047. By guaranty, a person called the guarantor binds himself to the
creditor to fulfill the obligation of the principal debtor in case the latter should fail
to do so.
If a person binds himself solidarily with the principal debtor, the provisions of
Section 4, Chapter 3, Title I of this Book shall be observed. In such case the
contract is called a suretyship.
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It is a cardinal rule in the interpretation of contracts that if the terms of a contract are clear
and leave no doubt upon the intention of the contracting parties, the literal meaning of its
stipulation shall control. 1 3 In the case at bar, petitioner expressly bound herself to be
jointly and severally or solidarily liable with the principal maker of the note. The terms of
the contract are clear, explicit and unequivocal that petitioner's liability is that of a surety.
Her pretension that the terms "jointly and severally or solidarity liable" contained in the
second paragraph of her contract are technical and legal terms which could not be easily
understood by an ordinary layman like her is diametrically opposed to her manifestation in
the contract that she "fully understood the contents" of the promissory note and that she is
"fully aware" of her solidary liability with the principal maker. Petitioner admits that she
voluntarily affixed her signature thereto; ergo, she cannot now be heard to claim otherwise.
Any reference to the existence of fraud is unavailing. Fraud must be established by clear
and convincing evidence, mere preponderance of evidence not even being adequate.
Petitioner's attempt to prove fraud must, therefore, fail as it was evidenced only by her
own uncorroborated and, expectedly, self-serving allegations. 14
Having entered into the contract with full knowledge of its terms and conditions, petitioner
is estopped to assert that she did so under a misapprehension or in ignorance of their
legal effect, or as to the legal effect of the undertaking. 1 5 The rule that ignorance of the
contents of an instrument does not ordinarily affect the liability of one who signs it also
applies to contracts of suretyship. And the mistake of a surety as to the legal effect of her
obligation is ordinarily no reason for relieving her of liability. 1 6
Petitioner would like to make capital of the fact that although she obligated herself to be
jointly and severally liable with the principal maker, her liability is deemed restricted by the
provisions of the third paragraph of her contract wherein she agreed "that M.B. Lending
Corporation may demand payment of the above loan from me in case the principal maker,
Mrs. Merlyn Azarraga defaults in the payment of the note," which makes her contract one
of guaranty and not suretyship. The purported discordance is more apparent than real.
A surety is an insurer of the debt, whereas a guarantor is an insurer of the solvency of the
debtor. 17 A suretyship is an undertaking that the debt shall be paid; a guaranty, an
undertaking that the debtor shall pay. 18 Stated differently, a surety promises to pay the
principal's debt if the principal will not pay, while a guarantor agrees that the creditor, after
proceeding against the principal, may proceed against the guarantor if the principal is
unable to pay. 19 A surety binds himself to perform if the principal does not, without regard
to his ability to do so. A guarantor, on the other hand, does not contract that the principal
will pay, but simply that he is able to do so. 20 In other words, a surety undertakes directly
for the payment and is so responsible at once if the principal debtor makes default, while a
guarantor contracts to pay if, by the use of due diligence, the debt cannot be made out of
the principal debtor. 21
Quintessentially, the undertaking to pay upon default of the principal debtor does not
automatically remove it from the ambit of a contract of suretyship. The second and third
paragraphs of the aforequoted portion of the promissory note do not contain any other
condition for the enforcement of respondent corporation's right against petitioner. It has
not been shown, either in the contract or the pleadings, that respondent corporation
agreed to proceed against herein petitioner only if and when the defaulting principal has
become insolvent. A contract of suretyship, to repeat, is that wherein one lends his credit
by joining in the principal debtor's obligation, so as to render himself directly and primarily
responsible with him, and without reference to the solvency of the principal. 2 2
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In a desperate effort to exonerate herself from liability, petitioner erroneously invokes the
rule on strictissimi juris, which holds that when the meaning of a contract of indemnity or
guaranty has once been judicially determined under the rule of reasonable construction
applicable to all written contracts, then the liability of the surety, under his contract, as thus
interpreted and construed, is not to be extended beyond its strict meaning. 2 3 The rule,
however, will apply only after it has been definitely ascertained that the contract is one of
suretyship and not a contract of guaranty. It cannot be used as an aid in determining
whether a party's undertaking is that of a surety or a guarantor.
Prescinding from these jurisprudential authorities, there can be no doubt that the
stipulation contained in the third paragraph of the controverted suretyship contract merely
elucidated on and made more specific the obligation of petitioner as generally defined in
the second paragraph thereof. Resultantly, the theory advanced by petitioner, that she is
merely a guarantor because her liability attaches only upon default of the principal debtor,
must necessarily fail for being incongruent with the judicial pronouncements adverted to
above.
It is a well-entrenched rule that in order to judge the intention of the contracting parties,
their contemporaneous and subsequent acts shall also be principally considered. 24
Several attendant factors in that genre lend support to our finding that petitioner is a
surety. For one, when petitioner was informed about the failure of the principal debtor to
pay the loan, she immediately offered to settle the account with respondent corporation.
Obviously, in her mind, she knew that she was directly and primarily liable upon default of
her principal. For another, and this is most revealing, petitioner presented the receipts of
the payments already made, from the time of initial payment up to the last, which were all
issued in her name and of the Azarraga spouses. 25 This can only be construed to mean
that the payments made by the principal debtors were considered by respondent
corporation as creditable directly upon the account and inuring to the benefit of petitioner.
The concomitant and simultaneous compliance of petitioner's obligation with that of her
principals only goes to show that, from the very start, petitioner considered herself equally
bound by the contract of the principal makers. cdasia
In this regard, we need only to reiterate the rule that a surety is bound equally and
absolutely with the principal, 2 6 and as such is deemed an original promisor and debtor
from the beginning. 2 7 This is because in suretyship there is but one contract, and the
surety is bound by the same agreement which binds the principal. 2 8 In essence, the
contract of a surety starts with the agreement, 2 9 which is precisely the situation obtaining
in this case before the Court.
It will further be observed that petitioner's undertaking as co-maker immediately follows
the terms and conditions stipulated between respondent corporation, as creditor, and the
principal obligors. A surety is usually bound with his principal by the same instrument,
executed at the same time and upon the same consideration; he is an original debtor, and
his liability is immediate and direct. 3 0 Thus, it has been held that where a written
agreement on the same sheet of paper with and immediately following the principal
contract between the buyer and seller is executed simultaneously therewith, providing that
the signers of the agreement agreed to the terms of the principal contract, the signers
were "sureties" jointly liable with the buyer. 3 1 A surety usually enters into the same
obligation as that of his principal, and the signatures of both usually appear upon the same
instrument, and the same consideration usually supports the obligation for both the
principal and the surety. 3 2
Even if it were otherwise, demand on the sureties is not necessary before bringing suit
against them, since the commencement of the suit is a sufficient demand. 34 On this point,
it may be worth mentioning that a surety is not even entitled, as a matter of right, to be
given notice of the principal's default. Inasmuch as the creditor owes no duty of active
diligence to take care of the interest of the surety, his mere failure to voluntarily give
information to the surety of the default of the principal cannot have the effect of
discharging the surety. The surety is bound to take notice of the principal's default and to
perform the obligation. He cannot complain that the creditor has not notified him in the
absence of a special agreement to that effect in the contract of suretyship. 35
The alleged failure of respondent corporation to prove the fact of demand on the principal
debtors, by not attaching copies thereof to its pleadings, is likewise immaterial. In the
absence of a statutory or contractual requirement, it is not necessary that payment or
performance of his obligation be first demanded of the principal, especially where demand
would have been useless; nor is it a requisite, before proceeding against the sureties, that
the principal be called on to account. 3 6 The underlying principle therefor is that a
suretyship is a direct contract to pay the debt of another. A surety is liable as much as his
principal is liable, and absolutely liable as soon as default is made, without any demand
upon the principal whatsoever or any notice of default. 3 7 As an original promisor and
debtor from the beginning, he is held ordinarily to know every default of his principal. 3 8
Petitioner questions the propriety of the filing of a complaint solely against her to the
exclusion of the principal debtors who allegedly were the only ones who benefited from
the proceeds of the loan. What petitioner is trying to imply is that the creditor, herein
respondent corporation, should have proceeded first against the principal before suing on
her obligation as surety. We disagree.
A creditor's right to proceed against the surety exists independently of his right to proceed
against the principal. 3 9 Under Article 1216 of the Civil Code, the creditor may proceed
against any one of the solidary debtors or some or all of them simultaneously. The rule,
therefore, is that if the obligation is joint and several, the creditor has the right to proceed
even against the surety alone. 4 0 Since, generally, it is not necessary for a creditor to
proceed against a principal in order to hold the surety liable, where, by the terms of the
contract, the obligation of the surety is the same as that of the principal, then as soon as
the principal is in default, the surety is likewise in default, and may be sued immediately
and before any proceedings are had against the principal. 4 1 Perforce, in accordance with
the rule that, in the absence of statute or agreement otherwise, a surety is primarily liable,
and with the rule that his proper remedy is to pay the debt and pursue the principal for
reimbursement, the surety cannot at law, unless permitted by statute and in the absence of
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any agreement limiting the application of the security, require the creditor or obligee,
before proceeding against the surety, to resort to and exhaust his remedies against the
principal, particularly where both principal and surety are equally bound. 4 2
We agree with respondent corporation that its mere failure to immediately sue petitioner
on her obligation does not release her from liability. Where a creditor refrains from
proceeding against the principal, the surety is not exonerated. In other words, mere want
of diligence or forbearance does not affect the creditor's rights vis-a-vis the surety, unless
the surety requires him by appropriate notice to sue on the obligation. Such gratuitous
indulgence of the principal does not discharge the surety whether given at the principal's
request or without it, and whether it is yielded by the creditor through sympathy or from an
inclination to favor the principal, or is only the result of passiveness. The neglect of the
creditor to sue the principal at the time the debt falls due does not discharge the surety,
even if such delay continues until the principal becomes insolvent. 43 And, in the absence
of proof of resultant injury, a surety is not discharged by the creditor's mere statement that
the creditor will not look to the surety, 44 or that he need not trouble himself. 45 The
consequences of the delay, such as the subsequent insolvency of the principal, 46 or the
fact that the remedies against the principal may be lost by lapse of time, are immaterial. 47
The raison d'êtrefor the rule is that there is nothing to prevent the creditor from proceeding
against the principal at any time. 4 8 At any rate, if the surety is dissatisfied with the degree
of activity displayed by the creditor in the pursuit of his principal, he may pay the debt
himself and become subrogated to all the rights and remedies of the creditor. 4 9
It may not be amiss to add that leniency shown to a debtor in default, by delay permitted
by the creditor without change in the time when the debt might be demanded, does not
constitute an extension of the time of payment, which would release the surety. 5 0 In order
to constitute an extension discharging the surety, it should appear that the extension was
for a definite period , pursuant to an enforceable agreement between the principal and the
creditor, and that it was made without the consent of the surety or with a reservation of
rights with respect to him. The contract must be one which precludes the creditor from, or
at least hinders him in, enforcing the principal contract within the period during which he
could otherwise have enforced it, and which precludes the surety from paying the debt. 5 1
None of these elements are present in the instant case. Verily, the mere fact that
respondent corporation gave the principal debtors an extended period of time within
which to comply with their obligation did not effectively absolve herein petitioner from the
consequences of her undertaking. Besides, the burden is on the surety, herein petitioner, to
show that she has been discharged by some act of the creditor, 52 herein respondent
corporation, failing in which we cannot grant the relief prayed for. LLjur
As a final issue, petitioner claims that assuming that her liability is solidary, the interests
and penalty chargers on the outstanding balance of the loan cannot be imposed for being
illegal and unconscionable. Petitioner additionally theorizes that respondent corporation
intentionally delayed the collection of the loan in order that the interests and penalty
charges would accumulate. The statement, likewise traversed by said respondent, is
misleading.
In an affidavit 5 3 executed by petitioner, which was attached to her petition, she stated,
among others, that:
8. During the latter part of 1990, I was surprised to learn that Merlyn
Azarraga's loan has been released and that she has not paid the same upon its
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maturity. I received a telephone call from Mr. Augusto Banusing of MB Lending
informing me of this fact and of my liability arising from the promissory note
which I signed.
9. I requested Mr. Banusing to try to collect first from Merlyn and Osmeña
Azarraga. At the same time, I offered to pay MB Lending the outstanding balance
of the principal obligation should he fail to collect from Merlyn and Osmeña
Azarraga. Mr. Banusing advised me not to worry because he will try to collect first
from Merlyn and Osmeña Azarraga.
10. A year thereafter, I received a telephone call from the secretary of Mr.
Banusing who reminded that the loan of Merlyn and Osmeña Azarraga, together
with interest and penalties thereon, has not been paid. Since I had no available
funds at that time, I offered to pay MB Lending by delivering to them a parcel of
land which I own. Mr. Banusing's secretary, however, refused my offer for the
reason that they are not interested in real estate.
11. In March 1992, I received a copy of the summons and of the complaint
filed against me by MB Lending before the RTC-Iloilo. After learning that a
complaint was filed against me, I instructed Sheila Gatia to go to MB Lending and
reiterate my first offer to pay the outstanding balance of the principal obligation
of Merlyn Azarraga in the amount of P30,000.00.
12. Ms. Gatia talked to the secretary of Mr. Banusing who referred her to Atty.
Venus, counsel of MB Lending.
13. Atty. Venus informed Ms. Gatia that he will consult Mr. Banusing if my
offer to pay the outstanding balance of the principal obligation loan (sic) of
Merlyn and Osmeña Azarraga is acceptable. Later, Atty. Venus informed Ms.
Gatia that my offer is not acceptable to Mr. Banusing.
The purported offer to pay made by petitioner can not be deemed sufficient and
substantial in order to effectively discharge her from liability. There are a number of
circumstances which conjointly inveigh against her aforesaid theory.
1. Respondent corporation cannot be faulted for not immediately demanding payment
from petitioner. It was petitioner who initially requested that the creditor try to collect from
her principal first, and she offered to pay only in case the creditor fails to collect. The delay,
if any, was occasioned by the fact that respondent corporation merely acquiesced to the
request of petitioner. At any rate, there was here no actual offer of payment to speak of
but only a commitment to pay if the principal does not pay.
2. Petitioner made a second attempt to settle the obligation by offering a parcel of
land which she owned. Respondent corporation was acting well within its rights when it
refused to accept the offer. The debtor of a thing cannot compel the creditor to receive a
different one, although the latter may be of the same value, or more valuable than that
which is due. 5 4 The obligee is entitled to demand fulfillment of the obligation or
performance as stipulated. A change of the object of the obligation would constitute
novation requiring the express consent of the parties. 5 5
3. After the complaint was filed against her, petitioner reiterated her offer to pay the
outstanding balance of the obligation in the amount of P30,000.00 but the same was
likewise rejected. Again, respondent corporation cannot be blamed for refusing the
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amount being offered because it fell way below the amount it had computed, based on the
stipulated interests and penalty charges, as owing and due from herein petitioner. A debt
shall not be understood to have been paid unless the thing or service in which the
obligation consists has been completely delivered or rendered, as the case may be. 5 6 In
other words, the prestation must be fulfilled completely. A person entering into a contract
has a right to insist on its performance in all particulars. 5 7
Petitioner cannot compel respondent corporation to accept the amount she is willing to
pay because the moment the latter accepts the performance, knowing its incompleteness
or irregularity, and without expressing any protest or objection, then the obligation shall be
deemed fully complied with. 58 Precisely, this is what respondent corporation wanted to
avoid when it continually refused to settle with petitioner at less than what was actually
due under their contract.
This notwithstanding, however, we find and so hold that the penalty charge of 3% per
month and attorney's fees equivalent to 25% of the total amount due are highly inequitable
and unreasonable.
It must be remembered that from the principal loan of P30,000.00, the amount of
P16,300.00 had already been paid even before the filing of the present case. Article 1229
of the Civil Code provides that the court shall equitably reduce the penalty when the
principal obligation has been partly or irregularly complied with by the debtor. And, even if
there has been no performance, the penalty may also be reduced if it is iniquitous or
leonine.
In a case previously decided by this Court which likewise involved private respondent M.B.
Lending Corporation, and which is substantially on all fours with the one at bar, we decided
to eliminate altogether the penalty interest for being excessive and unwarranted under the
following rationalization:
Upon the matter of penalty interest, we agree with the Court of Appeals that the
economic impact of the penalty interest of three percent (3%) per month on total
amount due but unpaid should be equitably reduced. The purpose for which the
penalty interest is intended — that is, to punish the obligor — will have been
sufficiently served by the effects of compounded interest. Under the exceptional
circumstances in the case at bar, e.g., the original amount loaned was only
P15,000.00; partial payment of P8,600.00 was made on due date; and the heavy
(albeit still lawful) regular compensatory interest, the penalty interest stipulated in
the parties' promissory note is iniquitous and unconscionable and may be
equitably reduced further by eliminating such penalty interest altogether. 5 9
Accordingly, the penalty interest of 3% per month being imposed on petitioner should
similarly be eliminated.
Finally, with respect to the award of attorney's fees, this Court has previously ruled that
even with an agreement thereon between the parties, the court may nevertheless reduce
such attorney's fees fixed in the contract when the amount thereof appears to be
unconscionable or unreasonable. 6 0 To that end, it is not even necessary to show, as in
other contracts, that it is contrary to morals or public policy. 6 1 The grant of attorney's fees
equivalent to 25% of the total amount due is, in our opinion, unreasonable and immoderate,
considering the minimal unpaid amount involved and the extent of the work involved in this
simple action for collection of a sum of money. We, therefore, hold that the amount of
P10,000.00 as and for attorney's fee would be sufficient in this case. 6 2
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WHEREFORE, the judgment appealed from is hereby AFFIRMED, subject to the
MODIFICATION that the penalty interest of 3% per month is hereby deleted and the award
of attorney's fees is reduced to P10,000.00.
SO ORDERED. LLjur
2. Rollo, 38.
3. Annex D, id., ibid., 51.
4. Annex H, id., ibid., 69.
5. Rollo, 76.
6. Annex I, Petition; Rollo, 73; penned by Presiding Judge Tito G. Gustilo.
7. Annex A, id., ibid., 36; Associate Justice Jose C. de la Rama, ponente, with Associate
Justices Emeterio C. Cui and Eduardo G. Montenegro, concurring.
8. Rollo, 50.
9. Art. 1377. The interpretation of obscure words or stipulations in a contract shall not
favor the party who caused the obscurity.
12. Philippine Airlines, Inc. vs. Court of Appeals, et al., G.R. No. 119706, March 14, 1996,
255 SCRA 48.
13. Abella vs. Court of Appeals, et al., G.R. No. 107606, June 20, 1996, 257 SCRA 482.
14. Inciong, Jr. vs. Court of Appeals, et al., G.R. No. 96405, June 26, 1996, 257 SCRA 578.
15. 72 CJS, Principal and Surety, § 83, 565.
16. Churchill vs. Bradley, 5 A. 189.
17. Northern State Bank of Grand Forks vs. Bellamy, 125 N. W. 888.
18. Shearer vs. R.S. Peele & Co., 36 N.E. 455.
19. W.T. Rawleigh Co. vs. Overstreet, et al., 32 S. E. 2d 574.
20. Manry vs. Waxelbaum Co., 33 S. E. 701.
21. 40A Words and Phrases 429.
55. Padilla, A., Civil Code Annotated, Vol. IV, 1987 ed., 434.
56. Article 1233, Civil Code.
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57. Tolentino, A., Commentaries and Jurisprudence on the Civil Code of the Philippines, Vol.
IV, 1986 ed., 280.
59. Magallanes, et al .vs. Court of Appeals, et al., G.R. No. 112614, May 16, 1994, Third
Division, Minute Resolution.
60. Security Bank & Trust Co., et al. vs. Court of Appeals, et al., G.R. No. 117009, October 11,
1995, 249 SCRA 206.
61. Medco Industrial Corporation, et al. vs. The Hon. Court of Appeals, et al., G.R. No.
84610, November 24, 1988, 167 SCRA 838.
DECISION
The petitioner thus paid the amount of US$876,564 to Al Ahli Bank of Kuwait on 21
January 1988. 3 0 Then, on 6 May 1988, the petitioner paid to Al Ahli Bank of Kuwait
US$59,129.83 representing interest and penalty charges demanded by the latter bank. 3 1
On 19 June 1991, the petitioner sent to the respondents separate letters demanding
full payment of the amount of P47,872,373.98 plus accruing interest, penalty charges, and
10% attorney's fees pursuant to their joint and solidary obligations under the deed of
undertaking and surety bond. 3 2 When the respondents failed to pay, the petitioner led on
9 July 1991 a civil case for collection of a sum of money against the respondents before
the RTC of Makati City.
After due trial, the trial court ruled against Philguarantee and held that the latter had
no valid cause of action against the respondents. It opined that at the time the call was
made on the guarantee which was executed for a speci c period, the guarantee had
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already lapsed or expired. There was no valid renewal or extension of the guarantee for
failure of the petitioner to secure respondents' express consent thereto. The trial court
also found that the joint venture contractor incurred no delay in the execution of the
Project. Considering the Project owner's violations of the contract which rendered
impossible the joint venture contractor's performance of its undertaking, no valid call on
the guarantee could be made. Furthermore, the trial court held that no valid notice was rst
made by the Project owner SOB to the joint venture contractor before the call on the
guarantee. Accordingly, it dismissed the complaint, as well as the counterclaims and
cross-claim, and ordered the petitioner to pay attorney's fees of P100,000 to respondents
VPECI and Eusebio Spouses and P100,000 to 3-Plex and the Santos Spouses, plus costs.
33
In its 14 June 1999 Decision, 3 4 the Court of Appeals a rmed the trial court's
decision, ratiocinating as follows:
First, appellant cannot deny the fact that it was fully aware of the status of
project implementation as well as the problems besetting the contractors,
between 1982 to 1985, having sent some of its people to Baghdad during that
period. The successive renewals/extensions of the guarantees in fact, was
prompted by delays, not solely attributable to the contractors, and such extension
understandably allowed by the SOB (project owner) which had not anyway
complied with its contractual commitment to tender 75% of payment in US
Dollars, and which still retained overdue amounts collectible by VPECI.
The petitioner then came to this Court via Rule 45 of the Rules of Court claiming that
the Court of Appeals erred in affirming the trial court's ruling that DHSaCA
I
. . . RESPONDENTS ARE NOT LIABLE UNDER THE DEED OF UNDERTAKING THEY
EXECUTED IN FAVOR OF PETITIONER IN CONSIDERATION FOR THE ISSUANCE
OF ITS COUNTER-GUARANTEE AND THAT PETITIONER CANNOT PASS ON TO
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RESPONDENTS WHAT IT HAD PAID UNDER THE SAID COUNTER-GUARANTEE.
II
. . . PETITIONER CANNOT CLAIM SUBROGATION.
III
. . . IT IS INIQUITOUS AND UNJUST FOR PETITIONER TO HOLD RESPONDENTS
LIABLE UNDER THEIR DEED OF UNDERTAKING. 3 6
The main issue in this case is whether the petitioner is entitled to reimbursement of
what it paid under Letter of Guarantee No. 81-194-F it issued to Al Ahli Bank of Kuwait
based on the deed of undertaking and surety bond from the respondents.
The petitioner asserts that since the guarantee it issued was absolute,
unconditional, and irrevocable the nature and extent of its liability are analogous to those
of suretyship. Its liability accrued upon the failure of the respondents to nish the
construction of the Institute of Physical Therapy Buildings in Baghdad.
By guaranty a person, called the guarantor, binds himself to the creditor to ful ll the
obligation of the principal debtor in case the latter should fail to do so. If a person binds
himself solidarily with the principal debtor, the contract is called suretyship. 3 7
Strictly speaking, guaranty and surety are nearly related, and many of the principles
are common to both. In both contracts, there is a promise to answer for the debt or
default of another. However, in this jurisdiction, they may be distinguished thus:
1. A surety is usually bound with his principal by the same instrument
executed at the same time and on the same consideration. On the
other hand, the contract of guaranty is the guarantor's own separate
undertaking often supported by a consideration separate from that
supporting the contract of the principal; the original contract of his
principal is not his contract.
2. A surety assumes liability as a regular party to the undertaking; while
the liability of a guarantor is conditional depending on the failure of
the primary debtor to pay the obligation.
3. The obligation of a surety is primary, while that of a guarantor is
secondary.
4. A surety is an original promissor and debtor from the beginning, while
a guarantor is charged on his own undertaking.
5. A surety is, ordinarily, held to know every default of his principal;
whereas a guarantor is not bound to take notice of the non-
performance of his principal.
6. Usually, a surety will not be discharged either by the mere indulgence
of the creditor to the principal or by want of notice of the default of
the principal, no matter how much he may be injured thereby. A
guarantor is often discharged by the mere indulgence of the creditor
to the principal, and is usually not liable unless noti ed of the default
of the principal. 3 8
No con icts rule on essential validity of contracts is expressly provided for in our
laws. The rule followed by most legal systems, however, is that the intrinsic validity of a
contract must be governed by the lex contractus or "proper law of the contract." This is the
law voluntarily agreed upon by the parties (the lex loci voluntatis) or the law intended by
them either expressly or implicitly (the lex loci intentionis). The law selected may be
implied from such factors as substantial connection with the transaction, or the nationality
or domicile of the parties. 4 7 Philippine courts would do well to adopt the rst and most
basic rule in most legal systems, namely, to allow the parties to select the law applicable
to their contract, subject to the limitation that it is not against the law, morals, or public
policy of the forum and that the chosen law must bear a substantive relationship to the
transaction. 4 8
It must be noted that the service contract between SOB and VPECI contains no
express choice of the law that would govern it. In the United States and Europe, the two
rules that now seem to have emerged as "kings of the hill" are (1) the parties may choose
the governing law; and (2) in the absence of such a choice, the applicable law is that of the
State that "has the most signi cant relationship to the transaction and the parties." 4 9
Another authority proposed that all matters relating to the time, place, and manner of
performance and valid excuses for non-performance are determined by the law of the
place of performance or lex loci solutionis, which is useful because it is undoubtedly
always connected to the contract in a significant way. 5 0
In this case, the laws of Iraq bear substantial connection to the transaction, since
one of the parties is the Iraqi Government and the place of performance is in Iraq. Hence,
the issue of whether respondent VPECI defaulted in its obligations may be determined by
the laws of Iraq. However, since that foreign law was not properly pleaded or proved, the
presumption of identity or similarity, otherwise known as the processual presumption,
comes into play. Where foreign law is not pleaded or, even if pleaded, is not proved, the
presumption is that foreign law is the same as ours. 5 1
Our law, speci cally Article 1169, last paragraph, of the Civil Code, provides: "In
reciprocal obligations, neither party incurs in delay if the other party does not comply or is
not ready to comply in a proper manner with what is incumbent upon him."
Default or mora on the part of the debtor is the delay in the ful llment of the
prestation by reason of a cause imputable to the former. 5 2 It is the non-ful llment of an
obligation with respect to time. 5 3
It is undisputed that only 51.7% of the total work had been accomplished. The 48.3%
un nished portion consisted in the purchase and installation of electro-mechanical
equipment and materials, which were available from foreign suppliers, thus requiring US
Dollars for their importation. The monthly billings and payments made by SOB 5 4 reveal
that the agreement between the parties was a periodic payment by the Project owner to
the contractor depending on the percentage of accomplishment within the period. 5 5 The
payments were, in turn, to be used by the contractor to nance the subsequent phase of
the work. 5 6 However, as explained by VPECI in its letter to the Department of Foreign
Affairs (DFA), the payment by SOB purely in Dinars adversely affected the completion of
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the project; thus: IaEHSD
10. Due to the lack of Foreign currency in Iraq for this purpose, and if
only to assist the Iraqi government in completing the PROJECT, the Contractor
without any obligation on its part to do so but with the knowledge and consent of
SOB and the Ministry of Housing & Construction of Iraq, offered to arrange on
behalf of SOB, a foreign currency loan, through the facilities of Circle International
S.A., the Contractor's Sub-contractor and SACE MEDIO CREDITO which will act as
the guarantor for this foreign currency loan.
Arrangements were rst made with Banco di Roma. Negotiation started in
June 1985. SOB is informed of the developments of this negotiation, attached is
a copy of the draft of the loan Agreement between SOB as the Borrower and
Agent. The Several Banks, as Lender, and counter-guaranteed by Istituto Centrale
Per II Credito A Medio Termine (Mediocredito) Sezione Speciale Per
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L'Assicurazione Del Credito All' Exportazione (Sace). Negotiations went on and
continued until it suddenly collapsed due to the reported default by Iraq in the
payment of its obligations with Italian government, copy of the news clipping
dated June 18, 1986 is hereto attached as Annex "D" to form an integral part
hereof;
15. On September 15, 1986, Contractor received information from
Circle International S.A. that because of the news report that Iraq defaulted in its
obligations with European banks, the approval by Banco di Roma of the loan to
SOB shall be deferred inde nitely, a copy of the letter of Circle International
together with the news clippings are hereto attached as Annexes "F" and "F-1",
respectively. 5 7
As found by both the Court of Appeals and the trial court, the delay or the non-
completion of the Project was caused by factors not imputable to the respondent
contractor. It was rather due mainly to the persistent violations by SOB of the terms and
conditions of the contract, particularly its failure to pay 75% of the accomplished work in
US Dollars. Indeed, where one of the parties to a contract does not perform in a proper
manner the prestation which he is bound to perform under the contract, he is not entitled
to demand the performance of the other party. A party does not incur in delay if the other
party fails to perform the obligation incumbent upon him.
The petitioner, however, maintains that the payments by SOB of the monthly billings
in purely Iraqi Dinars did not render impossible the performance of the Project by VPECI.
Such posture is quite contrary to its previous representations. In his 26 March 1987 letter
to the O ce of the Middle Eastern and African Affairs (OMEAA), DFA, Manila, petitioner's
Executive Vice-President Jesus M. Tañedo stated that while VPECI had taken every
possible measure to complete the Project, the war situation in Iraq, particularly the lack of
foreign exchange, was proving to be a great obstacle; thus:
VPECI has taken every possible measure for the completion of the project
but the war situation in Iraq particularly the lack of foreign exchange is proving to
be a great obstacle. Our performance counterguarantee was called last 26
October 1986 when the negotiations for a foreign currency loan with the Italian
government through Banco de Roma bogged down following news report that
Iraq has defaulted in its obligation with major European banks. Unless the
situation in Iraq is improved as to allay the bank's apprehension, there is no
assurance that the project will ever be completed. 5 8
In order that the debtor may be in default it is necessary that the following requisites
be present: (1) that the obligation be demandable and already liquidated; (2) that the
debtor delays performance; and (3) that the creditor requires the performance because it
must appear that the tolerance or benevolence of the creditor must have ended. 5 9
As stated earlier, SOB cannot yet demand complete performance from VPECI
because it has not yet itself performed its obligation in a proper manner, particularly the
payment of the 75% of the cost of the Project in US Dollars. The VPECI cannot yet be said
to have incurred in delay. Even assuming that there was delay and that the delay was
attributable to VPECI, still the effects of that delay ceased upon the renunciation by the
creditor, SOB, which could be implied when the latter granted several extensions of time to
the former. 6 0 Besides, no demand has yet been made by SOB against the respondent
contractor. Demand is generally necessary even if a period has been xed in the obligation.
And default generally begins from the moment the creditor demands judicially or extra-
judicially the performance of the obligation. Without such demand, the effects of default
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will not arise. 6 1
Moreover, the petitioner as a guarantor is entitled to the bene t of excussion, that is,
it cannot be compelled to pay the creditor SOB unless the property of the debtor VPECI
has been exhausted and all legal remedies against the said debtor have been resorted to
by the creditor. 6 2 It could also set up compensation as regards what the creditor SOB
may owe the principal debtor VPECI. 6 3 In this case, however, the petitioner has clearly
waived these rights and remedies by making the payment of an obligation that was yet to
be shown to be rightfully due the creditor and demandable of the principal debtor.
As found by the Court of Appeals, the petitioner fully knew that the joint venture
contractor had collectibles from SOB which could be set off with the amount covered by
the performance guarantee. In February 1987, the OMEAA transmitted to the petitioner a
copy of a telex dated 10 February 1987 of the Philippine Ambassador in Baghdad, Iraq,
informing it of the note verbale sent by the Iraqi Ministry of Foreign Affairs stating that the
past due obligations of the joint venture contractor from the petitioner would "be deducted
from the dues of the two contractors." 6 4
Also, in the project situationer attached to the letter to the OMEAA dated 26 March
1987, the petitioner raised as among the arguments to be presented in support of the
cancellation of the counter-guarantee the fact that the amount of ID281,414/066 retained
by SOB from the Project was more than enough to cover the counter-guarantee of
ID271,808/610; thus:
6.1 Present the following arguments in cancelling the counterguarantee:
• The Iraqi Government does not have the foreign exchange to fulfill its
contractual obligations of paying 75% of progress billings in US
dollars.
xxx xxx xxx
• It could also be argued that the amount of ID281,414/066 retained by
SOB from the proposed project is more than the amount of the
outstanding counterguarantee. 6 5
Moreover, the petitioner was very much aware of the predicament of the
respondents. In fact, in its 13 May 1987 letter to the OMEAA, DFA, Manila, it stated:
VPECI also maintains that the delay in the completion of the project was
mainly due to SOB's violation of contract terms and as such, call on the
guarantee has no basis.
While PHILGUARANTEE is prepared to honor its commitment under the
guarantee, PHILGUARANTEE does not want to be an instrument in any case of
inequity committed against a Filipino contractor. It is for this reason that we are
constrained to seek your assistance not only in ascertaining the veracity of Al Ahli
Bank's claim that it has paid Ra dain Bank but possibly averting such an event.
As any payment effected by the banks will complicate matters, we cannot help
underscore the urgency of VPECI's bid for government intervention for the
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amicable termination of the contract and release of the performance guarantee.
66
But surprisingly, though fully cognizant of SOB's violations of the service contract
and VPECI's outstanding receivables from SOB, as well as the situation obtaining in the
Project site compounded by the Iran-Iraq war, the petitioner opted to pay the second layer
guarantor not only the full amount of the performance bond counter-guarantee but also
interests and penalty charges.
This brings us to the next question: May the petitioner as a guarantor secure
reimbursement from the respondents for what it has paid under Letter of Guarantee No.
81-194-F?
As a rule, a guarantor who pays for a debtor should be indemni ed by the latter 6 7
and would be legally subrogated to the rights which the creditor has against the debtor. 6 8
However, a person who makes payment without the knowledge or against the will of the
debtor has the right to recover only insofar as the payment has been bene cial to the
debtor. 6 9 If the obligation was subject to defenses on the part of the debtor, the same
defenses which could have been set up against the creditor can be set up against the
paying guarantor. 7 0
From the ndings of the Court of Appeals and the trial court, it is clear that the
payment made by the petitioner guarantor did not in any way bene t the principal debtor,
given the project status and the conditions obtaining at the Project site at that time.
Moreover, the respondent contractor was found to have valid defenses against SOB, which
are fully supported by evidence and which have been meritoriously set up against the
paying guarantor, the petitioner in this case. And even if the deed of undertaking and the
surety bond secured petitioner's guaranty, the petitioner is precluded from enforcing the
same by reason of the petitioner's undue payment on the guaranty. Rights under the deed
of undertaking and the surety bond do not arise because these contracts depend on the
validity of the enforcement of the guaranty.
The petitioner guarantor should have waited for the natural course of guaranty: the
debtor VPECI should have, in the rst place, defaulted in its obligation and that the creditor
SOB should have rst made a demand from the principal debtor. It is only when the debtor
does not or cannot pay, in whole or in part, that the guarantor should pay. 7 1 When the
petitioner guarantor in this case paid against the will of the debtor VPECI, the debtor
VPECI may set up against it defenses available against the creditor SOB at the time of
payment. This is the hard lesson that the petitioner must learn.
As the government arm in pursuing its objective of providing "the necessary support
and assistance in order to enable . . . [Filipino exporters and contractors to operate viably
under the prevailing economic and business conditions," 7 2 the petitioner should have
exercised prudence and caution under the circumstances. As aptly put by the Court of
Appeals, it would be the height of inequity to allow the petitioner to pass on its losses to
the Filipino contractor VPECI which had sternly warned against paying the Al Ahli Bank and
constantly apprised it of the developments in the Project implementation.
WHEREFORE, the petition for review on certiorari is hereby DENIED for lack of merit,
and the decision of the Court of appeals in CA-G.R. CV No. 39302 is AFFIRMED.
No pronouncement as to costs.
SO ORDERED.
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Panganiban, Ynares-Santiago, Carpio and Azcuna, JJ ., concur.
Footnotes
2. Exhibit "V" and "2-3," Original Record, vol. III (hereinafter OR III), 395.
3. Exh. "12-E," OR III, 433.
9. CA Decision, 3.
10. Exh. "A," OR III, 49.
34. Per Associate Justice Martin S. Villarama, Jr. with Associate Justices Angelina
Sandoval-Gutierrez (now Supreme Court Associate Justice) and Romeo A. Brawner
concurring. Rollo, 48-71.
35. Rollo, 61-68.
36. Id., 293-294.
37. Article 2047, Civil Code.
38. E. Zobel Inc. v. CA, G.R. No. 113931, 6 May 1998, 290 SCRA 1; VI AMBROSIO PADILLA,
CIVIL LAW 497-498 (5th ed. 1969)(hereinafter PADILLA).
43. Alba v. Court of Appeals, G.R. No. 120066, 9 September 1999, 314 SCRA 36.
44. Development Bank of the Philippines v. Court of Appeals, G.R. No. 119712, 29 January
1999, 302 SCRA 362.
45. DISEDERIO P. JURADO, COMMENTS AND JURISPRUDENCE ON OBLIGATIONS AND
CONTRACTS 49 (7th Revised ed. 1980) (hereinafter JURADO).
46. JOVITO R. SALONGA, PRIVATE INTERNATIONAL LAW 350 (1995 ed.) (hereinafter
SALONGA).
47. EDGARDO L. PARAS, PHILIPPINE CONFLICT OF LAWS 414 (6th ed. 1984).
55. See Court of Appeals' Decision, 19, Rollo, 66; RTC's Decision, 22, Rollo, 93.
56. RTC's Decision, 22; Rollo, 93.
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57. Exhs. "4-A" to "4-D," OR III, 296-298.
72. 4th Whereas Clause of Executive Order No. 185, which took effect on 5 June 1987.
SYLLABUS
DECISION
CARPIO , J : p
The Case
This is a petition for review 1 of the Decision 2 of the Court of Appeals dated 7
September 2000 and its Resolution dated 18 October 2000. The 7 September 2000
Decision a rmed the ruling of the Regional Trial Court, Makati, Branch 144 in a case for
estafa under Section 13, Presidential Decree No. 115. The Court of Appeals' Resolution of
18 October 2000 denied petitioners' motion for reconsideration.
The Facts
Petitioners Jose C. Tupaz IV and Petronila C. Tupaz ("petitioners") were Vice-
President for Operations and Vice-President/Treasurer, respectively, of El Oro Engraver
Corporation ("El Oro Corporation"). El Oro Corporation had a contract with the Philippine
Army to supply the latter with "survival bolos."
To nance the purchase of the raw materials for the survival bolos, petitioners, on
behalf of El Oro Corporation, applied with respondent Bank of the Philippine Islands
("respondent bank") for two commercial letters of credit. The letters of credit were in favor
of El Oro Corporation's suppliers, Tanchaoco Manufacturing Incorporated 3 ("Tanchaoco
Incorporated") and Maresco Rubber and Retreading Corporation 4 ("Maresco
Corporation"). Respondent bank granted petitioners' application and issued Letter of
Credit No. 2-00896-3 for P564,871.05 to Tanchaoco Incorporated and Letter of Credit No.
2-00914-5 for P294,000 to Maresco Corporation.
Simultaneous with the issuance of the letters of credit, petitioners signed trust
receipts in favor of respondent bank. On 30 September 1981, petitioner Jose C. Tupaz IV
("petitioner Jose Tupaz") signed, in his personal capacity, a trust receipt corresponding to
Letter of Credit No. 2-00896-3 (for P564,871.05). Petitioner Jose Tupaz bound himself to
sell the goods covered by the letter of credit and to remit the proceeds to respondent
bank, if sold, or to return the goods, if not sold, on or before 29 December 1981.
On 9 October 1981, petitioners signed, in their capacities as o cers of El Oro
Corporation, a trust receipt corresponding to Letter of Credit No. 2-00914-5 (for
P294,000). Petitioners bound themselves to sell the goods covered by that letter of credit
and to remit the proceeds to respondent bank, if sold, or to return the goods, if not sold, on
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or before 8 December 1981.
After Tanchaoco Incorporated and Maresco Corporation delivered the raw materials
to El Oro Corporation, respondent bank paid the former P564,871.05 and P294,000,
respectively. DIAcTE
Petitioners did not comply with their undertaking under the trust receipts.
Respondent bank made several demands for payments but El Oro Corporation made
partial payments only. On 27 June 1983 and 28 June 1983, respondent bank's counsel 5
and its representative 6 respectively sent nal demand letters to El Oro Corporation. El Oro
Corporation replied that it could not fully pay its debt because the Armed Forces of the
Philippines had delayed paying for the survival bolos.
Respondent bank charged petitioners with estafa under Section 13, Presidential
Decree No. 115 ("Section 13") 7 or Trust Receipts Law ("PD 115"). After preliminary
investigation, the then Makati Fiscal's O ce found probable cause to indict petitioners.
The Makati Fiscal's O ce led the corresponding Informations (docketed as Criminal
Case Nos. 8848 and 8849) with the Regional Trial Court, Makati, on 17 January 1984 and
the cases were ra ed to Branch 144 ("trial court") on 20 January 1984. Petitioners
pleaded not guilty to the charges and trial ensued. During the trial, respondent bank
presented evidence on the civil aspect of the cases.
The Ruling of the Trial Court
On 16 July 1992, the trial court rendered judgment acquitting petitioners of estafa
on reasonable doubt. However, the trial court found petitioners solidarily liable with El Oro
Corporation for the balance of El Oro Corporation's principal debt under the trust receipts.
The dispositive portion of the trial court's Decision provides:
WHEREFORE, judgment is hereby rendered ACQUITTING both accused
Jose C. Tupaz, IV and Petronila Tupaz based upon reasonable doubt.
In holding petitioners civilly liable with El Oro Corporation, the trial court held:
[S]ince the civil action for the recovery of the civil liability is deemed
impliedly instituted with the criminal action, as in fact the prosecution thereof was
actively handled by the private prosecutor, the Court believes that the El Oro
Engraver Corporation and both accused Jose C. Tupaz and Petronila Tupaz,
jointly and solidarily should be held civilly liable to the Bank of the Philippine
Islands. The mere fact that they were unable to collect in full from the AFP and/or
the Department of National Defense the proceeds of the sale of the delivered
survival bolos manufactured from the raw materials covered by the trust receipt
agreements is no valid defense to the civil claim of the said complainant and
surely could not wipe out their civil obligation. After all, they are free to institute an
action to collect the same. 9
Petitioners appealed to the Court of Appeals. Petitioners contended that: (1) their
acquittal "operates to extinguish [their] civil liability" and (2) at any rate, they are not
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personally liable for El Oro Corporation's debts.
The Ruling of the Court of Appeals
In its Decision of 7 September 2000, the Court of Appeals a rmed the trial court's
ruling. The appellate court held:
It is clear from [Section 13, PD 115] that civil liability arising from the
violation of the trust receipt agreement is distinct from the criminal liability
imposed therein. In the case of Vintola vs. Insular Bank of Asia and America, our
Supreme Court held that acquittal in the estafa case (P.D. 115) is no bar to the
institution of a civil action for collection. This is because in such cases, the civil
liability of the accused does not arise ex delicto but rather based ex contractu and
as such is distinct and independent from any criminal proceedings and may
proceed regardless of the result of the latter. Thus, an independent civil action to
enforce the civil liability may be led against the corporation aside from the
criminal action against the responsible officers or employees.
xxx xxx xxx
[W]e hereby hold that the acquittal of the accused-appellants from the
criminal charge of estafa did not operate to extinguish their civil liability under the
letter of credit-trust receipt arrangement with plaintiff-appellee, with which they
dealt both in their personal capacity and as o cers of El Oro Engraver
Corporation, the letter of credit applicant and principal debtor.
Appellants argued that they cannot be held solidarily liable with their
corporation, El Oro Engraver Corporation, alleging that they executed the subject
documents including the trust receipt agreements only in their capacity as such
corporate o cers. They said that these instruments are mere pro-forma and that
they executed these instruments on the strength of a board resolution of said
corporation authorizing them to apply for the opening of a letter of credit in favor
of their suppliers as well as to execute the other documents necessary to
accomplish the same.
Such contention, however, is contradicted by the evidence on record. The
trust receipt agreement indicated in clear and unmistakable terms that the
accused signed the same as surety for the corporation and that they bound
themselves directly and immediately liable in the event of default with respect to
the obligation under the letters of credit which were made part of the said
agreement, without need of demand. Even in the application for the letter of credit,
it is likewise clear that the undertaking of the accused is that of a surety as
indicated [in] the following words: "In consideration of your establishing the
commercial letter of credit herein applied for substantially in accordance with the
foregoing, the undersigned Applicant and Surety hereby agree, jointly and
severally, to each and all stipulations, provisions and conditions on the reverse
side hereof." caAICE
The Issues
The petition raises these issues:
(1) Whether petitioners bound themselves personally liable for El Oro
Corporation's debts under the trust receipts;
(2) If so —
(a) whether petitioners' liability is solidary with El Oro Corporation;
and
(b) whether petitioners' acquittal of estafa under Section 13, PD
115 extinguished their civil liability.
The Ruling of the Court
The petition is partly meritorious. We a rm the Court of Appeals' ruling with the
modi cation that petitioner Jose Tupaz is liable as guarantor of El Oro Corporation's debt
under the trust receipt dated 30 September 1981.
On Petitioners' Undertaking Under
the Trust Receipts
A corporation, being a juridical entity, may act only through its directors, o cers,
and employees. Debts incurred by these individuals, acting as such corporate agents, are
not theirs but the direct liability of the corporation they represent. 1 2 As an exception,
directors or o cers are personally liable for the corporation's debts only if they so
contractually agree or stipulate. 1 3
Here, the dorsal side of the trust receipts contains the following stipulation:
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To the Bank of the Philippine Islands
In the trust receipt dated 9 October 1981, petitioners signed below this clause as
o cers of El Oro Corporation. Thus, under petitioner Petronila Tupaz's signature are the
words "Vice-Pres–Treasurer" and under petitioner Jose Tupaz's signature are the words
"Vice-Pres–Operations." By so signing that trust receipt, petitioners did not bind
themselves personally liable for El Oro Corporation's obligation. In Ong v. Court of
Appeals , 1 5 a corporate representative signed a solidary guarantee clause in two trust
receipts in his capacity as corporate representative. There, the Court held that the
corporate representative did not undertake to guarantee personally the payment of the
corporation's debts, thus:
[P]etitioner did not sign in his personal capacity the solidary guarantee
clause found on the dorsal portion of the trust receipts. Petitioner placed his
signature after the typewritten words "ARMCO INDUSTRIAL CORPORATION"
found at the end of the solidary guarantee clause. Evidently, petitioner did not
undertake to guaranty personally the payment of the principal and interest of
ARMAGRI's debt under the two trust receipts.
Hence, for the trust receipt dated 9 October 1981, we sustain petitioners' claim that
they are not personally liable for El Oro Corporation's obligation.
For the trust receipt dated 30 September 1981, the dorsal portion of which
petitioner Jose Tupaz signed alone, we nd that he did so in his personal capacity.
Petitioner Jose Tupaz did not indicate that he was signing as El Oro Corporation's Vice-
President for Operations. Hence, petitioner Jose Tupaz bound himself personally liable for
El Oro Corporation's debts. Not being a party to the trust receipt dated 30 September
1981, petitioner Petronila Tupaz is not liable under such trust receipt.
The Nature of Petitioner Jose Tupaz's Liability
Under the Trust Receipt Dated 30 September 1981
As stated, the dorsal side of the trust receipt dated 30 September 1981 provides:
To the Bank of the Philippine Islands
The lower courts interpreted this to mean that petitioner Jose Tupaz bound himself
solidarily liable with El Oro Corporation for the latter's debt under that trust receipt.
This is error.
In Prudential Bank v. Intermediate Appellate Court , 1 6 the Court interpreted a
substantially identical clause 1 7 in a trust receipt signed by a corporate o cer who bound
himself personally liable for the corporation's obligation. The petitioner in that case
contended that the stipulation "we jointly and severally agree and undertake" rendered the
corporate o cer solidarily liable with the corporation. We dismissed this claim and held
the corporate o cer liable as guarantor only. The Court further ruled that had there been
more than one signatories to the trust receipt, the solidary liability would exist between the
guarantors. We held:
Petitioner [Prudential Bank] insists that by virtue of the clear wording of the
. . . clause ". . . we jointly and severally agree and undertake . . . ," and the
concluding sentence on exhaustion, [respondent] Chi's liability therein is solidary.
xxx xxx xxx
Our . . . reading of the questioned solidary guaranty clause yields no other
conclusion than that the obligation of Chi is only that of a guarantor. This is
further bolstered by the last sentence which speaks of waiver of exhaustion,
which, nevertheless, is ineffective in this case because the space therein for the
party whose property may not be exhausted was not lled up. Under Article 2058
of the Civil Code, the defense of exhaustion (excussion) may be raised by a
guarantor before he may be held liable for the obligation. Petitioner likewise
admits that the questioned provision is a solidary guaranty clause, thereby clearly
distinguishing it from a contract of surety. It, however, described the guaranty as
solidary between the guarantors; this would have been correct if two (2)
guarantors had signed it. The clause "we jointly and severally agree and
undertake" refers to the undertaking of the two (2) parties who are to sign it or to
the liability existing between themselves. It does not refer to the undertaking
between either one or both of them on the one hand and the petitioner on the
other with respect to the liability described under the trust receipt. . . .
However, respondent bank's suit against petitioner Jose Tupaz stands despite the
Court's nding that he is liable as guarantor only. First, excussion is not a pre-requisite to
secure judgment against a guarantor. The guarantor can still demand deferment of the
execution of the judgment against him until after the assets of the principal debtor shall
have been exhausted. 1 9 Second, the benefit of excussion may be waived. 2 0 Under the trust
receipt dated 30 September 1981, petitioner Jose Tupaz waived excussion when he
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agreed that his "liability in [the] guaranty shall be DIRECT AND IMMEDIATE, without any
need whatsoever on . . . [the] part [of respondent bank] to take any steps or exhaust any
legal remedies . . . ." The clear import of this stipulation is that petitioner Jose Tupaz
waived the benefit of excussion under his guarantee.
As guarantor, petitioner Jose Tupaz is liable for El Oro Corporation's principal debt
and other accessory liabilities (as stipulated in the trust receipt and as provided by law)
under the trust receipt dated 30 September 1981. That trust receipt (and the trust receipt
dated 9 October 1981) provided for payment of attorney's fees equivalent to 10% of the
total amount due and an "interest at the rate of 7% per annum, or at such other rate as the
bank may x, from the date due until paid . . . ." 2 1 In the applications for the letters of
credit, the parties stipulated that drafts drawn under the letters of credit are subject to
interest at the rate of 18% per annum. 2 2
The lower courts correctly applied the 18% interest rate per annum considering that
the face value of each of the trust receipts is based on the drafts drawn under the letters
of credit. Based on the guidelines laid down in Eastern Shipping Lines, Inc. v. Court of
Appeals , 2 3 the accrued stipulated interest earns 12% interest per annum from the time of
the ling of the Informations in the Makati Regional Trial Court on 17 January 1984.
Further, the total amount due as of the date of the nality of this Decision will earn interest
at 18% per annum until fully paid since this was the stipulated rate in the applications for
the letters of credit. 2 4
The accounting of El Oro Corporation's debts as of 23 January 1992, which the trial
court used, is no longer useful as it does not specify the amounts owing under each of the
trust receipts. Hence, in the execution of this Decision, the trial court shall compute El Oro
Corporation's total liability under each of the trust receipts dated 30 September 1981 and
9 October 1981 based on the following formula: 2 5
TOTAL AMOUNT DUE = [principal + interest + interest on interest] — partial
payments made 2 6
Interest = principal x 18 % per annum x no. of years from due date 2 7 until
finality of judgment
Interest on interest = interest computed as of the ling of the complaint (17
January 1984) x 12% x no. of years until finality of judgment
Attorney's fees is 10% of the total amount computed as of nality of
judgment
Total amount due as of the date of nality of judgment will earn an
interest of 18% per annum until fully paid.
Here, respondent bank chose not to file a separate civil action 3 0 to recover payment
under the trust receipts. Instead, respondent bank sought to recover payment in Criminal
Case Nos. 8848 and 8849. Although the trial court acquitted petitioner Jose Tupaz, his
acquittal did not extinguish his civil liability. As the Court of Appeals correctly held, his
liability arose not from the criminal act of which he was acquitted (ex delito) but from the
trust receipt contract (ex contractu) of 30 September 1981. Petitioner Jose Tupaz signed
the trust receipt of 30 September 1981 in his personal capacity.
On the other Matters Petitioners Raise
Petitioners raise for the rst time in this appeal the contention that El Oro
Corporation's debts under the trust receipts are not yet due and demandable. Alternatively,
petitioners assail the trust receipts as simulated. These assertions have no merit. Under
the terms of the trust receipts dated 30 September 1981 and 9 October 1981, El Oro
Corporation's debts fell due on 29 December 1981 and 8 December 1981, respectively.
Neither is there merit to petitioners' claim that the trust receipts were simulated.
During the trial, petitioners did not deny applying for the letters of credit and subsequently
executing the trust receipts to secure payment of the drafts drawn under the letters of
credit.
WHEREFORE, we GRANT the petition in part. We AFFIRM the Decision of the Court of
Appeals dated 7 September 2000 and its Resolution dated 18 October 2000 with the
following MODIFICATIONS:
1) El Oro Engraver Corporation is principally liable for the total amount
due under the trust receipts dated 30 September 1981 and 9 October
1981, as computed by the Regional Trial Court, Makati, Branch 144,
upon finality of this Decision, based on the formula provided above;
2) Petitioner Jose C. Tupaz IV is liable for El Oro Engraver Corporation's
total debt under the trust receipt dated 30 September 1981 as thus
computed by the Regional Trial Court, Makati, Branch 144; and
3) Petitioners Jose C. Tupaz IV and Petronila C. Tupaz are not liable
under the trust receipt dated 9 October 1981.
SO ORDERED.
Davide, Jr., C.J., Quisumbing, Ynares-Santiago and Azcuna, JJ., concur.
17. The clause reads: "In consideration of the PRUDENTIAL BANK AND TRUST COMPANY
complying with the foregoing, we jointly and severally agree and undertake to pay on
demand to the PRUDENTIAL BANK AND TRUST COMPANY all sums of money which the
said PRUDENTIAL BANK AND TRUST COMPANY may call upon us to pay arising out of
or pertaining to, and/or in any event connected with the default of and/or non-fulfillment
in any respect of the undertaking of the aforesaid:
18. Prudential Bank v. Intermediate Appellate Court, supra note 16 (internal citations
omitted).
24. See Philippine Blooming Mills, Inc. v. Court of Appeals, G.R. No. 142381, 15 October
2003, 413 SCRA 445.
25. See Rizal Commercial Banking Corp. v. Alfa RTW Mfg. Corp., 420 Phil. 702 (2001),
citing Eastern Shipping Lines, Inc. v. Court of Appeals, supra note 23.
27. 8 December 1981 for the trust receipt dated 9 October 1981 and 29 December 1981 for
the trust receipt dated 30 September 1981.
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28. Supra note 25. Reported as Rizal Commercial Banking Corp. v. Alfa RTW Mfg. Corp.
29. Padilla, et al. v. CA, 214 Phil. 492 (1984).
30. The action to recover payment under a trust receipt may be instituted separately under
Article 31 of the Civil Code based on the trust receipt contract (Vintola v. Insular Bank of
Asia and America, No. L-78671, 25 March 1988, 159 SCRA 140; Vintola v. Insular Bank of
Asia and America, No. L-73271, 29 May 1987, 150 SCRA 578) or under Article 33 of the
Civil Code based on fraud (Prudential Bank v. Intermediate Appellate Court, supra note
16). The civil action under Article 31 or Article 33 proceeds independently of the criminal
action.
SYLLABUS
DECISION
VITUG , J : p
The issues, albeit not completely novel, are: (a) whether or not a claim for damage
sustained on a shipment of goods can be a solidary, or joint and several, liability of the
common carrier, the arrastre operator and the customs broker; (b) whether the payment of
legal interest on an award of loss or damage is to be computed from the time the
complaint is led or from the date the decision appealed from is rendered; and (c) whether
the applicable rate of interest, referred to above, is twelve percent (12%) or six percent
(6%). llcd
The ndings of the court a quo, adopted by the Court of Appeals, on the antecedent and
undisputed facts that have led to the controversy are hereunder reproduced:
"This is an action against defendants shipping company, arrastre operator and
broker-forwarded for damages sustained by a shipment while in defendants'
custody, led by the insurer-subrogee who paid the consignee the value of such
losses/damages.
"On December 4, 1981, two ber drums of ribo avin were shipped from
Yokohama, Japan for delivery vessel `SS EASTERN COMET' owned by defendant
Eastern Shipping Lines under Bill of Lading No. YMA-8 (Exh. B). The shipment
was insured under plaintiff's Marine Insurance Policy No. 81/01177 for
P36,382,466.38.
"Upon arrival of the shipment in Manila on December 12, 1981, it was discharged
unto the custody of defendant Metro Port Services, Inc. The latter excepted to one
drum, said to be in bad order, which damage was unknown to plaintiff.
"On January 8 and 14, 1982, defendant Allied Brokerage Corporation made
deliveries of the shipment to the consignees' warehouse. The latter excepted to
one drum which contained spillages, while the rest of the contents was
adulterated/fake (per 'Bad Order Waybill' No. 10649, Exh. E).
"Plaintiff contended that due to the losses/damage sustained by said drum, the
consignee suffered losses totaling P19,032.95, due to the fault and negligence of
defendants. Claims were presented against defendants who failed and refused to
pay the same (Exhs. H, I, J, K, L).
Cdpr
"As a consequence of the losses sustained, plaintiff was compelled to pay the
consignee P19,032.95 under the aforestated marine insurance policy, so that it
became subrogated to all the rights of action of said consignee against
defendants (per 'Form of Subrogation,' 'Release' and Philbanking check, Exhs. M,
N, and O)." (pp. 85-86, Rollo.)
'As to the rst issue, there can be no doubt that the shipment sustained
losses/damages. The two drums were shipped in good order and
condition, as clearly shown by the Bill of Lading and Commercial Invoice
which do not indicate any damages drum that was shipped (Exhs. B and
C). But when on December 12, 1981 the shipment was delivered to
defendant Metro Port Service, Inc., it excepted to one drum in bad order.
'Correspondingly, as to the second issue, it follows that the
losses/damages were sustained while in the respective and/or successive
custody and possession of defendants carrier (Eastern), arrastre operator
(Metro Port) and broker (Allied Brokerage). This becomes evident when the
Marine Cargo Survey Report (Exh. G), with its 'Additional Survey Notes,' are
considered. In the latter notes, it is stated that when the shipment was
'landed on vessel' to dock of Pier # 15, South Harbor, Manila on December
12, 1981,' it was observed that ' one (1) ber drum (was) in damaged
condition, covered by the vessel's Agent's Bad order Tally Sheet No.
86427.' The report further states that when defendant Allied Brokerage
withdrew the shipment, from defendant arrastre operator's custody on
January 7, 1982, one drum was found opened without seal, cello bag partly
torn but contents intact. Net unrecovered spillages was 15 kgs. The report
went on to state that when the drums reached the consignee, one drum
was found with adulterated/faked contents. It is obvious, therefore, that
these losses/damages occurred before the shipment reached the
consignee while under the successive custodies of defendants. Under Art.
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1737 of the New Civil Code, the common carrier's duty to observe
extraordinary diligence in the vigilance of goods remains in full force and
effect even if the goods are temporarily unloaded and stored in transit in
the warehouse of the carrier at the place of destination, until the consignee
has been advised and has had reasonable opportunity to remove or
dispose of the goods (Art. 1738, NCC). Defendant Eastern Shipping's own
exhibit, the 'Turn-Over Survey of Bad Order Cargoes' (Exhs. 3-Eastern)
states that on December 12, 1981 one drum was found 'open.'
"and thus held:
The Court of Appeal thus affirmed in toto the judgment of the court a quo.
In this petition, Eastern Shipping Lines, Inc., the common carrier, attributes error and grave
abuse of discretion on the part of the appellate court when —
I. IT HELD PETITIONER CARRIER JOINTLY AND SEVERALLY LIABLE WITH
THE ARRASTRE OPERATOR AND CUSTOMS BROKER FOR THE CLAIM OF
PRIVATE RESPONDENT AS GRANTED IN THE QUESTIONED DECISION;
II. IT HELD THAT THE GRANT OF INTEREST ON THE CLAIM OF PRIVATE
RESPONDENT SHOULD COMMENCE FROM THE DATE OF THE FILING OF THE
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COMPLAINT AT THE RATE OF TWELVE PERCENT PER ANNUM INSTEAD OF
FROM THE DATE OF THE DECISION OF THE TRIAL COURT AND ONLY AT THE
RATE OF SIX PERCENT PER ANNUM, PRIVATE RESPONDENT'S CLAIM BEING
INDISPUTABLY UNLIQUIDATED.
The common carrier's duty to observe the requisite diligence in the shipment of goods
lasts from the time the articles are surrendered to or unconditionally placed in the
possession of, and received by, the carrier for transportation until delivered to, or until the
lapse of a reasonable time for their acceptance, by the person entitled to receive them
(Arts. 1736-1738, Civil Code; Ganzon vs. Court of Appeals, 161 SCRA 646; Kui Bai vs.
Dollar Steamship Lines, 52 Phil. 863).When the goods shipped either are lost or arrive in
damaged condition, a presumption arises against the carrier of its failure to observe that
diligence, and there need not be an express nding of negligence to hold it liable (Art.
1735, Civil Code; Philippine National Railways vs. Court of Appeals, 139 SCRA 87; Metro
Port Service vs. Court of Appeals, 131 SCRA 365). There are, of course, exceptional cases
when such presumption of fault is not observed but these cases, enumerated in Article
1734 1 of the Civil Code, are exclusive, not one of which can be applied to this case.
The question of charging both the carrier and the arrastre operator with the obligation of
properly delivering the goods to the consignee has, too, been passed upon by the Court. In
Fireman's Fund Insurance vs. Metro Port Services (182 SCRA 455), we have explained in
holding the carrier and the arrastre operator liable in solidum, thus: Cdpr
"The legal relationship between the consignee and the arrastre operator is akin to
that of a depositor and warehouseman (Lua Kian v. Manila Railroad Co., 19 SCRA
5 [1967]. The relationship between the consignee and the common carrier is
similar to that of the consignee and the arrastre operator (Northern Motors, Inc. v.
Prince Line, et al., 107 Phil. 253 [1960]). Since it is the duty of the ARRASTRE to
take good care of the goods that are in its custody and to deliver them in good
condition to the consignee, such responsibility also devolves upon the CARRIER.
Both the ARRASTRE and the CARRIER are therefore charged with the obligation to
deliver the goods in goods condition to the consignee."
We do not, of course, imply by the above pronouncement that the arrastre operator and the
customs broker are themselves always and necessarily liable solidarily with the carrier, or
vice-versa, nor that attendant facts in a given case may not vary the rule. The instant
petition has been brought solely by Eastern Shipping Lines which, being the carrier and not
having been able to rebut the presumption of fault, is, in any event, to be held liable in this
particular case. A factual nding of both the court a quo and the appellate court, we take
note, is that "there is suf cient evidence that the shipment sustained damage while in the
successive possession of appellants" (the herein petitioner among them). Accordingly, the
liability imposed on Eastern Shipping Lines, Inc., the sole petitioner in this case, is
inevitable regardless of whether there are others solidarily liable with it. llcd
It is over the issue of legal interest adjudged by the appellate court that deserves more
than just a passing remark.
Let us first see a chronological recitation of the major rulings of this Court:
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The early case of Malayan Insurance Co., Inc., vs. Manila Port Service, 2 decided 3 on 15
May 1969, involved a suit for recovery of money arising out of short deliveries and
pilferage of goods. In this case, appellee Malayan Insurance (the plaintiff in the lower
court) averred in its complaint that the total amount of its claim for the value of the
undelivered goods amounted to P3,947.20. This demand, however, was neither
established in its totality nor de nitely ascertained. In the stipulation of facts later entered
into by the parties, in lieu of proof, the amount of P1,447.51 was agreed upon. The trial
court rendered judgment ordering the appellants (defendants) Manila Port Service and
Manila Railroad Company to pay appellee Malayan Insurance the sum of P1,447.51 with
legal interest thereon from the date the complaint was led on 28 December 1962 until full
payment thereof. The appellants then assailed, inter alia, the award of legal interest. In
sustaining the appellants, this Court ruled:
"Interest upon an obligation which calls for the payment of money, absent a
stipulation, is the legal rate. Such interest normally is allowable from the date of
demand, judicial or extrajudicial. The trial court opted for judicial demand as the
starting point.
"But then upon the provisions of Article 2213 of the Civil Code, interest 'cannot be
recovered upon unliquidated claims or damages, except when the demand can be
established with reasonable certainty.' And as was held by this Court in Rivera vs.
Perez 4 , L-6998, February 29, 1956, if the suit were for damages, 'unliquidated
and not known until de nitely ascertained, assessed and determined by the
courts after proof (Montilla c. Corporacion de P. P. Agustinos, 25 Phil. 447;
Lichauco v. Guzman, 38 Phil. 302), ' then, interest 'should be from the date of the
decision.'" (Emphasis supplied).Cdpr
The case of Reformina vs. Tomol , 5 rendered on 11 October 1985, was for "Recovery of
Damages for Injury to Person and Loss of Property." After trial, the lower court decreed:
"WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and third
party defendants and against the defendants and third party plaintiffs as follows:
"Ordering defendants and third party plaintiffs Shell and Michael, Incorporated to
pay jointly and severally the following persons:
"(a) ...
"xxx xxx xxx
"(g) Plaintiffs Pacita F. Reformina and Francisco Reformina the sum of
P131,084.00 which is the value of the boat F B Pacita III together with its
accessories, shing gear and equipment minus P80,000.00 which is the value of
the insurance recovered and the amount of P10,000.00 a month as the estimated
monthly loss suffered by them as a result of the re of May 6, 1969 up to the time
they are actually paid or already the total sum of P370,000.00 as of June 4, 1972
with legal interest from the ling of the complaint until paid and to pay attorney's
fees of P5,000.00 with costs against defendants and third party plaintiffs."
(Emphasis supplied.)
On appeal of the Court of Appeals, the latter modi ed the amount of damages awarded
but sustained the trial court in adjudging legal interest from the ling of the complaint
until fully paid. When the appellate court's decision became nal, the case was
remanded to the lower court for execution, and this was when the trial court issued its
assailed resolution which applied the 6% interest per annum prescribed in Article 2209
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of the Civil Code. In their petition for review on certiorari, the petitioners contended that
Central Bank Circular No. 416, providing thus — Cdpr
"By virtue of the authority granted to it under Section 1 of Act 2655, as amended,
Monetary Board in its Resolution No. 1622 dated July 29, 1974, has prescribed
that the rate of interest for the loan, or forbearance of any money, goods, or
credits and the rate allowed in judgments, in the absence of express contract as
to such rate of interest, shall be twelve (12%) percent per annum. This Circular
shall take effect immediately." (Emphasis found in the text) —
The above rule was reiterated in Philippine Rabbit Bus Lines, Inc., v. Cruz , 7 promulgated on
28 July 1986. The case was for damages occasioned by an injury to person and loss of
property. The trial court awarded private respondent Pedro Manabat actual and
compensatory damages in the amount of P72,500.00 with legal interest thereon from the
ling of the complaint until fully paid . Relying on the Reformina v. Tomol case, this Court 8
modi ed the interest award from 12% to 6% interest per annum but sustained the time
computation thereof, i.e., from the filing of the complaint until fully paid. Cdpr
In Nakpil and Sons vs. Court of Appeals, 9 the trial court, in an action for the recovery of
damages arising from the collapse of a building, ordered inter alia, the "defendant United
Construction Co., Inc. (one of the petitioners) . . . to pay the plaintiff, . . ., the sum of
P989,335.68 with interest at the legal rate from November 29, 1968, the date of the ling
of the complaint until full payment . . . ." Save from the modi cation of the amount granted
by the lower court, the Court of Appeals sustained the trial court's decision. When taken to
this Court for review, the case, on 03 October 1986, was decided, thus:
"WHEREFORE, the decision appealed from is hereby MODIFIED and considering
the special and environmental circumstances of this case, we deem it reasonable
to render a decision imposing, as We do hereby impose, upon the defendant and
the third-party defendants (with the exception of Roman Ozaeta) a solidary (Art.
1723, Civil Code, Supra. p. 10) indemnity in favor of the Philippine Bar
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Association of FIVE MILLION (P5,000,000.00) Pesos to cover all damages (with
the exception of attorney's fees) occasioned by the loss of the building and an
additional ONE HUNDRED THOUSAND (P100,000.00) Pesos as and for attorney's
fees, the total sum being payable upon the finality of this decision. Upon failure to
pay on such nality, twelve (12%) per cent interest per annum shall be imposed
upon aforementioned amounts from nality until paid . Solidary costs against the
defendant and third-party defendants (except Roman Ozaeta)." (Emphasis
supplied).
A motion for reconsideration was led by United Construction, contending that "the
interest of twelve (12%) per cent per annum imposed on the total amount of the
monetary award was in contravention of law." The Court 1 0 ruled out the applicability of
the Reformina and Philippine Rabbit Bus Lines cases and, in its resolution of 15 April
1988, it explained: LLphil
The subsequent case of American Express International, Inc., vs. International Appellate
Court 1 1 was a petition for review on certiorari from the decision, dated 27 February 1985,
of the then Intermediate Appellate Court reducing the amount of moral and exemplary
damages awarded by the trial court, to P240,000.00 and P100,000.00, respectively, and its
resolution, dated 29 April 1985, restoring the amount of damages awarded by the trial
court, i.e., P2,000,000,00 as moral damages and P400,000.00 as exemplary damages with
interest thereon at 12% per annum from notice of judgment, plus costs of suit. In a
decision of 09 November 1988, this Court, while recognizing the right of the private
respondent to recover damages, held the award, however, for moral damages by the trial
court, later sustained by the IAC, to be inconceivably large. The Court 1 2 thus set aside the
decision of the appellate court and rendered a new one, "ordering the petitioner to pay
private respondent the sum of One Hundred Thousand (P100,000.00) Pesos as moral
damages, with six (6%) percent interest thereon computed from the finality of this decision
until paid." (Emphasis supplied). Cdpr
Reformina came into fore again in the 21 February 1989 case of Florendo v. Ruiz 1 3 which
arose from a breach of employment contract. For having been illegally dismissed, the
petitioner was awarded by the trial court moral and exemplary damages without, however,
providing any legal interest thereon. When the decision was appealed to the Court of
Appeals, the latter held:
"WHEREFORE, except as modi ed hereinabove the decision of the CFI of Negros
Oriental dated October 31, 1972 is af rmed in all respects, with the modi cation
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that defendants-appellants, except defendant-appellant Merton Munn, are ordered
to pay, jointly and severally, the amounts stated in the dispositive portion of the
decision, including the sum of P1,400.00 in concept of compensatory damages,
with interest at the legal rate from the date of the ling of the complaint until fully
paid." (Emphasis supplied)
The petition for review to this Court was denied. The records were thereupon
transmitted to the trial court, and an entry of judgment was made. The writ of execution
issued by the trial court directed that only compensatory damages should earn interest
at 6% per annum from the date of the ling of the complaint. Ascribing grave abuse of
discretion on the part of the trial judge, a petition for certiorari assailed the said order.
This court said:
". . ., it is to be noted that the Court of Appeals ordered the payment of interest 'at
the legal rate' from the time of the filing of the complaint. . . . Said circular [Central
Bank Circular No. 416] does not apply to actions based on a breach of
employment contract like the case at bar." (Emphasis supplied)
The Court reiterated that the 6% interest per annum on the damages should be
computed from the time the complaint was filed until the amount is fully paid.
Quite recently, the Court had another occasion to rule on the matter. National Power
Corporation vs. Angas, 1 4 decided on 08 May 1992, involved the expropriation of certain
parcels of land. After conducting a hearing on the complaints for eminent domain, the trial
court ordered the petitioner to pay the private respondents certain sums of money as just
compensation for their lands so expropriated "with legal interest thereon . . . until fully
paid." Again, in applying the 6% legal interest per annum under the Civil Code, the Court 1 5
declared: LLpr
Concededly, there have been seeming variances in the above holdings. The cases can
perhaps be classi ed into two groups according to the similarity of the issues involved
and the corresponding rulings rendered by the court. The " first group " would consist of the
cases of Reformina v. Tomol (1985), Philippine Rabbit Bus Lines v. Cruz (1986), Florendo v.
Ruiz (1989) and National Power Corporation v. Angas (1992). In the "second group" would
be Malayan Insurance Company v. Manila Port Service (1969), Nakpil and Sons v. Court of
Appeals (1988), and American Express International v. Intermediate Appellate Court
(1988). LLpr
In the " first group ," the basic issue focus on the application of either the 6% (under the Civil
Code) or 12% (under the Central Bank Circular) interest per annum. It is easily discernible in
these cases that there has been a consistent holding that the Central Bank Circular
imposing the 12% interest per annum applies only to loans or forbearance 1 6 of money,
goods or credits, as well as to judgments involving such loan or forbearance of money,
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goods or credits, and that the 6% interest under the Civil Code governs when the
transaction involves the payment of indemnities in the concept of damage arising from the
breach of a delay in the performance of obligations in general. Observe, too, that in these
cases, a common time frame in the computation of the 6% interest per annum has been
applied, i.e., from the time the complaint is filed until the adjudged amount is fully paid.
The "second group ," did not alter the pronounced rule on the application of the 6% or 12%
interest per annum, 17 depending on whether or not the amount involved is a loan or
forbearance, on the one hand, or one of indemnity for damage, on the other hand. Unlike,
however, the " rst group" which remained consistent in holding that the running of the legal
interest should be from the time of the ling of the complaint until fully paid, the "second
group" varied on the commencement of the running of the legal interest. cdll
Malayan held that the amount awarded should bear legal interest from the date of the
decision of the court a quo, explaining that "if the suit were for damages, 'unliquidated and
not known until de nitely ascertained, assessed and determined by the courts after proof,'
then, interest 'should be from the date of the decision.'" American Express International v.
IAC, introduced a different time frame for reckoning the 6% interest by ordering it to be
"computed from the nality of (the) decision until paid ." The Nakpil and Sons case ruled
that 12% interest per annum should be imposed from the nality of the decision until the
judgment amount is paid.
The ostensible discord is not dif cult to explain. The factual circumstances may have
called for different applications, guided by the rule that the courts are vested with
discretion, depending on the equities of each case, on the award of interest. Nonetheless,
it may not be unwise, by way of clari cation and reconciliation, to suggest the following
rules of thumb for future guidance.
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts,
delicts or quasi-delicts 1 8 is breached, the contravenor can be held liable for damages. 1 9
The provisions under Title XVIII on "Damages" of the Civil Code govern in determining the
measure of recoverable damages. 2 0
II. With regard particularly to an award of interest in the concept of actual and
compensatory damages, the rate of interest, as well as the accrual thereof, is imposed, as
follows: LibLex
1. When the obligation is breached, and it consists in the payment of a sum of money,
i.e., a loan or forbearance of money, the interest due should be that which may have been
stipulated in writing. 2 1 Furthermore, the interest due shall itself earn legal interest from
the time it is judicially demanded. 2 2 In the absence of stipulation, the rate of interest shall
be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand
under and subject to the provisions of Article 1169 2 3 of the Civil Code.
2. When a obligation, not constituting a loan or forbearance of money, is breached, an
interest on the amount of damages awarded may be imposed at the discretion of the
court 2 4 at the rate of 6% per annum. 2 5 No interest, however, shall be adjudged on
unliquidated claims or damages except when or until the demand can be established with
reasonable certainty. 2 6 Accordingly, where the demand is established with reasonable
certainty, the interest shall begin to run from the time the claim is made judicially or
extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably
established at the time the demand is made, the interest shall begin to run only from the
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date of the judgment of the court is made (at which time the quanti cation of damages
may be deemed to have been reasonably ascertained). The actual base for the
computation of legal interest shall, in any case, be on the amount of finally adjudged. LLjur
3. When the judgment of the court awarding a sum of money becomes nal and
executory, the rate of legal interest, whether the case falls under paragraph 1 or paragraph
2, above, shall be 12% per annum from such nality until its satisfaction, this interim period
being deemed to be by then an equivalent to a forbearance of credit.
WHEREFORE, the petition is partly GRANTED. The appealed decision is AFFIRMED with the
MODIFICATION that the legal interest to be paid is SIX PERCENT(6%) on the amount due
computed from the decision, dated 03 February 1988, of the court a quo. A TWELVE
PERCENT (12%) interest, in lieu of SIX PERCENT (6%), shall be imposed on such amount
upon finality of this decision until the payment thereof. cdll
SO ORDERED.
Narvasa, C.J., Cruz, Feliciano, Padilla, Bidin, Regalado, Davide, Jr., Romero, Bellosillo, Melo,
Quiason, Puno and Kapunan, JJ., concur.
Mendoza, J., took no part.
Footnotes
1. Art. 1734. Common carriers are responsible for the loss, destruction, or deterioration of
the goods, unless the same is due to any of the following causes only:
(4) The character of the goods or defects in the packing or in the containers;
(5) Order or act of competent public authority.
2. 28 SCRA 65.
3. Penned by Justice Conrado Sanchez, concurred in by Justices Jose B.L. Reyes, Arsenio
Dizon, Querube Makalintal, Calixto Zaldivar, Enrique Fernando, Francisco Capistrano,
Claudio Teehankee and Antonio Barredo, Chief Justice Roberto Concepcion and Justice
Fred Ruiz Castro were on official leave.
4. The correct caption of the case is "Claro Rivera vs. Amadeo Matute, L-6998, 29 February
1956," 98 Phil., 516.
5. 139 SCRA 260, 265.
8. Penned by then Justice, now Chief Justice, Andres Narvasa, concurred in by Justices
Pedro Yap, Ameurfina Melencio-Herrera, Isagani A. Cruz and Edgardo Paras.
9. 160 SCRA 334.
10. Penned by Justice Edgardo Paras, with the concurrence of Justices Marcelo Fernan,
Teodoro Padilla, Abdulwahid Bidin, and Irene Cortes. Justice Hugo Gutierrez, Jr., took no
part because he was the ponente in the Court of Appeals.
11. 167 SCRA 209.
12. Rendered per curiam with the concurrence of then Chief Justice Marcelo Fernan,
Justices Andres Narvasa, Isagani A. Cruz, Emilio Gancayco, Teodoro Padilla, Abdulwahid
Bidin, Abraham Sarmiento, Irene Cortes, CArolina Grino-Aquino, Leo Medialdea and
Florenz Regalado. Justices, Ameurfina Melencio-Herrera and Hugo Gutierrez, Jr., took no
part because they did not participate in the deliberations. Justices Edgardo Paras and
Florentino Feliciano also took no part.
15. Penned by Justice Edgardo Paras with the concurrence of Justices Ameurfina
Melencio-Herrera, Teodoro Padilla, Florenz Regalado and Rodolfo Nocon.
16. Black's Law Dictionary (1990 ed., 644) citing the case of Hafer v. Spaeth, 22 Wash. 2d
378, 156 P. 2d 408, 411 defines the word forbearance, within the context of usury law, as
a contractual obligation of lender or creditor to refrain, during given period of time, from
requiring borrower or debtor to repay loan or debt then due and payable.
17. In the case of Malayan Insurance, the application of the 6% and 12% interest per
annum has no bearing considering that this case was decided upon before the issuance
of Circular No. 416 by the Central Bank.
(1) Law;
(2) Contracts;
(3) Quasi-contracts;
(4) Acts or omissions punished by law; and
(5) Quasi-delicts."
19. "ART. 1170. Those who in the performance of their obligations are guilty of fraud,
negligence, or delay, and those who in any manner contravene the tenor thereof, are
liable for damages."
20. "ART. 2195. The provisions of this Title (on Damages) shall be respectively applicable
to all obligations mentioned in article 1157."
21. "ART. 1956. No interest shall be due unless it has been expressly stipulated in writing."
22. "ART. 2212. Interest due shall earn legal interest from the time it is judicially demanded,
although the obligation may be silent upon this point."
"However, the demand by the creditor shall not be necessary in order that delay may
exist:
"In reciprocal obligations, neither party incurs in delay if the other does not comply or
is not ready to comply in a proper manner with what is incumbent upon him. From the
moment one of the parties fulfills his obligation, delay by the other begins."
24. "ART. 2210. Interest may, in the discretion of the court, be allowed upon damages
awarded for breach of contract.
"ART. 2211. In crimes and quasi-delicts, interest as a part of the damages may, in a
proper case, be adjudicated in the discretion of the court."
25. "Art. 2209. If the obligation consists in the payment of a sum of money, and the debtor
incurs in delay, the indemnity for damages, there being no stipulation to the contrary,
shall be the payment of the interest agreed upon, and in the absence of stipulation, the
legal interest, which is six per cent per annum."
26. "ART. 2213. Interest cannot be recovered upon unliquidated claims or damages, except
when the demand can be established with reasonable certainty."
DECISION
TINGA , J : p
The main contention raised in this petition is that petitioners are not under
obligation to reimburse respondent, a claim that can be easily debunked. The more
perplexing question is whether this obligation to repay is solidary, as contended by
respondent and the lower courts, or merely joint as argued by petitioners. ITEcAD
c. In the event that any of [the] OBLIGORS is for any reason made to
pay any amount to PDCP and/or PAIC, SURETIES shall reimburse
OBLIGORS for said amount/s within seven (7) calendar days from such
payment; CSEHIa
4. OBLIGORS hereby waive in favor of SURETIES any and all fees which
may be due from FALCON arising out of, or in connection with, their said
guarantees [sic]. 8
Falcon eventually availed of the sum of US$178,655.59 from the credit line extended
by PDCP. It would also execute a Deed of Chattel Mortgage over its personal properties to
further secure the loan. However, Falcon subsequently defaulted in its payments. After
PDCP foreclosed on the chattel mortgage, there remained a subsisting de ciency of
P5,031,004.07, which Falcon did not satisfy despite demand. 9
On 28 April 1989, in order to recover the indebtedness, PDCP led a complaint for
sum of money with the Regional Trial Court of Makati (RTC) against Falcon, Ortigas,
Escaño, Silos, Silverio and Inductivo. The case was docketed as Civil Case No. 89-5128.
For his part, Ortigas led together with his answer a cross-claim against his co-defendants
Falcon, Escaño and Silos, and also manifested his intent to le a third-party complaint
against the Scholeys and Matti. 1 0 The cross-claim lodged against Escaño and Silos was
predicated on the 1982 Undertaking, wherein they agreed to assume the liabilities of
Ortigas with respect to the PDCP loan.
Escaño, Ortigas and Silos each sought to seek a settlement with PDCP. The rst to
come to terms with PDCP was Escaño, who in December of 1993, entered into a
compromise agreement whereby he agreed to pay the bank P1,000,000.00. In exchange,
PDCP waived or assigned in favor of Escaño one-third (1/3) of its entire claim in the
complaint against all of the other defendants in the case. 1 1 The compromise agreement
was approved by the RTC in a Judgment 1 2 dated 6 January 1994.
Then on 24 February 1994, Ortigas entered into his own compromise agreement 1 3
with PDCP, allegedly without the knowledge of Escaño, Matti and Silos. Thereby, Ortigas
agreed to pay PDCP P1,300,000.00 as "full satisfaction of the PDCP's claim against
Ortigas," 1 4 in exchange for PDCP's release of Ortigas from any liability or claim arising
from the Falcon loan agreement, and a renunciation of its claims against Ortigas. ACETSa
In 1995, Silos and PDCP entered into a Partial Compromise Agreement whereby he
agreed to pay P500,000.00 in exchange for PDCP's waiver of its claims against him. 1 5
In the meantime, after having settled with PDCP, Ortigas pursued his claims against
Escaño, Silos and Matti, on the basis of the 1982 Undertaking. He initiated a third-party
complaint against Matti and Silos, 1 6 while he maintained his cross-claim against Escaño.
In 1995, Ortigas led a motion for Summary Judgment in his favor against Escaño, Silos
and Matti. On 5 October 1995, the RTC issued the Summary Judgment, ordering Escaño,
Silos and Matti to pay Ortigas, jointly and severally , the amount of P1,300,000.00, as
well as P20,000.00 in attorney's fees. 1 7 The trial court ratiocinated that none of the third-
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party defendants disputed the 1982 Undertaking, and that "the mere denials of defendants
with respect to non-compliance of Ortigas of the terms and conditions of the Undertaking,
unaccompanied by any substantial fact which would be admissible in evidence at a
hearing, are not su cient to raise genuine issues of fact necessary to defeat a motion for
summary judgment, even if such facts were raised in the pleadings." 1 8 In an Order dated 7
March 1996, the trial court denied the motion for reconsideration of the Summary
Judgment and awarded Ortigas legal interest of 12% per annum to be computed from 28
February 1994. 1 9 SaICcT
From the Summary Judgment, recourse was had by way of appeal to the Court of
Appeals. Escaño and Silos appealed jointly while Matti appealed by his lonesome. In a
Decision 2 0 dated 23 January 2002, the Court of Appeals dismissed the appeals and
a rmed the Summary Judgment. The appellate court found that the RTC did not err in
rendering the Summary Judgment since the three appellants did not effectively deny their
execution of the 1982 Undertaking. The special defenses that were raised, "payment and
excussion," were characterized by the Court of Appeals as "appear[ing] to be merely sham
in the light of the pleadings and supporting documents and a davits." 2 1 Thus, it was
concluded that there was no genuine issue that would still require the rigors of trial, and
that the appealed judgment was decided on the bases of the undisputed and established
facts of the case.
Hence, the present petition for review led by Escaño and Silos. 2 2 Two main issues
are raised. First, petitioners dispute that they are liable to Ortigas on the basis of the 1982
Undertaking, a document which they do not disavow and have in fact annexed to their
petition. Second, on the assumption that they are liable to Ortigas under the 1982
Undertaking, petitioners argue that they are jointly liable only, and not solidarily. Further
assuming that they are liable, petitioners also submit that they are not liable for interest
and if at all, the proper interest rate is 6% and not 12%.
Interestingly, petitioners do not challenge, whether in their petition or their
memorandum before the Court, the appropriateness of the summary judgment as a relief
favorable to Ortigas. Under Section 3, Rule 35 of the 1997 Rules of Civil Procedure,
summary judgment may avail if the pleadings, supporting a davits, depositions and
admissions on le show that, except as to the amount of damages, there is no genuine
issue as to any material fact and that the moving party is entitled to a judgment as a
matter of law. Petitioner have not attempted to demonstrate before us that there existed a
genuine issue as to any material fact that would preclude summary judgment. Thus, we
a rm with ease the common rulings of the lower courts that summary judgment is an
appropriate recourse in this case.
The vital issue actually raised before us is whether petitioners were correctly held
liable to Ortigas on the basis of the 1982 Undertaking in this Summary Judgment. An
examination of the document reveals several clauses that make it clear that the agreement
was brought forth by the desire of Ortigas, Inductivo and the Scholeys to be released from
their liability under the loan agreement which release was, in turn, part of the consideration
for the assignment of their shares in Falcon to petitioners and Matti. The whereas clauses
manifest that Ortigas had bound himself with Falcon for the payment of the loan with
PDCP, and that "amongst the consideration for OBLIGORS and/or their principals aforesaid
selling is SURETIES' relieving OBLIGORS of any and all liability arising from their said joint
and several undertakings with FALCON." 2 3 Most crucial is the clause in Paragraph 3 of the
Undertaking wherein petitioners "irrevocably agree and undertake to assume all of
OBLIGORs' said guarantees [ sic] to PDCP . . . under the following terms and conditions." 2 4
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At the same time, it is clear that the assumption by petitioners of Ortigas's
"guarantees" [ sic] to PDCP is governed by stipulated terms and conditions as set forth in
sub-paragraphs (a) to (c) of Paragraph 3. First, upon receipt by "any of OBLIGORS" of any
demand from PDCP for the payment of Falcon's obligations with it, "any of OBLIGORS" was
to immediately inform "SURETIES" thereof so that the latter can timely take appropriate
measures. Second, should "any and/or all of OBLIGORS" be impleaded by PDCP in a suit for
collection of its loan, "SURETIES agree[d] to defend OBLIGORS at their own expense,
without prejudice to any and/or all of OBLIGORS impleading SURETIES therein for
contribution, indemnity, subrogation or other relief" 2 5 in respect to any of the claims of
PDCP. Third, if any of the "OBLIGORS is for any reason made to pay any amount to [PDCP],
SURETIES [were to] reimburse OBLIGORS for said amount/s within seven (7) calendar
days from such payment." 2 6
Petitioners claim that, contrary to paragraph 3 (c) of the Undertaking, Ortigas was
not "made to pay" PDCP the amount now sought to be reimbursed, as Ortigas voluntarily
paid PDCP the amount of P1.3 Million as an amicable settlement of the claims posed by
the bank against him. However, the subject clause in paragraph 3 (c) actually reads "[i]n the
event that any of OBLIGORS is for any reason made to pay any amount to PDCP . . . "
2 7 As pointed out by Ortigas, the phrase "for any reason" reasonably includes any extra-
judicial settlement of obligation such as what Ortigas had undertaken to pay to PDCP, as it
is indeed obvious that the phrase was incorporated in the clause to render the eventual
payment adverted to therein unlimited and unqualified. ASHEca
The interpretation posed by petitioners would have held water had the Undertaking
made clear that the right of Ortigas to seek reimbursement accrued only after he had
delivered payment to PDCP as a consequence of a nal and executory judgment. On the
contrary, the clear intent of the Undertaking was for petitioners and Matti to relieve the
burden on Ortigas and his fellow "OBLIGORS" as soon as possible, and not only after
Ortigas had been subjected to a final and executory adverse judgment.
Paragraph 1 of the Undertaking enjoins petitioners to "exert all efforts to cause
PDCP . . . to within a reasonable time release all the OBLIGORS . . . from their guarantees
[ sic] to PDCP . . . " 2 8 In the event that Ortigas and his fellow "OBLIGORS" could not be
released from their guaranties, paragraph 2 commits petitioners and Matti to cause the
Board of Directors of Falcon to make a call on its stockholders for the payment of their
unpaid subscriptions and to pledge or assign such payments to Ortigas, et al., as security
for whatever amounts the latter may be held liable under their guaranties. In addition,
paragraph 1 also makes clear that nothing in the Undertaking "shall prevent OBLIGORS, or
any one of them, from themselves negotiating with PDCP . . . for the release of their said
guarantees [ sic]." 2 9
There is no argument to support petitioners' position on the import of the phrase
"made to pay" in the Undertaking, other than an unduly literalist reading that is clearly
inconsistent with the thrust of the document. Under the Civil Code, the various stipulations
of a contract shall be interpreted together, attributing to the doubtful ones that sense
which may result from all of them taken jointly. 3 0 Likewise applicable is the provision that
if some stipulation of any contract should admit of several meanings, it shall be
understood as bearing that import which is most adequate to render it effectual. 3 1 As a
means to effect the general intent of the document to relieve Ortigas from liability to
PDCP, it is his interpretation, not that of petitioners, that holds sway with this Court.
The other arguments petitioners have offered to escape liability to Ortigas are
similarly weak.
Petitioners impugn Ortigas for having settled with PDCP in the rst place. They note
that Ortigas had, in his answer, denied any liability to PDCP and had alleged that he signed
the Assumption of Solidary Liability not in his personal capacity, but as an o cer of
Falcon. However, such position, according to petitioners, could not be justi ed since
Ortigas later voluntarily paid PDCP the amount of P1.3 Million. Such circumstances,
according to petitioners, amounted to estoppel on the part of Ortigas.
Even as we entertain this argument at depth, its premises are still erroneous. The
Partial Compromise Agreement between PDCP and Ortigas expressly stipulated that
Ortigas's offer to pay PDCP was conditioned "without [Ortigas's] admitting liability to
plaintiff PDCP Bank's complaint, and to terminate and dismiss the said case as against
Ortigas solely." 3 4 Petitioners profess it is "unthinkable" for Ortigas to have voluntarily paid
PDCP without admitting his liability, 3 5 yet such contention based on assumption cannot
supersede the literal terms of the Partial Compromise Agreement.
Petitioners further observe that Ortigas made the payment to PDCP after he had
already assigned his obligation to petitioners through the 1982 Undertaking. Yet the fact is
PDCP did pursue a judicial claim against Ortigas notwithstanding the Undertaking he
executed with petitioners. Not being a party to such Undertaking, PDCP was not precluded
by a contract from pursuing its claim against Ortigas based on the original Assumption of
Solidary Liability.
At the same time, the Undertaking did not preclude Ortigas from relieving his
distress through a settlement with the creditor bank. Indeed, paragraph 1 of the
Undertaking expressly states that "nothing herein shall prevent OBLIGORS, or any one of
them, from themselves negotiating with PDCP . . . for the release of their said guarantees
[ sic]." 3 6 Simply put, the Undertaking did not bar Ortigas from pursuing his own settlement
with PDCP. Neither did the Undertaking bar Ortigas from recovering from petitioners
whatever amount he may have paid PDCP through his own settlement. The stipulation that
if Ortigas was "for any reason made to pay any amount to PDCP[,] . . . SURETIES shall
reimburse OBLIGORS for said amount/s within seven (7) calendar days from such
payment" 3 7 makes it clear that petitioners remain liable to reimburse Ortigas for the sums
he paid PDCP. ETDAaC
We now turn to the set of arguments posed by petitioners, in the alternative, that is,
on the assumption that they are indeed liable.
The Undertaking does not contain any express stipulation that the petitioners
agreed "to bind themselves jointly and severally" in their obligations to the Ortigas group,
or any such terms to that effect. Hence, such obligation established in the Undertaking is
presumed only to be joint. Ortigas, as the party alleging that the obligation is in fact
solidary, bears the burden to overcome the presumption of jointness of obligations. We
rule and so hold that he failed to discharge such burden.
Ortigas places primary reliance on the fact that the petitioners and Matti identi ed
themselves in the Undertaking as "SURETIES", a term repeated no less than thirteen (13)
times in the document. Ortigas claims that such manner of identi cation su ciently
establishes that the obligation of petitioners to him was solidary in nature.
The term "surety" has a speci c meaning under our Civil Code. Article 2047 provides
the statutory definition of a surety agreement, thus:
Art. 2047. By guaranty a person, called the guarantor, binds himself to the
creditor to ful ll the obligation of the principal debtor in case the latter should fail
to do so.
If a person binds himself solidarily with the principal debtor, the provisions
of Section 4, Chapter 3, Title I of this Book shall be observed. In such case the
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contract is called a suretyship . [Emphasis supplied] 4 0
In the case of joint and several debtors, Article 1217 makes plain that the solidary
debtor who effected the payment to the creditor "may claim from his co-debtors only the
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share which corresponds to each , with the interest for the payment already made."
Such solidary debtor will not be able to recover from the co-debtors the full amount
already paid to the creditor, because the right to recovery extends only to the proportional
share of the other co-debtors, and not as to the particular proportional share of the
solidary debtor who already paid. In contrast, even as the surety is solidarily bound with
the principal debtor to the creditor, the surety who does pay the creditor has the right to
recover the full amount paid, and not just any proportional share, from the principal debtor
or debtors. Such right to full reimbursement falls within the other rights, actions and
bene ts which pertain to the surety by reason of the subsidiary obligation assumed by the
surety. ISCaDH
What is the source of this right to full reimbursement by the surety? We nd the right
under Article 2066 of the Civil Code, which assures that "[t]he guarantor who pays for a
debtor must be indemni ed by the latter," such indemnity comprising of, among others,
"the total amount of the debt." 4 7 Further, Article 2067 of the Civil Code likewise
establishes that "[t]he guarantor who pays is subrogated by virtue thereof to all the rights
which the creditor had against the debtor." 4 8
Articles 2066 and 2067 explicitly pertain to guarantors, and one might argue that the
provisions should not extend to sureties, especially in light of the quali er in Article 2047
that the provisions on joint and several obligations should apply to sureties. We reject that
argument, and instead adopt Dr. Tolentino's observation that "[t]he reference in the second
paragraph of [Article 2047] to the provisions of Section 4, Chapter 3, Title I, Book IV, on
solidary or several obligations, however, does not mean that suretyship is withdrawn from
the applicable provisions governing guaranty." 4 9 For if that were not the implication, there
would be no material difference between the surety as de ned under Article 2047 and the
joint and several debtors, for both classes of obligors would be governed by exactly the
same rules and limitations.
Accordingly, the rights to indemni cation and subrogation as established and
granted to the guarantor by Articles 2066 and 2067 extend as well to sureties as de ned
under Article 2047. These rights granted to the surety who pays materially differ from
those granted under Article 1217 to the solidary debtor who pays, since the
"indemni cation" that pertains to the latter extends "only [to] the share which corresponds
to each [co-debtor]." It is for this reason that the Court cannot accord the conclusion that
because petitioners are identi ed in the Undertaking as "SURETIES," they are consequently
joint and severally liable to Ortigas.
In order for the conclusion espoused by Ortigas to hold, in light of the general
presumption favoring joint liability, the Court would have to be satis ed that among the
petitioners and Matti, there is one or some of them who stand as the principal debtor to
Ortigas and another as surety who has the right to full reimbursement from the principal
debtor or debtors. No suggestion is made by the parties that such is the case, and
certainly the Undertaking is not revelatory of such intention. If the Court were to give full
fruition to the use of the term "SURETIES" as conclusive indication of the existence of a
surety agreement that in turn gives rise to a solidary obligation to pay Ortigas, the
necessary implication would be to lay down a corresponding set of rights and obligations
as between the "SURETIES" which petitioners and Matti did not clearly intend. AaIDCS
It is not impossible that as between Escaño, Silos and Matti, there was an
agreement whereby in the event that Ortigas were to seek reimbursement from them per
the terms of the Undertaking, one of them was to act as surety and to pay Ortigas in full,
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subject to his right to full reimbursement from the other two obligors. In such case, there
would have been, in fact, a surety agreement which evinces a solidary obligation in favor of
Ortigas. Yet if there was indeed such an agreement, it does not appear on the records.
More consequentially, no such intention is re ected in the Undertaking itself, the very
document that creates the conditional obligation that petitioners and Matti reimburse
Ortigas should he be made to pay PDCP. The mere utilization of the term "SURETIES" could
not work to such effect, especially as it does not appear who exactly is the principal debtor
whose obligation is "assured" or "guaranteed" by the surety.
Ortigas further argues that the nature of the Undertaking requires "solidary
obligation of the Sureties," since the Undertaking expressly seeks to "reliev[e] obligors of
any and all liability arising from their said joint and several undertaking with [F]alcon," and
for the "sureties" to "irrevocably agree and undertake to assume all of obligors said
guarantees to PDCP." 5 0 We do not doubt that a nding of solidary liability among the
petitioners works to the bene t of Ortigas in the facilitation of these goals, yet the
Undertaking itself contains no stipulation or clause that establishes petitioners' obligation
to Ortigas as solidary. Moreover, the aims adverted to by Ortigas do not by themselves
establish that the nature of the obligation requires solidarity. Even if the liability of
petitioners and Matti were adjudged as merely joint, the full relief and reimbursement of
Ortigas arising from his payment to PDCP would still be accomplished through the
complete execution of such a judgment.
Petitioners further claim that they are not liable for attorney's fees since the
Undertaking contained no such stipulation for attorney's fees, and that the situation did not
fall under the instances under Article 2208 of the Civil Code where attorney's fees are
recoverable in the absence of stipulation.
We disagree. As Ortigas points out, the acts or omissions of the petitioners led to
his being impleaded in the suit led by PDCP. The Undertaking was precisely executed as a
means to obtain the release of Ortigas and the Scholeys from their previous obligations as
sureties of Falcon, especially considering that they were already divesting their shares in
the corporation. Speci c provisions in the Undertaking obligate petitioners to work for the
release of Ortigas from his surety agreements with Falcon. Speci c provisions likewise
mandate the immediate repayment of Ortigas should he still be made to pay PDCP by
reason of the guaranty agreements from which he was ostensibly to be released through
the efforts of petitioners. None of these provisions were complied with by petitioners, and
Article 2208 (2) precisely allows for the recovery of attorney's fees "[w]hen the defendant's
act or omission has compelled the plaintiff to litigate with third persons or to incur
expenses to protect his interest." TDCAHE
Finally, petitioners claim that they should not be liable for interest since the
Undertaking does not contain any stipulation for interest, and assuming that they are liable,
that the rate of interest should not be 12% per annum, as adjudged by the RTC.
The seminal ruling in Eastern Shipping Lines, Inc. v. Court of Appeals 51 set forth the
rules with respect to the manner of computing legal interest:
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-
contracts, delicts or quasi-delicts is breached, the contravenor can be held liable
for damages. The provisions under Title XVIII on "Damages" of the Civil Code
govern in determining the measure of recoverable damages.
Footnotes
5. Id. at 41.
6. See id. at 52-53.
7. See id. at 54.
20. Id. at 26-32. Penned by Associate Justice R. A. Barrios, concurred in by then Presiding
Justice of the Court of Appeals (now Supreme Court Associate Justice) M.A. Austria-
Martinez and Associate Justice B. L. Reyes. CADacT
28. Id.
29. Id.
30. Civil Code, Art. 1374.
41. "Since, generally, it is not necessary for a creditor to proceed against a principal in order to
hold the surety liable, where, by the terms of the contract, the obligation of the surety is
the same as that of the principal, then as soon as the principal is in default, the surety is
likewise in default, and may be sued immediately and before any proceedings are had
against the principal." Palmares v. Court of Appeals, 351 Phil. 664, 685 (1998) citing
Standard Accident Insurance Co. v. Standard Oil Co., 133 So. 2d 539; School District No.
65 of Lincoln County v. Universal Surety Co., 135 N. W. 2d 232; Depot Realty Syndicate v.
Enterprise Brewing Co., 171 P. 223.
42. "Payment made by one of the solidary debtors extinguishes the obligation." See Civil Code,
Art. 1217.
43. See Palmares v. Court of Appeals, supra at 686; citing 74 Am Jur 2d, Principal and Surety,
Subsection 68, 53.
44. See note 49.
45. See Lapanday Agricultural v. Court of Appeals, 381 Phil. 41, 52 (2000). Art. 1217 reads in
part: ""Payment made by one of the solidary debtors extinguishes the obligation. If two
or more solidary debtors offer to pay, the creditor may choose which offer to accept . . .
He who made payment may claim from his co-debtors only on the share which corresponds to
each, with interest for the payment already made. If the payment is made before the debt
is due, no interest for the intervening period may be demanded . . .""
46. A. Tolentino, V Civil Code of the Philippines (1992 ed.), at 502. See also Inciong v. Court of
Appeals, 327 Phil. 364, 373 (1996).
47. Civil Code, Art. 2066.
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48. Civil Code, Art. 2067.
49. A. Tolentino, supra note 46 citing Manila Surety & Fidelity Co. v. Barter Construction & Co.,
et al., 53 Off. Gaz. 8836 & Arranz v. Manila Fidelity & Surety Co., 53 Off. Gaz. 7247.
50. Rollo, pp. 89-90.
51. G.R. No. 97412, 12 July 1994, 234 SCRA 78.
The Supreme Court a rmed the judgment of the Court of Appeals. According to the
Court, petitioner Ching is liable for credit obligations contracted by PBM against TRB
before and after the execution of the 21 July 1977 Deed of Suretyship. It is evident from
the tenor of the deed itself, referring to amounts PBM "may now be indebted or may
hereafter become indebted" to TRB. Article 2053 of the Civil Code expressly allows a
suretyship for "future debts." The Court also ruled that petitioner Ching is liable for the
amounts stated in the letters of credit covered by the trust receipts. Petitioner Ching
executed, on behalf of PBM, separate Undertakings for each trust receipt expressly
granting to TRB the right to take possession of the goods at any time to protect TRB's
interests. TRB may exercise such right without waiving its right to collect the full amount of
the loan to PBM. The Undertakings also provide that any suspension of payment or any
assignment by PBM for the benefit of creditors renders the loan due and demandable. HESAIT
SYLLABUS
DECISION
CARPIO , J : p
The Case
This is a petition for review on certiorari 1 to annul the Decision 2 dated 16 July 1999
of the Court of Appeals in CA-G.R. CV No. 39690, as well as its Resolution dated 17
February 2000 denying the motion for reconsideration. The Court of Appeals a rmed with
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modi cation the Decision 3 dated 31 August 1992 rendered by Branch 113 of the Regional
Trial Court of Pasay City ("trial court"). The trial court's Decision declared petitioner Alfredo
Ching ("Ching") liable to respondent Traders Royal Bank ("TRB") for the payment of the
credit accommodations extended to Philippine Blooming Mills, Inc. ("PBM").
Antecedent Facts
This case stems from an action to compel Ching to pay TRB the following amounts:
1. P959,611.96 under Letter of Credit No. 479 AD covered by Trust
Receipt No. 106; 4
2. P1,191,137.13 under Letter of Credit No. 563 AD covered by Trust
Receipt No. 113; 5 and
3. P3,500,000 under the trust loan covered by a notarized Promissory
Note. 6
Ching was the Senior Vice President of PBM. In his personal capacity and not as a
corporate o cer, Ching signed a Deed of Suretyship dated 21 July 1977 binding himself
as follows:
. . . as primary obligor(s) and not as mere guarantor(s), hereby warrant to
the TRADERS ROYAL BANK, its successors and assigns, the due and punctual
payment by the following individuals and/or companies/ rms, hereinafter called
the DEBTOR(S), of such amounts whether due or not, as indicated opposite their
respective names, to wit:
NAME OF DEBTOR(S) AMOUNT OF OBLIGATION
In case of default by any and/or all the DEBTOR(S) to pay the whole or
part of said indebtedness herein secured at maturity, I/We, jointly and severally,
agree and engage to the CREDITOR, its successors and assigns, the prompt
payment, without demand or notice from said CREDITOR, of such notes, drafts,
overdrafts and other credit obligations on which the DEBTOR(S) may now be
indebted or may hereafter become indebted to the CREDITOR, together with all
interests, penalty and other bank charges as may accrue thereon and all expenses
which may be incurred by the latter in collecting any or all such instruments.
I/WE further warrant the due and faithful performance by the DEBTOR(S)
of all the obligations to be performed under any contracts, evidencing
indebtedness/obligations and any supplements, amendments, charges or
modi cations made thereto, including but not limited to, the due and punctual
payment by the said DEBTOR(S).
I/WE hereby expressly waive notice of acceptance of this suretyship, and
also presentment, demand, protest and notice of dishonor of any and all such
instruments, loans, advances, credits, or other indebtedness or obligations
hereinbefore referred to.
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MY/OUR liability on this Deed of Suretyship shall be solidary, direct and
immediate and not contingent upon the pursuit by the CREDITOR, its successors
or assigns, of whatever remedies it or they possess; and I/WE hereby agree to be
and remain bound upon this suretyship, irrespective of the existence, value or
condition of any collateral, notwithstanding also that all obligations of the
DEBTOR(S) to you outstanding and unpaid at any time may exceed the aggregate
principal sum herein above stated.
In the event of judicial proceedings, I/WE hereby expressly agree to pay the
creditor for and as attorney's fees a sum equivalent to TEN PERCENT (10%) of the
total indebtedness (principal and interest) then unpaid, exclusive of all costs or
expenses for collection allowed by law. 7 (Emphasis supplied)
On 24 March and 6 August 1980, TRB granted PBM letters of credit on application
of Ching in his capacity as Senior Vice President of PBM. Ching later accomplished and
delivered to TRB trust receipts, which acknowledged receipt in trust for TRB of the
merchandise subject of the letters of credit. Under the trust receipts, PBM had the right to
sell the merchandise for cash with the obligation to turn over the entire proceeds of the
sale to TRB as payment of PBM's indebtedness. Letter of Credit No. 479 AD, covered by
Trust Receipt No. 106, has a face value of US$591,043, while Letter of Credit No. 563 AD,
covered by Trust Receipt No. 113, has a face value of US$155,460.34.
Ching further executed an Undertaking for each trust receipt, which uniformly
provided that:
xxx xxx xxx
6. All obligations of the undersigned under the agreement of trusts shall bear
interest at the rate of _____ per centum (___%) per annum from the date due
until paid.
7. [I]n consideration of the Trust Receipt, the undersigned hereby jointly and
severally undertake and agree to pay on demand on the said BANK, all
sums and amounts of money which said BANK may call upon them to pay
arising out of, pertaining to, and/or in any manner connected with this
receipt. In case it is necessary to collect the draft covered by the Trust
Receipt by or through an attorney-at-law, the undersigned hereby further
agree(s) to pay an additional of 10% of the total mount due on the draft as
attorney's fees, exclusive of all costs, fees and other expenses of collection
but shall in no case be less than P200.00" 8 (Emphasis supplied)
On 27 April 1981, PBM obtained a P3,500,000 trust loan from TRB. Ching signed as
co-maker in the notarized Promissory Note evidencing this trust loan. The Promissory
Note reads:
FOR VALUE RECEIVED THIRTY (30) DAYS after date, I/We, jointly and
severally, promise to pay the TRADERS ROYAL BANK or order, at its O ce in 4th
Floor, Kanlaon Towers Bldg., Roxas Blvd., Pasay City, the sum of Pesos THREE
MILLION FIVE HUNDRED THOUSAND ONLY (P3,500,000.00), Philippine Currency,
with the interest rate of Eighteen Percent (18%) per annum until fully paid.
PBM defaulted in its payment of Trust Receipt No. 106 (Letter of Credit No. 479 AD)
for P959,611.96, and of Trust Receipt No. 113 (Letter of Credit No. 563 AD) for
P1,191,137.13. PBM also defaulted on its P3,500,000 trust loan.
On 1 April 1982, PBM and Ching led a petition for suspension of payments with the
Securities and Exchange Commission ("SEC"), docketed as SEC Case No. 2250. 1 0 The
petition sought to suspend payment of PBM's obligations and prayed that the SEC allow
PBM to continue its normal business operations free from the interference of its creditors.
One of the listed creditors of PBM was TRB. 1 1
On 9 July 1982, the SEC placed all of PBM's assets, liabilities, and obligations under
the rehabilitation receivership of Kalaw, Escaler and Associates. 1 2
On 13 May 1983, ten months after the SEC placed PBM under rehabilitation
receivership, TRB led with the trial court a complaint for collection against PBM and
Ching. TRB asked the trial court to order defendants to pay solidarily the following
amounts:
(1) P6,612,132.74 exclusive of interests, penalties, and bank charges
[representing its indebtedness arising from the letters of credit issued to its
various suppliers];
(2) P4,831,361.11, exclusive of interests, penalties, and other bank charges
[due and owing from the trust loan of 27 April 1981 evidenced by a
promissory note];
(3) P783,300.00 exclusive of interests, penalties, and other bank charges [due
and owing from the money market loan of 1 April 1981 evidenced by a
promissory note];
(6) Such other amounts that may be proven by the plaintiff during the trial, by
way of damages and expenses for litigation. 1 3
On 25 May 1983, TRB moved to withdraw the complaint against PBM on the ground
that the SEC had already placed PBM under receivership. 1 4 The trial court thus dismissed
the complaint against PBM. 1 5
On 23 June 1983, PBM and Ching also moved to dismiss the complaint on the
ground that the trial court had no jurisdiction over the subject matter of the case. PBM and
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Ching invoked the assumption of jurisdiction by the SEC over all of PBM's assets and
liabilities. 1 6
TRB led an opposition to the Motion to Dismiss. TRB argued that (1) Ching is being
sued in his personal capacity as a surety for PBM; (2) the SEC decision declaring PBM in
suspension of payments is not binding on TRB; and (3) Presidential Decree No. 1758 ("PD
No. 1758"), 1 7 which Ching relied on to support his assertion that all claims against PBM
are suspended, does not apply to Ching as the decree regulates corporate activities only.
18
In its order dated 15 August 1983, 1 9 the trial court denied the motion to dismiss
with respect to Ching and a rmed its dismissal of the case with respect to PBM. The trial
court stressed that TRB was holding Ching liable under the Deed of Suretyship. As Ching's
obligation was solidary, the trial court ruled that TRB could proceed against Ching as
surety upon default of the principal debtor PBM. The trial court also held that PD No. 1758
applied only to corporations, partnership and associations and not to individuals.
Upon the trial court's denial of his Motion for Reconsideration, Ching led a Petition
for Certiorari and Prohibition 2 0 before the Court of Appeals. The appellate court granted
Ching's petition and ordered the dismissal of the case. The appellate court ruled that the
SEC assumed jurisdiction over Ching and PBM to the exclusion of courts or tribunals of
coordinate rank.
TRB assailed the Court of Appeals' Decision 2 1 before this Court. In Traders Royal
Bank v. Court of Appeals , 2 2 this Court upheld TRB and ruled that Ching was merely a
nominal party in SEC Case No. 2250. Creditors may sue individual sureties of debtor
corporations, like Ching, in a separate proceeding before regular courts despite the
pendency of a case before the SEC involving the debtor corporation.
In his Answer dated 6 November 1989, Ching denied liability as surety and
accommodation co-maker of PBM. He claimed that the SEC had already issued a decision
2 3 approving a revised rehabilitation plan for PBM's creditors, and that PBM obtained the
credit accommodations for corporate purposes that did not redound to his personal
bene t. He further claimed that even as a surety, he has the right to the defenses personal
to PBM. Thus, his liability as surety would attach only if, after the implementation of
payments scheduled under the rehabilitation plan, there would remain a balance of PBM's
debt to TRB. 2 4 Although Ching admitted PBM's availment of the credit accommodations,
he did not show any proof of payment by PBM or by him.
TRB admitted certain partial payments on the PBM account made by PBM itself and
by the SEC-appointed receiver. 2 5 Thus, the trial court had to resolve the following
remaining issues:
1. How much exactly is the corporate defendant's outstanding obligation to
the plaintiff?
2. Is defendant Alfredo Ching personally answerable, and for exactly how
much? 2 6
TRB presented Mr. Lauro Francisco, loan o cer of the Remedial Management
Department of TRB, and Ms. Carla Pecson, manager of the International Department of
TRB, as witnesses. Both witnesses testified to the following:
1. The existence of a Deed of Suretyship dated 21 July 1977 executed by
Ching for PBM's liabilities to TRB up to P10,000,000; 2 7
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2. The application of PBM and grant by TRB on 13 March 1980 of Letter of
Credit No. 479 AD for US$591,043, and the actual availment by PBM of the
full proceeds of the credit accommodation; 2 8
3. The application of PBM and grant by TRB on 6 August 1980 of Letter of
Credit No. 563 AD for US$156,000, and the actual availment by PBM of the
full proceeds of the credit accommodation; 2 9 and
Ching presented Atty. Vicente Aranda, corporate secretary and First Vice President
of Human Resources Department of TRB, as witness. Ching sought to establish that TRB's
Board of Directors adopted a resolution xing the PBM account at an amount lower than
what TRB wanted to collect from Ching. The trial court allowed Atty. Aranda to testify over
TRB's manifestation that the Answer failed to plead the subject matter of his testimony.
Atty. Aranda produced TRB Board Resolution No. 5935, series of 1990, which contained
the minutes of the special meeting of TRB's Board of Directors held on 8 June 1990. 3 2 In
the resolution, the Board of Directors advised TRB's Management "not to release Alfredo
Ching from his JSS liability to the bank." 3 3 The resolution also stated the following:
However, Atty. Aranda himself testi ed that both items (a) and (b) quoted above were
never complied with or implemented. Not only was there no initial deposit of P150,000
as required in the resolution, TRB also disapproved the document prepared by the
receiver, which would have released Ching from his suretyship. 3 5
The Ruling of the Trial Court
The trial court found Ching liable to TRB for P19,333,558.16 under the Deed of
Suretyship. The trial court explained:
[T]he liability of Ching as a surety attaches independently from his
capacity as a stockholder of the Philippine Blooming Mills. Indisputably, under
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the Deed of Suretyship defendant Ching unconditionally agreed to assume PBM's
liability to the plaintiff in the event PBM defaulted in the payment of the said
obligation in addition to whatever penalties, expenses and bank charges that may
occur by reason of default. Clear enough, under the Deed of Suretyship (Exh. J),
defendant Ching bound himself jointly and severally with PBM in the payment of
the latter's obligation to the plaintiff. The obligation being solidary, the plaintiff
Bank can hold Ching liable upon default of the principal debtor. This is explicitly
provided in Article 1216 of the New Civil Code already quoted above. 3 6
SO ORDERED. 3 7
Ching claimed that his liability should likewise be reduced since the equitable
apportionment of PBM's remaining assets among its creditors under the rehabilitation
proceedings would have the effect of reducing PBM's liability. He also claimed that the
amount for which he was being held liable was excessive. He contended that the
outstanding principal balance, as stated in TRB Board Resolution No. 5893-1990, was only
P5,650,749.09. 3 8 Ching also contended that he was not liable for interest, as the loan
documents did not stipulate the interest rate, pursuant to Article 1956 of the Civil Code. 3 9
Finally, Ching asserted that the Deed of Suretyship executed on 21 July 1977 could not
guarantee obligations incurred after its execution. 4 0
TRB did not le its appellee's brief. Thus, the Court of Appeals resolved to submit
the case for decision. 4 1
The Court of Appeals considered the following issues for its determination:
1. Whether the Answer of Ching amounted to an admission of liability.
2. Whether Ching can still be sued as a surety after the SEC placed PBM
under rehabilitation receivership, and if in the a rmative, for how much. 4 2
The Court of Appeals resolved the rst two questions in favor of TRB, The appellate
court stated:
Ching did not deny under oath the genuineness and due execution of the
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L/Cs, Trust Receipts, Undertaking, Deed of Surety, and the 3.5 Million Peso
Promissory Note upon which TRB's action rested. He is, therefore; presumed to be
liable unless he presents evidence showing payment, partially or in full, of these
obligations (Investment and Underwriting Corporation of the Philippines v.
Comptronics Philippines, Inc. and Gene v. Tamesis, 192 SCRA 725 [1990]).
As surety of a corporation placed under rehabilitation receivership, Ching
can answer separately for the obligations of debtor PBM (Rizal Banking
Corporation v. Court of Appeals , Philippine Blooming Mills, Inc., and Alfredo
Ching, 178 SCRA 738 [1990], and Traders Royal Bank v. Philippine Blooming Mills
and Alfredo Ching, 177 SCRA 788 [1989])
Even a[n] SEC injunctive order cannot suspend payment of the surety's
obligation since the rehabilitation receivers are limited to the existing assets of
the corporation. 4 3
The Court of Appeals denied Ching's Motion for Reconsideration for lack of merit.
Hence, this petition.
Issues
Ching assigns the following as errors of the Court of Appeals:
1. THE COURT OF APPEALS COMMITTED AN ERROR WHEN IT RULED THAT
PETITIONER ALFREDO CHING WAS LIABLE FOR OBLIGATIONS
CONTRACTED BY PBM LONG AFTER THE EXECUTION OF THE DEED OF
SURETYSHIP.
2. THE COURT OF APPEALS COMMITTED AN ERROR WHEN IT RULED THAT
THE PETITIONERS WERE LIABLE FOR THE TRUST RECEIPTS DESPITE
THE FACT THAT PRIVATE RESPONDENT HAD PREVENTED THEIR
FULFILLMENT.
3. THE COURT OF APPEALS COMMITTED AN ERROR WHEN IT FOUND
PETITIONER ALFREDO CHING LIABLE FOR P15,773.708.78 WITH LEGAL
INTEREST AT 12% PER ANNUM UNTIL FULLY PAID DESPITE THE FACT
THAT UNDER THE REHABILITATION PLAN OF PETITIONER PBM, WHICH
WAS APPROVED BY THE SECURITIES AND EXCHANGE COMMISSION,
PRIVATE RESPONDENT IS ONLY ENTITLED TO P1,373,415.00. 4 5
Ching asserted that the Deed of Suretyship dated 21 July 1977 could not answer for
obligations not yet in existence at the time of its execution. Speci cally, Ching maintained
that the Deed of Suretyship could not answer for debts contracted by PBM in 1980 and
1981. Ching contended that no accessory contract of suretyship could arise without an
existing principal contract of loan. Ching likewise argued that TRB could no longer claim on
the trust receipts because TRB had already taken the properties subject of the trust
receipts. Ching likewise maintained that his obligation as surety could not exceed the
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P1,373,415 apportioned to PBM under the SEC-approved rehabilitation plan.
In its Comment, TRB asserted that the rst two assigned errors raised factual
issues not brought before the trial court. Furthermore, TRB pointed out that Ching never
presented PBM's rehabilitation plan before the trial court. TRB also stated that the
Supreme Court ruling in Traders Royal Bank v. Court of Appeals 4 6 constitutes res judicata
between the parties. Therefore, TRB could proceed against Ching separately from PBM to
enforce in full Ching's liability as surety. 4 7
The Ruling of the Court
The petition has no merit.
The case before us is an offshoot of the trial court's denial of Ching's motion to have
the case dismissed against him. The petition is a thinly veiled attempt to make this Court
reconsider its decision in the prior case of Traders Royal Bank v. Court of Appeals. 4 8 This
Court has already resolved the issue of Ching's separate liability as a surety despite the
rehabilitation proceedings before the SEC. We held in Traders Royal Bank that:
Although Ching was impleaded in SEC Case No. 2250, as a co-petitioner of
PBM, the SEC could not assume jurisdiction over his person and properties. The
Securities and Exchange Commission was empowered, as rehabilitation receiver,
to take custody and control of the assets and properties of PBM only, for the SEC
has jurisdiction over corporations only [and] not over private individuals, except
stockholders in an intra-corporate dispute (Sec. 5, P.D. 902-A and Sec. 2 of P.D.
1758). Being a nominal party in SEC Case No. 2250, Ching's properties were not
included in the rehabilitation receivership that the SEC constituted to take custody
of PBM's assets. Therefore, the petitioner bank was not barred from ling a suit
against Ching, as a surety for PBM. An anomalous situation would arise if
individual sureties for debtor corporations may escape liability by simply co- ling
with the corporation a petition for suspension of payments in the SEC whose
jurisdiction is limited only to corporations and their corporate assets.
xxx xxx xxx
Ching can be sued separately to enforce his liability as surety for PBM, as
expressly provided by Article 1216 of the New Civil Code.
xxx xxx xxx
It is elementary that a corporation has a personality distinct and separate
from its individual stockholders and members. Being an o cer or stockholder of
a corporation does not make one's property the property also of the corporation,
for they are separate entities (Adelio Cruz vs. Quiterio Dalisay , 152 SCRA 482).
Ching's act of joining as a co-petitioner with PBM is SEC Case No. 2250 did
not vest in the SEC jurisdiction over his person or property, for jurisdiction does
not depend on the consent or acts of the parties but upon express provision of
law (Tolentino vs. Social Security System , 138 SCRA 428; Lee vs. Municipal Trial
Court of Legaspi City, Br. I, 145 SCRA 408). (Emphasis supplied)
Traders Royal Bank has fully resolved the issue regarding Ching's liability as a surety
of the credit accommodations TRB extended to PBM. The decision amounts to res
judicata 4 9 which bars Ching from raising the same issue again. Hence, the only question
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that remains is the amount of Ching's liability. Nevertheless, we shall resolve the issues
Ching has raised in his attempt to escape liability under his surety.
Whether Ching is liable for obligations PBM contracted after execution of the Deed of
Suretyship
Ching is liable for credit obligations contracted by PBM against TRB before and
after the execution of the 21 July 1977 Deed of Suretyship. This is evident from the tenor
of the deed itself, referring to amounts PBM "may now be indebted or may hereafter
become indebted" to TRB.
The law expressly allows a suretyship for "future debts". Article 2053 of the Civil
Code provides:
A guaranty may also be given as security for future debts, the amount of
which is not yet known; there can be no claim against the guarantor until the debt
is liquidated. A conditional obligation may also be secure. (Emphasis supplied)
Whether Ching's liability is limited to the amount stated in PBM's rehabilitation plan
Ching would like this Court to rule that his liability is limited, at most, to the amount
stated in PBM's rehabilitation plan. In claiming this reduced liability, Ching invokes Article
1222 of the Civil Code which reads:
Art. 1222. A solidary debtor may, in actions led by the creditor, avail
himself of all defenses which are derived from the nature of the obligation and of
those which are personal to him, or pertain to his own share. With respect to those
which personally belong to the others, he may avail himself thereof only as
regards that part of the debt for which the latter are responsible.
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In granting the loan to PBM, TRB required Ching's surety precisely to insure full
recovery of the loan in case PBM becomes insolvent or fails to pay in full. This was the very
purpose of the surety. Thus, Ching cannot use PBM's failure to pay in full as justification for
his own reduced liability to TRB. As surely, Ching agreed to pay in full PBM's loan in case
PBM fails to pay in full for any reason, including its insolvency.
TRB, as creditor, has the right under the surety to proceed against Ching for the
entire amount of PBM's loan. This is clear from Article 1216 of the Civil Code:
ART. 1216. The creditor may proceed against any one of the solidary
debtors or some or all of them simultaneously. The demand made against one of
thetas shall not be an obstacle to those which may subsequently be directed
against the others, so long as the debt has not been fully collected. (Emphasis
supplied)
Ching further claims a reduced liability under TRB Board Resolution No. 5935. This
resolution states that PBM's outstanding loans may be reduced to P1.373 million subject
to certain conditions like the payment of P150,000 initial payment. 5 1 The resolution also
states that TRB should not release Ching's solidary liability under his surety. The resolution
even directs TRB's management to study Ching's criminal liability under the trust
documents. 5 2
Ching's own witness testi ed that Resolution No. 5935 was never implemented. For
one, PBM or its receiver never paid the P150,000 initial payment to TRB. TRB also rejected
the document that PBM's receiver presented which would have released Ching from his
suretyship. Clearly, Ching cannot rely on Resolution No. 5935 to escape liability under his
suretyship.
Ching's attempts to have this Court review the factual issues of the case are
improper. It is not a function of the Supreme Court to assess and evaluate again the
evidence, testimonial and evidentiary, adduced by the parties particularly where the
findings of both the trial court and the appellate court coincide on the matter. 5 3
Whether Ching is liable for the trust receipts
Ching is still liable for the amounts stated in the letters of credit covered by the trust
receipts. Other than his bare allegations, Ching has not shown proof of payment or
settlement with TRB. Atty. Vicente Aranda, TRB's corporate secretary and First Vice
President of its Human Resource Management Department, testi ed that the conditions in
the TRB board resolution presented by Ching were not met or implemented, thus:
ATTY. AZURA
Q Going into the resolution itself. A certain stipulation ha[s] been outlined,
and may I refer you to condition or step No. 1, which reads: "a) Accept the
P1.373 million deposits remitted over a period of 17 years or until 2006
which shall be applied directly to the account (as remitted per hereto
attached schedule). The amount of P1.373 million shall be considered as
full payment of PBM's account. (The receiver is amenable to this
alternative.) The initial deposit/remittance which amounts to P150,000.00
shall be remitted upon approval of the above and conforme of PISCOR [. . .]
and PBM. Subsequent deposit shall start on the 3rd year and annually
thereafter (every June 30th of the year) until June 30, 2006.
Failure to pay one annual installment shall make the whole obligation due
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and demandable. Now Mr. Witness, would you be in a position to inform
[the court] if these conditions listed in item (a) in Resolution No. 5935,
series of 1990, were implemented or met?
A Yes. I know for a fact that the conditions, more particularly the initial
deposit/remittance in the amount of P150,000.00 which have to be done
with approval was not remitted or met.
Q Will you clarify your answer. Would you be in a position to inform the court
if those conditions were met? Because your initial answer was yes.
A Yes sir, I am in a position to state that these conditions were not met.
Q Let me refer you to the condition listed as item (b) of the same resolution
which I read and quote: "Write off immediately P4.278 million. The balance
of P1.373 million to remain outstanding in the books of the bank. Said
balance will be remitted to the Bank for a period of 17 years." Mr. Witness,
would you be in a position to inform the court if the bank implemented that
particular condition?
A In the implementation of this settlement the receiver prepared a document
for approval and conformity of the bank. The said document would in
effect release the suretyship of Alfredo Ching and for that reason the bank
refused or denied fixing its conformity and approval with the court.
xxx xxx xxx
Q Mr. Witness you stated that the reason why the plaintiff bank did not
implement these conditionalities [sic] was because the former defendant
corporation requested that the suretyship of Alfredo Ching be released, is
that correct?
A I did not say that. I said that in effect the document prepared by the lawyer
of the receiver . . . the bank would release the suretyship of Alfredo Ching,
that is why the bank is not amenable to such a document.
Q Despite this approved resolution the bank, because of said requirement or
conformity did not seek to implement these conditionalities [sic]?
A Yes sir because the conditions imposed by the board is not being followed
in that document because it was the condition of the board that the
suretyship should not be released but the document being presented to the
bank for signature and conformity in effect if signed would release the
suretyship. So it would be a violation with the approval of the board so the
bank did not sign the conformity. 5 4
Ching also claims that TRB prevented PBM from ful lling its obligations under the
trust receipts when TRB, together with other creditor banks, took hold of PBM's
inventories, including the goods covered by the trust receipts. Ching asserts that this act
of TRB released him from liability under the suretyship. Ching forgets that he executed, on
behalf of PBM, separate Undertakings for each trust receipt expressly granting to TRB the
right to take possession of the goods at any time to protect TRB's interests. TRB may
exercise such right without waiving its right to collect the full amount of the loan to PBM.
The Undertakings also provide that any suspension of payment or any assignment by PBM
for the bene t of creditors renders the loan due and demandable. Thus, the separate
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Undertakings uniformly provide:
2. That the said BANK may at any time cancel the foregoing trust and
take possession of said merchandise with the right to sell and
dispose of the same under such terms and conditions it may deem
best, or of the proceeds of such of the same as may then have been
sold, wherever the said merchandise or proceeds may then be found
and all the provisions of the Trust Receipt shall apply to and be
deemed to include said above-mentioned merchandise if the same
shall have been made up or used in the manufacture of any other
goods, or merchandise, and the said BANK shall have the same rights
and remedies against the said merchandise in its manufactured state,
or the product of said manufacture as it would have had in the event
that such merchandise had remained [in] its original state and
irrespective of the fact that other and different merchandise is used in
completing such manufacture. In the event of any suspension, or
failure or assignment for the bene t of creditors on the part of the
undersigned or of the non-ful llment of any obligation, or of the non-
payment at maturity of any acceptance made under said credit, or any
other credit issued by the said BANK on account of the undersigned
or of the non-payment of any indebtedness on the part of the
undersigned to the said BANK, all obligations, acceptances,
indebtedness and liabilities whatsoever shall thereupon without
notice mature and become due and payable and the BANK may avail
of the remedies provided herein. 5 5 (Emphasis supplied)
Presidential Decree No. 115 ("PD No. 115"), otherwise known as the Trust Receipts
Law, expressly allows TRB to take possession of the goods covered by the trust receipts.
Thus, Section 7 of PD No. 115 states:
SECTION 7. Rights of the entruster. — The entruster shall be entitled to
the proceeds from the sale of the goods, documents or instruments released
under a trust receipt to the entrustee to the extent of the amount owing to the
entruster or as appears in the trust receipt, or to the return of the goods,
documents or instruments in case of non-sale, and to the enforcement of all other
rights conferred on him in the trust receipt provided such are not contrary to the
provisions of this Decree.
The entruster may cancel the trust and take possession of the goods,
documents or instruments subject of the trust or of the proceeds realized
therefrom at any time upon default or failure of the entrustee to comply with any
of the terms and conditions of the trust receipt or any other agreement between
the entruster and the entrustee, and the entruster in possession of the goods,
documents or instruments may, on or after default, give notice to the entrustee of
the intention to sell, and may, not less than ve days after serving or sending of
such notice, sell the goods, documents or instruments at public or private sale,
and the entruster may, at a public sale, become a purchaser. The proceeds of any
such sale, whether public or private, shall be applied (a) to the payment of the
expenses thereof, (b) to the payment of the expenses of re-taking, keeping and
storing the goods, documents or instruments; (c) to the satisfaction of the
entrustee's indebtedness to the entruster. The entrustee shall receive any surplus
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but shall be liable to the entruster for any de ciency . Notice of sale shall be
deemed su ciently given if in writing, and either personally served on the
entrustee or sent by post-paid ordinary mail to the entrustee's last known
business address. (Emphasis supplied)
Thus, even though TRB took possession of the goods covered by the trust receipts,
PBM and Ching remained liable for the entire amount of the loans covered by they trust
receipts.
Absent goof of payment or settlement of PBM and Ching's credit obligations with
TRB, Ching's liability is what the Deed of Suretyship stipulates, plus the applicable interest
and penalties. The trust receipts, as well as the Letter of Undertaking dated 16 April 1980
5 6 executed by PBM, stipulate in writing the payment of interest without specifying the
rate. In such a case, the applicable interest rate shall be the legal rate, which is now 12%
per annum. 5 7 This is in accordance with Central Bank Circular No. 416, which states:
By virtue of the authority granted to it under Section 1 of Act No. 2655, as
amended, otherwise known as the "Usury Law," the Monetary Board, in its
Resolution No. 1622 dated July 29, 1974, has prescribed that the rate of interest
for the loan or forbearance of any money, goods or credits and the rate allowed in
judgments, in the absence of express contract as to such rate of interest, shall be
twelve per cent (12%) per annum. (Emphasis supplied)
On the other hand, the Promissory Note evidencing the P3,500,000 trust loan
provides for 18% interest per annum plus 2% penalty interest per annum in case of default.
This stipulated interest should continue to run until full payment of the P3,500,000 trust
loan. In addition, the accrued interest on all the credit accommodations should earn legal
interest from the date of filing of the complaint pursuant to Article 2212 of the Civil Code.
Art. 2212. Interest due shall earn legal interest from the time it is
judicially demanded, although the obligation may be silent upon this point.
The trial court found and the appellate court a rmed that the outstanding principal
amounts as of the ling of the complaint with the trial court on 13 May 1983 were
P959,611.96 under Trust Receipt No. 106, P1,191,137.13 under Trust Receipt No. 113, and
P3,500,000 for the trust loan. As extracted from TRB's Statement of Account as of 31
October 1991, 5 8 the accrued interest on the trust receipts and the trust loan as of the
ling of the complaint on 13 May 1983 were P311,387.51 5 9 under Trust Receipt No. 106,
P338,739.81 6 0 under Trust Receipt No. 113, and P1,287,616.44 6 1 under the trust loan.
The penalty interest on the trust loan amounted to P137,315.07. 6 2 Ching did not rebut this
Statement of Account which TRB presented during trial.
Thus, the following is the summary of Ching's liability under the suretyship as of 13
May, 1983, the date of filing of TRB's complaint with the trial court:
1. On Trust Receipt No. 106 (Letter of Credit No. 479 AD)
SO ORDERED.
Davide, Jr ., C .J ., Vitug and Azcuna, JJ ., concur.
Ynares-Santiago, J ., is on leave.
Footnotes
1. Under Rule 45 of the Rules of Court.
8. Interest rate in item number 6 was left blank. Annexes "G" to "G-5," Records, pp. 38–43.
9. Annex "H," Records, p. 44.
10. In the Matter of the Petition for Suspension of Payments, Philippine Blooming Mills Co.,
Inc., et al.
11. Rollo, p. 19.
12. Ibid.
13. Records, pp. 7–8.
28. TSN, 15 November 1991, Records, p. 416 (Lauro Francisco); 6 December 1991, Records,
pp. 434–450 (Carla Pecson).
29. TSN, 15 November 1991, Records, p. 416 (Lauro Francisco); 10 January 1992, Records,
pp. 453–462 (Carla Pecson).
30. TSN, 15 November 1991, Records, p. 416 (Lauro Francisco); 10 January 1992, Records,
pp. 464–465 (Carla Pecson).
31. TSN, 15 November 1991, Records, pp. 418–419 (Lauro Francisco); 10 January 1992,
Records, pp. 467–468 (Carla Pecson).
32. TSN, 6 July 1994, Records, pp. 524–529.
39. Art. 1956. No interest shall be due unless it has been expressly stipulated in writing.
40. CA Rollo, pp. 39–43.
2. It must have been rendered by a court having jurisdiction of the subject matter and
of the parties;
60. Legal Interest Pursuant to Central Bank Circular No. 416 = 12% per annum
Period from 29 December 1980 (Execution of trust receipt) to 13 May 1983 (Filing of the
complaint) = 865 days
Period from 27 April 1981 (Execution of promissory note) to 13 May 1983 (Filing of the
complaint) = 746 days
Period from 27 May 1980 (Maturity of promissory note) to 13 May 1983 (Filing of the
complaint) = 716 days
Interest Due = (Principal) (Interest Rate) (Number of Days)/365 days
SYNOPSIS
Lydia P. Cuba (Cuba) obtained from the Development Bank of the Philippines
(DBP) three separate loans, each of which was covered by a promissory note. As a
security for said loans, Cuba executed two Deeds of Assignment of her Leasehold
Rights over her 44-hectare shpond. For failure of Cuba to pay her loans, DBP
appropriated her Leasehold Rights over the shpond without foreclosure proceedings.
Subsequently, Cuba offered and agreed to repurchase her leasehold rights from DBP.
For failure to pay the monthly amortizations stipulated in the deed of conditional sale
executed by DBP in favor of Cuba, DBP took possession of the leasehold right and
subsequently sold the same to Agripina Capera. Cuba led a complaint with the
Regional Trial Court seeking declaration of nullity DBP's appropriation of her leasehold
rights without foreclosure proceedings which is contrary to Article 2088 of the Civil
Code. The trial court resolved the issue in favor of Cuba and declared invalid the deed
of assignment for being a clear case of patum commissorium. On appeal, the Court of
Appeals reverse the decision of the trial court and declared that the deed of
assignment was an express authority from Cuba for DBP to sell whatever right she had
over the shpond. The appellate court likewise held that the deed of assignment
amounted to a novation of the promissory note.
The Supreme Court ruled that the deed of assignment of leasehold rights was a
mortgage contract. The assignment, being in its essence a mortgage, was but a
security and not a satisfaction of indebtedness. DBP's act of appropriating Cuba's
rights was violative of Article 2088 of the Civil Code, which forbids a creditor from
appropriating, or disposing of, the thing given as security for the payment of debt. DBP
cannot take refuge in the deed of assignment to justify its act of appropriating the
leasehold rights since the said deed did not provide that the leasehold rights would
automatically pass to DBP upon Cuba's failure to pay the loans on time. It merely
provided for the appointment of DBP as attorney-in-fact with authority, among other
things, to sell or otherwise dispose of the said real rights, in case of default by Cuba,
and to apply the proceeds to the payment of the loan. The Supreme Court likewise
found no merit in the contention that the assignment novated the promissory notes in
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that the obligation to pay a sum of money was substituted by the assignment of the
rights over the shpond. The said assignment merely complemented or supplemented
the promissory notes. The obligation to pay a sum of money remained, and the
assignment merely served as security for the loans covered by the promissory notes.
HcSaAD
SYLLABUS
DECISION
DAVIDE , JR. , J : p
After the joinder of issues following the ling by the parties of their respective
pleadings, the trial court conducted a pre-trial where CUBA and DBP agreed on the
following facts, which were embodied in the pre-trial order: 2
1. Plaintiff Lydia P. Cuba is a grantee of a Fishpond Lease Agreement No.
2083 (new) dated May 13, 1974 from the Government;
2. Plaintiff Lydia P. Cuba obtained loans from the Development Bank of the
Philippines in the amounts of P109,000.00; P109,000.00; and P98,700.00
under the terms stated in the Promissory Notes dated September 6, 1974;
August 11, 1975; and April 4, 1977;
3. As security for said loans, plaintiff Lydia P. Cuba executed two Deeds of
Assignment of her Leasehold Rights;
4. Plaintiff failed to pay her loan on the scheduled dates thereof in
accordance with the terms of the Promissory Notes;
5. Without foreclosure proceedings, whether judicial or extra-judicial,
defendant DBP appropriated the leasehold Rights of plaintiff Lydia Cuba
over the fishpond in question;
9. Plaintiff Lydia Cuba failed to pay the amortizations stipulated in the Deed
of Conditional Sale;
10. After plaintiff Lydia Cuba failed to pay the amortization as stated in Deed
of Conditional Sale, she entered with the DBP a temporary arrangement
whereby in consideration for the deferment of the Notarial Rescission of
Deed of Conditional Sale, plaintiff Lydia Cuba promised to make certain
payments as stated in temporary Arrangement dated February 23, 1982;
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11. Defendant DBP thereafter sent a Notice of Rescission thru Notarial Act
dated March 13, 1984, and which was received by plaintiff Lydia Cuba;
12. After the Notice of Rescission, defendant DBP took possession of the
Leasehold Rights of the fishpond in question;
13. That after defendant DBP took possession of the Leasehold Rights over
the shpond in question, DBP advertised in the SUNDAY PUNCH the public
bidding dated June 24, 1984, to dispose of the property;
14. That the DBP thereafter executed a Deed of Conditional Sale in favor of
defendant Agripina Caperal on August 6, 1984;
15. Thereafter, defendant Caperal was awarded Fishpond Lease Agreement
No. 2083-A on December 28, 1984 by the Ministry of Agriculture and Food.
Defendant Caperal admitted only the facts stated in paragraphs 14 and 15 of the
pre-trial order. 3
Trial was thereafter had on other matters.
The principal issue presented was whether the act of DBP in appropriating to
itself CUBA's leasehold rights over the shpond in question without foreclosure
proceedings was contrary to Article 2088 of the Civil Code and, therefore, invalid. CUBA
insisted on an a rmative resolution. DBP stressed that it merely exercised its
contractual right under the Assignments of Leasehold Rights, which was not a contract
of mortgage. Defendant Caperal sided with DBP.
The trial court resolved the issue in favor of CUBA by declaring that DBP's taking
possession and ownership of the property without foreclosure was plainly violative of
Article 2088 of the Civil Code which provides as follows:
ART. 2088. The creditor cannot appropriate the things given by way of pledge
or mortgage, or dispose of them. Any stipulation to the contrary is null and void.
It disagreed with DBP's stand that the Assignments of Leasehold Rights were not
contracts of mortgage because (1) they were given as security for loans (2) although
the "' shpond land"' in question is still a public land, CUBA's leasehold rights and
interest thereon are alienable rights which can be the proper subject of a mortgage; and
(3) the intention of the contracting parties to treat the Assignment of Leasehold Rights
as a mortgage was obvious and unmistakable; hence, upon CUBA's default, DBP's only
right was to foreclose the Assignment in accordance with law.
The trial court also declared invalid condition no. 12 of the Assignment of
Leasehold Rights for being a clear case of pactum commissorium expressly prohibited
and declared null and void by Article 2088 of the Civil Code. It then concluded that since
DBP never acquired lawful ownership of CUBA's leasehold rights, all acts of ownership
and possession by the said bank were void. Accordingly, the Deed of Conditional Sale in
favor of CUBA, the notarial rescission of such sale, and the Deed of Conditional Sale in
favor of defendant Caperal, as well as the Assignment of Leasehold Rights executed by
Caperal in favor of DBP, were also void and ineffective.
As to damages, the trial court found "ample evidence on record" that in 1984 the
representatives of DBP ejected CUBA and her caretakers not only from the shpond
area but also from the adjoining big house; and that when CUBA's son and caretaker
went there on 15 September 1985, they found the said house unoccupied and
destroyed and CUBA's personal belongings, machineries, equipment, tools, and other
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articles used in shpond operation which were kept in the house were missing. The
missing items were valued at about P550,000. It further found that when CUBA and her
men were ejected by DBP for the rst time in 1979, CUBA had stocked the shpond
with 250,000 pieces of bangus sh (milk sh), all of which died because the DBP
representatives prevented CUBA's men from feeding the sh. At the conservative price
of P3.00 per sh, the gross value would have been P690,000, and after deducting 25%
of said value as reasonable allowance for the cost of feeds, CUBA suffered a loss of
P517,500. It then set the aggregate of the actual damages sustained by CUBA at
P1,067,500.
The trial court further found that DBP was guilty of gross bad faith in falsely
representing to the Bureau of Fisheries that it had foreclosed its mortgage on CUBA's
leasehold rights. Such representation induced the said Bureau to terminate CUBA's
leasehold rights and to approve the Deed of Conditional Sale in favor of CUBA. And
considering that by reason of her unlawful ejectment by DBP, CUBA "suffered moral
shock, degradation, social humiliation, and serious anxieties for which she became sick
and had to be hospitalized" the trial court found her entitled to moral and exemplary
damages. The trial court also held that CUBA was entitled to P100,000 attorney's fees
in view of the considerable expenses she incurred for lawyers' fees and in view of the
finding that she was entitled to exemplary damages.
In its decision of 31 January 1990, 4 the trial court disposed as follows:
WHEREFORE, judgment is hereby rendered in favor of plaintiff:
1. DECLARING null and void and without any legal effect the act of
defendant Development Bank of the Philippines in appropriating for
its own interest, without any judicial or extra-judicial foreclosure,
plaintiffs leasehold rights and interest over the shpond land in
question under her Fishpond Lease Agreement No. 2083 (new);
2. DECLARING the Deed of Conditional Sale dated February 21, 1980
by and between the defendant Development Bank of the Philippines
and plaintiff (Exh. E and Exh. 1) and the acts of notarial rescission
of the Development Bank of the Philippines relative to said sale
(Exhs. 16 and 26) as void and ineffective;
3. DECLARING the Deed of Conditional Sale dated August 16, 1984 by
and between the Development Bank of the Philippines and
defendant Agripina Caperal (Exh. F and Exh. 21), the Fishpond
Lease Agreement No. 2083-A dated December 28, 1984 of
defendant Agripina Caperal (Exh. 23) and the Assignment of
Leasehold Rights dated February 12, 1985 executed by defendant
Agripina Caperal in favor of the defendant Development Bank of the
Philippines (Exh. 24) as void ab initio;
cdtai
CUBA and DBP interposed separate appeals from the decision to the Court of
Appeals. The former sought an increase in the amount of damages, while the latter
questioned the findings of fact and law of the lower court.
In its decision 5 of 25 May 1994, the Court of Appeals ruled that (1) the trial court
erred in declaring that the deed of assignment was null and void and that defendant
Caperal could not validly acquire the leasehold rights from DBP; (2) contrary to the
claim of DBP, the assignment was not a cession under Article 1255 of the Civil Code
because DBP appeared to be the sole creditor to CUBA — cession presupposes
plurality of debts and creditors; (3) the deeds of assignment represented the voluntary
act of CUBA in assigning her property rights in payment of her debts, which amounted
to a novation of the promissory notes executed by CUBA in favor of DBP; (4) CUBA was
estopped from questioning the assignment of the leasehold rights, since she agreed to
repurchase the said rights under a deed of conditional sale; and (5) condition no. 12 of
the deed of assignment was an express authority from CUBA for DBP to sell whatever
right she had over the shpond. It also ruled that CUBA was not entitled to loss of
pro ts for lack of evidence, but agreed with the trial court as to the actual damages of
P1,067,500. It, however, deleted the amount of exemplary damages and reduced the
award of moral damages from P100,000 to P50,000 and attorney's fees, from P100.00
to P50,000.
The Court of Appeals thus declared as valid the following: (1) the act of DBP in
appropriating Cuba's leasehold rights and interest under Fishpond Lease Agreement
No. 2083; (2) the deeds of assignment executed by Cuba in favor of DBP; (3) the deed
of conditional sale between CUBA and DBP; and (4) the deed of conditional sale
between DBP and Caperal, the Fishpond Lease Agreement in favor of Caperal, and the
assignment of leasehold rights executed by Caperal in favor of DBP. It then ordered
DBP to turn over possession of the property to Caperal as lawful holder of the
leasehold rights and to pay CUBA the following amounts: (a) P1,067,500 as actual
damages; P50,000 as moral damages; and P50,000 as attorney's fees.
Since their motions for reconsideration were denied, 6 DBP and CUBA led
separate petitions for review.
In its petition (G.R. No. 118342), DBP assails the award of actual and moral
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damages and attorney's fees in favor of CUBA.
Upon the other hand, in her petition (G.R. No. 118367), CUBA contends that the
Court of Appeals erred (1) in not holding that the questioned deed of assignment was a
pactum commissorium contrary to Article 2088 of the Civil Code; (b) in holding that the
deed of assignment effected a novation of the promissory notes; (c) in holding that
CUBA was estopped from questioning the validity of the deed of assignment when she
agreed to repurchase her leasehold rights under a deed of conditional sale; and (d) in
reducing the amounts of moral damages and attorney's fees, in deleting the award of
exemplary damages, and in not increasing the amount of damages.
We agree with CUBA that the assignment of leasehold rights was mortgage
contract.
It is undisputed that CUBA obtained from DBP three separate loans totalling
P335,000, each of which was covered by a promissory note. In all of these notes, there
was a provision that: "In the event of foreclosure of the mortgage securing this notes,
I/We further bind myself/ourselves, jointly and severally, to pay the deficiency, if any." 7
Simultaneous with the execution of the notes was the execution of "Assignments
of Leasehold Rights" 8 where CUBA assigned her leasehold rights and interest on a 44-
hectare fishpond, together with the improvements thereon. As pointed out by CUBA, the
deeds of assignment constantly referred to the assignor (CUBA) as "borrower"; the
assigned rights, as mortgaged properties; and the instrument itself, as mortgage
contract. Moreover, under condition no. 22 of the deed, it was provided that "failure to
comply with the terms and condition of any of the loans shall cause all other loans to
become due and demandable and all mortgages shall be foreclosed." And, condition
no. 33 provided that if " foreclosure is actually accomplished, the usual 10% attorney's
fees and 10% liquidated damages of the total obligation shall be imposed." There is,
therefore, no shred of doubt that a mortgage was intended.
Besides, in their stipulation of facts the parties admitted that the assignment
was by way of security for the payment of the loans; thus:
3. As security for said loans, plaintiff Lydia P. Cuba executed two Deeds of
Assignment of her Leasehold Rights. LibLex
In People's Bank & Trust Co . vs. Odom, 9 this Court had the occasion to rule that
an assignment to guarantee an obligation is in effect a mortgage.
We nd no merit in DBP's contention that the assignment novated the
promissory notes in that the obligation to pay a sum of money the loans (under the
promissory notes) was substituted by the assignment of the rights over the shpond
(under the deed of assignment). As correctly pointed out by CUBA, the said assignment
merely complemented or supplemented the notes; both could stand together. The
former was only an accessory to the latter. Contrary to DBP's submission, the
obligation to pay a sum of money remained, and the assignment merely served as
security for the loans covered by the promissory notes. Signi cantly, both the deeds of
assignment and the promissory notes were executed on the same dates the loans were
granted. Also, the last paragraph of the assignment stated: "The assignor further
reiterates and states all terms, covenants and conditions stipulated in the promissory
note or notes covering the proceeds of this loan, making said promissory note or notes,
to all intent and purposes, an integral part hereof."
Neither did the assignment amount to payment by cession under Article 1255 of
the Civil Code for the plain and simple reason that there was only one creditor, the DBP.
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Article 1255 contemplates the existence of two or more creditors and involves the
assignment of all the debtor's property.
Nor did the assignment constitute dation in payment under Article 1245 of the
Civil Code, which reads: "Dation in payment, whereby property is alienated to the
creditor in satisfaction of a debt in money, shall be governed by the law on sales." It
bears stressing that the assignment, being in its essence a mortgage, was but a
security and not a satisfaction of indebtedness. 1 0
We do not, however, buy CUBA's argument that condition no. 12 of the deed of
assignment constituted pactum commissorium. Said condition reads:
12. That effective upon the breach of any condition of this assignment, the
Assignor hereby appoints the Assignee his Attorney-in-fact with full power and
authority to take actual possession of the property above-described, together with
all improvements thereon, subject to the approval of the Secretary of Agriculture
and Natural Resources, to lease the same or any portion thereof and collect
rentals, to make repairs or improvements thereon and pay the same, to sell or
otherwise dispose of whatever rights the Assignor has or might have over said
property and/or its improvements and perform any other act which the Assignee
may deem convenient to protect its interest. All expenses advanced by the
Assignee in connection with purpose above indicated which shall bear the same
rate of interest aforementioned are also guaranteed by this Assignment. Any
amount received from rents, administration, sale or disposal of said property may
be supplied by the Assignee to the payment of repairs, improvements, taxes,
assessments and other incidental expenses and obligations and the balance, if
any, to the payment of interest and then on the capital of the indebtedness
secured hereby. If after disposal or sale of said property and upon application of
total amounts received there shall remain a de ciency, said Assignor hereby
binds himself to pay the same to the Assignee upon demand, together with all
interest thereon until fully paid. The power herein granted shall not be revoked as
long as the Assignor is indebted to the Assignee and all acts that may be
executed by the Assignee by virtue of said power are hereby ratified.
DBP, however, exceeded the authority vested by condition no. 12 of the deed of
assignment. As admitted by it during the pre-trial, it had "without foreclosure
proceedings, whether judicial or extrajudicial, . . . appropriated the [l]easehold [r]ights of
plaintiff Lydia Cuba over the shpond in question." Its contention that it limited itself to
mere administration by posting caretakers is further belied by the deed of conditional
sale it executed in favor of CUBA. The deed stated:
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WHEREAS, the Vendor [DBP] by virtue of a deed of assignment executed in its
favor by the herein vendees [Cuba spouses] the former acquired all the rights and
interest of the latter over the above-described property;
xxx xxx xxx
T h e title to the real estate property [sic] and all improvements thereon shall
remain the name of the Vendor until after the purchase price, advances and
interest shall have been fully paid. (Emphasis supplied).
It is obvious from the above-quoted paragraphs that DBP had appropriated and
taken ownership of CUBA's leasehold rights merely on the strength of the deed of
assignment.
DBP cannot take refuge in condition no. 12 of the deed of assignment to justify
its act of appropriating the leasehold rights. As stated earlier, condition no. 12 did not
provide that CUBA's default would operate to vest in DBP ownership of the said rights.
Besides an assignment to guarantee an obligation, as in the present case, is virtually a
mortgage and not an absolute conveyance of title which confers ownership on the
assignee. 12
At any rate, DBP's act of appropriating CUBA's leasehold rights was violative of
Article 2088 of the Civil Code, which forbids a creditor from appropriating, or disposing
of, the thing given as security for the payment of a debt.
The fact that CUBA offered and agreed to repurchase her leasehold rights from
DBP did not estop her from questioning DBP's act of appropriation. Estoppel is
unavailing in this case. As held by this Court in some cases, 13 estoppel cannot give
validity to an act that is prohibited by law or against public policy. Hence, the
appropriation of the leasehold rights, being contrary to Article 2088 of the Civil Code
and to public policy, cannot be deemed validated by estoppel.
Instead of taking ownership of the questioned real rights upon default by CUBA,
DBP should have foreclosed the mortgage, as has been stipulated in condition no. 22 of
the deed of assignment. But, as admitted by DBP, there was no such foreclosure. Yet in
its letter dated 26 October 1979, addressed to the Minister of Agriculture and Natural
Resources and coursed through the Director of the Bureau of Fisheries and Aquatic
Resources, DBP declared that it "had foreclosed the mortgage and enforced the
assignment of leasehold rights on March 21, 1979 for failure of said spouses [Cuba
spouses] to pay their loan amortizations." 14 This only goes to show that DBP was
aware of the necessity of foreclosure proceedings.
In view of the false representation of DBP that it had already foreclosed the
mortgage, the Bureau of Fisheries canceled CUBA's original lease permit, approved the
deed of conditional sale, and issued a new permit in favor of CUBA. Said acts which
were predicated on such false representation, as well as the subsequent acts
emanating from DBP's appropriation of the leasehold rights, should therefore be set
aside. To validate these acts would open the oodgates to circumvention of Article
2088 of the Civil Code.
Even in cases where foreclosure proceedings were had, this Court had not
hesitated to nullify the consequent auction sale for failure to comply with the
requirements laid down by law, such as Act No. 3135, as amended. 15 With more
reason that the sale of property given as security for the payment of a debt be set aside
if there was no prior foreclosure proceeding.
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Hence, DBP should render an accounting of the income derived from the
operation of the shpond in question and apply the said income in accordance with
condition no. 12 of the deed of assignment which provided: "Any amount received from
rents, administration, . . . may be applied to the payment of repairs, improvements,
taxes, assessment, and other incidental expenses and obligations and the balance, if
any, to the payment of interest and then on the capital of the indebtedness . . ."
We shall now take up the issue of damages.
Article 2199 provides:
Except as provided by law or by stipulation, one is entitled to an adequate
compensation only for such pecuniary loss suffered by him as he has duly
proved. Such compensation is referred to as actual or compensatory damages.
Nowhere in the said letter, which was written seven months after DBP took
possession of the shpond, did CUBA intimate that upon DBP's take-over there was a
total of 230,000 pieces of bangus, but all of which died because of DBP's
representatives prevented her men from feeding the fish.
The award of actual damages should, therefore, be struck down for lack of
sufficient basis.
In view however, of DBP's act of appropriating CUBA's leasehold rights which
was contrary to law and public policy, as well as its false representation to the then
Ministry of Agriculture and Natural Resources that it had "foreclosed the mortgage," an
award of moral damages in the amount of P50,000 is in order conformably with Article
2219(10), in relation to Article 21 of the Civil Code. Exemplary or corrective damages in
the amount of P25,000 should likewise be awarded by way of example or correction for
the public good. 2 0 There being an award of exemplary damages, attorney's fees are
also recoverable. 2 1
WHEREFORE, the 25 May 1994 Decision of the Court of Appeals in CA-G.R. CV
No. 26535 is hereby REVERSED, except as to the award of P50,000 as moral damages,
which is hereby sustained. The 31 January 1990 Decision of the Regional Trial Court of
Pangasinan, Branch 54, in Civil Case No. A-1574 is MODIFIED setting aside the nding
that condition no. 12 of the deed of assignment constituted pactum commissorium
and the award of actual damages; and by reducing the amounts of moral damages
from P100,000 to P50,000; the exemplary damages, from P50,000 to P25,000; and the
attorney's fees, from P100,000 to P20,000. The Development Bank of the Philippines is
hereby ordered to render an accounting of the income derived from the operation of the
fishpond in question.
Let this case be REMANDED to the trial court for the reception of the income
statement of DBP, as well as the statement of the account of Lydia P. Cuba, and for the
determination of each party's financial obligation to one another.
SO ORDERED.
Bellosillo, Vitug and Kapunan, JJ., concur.
Footnotes
2. OR, 168-170.
3. See OR, 169.
4. Per Judge Artemio R. Corpus. OR, 686-705.
5. Per Manuel C. Herrera, J ., with Artemon D. Luna and Alfredo J. Lagamon, JJ.,
concurring. Rollo, G.R. No. 118342, 21-41; Rollo, G.R. No. 118367, 33-53.
6. Rollo, G.R. No. 118342, 43; Rollo, G.R. No. 118367, 55.
7. Exhibits "B," "C," and "D"; OR, 37-39.
15. Roxas v. Court of Appeals, 221 SCRA 729 [1993]; Sempio v. Court of Appeals, 263 SCRA
617 [1996].
16. Del Mundo v. Court of Appeals , 240 SCRA 348 [1995]; Lufthansa German Airlines v.
Court of Appeals, 243 SCRA 600 [1995]; Development Bank of the Philippines v. Court of
Appeals, 249 SCRA 331 [1995]; Del Rosario v. Court of Appeals , G.R. No. 118325, 29
January 1997.
17. Lufthansa German Airlines v. Court of Appeals , supra note 16; People v. Rosario , 246
SCRA 658 [1995]; Del Rosario v. Court of Appeals , supra note 16; Sumalpong v. Court of
Appeals, G.R. No. 123404, 26 February 1997.
18. Del Mundo v. Court of Appeals, supra note 16.
19. Exhibit 4, OR, 560.
SYNOPSIS
Norma Rosel, respondent herein, entered into a loan agreement with petitioner. Petitioner
used as collateral a portion of land she owned with an area of 70 sq. m., inclusive of the
apartment thereon. Under the terms of their agreement, the lender has the option to buy
the collateral for the amount of P200,000.00 inclusive of the borrowed amount
(P100,000.00) and interest therein (18% per annum). When the loan was about to mature,
respondents proposed to buy the land at the pre-set price of P200,000.00. Petitioner
refused to sell and requested for extension of time to pay the loan and offered to sell
another land instead. Respondents refused all proposals of the petitioner. On maturing
date of the loan, petitioner tendered payment to the respondents, which the latter refused
to accept and insisted that petitioner signed a prepared deed of absolute sale of the
collateral. Respondents refused. They thereafter led with the Regional Trial Court a
complaint for speci c performance with consignation against petitioner. A few days later,
petitioner filed a petition for consignation and deposited the amount of P153,000.00. After
due trial, the trial court rendered a decision denying the execution of the deed of sale to
convey the collateral and ordered that the loan be paid with the corresponding interest
thereon. Respondents appealed to the Court of Appeals, which reversed and set aside the
decision of the trial court and ordering herein petitioner to execute the necessary Deed of
Sale and accept the balance of payment thereon. Hence, this petition for review on
certiorari. The questions here are whether petitioner failed to pay the loan at its maturity
date, and whether the stipulation in the loan contract was valid and enforceable.
The Supreme Court ruled that the petitioner did not fail to pay the loan. When the
respondents refused to accept payment, petitioner consigned the amount with the trial
court. A scrutiny of the stipulation of the parties reveals a subtle intention of the creditor to
acquire the property given as security for the loan. This is embraced in the concept of
pactum commissorium, which is proscribed by law. The petition was granted and the
decision of the Court of Appeals was reversed.
SYLLABUS
RESOLUTION
PARDO , J : p
The case before the Court is a petition for review on certiorari 1 to annul the decision of the
Court of Appeals, 2 reversing and setting aside the decision of the Regional Trial Court, 3
Quezon City, Branch 84, in an action for specific performance with consignation. cdrep
On March 8, 1987, at Quezon City, Norma Rosel entered into a loan agreement with
petitioner Natalia Bustamante and her late husband Ismael C. Bustamante, under the
following terms and conditions:
"1. That the borrowers are the registered owners of a parcel of land, evidenced by
TRANSFER CERTIFICATE OF TITLE No. 80667, containing an area of FOUR
HUNDRED TWENTY THREE (423) SQUARE Meters, more or less, situated along
Congressional Avenue.
"2. That the borrowers were desirous to borrow the sum of ONE HUNDRED
THOUSAND (P100,000.00) PESOS from the LENDER, for a period of two (2) years,
counted from March 1, 1987, with an interest of EIGHTEEN (18%) PERCENT per
annum, and to guaranty the payment thereof, they are putting as a collateral
SEVENTY (70) SQUARE METERS portion, inclusive of the apartment therein, of
the aforestated parcel of land, however, in the event the borrowers fail to pay, the
lender has the option to buy or purchase the collateral for a total consideration of
TWO HUNDRED THOUSAND (P200,000.00) PESOS, inclusive of the borrowed
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amount and interest therein;
"3. That the lender do hereby manifest her agreement and conformity to the
preceding paragraph, while the borrowers do hereby confess receipt of the
borrowed amount." 4
When the loan was about to mature on March 1, 1989, respondents proposed to buy at the
pre-set price of P200,000.00, the seventy (70) square meters parcel of land covered by
TCT No. 80667, given as collateral to guarantee payment of the loan. Petitioner, however,
refused to sell and requested for extension of time to pay the loan and offered to sell to
respondents another residential lot located at Road 20, Project 8, Quezon City, with the
principal loan plus interest to be used as down payment. Respondents refused to extend
the payment of the loan and to accept the lot in Road 20 as it was occupied by squatters
and petitioner and her husband were not the owners thereof but were mere land
developers entitled to subdivision shares or commission if and when they developed at
least one half of the subdivision area. 5
Hence, on March 1, 1989, petitioner tendered payment of the loan to respondents which
the latter refused to accept, insisting on petitioner's signing a prepared deed of absolute
sale of the collateral.
On February 28, 1990, respondents led with the Regional Trial Court, Quezon City, Branch
84, a complaint for speci c performance with consignation against petitioner and her
spouse. 6
Nevertheless, on March 4, 1990, respondents sent a demand letter asking petitioner to sell
the collateral pursuant to the option to buy embodied in the loan agreement.
On the other hand, on March 5, 1990, petitioner filed in the Regional Trial Court, Quezon City
a petition for consignation, and deposited the amount of P153,000.00 with the City
Treasurer of Quezon City on August 10, 1990. 7
When petitioner refused to sell the collateral and barangay conciliation failed, respondents
consigned the amount of P47,500.00 with the trial court. 8 In arriving at the amount
deposited, respondent considered the principal loan of P100,000.00 and 18% interest per
annum thereon, which amounted to P52,500.00. 9 The principal lot and the interest taken
together amounted to P152,500.00, leaving balance of P47,500.00. 1 0
After due trial, on November 10, 1992, the trial court rendered decision holding:
"WHEREFORE, premises considered, judgment is hereby rendered as follows:
"1. Denying the plaintiff's prayer for the defendants' execution of the Deed of Sale
to Convey the collateral in plaintiffs' favor;
"2. Ordering the defendants to pay the loan of P100,000.00 with interest thereon
at 18% per annum commencing on March 2, 1989, up to and until August 10,
1990, when defendants deposited the amount with the Of ce of the City
Treasurer under Official Receipt No. 0116548 (Exhibit "2"); and
"3. To pay Attorney's Fees in the amount of P5,000.00, plus costs of suit.
"SO ORDERED. cdasia
On November 16, 1992, respondents appealed from the decision to the Court of Appeals.
12 On July 8, 1996, the Court of Appeals rendered decision reversing the ruling of the
Regional Trial Court. The dispositive portion of the Court of Appeals' decision reads:
"IN VIEW OF THE FOREGOING, the judgment appeal (sic) from is REVERSED and
SET ASIDE and a new one entered in favor of the plaintiffs ordering the
defendants to accept the amount of P47,000.00 deposited with the Clerk of Court
of Regional Trial Court of Quezon City under Official Receipt No. 0719847, and for
defendants to execute the necessary Deed of Sale in favor of the plaintiffs over
the 70 SQUARE METER portion and the apartment standing thereon being
occupied by the plaintiffs and covered by TCT No. 80667 within fteen (15) days
from nality hereof. Defendants, in turn, are allowed to withdraw the amount of
P153,000.00 deposited by them under Of cial Receipt No. 0116548 of the City
Treasurer's Of ce of Quezon City. All other claims and counterclaims are
DISMISSED, for lack of sufficient basis. No costs.
"SO ORDERED." 13
A scrutiny of the stipulation of the parties reveals a subtle intention of the creditor to
acquire the property given as security for the loan. This is embraced in the concept of
pactum commissorium, which is proscribed by law. 2 2
"The elements of pactum commissorium are as follows: (1) there should be a property
mortgaged by way of security for the payment of the principal obligation, and (2) there
should be a stipulation automatic appropriation by the creditor of the thing mortgaged in
case of non-payment of the principal obligation within the stipulated period." 23
In Nakpil vs. Intermediate Appellate Court, 2 4 we said:
"The arrangement entered into between the parties, whereby Pulong Maulap was
to be "considered sold to him (respondent) . . . in case petitioner fails to reimburse
Valdes, must then be construed as tantamount to pactum commissorium which
is expressly prohibited by Art. 2088 of the Civil Code. For, there was to be
automatic appropriation of the property by Valdes in the event of failure of
petitioner to pay the value of the advances. Thus, contrary to respondent's
manifestation, all the elements of a pactum commissorium were present: there
was a creditor-debtor relationship between the parties; the property was used as
security for the loan; and there was automatic appropriation by respondent of
Pulong Maulap in case of default of petitioner."
A signi cant task in contract interpretation is the ascertainment of the intention of the
parties and looking into the words used by the parties to project that intention. In this
case, the intent to appropriate the property given as collateral in favor of the creditor
appears to be evident, for the debtor is obliged to dispose of the collateral at the pre-
agreed consideration amounting to practically the same amount as the loan. In effect, the
creditor acquires the collateral in the event of non-payment of the loan. This is within the
concept of pactum commissorium. Such stipulation is void. 2 5
All persons in need of money are liable to enter into contractual relationships whatever the
condition if only to alleviate their nancial burden albeit temporarily. Hence, courts are duty
bound to exercise caution in the interpretation and resolution of contracts lest the lenders
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devour the borrowers like vultures do with their prey.
WHEREFORE, we GRANT petitioner's motion for reconsideration and SET ASIDE the
Court's resolution of February 9, 1998. We REVERSE the decision of the Court of Appeals
in CA-G.R. CV No. 40193. In lieu thereof, we hereby DISMISS the complaint in Civil Case No.
Q-90-4813.
No costs.
SO ORDERED. LLphil
Footnotes
3. In Civil Case No. Q-90-4813, dated November 10, 1992, Judge Teodoro P. Regino.
4. Exhibit "A", RTC Record, p. 142.
5. Regional Trial Court Decision, Rollo, p. 31.
6. Civil Case No. Q-90-4813.
14. Petition, led on November 29, 1996, Rollo, pp. 7-17. On November 27, 1996, the Court
granted petitioner an extension of thirty days from the expiration of the reglementary
period within which to file a petition for review on certiorari (Rollo, p. 14).
15. Rollo, p. 40.
DECISION
CARPIO-MORALES , J : p
On different dates from July 14, 1999 to March 20, 2000, petitioner-spouses
Wilfredo N. Ong and Edna Sheila Paguio-Ong obtained several loans from Roban
Lending Corporation (respondent) in the total amount of P4,000,000.00. These loans
were secured by a real estate mortgage on petitioners' parcels of land located in
Binauganan, Tarlac City and covered by TCT No. 297840. 1
On February 12, 2001, petitioners and respondent executed an Amendment to
Amended Real Estate Mortgage 2 consolidating their loans inclusive of charges thereon
which totaled P5,916,117.50. On even date, the parties executed a Dacion in Payment
Agreement 3 wherein petitioners assigned the properties covered by TCT No. 297840
to respondent in settlement of their total obligation, and a Memorandum of Agreement
4 reading: AIaSTE
That the FIRST PARTY [Roban Lending Corporation] and the SECOND
PARTY [the petitioners] agreed to consolidate and restructure all
aforementioned loans, which have been all past due and delinquent since April
19, 2000, and outstanding obligations totaling P5,916,117.50. The SECOND
PARTY hereby sign [sic] another promissory note in the amount of
P5,916,117.50 (a copy of which is hereto attached and forms . . . an integral part
of this document), with a promise to pay the FIRST PARTY in full within one
year from the date of the consolidation and restructuring, otherwise the
SECOND PARTY agree to have their "DACION IN PAYMENT" agreement, which
they have executed and signed today in favor of the FIRST PARTY be enforced[.]
5
At the scheduled April 14, 2004 hearing, both counsels appeared but only the
counsel of respondent filed a memorandum. 1 9
By Decision of April 21, 2004, Branch 64 of the Tarlac City RTC, nding on the
basis of the pleadings that there was no pactum commissorium, dismissed the
complaint. 2 0
On appeal, 2 1 the Court of Appeals 2 2 noted that:
. . . [W]hile the trial court in its decision stated that it was rendering
judgment on the pleadings, . . . what it actually rendered was a summary
judgment. A judgment on the pleadings is proper when the answer fails to
tender an issue, or otherwise admits the material allegations of the adverse
party's pleading. However, a judgment on the pleadings would not have been
proper in this case as the answer tendered an issue, i.e. the validity of the MOA
and DPA. On the other hand, a summary judgment may be rendered by the court
if the pleadings, supporting a davits, and other documents show that, except
as to the amount of damages, there is no genuine issue as to any material fact.
23
This Court nds that the Memorandum of Agreement and Dacion in Payment
constitute pactum commissorium, which is prohibited under Article 2088 of the Civil
Code which provides:
The creditor cannot appropriate the things given by way of pledge or
mortgage, or dispose of them. Any stipulation to the contrary is null and void."
The elements of pactum commissorium, which enables the mortgagee to
acquire ownership of the mortgaged property without the need of any foreclosure
proceedings, 3 0 are: (1) there should be a property mortgaged by way of security for
the payment of the principal obligation, and (2) there should be a stipulation for
automatic appropriation by the creditor of the thing mortgaged in case of non-payment
of the principal obligation within the stipulated period. 3 1
In the case at bar, the Memorandum of Agreement and the Dacion in Payment
contain no provisions for foreclosure proceedings nor redemption. Under the
Memorandum of Agreement, the failure by the petitioners to pay their debt within the
one-year period gives respondent the right to enforce the Dacion in Payment
transferring to it ownership of the properties covered by TCT No. 297840. Respondent,
in effect, automatically acquires ownership of the properties upon petitioners' failure to
pay their debt within the stipulated period. ASEIDH
Respondent argues that the law recognizes dacion en pago as a special form of
payment whereby the debtor alienates property to the creditor in satisfaction of a
monetary obligation. 3 2 This does not persuade. In a true dacion en pago, the
assignment of the property extinguishes the monetary debt. 3 3 In the case at bar, the
alienation of the properties was by way of security, and not by way of satisfying the
debt. 3 4 The Dacion in Payment did not extinguish petitioners' obligation to respondent.
On the contrary, under the Memorandum of Agreement executed on the same day as
the Dacion in Payment, petitioners had to execute a promissory note for P5,916,117.50
which they were to pay within one year. 3 5
Respondent cites Solid Homes, Inc. v. Court of Appeals 3 6 where this Court
upheld a Memorandum of Agreement/Dacion en Pago. 3 7 That case did not involve the
issue of pactum commissorium. 3 8
That the questioned contracts were freely and voluntarily executed by petitioners
and respondent is of no moment, pactum commissorium being void for being
prohibited by law. 3 9
Respecting the charges on the loans, courts may reduce interest rates, penalty
charges, and attorney's fees if they are iniquitous or unconscionable. 4 0
This Court, based on existing jurisprudence, 4 1 nds the monthly interest rate of
3.5%, or 42% per annum unconscionable and thus reduces it to 12% per annum. This
Court nds too the penalty fee at the monthly rate of 5% (60% per annum) of the total
amount due and demandable — principal plus interest, with interest not paid when due
added to and becoming part of the principal and likewise bearing interest at the same
rate, compounded monthly 4 2 — unconscionable and reduces it to a yearly rate of 12%
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of the amount due, to be computed from the time of demand. 4 3 This Court nds the
attorney's fees of 25% of the principal, interests and interests thereon, and the penalty
fees unconscionable, and thus reduces the attorney's fees to 25% of the principal
amount only. 4 4
The prayer for accounting in petitioners' complaint requires presentation of
evidence, they claiming to have made partial payments on their loans, vis a vis
respondent's denial thereof. 4 5 A remand of the case is thus in order. TDCAIS
Prescinding from the above disquisition, the trial court and the Court of Appeals
erred in holding that a summary judgment is proper. A summary judgment is permitted
only if there is no genuine issue as to any material fact and a moving party is entitled to
a judgment as a matter of law. 4 6 A summary judgment is proper if, while the pleadings
on their face appear to raise issues, the a davits, depositions, and admissions
presented by the moving party show that such issues are not genuine. 4 7 A genuine
issue, as opposed to a ctitious or contrived one, is an issue of fact that requires the
presentation of evidence. 4 8 As mentioned above, petitioners' prayer for accounting
requires the presentation of evidence on the issue of partial payment.
But neither is a judgment on the pleadings proper. A judgment on the pleadings
may be rendered only when an answer fails to tender an issue or otherwise admits the
material allegations of the adverse party's pleadings. 4 9 In the case at bar, respondent's
Answer with Counterclaim disputed petitioners' claims that the Memorandum of
Agreement and Dation in Payment are illegal and that the extra charges on the loans are
unconscionable. 5 0 Respondent disputed too petitioners' allegation of bad faith. 5 1
WHEREFORE, the challenged Court of Appeals Decision is REVERSED and SET
ASIDE. The Memorandum of Agreement and the Dacion in Payment executed by
petitioner — spouses Wilfredo N. Ong and Edna Sheila Paguio-Ong and respondent
Roban Lending Corporation on February 12, 2001 are declared NULL AND VOID for
being pactum commissorium. ECDAcS
In line with the foregoing ndings, the following terms of the loan contracts
between the parties are MODIFIED as follows:
1. The monthly interest rate of 3.5%, or 42% per annum, is reduced to
12% per annum;
2. The monthly penalty fee of 5% of the total amount due and
demandable is reduced to 12% per annum, to be computed from the time
of demand; and
3. The attorney's fees are reduced to 25% of the principal amount
only. cHCaIE
Civil Case No. 9322 is REMANDED to the court of origin only for the purpose of
receiving evidence on petitioners' prayer for accounting.
SO ORDERED.
Quisumbing, Tinga, Velasco, Jr. and Brion, JJ., concur.
Footnotes
1. Records, pp. 11-16. SEIDAC
2. Id. at 37.
3. Id. at 40.
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4. Id. at 38-39.
5. Id. at 38-39.
6. Id. at 1-5.
7. Id. at 2.
10. Id. at 3.
11. Id. at 3.
12. Id. at 4.
13. Id. at 51-54.
30. Vide Lumayag v. Heirs of Jacinto Nemeño, G.R. No. 162112, July 3, 2007, 526 SCRA 315,
328.
31. Development Bank of the Philippines v. Court of Appeals, 348 Phil. 15, 31 (1998).
32. Records, p. 53. Vide CIVIL CODE, Article 1245.
33. Vide CIVIL CODE, Article 1245; Development Bank of the Philippines v. Court of Appeals,
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348 Phil. 15, 30 (1998). IHEDAT
41. Vide Poltan v. BPI Family Savings Bank, Inc. , G.R. No. 164307, March 5, 2007, 517 SCRA
430, 444-446.
42. Records, p. 41.
43. Vide United Coconut Planters Bank v. Beluso, G.R. No. 159912, August 17, 2007, 530 SCRA
567, 590, 604-605.
44. Vide Titan Construction Corporation v. Uni-Field Enterprises, Inc. , G.R. No. 153874, March 1,
2007, 517 SCRA 180, 190.
45. Vide records, pp. 3, 51-52.
46. RULES OF COURT, Rule 35, Section 3; Pineda v. Heirs of Eliseo Guevarra, G.R. No. 143188,
February 14, 2007, 515 SCRA 627, 638.
47. Vide Marcelo v. Sandiganbayan, G.R. No. 156605, August 28, 2007, 531 SCRA 385, 398. DHIcET
48. Ibid.
DECISION
GANCAYCO , J : p
This petition for review presents two (2) main issues, to wit: (1) Can a plaintiff in a case,
who had previously assigned in favor of his creditor his litigated credit in said case, by a
deed of assignment which was duly submitted to the court, validly enter into a
compromise agreement thereafter releasing the defendant therein from his claim without
notice to his assignee? and (2) Will such previous knowledge on the part of the defendant
of the assignment made by the plaintiff estop said defendant from invoking said
compromise as a ground for dismissal of the action against him?
The present case stemmed from Civil Case No. Q-8303 1 entitled "Alfonso Tan vs. Ciriaco
B. Mendoza," an action for the collection of a sum of money representing the value of two
(2) checks which plaintiff Tan claims to have been delivered to him by defendant Mendoza,
private respondent herein, by way of guaranty with a commission.
The record discloses that the Bernal spouses 2 are engaged in the manufacture of
embroidery, garments and cotton materials. Sometime in September 1963, C.B.M.
Products, 3 with Mendoza as president, offered to sell to the Bernals textile cotton
materials and, for this purpose, Mendoza introduced the Bernals to Alfonso Tan. Thus, the
Bernals purchased on credit from Tan some cotton materials worth P80,796.62, payment
of which was guaranteed by Mendoza. Thereupon, Tan delivered the said cotton materials
to the Bernals. In view of the said arrangement, on November 1963, C.B.M. Products,
through Mendoza, asked and received from the Bernals PBTC Check No. 626405 for
P80,796.62 dated February 20, 1964 with the understanding that the said check will
remain in the possession of Mendoza until the cotton materials are finally manufactured
into garments after which time 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 4 in the same amount without a date.
On the other hand, on February 28, 1964, defendant Mendoza issued two (2) PNB checks 5
in favor of Tan in the total amount of P80,796.62. 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. cdrep
I further undertake to hold in trust any and all amounts which may hereafter be
realized from the aforementioned cases for the ASSIGNEE, Mr. GEORGE LITTON,
SR., and to turn over to him such amounts in application to my liability to him, as
his interest may then show, and I further undertake to cooperate towards the
successful prosecution of the aforementioned cases making available myself, as
witness or otherwise, as well as any and all documents thereto appertaining . . ." 9
After due trial, the lower court ruled that the said PNB checks were issued by Mendoza in
favor of Tan for a commission in the sum of P4,847.79 and held Mendoza liable as a
drawer whose liability is primary and not merely as an indorser and thus directed Mendoza
to pay Tan the sum of P76,000.00, the sum still due, plus damages and attorney's fees. 1 0
Mendoza seasonably filed an appeal with the Court of Appeals, docketed as C.A. G.R. No.
41900-R, arguing in the main that his liability is one of an accommodation party and not as
a drawer.
On January 27, 1977, the Court of Appeals rendered a decision affirming in toto the
decision of the lower court. 1 1
Meanwhile, on February 2, 1971, 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. 1 2
On February 25, 1977, Mendoza filed a motion for reconsideration praying that the
decision of January 27, 1977 be set aside, principally anchored upon the ground that a
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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 Atty. Quiogue, and was instead represented by a certain Atty. Laberinto, 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. LLphil
While the case was still pending reconsideration by the respondent court, Tan, the
assignor, died leaving no properties whatever to satisfy the claim of the estate of the late
George Litton, Sr.
In its Resolution dated August 30, 1977, 1 3 the respondent court set aside its decision and
approved the compromise agreement.
As to the first ground invoked by Tan, now deceased, the respondent court ruled that the
non-intervention of Tan's counsel of record in the compromise agreement does not affect
the validity of the settlement on the ground that the client had an undoubted right to
compromise a suit without the intervention of his lawyer, citing Aro vs. Nanawa. 1 4
As to the second ground, respondent court ruled as follows:
". . . it is relevant to note that Paragraph 1 of the deed of assignment states that
the cession, assignment, transfer, and conveyance by Alfonso Tan was only by
way of securing or guaranteeing his obligation to GEORGE LITTON, SR.
"Hence, Alfonso Tan retained possession and dominion of the credit (Par. 2, Art.
2085, Civil Code).
"Such alienation is subject to the remedies of Litton under Article 6 of the Civil
Code, whereby the waiver, release, or quit-claim made by plaintiff-appellee
Alfonso Tan in favor of defendant-appellant Ciriaco B. Mendoza, if proven
prejudicial to George Litton, Sr. as assignee under the deed of assignment, may
entitle Litton to pursue his remedies against Tan.
"The alienation of a litigatious credit is further subject to the debtor's right of
redemption under Article 1634 of the Civil Code."
As mentioned earlier, the assignor Tan died pending resolution of the motion for
reconsideration. The estate of George Litton, Sr., petitioner herein, as represented by
James Litton, son of George Litton, Sr. and administrator 1 5 of the former's estate, is now
appealing the said resolution to this Court as assignee of the amount sued in Civil Case
No. Q-8303, in relation to Civil Case No. 56850.
Before resolving the main issues aforementioned, the question of legal personality of
herein petitioner to bring the instant petition for review, must be resolved.
As a rule, the parties in an appeal through a review on certiorari are the same original
parties to the case. 1 6 If after the rendition of judgment the original party dies, he should
be substituted by his successor-in-interest. In this case, it is not disputed that no proper
substitution of parties was done. This notwithstanding, the Court so holds that the same
cannot and will not materially affect the legal right of herein petitioner in instituting the
instant petition in view of the tenor of the deed of assignment, particularly paragraph two
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thereof 1 7 wherein the assignor, Tan, assumed the responsibility to prosecute the case and
to turn over to the assignee whatever amounts may be realized in the prosecution of the
suit.
We note that private respondent moved for the dismissal of the appeal without notifying
the estate of George Litton, Sr. whereas the former was fully aware of the fact that the said
estate is an assignee of Tan's right in the case litigated. 1 8 Hence, if herein petitioner failed
to observe the proper substitution of parties when Alfonso Tan died during the pendency
of private respondent's motion for reconsideration, no one is to blame but private
respondent himself. Moreover, the right of the petitioner to bring the present petition is
well within the concept of a real party-in-interest in the subject matter of the action. Well-
settled is the rule that a real party-in-interest is a party entitled to the avails of the suit or
the party who would be injured by the judgment. 1 9 We see the petitioner well within the
latter category. LexLib
Hence, as the assignee and successor-in-interest of Tan, petitioner has the personality to
bring this petition in substitution of Tan.
Now, the resolution of the main issues.
The purpose of a compromise being to replace and terminate controverted claims, 2 0
courts encourage the same. A compromise once approved by final order of the court has
the force of res judicata between parties and should not be disturbed except for vices of
consent or forgery. 2 1
In this case, petitioner seeks to set aside the said compromise on the ground that
previous thereto, Tan executed a deed of assignment in favor of George Litton, Sr.
involving the same litigated credit.
We rule for the petitioner. The fact that the deed of assignment was done by way of
securing or guaranteeing Tan's obligation in favor of George Litton, Sr., as observed by the
appellate court, will not in any way alter the resolution on the matter. The validity of the
guaranty or pledge in favor of Litton has not been questioned. Our examination of the deed
of assignment shows that it fulfills the requisites of a valid pledge or mortgage. 2 2
Although it is true that Tan may validly alienate the litigatious credit as ruled by the
appellate court, citing Article 1634 of the Civil Code, said provision should not be taken to
mean as a grant of an absolute right on the part of the assignor Tan to 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. 2 3 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, 2 4 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.
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Indeed, a painstaking review of the record of the case reveals that private respondent has,
from the very beginning, been fully aware of the deed of assignment executed by Tan in
favor of Litton, Sr. as said deed was duly submitted to Branch XI of the then Court of First
Instance of Manila in Civil Case No. 56850 (in relation to Civil Case No. Q-8303) where
C.B.M. Products is one of the defendants and the parties were notified through their
counsel. 2 5 As earlier mentioned, private respondent herein is the president of C.B.M.
Products, hence, his contention that he is not aware of the said deed of assignment
deserves scant consideration from the Court. Petitioner pointed out at the same time that
private respondent together with his counsel were served with a copy of the deed of
assignment which allegation remains uncontroverted. Having such knowledge thereof,
private respondent is estopped from entering into a compromise agreement involving the
same litigated credit without notice to and consent of the assignee, petitioner herein. More
so, in the light of the fact that no reimbursement has ever been made in favor of the
assignee as required under Article 1634. Private respondent acted in bad faith and in
connivance with assignor Tan so as to defraud the petitioner in entering into the
compromise agreement. LibLex
WHEREFORE, the petition is GRANTED. The assailed resolution of the respondent court
dated August 30, 1977 is hereby SET ASIDE, the said compromise agreement being null
and void, and a new one is hereby rendered reinstating its decision dated January 27, 1977,
affirming in toto the decision of the lower court. This decision is immediately executory.
No motion for extension of time to file a motion for reconsideration will be granted.
SO ORDERED.
Narvasa, Cruz and Griño-Aquino, JJ., concur.
Medialdea, J., is on leave.
Footnotes
13. Penned by Justice Ricardo C. Puno and concurred into by Justices Pacifico P. de
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Castro and Delfin F1. Batacan, pages 29-36, Rollo.
17. Supra.
18. Infra.
19. Salonga vs. Warner Barnes & Co., Ltd., 88 Phil. 125, 131 (1951).
SYLLABUS
DECISION
BIDIN , J : p
This is an appeal from the decision ** of the Court of First Instance of Manila, Branch XVII
in Civil Case No. 78178 for collection of sum of money based on promissory notes
executed by the defendants-appellants in favor of plaintiff-appellee bank. The dispositive
portion of the appealed decision (Record on Appeal, p. 33) reads as follows:
"WHEREFORE judgment is hereby rendered (a) sentencing defendants, Anastacio
Teodoro, Jr. and Grace Anna Teodoro jointly and severally, to pay plaintiff the
sum of P15,037.11 plus 12% interest per annum from September 30, 1969 until
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fully paid, in payment of Promissory Notes No. 11487, plus the sum of P1,000.00
as attorney's fees; and (b) sentencing defendant Anastacio Teodoro, Jr. to pay
plaintiff the sum of P8,934.74, plus interest at 12% per annum from September
30, 1969 until fully paid, in payment of Promissory Notes Nos. 11515 and 11699,
plus the sum of P500.00 a attorney's fees.
The facts of the case as found by the trial court are as follows:
"On April 25, 1966, defendants, together with Anastacio Teodoro, Sr., jointly and
severally, executed in favor of plaintiff a Promissory Note (No. 11487) for the sum
of P10,420.00 payable in 120 days, or on August 25, 1966, at 12% interest per
annum. Defendants failed to pay the aid amount inspite of repeated demands
and the obligation as of September 30, 1969 stood at P15,137.11 including
accrued interest and service charge.
On May 3, 1966 and June 20, 1966, defendants Anastacio Teodoro, Sr. (Father)
and Anastacio Teodoro, Jr. (Son) executed in favor of plaintiff two Promissory
Notes (Nos. 11515 and 11699) for P8,000.00 and P1,000.00 respectively, payable
in 120 days at 12% interest per annum. Father and Son made a partial payment
on the May 3, 1966 Promissory Note but none on the June 20, 1966 Promissory
Note, leaving still an unpaid balance of P8,934.74 as of September 30, 1969
including accrued interest and service charge. LexLib
The three Promissory Notes stipulated that any interest due if not paid at the end
of every month shall be added to the total amount then due, the whole amount to
bear interest at the rate of 12% per annum until fully paid; and in case of
collection through an attorney-at-law, the makers shall, jointly and severally, pay
10% of the amount over-due as attorney's fees, which in no case shall be less
than P200.00.
It appears that on January 24, 1964, the Son executed in favor of plaintiff a Deed
of Assignment of Receivables from the Emergency Employment Administration in
the sum of P44,635.00. The Deed of Assignment provided that it was for and in
consideration of certain credits, loans, overdrafts and other credit
accommodations extended to defendants as security for the payment of said
sum and the interest thereon, and that defendants do hereby remise, release and
quitclaim all its rights, title, and interest in and to the accounts receivables.'
Further:
'(1) The title and right of possession to said accounts receivable
is to remain in the assignee, and it shall have the right to collect the same
from the debtor, and whatsoever the Assignor does in connection with the
collection of said accounts, it agrees to do as agent and representative of
the Assignee and in trust for said Assignee . . .;
For failure of defendants to pay the sums due on the Promissory Note, this action
was instituted on November 13, 1969, originally against the Father, Son, and the
latter's wife. Because the Father died, however, during the pendency of the suit,
the case as against him was dismissed under the provisions of Section 21, Rule 3
of the Rules of Court. The action, then is against defendant Son and his wife for
the collection of the sum of P15,037.11 on Promissory Note No. 14487; and
against defendant Son for the recovery of P8,394.74 on Promissory Notes Nos.
11515 and 11699, plus interest on both amounts at 12% per annum from
September 30, 1969 until fully paid, and 10% of the amounts due as attorney's
fees.
Neither of the parties presented any testimonial evidence and submitted the case
for decision based on their Stipulations of Fact and on their documentary
evidence.
The issues, as defined by the parties are: (1) whether or not plaintiff's claim is
already considered paid by the Deed of Assignment of Receivables by the Son;
and (2) whether or not it is plaintiff who should directly sue the Philippine
Fisheries Commission for collection." (Record on Appeal, p. 29-32).
On April 17, 1972, the trial court rendered its judgment adverse to defendants. On June 8,
1972, defendants filed a motion for reconsideration (Record on Appeal, p. 33) which was
denied by the trial court in its order of June 14, 1972 (Record on Appeal, p. 37). On June
23, 1972, defendants filed with the lower court their notice of appeal together with the
appeal bond (Record on Appeal, p. 38). The record of appeal was forwarded to the Court
of Appeals on August 22, 1972 (Record on Appeal, p. 42). LLpr
In their appeal (Brief for the Appellants, Rollo, p. 12), appellants raised a single assignment
of error, that is —
"THAT THE DECISION IN QUESTION AMOUNTS TO A JUDICIAL REMAKING OF
THE CONTRACT BETWEEN THE PARTIES, IN VIOLATION OF LAW; HENCE,
TANTAMOUNT TO LACK OR EXCESS OF JURISDICTION.'
As the appeal involves a pure question of law, the Court of Appeals, in its resolution
promulgated on March 6, 1980, certified the case to this Court (Rollo, p. 24). The record on
Appeal was forwarded to this Court on March 31, 1980 (Rollo, p. 1).
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In the resolution of May 30, 1980, the First Division of this Court ordered that the case be
docketed and declared submitted for decision (Rollo, p. 33).
On March 7, 1988, considering the length of time that the case has been pending with the
Court and to determine whether supervening events may have rendered the case moot and
academic, the Court resolved (1) to require the parties to MOVE IN THE PREMISES within
thirty days from notice, and in case they fail to make the proper manifestation within the
required period, (2) to consider the case terminated and closed with the entry of judgment
accordingly made thereon (Rollo, p. 40).
On April 27, 1988, appellee moved for a resolution of the appeal/review interposed by
defendants-appellants (Rollo, p. 41).
The major issues raised in this case are as follows: (1) whether or not the assignment of
receivables has the effect of payment of all the loans contracted by appellants from
appellee bank; and (2) whether or not appellee bank must first exhaust all legal remedies
against the Philippine Fisheries Commission before it can proceed against appellants for
collections of loan under the promissory notes which are plaintiff's bases in the action for
collection in Civil Case No. 78178.
"Assignment of credit is an agreement by virtue of which the owner of a credit, known as
the assignor, by a legal cause, such as sale, dation in payment, exchange or donation, and
without the need of the consent of the debtor, transfers his credit and its accessory rights
to another, known as the assignee, who acquires the power to enforce it to the same
extent as the assignor could have enforced it against the debtor . . . It may be in the form
of a sale, but at times it may constitute a dation in payment, such as when a debtor, in
order to obtain a release from his debt, assigns to his creditor a credit he has against a
third person, or it may constitute a donation as when it is by gratuitous title; or it may even
be merely by way of guaranty, as when the creditor gives as a collateral, to secure his own
debt in favor of the assignee, without transmitting ownership. The character that it may
assume determines its requisites and effects, its regulation, and the capacity of the parties
to execute it; and in every case, the obligations between assignor and assignee will depend
upon the judicial relation which is the basis of the assignment: (Tolentino, Commentaries
and Jurisprudence on the Civil Code of the Philippines, Vol. 5, pp. 165-166).
There is no question as to the validity of the assignment of receivables executed by
appellants in favor of appellee bank. The issue is with regard to its legal effects.
I
It is evident that the assignment of receivables executed by appellants on January 24,
1964 did not transfer the ownership of the receivables to appellee bank and release
appellants from their loans with the bank incurred under promissory notes Nos. 11487,
11515 and 11699. LLpr
The Deed of Assignment provided that it was for and in consideration of certain credits,
loans, overdrafts, and their credit accommodations in the sum of P10,000.00 extended to
appellants by appellee bank, and as security for the payment of said sum and the interest
thereon; that appellants as assignors, remise, release, and quitclaim to assignee bank all
their rights, title and interest in and to the accounts receivable assigned (1st paragraph). It
was further stipulated that the assignment will also stand as a continuing guaranty for
future loans of appellants to appellee bank and correspondingly the assignment shall also
extend to all the accounts receivable; appellants shall also obtain in the future, until the
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consideration on the loans secured by appellants from appellee bank shall have been fully
paid by them (No. 9).
The position of appellants, however, is that the deed of assignment is a quitclaim in
consideration of their indebtedness to appellee bank, not mere guaranty, in view of the
following provisions of the deed of assignment:
". . . the Assignor do hereby remise, release and quit-claim unto said assignee all
its rights, title and interest in the accounts receivable described hereunder."
(Emphasis supplied by appellants, first par., Deed of Assignment)."
". . . that the title and right of possession to said account receivable is to remain in
said assignee and it shall have the right to collect directly from the debtor, and
whatsoever the Assignor does in connection with the collection of said accounts,
it agrees to do so agent and representative of the Assignee and it trust for said
Assignee . . . " (Ibid. par. 2 of Deed of Assignment)." (Record on Appeal, p. 27)
The character of the transactions between the parties is not, however, determined by the
language used in the document but by their intention. Thus, the Court, quoting from the
American Jurisprudence (68 2d, Secured Transaction, Section 50) said:
"The characters of the transaction between the parties is to be determined by their
intention, regardless of what language was used or what the form of the transfer
was. If it was intended to secure the payment of money, it must be construed all a
pledge. However, even though a transfer, if regarded by itself, appears to have
been absolute, its object and character might still be qualified and explained by a
contemporaneous writing declaring it to have been a deposit of the property as
collateral security. It has been said that a transfer of property by the debtor to a
creditor, even if sufficient on its face to make an absolute conveyance, should be
treated as a pledge if the debt continues in existence and is not discharged by the
transfer, and that accordingly, the use of the terms ordinarily importing
conveyance, of absolute ownership will not be given that effect in such a
transaction if they are also commonly used in pledges and mortgages and
therefore do not unqualifiedly indicate a transfer of absolute ownership, in the
absence of clear and ambiguous language or other circumstances excluding an
intent to pledge." (Lopez v. Court of Appeals, 114 SCRA 671 [1962]).
Definitely, the assignment of the receivables did not result from a sale transaction. It
cannot be said to have been constituted by virtue of a dation in payment for appellants'
loans with the bank evidenced by promissory note Nos. 11487, 11515 and 11699 which
are the subject of the suit for collection in Civil Case No. 78178. At the time the deed of
assignment was executed, said loans were non-existent yet. The deed of assignment was
executed on January 24, 1964 (Exh. "G"), while promissory note No. 11487 is dated April
25, 1966 (Exh. "A"), promissory note 11515, dated May 3, 1966 (Exh. "B"), promissory note
11699, on June 20, 1966 (Exh. "C"). At most, it was a dation in payment for P10,000.00, the
amount of credit from appellee bank indicated in the deed of assignment. At the time the
assignment was executed, there was no obligation to be extinguished except the amount
of P10,000.00. Moreover, in order that an obligation may be extinguished by another which
substitutes the same, it is imperative that it be so declared in unequivocal terms, or that
the old and the new obligations be on every point incompatible with each other (Article
1292, New Civil Code). LLjur
Obviously, the deed of assignment was intended as collateral security for the bank loans
of appellants, as a continuing guaranty for whatever sums would be owing by defendants
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to plaintiff, as stated in stipulation No. 9 of the deed.
In case of doubt as to whether a transaction is a pledge or a dation in payment, the
presumption is in favor of pledge, the latter being the lesser transmission of rights and
interests (Lopez v. Court of Appeals, supra).
In one case, the assignments of rights, title and interest of the defendant in the contracts
of lease of two buildings as well as her rights, title and interest in the land on which the
buildings were constructed to secure an overdraft from a bank amounting to P110,000.00
which was increased to P150,000.00, then to P165,000.00 was considered by the Court to
be documents of mortgage contracts inasmuch as they were executed to guarantee the
principal obligations of the defendant consisting of the overdrafts or the indebtedness
resulting therefrom. The Court ruled that an assignment to guarantee an obligation is in
effect a mortgage and not an absolute conveyance of title which confers ownership on the
assignee (Peoples Bank & Trust Co. v. Odom, 64 Phil. 126 [1937]).
II
As to whether or not appellee bank must have to exhaust all legal remedies against the
Philippine Fisheries Commission before it can proceed against appellants for collection of
loans under their promissory notes, must also be answered in the negative.
The obligation of appellants under the promissory notes not having been released by the
assignment of receivables, appellants remain as the principal debtors of appellee bank
rather than mere guarantors. The deed of assignment merely guarantees said obligations.
That the guarantor cannot be compelled to pay the creditor unless the latter has exhausted
all the property of the debtor, and has resorted to all the legal remedies against the debtor,
under Article 2058 of the New Civil Code does not therefore apply to them. It is of course
of the essence of a contract of pledge or mortgage that when the principal obligation
becomes due, the things in which the pledge or mortgage consists may be alienated for
the payment to the creditor (Article 2087, New Civil Code). In the instant case, appellants
are both the principal debtors and the pledgors or mortgagors. Resort to one is, therefore,
resort to the other.
Appellee bank did try to collect on the pledged receivables. As the Emergency
Employment Agency (EEA) which issued the receivables had been abolished, the collection
had to be coursed through the Office of the President which disapproved the same
(Record on Appeal, p. 16). The receivable became virtually worthless leaving appellants'
loans from appellee bank unsecured. It is but proper that after their repeated demands
made on appellants for the settlement of their obligations, appellee bank should proceed
against appellants. It would be an exercise in futility to proceed against a defunct office for
the collection of the receivables pledged.
WHEREFORE, the appeal is Dismissed for lack of merit and the appealed decision of the
trial court is affirmed in toto.
SO ORDERED.
Fernan, C.J., Gutierrez, Jr., Feliciano and Cortes, JJ., concur.
Separate Opinions
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FELICIANO, J., concurring :
I quite agree with the general reasoning of and the results reached by my distinguished
brother Bidin in respect of both of the principal issues he addressed in his opinion.
I would merely wish to add a few lines in respect of the point made by Bidin, J., that "the
character of the transactions between the parties is not, however, determined by the
language used in the document but by their intention." This statement is basically not
exceptionable, so far as it goes. It might, however, be borne in mind that the intent of the
parties to the transaction is to be determined, in the first instance, by the very language
which they used. The deed of assignment contains language which suggest that the
parties intended to effect a complete alienation of title to and rights over the receivables
which are the subject of the assignment. This language is comprised of works like
"remise," "release and quitclaim" and clauses like "the title and right of possession to said
accounts receivable is to remain in said assignee" who "shall have the right to collect
directly from the debtor." The same intent is also suggested by the use of the words
"agent and representative of the assignee" in referring to the assignor. LibLex
The point that appears to me to be worth making is that although in its form, the deed of
assignment of receivables partakes of the nature of a complete alienation of the
receivables assigned, such form should be taken in conjunction with, and indeed must be
qualified and controlled by, other language showing an intent of the parties that title to the
receivables shall pass to the assignee for the limited purpose of securing another,
principal; obligation owed by the assignor to the assignee. Title moves from assignor to
assignee but that title is defeasible being designed to collateralize the principal obligation.
Operationally, what this means is that the assignee is burdened with an obligation of taking
the proceeds of the receivables assigned and applying such proceeds to the satisfaction
of the principal obligation and returning any balance remaining thereafter to the assignor.
The parties gaved the deed of assignment the form of an absolute conveyance of title over
the receivables assigned, essentially for the convenience of the assignee. Without such
formally unlimited conveyance of title, the assignee would have to treat the deed of
assignment as no more than a deed of pledge or of chattel mortgage. In other words, in
such hypothetical case, should the assignee seek to realize upon the security given to him
through the deed of assignment (which would then have to comply with the
documentation and registration requirements of a pledge or chattel mortgage), the
assignee would have to foreclose upon the securities or credits assigned and place them
on public sale and there acquire the same. It should be recalled that under the principle
which forbids a pactum commisorium Article 2088, Civil Code), a mortgagee or pledgee is
prohibited from simply taking and appropriating the personal property turned over to him
as security for the payment of a principal obligation. A deed of assignment by way of
security avoids the necessity of a public sale imposed by the rule on pactum
commisorium, by in effect placing the sale of the collateral up front.
The foregoing is applicable where, as in the present instance, the deed of assignment of
receivables combines elements of both a complete or absolute alienation of the credits
being assigned and a security arrangement to assure payment of a principal obligation.
Where the second element is absent, that is, where there is nothing to indicate that the
parties intended the deed of assignment to function as a security device, it would of
course follow that the simple absolute conveyance embodied in the deed of assignment
would be operative; the assignment would constitute essentially a mode of payment or
dacion en pago. Put a little differently, in order that a deed of assignment of receivables
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which is in form an absolute conveyance of title to the credits being assigned, may be
qualified and treated as a security arrangement, language to such effect must be found in
the document itself and that language, precisely, is embodied in the deed of assignment in
the instant case. Finally, it might be noted that that deed simply follows a form in standard
use in commercial banking.
Footnotes
* Penned by then Judge of the Court of First Instance of Manila, Ameurfina Melencio-
Herrera, now Associate Justice of the Court.
DECISION
GRIÑO-AQUINO , J : p
This is a petition for review on certiorari to annul and set aside the Court of Appeals'
decision dated October 28, 1986 in CA-G.R. CV No. 03269 which affirmed the decision of
the trial court in favor of the private respondents in an action to recover the petitioners'
time deposits in the respondent Family Savings Bank.
Since 1980, the petitioner, Victoria Yau Chu, had been purchasing cement on credit from
CAMS Trading Enterprises, Inc. (hereafter "Cams Trading" for brevity). To guaranty
payment for her cement withdrawals, she executed in favor of Cams Trading deeds of
assignment of her time deposits in the total sum of P320,000 in the Family Savings Bank
(hereafter the Bank). Except for the serial numbers and the dates of the time deposit
certificates, the deeds of assignment, which were prepared by her own lawyer, uniformly
provided —
". . . That this assignment serves as a collateral or guarantee for the payment of
my obligation with the said CAMS TRADING ENTERPRISES, INC. on account of
my cement withdrawal from said company, per separate contract executed
between us."
On July 24, 1980, Cams Trading notified the Bank that Mrs. Chu had an unpaid account
with it in the sum of P314,639.75. It asked that it be allowed to encash the time deposit
certificates which had been assigned to it by Mrs. Chu. It submitted to the Bank a letter
dated July 18, 1980 of Mrs. Chu admitting that her outstanding account with Cams
Trading was P404,500. After verbally advising Mrs. Chu of the assignee's request to
encash her time deposit certificates and obtaining her verbal conformity thereto, the Bank
agreed to encash the certificates. It delivered to Cams Trading the sum of P283,737.75
only, as one time deposit certificate (No. 0048120954) lacked the proper signatures. Upon
being informed of the encashment, Mrs. Chu demanded from the Bank and Cams Trading
that her time deposit be restored. When neither complied, she filed a complaint to recover
the sum of P283,737.75 from them. The case was docketed in the Regional Trial Court of
Makati, Metro Manila (then CFI of Rizal, Pasig Branch XIX), as Civil Case No. 38861. LLphil
In a decision dated December 12, 1983, the trial court dismissed the complaint for lack of
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merit.
Chu appealed to the Court of Appeals (CA-G.R. CV No. 03269) which affirmed the
dismissal of her complaint.
In this petition for review, she alleges that the Court of Appeals erred:
1. In not annulling the encashment of her time deposit certificates as a pactum
commissorium; and
2. In not finding that the obligations secured by her time deposits had already been
paid.
We find no merit in the petition for review.
The Court of Appeals found that the deeds of assignment were contracts of pledge, but,
as the collateral was also money or an exchange of "peso for peso," the provision in Article
2112 of the Civil Code for the sale of the thing pledged at public auction to convert it into
money to satisfy the pledgor's obligation, did not have to be followed. All that had to be
done to convert the pledgor's time deposit certificates into cash was to present them to
the bank for encashment after due notice to the debtor.
The encashment of the deposit certificates was not a pacto commissorio which is
prohibited under Art. 2088 of the Civil Code. A pacto commissorio is a provision for the
automatic appropriation of the pledged or mortgaged property by the creditor in payment
of the loan upon its maturity. The prohibition against a pacto commissorio is intended to
protect the obligor, pledgor, or mortgagor against being overreached by his creditor who
holds a pledge or mortgage over property whose value is much more than the debt. Where,
as in this case, the security for the debt is also money deposited in a bank, the amount of
which is even less than the debt, it was not illegal for the creditor to encash the time
deposit certificates to pay the debtors' overdue obligation, with the latter's consent.
LexLib
Whether the debt had already been paid as now alleged by the debtor, is a factual question
which the Court of Appeals found not to have been proven for the evidence which the
debtor sought to present on appeal, were receipts for payments made prior to July 18,
1980. Since the petitioner signed on July 18, 1980 a letter admitting her indebtedness to
be in the sum of P404,500, and there is no proof of payment made by her thereafter to
reduce or extinguish her debt, the application of her time deposits, which she had assigned
to the creditor to secure the payment of her debt, was proper. The Court of Appeals did
not commit a reversible error in holding that it was so.
WHEREFORE, the petition for review is denied. Costs against the appellant.
SO ORDERED.
Narvasa, Cruz and Medialdea, JJ., concur.
Gancayco, J., I inhibit.
DECISION
CHICO-NAZARIO , J : p
Before this Court is a Petition for Review on Certiorari, 1 under Rule 45 of the Revised
Rules of Court, of the Decision 2 of the Court of Appeals in CA-G.R. CV No. 51930, dated 26
March 2002, and the Resolution, 3 dated 20 November 2002, of the same court which,
although modifying its earlier Decision, still denied for the most part the Motion for
Reconsideration of herein petitioners.
Petitioner Citibank, N.A. (formerly known as the First National City Bank) is a banking
corporation duly authorized and existing under the laws of the United States of America and
licensed to do commercial banking activities and perform trust functions in the Philippines.
Petitioner Investor's Finance Corporation, which did business under the name and style
of FNCB Finance, was an a liate company of petitioner Citibank, speci cally handling money
market placements for its clients. It is now, by virtue of a merger, doing business as part of
its successor-in-interest, BPI Card Finance Corporation. However, so as to consistently
establish its identity in the Petition at bar, the said petitioner shall still be referred to herein
as FNCB Finance. 4
Respondent Modesta R. Sabeniano was a client of both petitioners Citibank and FNCB
Finance. Regrettably, the business relations among the parties subsequently went awry.
On 8 August 1985, respondent led a Complaint 5 against petitioners, docketed as
Civil Case No. 11336, before the Regional Trial Court (RTC) of Makati City. Respondent
claimed to have substantial deposits and money market placements with the petitioners, as
well as money market placements with the Ayala Investment and Development Corporation
(AIDC), the proceeds of which were supposedly deposited automatically and directly to
respondent's accounts with petitioner Citibank. Respondent alleged that petitioners refused
to return her deposits and the proceeds of her money market placements despite her
repeated demands, thus, compelling respondent to le Civil Case No. 11336 against
petitioners for "Accounting, Sum of Money and Damages." Respondent eventually led an
Amended Complaint 6 on 9 October 1985 to include additional claims to deposits and
money market placements inadvertently left out from her original Complaint.
In their joint Answer 7 and Answer to Amended Complaint, 8 led on 12 September
1985 and 6 November 1985, respectively, petitioners admitted that respondent had deposits
and money market placements with them, including dollar accounts in the Citibank branch in
Geneva, Switzerland (Citibank-Geneva). Petitioners further alleged that the respondent later
obtained several loans from petitioner Citibank, for which she executed Promissory Notes
(PNs), and secured by (a) a Declaration of Pledge of her dollar accounts in Citibank-Geneva,
and (b) Deeds of Assignment of her money market placements with petitioner FNCB Finance.
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When respondent failed to pay her loans despite repeated demands by petitioner Citibank,
the latter exercised its right to off-set or compensate respondent's outstanding loans with
her deposits and money market placements, pursuant to the Declaration of Pledge and the
Deeds of Assignment executed by respondent in its favor. Petitioner Citibank supposedly
informed respondent Sabeniano of the foregoing compensation through letters, dated 28
September 1979 and 31 October 1979. Petitioners were therefore surprised when six years
later, in 1985, respondent and her counsel made repeated requests for the withdrawal of
respondent's deposits and money market placements with petitioner Citibank, including her
dollar accounts with Citibank-Geneva and her money market placements with petitioner
FNCB Finance. Thus, petitioners prayed for the dismissal of the Complaint and for the award
of actual, moral, and exemplary damages, and attorney's fees. HAaScT
When the parties failed to reach a compromise during the pre-trial hearing, 9 trial
proper ensued and the parties proceeded with the presentation of their respective evidence.
Ten years after the ling of the Complaint on 8 August 1985, a Decision 1 0 was nally
rendered in Civil Case No. 11336 on 24 August 1995 by the fourth Judge 1 1 who handled the
said case, Judge Manuel D. Victorio, the dispositive portion of which reads —
WHEREFORE, in view of all the foregoing, decision is hereby rendered as
follows:
(1) Declaring as illegal, null and void the setoff effected by the defendant
Bank [petitioner Citibank] of plaintiff's [respondent Sabeniano] dollar deposit with
Citibank, Switzerland, in the amount of US$149,632.99, and ordering the said
defendant [petitioner Citibank] to refund the said amount to the plaintiff with legal
interest at the rate of twelve percent (12%) per annum, compounded yearly, from 31
October 1979 until fully paid, or its peso equivalent at the time of payment;
(2) Declaring the plaintiff [respondent Sabeniano] indebted to the
defendant Bank [petitioner Citibank] in the amount of P1,069,847.40 as of 5
September 1979 and ordering the plaintiff [respondent Sabeniano] to pay said
amount, however, there shall be no interest and penalty charges from the time the
illegal setoff was effected on 31 October 1979;
(3) Dismissing all other claims and counterclaims interposed by the
parties against each other.
Costs against the defendant Bank.
All the parties appealed the foregoing Decision of the RTC to the Court of Appeals,
docketed as CA-G.R. CV No. 51930. Respondent questioned the ndings of the RTC that she
was still indebted to petitioner Citibank, as well as the failure of the RTC to order petitioners
to render an accounting of respondent's deposits and money market placements with them.
On the other hand, petitioners argued that petitioner Citibank validly compensated
respondent's outstanding loans with her dollar accounts with Citibank-Geneva, in accordance
with the Declaration of Pledge she executed in its favor. Petitioners also alleged that the RTC
erred in not declaring respondent liable for damages and interest.
On 26 March 2002, the Court of Appeals rendered its Decision 1 2 a rming with
modi cation the RTC Decision in Civil Case No. 11336, dated 24 August 1995, and ruling
entirely in favor of respondent in this wise —
Wherefore, premises considered, the assailed 24 August 1995 Decision of the
court a quo is hereby AFFIRMED with MODIFICATION , as follows:
1. Declaring as illegal, null and void the set-off effected by the defendant-
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appellant Bank of the plaintiff-appellant's dollar deposit with Citibank, Switzerland,
in the amount of US$149,632.99, and ordering defendant-appellant Citibank to
refund the said amount to the plaintiff-appellant with legal interest at the rate of
twelve percent (12%) per annum, compounded yearly, from 31 October 1979 until
fully paid, or its peso equivalent at the time of payment;
Apparently, the parties to the case, namely, the respondent, on one hand, and the
petitioners, on the other, made separate attempts to bring the aforementioned Decision of
the Court of Appeals, dated 26 March 2002, before this Court for review.
G.R. No. 152985
Respondent no longer sought a reconsideration of the Decision of the Court of
Appeals in CA-G.R. CV No. 51930, dated 26 March 2002, and instead, led immediately with
this Court on 3 May 2002 a Motion for Extension of Time to File a Petition for Review, 1 3
which, after payment of the docket and other lawful fees, was assigned the docket number
G.R. No. 152985. In the said Motion, respondent alleged that she received a copy of the
assailed Court of Appeals Decision on 18 April 2002 and, thus, had 15 days therefrom or until
3 May 2002 within which to le her Petition for Review. Since she informed her counsel of her
desire to pursue an appeal of the Court of Appeals Decision only on 29 April 2002, her
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counsel neither had enough time to file a motion for reconsideration of the said Decision with
the Court of Appeals, nor a Petition for Certiorari with this Court. Yet, the Motion failed to
state the exact extension period respondent was requesting for. EcDTIH
Since this Court did not act upon respondent's Motion for Extension of Time to le her
Petition for Review, then the period for appeal continued to run and still expired on 3 May
2002. 1 4 Respondent failed to le any Petition for Review within the prescribed period for
appeal and, hence, this Court issued a Resolution, 1 5 dated 13 November 2002, in which it
pronounced that —
G.R. No. 152985 (Modesta R. Sabeniano vs. Court of Appeals, et
al.). — It appearing that petitioner failed to le the intended petition for review on
certiorari within the period which expired on May 3, 2002, the Court Resolves to
DECLARE THIS CASE TERMINATED and DIRECT the Division Clerk of Court to
INFORM the parties that the judgment sought to be reviewed has become nal and
executory.
The said Resolution was duly recorded in the Book of Entries of Judgments on 3 January
2003.
G.R. No. 156132
Meanwhile, petitioners led with the Court of Appeals a Motion for Reconsideration of
its Decision in CA-G.R. CV No. 51930, dated 26 March 2002. Acting upon the said Motion, the
Court of Appeals issued the Resolution, 1 6 dated 20 November 2002, modifying its Decision
of 26 March 2002, as follows —
WHEREFORE , premises considered, the instant Motion for Reconsideration
i s PARTIALLY GRANTED as Sub-paragraph (V) paragraph 3 of the assailed
Decision's dispositive portion is hereby ordered DELETED .
The challenged 26 March 2002 Decision of the Court is AFFIRMED with
MODIFICATION .
Assailing the Decision and Resolution of the Court of Appeals in CA-G.R. CV No. 51930,
dated 26 March 2002 and 20 November 2002, respectively, petitioners led the present
Petition, docketed as G.R. No. 156132. The Petition was initially denied 1 7 by this Court for
failure of the petitioners to attach thereto a Certi cation against Forum Shopping. However,
upon petitioners' Motion and compliance with the requirements, this Court resolved 1 8 to
reinstate the Petition.
The Petition presented fourteen (14) assignments of errors allegedly committed by
the Court of Appeals in its Decision, dated 26 March 2002, involving both questions of fact
and questions of law which this Court, for the sake of expediency, discusses jointly, whenever
possible, in the succeeding paragraphs.
I
The Resolution of this Court, dated
13 November 2002, in G.R. No.
152985, declaring the Decision of the
Court of Appeals, dated 26 March
2002, final and executory, pertains to
respondent Sabeniano alone.
Before proceeding to a discussion of the merits of the instant Petition, this Court
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wishes to address rst the argument, persistently advanced by respondent in her pleadings
on record, as well as her numerous personal and unofficial letters to this Court which were no
longer made part of the record, that the Decision of the Court of Appeals in CA-G.R. CV No.
51930, dated 26 March 2002, had already become nal and executory by virtue of the
Resolution of this Court in G.R. No. 152985, dated 13 November 2002.
G.R. No. 152985 was the docket number assigned by this Court to respondent's
Motion for Extension of Time to File a Petition for Review. Respondent, though, did not le
her supposed Petition. Thus, after the lapse of the prescribed period for the ling of the
Petition, this Court issued the Resolution, dated 13 November 2002, declaring the Decision
of the Court of Appeals, dated 26 March 2002, nal and executory. It should be pointed out,
however, that the Resolution, dated 13 November 2002, referred only to G.R. No. 152985,
respondent's appeal, which she failed to perfect through the ling of a Petition for Review
within the prescribed period. The declaration of this Court in the same Resolution would bind
respondent solely, and not petitioners which led their own separate appeal before this
Court, docketed as G.R. No. 156132, the Petition at bar. This would mean that respondent, on
her part, should be bound by the ndings of fact and law of the Court of Appeals, including
the monetary amounts consequently awarded to her by the appellate court in its Decision,
dated 26 March 2002; and she can no longer refute or assail any part thereof. 1 9
This Court already explained the matter to respondent when it issued a Resolution 2 0 in
G.R. No. 156132, dated 2 February 2004, which addressed her Urgent Motion for the Release
of the Decision with the Implementation of the Entry of Judgment in the following manner —
[A]cting on Citibank's and FNCB Finance's Motion for Reconsideration, we
resolved to grant the motion, reinstate the petition and require Sabeniano to le a
comment thereto in our Resolution of June 23, 2003. Sabeniano led a Comment
dated July 17, 2003 to which Citibank and FNCB Finance led a Reply dated August
20, 2003.
From the foregoing, it is clear that Sabeniano had knowledge of, and in fact
participated in, the proceedings in G.R. No. 156132. She cannot feign ignorance of
the proceedings therein and claim that the Decision of the Court of Appeals has
become nal and executory. More precisely, the Decision became nal and
executory only with regard to Sabeniano in view of her failure to le a petition
for review within the extended period granted by the Court, and not to Citibank and
FNCB Finance whose Petition for Review was duly reinstated and is now submitted
for decision.
Although it may seem at rst glance that respondent was simultaneously seeking
recourse from the Court of Appeals and this Court, a careful and closer scrutiny of the details
of the case at bar would reveal otherwise.
It should be recalled that respondent did nothing more in G.R. No. 152985 than to le
with this Court a Motion for Extension of Time within which to le her Petition for Review. For
unexplained reasons, respondent failed to submit to this Court her intended Petition within
the reglementary period. Consequently, this Court was prompted to issue a Resolution, dated
13 November 2002, declaring G.R. No. 152985 terminated, and the therein assailed Court of
Appeals Decision nal and executory. G.R. No. 152985, therefore, did not progress and
respondent's appeal was unperfected.
II
As an exception to the general rule,
this Court takes cognizance of
questions of fact raised in the
Petition at bar.
It is already a well-settled rule that the jurisdiction of this Court in cases brought
before it from the Court of Appeals by virtue of Rule 45 of the Revised Rules of Court is
limited to reviewing errors of law. Findings of fact of the Court of Appeals are conclusive
upon this Court. There are, however, recognized exceptions to the foregoing rule, namely: (1)
when the ndings are grounded entirely on speculation, surmises, or conjectures; (2) when
the interference made is manifestly mistaken, absurd, or impossible; (3) when there is grave
abuse of discretion; (4) when the judgment is based on a misapprehension of facts; (5) when
the ndings of fact are con icting; (6) when in making its ndings, the Court of Appeals went
beyond the issues of the case, or its ndings are contrary to the admissions of both the
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appellant and the appellee; (7) when the ndings are contrary to those of the trial court; (8)
when the ndings are conclusions without citation of speci c evidence on which they are
based; (9) when the facts set forth in the petition as well as in the petitioner's main and reply
briefs are not disputed by the respondent; and (10) when the ndings of fact are premised
on the supposed absence of evidence and contradicted by the evidence on record. 2 4
Several of the enumerated exceptions pertain to the Petition at bar.
It is indubitable that the Court of Appeals made factual ndings that are contrary to
those of the RTC, 2 5 thus, resulting in its substantial modi cation of the trial court's Decision,
and a ruling entirely in favor of the respondent. In addition, petitioners invoked in the instant
Petition for Review several exceptions that would justify this Court's review of the factual
ndings of the Court of Appeals, i.e., the Court of Appeals made con icting ndings of fact;
ndings of fact which went beyond the issues raised on appeal before it; as well as ndings
of fact premised on the supposed absence of evidence and contradicted by the evidence on
record.
On the basis of the foregoing, this Court shall proceed to reviewing and re-evaluating
the evidence on record in order to settle questions of fact raised in the Petition at bar.
The fact that the trial judge who
rendered the RTC Decision in Civil
Case No. 11336, dated 24 August
1995, was not the same judge who
heard and tried the case, does not, by
itself, render the said Decision erroneous.
The Decision in Civil Case No. 11336 was rendered more than 10 years from the
institution of the said case. In the course of its trial, the case was presided over by four (4)
different RTC judges. 2 6 It was Judge Victorio, the fourth judge assigned to the case, who
wrote the RTC Decision, dated 24 August 1995. In his Decision, 2 7 Judge Victorio made the
following findings —
After carefully evaluating the mass of evidence adduced by the parties, this
Court is not inclined to believe the plaintiff's assertion that the promissory notes as
well as the deeds of assignments of her FNCB Finance money market placements
were simulated. The evidence is overwhelming that the plaintiff received the
proceeds of the loans evidenced by the various promissory notes she had signed.
What is more, there was not an iota of proof save the plaintiff's bare testimony that
she had indeed applied for loan with the Development Bank of the Philippines.
More importantly, the two deeds of assignment were notarized, hence they
partake the nature of a public document. It makes more than preponderant proof to
overturn the effect of a notarial attestation. Copies of the deeds of assignments
were actually filed with the Records Management and Archives Office.
Finally, there were su cient evidence wherein the plaintiff had admitted the
existence of her loans with the defendant Bank in the total amount of P1,920,000.00
exclusive of interests and penalty charges (Exhibits "28", "31", "32", and "33").
In ne, this Court hereby nds that the defendants had established the
genuineness and due execution of the various promissory notes heretofore
identi ed as well as the two deeds of assignments of the plaintiff's money market
placements with defendant FNCB Finance, on the strength of which the said money
market placements were applied to partially pay the plaintiff's past due obligation
with the defendant Bank. Thus, the total sum of P1,053,995.80 of the plaintiff's past
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due obligation was partially offset by the said money market placement leaving a
balance of P1,069,847.40 as of 5 September 1979 (Exhibit "34").
Disagreeing in the foregoing ndings, the Court of Appeals stressed, in its Decision in
CA-G.R. CV No. 51930, dated 26 March 2002, "that the ponente of the herein assailed
Decision is not the Presiding Judge who heard and tried the case." 2 8 This brings us to the
question of whether the fact alone that the RTC Decision was rendered by a judge other than
the judge who actually heard and tried the case is su cient justi cation for the appellate
court to disregard or set aside the findings in the Decision of the court a quo?
This Court rules in the negative.
What deserves stressing is that, in this jurisdiction, there exists a disputable
presumption that the RTC Decision was rendered by the judge in the regular performance of
his o cial duties. While the said presumption is only disputable, it is satisfactory unless
contradicted or overcame by other evidence. 2 9 Encompassed in this presumption of
regularity is the presumption that the RTC judge, in resolving the case and drafting his
Decision, reviewed, evaluated, and weighed all the evidence on record. That the said RTC
judge is not the same judge who heard the case and received the evidence is of little
consequence when the records and transcripts of stenographic notes (TSNs) are complete
and available for consideration by the former.
In People v. Gazmen, 3 0 this Court already elucidated its position on such an issue —
Accused-appellant makes an issue of the fact that the judge who penned the
decision was not the judge who heard and tried the case and concludes therefrom
that the ndings of the former are erroneous. Accused-appellant's argument does
not merit a lengthy discussion. It is well-settled that the decision of a judge who did
not try the case is not by that reason alone erroneous. DAEaTS
It is true that the judge who ultimately decided the case had not heard the
controversy at all, the trial having been conducted by then Judge Emilio L. Polig,
who was inde nitely suspended by this Court. Nonetheless, the transcripts of
stenographic notes taken during the trial were complete and were presumably
examined and studied by Judge Baguilat before he rendered his decision. It is not
unusual for a judge who did not try a case to decide it on the basis of the record.
The fact that he did not have the opportunity to observe the demeanor of the
witnesses during the trial but merely relied on the transcript of their testimonies does
not for that reason alone render the judgment erroneous.
Irrefragably, by reason alone that the judge who penned the RTC Decision was not the
same judge who heard the case and received the evidence therein would not render the
ndings in the said Decision erroneous and unreliable. While the conduct and demeanor of
witnesses may sway a trial court judge in deciding a case, it is not, and should not be, his only
consideration. Even more vital for the trial court judge's decision are the contents and
substance of the witnesses' testimonies, as borne out by the TSNs, as well as the object and
documentary evidence submitted and made part of the records of the case.
This Court proceeds to making its
own findings of fact.
Since the Decision of the Court of Appeals in CA-G.R. CV No. 51930, dated 26 March
2002, has become nal and executory as to the respondent, due to her failure to interpose an
appeal therefrom within the reglementary period, she is already bound by the factual ndings
in the said Decision. Likewise, respondent's failure to le, within the reglementary period, a
Motion for Reconsideration or an appeal of the Resolution of the Court of Appeals in the
same case, dated 20 November 2002, which modi ed its earlier Decision by deleting
paragraph 3(v) of its dispositive portion, ordering petitioners to return to respondent the
proceeds of her money market placement with AIDC, shall already bar her from questioning
such modi cation before this Court. Thus, what is for review before this Court is the Decision
of the Court of Appeals, dated 26 March 2002, as modi ed by the Resolution of the same
court, dated 20 November 2002.
Respondent alleged that she had several deposits and money market placements with
petitioners. These deposits and money market placements, as determined by the Court of
Appeals in its Decision, dated 26 March 2002, and as modi ed by its Resolution, dated 20
November 2002, are as follows —
Deposit/Placement Amount
Petitioner Citibank alleged that it had already paid to respondent the principal
amounts and proceeds of PNs No. 23356 and 23357, upon their maturity. Petitioner Citibank
further averred that respondent used the P500,000.00 from the payment of PNs No. 23356
and 23357, plus P600,000.00 sourced from her other funds, to open two time deposit (TD)
accounts with petitioner Citibank, namely, TD Accounts No. 17783 and 17784.
Petitioner Citibank did not deny the existence nor questioned the authenticity of PNs
No. 23356 and 23357 it issued in favor of respondent for her money market placements. In
fact, it admitted the genuineness and due execution of the said PNs, but quali ed that they
were no longer outstanding. 3 1 In Hibberd v. Rohde and McMillian , 3 2 this Court delineated
the consequences of such an admission —
By the admission of the genuineness and due execution of an instrument, as
provided in this section, is meant that the party whose signature it bears admits that
he signed it or that it was signed by another for him with his authority; that at the
time it was signed it was in words and gures exactly as set out in the pleading of
the party relying upon it; that the document was delivered; and that any formal
requisites required by law, such as a seal, an acknowledgment, or revenue stamp,
which it lacks, are waived by him. Hence, such defenses as that the signature is a
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forgery (Puritan Mfg. Co. vs. Toti & Gradi , 14 N. M., 425; Cox vs. Northwestern Stage
Co., 1 Idaho, 376; Woollen vs. Whitacre, 73 Ind., 198; Smith vs. Ehnert, 47 Wis., 479;
Faelnar vs. Escaño, 11 Phil. Rep., 92); or that it was unauthorized, as in the case of
an agent signing for his principal, or one signing in behalf of a partnership (Country
Bank vs. Greenberg, 127 Cal., 26; Henshaw vs. Root, 60 Inc., 220; Naftzker vs. Lantz,
137 Mich., 441) or of a corporation (Merchant vs. International Banking Corporation,
6 Phil Rep., 314; Wanita vs. Rollins, 75 Miss., 253; Barnes vs. Spencer & Barnes Co.,
162 Mich., 509); or that, in the case of the latter, that the corporation was authorized
under its charter to sign the instrument (Merchant vs. International Banking
Corporation, supra); or that the party charged signed the instrument in some other
capacity than that alleged in the pleading setting it out (Payne vs. National Bank, 16
Kan., 147); or that it was never delivered (Hunt vs. Weir, 29 Ill., 83; Elbring vs. Mullen,
4 Idaho, 199; Thorp vs. Keokuk Coal Co., 48 N.Y., 253; Fire Association of
Philadelphia vs. Ruby, 60 Neb., 216) are cut off by the admission of its genuineness
and due execution.
The effect of the admission is such that in the case of a promissory note a
prima facie case is made for the plaintiff which dispenses with the necessity of
evidence on his part and entitles him to a judgment on the pleadings unless a
special defense of new matter, such as payment, is interposed by the defendant
(Papa vs. Martinez, 12 Phil. Rep., 613; Chinese Chamber of Commerce vs. Pua To
Ching, 14 Phil. Rep., 222; Banco Español-Filipino vs. McKay & Zoeller, 27 Phil. Rep.,
183). . . .
Since the genuineness and due execution of PNs No. 23356 and 23357 are uncontested,
respondent was able to establish prima facie that petitioner Citibank is liable to her for
the amounts stated therein. The assertion of petitioner Citibank of payment of the said
PNs is an a rmative allegation of a new matter, the burden of proof as to such resting on
petitioner Citibank. Respondent having proved the existence of the obligation, the burden
of proof was upon petitioner Citibank to show that it had been discharged. 3 3 It has
already been established by this Court that —
As a general rule, one who pleads payment has the burden of proving it. Even
where the plaintiff must allege non-payment, the general rule is that the burden rests
on the defendant to prove payment, rather than on the plaintiff to prove non-
payment. The debtor has the burden of showing with legal certainty that the
obligation has been discharged by payment.
When the existence of a debt is fully established by the evidence contained in
the record, the burden of proving that it has been extinguished by payment devolves
upon the debtor who offers such defense to the claim of the creditor. Where the
debtor introduces some evidence of payment, the burden of going forward with the
evidence — as distinct from the general burden of proof — shifts to the creditor, who
is then under the duty of producing some evidence of non-payment. 3 4
Reviewing the evidence on record, this Court nds that petitioner Citibank failed to
satisfactorily prove that PNs No. 23356 and 23357 had already been paid, and that the
amount so paid was actually used to open one of respondent's TD accounts with petitioner
Citibank.
Petitioner Citibank presented the testimonies of two witnesses to support its
contention of payment: (1) That of Mr. Herminio Pujeda, 3 5 the o cer-in-charge of loans and
placements at the time when the questioned transactions took place; and (2) that of Mr.
Francisco Tan, 3 6 the former Assistant Vice-President of Citibank, who directly dealt with
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respondent with regard to her deposits and loans.
The relevant portion 3 7 of Mr. Pujeda's testimony as to PNs No. 23356 and 23357
(referred to therein as Exhibits No. "47" and "48," respectively) is reproduced below —
Atty. Mabasa:
Okey [sic]. Now Mr. Witness, you were asked to testify in this case and this case
is [sic] consist [sic] of several documents involving transactions between the
plaintiff and the defendant. Now, were you able to make your own
memorandum regarding all these transactions? TCEaDI
A Yes, based on my recollection of these facts, I did come up of [sic] the outline
of the chronological sequence of events.
Court:
Are you trying to say that you have personal knowledge or participation to
these transactions?
A Yes, your Honor, I was the officer-in charge of the unit that was processing
these transactions. Some of the documents bear my signature.
Court:
And this resume or summary that you have prepared is based on purely your
recollection or documents?
A Based on documents, your Honor.
Court:
Are these documents still available now?
In his deposition in Hong Kong, Mr. Tan recounted what happened to PNs No. 23356
and 23357 (referred to therein as Exhibits "E" and "F," respectively), as follows —
Atty. Mabasa:
Now from the Exhibits that you have identified Mr. Tan from Exhibits "A" to "F",
which are Exhibits of the plaintiff. Now, do I understand from you that the
original amount is Five Hundred Thousand and thereafter renewed in the
succeeding exhibits?
Mr. Tan:
Yes, Sir.
Atty. Mabasa:
Alright, after these Exhibits "E" and "F" matured, what happened thereafter?
Mr. Tan:
Split into two time deposits.
Atty. Mabasa:
Exhibits "E" and "F"?
Before anything else, it should be noted that when Mr. Pujeda's testimony before the
RTC was made on 12 March 1990 and Mr. Tan's deposition in Hong Kong was conducted on
3 September 1990, more than a decade had passed from the time the transactions they
were testifying on took place. This Court had previously recognized the frailty and
unreliability of human memory with regards to gures after the lapse of ve years. 3 8 Taking
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into consideration the substantial length of time between the transactions and the
witnesses' testimonies, as well as the undeniable fact that bank o cers deal with multiple
clients and process numerous transactions during their tenure, this Court is reluctant to give
much weight to the testimonies of Mr. Pujeda and Mr. Tan regarding the payment of PNs No.
23356 and 23357 and the use by respondent of the proceeds thereof for opening TD
accounts. This Court finds it implausible that they should remember, after all these years, this
particular transaction with respondent involving her PNs No. 23356 and 23357 and TD
accounts. Both witnesses did not give any reason as to why, from among all the clients they
had dealt with and all the transactions they had processed as o cers of petitioner Citibank,
they specially remembered respondent and her PNs No. 23356 and 23357. Their testimonies
likewise lacked details on the circumstances surrounding the payment of the two PNs and
the opening of the time deposit accounts by respondent, such as the date of payment of the
two PNs, mode of payment, and the manner and context by which respondent relayed her
instructions to the o cers of petitioner Citibank to use the proceeds of her two PNs in
opening the TD accounts. ADSIaT
Moreover, while there are documentary evidences to support and trace respondent's
money market placements with petitioner Citibank, from the original PN No. 20773, rolled-
over several times to, nally, PNs No. 23356 and 23357, there is an evident absence of any
documentary evidence on the payment of these last two PNs and the use of the proceeds
thereof by respondent for opening TD accounts. The paper trail seems to have ended with
the copies of PNs No. 23356 and 23357. Although both Mr. Pujeda and Mr. Tan said that
they based their testimonies, not just on their memories but also on the documents on le,
the supposed documents on which they based those portions of their testimony on the
payment of PNs No. 23356 and 23357 and the opening of the TD accounts from the
proceeds thereof, were never presented before the courts nor made part of the
records of the case . Respondent's money market placements were of substantial
amounts — consisting of the principal amount of P500,000.00, plus the interest it should
have earned during the years of placement — and it is di cult for this Court to believe that
petitioner Citibank would not have had documented the payment thereof.
When Mr. Pujeda testi ed before the RTC on 6 February 1990, 3 9 petitioners' counsel
attempted to present in evidence a document that would supposedly support the claim of
petitioner Citibank that the proceeds of PNs No. 23356 and 23357 were used by respondent
to open one of her two TD accounts in the amount of P500,000.00. Respondent's counsel
objected to the presentation of the document since it was a mere "xerox" copy, and was
blurred and hardly readable. Petitioners' counsel then asked for a continuance of the hearing
so that they can have time to produce a better document, which was granted by the court.
However, during the next hearing and continuance of Mr. Pujeda's testimony on 12 March
1990, petitioners' counsel no longer referred to the said document.
As respondent had established a prima facie case that petitioner Citibank is obligated
to her for the amounts stated in PNs No. 23356 and 23357, and as petitioner Citibank failed
to present su cient proof of payment of the said PNs and the use by the respondent of the
proceeds thereof to open her TD accounts, this Court nds that PNs No. 23356 and
23357 are still outstanding and petitioner Citibank is still liable to respondent for
the amounts stated therein .
The signi cance of this Court's declaration that PNs No. 23356 and 23357 are still
outstanding becomes apparent in the light of petitioners' next contentions — that respondent
used the proceeds of PNs No. 23356 and 23357, together with additional money, to open TD
Accounts No. 17783 and 17784 with petitioner Citibank; and, subsequently, respondent pre-
terminated these TD accounts and transferred the proceeds thereof, amounting to
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P1,100,000.00, to petitioner FNCB Finance for money market placements. While
respondent's money market placements with petitioner FNCB Finance may be traced back
with de niteness to TD Accounts No. 17783 and 17784, there is only imsy and
unsubstantiated connection between the said TD accounts and the supposed proceeds paid
from PNs No. 23356 and 23357. With PNs No. 23356 and 23357 still unpaid, then they
represent an obligation of petitioner Citibank separate and distinct from the obligation of
petitioner FNCB Finance arising from respondent's money market placements with the latter.
Money market placements with petitioner FNCB Finance
According to petitioners, respondent's TD Accounts No. 17783 and 17784, in the total
amount of P1,100,000.00, were supposed to mature on 15 March 1978. However,
respondent, through a letter dated 28 April 1977, 4 0 pre-terminated the said TD accounts and
transferred all the proceeds thereof to petitioner FNCB Finance for money market
placement. Pursuant to her instructions, TD Accounts No. 17783 and 17784 were pre-
terminated and petitioner Citibank (then still named First National City Bank) issued
Manager's Checks (MC) No. 199253 4 1 and 199251 4 2 for the amounts of P500,000.00 and
P600,00.00, respectively. Both MCs were payable to Citi nance (which, according to Mr.
Pujeda, 4 3 was one with and the same as petitioner FNCB Finance), with the additional
notation that "A/C MODESTA R. SABENIANO." Typewritten on MC No. 199253 is the phrase
"Ref. Proceeds of TD 17783," and on MC No. 199251 is a similar phrase, "Ref. Proceeds of TD
17784." These phrases purportedly established that the MCs were paid from the proceeds
of respondent's pre-terminated TD accounts with petitioner Citibank. Upon receipt of the
MCs, petitioner FNCB Finance deposited the same to its account with Feati Bank and Trust
Co., as evidenced by the rubber stamp mark of the latter found at the back of both MCs. In
exchange, petitioner FNCB Finance booked the amounts received as money market
placements, and accordingly issued PNs No. 4952 and 4962, for the amounts of
P500,000.00 and P600,000.00, respectively, payable to respondent's savings account with
petitioner Citibank, S/A No. 25-13703-4, upon their maturity on 1 June 1977. Once again,
respondent rolled-over several times the principal amounts of her money market placements
with petitioner FNCB Finance, as follows —
Maturity
Date PN No. Cancels Date Amount Interest
(mm/dd/yyyy) PN No. (mm/dd/yyyy) (P) (p.a.)
Petitioner FNCB Finance presented four checks as proof of payment of the principal
amounts and interests of PNs No. 8167 and 8169 upon their maturity. All the checks were
payable to respondent's savings account with petitioner Citibank, with the following details —
Date of Issuance Amount
(mm/dd/yyyy) Check No. (P) Notation
Then again, Checks No. 77035 and 77034 were later returned to petitioner FNCB Finance
together with a memo, 4 7 dated 6 September 1978, from Mr. Tan of petitioner Citibank, to
a Mr. Bobby Mendoza of petitioner FNCB Finance. According to the memo, the two
checks, in the total amount of P1,000,000.00, were to be returned to respondent's
account with instructions to book the said amount in money market placements for one
more year. Pursuant to the said memo, Checks No. 77035 and 77034 were invested by
petitioner FNCB Finance, on behalf of respondent, in money market placements for which
it issued PNs No. 20138 and 20139. The PNs each covered P500,000.00, to earn 11%
interest per annum, and to mature on 3 September 1979.
On 3 September 1979, petitioner FNCB Finance issued Check No. 100168, pay to the
order of "Citibank N.A. A/C Modesta Sabeniano," in the amount of P1,022,916.66, as full
payment of the principal amounts and interests of both PNs No. 20138 and 20139 and,
resultantly, canceling the said PNs. 4 8 Respondent actually admitted the issuance and
existence of Check No. 100168, but with the quali cation that the proceeds thereof were
turned over to petitioner Citibank. 4 9 Respondent did not clarify the circumstances attending
the supposed turn over, but on the basis of the allegations of petitioner Citibank itself, the
proceeds of PNs No. 20138 and 20139, amounting to P1,022,916.66, was used by it to
liquidate respondent's outstanding loans. Therefore, the determination of whether or not
respondent is still entitled to the return of the proceeds of PNs No. 20138 and 20139 shall
be dependent on the resolution of the issues raised as to the existence of the loans and the
authority of petitioner Citibank to use the proceeds of the said PNs, together with
respondent's other deposits and money market placements, to pay for the same.
Savings and current accounts with petitioner Citibank
Respondent presented and submitted before the RTC deposit slips and bank
statements to prove deposits made to several of her accounts with petitioner Citibank,
particularly, Accounts No. 00484202, 59091, and 472-751, which would have amounted to a
total of P3,812,712.32, had there been no withdrawals or debits from the said accounts from
the time the said deposits were made.
Although the RTC and the Court of Appeals did not make any de nitive ndings as to
the status of respondent's savings and current accounts with petitioner Citibank, the
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Decisions of both the trial and appellate courts effectively recognized only the P31,079.14
coming from respondent's savings account which was used to off-set her alleged
outstanding loans with petitioner Citibank. 5 0
Since both the RTC and the Court of Appeals had consistently recognized only the
P31,079.14 of respondent's savings account with petitioner Citibank, and that respondent
failed to move for reconsideration or to appeal this particular nding of fact by the trial and
appellate courts, it is already binding upon this Court. Respondent is already precluded from
claiming any greater amount in her savings and current accounts with petitioner Citibank.
Thus, this Court shall limit itself to determining whether or not respondent is entitled to the
return of the amount of P31,079.14 should the off-set thereof by petitioner Citibank against
her supposed loans be found invalid.
Dollar accounts with Citibank-Geneva
Respondent made an effort of preparing and presenting before the RTC her own
computations of her money market placements and dollar accounts with Citibank-Geneva,
purportedly amounting to a total of United States (US) $343,220.98, as of 23 June 1985. 5 1
In her Memorandum led with the RTC, she claimed a much bigger amount of deposits and
money market placements with Citibank-Geneva, totaling US$1,336,638.65. 5 2 However,
respondent herself also submitted as part of her formal offer of evidence the computation of
her money market placements and dollar accounts with Citibank-Geneva as determined by
the latter. 5 3 Citibank-Geneva accounted for respondent's money market placements and
dollar accounts as follows —
MODESTA SABENIANO &/OR
III
Petitioner Citibank was able to
establish by preponderance of
evidence the existence of
respondent's loans.
Petitioners' version of events
In sum, the following amounts were used by petitioner Citibank to liquidate
respondent's purported outstanding loans —
Description Amount
Respondent sent a reply letter 6 3 dated 26 April 1979, printed on paper bearing the
letterhead of respondent's company, MC Adore International Palace, the body of which reads
—
This is in reply to your letter dated April 5, 1979 inviting my attention to my
loan which has become due. Pursuant to our representation with you over the
telephone through Mr. F. A. Tan, you allow us to pay the interests due for the
meantime.
Please accept our Comtrust Check in the amount of P62,683.33.
Please bear with us for a little while, at most ninety days. As you know, we
have a pending loan with the Development Bank of the Philippines in the amount of
P11-M. This loan has already been recommended for approval and would be
submitted to the Board of Governors. In fact, to further facilitate the early release of
this loan, we have presented and furnished Gov. J. Tengco a xerox copy of your
letter.
You will be doing our corporation a very viable service, should you grant us
our request for a little more time.
In this regard, please entrust to bearer, our Comtrust check for P62,683.33 to
be replaced by another check with amount resulting from the new computation.
Also, to facilitate the processing of the same, may we request for another set of
promissory notes for the signature of Mrs. Sabeniano and to cancel the previous
ones she has signed and forwarded to you.
This was followed by a telegram, 6 5 dated 5 June 1979, and received by petitioner
Citibank the following day. The telegram was sent by a Dewey G. Soriano, Legal Counsel. The
telegram acknowledged receipt of the telegram sent by petitioner Citibank regarding the "re-
past due obligation" of McAdore International Palace. However, it reported that respondent,
the President and Chairman of MC Adore International Palace, was presently abroad
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negotiating for a big loan. Thus, he was requesting for an extension of the due date of the
obligation until respondent's arrival on or before 31 July 1979.
The next letter, 6 6 dated 21 June 1979, was signed by respondent herself and
addressed to Mr. Bobby Mendoza, a Manager of petitioner FNCB Finance. Respondent wrote
therein —
Re: PN No. 20138 for P500,000.00 & PN No. 20139 for
P500,000.00 totalling P1 Million, both PNs will mature on
9/3/1979.
On even date, respondent sent another letter 6 7 to Mr. Tan of petitioner Citibank,
stating that —
Re: S/A No. 25-225928
and C/A No. 484-946
Unlike respondent's earlier letters, both letters, dated 21 June 1979, are printed on plain
paper, without the letterhead of her company, MC Adore International Palace.
By 5 September 1979, respondent's outstanding and past due obligations to
petitioner Citibank totaled P2,123,843.20, representing the principal amounts plus interests.
Relying on respondent's Deeds of Assignment, petitioner Citibank applied the proceeds of
respondent's money market placements with petitioner FNCB Finance, as well as her deposit
account with petitioner Citibank, to partly liquidate respondent's outstanding loan balance, 6 8
as follows —
Mr. Tan of petitioner Citibank subsequently sent a letter, 6 9 dated 28 September 1979,
notifying respondent of the status of her loans and the foregoing compensation which
petitioner Citibank effected. In the letter, Mr. Tan informed respondent that she still had a
remaining past-due obligation in the amount of P1,069,847.40, as of 5 September 1979, and
should respondent fail to pay the amount by 15 October 1979, then petitioner Citibank shall
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proceed to off-set the unpaid amount with respondent's other collateral, particularly, a
money market placement in Citibank-Hongkong.
On 5 October 1979, respondent wrote Mr. Tan of petitioner Citibank, on paper bearing
the letterhead of MC Adore International Palace, as regards the P1,920,000.00 loan account
supposedly of MC Adore Finance & Investment, Inc., and requested for a statement of
account covering the principal and interest of the loan as of 31 October 1979. She stated
therein that the loan obligation shall be paid within 60 days from receipt of the statement of
account.
Almost three weeks later, or on 25 October 1979, a certain Atty. Moises Tolentino
dropped by the o ce of petitioner Citibank, with a letter, dated 9 October 1979, and printed
on paper with the letterhead of MC Adore International Palace, which authorized the bearer
thereof to represent the respondent in settling the overdue account, this time, purportedly, of
MC Adore International Palace Hotel. The letter was signed by respondent as the President
and Chairman of the Board.
Eventually, Atty. Antonio Agcaoili of Agcaoili & Associates, as counsel of petitioner
Citibank, sent a letter to respondent, dated 31 October 1979, informing her that petitioner
Citibank had effected an off-set using her account with Citibank-Geneva, in the amount of
US$149,632.99, against her "outstanding, overdue, demandable and unpaid obligation" to
petitioner Citibank. Atty. Agcaoili claimed therein that the compensation or off-set was made
pursuant to and in accordance with the provisions of Articles 1278 through 1290 of the Civil
Code. He further declared that respondent's obligation to petitioner Citibank was now fully
paid and liquidated. aEDCAH
It bears to emphasize that the proceeds of the loans were paid to respondent in MCs,
with the respondent speci cally named as payee. MCs checks are drawn by the bank's
manager upon the bank itself and regarded to be as good as the money it represents. 7 9
Moreover, the MCs were crossed checks, with the words "Payee's Account Only."
In general, a crossed check cannot be presented to the drawee bank for payment in
cash. Instead, the check can only be deposited with the payee's bank which, in turn, must
present it for payment against the drawee bank in the course of normal banking hours. The
crossed check cannot be presented for payment, but it can only be deposited and the
drawee bank may only pay to another bank in the payee's or indorser's account. 8 0 The effect
of crossing a check was described by this Court in Philippine Commercial International Bank
v. Court of Appeals 8 1 —
[T]he crossing of a check with the phrase "Payee's Account Only" is a warning
that the check should be deposited in the account of the payee. Thus, it is the duty
of the collecting bank PCI Bank to ascertain that the check be deposited in payee's
account only. It is bound to scrutinize the check and to know its depositors before it
can make the clearing indorsement "all prior indorsements and/or lack of
indorsement guaranteed."
The crossed MCs presented by petitioner Bank were indeed deposited in several
different bank accounts and cleared by the Clearing O ce of the Central Bank of the
Philippines, as evidenced by the stamp marks and notations on the said checks. The crossed
MCs are already in the possession of petitioner Citibank, the drawee bank, which was
ultimately responsible for the payment of the amount stated in the checks. Given that a
check is more than just an instrument of credit used in commercial transactions for it also
serves as a receipt or evidence for the drawee bank of the cancellation of the said check due
to payment, 8 2 then, the possession by petitioner Citibank of the said MCs, duly stamped
"Paid" gives rise to the presumption that the said MCs were already paid out to the intended
payee, who was in this case, the respondent.
This Court nds applicable herein the presumptions that private transactions have
been fair and regular, 8 3 and that the ordinary course of business has been followed. 8 4 There
is no question that the loan transaction between petitioner Citibank and the respondent is a
private transaction. The transactions revolving around the crossed MCs — from their
issuance by petitioner Citibank to respondent as payment of the proceeds of her loans; to its
deposit in respondent's accounts with several different banks; to the clearing of the MCs by
an independent clearing house; and nally, to the payment of the MCs by petitioner Citibank
as the drawee bank of the said checks — are all private transactions which shall be presumed
to have been fair and regular to all the parties concerned. In addition, the banks involved in
the foregoing transactions are also presumed to have followed the ordinary course of
business in the acceptance of the crossed MCs for deposit in respondent's accounts,
submitting them for clearing, and their eventual payment and cancellation.
Exhibits "III" and "III-1," the front and bank pages of a handwritten note of Mr. Bobby
Mendoza of petitioner FNCB Finance, 9 8 also did not deserve much evidentiary weight, and
this Court cannot rely on the truth and accuracy of the computations presented therein. Mr.
Mendoza was not presented as a witness during the trial before the RTC, so that the
document was not properly authenticated nor its contents su ciently explained. No one was
able to competently identify whether the initials as appearing on the note were actually Mr.
Mendoza's.
Also, going by the information on the front page of the note, this Court observes that
payment of respondent's alleged money market placements with petitioner FNCB Finance
were made using Citytrust Checks; the MCs in question, including MC No. 228057, were
issued by petitioner Citibank. Although Citytrust (formerly Feati Bank & Trust Co.), petitioner
FNCB Finance, and petitioner Citibank may be a liates of one another, they each remained
separate and distinct corporations, each having its own nancial system and records. Thus,
this Court cannot simply assume that one corporation, such as petitioner Citibank or
Citytrust, can issue a check to discharge an obligation of petitioner FNCB Finance. It should
be recalled that when petitioner FNCB Finance paid for respondent's money market
placements, covered by its PNs No. 8167 and 8169, as well as PNs No. 20138 and 20139,
petitioner FNCB Finance issued its own checks. cCSHET
As a last point on this matter, if respondent truly had money market placements with
petitioners, then these would have been evidenced by PNs issued by either petitioner
Citibank or petitioner FNCB Finance, acknowledging the principal amounts of the
investments, and stating the applicable interest rates, as well as the dates of their of
issuance and maturity. After respondent had so meticulously reconstructed her other money
market placements with petitioners and consolidated the documentary evidence thereon,
she came surprisingly short of offering similar details and substantiation for these particular
money market placements.
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Since this Court is satis ed that respondent indeed received the proceeds of the rst
set of PNs, then it proceeds to analyze her evidence of payment thereof.
In support of respondent's assertion that she had already paid whatever loans she
may have had with petitioner Citibank, she presented as evidence Provisional Receipts No.
19471, dated 11 August 1978, and No. 12723, dated 10 November 1978, both of petitioner
Citibank and signed by Mr. Tan, for the amounts of P500,744.00 and P500,000.00,
respectively. While these provisional receipts did state that Mr. Tan, on behalf of petitioner
Citibank, received respondent's checks as payment for her loans, they failed to speci cally
identify which loans were actually paid. Petitioner Citibank was able to present evidence that
respondent had executed several PNs in the years 1978 and 1979 to cover the loans she
secured from the said bank. Petitioner Citibank did admit that respondent was able to pay
for some of these PNs, and what it identi ed as the rst and second sets of PNs were only
those which remained unpaid. It thus became incumbent upon respondent to prove that the
checks received by Mr. Tan were actually applied to the PNs in either the rst or second set;
a fact that, unfortunately, cannot be determined from the provisional receipts submitted by
respondent since they only generally stated that the checks received by Mr. Tan were
payment for respondent's loans.
Mr. Tan, in his deposition, further explained that provisional receipts were issued when
payment to the bank was made using checks, since the checks would still be subject to
clearing. The purpose for the provisional receipts was merely to acknowledge the delivery of
the checks to the possession of the bank, but not yet of payment. 9 9 This bank practice nds
legitimacy in the pronouncement of this Court that a check, whether an MC or an ordinary
check, is not legal tender and, therefore, cannot constitute valid tender of payment. In
Philippine Airlines, Inc. v. Court of Appeals, 1 0 0 this Court elucidated that:
Since a negotiable instrument is only a substitute for money and not money,
the delivery of such an instrument does not, by itself, operate as payment (Sec. 189,
Act 2031 on Negs. Insts.; Art. 1249, Civil Code; Bryan Landon Co. v. American Bank ,
7 Phil. 255; Tan Sunco, v. Santos , 9 Phil. 44; 21 R.C.L. 60, 61). A check, whether a
manager's check or ordinary check, is not legal tender, and an offer of a check in
payment of a debt is not a valid tender of payment and may be refused receipt by
the obligee or creditor. Mere delivery of checks does not discharge the obligation
under a judgment. The obligation is not extinguished and remains suspended until
the payment by commercial document is actually realized (Art. 1249, Civil Code, par.
3).
In the case at bar, the issuance of an o cial receipt by petitioner Citibank would have
been dependent on whether the checks delivered by respondent were actually cleared and
paid for by the drawee banks.
As for PN No. 34534, respondent asserted payment thereof at two separate instances
by two different means. In her formal offer of exhibits, respondent submitted a deposit slip
of petitioner Citibank, dated 11 August 1978, evidencing the deposit of BPI Check No. 5785
for P150,000.00. 1 0 1 In her Formal Offer of Documentary Exhibits, dated 7 July 1989,
respondent stated that the purpose for the presentation of the said deposit slip was to
prove that she already paid her loan covered by PN No. 34534. 1 0 2 In her testimony before
the RTC three years later, on 28 November 1991, she changed her story. This time she
narrated that the loan covered by PN No. 34534 was secured by her money market
placement with petitioner FNCB Finance, and when she failed to pay the said PN when it
became due, the security was applied to the loan, therefore, the loan was considered paid.
1 0 3 Given the foregoing, respondent's assertion of payment of PN No. 34534 is extremely
dubious.
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According to petitioner Citibank, the PNs in the second set, except for PN No. 34534,
were mere renewals of the unpaid PNs in the rst set, which was why the PNs stated that
they were for the purpose of liquidating existing obligations. PN No. 34534, however, which
was part of the rst set, was still valid and subsisting and so it was included in the second
set without need for its renewal, and it still being the original PN for that particular loan, its
stated purpose was for personal investment. 1 0 4 Respondent essentially admitted executing
the second set of PNs, but they were only meant to cover simulated loans. Mr. Tan
supposedly convinced her that her pending loan application with DBP would have a greater
chance of being approved if they made it appear that respondent urgently needed the money
because petitioner Citibank was already demanding payment for her simulated loans.
Respondent's defense of simulated loans to escape liability for the second set of PNs
is truly a novel one. It is regrettable, however, that she was unable to substantiate the same.
Yet again, respondent's version of events is totally based on her own uncorroborated
testimony. The notations on the second set of PNs, that they were non-negotiable simulated
notes, were admittedly made by respondent herself and were, thus, self-serving. Equally self-
serving was respondent's letter, written on 7 October 1985, or more than six years after the
execution of the second set of PNs, in which she demanded return of the simulated or
ctitious PNs, together with the letters relating thereto, which Mr. Tan purportedly asked her
to execute. Respondent further failed to present any proof of her alleged loan application
with the DBP, and of any circumstance or correspondence wherein the simulated or ctitious
PNs were indeed used for their supposed purpose. EcTDCI
Ms. Teresita Glorioso was an Investigation and Reconcilement Clerk at the Control
Department of petitioner Citibank. She was presented by petitioner Citibank to expound on
the micro lming procedure at the bank, since most of the copies of the PNs were retrieved
from microfilm. Microfilming of the documents are actually done by people at the Operations
Department. At the end of the day or during the day, the original copies of all bank
documents, not just those pertaining to loans, are micro lmed. She refuted the possibility
that insertions could be made in the micro lm because the micro lm is inserted in a
cassette; the cassette is placed in the micro lm machine for use; at the end of the day, the
cassette is taken out of the micro lm machine and put in a safe vault; and the cassette is
returned to the machine only the following day for use, until the spool is full. This is the
micro lming procedure followed everyday. When the micro lm spool is already full, the
micro lm is developed, then sent to the Control Department, which double checks the
contents of the micro lms against the entries in the General Ledger. The Control Department
also conducts a random comparison of the contents of the micro lms with the original
documents; a random review of the contents is done on every role of microfilm. 1 0 8
Ms. Renee Rubio worked for petitioner Citibank for 20 years. She rose from the ranks,
initially working as a secretary in the Personnel Group; then as a secretary to the Personnel
Group Head; a Service Assistant with the Marketing Group, in 1972 to 1974, dealing directly
with corporate and individual clients who, among other things, secured loans from petitioner
Citibank; the Head of the Collection Group of the Foreign Department in 1974 to 1976; the
Head of the Money Transfer Unit in 1976 to 1978; the Head of the Loans and Placements
Unit up to the early 1980s; and, thereafter, she established operations training for petitioner
Citibank in the Asia-Pacific Region responsible for the training of the officers of the bank. She
testi ed on the standard loan application process at petitioner Citibank. According to Ms.
Rubio, the account o cer or marketing person submits a proposal to grant a loan to an
individual or corporation. Petitioner Citibank has a worldwide policy that requires a credit
committee, composed of a minimum of three people, which would approve the loan and
amount thereof. There can be no instance when only one o cer has the power to approve
the loan application. When the loan is approved, the account o cer in charge will obtain the
corresponding PNs from the client. The PNs are sent to the signature veri er who would
validate the signatures therein against those appearing in the signature cards previously
submitted by the client to the bank. The Operations Unit will check and review the
documents, including the PNs, if it is a clean loan, and securities and deposits, if it is
collateralized. The loan is then recorded in the General Ledger. The Loans and Placements
Department will not book the loans without the PNs. When the PNs are liquidated, whether
they are paid or rolled-over, they are returned to the client. 1 0 9 Ms. Rubio further explained
that she was familiar with respondent's accounts since, while she was still the Head of the
Loan and Placements Unit, she was asked by Mr. Tan to prepare a list of respondent's
outstanding obligations. 1 1 0 She thus calculated respondent's outstanding loans, which was
sent as an attachment to Mr. Tan's letter to respondent, dated 28 September 1979, and
presented before the RTC as Exhibits "34-B" and "34-C." 1 1 1
Lastly, the exchange of letters between petitioner Citibank and respondent, as well as
the letters sent by other people working for respondent, had consistently recognized that
respondent owed petitioner Citibank money.
In consideration of the foregoing discussion, this Court nds that the preponderance
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of evidence supports the existence of the respondent's loans, in the principal sum of
P1,920,000.00, as of 5 September 1979. While it is well-settled that the term "preponderance
of evidence" should not be wholly dependent on the number of witnesses, there are certain
instances when the number of witnesses become the determining factor —
The preponderance of evidence may be determined, under certain conditions,
by the number of witnesses testifying to a particular fact or state of facts. For
instance, one or two witnesses may testify to a given state of facts, and six or seven
witnesses of equal candor, fairness, intelligence, and truthfulness, and equally well
corroborated by all the remaining evidence, who have no greater interest in the result
of the suit, testify against such state of facts. Then the preponderance of evidence
is determined by the number of witnesses. (Wilcox vs. Hines, 100 Tenn. 524, 66 Am.
St. Rep., 761.) 1 1 2
(a) When the original has been lost or destroyed, or cannot be produced
in court, without bad faith on the part of the offeror;
(b) When the original is in the custody or under the control of the party
against whom the evidence is offered, and the latter fails to produce it after
reasonable notice;
(c) When the original consists of numerous accounts or other documents
which cannot be examined in court without great loss of time and the fact sought to
be established from them is only the general result of the whole; and ISADET
(d) When the original is a public record in the custody of a public o cer
or is recorded in a public office.
As the afore-quoted provision states, the best evidence rule applies only when the subject
of the inquiry is the contents of the document. The scope of the rule is more extensively
explained thus —
But even with respect to documentary evidence, the best evidence rule applies
only when the content of such document is the subject of the inquiry. Where the
issue is only as to whether such document was actually executed, or exists, or on
the circumstances relevant to or surrounding its execution, the best evidence rule
does not apply and testimonial evidence is admissible (5 Moran, op. cit., pp. 76-66; 4
Martin, op. cit., p. 78). Any other substitutionary evidence is likewise admissible
without need for accounting for the original.
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Thus, when a document is presented to prove its existence or condition it is
offered not as documentary, but as real, evidence. Parol evidence of the fact of
execution of the documents is allowed (Hernaez, et al. vs. McGrath, etc., et al., 91
Phil 565). . . . 1 1 5
The execution or existence of the original copies of the documents was established
through the testimonies of witnesses, such as Mr. Tan, before whom most of the documents
were personally executed by respondent. The original PNs also went through the whole loan
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booking system of petitioner Citibank — from the account o cer in its Marketing
Department, to the pre-processor, to the signature veri er, back to the pre-processor, then to
the processor for booking. 1 1 7 The original PNs were seen by Ms. Dondoyano, the processor,
who recorded them in the General Ledger. Mr. Pujeda personally saw the original MCs,
proving respondent's receipt of the proceeds of her loans from petitioner Citibank, when he
helped Attys. Cleofe and Fernandez, the bank's legal counsels, to reconstruct the records of
respondent's loans. The original MCs were presented to Atty. Cleofe who used the same
during the preliminary investigation of the case, sometime in years 1986-1987. The original
MCs were subsequently turned over to the Control and Investigation Division of petitioner
Citibank. 1 1 8
It was only petitioner FNCB Finance who claimed that they lost the original copies of
the PNs when it moved to a new o ce. Citibank did not make a similar contention; instead, it
explained that the original copies of the PNs were returned to the borrower upon liquidation
of the loan, either through payment or roll-over. Petitioner Citibank proffered the excuse that
they were still looking for the documents in their storage or warehouse to explain the delay
and di culty in the retrieval thereof, but not their absence or loss. The original documents in
this case, such as the MCs and letters, were destroyed and, thus, unavailable for presentation
before the RTC only on 7 October 1987, when a re broke out on the 7th oor of the o ce
building of petitioner Citibank. There is no showing that the re was intentionally set. The re
destroyed relevant documents, not just of the present case, but also of other cases, since the
7th oor housed the Control and Investigation Division, in charge of keeping the necessary
documents for cases in which petitioner Citibank was involved.
The foregoing would have been su cient to allow the presentation of photocopies or
micro lm copies of the PNs, MCs, and letters by the petitioners as secondary evidence to
establish the existence of respondent's loans, as an exception to the best evidence rule. HcDaAI
What this Court truly nds disturbing is the signi cance given by the Court of Appeals
in its assailed Decision to the Decision 1 1 9 of its Third Division in CA-G.R. CV No. 15934 (or
the Dy case), when there is an absolute lack of legal basis for doing such.
Although petitioner Citibank and its o cer, Mr. Tan, were also involved in the Dy case,
that is about the only connection between the Dy case and the one at bar. Not only did the Dy
case tackle transactions between parties other than the parties presently before this Court,
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but the transactions are absolutely independent and unrelated to those in the instant
Petition.
In the Dy case, Severino Chua Caedo managed to obtain loans from herein petitioner
Citibank amounting to P7,000,000.00, secured to the extent of P5,000,000.00 by a Third
Party Real Estate Mortgage of the properties of Caedo's aunt, Rosalind Dy. It turned out that
Rosalind Dy and her husband were unaware of the said loans and the mortgage of their
properties. The transactions were carried out exclusively between Caedo and Mr. Tan of
petitioner Citibank. The RTC found Mr. Tan guilty of fraud for his participation in the
questionable transactions, essentially because he allowed Caedo to take out the signature
cards, when these should have been signed by the Dy spouses personally before him.
Although the Dy spouses' signatures in the PNs and Third Party Real Estate Mortgage were
forged, they were approved by the signature veri er since the signature cards against which
they were compared to were also forged. Neither the RTC nor the Court of Appeals, however,
categorically declared Mr. Tan personally responsible for the forgeries, which, in the narration
of the facts, were more likely committed by Caedo.
In the Petition at bar, respondent dealt with Mr. Tan directly, there was no third party
involved who could have perpetrated any fraud or forgery in her loan transactions. Although
respondent attempted to raise suspicion as to the authenticity of her signatures on certain
documents, these were nothing more than naked allegations with no corroborating evidence;
worse, even her own allegations were replete with inconsistencies. She could not even
establish in what manner or under what circumstances the fraud or forgery was committed,
or how Mr. Tan could have been directly responsible for the same.
While the Court of Appeals can take judicial notice of the Decision of its Third Division
in the Dy case, it should not have given the said case much weight when it rendered the
assailed Decision, since the former does not constitute a precedent. The Court of Appeals, in
the challenged Decision, did not apply any legal argument or principle established in the Dy
case but, rather, adopted the ndings therein of wrongdoing or misconduct on the part of
herein petitioner Citibank and Mr. Tan. Any nding of wrongdoing or misconduct as against
herein petitioners should be made based on the factual background and pieces of evidence
submitted in this case, not those in another case.
It is apparent that the Court of Appeals took judicial notice of the Dy case not as a
legal precedent for the present case, but rather as evidence of similar acts committed by
petitioner Citibank and Mr. Tan. A basic rule of evidence, however, states that, "Evidence that
one did or did not do a certain thing at one time is not admissible to prove that he did or did
not do the same or similar thing at another time; but it may be received to prove a speci c
intent or knowledge, identity, plan, system, scheme, habit, custom or usage, and the like." 1 2 0
The rationale for the rule is explained thus —
The rule is founded upon reason, public policy, justice and judicial
convenience. The fact that a person has committed the same or similar acts at
some prior time affords, as a general rule, no logical guaranty that he committed the
act in question. This is so because, subjectively, a man's mind and even his modes
of life may change; and, objectively, the conditions under which he may nd himself
at a given time may likewise change and thus induce him to act in a different way.
Besides, if evidence of similar acts are to be invariably admitted, they will give rise to
a multiplicity of collateral issues and will subject the defendant to surprise as well
as confuse the court and prolong the trial. 1 2 1
The factual backgrounds of the two cases are so different and unrelated that the Dy case
cannot be used to prove speci c intent, knowledge, identity, plan, system, scheme, habit,
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custom or usage on the part of petitioner Citibank or its o cer, Mr. Tan, to defraud
respondent in the present case.
IV
The liquidation of respondent's
outstanding loans were valid in so
far as petitioner Citibank used
respondent's savings account with
the bank and her money market
placements with petitioner FNCB
Finance; but illegal and void in so
far as petitioner Citibank used
respondent's dollar accounts with
Citibank-Geneva.
Savings Account with petitioner Citibank
Compensation is a recognized mode of extinguishing obligations. Relevant provisions
of the Civil Code provides —
Art. 1278. Compensation shall take place when two persons, in their own
right, are creditors and debtors of each other.
Art. 1279. In order that compensation may be proper, it is necessary;
(1) That each one of the obligors be bound principally, and that he be at
the same time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are
consumable, they be of the same kind, and also of the same quality if the latter has
been stated; DISEaC
The rule on the evidentiary weight that must be accorded a notarized document is
clear and unambiguous. The certi cate of acknowledgement in the notarized Deeds of
Assignment constituted prima facie evidence of the execution thereof. Thus, the burden of
refuting this presumption fell on respondent. She could have presented evidence of any
defect or irregularity in the execution of the said documents 1 2 5 or raised questions as to the
verity of the notary public's acknowledgment and certi cate in the Deeds. 1 2 6 But again,
respondent admitted executing the Deeds of Assignment, dated 2 March 1978 and 9 March
1978, although claiming that the loans for which they were executed as security were already
paid. And, she assailed the Deeds of Assignment, dated 25 August 1978, with nothing more
than her bare denial of execution thereof, hardly the clear and convincing evidence required to
trounce the presumption of due execution of a notarized document. IHaSED
Petitioners not only presented the notarized Deeds of Assignment, but even secured
certi ed literal copies thereof from the National Archives. 1 2 7 Mr. Renato Medua, an archivist,
working at the Records Management and Archives O ce of the National Library, testi ed
that the copies of the Deeds presented before the RTC were certi ed literal copies of those
contained in the Notarial Registries of the notary publics concerned, which were already in
the possession of the National Archives. He also explained that he could not bring to the RTC
the Notarial Registries containing the original copies of the Deeds of Assignment, because
the Department of Justice (DOJ) Circular No. 97, dated 8 November 1968, prohibits the
bringing of original documents to the courts to prevent the loss of irreplaceable and
priceless documents. 1 2 8
Accordingly, this Court gives the Deeds of Assignment grave importance in
establishing the authority given by the respondent to petitioner Citibank to use as security
for her loans her money her market placements with petitioner FNCB Finance, represented by
PNs No. 8167 and 8169, later to be rolled-over as PNs No. 20138 and 20139. These Deeds
of Assignment constitute the law between the parties, and the obligations arising therefrom
shall have the force of law between the parties and should be complied with in good faith.
1 2 9 Standard clauses in all of the Deeds provide that —
Petitioner Citibank was only acting upon the authority granted to it under the foregoing
Deeds when it nally used the proceeds of PNs No. 20138 and 20139, paid by petitioner
FNCB Finance, to partly pay for respondent's outstanding loans. Strictly speaking, it did not
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effect a legal compensation or off-set under Article 1278 of the Civil Code, but rather, it
partly extinguished respondent's obligations through the application of the security given by
the respondent for her loans. Although the pertinent documents were entitled Deeds of
Assignment, they were, in reality, more of a pledge by respondent to petitioner Citibank of her
credit due from petitioner FNCB Finance by virtue of her money market placements with the
latter. According to Article 2118 of the Civil Code —
ART. 2118. If a credit has been pledged becomes due before it is
redeemed, the pledgee may collect and receive the amount due. He shall apply the
same to the payment of his claim, and deliver the surplus, should there be any, to
the pledgor.
PNs No. 20138 and 20139 matured on 3 September 1979, without them being
redeemed by respondent, so that petitioner Citibank collected from petitioner FNCB Finance
the proceeds thereof, which included the principal amounts and interests earned by the
money market placements, amounting to P1,022,916.66, and applied the same against
respondent's outstanding loans, leaving no surplus to be delivered to respondent.
Dollar accounts with Citibank-Geneva
Despite the legal compensation of respondent's savings account and the total
application of the proceeds of PNs No. 20138 and 20139 to respondent's outstanding loans,
there still remained a balance of P1,069,847.40. Petitioner Citibank then proceeded to
applying respondent's dollar accounts with Citibank-Geneva against her remaining loan
balance, pursuant to a Declaration of Pledge supposedly executed by respondent in its favor.
Certain principles of private international law should be considered herein because the
property pledged was in the possession of an entity in a foreign country, namely, Citibank-
Geneva. In the absence of any allegation and evidence presented by petitioners of the
speci c rules and laws governing the constitution of a pledge in Geneva, Switzerland, they
will be presumed to be the same as Philippine local or domestic laws; this is known as
processual presumption. 1 3 1
Upon closer scrutiny of the Declaration of Pledge, this Court nds the same
exceedingly suspicious and irregular.
First of all, it escapes this Court why petitioner Citibank took care to have the Deeds of
Assignment of the PNs notarized, yet left the Declaration of Pledge unnotarized. This Court
would think that petitioner Citibank would take greater cautionary measures with the
preparation and execution of the Declaration of Pledge because it involved respondent's "all
present and future duciary placements" with a Citibank branch in another country,
speci cally, in Geneva, Switzerland. While there is no express legal requirement that the
Declaration of Pledge had to be notarized to be effective, even so, it could not enjoy the same
prima facie presumption of due execution that is extended to notarized documents, and
petitioner Citibank must discharge the burden of proving due execution and authenticity of
the Declaration of Pledge.
Second, petitioner Citibank was unable to establish the date when the Declaration of
Pledge was actually executed. The photocopy of the Declaration of Pledge submitted by
petitioner Citibank before the RTC was undated. 1 3 2 It presented only a photocopy of the
pledge because it already forwarded the original copy thereof to Citibank-Geneva when it
requested for the remittance of respondent's dollar accounts pursuant thereto. Respondent,
on the other hand, was able to secure a copy of the Declaration of Pledge, certi ed by an
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o cer of Citibank-Geneva, which bore the date 24 September 1979. 1 3 3 Respondent,
however, presented her passport and plane tickets to prove that she was out of the country
on the said date and could not have signed the pledge. Petitioner Citibank insisted that the
pledge was signed before 24 September 1979, but could not provide an explanation as to
how and why the said date was written on the pledge. Although Mr. Tan testi ed that the
Declaration of Pledge was signed by respondent personally before him, he could not give the
exact date when the said signing took place. It is important to note that the copy of the
Declaration of Pledge submitted by the respondent to the RTC was certi ed by an o cer of
Citibank-Geneva, which had possession of the original copy of the pledge. It is dated 24
September 1979, and this Court shall abide by the presumption that the written document is
truly dated. 1 3 4 Since it is undeniable that respondent was out of the country on 24
September 1979, then she could not have executed the pledge on the said date. DSCIEa
Third, the Declaration of Pledge was irregularly lled-out. The pledge was in a standard
printed form. It was constituted in favor of Citibank, N.A., otherwise referred to therein as the
Bank. It should be noted, however, that in the space which should have named the pledgor,
the name of petitioner Citibank was typewritten, to wit —
The pledge right herewith constituted shall secure all claims which the Bank
now has or in the future acquires against Citibank, N.A., Manila (full name and
address of the Debtor), regardless of the legal cause or the transaction (for example
current account, securities transactions, collections, credits, payments, documentary
credits and collections) which gives rise thereto, and including principal, all
contractual and penalty interest, commissions, charges, and costs.
The pledge, therefore, made no sense, the pledgor and pledgee being the same entity.
Was a mistake made by whoever lled-out the form? Yes, it could be a possibility.
Nonetheless, considering the value of such a document, the mistake as to a signi cant
detail in the pledge could only be committed with gross carelessness on the part of
petitioner Citibank, and raised serious doubts as to the authenticity and due execution of
the same. The Declaration of Pledge had passed through the hands of several bank
o cers in the country and abroad, yet, surprisingly and implausibly, no one noticed such a
glaring mistake.
Lastly, respondent denied that it was her signature on the Declaration of Pledge. She
claimed that the signature was a forgery. When a document is assailed on the basis of
forgery, the best evidence rule applies —
Basic is the rule of evidence that when the subject of inquiry is the contents
of a document, no evidence is admissible other than the original document itself
except in the instances mentioned in Section 3, Rule 130 of the Revised Rules of
Court. Mere photocopies of documents are inadmissible pursuant to the best
evidence rule. This is especially true when the issue is that of forgery .
While it is true that the general rule is that only errors which have been stated in the
assignment of errors and properly argued in the brief shall be considered, this Court has also
recognized exceptions to the general rule, wherein it authorized the review of matters, even
those not assigned as errors in the appeal, if the consideration thereof is necessary in
arriving at a just decision of the case, and there is a close inter-relation between the omitted
assignment of error and those actually assigned and discussed by the appellant. 1 4 0 Thus,
the Court of Appeals did not err in awarding the damages when it already made ndings that
would justify and support the said award.
Although this Court appreciates the right of petitioner Citibank to effect legal
compensation of respondent's local deposits, as well as its right to the proceeds of PNs No.
20138 and 20139 by virtue of the notarized Deeds of Assignment, to partly extinguish
respondent's outstanding loans, it nds that petitioner Citibank did commit wrong when it
failed to pay and properly account for the proceeds of respondent's money market
placements, evidenced by PNs No. 23356 and 23357, and when it sought the remittance of
respondent's dollar accounts from Citibank-Geneva by virtue of a highly-suspect Declaration
of Pledge to be applied to the remaining balance of respondent's outstanding loans. It bears
to emphasize that banking is impressed with public interest and its duciary character
requires high standards of integrity and performance. 1 4 1 A bank is under the obligation to
treat the accounts of its depositors with meticulous care whether such accounts consist
only of a few hundred pesos or of millions of pesos. 1 4 2 The bank must record every single
transaction accurately, down to the last centavo, and as promptly as possible. 1 4 3 Petitioner
Citibank evidently failed to exercise the required degree of care and transparency in its
transactions with respondent, thus, resulting in the wrongful deprivation of her property.
Q Aside from those businesses are you a member of any national or community
organization for social and civil activities?
A Yes sir.
Q Where?
A They are not all operating, in short, I was hampered to push through the
businesses that I have.
A [sic] Of all the businesses and enterprises that you mentioned what are those that
are paralyzed and what remain inactive?
A Of all the company [sic] that I have, only the Disto Company that is now
operating in California.
Q How about your candidacy as Mayor of Dagupan, [sic] City, and later as
Assemblywoman of Region I, what happened to this?
A I won by voting but when election comes on [sic] the counting I lost and I
protested this, it is still pending and because I don't have financial resources I
was not able to push through the case. I just have it pending in the Comelec.
Q Now, do these things also affect your social and civic activities?
Q How?
For the mental anguish, serious anxiety, besmirched reputation, moral shock and social
humiliation suffered by the respondent, the award of moral damages is but proper.
However, this Court reduces the amount thereof to P300,000.00, for the award of moral
damages is meant to compensate for the actual injury suffered by the respondent, not to
enrich her. 1 4 5
Having failed to exercise more care and prudence than a private individual in its
dealings with respondent, petitioner Citibank should be liable for exemplary damages, in the
amount of P250,000.00, in accordance with Article 2229 1 4 6 and 2234 1 4 7 of the Civil Code.
With the award of exemplary damages, then respondent shall also be entitled to an
award of attorney's fees. 1 4 8 Additionally, attorney's fees may be awarded when a party is
compelled to litigate or to incur expenses to protect his interest by reason of an unjusti ed
act of the other party. 1 4 9 In this case, an award of P200,000.00 attorney's fees shall be
satisfactory.
In contrast, this Court nds no su cient basis to award damages to petitioners.
Respondent was compelled to institute the present case in the exercise of her rights and in
the protection of her interests. In fact, although her Complaint before the RTC was not
sustained in its entirety, it did raise meritorious points and on which this Court rules in her
favor. Any injury resulting from the exercise of one's rights is damnum absque injuria. 1 5 0
IN VIEW OF THE FOREGOING, the instant Petition is PARTLY GRANTED. The assailed
Decision of the Court of Appeals in CA-G.R. No. 51930, dated 26 March 2002, as already
modi ed by its Resolution, dated 20 November 2002, is hereby AFFIRMED WITH
MODIFICATION, as follows —
1. PNs No. 23356 and 23357 are DECLARED subsisting and outstanding.
Petitioner Citibank is ORDERED to return to respondent the principal amounts of the said
PNs, amounting to Three Hundred Eighteen Thousand Eight Hundred Ninety-Seven Pesos
and Thirty-Four Centavos (P318,897.34) and Two Hundred Three Thousand One Hundred
Fifty Pesos (P203,150.00), respectively, plus the stipulated interest of Fourteen and a half
percent (14.5%) per annum, beginning 17 March 1977;
2. The remittance of One Hundred Forty-Nine Thousand Six Hundred Thirty Two US
Dollars and Ninety-Nine Cents (US$149,632.99) from respondent's Citibank-Geneva
accounts to petitioner Citibank in Manila, and the application of the same against
respondent's outstanding loans with the latter, is DECLARED illegal, null and void. Petitioner
Citibank is ORDERED to refund to respondent the said amount, or its equivalent in Philippine
currency using the exchange rate at the time of payment, plus the stipulated interest for each
of the fiduciary placements and current accounts involved, beginning 26 October 1979;
3. Petitioner Citibank is ORDERED to pay respondent moral damages in the
amount of Three Hundred Thousand Pesos (P300,000.00); exemplary damages in the
amount of Two Hundred Fifty Thousand Pesos (P250,000.00); and attorney's fees in the
amount of Two Hundred Thousand Pesos (P200,000.00); and
4. Respondent is ORDERED to pay petitioner Citibank the balance of her
outstanding loans, which, from the respective dates of their maturity to 5 September 1979,
was computed to be in the sum of One Million Sixty-Nine Thousand Eight Hundred Forty-
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Seven Pesos and Forty Centavos (P1,069,847.40), inclusive of interest. These outstanding
loans shall continue to earn interest, at the rates stipulated in the corresponding PNs, from 5
September 1979 until payment thereof. DTIaHE
SO ORDERED.
Panganiban, C.J., Ynares-Santiago, Austria-Martinez and Callejo, Sr., JJ., concur.
Footnotes
3. Id. at 368-374.
4. TSN, Deposition of Mr. Francisco Tan, 3 September 1990, pp. 9-10.
5. Records, Vol. I, pp. 1-8.
6. Id. at 148-157.
7. Id. at 40-51.
8. Id. at 208-227.
9. Order, dated 11 December 1985, penned by Judge Ansberto P. Paredes, Records, Vol. I, p.
346.
10. Penned by Judge Manuel D. Victorio, Records, Vol. III, pp. 1607-1621.
11. Civil Case No. 11336 was raffled and re-reffled to four different Judges of the Makati RTC
before it was finally resolved. It was originally raffled to Makati RTC, Branch 140, presided
by Judge Ansberto P. Paredes. On 4 February 1987, before the termination of the re-direct
examination of herein respondent (plaintiff before the RTC), the case was transferred to
Makati RTC, Branch 57, presided by Judge Francisco X. Velez, for reasons not disclosed in
the Records. Judge Velez was able to try and hear the case until the presentation of the
evidence by herein petitioners (defendants before the RTC). Respondent again took the
stand to present rebuttal evidence, but even before she could finish her testimony, Judge
Velez inhibited himself upon petitioners' motion (Order, dated 10 April 1992, penned by
Judge Francisco X. Velez, Records, Vol. 11, p. 1085). The case was transferred to Makati
RTC, Branch 141, presided by Judge Marcelino F. Bautista, Jr. For reasons not disclosed in
the Records, Judge Manuel D. Victorio took over Makati RTC, Branch 141. After the parties
submitted their respective Memoranda, Judge Victorio declared the case submitted for
decision (Order, dated 9 December 1994, penned by Judge Manuel D. Victorio, Records, Vol.
III, p. 1602). Judge Victorio rendered his Decision in Civil Case No. 11336 on 24 August
1995 (Records, Vol. III, pp. 1607-1621).
22. The Executive Secretary v. Gordon, 359 Phil. 266, 271 (1998).
23. Young v. John Keng Seng, 446 Phil. 823, 833 (2003).
24. Sps. Sta. Maria v. Court of Appeals, 349 Phil. 275, 282-283 (1998).
25. The Court of Appeals modified the trial court's findings and conclusions, as follows: (1)
By declaring the P1,069,847.40 alleged indebtedness of Ms. Sabeniano as non-existing for
failure of Citibank to substantiate its allegations; (2) By declaring that there are unpaid
money market placements, current accounts and savings account of Ms. Sabeniano; and
(3) The awarding of damages in favor of Ms. Sabeniano and against Citibank.
26. Supra note 11.
27. Records, Vol. III, pp. 1612-1613.
28. Penned by Associate Justice Andres B. Reyes with Associate Justices Conrado M.
Vasquez, Jr. and Amelita G. Tolentino, concurring; rollo, p. 344.
29. Section 3(m) of Rule 131 of the REVISED RULES OF COURT reads —
36. Mr. Francisco Tan, at the time of his deposition in 1990, was already working as Assistant
General Manager for Dai-Chi Kangyo Bank in Hong Kong.
37. TSN, 12 March 1990, pp. 6-10.
38. Lichauco v. Atlantic Gulf & Pacific Co., 84 Phil. 330, 346 (1949).
39. TSN, 6 February 1990, Vol. V, pp. 16-24.
72. TSN, 28 November 1991, Vol. XIII, pp. 5, 15, 23, 28-29.
80. Gempesaw v. Court of Appeals, G.R. No. 92244, 9 February 1993, 218 SCRA 682, 695.
81. 403 Phil. 361, 383 (2001).
82. Moran v. Court of Appeals, G.R. No. 105836, 7 March 1994, 230 SCRA 799, 311-312.
83. REVISED RULES OF COURT, Rule 131, Section 3(p).
90. Associated Bank v. Court of Appeals, G.R. No. 89802, 7 May 1992, 208 SCRA 465, 469-
471.
91. Banco de Oro Savings and Mortgage Bank v Equitable Banking Corporation, G.R. No.
74917, 20 January 1988, 157 SCRA 188, 199.
92. NEGOTIABLE INSTRUMENTS LAW, Section 66, in connection with Section 65.
93. Associated Bank v. Court of Appeals, 322 Phil. 677, 697 (1996); Associated Bank v. Court
of Appeals, G.R. No. 89802, 7 May 1992, 208 SCRA 465, 472.
94. Plaintiff's Formal Offer of Documentary Exhibits, records, Vol. I, pp. 504-505; plaintiff's
folder of exhibits, p. 110.
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95. Exhibits "GGG" and "JJJ," plaintiff's folder of exhibits, pp. 109, 113.
96. Plaintiff's folder of exhibits, p. 110.
97. See the initials on Exhibit "III-1," plaintiff's folder of exhibits, p. 112.
100. G.R. No. 49188, 30 January 1990, 181 SCRA 557, 568.
101. Exhibit "MMM," plaintiff's folder of exhibits, p. 115.
105. TSN, deposition of Mr. Francisco A. Tan, 3 September 1990, pp. 13-16.
106. TSN, 22 May 1990, Vol. V, pp. 31-61.
107. TSN, 7 March 1991, Vol. IX, pp. 15-19; TSN, 13 March 1991, Vol X, pp. 7-9.
108. TSN, 19 March 1991, Vol. X, pp. 17-21; TSN, 8 April 1991, Vol. X, pp. 31-34.
114. F.D. Regalado, REMEDIAL LAW COMPENDIUM, Vol. II, p. 571 (8th ed., 2000).
115. F.D. Regalado, REMEDIAL LAW COMPENDIUM, Vol. II, 571 (8th ed., 2000).
116. G.R. Nos. 146710-15, 3 April 2001, 356 SCRA 108, 137-138.
121. J.A.R. Sibal and J.N. Salazar, Jr., COMPENDIUM ON EVIDENCE 199-200 (4th ed., 1995).
122. CIVIL CODE, Article 1980; Guingona, Jr. v. City Fiscal of Manila, 213 Phil. 516,523-524
(1984).
124. G.R. No. 57092, 21 January 1993, 217 SCRA 307, 313-314.
125. Anachuelo v. Intermediate Appellate Court, G.R. No. L-71391, 29 January 1987, 147
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SCRA 434, 441-442.
131. Wildvalley Shipping Co., Ltd. v. Court of Appeals, 396 Phil. 383, 396 (2000).
132. Exhibit "38," defendants' folder of exhibits, pp. 109-110.
133. Exhibit "K-1," plaintiff's folder of exhibits, 54-55.
135. Heirs of Severa P. Gregorio v. Court of Appeals, 360 Phil. 753, 763 (1998).
136. Order, dated 12 November 1985, penned by Judge Ansberto P. Paredes, records, Vol. I, p.
310; Order, dated 2 September 1988, id. at penned by Judge Francisco X. Velez, records,
Vol. I, p. 449; Order, dated 24 November 1988, penned by Judge Francisco X. Velez, records,
Vol. I, p. 458; Order, dated 25 April 1989, penned by Judge Francisco X. Velez, records, Vol. I,
pp. 476-477
137. Security Bank & Trust Co. v. Triumph Lumber and Construction Corporation, 361 Phil.
463, 477 (1999).
Note, however, that the legal interest has been increased from six percent to twelve
percent per annum by virtue of Central Bank Circulars No. 416, dated 29 July 1974, and No.
905, dated 10 December 1982.
140. Radio Communications of the Philippines, Inc. v. National Labor Relations Commission,
G.R. Nos. 101181-84, 22 June 1992, 210 SCRA 222, 226-227; Ortigas, Jr. v. Lufthansa
German Airlines, G.R. No. L-28773, 30 June 1975, 64 SCRA 610, 633-634; Hernandez v.
Andal, 78 Phil. 196, 209-210 (1947).
141. THE GENERAL BANKING LAW OF 2000, Section 2.
142. Philippine National Bank v. Court of Appeals, 373 Phil. 942, 948 (1999).
143. Simex International (Manila), Inc. vs. Court of Appeals, G.R. No. 88013, 19 March 1990,
183 SCRA 360, 367; Bank of Philippine Islands vs. Intermediate Appellate Court, G.R. No.
69162, 21 February 1992, 206 SCRA 408, 412-413.
147. While the amount of exemplary damages need not be proved, the plaintiff must show
that he is entitled to moral, temperate or compensatory damages before the court may
consider the question of whether or not exemplary damages should be awarded. . . .
149. Ching Sen Ben vs. Court of Appeals, 373 Phil. 544, 555 (1999).
150. ABS-CBN Broadcasting Corporation v. Court of Appeals, 361 Phil. 498, 531-532 (1999);
Tierra International Construction Corp. v. National Labor Relations Commission, G.R. No.
88912, 3 July 1992, 211 SCRA 73, 81; Saba v. Court of Appeals, G.R. No. 77950, 24 August
1990, 189 SCRA 50, 55.
RESOLUTION
CHICO-NAZARIO , J : p
Respondent, however, denied having any outstanding loans with petitioner Citibank.
She likewise denied that she was duly informed of the off-setting or compensation thereof
made by petitioner Citibank using her deposits and money market placements with
petitioners. Hence, respondent sought to recover her deposits and money market
placements. cADEHI
(1) Declaring as illegal, null and void the setoff effected by the
defendant Bank [petitioner Citibank] of plaintiff's [respondent Sabeniano] dollar
deposit with Citibank, Switzerland, in the amount of US$149,632.99, and ordering
the said defendant [petitioner Citibank] to refund the said amount to the plaintiff
with legal interest at the rate of twelve percent (12%) per annum, compounded
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yearly, from 31 October 1979 until fully paid, or its peso equivalent at the time of
payment;
(2) Declaring the plaintiff [respondent Sabeniano] indebted to the
defendant Bank [petitioner Citibank] in the amount of P1,069,847.40 as of 5
September 1979 and ordering the plaintiff [respondent Sabeniano] to pay said
amount, however, there shall be no interest and penalty charges from the time the
illegal setoff was effected on 31 October 1979;
All the parties appealed the afore-mentioned RTC Decision to the Court of Appeals,
docketed as CA-G.R. CV No. 51930. On 26 March 2002, the appellate court promulgated
its Decision, 5 ruling entirely in favor of respondent, to wit —
Wherefore, premises considered, the assailed 24 August 1995 Decision of
the court a quo is hereby AFFIRMED with MODIFICATION , as follows:
Since the Court of Appeals Decision, dated 26 March 2002, as modi ed by the
Resolution of the same court, dated 20 November 2002, was still principally in favor of
respondent, petitioners led the instant Petition for Review on Certiorari under Rule 45 of
the Revised Rules of Court. After giving due course to the instant Petition, this Court
promulgated on 16 October 2006 its Decision, now subject of petitioners' Motion for
Partial Reconsideration.
Among the numerous grounds raised by petitioners in their Motion for Partial
Reconsideration, this Court shall address and discuss herein only particular points that had
not been considered or discussed in its Decision. Even in consideration of these points
though, this Court remains unconvinced that it should modify or reverse in any way its
disposition of the case in its earlier Decision.
As to the off-setting or compensation
of respondent's outstanding loan
balance with her dollar deposits in
Citibank-Geneva
Petitioners' take exception to the following ndings made by this Court in its
Decision, dated 16 October 2006, disallowing the off-setting or compensation of the
balance of respondent's outstanding loans using her dollar deposits in Citibank-Geneva —
It is the petitioners' contention that the term "Citibank, N.A." used therein should be
deemed to refer to all branches of petitioner Citibank in the Philippines and abroad;
thus, giving petitioner Citibank the authority to apply as payment for the PNs even
respondent's dollar accounts with Citibank-Geneva. Still proceeding from the premise
that all branches of petitioner Citibank should be considered as a single entity, then it
should not matter that the respondent obtained the loans from Citibank-Manila and her
deposits were with Citibank-Geneva. Respondent should be considered the debtor (for
the loans) and creditor (for her deposits) of the same entity, petitioner Citibank. Since
petitioner Citibank and respondent were principal creditors of each other, in
compliance with the requirements under Article 1279 of the Civil Code, 8 then the
former could have very well used off-setting or compensation to extinguish the parties'
obligations to one another. And even without the PNs, off-setting or compensation was
still authorized because according to Article 1286 of the Civil Code, "Compensation
takes place by operation of law, even though the debts may be payable at different
places, but there shall be an indemnity for expenses of exchange or transportation to
the place of payment."
Pertinent provisions of Republic Act No. 8791, otherwise known as the General
Banking Law of 2000, governing bank branches are reproduced below —
SEC. 20. Bank Branches. — Universal or commercial banks may open
branches or other o ces within or outside the Philippines upon prior approval of
the Bangko Sentral.
Branching by all other banks shall be governed by pertinent laws.
A bank may, subject to prior approval of the Monetary Board, use any or all
of its branches as outlets for the presentation and/or sale of the nancial
products of its allied undertaking or its investment house units.
Republic Act No. 7721, otherwise known as the Foreign Banks Liberalization Law,
lays down the policies and regulations speci cally concerning the establishment and
operation of local branches of foreign banks. Relevant provisions of the said statute read
—
Sec. 2. Modes of Entry. — The Monetary Board may authorize foreign
banks to operate in the Philippine banking system through any of the following
modes of entry: (i) by acquiring, purchasing or owning up to sixty percent (60%)
of the voting stock of an existing bank; (ii) by investing in up to sixty percent
(60%) of the voting stock of a new banking subsidiary incorporated under the
laws of the Philippines; or (iii) by establishing branches with full banking
authority: Provided, That a foreign bank may avail itself of only one (1) mode of
entry: Provided, further, That a foreign bank or a Philippine corporation may own
up to a sixty percent (60%) of the voting stock of only one (1) domestic bank or
new banking subsidiary.
Sec. 5. Head O ce Guarantee . — The head o ce of foreign bank
branches shall guarantee prompt payment of all liabilities of its Philippine
branches.
It is true that the afore-quoted Section 20 of the General Banking Law of 2000
expressly states that the bank and its branches shall be treated as one unit. It should be
pointed out, however, that the said provision applies to a universal 9 or commercial bank, 1 0
duly established and organized as a Philippine corporation in accordance with Section 8 of
the same statute, 1 1 and authorized to establish branches within or outside the Philippines.
The General Banking Law of 2000, however, does not make the same categorical
statement as regards to foreign banks and their branches in the Philippines. What Section
74 of the said law provides is that in case of a foreign bank with several branches in the
country, all such branches shall be treated as one unit . As to the relations between
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the local branches of a foreign bank and its head o ce, Section 75 of the General Banking
Law of 2000 and Section 5 of the Foreign Banks Liberalization Law provide for a "Home
O ce Guarantee," in which the head o ce of the foreign bank shall guarantee prompt
payment of all liabilities of its Philippine branches. While the Home O ce Guarantee is in
accord with the principle that these local branches, together with its head office, constitute
but one legal entity, it does not necessarily support the view that said principle is true and
applicable in all circumstances.
The Home O ce Guarantee is included in Philippine statutes clearly for the
protection of the interests of the depositors and other creditors of the local branches of a
foreign bank. 1 2 Since the head o ce of the bank is located in another country or state,
such a guarantee is necessary so as to bring the head o ce within Philippine jurisdiction,
and to hold the same answerable for the liabilities of its Philippine branches. Hence, the
principle of the singular identity of that the local branches and the head o ce of a foreign
bank are more often invoked by the clients in order to establish the accountability of the
head o ce for the liabilities of its local branches. It is under such attendant circumstances
in which the American authorities and jurisprudence presented by petitioners in their
Motion for Partial Reconsideration were rendered.
Now the question that remains to be answered is whether the foreign bank can use
the principle for a reverse purpose, in order to extend the liability of a client to the foreign
bank's Philippine branch to its head o ce, as well as to its branches in other countries.
Thus, if a client obtains a loan from the foreign bank's Philippine branch, does it absolutely
and automatically make the client a debtor, not just of the Philippine branch, but also of the
head o ce and all other branches of the foreign bank around the world? This Court rules in
the negative. EIcSTD
There being a dearth of Philippine authorities and jurisprudence on the matter, this
Court, just as what petitioners have done, turns to American authorities and jurisprudence.
American authorities and jurisprudence are signi cant herein considering that the head
office of petitioner Citibank is located in New York, United States of America (U.S.A.).
Unlike Philippine statutes, the American legislation explicitly de nes the relations
among foreign branches of an American bank. Section 25 of the United States Federal
Reserve Act 1 3 states that —
Every national banking association operating foreign branches shall
conduct the accounts of each foreign branch independently of the accounts of
other foreign branches established by it and of its home o ce, and shall at the
end of each scal period transfer to its general ledger the pro t or loss accrued at
each branch as a separate item.
Defendant, upon its oral argument and in its brief, relies heavily on
Sokoloff v. National City Bank of New York , 1928, 250 N.Y. 69, 164 N.E. 745, as
authority for the proposition that Chartered Bank, not the Hamburg or New York
Agency, is ultimately responsible for the amounts owing its German customers
and, conversely, it is to Chartered Bank that the German rms owe their
obligations. The Sokoloff case, aside from its violently different fact situation, is
centered on the legal problem of default of payment and consequent breach of
contract by a branch bank. It does not stand for the principle that in every
instance an international bank with branches is but one legal entity for
all purposes . The defendant concedes in its brief (p. 15) that there are purposes
for which the various agencies and branches of Chartered Bank may be treated in
law as separate entities. I fail to see the applicability of Sokoloff either as a guide
to or authority for the resolution of this problem. The facts before me and the
cases catalogued supra lend weight to the view that we are dealing here with
Agencies independent of one another.
xxx xxx xxx
I hold that for instant purposes the Hamburg Agency and defendant were
independent business entities, and the attempted setoff may not be utilized by
defendant against its debt to the German firms obligated to the Hamburg Agency.
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Going back to the instant Petition, although this Court concedes that all the
Philippine branches of petitioner Citibank should be treated as one unit with its head
o ce, it cannot be persuaded to declare that these Philippine branches are likewise a
single unit with the Geneva branch. It would be stretching the principle way beyond its
intended purpose.
Therefore, this Court maintains its original position in the Decision that the off-
setting or compensation of respondent's loans with Citibank-Manila using her dollar
accounts with Citibank-Geneva cannot be effected. The parties cannot be considered
principal creditor of the other. As for the dollar accounts, respondent was the creditor and
Citibank-Geneva was the debtor; and as for the outstanding loans, petitioner Citibank,
particularly Citibank-Manila, was the creditor and respondent was the debtor. Since legal
compensation was not possible, petitioner Citibank could only use respondent's dollar
accounts with Citibank-Geneva to liquidate her loans if she had expressly authorized it to
do so by contract.
Respondent cannot be deemed to have authorized the use of her dollar deposits
with Citibank-Geneva to liquidate her loans with petitioner Citibank when she signed the
PNs 1 6 for her loans which all contained the provision that —
At or after the maturity of this note, or when same becomes due under any
of the provisions hereof, any money, stocks, bonds, or other property of any kind
whatsoever, on deposit or otherwise, to the credit of the undersigned on the books
of CITIBANK, N.A. in transit or in their possession, may without notice be applied
at the discretion of the said bank to the full or partial payment of this note.
As has been established in the preceding discussion, "Citibank, N.A." can only refer to
the local branches of petitioner Citibank together with its head o ce. Unless there is
any showing that respondent understood and expressly agreed to a more far-reaching
interpretation, the reference to Citibank, N.A. cannot be extended to all other branches
of petitioner Citibank all over the world. Although theoretically, books of the branches
form part of the books of the head o ce, operationally and practically, each branch
maintains its own books which shall only be later integrated and balanced with the
books of the head o ce. Thus, it is very possible to identify and segregate the books
of the Philippine branches of petitioner Citibank from those of Citibank-Geneva, and to
limit the authority granted for application as payment of the PNs to respondent's
deposits in the books of the former.
Moreover, the PNs can be considered a contract of adhesion, the PNs being in
standard printed form prepared by petitioner Citibank. Generally, stipulations in a contract
come about after deliberate drafting by the parties thereto, there are certain contracts
almost all the provisions of which have been drafted only by one party, usually a
corporation. Such contracts are called contracts of adhesion, because the only
participation of the party is the a xing of his signature or his "adhesion" thereto. This
being the case, the terms of such contract are to be construed strictly against the party
which prepared it. 1 7
As for the supposed Declaration of Pledge of respondent's dollar accounts with
Citibank-Geneva as security for the loans, this Court stands rm on its ruling that the non-
production thereof is fatal to petitioners' cause in light of respondent's claim that her
signature on such document was a forgery. It bears to note that the original of the
Declaration of Pledge is with Citibank-Geneva, a branch of petitioner Citibank. As between
respondent and petitioner Citibank, the latter has better access to the document. The
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constant excuse forwarded by petitioner Citibank that Citibank-Geneva refused to return
possession of the original Declaration of Pledge to Citibank-Manila only supports this
Court's nding in the preceding paragraphs that the two branches are actually operating
separately and independently of each other. aAcHCT
Further, petitioners keep playing up the fact that respondent, at the beginning of the
trial, refused to give her specimen signatures to help establish whether her signature on
the Declaration of Pledge was indeed forged. Petitioners seem to forget that
subsequently, respondent, on advice of her new counsel, already offered to cooperate in
whatever manner so as to bring the original Declaration of Pledge before the RTC for
inspection. The exchange of the counsels for the opposing sides during the hearing on 24
July 1991 before the RTC reveals the apparent willingness of respondent's counsel to
undertake whatever course of action necessary for the production of the contested
document, and the evasive, non-committal, and uncooperative attitude of petitioners'
counsel. 1 8
Lastly, this Court's ruling striking down the Declaration of Pledge is not entirely
based on respondent's allegation of forgery. In its Decision, this Court already extensively
discussed why it found the said Declaration of Pledge highly suspicious and irregular, to
wit —
First of all, it escapes this Court why petitioner Citibank took care to have
the Deeds of Assignment of the PNs notarized, yet left the Declaration of Pledge
unnotarized. This Court would think that petitioner Citibank would take greater
cautionary measures with the preparation and execution of the Declaration of
Pledge because it involved respondent's "all present and future duciary
placements" with a Citibank branch in another country, speci cally, in Geneva,
Switzerland. While there is no express legal requirement that the Declaration of
Pledge had to be notarized to be effective, even so, it could not enjoy the same
prima facie presumption of due execution that is extended to notarized
documents, and petitioner Citibank must discharge the burden of proving due
execution and authenticity of the Declaration of Pledge.
Second, petitioner Citibank was unable to establish the date when the
Declaration of Pledge was actually executed. The photocopy of the Declaration of
Pledge submitted by petitioner Citibank before the RTC was undated. It presented
only a photocopy of the pledge because it already forwarded the original copy
thereof to Citibank-Geneva when it requested for the remittance of respondent's
dollar accounts pursuant thereto. Respondent, on the other hand, was able to
secure a copy of the Declaration of Pledge, certi ed by an o cer of Citibank-
Geneva, which bore the date 24 September 1979. Respondent, however, presented
her passport and plane tickets to prove that she was out of the country on the
said date and could not have signed the pledge. Petitioner Citibank insisted that
the pledge was signed before 24 September 1979, but could not provide an
explanation as to how and why the said date was written on the pledge. Although
Mr. Tan testi ed that the Declaration of Pledge was signed by respondent
personally before him, he could not give the exact date when the said signing took
place. It is important to note that the copy of the Declaration of Pledge submitted
by the respondent to the RTC was certi ed by an o cer of Citibank-Geneva,
which had possession of the original copy of the pledge. It is dated 24 September
1979, and this Court shall abide by the presumption that the written document is
truly dated. Since it is undeniable that respondent was out of the country on 24
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September 1979, then she could not have executed the pledge on the said date.
Third, the Declaration of Pledge was irregularly lled-out. The pledge was
in a standard printed form. It was constituted in favor of Citibank, N.A., otherwise
referred to therein as the Bank. It should be noted, however, that in the space
which should have named the pledgor, the name of petitioner Citibank was
typewritten, to wit —
The pledge right herewith constituted shall secure all claims which
the Bank now has or in the future acquires against Citibank, N.A., Manila
(full name and address of the Debtor), regardless of the legal cause or the
transaction (for example current account, securities transactions,
collections, credits, payments, documentary credits and collections) which
gives rise thereto, and including principal, all contractual and penalty
interest, commissions, charges, and costs. CIETDc
The pledge, therefore, made no sense, the pledgor and pledgee being the
same entity. Was a mistake made by whoever lled-out the form? Yes, it could be
a possibility. Nonetheless, considering the value of such a document, the mistake
as to a signi cant detail in the pledge could only be committed with gross
carelessness on the part of petitioner Citibank, and raised serious doubts as to the
authenticity and due execution of the same. The Declaration of Pledge had
passed through the hands of several bank o cers in the country and abroad, yet,
surprisingly and implausibly, no one noticed such a glaring mistake.
As reported, "prices were going up every week, then every day, then
every hour. Women were paid several times a day so that they could rush
out and exchange their money for something of value before what little
purchasing power was left dissolved in their hands. Some workers tried to
beat the constantly rising prices by throwing their money out of the
windows to their waiting wives, who would rush to unload the nearly
worthless paper. A postage stamp cost millions of marks and a loaf of
bread, billions." (Sidney Rutberg, " The Money Balloon", New York: Simon
and Schuster, 1975, p. 19, cited in "Economics, An Introduction" by Villegas
& Abola, 3rd ed.)
Like the Serra and Huibonhoa cases, the instant case also raises as basis
for the application of Article 1250 the Philippine economic crisis in the early
1980s — when, based on petitioner's evidence, the in ation rate rose to 50.34% in
1984. We hold that there is no legal or factual basis to support petitioner's
allegation of the existence of extraordinary in ation during this period, or, for that
matter, the entire time frame of 1968 to 1983, to merit the adjustment of the
rentals in the lease contract dated July 16, 1968. Although by petitioner's
evidence there was a decided decline in the purchasing power of the Philippine
peso throughout this period, we are hard put to treat this as an "extraordinary
inflation" within the meaning and intent of Article 1250.
Rather, we adopt with approval the following observations of the Court of
Appeals on petitioner's evidence, especially the NEDA certi cation of in ation
rates based on consumer price index:
. . . (a) from the period 1966 to 1986, the o cial in ation rate never
exceeded 100% in any single year; (b) the highest o cial in ation rate
recorded was in 1984 which reached only 50.34%; (c) over a twenty one
(21) year period, the Philippines experienced a single-digit in ation in ten
(10) years (i.e., 1966, 1967, 1968, 1969, 1975, 1976, 1977, 1978, 1983 and
1986); (d) in other years (i.e., 1970, 1971, 1972, 1973, 1974, 1979, 1980,
1981, 1982, 1984 and 1989) when the Philippines experienced double-digit
in ation rates, the average of those rates was only 20.88%; (e) while there
was a decline in the purchasing power of the Philippine currency from the
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period 1966 to 1986, such cannot be considered as extraordinary; rather, it
is a normal erosion of the value of the Philippine peso which is a
characteristic of most currencies.
"Erosion" is indeed an accurate description of the trend of decline in the
value of the peso in the past three to four decades. Unfortunate as this trend may
be, it is certainly distinct from the phenomenon contemplated by Article 1250.
Moreover, this Court has held that the effects of extraordinary in ation are
not to be applied without an official declaration thereof by competent authorities.
The burden of proving that there had been extraordinary in ation or de ation of the
currency is upon the party that alleges it. Such circumstance must be proven by competent
evidence, and it cannot be merely assumed. In this case, petitioners presented no proof as
to how much, for instance, the price index of goods and services had risen during the
intervening period. 2 1 All the information petitioners provided was the drop of the U.S.
dollar-Philippine peso exchange rate by 17 points from June 1997 to January 1998. While
the said gure was based on the statistics of the Bangko Sentral ng Pilipinas (BSP), it is
also signi cant to note that the BSP did not categorically declare that the same constitute
as an extraordinary in ation. The existence of extraordinary in ation must be o cially
proclaimed by competent authorities, and the only competent authority so far recognized
by this Court to make such an official proclamation is the BSP. 2 2
Neither can this Court, by merely taking judicial notice of the Asian currency crisis in
1997, already declare that there had been extraordinary in ation. It should be recalled that
the Philippines likewise experienced economic crisis in the 1980s, yet this Court did not
nd that extraordinary in ation took place during the said period so as to warrant the
application of Article 1250 of the Civil Code.
Furthermore, it is incontrovertible that Article 1250 of the Civil Code is based on
equitable considerations. 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. 2 3 Petitioner Citibank, hence, cannot invoke Article 1250 of
the Civil Code because it does not come to court with clean hands. The delay in the
recovery 2 4 by respondent of her dollar accounts with Citibank-Geneva was due to the
unlawful act of petitioner Citibank in using the same to liquidate respondent's loans.
Petitioner Citibank even attempted to justify the off-setting or compensation of
respondent's loans using her dollar accounts with Citibank-Geneva by the presentation of a
highly suspicious and irregular, and even possibly forged, Declaration of Pledge. EcSaHA
The damage caused to respondent of the deprivation of her dollar accounts for
more than two decades is unquestionably relatively more extensive and devastating, as
compared to whatever damage petitioner Citibank, an international banking corporation
with undoubtedly substantial capital, may have suffered for respondent's non-payment of
her loans. It must also be remembered that petitioner Citibank had already considered
respondent's loans paid or liquidated by 26 October 1979 after it had fully effected
compensation thereof using respondents deposits and money market placements. All this
time, respondent's dollar accounts are unlawfully in the possession of and are being used
by petitioner Citibank for its business transactions. In the meantime, respondent's
businesses failed and her properties were foreclosed because she was denied access to
her funds when she needed them most. Taking these into consideration, respondent's
dollar accounts with Citibank-Geneva must be deemed to be subsisting and continuously
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deposited with petitioner Citibank all this while, and will only be presently withdrawn by
respondent. Therefore, petitioner Citibank should refund to respondent the U.S.
$149,632.99 taken from her Citibank-Geneva accounts, or its equivalent in Philippine
currency using the exchange rate at the time of payment , plus the stipulated interest for
each of the duciary placements and current accounts involved, beginning 26 October
1979.
As to respondent's Motion to Clarify
and/or Confirm Decision with Notice
of Judgment
Respondent, in her Motion, is of the mistaken notion that the Court of Appeals
Decision, dated 26 March 2002, as modi ed by the Resolution of the same court, dated 20
November 2002, would be implemented or executed together with this Court's Decision.
This Court clari es that its a rmation of the Decision of the Court of Appeals, as
modi ed, is only to the extent that it recognizes that petitioners had liabilities to the
respondent. However, this Court's Decision modi ed that of the appellate court's by
making its own determination of the speci c liabilities of the petitioners to respondent
and the amounts thereof; as well as by recognizing that respondent also had liabilities to
petitioner Citibank and the amount thereof.
Thus, for purposes of execution, the parties need only refer to the dispositive
portion of this Court's Decision, dated 16 October 2006, should it already become final and
executory, without any further modifications.
As the last point, there is no merit in respondent's Motion for this Court to already
declare its Decision, dated 16 October 2006, nal and executory. A judgment becomes
nal and executory by operation of law and, accordingly, the nality of the judgment
becomes a fact upon the lapse of the reglementary period without an appeal or a motion
for new trial or reconsideration being led. 2 5 This Court cannot arbitrarily disregard the
reglementary period and declare a judgment nal and executory upon the mere motion of
one party, for to do so will be a culpable violation of the right of the other parties to due
process.
IN VIEW OF THE FOREGOING, petitioners' Motion for Partial Reconsideration of this
Court's Decision, dated 16 October 2006, and respondent's Motion for this Court to
declare the same Decision already nal and executory, are both DENIED for lack of merit.
EACIcH
SO ORDERED.
Ynares-Santiago, Austria-Martinez and Callejo, Sr., JJ., concur.
Footnotes
2. Petitioner Investors' Finance Corporation, did business under the name and style of
FNCB Finance. As noted in the Decision, it is now, by virtue of a merger, doing business
as part of its successor-in-interest, BPI Finance Corporation. However, the said petitioner
shall be referred to herein as FNCB Finance, consistent with the reference used in the
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Decision.
3. "Manila," as used herein, is descriptive of any of the branches of petitioner Citibank in the
Philippines, the capital of which is the City of Manila. Respondent was actually dealing
with the branch of petitioner Citibank in Makati City.
6. Penned by Associate Justice Andres B. Reyes, Jr. with Associate Justices Conrado M.
Vasquez, Jr. and Amelita G. Tolentino, concurring; id. at 374.
(1) That each one of the obligors be bound principally, and that he be at the same
time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are
consumable, they be of at the same kinds, and also of the same quality if the latter has
been stated;
(3) That the two debts are due;
(5) That over neither of them there be any retention or controversy, commenced
by third persons and communicated in due time to the debtor.
9. A universal bank shall have the authority to exercise, in addition to the powers authorized
for a commercial bank in Section 29, the powers of an investment house as provided in
existing laws and the power to invest in non-allied enterprises as provided in this Act.
(The General Banking Law of 2000, Section 23)
10. A commercial bank shall have, in addition to the general powers incident to
corporations, all such powers as may be necessary to carry on the business of
commercial banking, such as accepting drafts and issuing letters of credit; discounting
and negotiating promissory notes, drafts, bills of exchange, and other evidence of debt;
accepting or creating demand deposits; receiving other types of deposits and deposit
substitutes; buying and selling foreign exchange and gold or silver bullion; acquiring
marketable bonds and other debt securities; and extending credit, subject to such rules
as the Monetary Board may promulgate. These rules may include the determination of
bonds and other debt securities eligible for investment, the maturities and aggregate
amount of such investment, the maturities and aggregate amount of investment. (The
General Banking Law of 2000, Section 29)
11. The full text of Section 8 of the General Banking Law of 2000 is as follows —
SEC. 8. Organization. — The Monetary Board may authorize the organization of a
bank or quasi-bank subject to the following conditions:
8.3. That the minimum capital requirements prescribed by the Monetary Board for
each category of banks are satisfied.
No new commercial bank shall be established within three (3) years from the
effectivity of this Act. In the exercise of the authority granted herein, the Monetary Board
shall take into consideration their capability in terms of their financial resources and
technical expertise and integrity. The bank licensing process shall incorporate an
assessment of the bank's ownership structure, directors and senior management, its
operating plan and internal controls as well as its projected financial condition and
capital base.
14. 6 F. 2d 762. (1925); See also Republic of China v. National City Bank of New York, 208
F. 2d 627 (1954).
21. Sangrador v. Valderrama, G.R. No. L-79552, 29 November 1988, 168 SCRA 215, 228-
229.
22. Ramos v. Court of Appeals, G.R. No. 119872, 7 July 1997, 275 SCRA 167, 175.
23. Pilapil v. Garchitorena, G.R. No. 128790, 25 November 1998, 299 SCRA 343, 359;
University of the Philippines v. Hon. Catungal, Jr., G.R. No. 121863, 5 May 1997, 272
SCRA 221, 237.
24. See Gatlabayan v. Ramirez, 134 Phil. 267, 272 (1968).
25. Munez v. Court of Appeals, G.R. No. L-46010, 23 July 1987, 152 SCRA 197, 201-202, in
relation to Section 10, Rule 51 of the revised Rules of Court, which provides —
DECISION
CARPIO , J : p
The Case
This is a petition for review 1 with application for the immediate issuance of a
temporary restraining order and writ of preliminary injunction assailing the 5 October
2006 Decision 2 and the 23 January 2007 Resolution 3 of the Court of Appeals in CA-
G.R. CV No. 75855. The 5 October 2006 Decision set aside the 23 July 2002 Decision 4
of the Regional Trial Court (Branch 79) of Quezon City in Civil Case No. Q-99-37559,
which granted petitioner's complaint for recovery of sum of money and personal
property with prayer for the issuance of a writ of replevin. The 23 January 2007
Resolution denied petitioner's motion for reconsideration.
The Facts
Sometime in 1997, respondent Trojan Metal Industries, Inc. (TMI) came to
petitioner PCI Leasing and Finance, Inc. (PCILF) to seek a loan. Instead of extending a
loan, PCILF offered to buy various equipment TMI owned, namely: a Verson double
action hydraulic press with cushion, a Hinohara powerpress 75-tons capacity, a USI-
clearing powerpress 60-tons capacity, a Watanabe powerpress 60-tons capacity, a
YMGP powerpress 30-tons capacity, a YMGP powerpress 15-tons capacity, a lathe
machine, a vertical milling machine, and a radial drill. Hard-pressed for money, TMI
agreed. PCILF and TMI immediately executed deeds of sale 5 evidencing TMI's sale to
PCILF of the various equipment in consideration of the total amount of P2,865,070.00.
PCILF and TMI then entered into a lease agreement, 6 dated 8 April 1997,
whereby the latter leased from the former the various equipment it previously owned.
Pursuant to the lease agreement, TMI issued postdated checks representing 24
monthly installments. The monthly rental for the Verson double action hydraulic press
with cushion was in the amount of P62,328.00; for the Hinohara powerpress 75-tons
capacity, the USI-clearing powerpress 60-tons capacity, the Watanabe powerpress 60-
tons capacity, the YMGP powerpress 30-tons capacity, and the YMGP powerpress 15-
tons capacity, the monthly rental was in the amount of P49,259.00; and for the lathe
machine, the vertical milling machine, and the radial drill, the monthly rental was in the
amount of P22,205.00.
The lease agreement required TMI to give PCILF a guaranty deposit of
P1,030,350.00, 7 which would serve as security for the timely performance of TMI's
obligations under the lease agreement, to be automatically forfeited should TMI return
the leased equipment before the expiration of the lease agreement. AaEcHC
Further, spouses Walfrido and Elizabeth Dizon, as TMI's President and Vice-
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President, respectively executed in favor of PCILF a Continuing Guaranty of Lease
Obligations. 8 Under the continuing guaranty, the Dizon spouses agreed to immediately
pay whatever obligations would be due PCILF in case TMI failed to meet its obligations
under the lease agreement.
To obtain additional loan from another nancing company, 9 TMI used the leased
equipment as temporary collateral. 1 0 PCILF considered the second mortgage a
violation of the lease agreement. At this time, TMI's partial payments had reached
P1,717,091.00. 1 1 On 8 December 1998, PCILF sent TMI a demand letter 1 2 for the
payment of the latter's outstanding obligation. PCILF's demand remained unheeded.
On 7 May 1999, PCILF led in the Regional Trial Court (Branch 79) of Quezon City
a complaint 1 3 against TMI, spouses Dizon, and John Doe (collectively referred to as
"respondents" hereon) for recovery of sum of money and personal property with prayer
for the issuance of a writ of replevin, docketed as Civil Case No. Q-99-37559.
On 7 September 1999, the RTC issued the writ of replevin 1 4 PCILF prayed for,
directing the sheriff to take custody of the leased equipment. Not long after, PCILF sold
the leased equipment to a third party and collected the proceeds amounting to
P1,025,000.00. 1 5
In their answer, 1 6 respondents claimed that the sale with lease agreement was a
mere scheme to facilitate the nancial lease between PCILF and TMI. Respondents
explained that in a simulated nancial lease, property of the debtor would be sold to the
creditor to be repaid through rentals; at the end of the lease period, the property sold
would revert back to the debtor. Respondents prayed that they be allowed to reform
the lease agreement to show the true agreement between the parties, which was a loan
secured by a chattel mortgage.
The Ruling of the RTC
In its 23 July 2002 Decision, the RTC granted the prayer of PCILF in its complaint.
The RTC ruled that the lease agreement must be presumed valid as the law between the
parties even if some of its provisions constituted unjust enrichment on the part of
PCILF. The dispositive portion of its Decision reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff-PCI Leasing
and Finance, Inc. and against defendants Trojan Metal, Walfrido Dizon, and
Elizabeth Dizon, as follows:
1. Ordering the plaintiff to be entitled to the possession of herein machineries.
SO ORDERED. 1 7
Respondents appealed to the Court of Appeals alleging that the RTC erred in
ruling that PCILF was entitled to the possession of TMI's equipment and that
respondents still owed PCILF the balance of P888,423.48.
The Ruling of the Court of Appeals
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The Court of Appeals ruled that the sale with lease agreement was in fact a loan
secured by chattel mortgage. The Court of Appeals held that since PCILF sold the
equipment to a third party for P1,025,000.00 and TMI paid PCILF a guaranty deposit of
P1,030,000.00, PCILF had in its hands the sum of P2,055,250.00, as against TMI's
remaining obligation of P888,423.48, or an excess of P1,166,826.52, which should be
returned to TMI in accordance with Section 14 of the Chattel Mortgage Law.
Thus, in its 5 October 2006 Decision, the Court of Appeals set aside the Decision
of the RTC. The Court of Appeals entered a new one dismissing PCILF's complaint and
directing PCILF to pay TMI, by way of refund, the amount of P1,166,826.52. The
decretal part of its Decision reads: ETaSDc
WHEREFORE, premises considered, the July 23, 2002 Decision of the Regional
Trial Court of Quezon City, Branch 79, in Civil Case No. Q-99-37559, is hereby
REVERSED and SET ASIDE, and a new one entered DISMISSING the complaint
and DIRECTING the plaintiff-appellee PCI Leasing and Finance, Inc. to PAY, by
way of REFUND, to the defendant-appellant Trojan Metal Industries, Inc., the net
amount of Php1,166,826.52.
SO ORDERED. 1 8
The Issues
The issues for resolution are (1) whether the sale with lease agreement the
parties entered into was a financial lease or a loan secured by chattel mortgage; and (2)
whether PCILF should pay TMI, by way of refund, the amount of P1,166,826.52.
The Court's Ruling
The petition lacks merit.
PCILF contends that the transaction between the parties was a sale and
leaseback nancing arrangement where the client sells movable property to a nancing
company, which then leases the same back to the client. PCILF insists the transaction
is not nancial leasing, which contemplates extension of credit to assist a buyer in
acquiring movable property which the buyer can use and eventually own. PCILF claims
that the sale and leaseback nancing arrangement is not contrary to law, morals, good
customs, public order, or public policy. PCILF stresses that the guaranty deposit should
be forfeited in its favor, as provided in the lease agreement. PCILF points out that this
case does not involve mere failure to pay rentals, it deals with a agrant violation of the
lease agreement.
Respondents counter that from the very beginning, transfer to PCILF of
ownership over the subject equipment was never the intention of the parties.
Respondents claim that under the lease agreement, the guaranty deposit would be
forfeited if TMI returned the leased equipment to PCILF before the expiration of the
lease agreement; thus, since TMI never returned the leased equipment voluntarily, but
through a writ of replevin ordered by the RTC, the guaranty deposit should not be
forfeited.
Since the lease agreement in this case was executed on 8 April 1997, Republic
Act No. 5980 (RA 5980), otherwise known as the Financing Company Act, governs as to
what constitutes nancial leasing. Section 1, paragraph (j) of the New Rules and
Regulations to Implement RA 5980 1 9 defines financial leasing as follows:
LEASING shall refer to nancial leasing which is a mode of extending credit
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through a non-cancelable contract under which the lessor purchases or acquires
at the instance of the lessee heavy equipment, motor vehicles, industrial
machinery, appliances, business and of ce machines, and other movable
property in consideration of the periodic payment by the lessee of a xed amount
of money suf cient to amortize at least 70% of the purchase price or acquisition
cost, including any incidental expenses and a margin of pro t, over the lease
period. The contract shall extend over an obligatory period during which the
lessee has the right to hold and use the leased property and shall bear the cost of
repairs, maintenance, insurance, and preservation thereof, but with no obligation
or option on the part of the lessee to purchase the leased property at the end of
the lease contract.
The above de nition of nancial leasing gained statutory recognition with the
enactment of Republic Act No. 8556 (RA 8556), otherwise known as the Financing
Company Act of 1998. 2 0 Section 3 (d) of RA 8556 defines financial leasing as:
a mode of extending credit through a non-cancelable lease contract under which
the lessor purchases or acquires, at the instance of the lessee, machinery,
equipment, motor vehicles, appliances, business and of ce machines, and other
movable or immovable property in consideration of the periodic payment by the
lessee of a xed amount of money suf cient to amortize at least seventy (70%)
of the purchase price or acquisition cost, including any incidental expenses and a
margin of pro t over an obligatory period of not less than two (2) years during
which the lessee has the right to hold and use the leased property with the right to
expense the lease rentals paid to the lessor and bears the cost of repairs,
maintenance, insurance and preservation thereof, but with no obligation or option
on his part to purchase the leased property from the owner-lessor at the end of the
lease contract. HSacEI
Under Article 1144 of the Civil Code, the prescriptive period for actions based
upon a written contract and for reformation of an instrument is ten years. 2 5 The right
of action for reformation accrued from the date of execution of the lease agreement on
8 April 1997. TMI timely exercised its right of action when it led an answer 2 6 on 14
February 2000 asking for the reformation of the lease agreement.
Hence, had the true transaction between the parties been expressed in a proper
instrument, it would have been a simple loan secured by a chattel mortgage, instead of
a simulated nancial leasing. Thus, upon TMI's default, PCILF was entitled to seize the
mortgaged equipment, not as owner but as creditor-mortgagee for the purpose of
foreclosing the chattel mortgage. PCILF's sale to a third party of the mortgaged
equipment and collection of the proceeds of the sale can be deemed in the exercise of
its right to foreclose the chattel mortgage as creditor-mortgagee.
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The Court of Appeals correctly ruled that the transaction between the parties
was simply a loan secured by a chattel mortgage. However, in reckoning the amount of
the principal obligation, the Court of Appeals should have taken into account the
proceeds of the sale to PCILF less the guaranty deposit paid by TMI. After deducting
payments made by TMI to PCILF, the balance plus applicable interest should then be
applied against the aggregate cash already in PCILF's hands.
Records show that PCILF paid TMI P2,865,070.00 2 7 as consideration for
acquiring the mortgaged equipment. In turn, TMI gave PCILF a guaranty deposit of
P1,030,350.00. 2 8 Thus, the amount of the principal loan was P1,834,720.00,
which was the net amount actually received by TMI (proceeds of the sale of
the equipment to PCILF minus the guaranty deposit) . Against the principal loan
of P1,834,720.00 plus the applicable interest should be deducted loan payments,
totaling P1,717,091.00. 2 9 Since PCILF sold the mortgaged equipment to a third party
for P1,025,000.00, 3 0 the proceeds of the said sale should be applied to offset the
remaining balance on the principal loan plus applicable interest.
However, the exact date of the sale of the mortgaged equipment, which is
needed to compute the interest on the remaining balance of the principal loan, cannot
be gleaned from the facts on record. We thus remand the case to the RTC for the
computation of the total amount due from the date of demand on 8 December 1998
until the date of sale of the mortgaged equipment to a third party, which amount due
shall be offset against the proceeds of the sale.
In the absence of stipulation, the applicable interest due on the remaining
balance of the loan is the legal rate of 12% per annum, computed from the date PCILF
sent a demand letter to TMI on 8 December 1998. No interest can be charged prior to
this date because TMI was not yet in default prior to 8 December 1998. The interest
due shall also earn legal interest from the time it is judicially demanded, pursuant to
Article 2212 of the Civil Code, which provides:
Art. 2212.Interest due shall earn legal interest from the time it is judicially
demanded, although the obligation may be silent upon this point.
Applying the rules in the computation of interest, the remaining balance of the
principal loan subject of the chattel mortgage must earn the legal interest of 12% per
annum, which interest, as long as unpaid, also earns legal interest of 12% per annum,
computed from the filing of the complaint on 7 May 1999.
In accordance with the rules laid down in Eastern Shipping Lines, Inc. v. Court of
Appeals, 3 2 we derive the following formula for the RTC's guidance:
TOTAL AMOUNT DUE = [principal - partial payments made] + [interest + interest
on interest], where
Interest = remaining balance x 12% per annum x no. of years from due date (8
December 1998 when demand was made) until date of sale to a third party
Footnotes
6.Id. at 10-14.
7.Id. at 12-14. TSN dated 12 July 2001, p. 19.
8.Id. at 17.
9.Technology and Livelihood Resources Center.
20.An Act Amending Republic Act No. 5980, otherwise known as the Financing Company Act.
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21.G.R. No. 107199, 22 July 2003, 407 SCRA 154.
22.Id.
23.G.R. No. 91334, 7 February 1991, 193 SCRA 701.
24.Id.
25.Civil Code, Art. 1144. The following actions must be brought within ten years from the time
the right of action accrues:
1. Upon a written contract;
xxx xxx xxx
26.Records, pp. 117-119.
27.Records, pp. 179-181.
28.Id.
29.Id. at 157, 187.
30.TSN dated 17 August 2001, p. 15.
31.G.R. No. 97412, 12 July 1994, 234 SCRA 78, 95-97.
32.Id.
33.PAMECA Wood Treatment Plant, Inc. v. CA, 369 Phil. 544 (1999).
34.Cuyco v. Cuyco, G.R. No. 168736, 19 April 2006, 487 SCRA 693.
SYLLABUS
DECISION
VITUG , J : p
Would it be valid and effective to have a clause in a chattel mortgage that purports to
likewise extend its coverage to obligations yet to be contracted or incurred? This question
is the core issue in the instant petition for review on certiorari.
Petitioner Chua Pac, the president and general manager of co-petitioner "Acme Shoe,
Rubber & Plastic Corporation," executed on 27 June 1978, for and in behalf of the
company, a chattel mortgage in favor of private respondent Producers Bank of the
Philippines. The mortgage stood by way of security for petitioner's corporate loan of three
million pesos (P3,000,000.00). A provision in the chattel mortgage agreement was to this
effect —
"(c) If the MORTGAGOR, his heirs, executors or administrators shall well and
truly perform the full obligation or obligations above-stated according to the
terms thereof, then this mortgage shall be null and void. . . .
"In case the MORTGAGOR executes subsequent promissory note or notes either
as a renewal of the former note, as an extension thereof, or as a new loan, or is
given any other kind of accommodations such as overdrafts, letters of credit,
acceptances and bills of exchange, releases of import shipments on Trust
Receipts, etc., this mortgage shall also stand as security for the payment of the
said promissory note or notes and/or accommodations without the necessity of
executing a new contract and this mortgage shall have the same force and effect
as if the said promissory note or notes and/or accommodations were existing on
the date thereof. This mortgage shall also stand as security for said obligations
and any and all other obligations of the MORTGAGOR to the MORTGAGEE of
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whatever kind and nature, whether such obligations have been contracted before,
during or after the constitution of this mortgage." 1
In due time, the loan of P3,000,000.00 was paid by petitioner corporation. Subsequently, in
1981, it obtained from respondent bank additional nancial accommodations totalling
P2,700,000.00. 2 These borrowings were on due date also fully paid.
On 10 and 11 January 1984, the bank yet again extended to petitioner corporation a loan
of one million pesos (P1,000,000.00) covered by four promissory notes for P250,000.00
each. Due to nancial constraints, the loan was not settled at maturity. 3 Respondent bank
thereupon applied for an extrajudicial foreclosure of the chattel mortgage, hereinbefore
cited, with the Sheriff of Caloocan City, prompting petitioner corporation to forthwith le
an action for injunction, with damages and a prayer for a writ of preliminary injunction,
before the Regional Trial Court of Caloocan City (Civil Case No. C-12081). Ultimately, the
court dismissed the complaint and ordered the foreclosure of the chattel mortgage. It held
petitioner corporation bound by the stipulations, aforequoted, of the chattel mortgage.
Petitioner corporation appealed to the Court of Appeals 4 which, on 14 August 1991,
af rmed, "in all respects," the decision of the court a quo. The motion for reconsideration
was denied on 24 January 1992.
The instant petition interposed by petitioner corporation was initially denied on 04 March
1992 by this Court for having been insuf cient in form and substance. Private respondent
led a motion to dismiss the petition while petitioner corporation led a compliance and
an opposition to private respondent's motion to dismiss. The Court denied petitioner's
rst motion for reconsideration but granted a second motion for reconsideration, thereby
reinstating the petition and requiring private respondent to comment thereon. 5
Except in criminal cases where the penalty of reclusion perpetua or death is imposed 6
which the Court so reviews as a matter of course, an appeal from judgments of lower
courts is not a matter of right but of sound judicial discretion. The circulars of the Court
prescribing technical and other procedural requirements are meant to weed out
unmeritorious petitions that can unnecessarily clog the docket and needlessly consume
the time of the Court. These technical and procedural rules, however, are intended to help
secure, not suppress, substantial justice. A deviation from the rigid enforcement of the
rules may thus be allowed to attain the prime objective for, after all, the dispensation of
justice is the core reason for the existence of courts. In this instance, once again, the Court
is constrained to relax the rules in order to give way to and uphold the paramount and
overriding interest of justice.
Contracts of security are either personal or real. 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 ful llment is
secured by an encumbrance of property — in pledge, the placing of movable property in the
possession of the creditor; in chattel mortgage, by the execution of the corresponding
deed substantially in the form prescribed by law; in real estate mortgage, by the execution
of a public instrument encumbering the real property covered thereby; and in antichresis,
by a written instrument granting to the creditor the right to receive the fruits of an
immovable property with the obligation to apply such fruits to the payment of interest, if
owing, and thereafter to the principal of his credit — upon the essential condition that if the
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principal obligation becomes due and the debtor defaults, then the property encumbered
can be alienated for the payment of the obligation, 7 but that should the obligation be duly
paid, then the contract is automatically extinguished proceeding from the accessory
character 8 of the agreement. As the law so puts it, once the obligation is complied with,
then the contract of security becomes, ipso facto, null and void. 9
While a pledge, real estate mortgage, or antichresis may exceptionally secure after-
incurred obligations so long as these future debts are accurately described, 1 0 a chattel
mortgage, however, can only cover obligations existing at the time the mortgage is
constituted. Although a promise expressed in a chattel mortgage to include debts that are
yet to be contracted can be a binding commitment that can be compelled upon, the
security itself, however, does not come into existence or arise until after a chattel
mortgage agreement covering the newly contracted debt is executed either by concluding
a fresh chattel mortgage or by amending the old contract conformably with the form
prescribed by the Chattel Mortgage Law. 1 1 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 nancing 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 af davit of good faith. While it is not doubted that if such an af davit is not
appended to the agreement, the chattel mortgage would still be valid between the parties
(not against third persons acting in good faith 1 2 ), the fact, however, that the statute has
provided that the parties to the contract must execute an oath that —
". . . (the) mortgage is made for the purpose of securing the obligation speci ed in
the conditions thereof, and for no other purpose, and that the same is a just and
valid obligation, and one not entered into for the purpose of fraud." 13
makes it obvious that the debt referred to in the law is a current, not an obligation that
is yet merely contemplated. In the chattel mortgage here involved, the only obligation
speci ed 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. In Belgian Catholic Missionaries, Inc., vs. Magallanes Press, Inc., et al. , 14
the Court said—
". . . A mortgage that contains a stipulation in regard to future advances in the
credit will take effect only from the date the same are made and not from the date
of the mortgage." 1 5
The signi cance of the ruling to the instant problem would be that since the 1978 chattel
mortgage had ceased to exist coincidentally with the full payment of the P3,000,000.00
loan, 1 6 there no longer was any chattel mortgage that could cover the new loans that were
concluded thereafter.
We nd no merit in petitioner corporation's other prayer that the case should be
remanded to the trial court for a speci c nding on the amount of damages it has
sustained "as a result of the unlawful action taken by respondent bank against it." 1 7
This prayer is not re ected in its complaint which has merely asked for the amount of
P3,000,000.00 by way of moral damages. 1 8 In LBC Express, Inc. vs. Court of Appeals,
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19 we have said:
"Moral damages are granted in recompense for physical suffering, mental
anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral
shock, social humiliation, and similar injury. A corporation, being an arti cial
person and having existence only in legal contemplation, has no feelings, no
emotions, no senses; therefore, it cannot experience physical suffering and
mental anguish. Mental suffering can be experienced only by one having a
nervous system and it ows from real ills, sorrows, and griefs of life — all of
which cannot be suffered by respondent bank as an artificial person." 20
While Chua Pac is included in the case, the complaint, however, clearly states that he
has merely been so named as a party in representation of petitioner corporation.
Petitioner corporation's counsel could be commended for his zeal in pursuing his client's
cause. It instead turned out to be, however, a source of disappointment for this Court to
read in petitioner's reply to private respondent's comment on the petition his so-called
"One Final Word;" viz:
"In simply quoting in toto the patently erroneous decision of the trial court,
respondent Court of Appeals should be required to justify its decision which
completely disregarded the basic laws on obligations and contracts, as well as
the clear provisions of the Chattel Mortgage Law and well-settled jurisprudence of
this Honorable Court; that in the event that its explanation is wholly unacceptable,
this Honorable Court should impose appropriate sanctions on the erring justices.
This is one positive step in ridding our courts of law of incompetent and
dishonest magistrates especially members of a superior court of appellate
jurisdiction." 2 1 (Emphasis supplied.)
The statement is not called for. The Court invites counsel's attention to the admonition in
Guerrero vs. Villamor; 2 2 thus:
"(L)awyers . . . should bear in mind their basic duty 'to observe and maintain the
respect due to the courts of justice and judicial of cers and . . . (to) insist on
similar conduct by others.' This respectful attitude towards the court is to be
observed, 'not for the sake of the temporary incumbent of the judicial of ce, but
for the maintenance of its supreme importance.' And it is 'through a scrupulous
preference for respectful language that a lawyer best demonstrates his
observance of the respect due to the courts and judicial officers . . ..'" 2 3
The virtues of humility and of respect and concern for others must still live on even in an
age of materialism.
WHEREFORE, the questioned decisions of the appellate court and the lower court are set
aside without prejudice to the appropriate legal recourse by private respondent as may
still be warranted as an unsecured creditor. No costs.
Atty. Francisco R. Sotto, counsel for petitioners, is admonished to be circumspect in
dealing with the courts.
SO ORDERED.
Kapunan and Hermosisima, Jr., JJ ., concur.
Footnotes
1. Rollo, p. 45.
2. Ibid., p. 34.
3. Ibid.
4. Associate Justice Consuelo Ynares Santiago, ponente, with Associate Justices Ricardo
L. Pronove, Jr. and Nicolas P. Lapeña, Jr., concurring.
10. See Mojica vs. Court of Appeals, 201 SCRA 517; Lim Julian vs. Lutero, 49 Phil. 703.
11. Act No. 1508.
12. See Philippine Refining Co. vs. Jarque, 61 Phil. 229.
13. Civil Code, Vol. 3, 1990 Edition by Ramon C. Aquino and Carolina C. Griño-Aquino, pp.
610-611.
14. 49 Phil. 647.
15. At p. 655. This ruling was reiterated in Jaca vs. Davao Lumber Company , 113 SCRA
107.
16. Being merely accessory in nature, it cannot exist independently of the principal
obligation.
17. Petitioner's Memorandum, p. 5; Rollo, p. 119.
23. At p. 362.
SYLLABUS
DECISION
GUTIERREZ, JR. , J : p
On appeal, the Court of Appeals reversed the decision of the RTC and dismissed the
complaint with costs against the petitioner. The Court of Appeals held that the tractor in
question still belonged to Wilfredo Dy when it was seized and levied by the sheriff by virtue
of the alias writ of execution issued in Civil Case No. R-16646.
The petitioner now comes to the Court raising the following questions:
A
"WHETHER OR NOT THE HONORABLE COURT OF APPEALS MISAPPREHENDED
THE FACTS AND ERRED IN NOT AFFIRMING THE TRIAL COURT'S FINDING THAT
OWNERSHIP OF THE FARM TRACTOR HAD ALREADY PASSED TO HEREIN
PETITIONER WHEN SAID TRACTOR WAS LEVIED ON BY THE SHERIFF
PURSUANT TO AN ALIAS WRIT OF EXECUTION ISSUED IN ANOTHER CASE IN
FAVOR OF RESPONDENT GELAC TRADING INC."
B
"WHETHER OR NOT THE HONORABLE COURT OF APPEALS EMBARKED ON
MERE CONJECTURE AND SURMISE IN HOLDING THAT THE SALE OF THE
AFORESAID TRACTOR TO PETITIONER WAS DONE IN FRAUD OF WILFREDO DY'S
CREDITORS, THERE BEING NO EVIDENCE OF SUCH FRAUD AS FOUND BY THE
TRIAL COURT."
C
The respondents claim that at the time of the execution of the deed of sale, no
constructive delivery was effected since the consummation of the sale depended upon the
clearance and encashment of the check which was issued in payment of the subject
tractor.
In the case of Servicewide Specialists Inc. v. Intermediate Appellate Court. (174 SCRA 80
[1989]), we stated that:
xxx xxx xxx
"The rule is settled that the chattel mortgagor continues to be the owner of the
property, and therefore, has the power to alienate the same; however, he is obliged
under pain of penal liability, to secure the written consent of the mortgagee.
(Francisco, Vicente, Jr., Revised Rules of Court in the Philippines, (1972), Volume
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IV-s Part I, p. 525) Thus, the instruments of mortgage are binding, while they
subsist, not only upon the parties executing them but also upon those who later,
by purchase or otherwise, acquire the properties referred to therein.
"The absence of the written consent of the mortgagee to the sale of the
mortgaged property in favor of a third person, therefore, effects not the validity of
the sale but only the penal liability of the mortgagor under the Revised Penal Code
and the binding effect of such sale on the mortgagee under the Deed of Chattel
Mortgage."
xxx xxx xxx
The mortgagor who gave the property as security under a chattel mortgage did not part
with the ownership over the same. He had the right to sell it although he was under the
obligation to secure the written consent of the mortgagee or he lays himself open to
criminal prosecution under the provision of Article 319 par. 2 of the Revised Penal Code.
And even if no consent was obtained from the mortgagee, the validity of the sale would
still not be affected. prLL
Thus, we see no reason why Wilfredo Dy, as the chattel mortgagor can not sell the subject
tractor. There is no dispute that the consent of Libra Finance was obtained in the instant
case. In a letter dated August 27, 1979, Libra allowed the petitioner to purchase the tractor
and assume the mortgage debt of his brother. The sale between the brothers was
therefore valid and binding as between them and to the mortgagee, as well.
Article 1496 of the Civil Code states that the ownership of the thing sold is acquired by the
vendee from the moment it is delivered to him in any of the ways specified in Articles 1497
to 1501 or in any other manner signing an agreement that the possession is transferred
from the vendor to the vendee. We agree with the petitioner that Articles 1498 and 1499
are applicable in the case at bar.
Article 1498 states:
"Art. 1498. When the sale is made through a public instrument, the execution
thereof shall be equivalent to the delivery of the thing which is the object of the
contract, if from the deed the contrary does not appear or cannot clearly be
inferred."
xxx xxx xxx
In the instant case, actual delivery of the subject tractor could not be made. However, there
was constructive delivery already upon the execution of the public instrument pursuant to
Article 1498 and upon the consent or agreement of the parties when the thing sold cannot
be immediately transferred to the possession of the vendee. (Art. 1499)
The respondent court avers that the vendor must first have control and possession of the
thing before he could transfer ownership by constructive delivery. Here, it was Libra
Finance which was in possession of the subject tractor due to Wilfredo's failure to pay the
amortization as a preliminary step to foreclosure. As mortgagee, he has the right of
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foreclosure upon default by the mortgagor in the performance of the conditions
mentioned in the contract of mortgage. The law implies that the mortgagee is entitled to
possess the mortgaged property because possession is necessary in order to enable him
to have the property sold.
While it is true that Wilfredo Dy was not in actual possession and control of the subject
tractor, his right of ownership was not divested from him upon his default. Neither could it
be said that Libra was the owner of the subject tractor because the mortgagee can not
become the owner of or convert and appropriate to himself the property mortgaged.
(Article 2088, Civil Code) Said property continues to belong to the mortgagor. The only
remedy given to the mortgagee is to have said property sold at public auction and the
proceeds of the sale applied to the payment of the obligation secured by the mortgagee.
(See Martinez v. PNB, 93 Phil. 765, 767 [1953]) There is no showing that Libra Finance has
already foreclosed the mortgage and that it was the new owner of the subject tractor.
Undeniably, Libra gave its consent to the sale of the subject tractor to the petitioner. It was
aware of the transfer of rights to the petitioner.
llcd
Where a third person purchases the mortgaged property, he automatically steps into the
shoes of the original mortgagor. (See Industrial Finance Corp. v. Apostol, 177 SCRA
521[1989]). His right of ownership shall be subject to the mortgage of the thing sold to
him. In the case at bar, the petitioner was fully aware of the existing mortgage of the
subject tractor to Libra. In fact, when he was obtaining Libra's consent to the sale, he
volunteered to assume the remaining balance of the mortgage debt of Wilfredo Dy which
Libra undeniably agreed to. cdphil
The payment of the check was actually intended to extinguish the mortgage obligation so
that the tractor could be released to the petitioner. It was never intended nor could it be
considered as payment of the purchase price because the relationship between Libra and
the petitioner is not one of sale but still a mortgage. The clearing or encashment of the
check which produced the effect of payment determined the full payment of the money
obligation and the release of the chattel mortgage. It was not determinative of the
consummation of the sale. The transaction between the brothers is distinct and apart from
the transaction between Libra and the petitioner. The contention, therefore, that the
consummation of the sale depended upon the encashment of the check is untenable.
The sale of the subject tractor was consummated upon the execution of the public
instrument on September 4, 1979. At this time constructive delivery was already effected.
Hence, the subject tractor was no longer owned by Wilfredo Dy when it was levied upon by
the sheriff in December, 1979. Well settled is the rule that only properties unquestionably
owned by the judgment debtor and which are not exempt by law from execution should be
levied upon or sought to be levied upon. For the power of the court in the execution of its
judgment extends only over properties belonging to the judgment debtor. (Consolidated
Bank and Trust Corp. v. Court of Appeals, G.R. No. 78771, January 23, 1991).
The respondents further claim that at that time the sheriff levied on the tractor and took
legal custody thereof no one ever protested or filed a third party claim.
It is inconsequential whether a third party claim has been filed or not by the petitioner
during the time the sheriff levied on the subject tractor. A person other than the judgment
debtor who claims ownership or right over levied properties is not precluded, however,
from taking other legal remedies to prosecute his claim. (Consolidated Bank and Trust
Corp. v. Court of Appeals, supra) This is precisely what the petitioner did when he filed the
action for replevin with the RTC.
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Anent the second and third issues raised, the Court accords great respect and weight to
the findings of fact of the trial court. There is no sufficient evidence to show that the sale
of the tractor was in fraud of Wilfredo and creditors. While it is true that Wilfredo and
Perfecto are brothers, this fact alone does not give rise to the presumption that the sale
was fraudulent. Relationship is not a badge of fraud (Goquiolay v. Sycip, 9 SCRA 663
[1963]). Moreover, fraud can not be presumed; it must be established by clear convincing
evidence. LexLib
We agree with the trial court's findings that the actuations of GELAC Trading were indeed
violative of the provisions on human relations. As found by the trial court, GELAC knew very
well of the transfer of the property to the petitioners on July 14, 1980 when it received
summons based on the complaint for replevin filed with the RTC by the petitioner.
Notwithstanding said summons, it continued to sell the subject tractor to one of its
stockholders on August 2, 1980.
WHEREFORE, the petition is hereby GRANTED. The decision of the Court of Appeals
promulgated on March 23,1990 is SET ASIDE and the decision of the Regional Trial Court
dated April 8, 1988 is REINSTATED.
SO ORDERED.
Fernan, C.J., Feliciano and Bidin, JJ., concur.
Davide, Jr., J., took no part.
DECISION
CARPIO MORALES , ** J : p
Terrymanila, Inc. 1 (Terrymanila) led a petition for voluntary insolvency with the
Regional Trial Court (RTC) of Bataan on February 13, 1991. 2 One of its creditors was
Rizal Commercial Banking Corporation (petitioner) with which it had an obligation of P3
Million that was secured by a chattel mortgage executed on February 16, 1989. The
chattel mortgage was duly recorded in the notarial register of Amado Castano, a notary
public for and in the Province of Bataan. 3 aHATDI
it claiming that its counsel received a notice only on the day of the sale. 1 0
Petitioner, alleging that the annulment of sale case led by respondent stated no
cause of action, led on December 3, 1992 a Motion to Dismiss 1 1 which was, however,
denied by Branch 16 of the Manila RTC. 1 2
Petitioner appealed the denial of the Motion to Dismiss via certiorari to the Court
of Appeals, docketed as CA-G.R. SP No. 31125 . The appellate court dismissed the
petition, by Decision of February 21, 1994, it holding that respondent's petition for
annulment "prima facie states a suf cient cause of action and that the [trial court] in
denying [herein petitioner RCBC's] motion to dismiss, had acted advisedly and well
within its powers and authority". 1 3
Petitioner thereupon led before the Manila RTC its Answer Ex Abundante
Cautelam 1 4 in the annulment of sale case in which it lodged a Compulsory
Counterclaim by seeking P1 Million for moral damages, P500,000 for exemplary
damages, and P250,000 for attorney's fees. It thereafter elevated the case to this Court
via petition for review on certiorari, docketed as G.R. 115662 . This Court by minute
Resolution of November 7, 1994, 1 5 denied the petition for failure to show that a
reversible error was committed by the appellate court. 1 6
Trial on the merits of the annulment of sale case thereupon ensued. By Decision
1 7 of October 15, 1997, Branch 16 of the Manila RTC rendered judgment in favor of
respondent, disposing as follows:
WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered:
SO ORDERED.
Both parties appealed to the Court of Appeals which, by Decision 1 8 of April 17,
2007, denied herein petitioner's appeal and partly granted herein respondent's by
increasing to P50,000 the attorney's fees awarded to it and additionally awarding it
exemplary damages and imposing interest on the principal amount payable to it. Thus it
disposed: aIAcCH
In partly granting respondent's appeal from the Decision of Br. 16 of RTC Manila,
the appellate court ratiocinated that respondent had a right to be "timely informed" of
the foreclosure sale.
RCBC's citations [sic] of numerous rulings on the matter more than supports the
fact that as mortgagee, it had preferential right over the chattels subject of the
foreclosure sale. This however is not at issue in this case. What is being
contested is the right of Royal Cargo to be timely informed of the foreclosure
sale as it too had interests over the mortgagee Terrymanila, Inc.'s assets. We note
that this matter had already been passed upon by this Court on February 21,
1994 in CA-G.R. SP No. 31125 as well as by the Supreme Court on November 7,
1994 in G.R. No. [1]15662. RCBC, by arguing about its preferential right as
mortgagee in the instant appeal merely reiterates what had already been
considered and ruled upon in earlier proceedings.
The above-quoted provision clearly requires that the mortgagee should notify in
writing the mortgagor or person holding under him of the time and place of
the sale by personal delivery of the notice. Thus, RCBC's failure to comply with
this requirement warranted a ruling against it by the RTC. (Italics in the original;
emphasis partly in the original; underscoring supplied) TIaCcD
Its motion for reconsideration having been denied by the appellate court, 1 9
petitioner lodged the present petition for review which raises the following issues:
I
II
WHETHER OR NOT THE TRIAL COURT AND THE COURT OF APPEALS GRAVELY
ERRED IN DECLARING PETITIONER GUILTY OF CONSTRUCTIVE FRAUD IN
FAILING TO PROVIDE RESPONDENT A TEN (10)-DAY PRIOR NOTICE OF THE
FORECLOSURE SALE.
III
WHETHER OR NOT THE PETITIONER WAS CORRECTLY HELD LIABLE TO PAY
RESPONDENT P296,662.[16] PLUS INTEREST THEREON, EXEMPLARY DAMAGES
AND ATTORNEY'S FEES.
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IV
WHETHER OR NOT PETITIONER IS ENTITLED TO AN AWARD OF ATTORNEY'S
FEES. 2 0 (Underscoring supplied)
Petitioner faults the appellate court in applying res judicata by holding that
respondent's entitlement to notice of the auction sale had already been settled in its
Decision in CA G.R. SP No. 31125 and in this Court's Decision in G.R. No. 115662. For,
so it contends, the decisions in these cases dealt on interlocutory issues, viz.: the issue
of whether respondent's petition for annulment of the sale stated a cause of action, and
the issue of whether petitioner's motion to dismiss was properly denied. 2 1
Arguing against respondent's position that it was entitled to notice of the auction
sale, petitioner cites the Chattel Mortgage Law which enumerates who are entitled to
be noti ed under Section 14 thereof. It posits that "[h]ad the law intended to include in
said Section an attaching creditor or a judgment creditor [like herein respondent], it
could have so speci cally stated therein, since in the preceding section, Section 13, it
already mentioned that a subsequent attaching creditor may redeem". 2 2
Petitioner goes on to fault the appellate court in echoing its ruling in CA-G.R. SP
No. 31125 that Sections 13 2 3 and 14 of the Chattel Mortgage Law should be read in
tandem since the right given to the attaching creditor under Section 13 "would not
serve its purpose if we were to exclude the subsequent attaching creditor from those
who under Section 14 need to be noti ed of the foreclosure sale ten days before it is
held". 2 4 ACcaET
There is bar by prior judgment when, as between the rst case where the
judgment was rendered, and the second case that is sought to be barred, there is
identity of parties, subject matter, and causes of action. Where there is identity of
parties and subject matter in the rst and second cases, but no identity of causes of
action, there is conclusiveness of judgment . 3 3 The rst judgment is conclusive only
as to those matters actually and directly controverted and determined, not as to
matters merely involved therein.
The Court of Appeals, in CA G.R. SP No. 31125, resolved only the interlocutory
issue of whether the trial court's Order of April 12, 1993 denying petitioner's motion to
dismiss respondent's petition for annulment was attended by grave abuse of
discretion. The appellate court did not rule on the merits of the petition as to establish
a controlling legal rule which has to be subsequently followed by the parties in the
same case. It merely held that respondent's petition in the trial court stated a suf cient
cause of action. Its determination of respondent's entitlement to notice of the public
auction sale was at best prima facie. Thus, the appellate court held:
In view of the above, We are of the considered view that the private respondent's
petition in the court a quo prima facie states a suf cient cause of action
and that the public respondent in denying the petitioner's motion to dismiss, had
acted advisedly and well within its powers and authority. We, therefore, nd no
cause to annul the challenged order issued by the respondent court in
Civil Case No. 92-62106 . (Underscoring in the original; emphasis and italics
supplied) 3 4
An order denying a motion to dismiss is merely interlocutory and cannot give rise
to res judicata, hence, it is subject to amendments until the rendition of the nal
judgment. 3 5
On respondent's contention that petitioner, as mortgagee, had the duty to notify
it of the public auction sale, the Court finds the same immaterial to the case.
Section 13 of the Chattel Mortgage Law allows the would-be redemptioner
thereunder to redeem the mortgaged property only before its sale. Consider the
following pronouncement in Paray: 3 6 DCSTAH
[T]here is no law in our statute books which vests the right of redemption over
personal property. Act No. 1508, or the Chattel Mortgage Law, ostensibly could
have served as the vehicle for any legislative intent to bestow a right of
redemption over personal property, since that law governs the extrajudicial sale of
mortgaged personal property, but the statute is de nitely silent on the point. And
Section 39 of the 1997 Rules of Civil Procedure, extensively relied upon by the
Court of Appeals, starkly utters that the right of redemption applies to real
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properties, not personal properties, sold on execution. (Emphasis, italics and
underscoring supplied)
Parenthetically, respondent has not shown that it was prejudiced by the auction
sale since the insolvency court already determined that even if the mortgaged
properties were foreclosed, there were still suf cient, unencumbered assets of
Terrymanila to cover the obligations owing to other creditors, including that of
respondent's. 4 5
In any event, even if respondent would have participated in the auction sale and
matched petitioner's bid, the superiority of petitioner's lien over the mortgaged assets
would preclude respondent from recovering the chattels. DTIaHE
It has long been settled by this Court that "the right of those who acquire said
properties should not and can not 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 faith, and without the least indication of
fraud . . . . . In purchasing it, with full knowledge that such circumstances existed,
it should be presumed that he did so, very much willing to respect the lien existing
thereon, since he should not have expected that with the purchase, he would
acquire a better right than that which the vendor then had. (Emphasis and
underscoring supplied) 4 6
It bears noting that the chattel mortgage in favor of petitioner was registered
more than two years before the issuance of a writ of attachment over some of
Terrymanila's chattels in favor of respondent. This is signi cant in determining who
between petitioner and respondent should be given preference over the subject
properties. Since the registration of a chattel mortgage is an effective and binding
notice to other creditors of its existence and creates a real right or lien that follows the
property wherever it may be, 4 7 the right of respondent, as an attaching creditor or as
purchaser, had it purchased the mortgaged chattel at the auction sale, is subordinate to
the lien of the mortgagee who has in his favor a valid chattel mortgage. 4 8
Contrary then to the appellate court's ruling, petitioner is not liable for
constructive fraud for proceeding with the auction sale. Nor for subsequently selling
the chattel. For foreclosure suits may be initiated even during insolvency proceedings,
as long as leave must rst be obtained from the insolvency court 4 9 as what petitioner
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did.
The appellate court's award of exemplary damages and attorney's fees for
respondent, given petitioner's good faith, is thus not warranted.
As for petitioner's prayer for attorney's fees in its Compulsory Counterclaim, the
same is in order, the dismissal of respondent's Complaint nowithstanding. * 5 0 Perkin
Elmer Singapore v. Dakila Trading, 5 1 citing Pinga v. Heirs of German Santiago, 5 2
enlightens:
It bears to emphasize that petitioner's counterclaim against respondent is for
damages and attorney's fees arising from the unfounded suit. While respondent's
Complaint against petitioner is already dismissed, petitioner may have very well
incurred damages and litigation expenses such as attorney's fees since it was
forced to engage legal representation in the Philippines to protect its rights and to
assert lack of jurisdiction of the courts over its person by virtue of the improper
service of summons upon it. Hence, the cause of action of petitioner's
counterclaim is not eliminated by the mere dismissal of respondent's complaint.
5 3 (Underscoring supplied) SIcEHC
To the Court, the amount of P250,000 prayed for by petitioner in its Counterclaim is just
and equitable, given the nature and extent of legal services employed in controverting
respondent's unfounded claim.
WHEREFORE , the petition for review is GRANTED . The challenged Decision and
Resolution of the Court of Appeals are REVERSED and SET ASIDE . Civil Case No. 92-
62106 lodged before the Regional Trial Court of Manila, Branch 16, is DISMISSED for
lack of merit.
Respondent, Royal Cargo Corporation, is ORDERED to pay petitioner, Rizal
Commercial Banking Corporation, P250,000 as and for attorney's fees.
No costs.
SO ORDERED.
Ynares-Santiago, * Peralta, *** Del Castillo and Abad, JJ., concur.
Footnotes
* Per Special Order No. 706 and additional member per Special Order No. 691.
** Per Special Order No. 690 in lieu of the sabbatical leave of Senior Associate Justice
Leonardo A. Quisumbing.
18. Rollo, pp. 59-76; Penned by Associate Justice Josefina Guevara-Salonga with
Associate Justices Vicente Q. Roxas and Ramon R. Garcia concurring.
19. Id. at 78-79.
20. Id. at 21.
21. Id. at 31-33.
22. Id. at 33-34.
23. Section 13 of the Chattel Mortgage Law reads: When the condition of a chattel
mortgage is broken, a mortgagor or person holding a subsequent mortgage, or a
subsequent attaching creditor may redeem the same by paying or delivering to the
mortgagee the amount due on such mortgage and the reasonable costs and expenses
incurred by such breach of condition before the sale thereof. An attaching creditor who
redeems shall be subrogated to the rights of the mortgagee and entitled to foreclose the
mortgage in the same manner that the mortgagee could foreclose it by the terms of this
Act. (Emphasis and underscoring supplied)
44. Art. 2244. With reference to other property, real and personal of the debtor, the following
claims or credits shall be preferred in the order named:
xxx xxx xxx
(14) Credits which, without special privilege, appear in (a) a public instrument; or (b) in a
final judgment, if they have been the subject of litigation. These credits shall have
preference among themselves in the order of priority of the dates of the instruments and
of the judgments, respectively. (Underscoring supplied)
45. Vide: De Amuzategui v. Macleod, G.R. No. 10629, December 24, 1915, 33 Phil. 80. In
this case, the Court held that "it is clear that, with the declaration of insolvency, courts in
insolvency obtain full and complete jurisdiction over all property of the insolvent and of
all claims by and against him, with full authority to suspend, on the application of the
debtor, a creditor, or the assignee, any action or proceeding then pending in any court, to
await the determination of the court of insolvency on the question of the bankrupt's
discharge. The assignee in the case at bar asked that the action be dismissed on the
ground that the court in insolvency having complete jurisdiction over the affairs of an
insolvent debtor, and particularly the distribution of his estate for the payment of his
debts, an action begun in another court which tends in any material way to interfere with
the exercise of that jurisdiction is prohibited either expressly or impliedly by the
Insolvency Law and cannot, therefore, be maintained when appropriate objection by the
proper parties is interposed. It is evident that if the various courts of the Islands may by
action or other proceeding intervene in the affairs of an insolvent debtor and with the
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administration of the court in insolvency, great confusion would result and the
termination of the insolvency proceeding might be delayed unduly. We believe it to be
the policy of the Insolvency Law to place the insolvent debtor and all his assets and
liabilities completely within the jurisdiction and control of the court in insolvency and not
to permit the intervention of any other court in the bankrupt's concerns or in the
administration of his estate".
46. Cabral v. Evangelista, G.R. No. L-26860, July 30, 1969, 139 Phil. 300, 306-307.
47. Allied Banking Corp. v. Salas, G.R. No. L-49081, December 13, 1988, 168 SCRA 414,
420.
48. Northern Motors Inc. v. Judge Coquia, G.R. No. L-40018, August 29, 1975, 160 Phil.
1091, 1098.
49. 1 J. VITUG, COMMERCIAL LAWS AND JURISPRUDENCE 549 (2006).
SYNOPSIS
The Supreme Court found the petition meritorious. Only notice to the debtor of the
assignment of credit is required. His consent is not required. In contrast, consent of the
creditor-mortgagee to the alienation of the mortgaged property is necessary in order to
bind said creditor. Accordingly, the decision of the Court of Appeals was reversed and set
aside. The decision of the Regional Trial Court was affirmed and reinstated.
SYLLABUS
DECISION
YNARES-SANTIAGO , J : p
This controversy is between a mortgagor who alienated the mortgaged property without
the consent of the mortgagee, on the one hand, and the assignee of the mortgagee to
whom the latter assigned his credit without notice to the mortgagor, on the other hand. cda
Sometime in 1975, respondent spouses Atty. Jesus and Elizabeth Ponce bought on
installment a Holden Torana vehicle from C.R. Tecson Enterprises. They executed a
promissory note and a chattel mortgage on the vehicle dated December 24, 1975 in favor
of the C.R. Tecson Enterprises to secure payment of the note. The mortgage was
registered both in the Registry of Deeds and the Land Transportation Office. On the same
date, C.R. Tecson Enterprises, in turn, executed a deed of assignment of said promissory
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note and chattel mortgage in favor of Filinvest Credit Corporation with the conformity of
respondent spouses. The latter were aware of the endorsement of the note and the
mortgage to Filinvest as they in fact availed of its financing services to pay for the car. In
1976, respondent spouses transferred and delivered the vehicle to Conrado R. Tecson by
way of sale with assumption of mortgage. Subsequently, in 1978, Filinvest assigned all its
rights and interest over the same promissory note and chattel mortgage to petitioner
Servicewide Specialists Inc. without notice to respondent spouses. Due to the failure of
respondent spouses to pay the installments under the promissory note from October
1977 to March 1978, and despite demands to pay the same or to return the vehicle,
petitioner was constrained to file before the Regional Trial Court of Manila on May 22,
1978 a complaint for replevin with damages against them, docketed as Civil Case No.
115567. In their answer, respondent spouses denied any liability claiming they had already
returned the car to Conrado Tecson pursuant to the Deed of Sale with Assumption of
Mortgage. Thus, they filed a third party complaint against Conrado Tecson praying that in
case they are adjudged liable to petitioner, Conrado Tecson should reimburse them.
After trial, the lower court found respondent spouses jointly and solidarily liable to
petitioner, however, the third party defendant Conrado Tecson was ordered to reimburse
the respondent spouses for the sum that they would pay to petitioner. 1 On appeal, the
Court of Appeals reversed and set aside the judgment of the court a quo on the principal
ground that respondent spouses were not notified of the assignment of the promissory
note and chattel mortgage to petitioner. 2 Hence, this petition for review.
The resolution of the petition hinges on whether the assignment of a credit requires notice
to the debtor in order to bind him. More specifically, is the debtor-mortgagor who sold the
property to another entitled to notice of the assignment of credit made by the creditor to
another party such that if the debtor was not notified of the assignment, he can no longer
be held liable since he already alienated the property? Conversely, is the consent of the
creditor-mortgagee necessary when the debtor-mortgagor alienates the property to a
third person?
Only notice to the debtor of the assignment of credit is required. His consent is not
required. In contrast, consent of the creditor-mortgagee to the alienation of the mortgaged
property is necessary in order to bind said creditor. To evade liability, respondent spouses
invoked Article 1626 of the Civil Code which provides that "the debtor who, before having
knowledge of the assignment, pays his creditor shall be released from the obligation."
They argue that they were not notified of the assignment made to petitioner. This
provision, however, is applicable only where the debtor pays the creditor prior to acquiring
knowledge of the latter’s assignment of his credit. It does not apply, nor is it relevant, to
cases of non-payment after the debtor came to know of the assignment of credit. This is
precisely so since the debtor did not make any payment after the assignment. LibLex
In the case at bar, what is relevant is not the assignment of credit between petitioner and
its assignor, but the knowledge or consent of the creditor's assignee to the debtor-
mortgagor's sale of the property to another.
When the credit was assigned to petitioner, only notice to but not the consent of the
debtor-mortgagor was necessary to bind the latter. Applying Article 1627 of the Civil Code,
3 the assignment made to petitioner includes the accessory rights such as the mortgage.
Article 2141, on the other hand, states that the provisions concerning a contract of pledge
shall be applicable to a chattel mortgage, such as the one at bar, insofar as there is no
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conflict with Act No. 1508, the Chattel Mortgage Law. As provided in Article 2096 in
relation to Article 2141 of the Civil Code, 4 a thing pledged may be alienated by the pledgor
or owner "with the consent of the pledgee." This provision is in accordance with Act No.
1508 which provides that "a mortgagor of personal property shall not sell or pledge such
property, or any part thereof, mortgaged by him without the consent of the mortgagee in
writing on the back of the mortgage and on the margin of the record thereof in the office
where such mortgage is recorded." 5 Although this provision in the chattel mortgage has
been expressly repealed by Article 367 of the Revised Penal Code, yet under Article 319(2)
of the same Code, the sale of the thing mortgaged may be made provided that the
mortgagee gives his consent and that the same is recorded. 6 In any case, applying by
analogy Article 2128 of the Civil Code 7 to a chattel mortgage, it appears that a mortgage
credit may be alienated or assigned to a third person. Since the assignee of the credit
steps into the shoes of the creditor-mortgagee to whom the chattel was mortgaged, it
follows that the assignee's consent is necessary in order to bind him of the alienation of
the mortgaged thing by the debtor-mortgagor. This is tantamount to a novation. As the
new assignee, petitioner's consent is necessary before respondent spouses' alienation of
the vehicle can be considered as binding against third persons. Petitioner is considered a
third person with respect to the sale with mortgage between respondent spouses and
third party defendant Conrado Tecson.
In this case, however, since the alienation by the respondent spouses of the vehicle
occurred prior to the assignment of credit to petitioner, it follows that the former were not
bound to obtain the consent of the latter as it was not yet an assignee of the credit at the
time of the alienation of the mortgaged vehicle.
The next question is whether respondent spouses needed to notify or secure the consent
of petitioner's predecessor to the alienation of the vehicle. The sale with assumption of
mortgage made by respondent spouses is tantamount to a substitution of debtors. In
such case, mere notice to the creditor is not enough, his consent is always necessary as
provided in Article 1293 of the Civil Code. 8 Without such consent by the creditor, the
alienation made by respondent spouses is not binding on the former. On the other hand,
Articles 1625, 9 1626 1 0 and 1627 of the Civil Code on assignment of credits do not
require the debtor's consent for the validity thereof and so as to render him liable to the
assignee. The law speaks not of consent but of notice to the debtor, the purpose of which
is to inform the latter that from the date of assignment he should make payment to the
assignee and not to the original creditor. Notice is thus for the protection of the assignee
because before said date, payment to the original creditor is valid.
When Tecson Enterprises assigned the promissory note and the chattel mortgage to
Filinvest, it was made with respondent spouses' tacit approval. When Filinvest in turn, as
assignee, assigned it further to petitioner, the latter should have notified the respondent
spouses of the assignment in order to bind them. This, they failed to do. The testimony of
petitioner's witness that notice of assignment was sent to respondent spouses was
stricken off the record. Having asserted the affirmative on the issue of notice, petitioner
should have substantiated its allegations in order to obtain a favorable judgment. In civil
cases, the burden is on the party who would be defeated if no evidence is given on either
side. 1 1 Being the plaintiff in the trial below, petitioner must establish its case, relying on
the strength of its own evidence and not upon the weakness of that of its opponent. 1 2 The
consent to the assignment given by respondent spouses to Filinvest cannot be construed
as the spouses' knowledge of the assignment to petitioner precisely because at the time
of the assignment to the latter, the spouses had earlier sold the vehicle to another. LLpr
d) costs of suit.
In connection with the Third Party Complaint of the respondents, the third party defendant
Conrado Tecson is hereby ordered to reimburse respondents Ponce for all the sums the
latter would pay to petitioner, and attorney's fees of P3,000.00.
SO ORDERED. prcd
1. Decision dated November 8, 1989 of Regional Trial Court (RTC-Branch IX, Manila),
penned by Judge Edilberto G. Sandoval, pp. 11-12; Rollo, pp. 78-79, reads: "WHEREFORE,
judgment is hereby rendered, ordering the defendants to pay the plaintiff jointly and
severally the following sums:
a.) P26,633,09, plus interest at 14% per annum from April 26, 1978 until fully
paid;
b.) 25% of the above sum in item (a) as liquidated damages;
3. The assignment of a credit includes all the accessory rights, such as a guaranty,
mortgage, pledge or preference.
4. The provisions of this Code on pledge, insofar as they are not in conflict with the Chattel
Mortgage Law shall be applicable to chattel mortgages.
SYNOPSIS
This is a review on certiorari of a judgment of the Court of Appeals affirming in toto the
decision of the Regional Trial Court of Makati to award respondent bank's deficiency claim,
arising from a loan secured by a chattel mortgage.
The Court denied the petition. It held that since the Chattel Mortgage Law bars the
creditor-mortgagee from retaining the excess of the sale proceeds, there is a corollary
obligation on the part of the debtor-mortgagor to pay the deficiency in case of a reduction
in the price at public auction.
As to petitioners' contention that the public auction sale is void on ground of fraud and
inadequacy of price, the Court ruled that parties may not bring on appeal issues that were
not raised on trial. Petitioners never assailed the validity of the sale in the RTC and only in
the Court of Appeals did they attempt to prove inadequacy of price. Moreover, fraud is a
serious allegation that requires full and convincing evidence and may not be inferred from
the lone circumstance that it was only respondent bank that bid in the sale of the
foreclosed properties. TAaIDH
SYLLABUS
1. CIVIL LAW; CHATTEL MORTGAGE LAW (ACT NO. 1508, AS AMENDED); DEBTOR-
MORTGAGOR BARRED FROM RETAINING EXCESS OF SALE PROCEEDS AND OBLIGED TO
PAY DEFICIENCY IN CASE OF REDUCTION IN PRICE AT PUBLIC AUCTION. — It is clear
from Section 14 of Act No. 1508, as amended that the effects of foreclosure under the
Chattel Mortgage Law run inconsistent with those of pledge under Article 2115. Whereas,
in pledge, the sale of the thing pledged extinguishes the entire principal obligation, such
that the pledgor may no longer recover proceeds of the sale in excess of the amount of the
principal obligation, Section 14 of the Chattel Mortgage Law expressly entitles the
mortgagor to the balance of the proceeds, upon satisfaction of the principal obligation
and costs. Since the Chattel Mortgage Law bars the creditor-mortgagee from retaining the
excess of the sale proceeds there is a corollary obligation on the part of the debtor-
mortgagee to pay the deficiency in case of a reduction in the price at public auction.
(Manila Trading and Supply Co. vs. Tamaraw Plantation Co., cited in Ablaza vs. Ignacio, G.R.
No. L-11466, May 23, 1958 [unpublished]). We find no reason to disturb the ruling in Ablaza
vs. Ignacio, and the cases reiterating. it. DEaCSA
DECISION
GONZAGA-REYES , J : p
The Court of Appeals affirmed the RTC decision. Hence, this Petition.
The petition raises the following grounds:
"1. Respondent appellate court gravely erred in not reversing the decision of
the trial court, and in not holding that the public auction sale of petitioner
PAMECA's chattels were tainted with fraud, as the chattels of the said
petitioner were bought by private respondent as sole bidder in only 1/6 of
the market value of the property, hence unconscionable and inequitable,
and therefore null and void.
2. Respondent appellate court gravely erred in not applying by analogy Article
1484 and Article 2115 of the Civil Code by reading the spirit of the law, and
taking into consideration the fact that the contract of loan was a contract
of adhesion.
3. The appellate court gravely erred in holding the petitioners Herminio Teves,
Victoria Teves and Hiram Diday R. Pulido solidarily liable with PAMECA
Wood Treatment Plant, Inc. when the intention of the parties was that the
loan is only for the corporation's benefit."LLphil
Relative to the first ground, petitioners contend that the amount of P322,350.00 at which
respondent bank bid for and purchased the mortgaged properties was unconscionable
and inequitable considering that, at the time of the public sale, the mortgaged properties
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had a total value of more than P2,000,000.00. According to petitioners, this is evident from
an inventory dated March 31, 1980, 5 which valued the properties at P2,518,621.00, in
accordance with the terms of the chattel mortgage contract 6 between the parties that
required that the inventories "be maintained at a level no less than P2 million". Petitioners
argue that respondent bank's act of bidding and purchasing the mortgaged properties for
P322,350.00 or only about 1/6 of their actual value in a public sale in which it was the sole
bidder was fraudulent, unconscionable and inequitable, and constitutes sufficient ground
for the annulment of the auction sale.
To this, respondent bank contends that the above-cited inventory and chattel mortgage
contract were not in fact submitted as evidence before the RTC of Makati, and that these
documents were first produced by petitioners only when the case was brought to the
Court of Appeals. 7 The Court of Appeals, in turn, disregarded these documents for
petitioners' failure to present them in evidence, or to even allude to them in their
testimonies before the lower court. 8 Instead, respondent court declared that it is not at all
unlikely for the chattels to have sufficiently deteriorated as to have fetched such a low
price at the time of the auction sale. 9 Neither did respondent court find anything irregular
or fraudulent in the circumstance that respondent bank was the sole bidder in the sale, as
all the legal procedures for the conduct of a foreclosure sale have been complied with,
thus giving rise to the presumption of regularity in the performance of public duties. 1 0
Petitioners also question the ruling of respondent court, affirming the RTC, to hold private
petitioners, officers and stockholders of petitioner PAMECA, liable with PAMECA for the
obligation under the loan obtained from respondent bank, contrary to the doctrine of
separate and distinct corporate personality. 11 Private petitioners contend that they
became signatories to the promissory note "only as a matter of practice by the respondent
bank", that the promissory note was in the nature of a contract of adhesion, and that the
loan was for the benefit of the corporation, PAMECA, alone. 12
Lastly, invoking the equity jurisdiction of the Supreme Court, petitioners submit that
Articles 1484 1 3 and 2115 1 4 of the Civil Code be applied in analogy to the instant case to
preclude the recovery of a deficiency claim. 1 5
Petitioners are not the first to posit the theory of the applicability of Article 2115 to
foreclosures of chattel mortgage. In the leading case of Ablaza vs. Ignacio, 1 6 the lower
court dismissed the complaint for collection of deficiency judgment in view of Article 2141
of the Civil Code, which provides that the provisions of the Civil Code on pledge shall also
apply to chattel mortgages, insofar as they are not in conflict with the Chattel Mortgage
Law. It was the lower court's opinion that, by virtue of Article 2141, the provisions of Article
2115 which deny the creditor-pledgee the right to recover deficiency in case the proceeds
of the foreclosure sale are less than the amount of the principal obligation, will apply. prcd
This Court reversed the ruling of the lower court and held that the provisions of the Chattel
Mortgage Law regarding the effects of foreclosure of chattel mortgage, being contrary to
the provisions of Article 2115, Article 2115 in relation to Article 2141, may not be applied
to the case.
Section 14 of Act No. 1508, as amended, or the Chattel Mortgage Law, states:
"xxx xxx xxx
The officer making the sale shall, within thirty days thereafter, make in writing a
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return of his doings and file the same in the office of the Registry of Deeds where
the mortgage is recorded, and the Register of Deeds shall record the same. The
fees of the officer for selling the property shall be the same as the case of sale on
execution as provided in Act Numbered One Hundred and Ninety, and the
amendments thereto, and the fees of the Register of Deeds for registering the
officer's return shall be taxed as a part of the costs of sale, which the officer shall
pay to the Register of Deeds. The return shall particularly describe the articles
sold, and state the amount received for each article, and shall operate as a
discharge of the lien thereon created by the mortgage. The proceeds of such sale
shall be applied to the payment, first, of the costs and expenses of keeping and
sale, and then to the payment of the demand or obligation secured by such
mortgage, and the residue shall be paid to persons holding subsequent
mortgages in their order, and the balance, after paying the mortgage, shall be paid
to the mortgagor or persons holding under him on demand." (Emphasis supplied)
cdasia
It is clear from the above provision that the effects of foreclosure under the Chattel
Mortgage Law run inconsistent with those of pledge under Article 2115. Whereas, in
pledge, the sale of the thing pledged extinguishes the entire principal obligation, such that
the pledgor may no longer recover proceeds of the sale in excess of the amount of the
principal obligation, Section 14 of the Chattel Mortgage Law expressly entitles the
mortgagor to the balance of the proceeds, upon satisfaction of the principal obligation
and costs.
Since the Chattel Mortgage Law bars the creditor-mortgagee from retaining the excess of
the sale proceeds there is a corollary obligation on the part of the debtor-mortgagee to
pay the deficiency in case of a reduction in the price at public auction. As explained in
Manila Trading and Supply Co. vs. Tamaraw Plantation Co., 1 7 cited in Ablaza vs. Ignacio,
supra:
"While it is true that section 3 of Act No. 1508 provides that 'a chattel mortgage is
a conditional sale', it further provides that it 'is a conditional sale of personal
property as security for the payment of a debt, or for the performance of some
other obligation specified therein.' The lower court overlooked the fact that the
chattels included in the chattel mortgage are only given as security and not as a
payment of the debt, in case of a failure of payment. cdtai
The theory of the lower court would lead to the absurd conclusion that if the
chattels mentioned in the mortgage, given as security, should sell for more than
the amount of the indebtedness secured, that the creditor would be entitled to the
full amount for which it might be sold, even though that amount was greatly in
excess of the indebtedness. Such a result certainly was not contemplated by the
legislature when it adopted Act No. 1508. There seems to be no reason supporting
that theory under the provision of the law. The value of the chattels changes
greatly from time to time, and sometimes very rapidly. If, for example, the chattels
should greatly increase in value and a sale under that condition should result in
largely overpaying the indebtedness, and if the creditor is not permitted to retain
the excess, then the same token would require the debtor to pay the deficiency in
case of a reduction in the price of the chattels between the date of the contract
and a breach of the condition.
Mr. Justice Kent, in the 12th Edition of his Commentaries, as well as other authors
on the question of chattel mortgages, have said, that 'in case of a sale under a
foreclosure of a chattel mortgage, there is no question that the mortgagee or
creditor may maintain an action for the deficiency, if any should occur.' And the
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fact that Act No. 1508 permits a private sale, such sale is not, in fact, a
satisfaction of the debt, to any greater extent than the value of the property at the
time of the sale. The amount received at the time of the sale, of course, always
requiring good faith and honesty in the sale, is only a payment, pro tanto, and an
action may be maintained for a deficiency in the debt."
We find no reason to disturb the ruling in Ablaza vs. Ignacio, and the cases reiterating it. 1 8
Neither do We find tenable the application by analogy of Article 1484 of the Civil Code to
the instant case. As correctly pointed out by the trial court, the said article applies clearly
and solely to the sale of personal property the price of which is payable in installments.
Although Article 1484, paragraph (3) expressly bars any further action against the
purchaser to recover an unpaid balance of the price, where the vendor opts to foreclose
the chattel mortgage on the thing sold, should the vendee's failure to pay cover two or
more installments, this provision is specifically applicable to a sale on installments.
To accommodate petitioners' prayer even on the basis of equity would be to expand the
application of the provisions of Article 1484 to situations beyond its specific purview, and
ignore the language and intent of the Chattel Mortgage Law. Equity, which has been aptly
described as "justice outside legality", is applied only in the absence of, and never against,
statutory law or judicial rules of procedure. 1 9
We are also unable to find merit in petitioners' submission that the public auction sale is
void on grounds of fraud and inadequacy of price. Petitioners never assailed the validity of
the sale in the RTC, and only in the Court of Appeals did they attempt to prove inadequacy
of price through the documents, i.e., the "Open-End Mortgage on Inventory" and inventory
dated March 31, 1980, likewise attached to their Petition before this Court. Basic is the
rule that parties may not bring on appeal issues that were not raised on trial. LLpr
Having nonetheless examined the inventory and chattel mortgage document as part of the
records, We are not convinced that they effectively prove that the mortgaged properties
had a market value of at least P2,000,000.00 on January 18, 1984, the date of the
foreclosure sale. At best, the chattel mortgage contract only indicates the obligation of the
mortgagor to maintain the inventory at a value of at least P2,000,000.00, but does not
evidence compliance therewith. The inventory, in turn, was as of March 31, 1980, or even
prior to April 17, 1980, the date when the parties entered into the contracts of loan and
chattel mortgage, and is far from being an accurate estimate of the market value of the
properties at the time of the foreclosure sale four years thereafter. Thus, even assuming
that the inventory and chattel mortgage contract were duly submitted as evidence before
the trial court, it is clear that they cannot suffice to substantiate petitioners' allegation of
inadequacy of price.
Furthermore, the mere fact that respondent bank was the sole bidder for the mortgaged
properties in the public sale does not warrant the conclusion that the transaction was
attended with fraud. Fraud is a serious allegation that requires full and convincing
evidence, 2 0 and may not be inferred from the lone circumstance that it was only
respondent bank that bid in the sale of the foreclosed properties. The sparseness of
petitioners' evidence in this regard leaves Us no discretion but to uphold the presumption
of regularity in the conduct of the public sale.
We likewise affirm private petitioners' joint and several liability with petitioner corporation
in the loan. As found by the trial court and the Court of Appeals, the terms of the
promissory note unmistakably set forth the solidary nature of private petitioners'
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commitment. Thus: cdrep
"On or before May 12, 1980, for value received, PAMECA WOOD TREATMENT
PLANT, INC., a corporation organized and existing under the laws of the
Philippines, with principal office at 304 El Hogar Filipina Building, San Juan,
Manila, promise to pay to the order of DEVELOPMENT BANK OF THE
PHILIPPINES at its office located at corner Buendia and Makati Avenues, Makati,
Metro Manila, the principal sum of TWO HUNDRED SIXTY SEVEN THOUSAND
EIGHT HUNDRED AND EIGHTY ONE & 67/100 US DOLLARS (US$267,881.67)
with interest at the rate of three per cent (3%) per annum over DBP's borrowing
rate for these funds. Before the date of maturity, we hereby bind ourselves, jointly
and severally, to make partial payments as follows:"
By:
(Sgd) HERMINIO G. TEVES
(For himself & as President of above-named corporation)
(Sgd) HIRAM DIDAY PULIDO
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(Sgd) VICTORIA V. TEVES" 2 2
From the foregoing, it is clear that private petitioners intended to bind themselves
solidarily with petitioner PAMECA in the loan. As correctly submitted by respondent bank,
private petitioners are not made to answer for the corporate act of petitioner PAMECA, but
are made liable because they made themselves co-makers with PAMECA under the
promissory note. LibLex
IN VIEW OF THE FOREGOING, the Petition is DENIED and the Decision of the Court of
Appeals dated April 23, 1992 in CA G.R. CV No. 27861 is hereby AFFIRMED. Costs against
petitioners.
SO ORDERED.
Romero, Vitug, Panganiban and Purisima, JJ., concur.
Footnotes
SYLLABUS
1. REMEDIAL LAW; PETITION FOR REVIEW; NOT RENDERED MOOT AND ACADEMIC;
WHERE RIGHT TO QUESTION DECISION, TIMELY RESERVED. — The contention of private
respondent is without merit. When petitioner returned the subject motor drive, it made
itself unequivocably clear that said action was without prejudice to a motion for
reconsideration of the Court of Appeals' decision, as shown by the receipt duly signed by
respondent's representative. Considering that petitioner has reserved its right to question
the propriety of the Court of Appeals' decision, the contention of private respondent that
this petition has been mooted by such return may not be sustained.
2. CIVIL LAW; PROPERTY; MACHINERY THOUGH IMMOBILIZED BY DESTINATION IF
TREATED BY THE PARTIES AS A PERSONALTY FOR PURPOSES OF A CHATTEL
MORTGAGE LEGAL, WHERE NO THIRD PARTY IS PREJUDICED. — The next and the more
crucial question to be resolved in this petition is whether the machinery in suit is real or
personal property from the point of view of the parties. Examining the records of the
instance case, the Supreme Court found no logical justification to exclude and rule out, as
the appellate court did, the present case from the application of the pronouncement in the
TUMALAD v. VICENCIO CASE (41 SCRA 143) where a similar, if not identical issue was
raised. If a house of strong materials, like what was involved in the Tumalad case may be
considered as personal property for purposes of executing a chattel mortgage thereon as
long as the parties to the contract so agree and no innocent third party will be prejudiced
thereby, there is absolutely no reason why a machinery, which is movable in its nature and
becomes immobilized only by destination or purpose, may not be likewise treated as such.
This is really because one who has so agreed is estopped from denying the existence of
the chattel mortgage.
3. ID.; ID.; ID.; COURT SHOULD NOT MAKE DISTINCTIONS, WHERE THE LAW DOES
NOT. — In rejecting petitioner's assertion on the applicability of the Tumalad doctrine, the
Court of Appeals lays stress on the fact that the house involved therein was built on a land
that did not belong to the owner of such house. But the law makes no distinction with
respect to the ownership of the land on which the house is built and the Supreme Court
should not lay down distinctions not contemplated by law.
4. ID.; ID.; ID.; CHARACTERIZATION OF PROPERTY, INDICATIVE OF THE INTENTION OF
THE PARTIES. — It must be pointed out that the characterization of the subject machinery
as chattel by the private respondent is indicative of intention and impresses upon the
property the character determined by the parties. As stated in Standard Oil Co. of New
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York v. Jaramillo, 44 Phil. 630, it is undeniable that the parties to a contract may by
agreement treat as personal property that which by nature would be real property, as long
as no interest of third parties would be prejudiced thereby.
5. CIVIL LAW; ESTOPPEL; REPRESENTING OR AGREEING ON THE CONSTITUTION OF
A PROPERTY AS CHATTEL; A CASE THEREOF. — Private respondent contends that
estoppel cannot apply against it because it had never represented nor agreed that the
machinery in suit he considered as personal property but was merely required and dictated
on by herein petitioner to sign a printed form of chattel mortgage which was in a blank
format the time of signing. This contention lacks persuasiveness. As aptly pointed out by
petitioner and not denied by the respondent, the status of the subject machine as movable
or immovable was never placed in issue before the lower court and the Court of Appeals
except ins supplemental memorandum in support of the petition filed in the appellate
court.
6. ID.; CONTRACT; TREATING A MACHINERY AS A CHATTEL; AGREEMENT DEEMED
VALID UNLESS ANNULLED OR VOIDED IN A PROPER ACTION. — Moreover, even granting
that the charge is true, such fact alone does not render a contract void ab initio, but can
only be a ground for rendering said contract voidable or annullable pursuant to Article
1390 of the new Civil Code, by a proper action in court. There is nothing on record to show
that the mortgage has been annulled. Neither is it disclosed that steps were taken to nullify
the same.
7. ID.; ID.; UNDUE BENEFIT OVER A CONTRACT AT THE EXPENSE OF ANOTHER NOT
COUNTENANCED BY EQUITY. — On the other hand, as pointed out by petitioner and again
not refuted by respondent, the latter has indubitably benefited from said contract. Equity
dictates that one should not benefit at the expense of another. Private respondent could
not now therefore, he allowed to impugn the efficacy of the chattel mortgage after it has
benefited therefrom.
DECISION
DE CASTRO , J : p
Petition for review on certiorari of the decision of the Court of Appeals (now Intermediate
Appellate Court) promulgation August 27, 1981 in CA-G.R. No. SP-12731, setting aside
certain Orders later specified herein, of Judge Ricardo J. Francisco, as Presiding Judge of
the Court of First Instance of Rizal, Branch VI, issued in Civil Case No. 36040, as well as the
resolution dated September 22, 1981 of the said appellate court, denying petitioner's
motion for reconsideration.
It appears that in order to obtain financial accommodations from herein petitioner Makati
Leasing and Finance Corporation, the private respondent Wearever Textile Mills, Inc.,
discounted and assigned several receivables with the former under a Receivable Purchase
Agreement. To secure the collection of the receivables assigned, private respondent
executed a Chattel Mortgage over certain raw materials inventory as well as a machinery
described as an Artos Aero Dryer Stentering Range.
Upon private respondent's default, petitioner filed a petition for extrajudicial foreclosure of
the properties mortgage to it. However, the Deputy Sheriff assigned to implement the
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foreclosure failed to gain entry into private respondent's premises and was not able to
effect the seizure of the aforedescribed machinery. Petitioner thereafter filed a complaint
for judicial foreclosure with the Court of First Instance of Rizal, Branch VI, docketed as Civil
Case No. 36040, the case before the lower court. LexLib
Acting on petitioner's application for replevin, the lower court issued a writ of seizure, the
enforcement of which was however subsequently restrained upon private respondent's
filing of a motion for reconsideration. After several incidents, the lower court finally issued
on February 11, 1981, an order lifting the restraining order for the enforcement of the writ
of seizure and an order to break open the premises of private respondent to enforce said
writ. The lower court reaffirmed its stand upon private respondent's filing of a further
motion for reconsideration.
On July 13, 1981, the sheriff enforcing the seizure order, repaired to the premises of
private respondent and removed the main drive motor of the subject machinery.
The Court of Appeals, in certiorari and prohibition proceedings subsequently filed by herein
private respondent, set aside the Orders of the lower court and ordered the return of the
drive motor seized by the sheriff pursuant to said Orders, after ruling that the machinery in
suit cannot be the subject of replevin, much less of a chattel mortgage, because it is a real
property pursuant to Article 415 of the new Civil Code, the same being attached to the
ground by means of bolts and the only way to remove it from respondent's plant would be
to drill out or destroy the concrete floor, the reason why all that the sheriff could do to
enforce the writ was to take the main drive motor of said machinery. The appellate court
rejected petitioner's argument that private respondent is estopped from claiming that the
machine is real property by constituting a chattel mortgage thereon.
A motion for reconsideration of this decision of the Court of Appeals having been denied,
petitioner has brought the case to this Court for review by writ of certiorari. It is contended
by private respondent, however, that the instant petition was rendered moot and academic
by petitioner's act of returning the subject motor drive of respondent's machinery after the
Court of Appeals' decision was promulgated.
The contention of private respondent is without merit. When petitioner returned the
subject motor drive, it made itself' unequivocably clear that said action was without
prejudice to a motion for reconsideration of the Court of Appeals decision, as shown by
the receipt duly signed by respondent's representative. 1 Considering that petitioner has
reserved its right to question the propriety of the Court of Appeals' decision, the
contention of private respondent that this petition has been mooted by such return may
not be sustained.
The next and the more crucial question to be resolved in this petition is whether the
machinery in suit is real or personal property from the point of view of the parties, with
petitioner arguing that it is a personalty, while the respondent claiming the contrary, and
was sustained by the appellate court, which accordingly held that the chattel mortgage
constituted thereon is null and void, as contended by said respondent. LLpr
A similar, if not identical issue was raised in Tumalad v. Vicencio, 41 SCRA 143 where this
Court, speaking through Justice J.B.L. Reyes, ruled:
"Although there is no specific statement referring to the subject house as personal
property, yet by ceding, selling or transferring a property by way of chattel
mortgage defendants-appellants could only have meant to convey the house as
chattel, or at least, intended to treat the same as such, so that they should not
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now be allowed to make an inconsistent stand by claiming otherwise. Moreover,
the subject house stood on a rented lot to which defendants-appellants merely
had a temporary right as lessee, and although this can not in itself alone
determine the status of the property, it does so when combined with other factors
to sustain the interpretation that the parties, particularly the mortgagors, intended
to treat the house as Personalty. Finally, unlike in the Iya cases, Lopez vs. Orosa,
Jr. & Plaza Theatre, Inc. & Leung Yee vs. F.L. Strong Machinery & Williamson,
wherein third persons assailed the validity of the chattel mortgage, it is the
defendants-appellants themselves, as debtors mortgagors, who are attacking the
validity of the chattel mortgage in this case. The doctrine of estoppel therefore
applies to the herein defendants appellants, having treated the subject house as
personalty."
Examining the records of the instant case, We find no logical justification to exclude the
rule out, as the appellate court did, the present case from the application of the
abovequoted pronouncement. If a house of strong materials, like what was involved in the
above Tumalad case, may be considered as personal property for purposes of executing a
chattel mortgage thereon as long as the parties to the contract so agree and no innocent
third party will be prejudiced thereby, there is absolutely no reason why a machinery, which
is movable in its nature and becomes immobilized only by destination or purpose, may not
be likewise treated as such. This is really because one who has so agreed is estopped
from denying the existence of the chattel mortgage.
In rejecting petitioner's assertion on the applicability of the Tumalad doctrine, the Court of
Appeals lays stress on the fact that the house involved therein was built on a land that did
not belong to the owner of such house. But the law makes no distinction with respect to
the ownership of the land on which the house is built and We should not lay down
distinctions not contemplated by law.
It must be pointed out that the characterization of the subject machinery as chattel by the
private respondent is indicative of intention and impresses upon the property the
character determined by the parties. As stated in Standard Oil Co. of New York v. Jaramillo,
44 Phil. 630, it is undeniable that the parties to a contract may by agreement treat as
personal property that which by nature would be real property, as long as no interest of
third parties would be prejudiced thereby.
Private respondent contends that estoppel cannot apply against it because it had never
represented nor agreed that the machinery in suit be considered as personal property but
was merely required and dictated on by herein petitioner to sign a printed form of chattel
mortgage which was in a blank form at the time of signing. This contention lacks
persuasiveness. As aptly pointed out by petitioner and not denied by the respondent, the
status of the subject machinery as movable or immovable was never placed in issue
before the lower court and the Court of Appeals except in a supplemental memorandum in
support of the petition filed in the appellate court. Moreover, even granting that the charge
is true, such fact alone does not render a contract void ab initio, but can only be a ground
for rendering said contract voidable, or annullable pursuant to Article 1390 of the new Civil
Code, by a proper action in court. There is nothing on record to show that the mortgage
has been annulled. Neither is it disclosed that steps were taken to nullify the same. On the
other hand, as pointed out by petitioner and again not refuted by respondent, the latter has
indubitably benefited from said contract. Equity dictates that one should not benefit at the
expense of another. Private respondent could not now therefore, be allowed to impugn the
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efficacy of the chattel mortgage after it has benefited therefrom. LexLib
From what has been said above, the error of the appellate court in ruling that the
questioned machinery is real, not personal property, becomes very apparent. Moreover, the
case of Machinery and Engineering Supplies, Inc. v. CA, 96 Phil. 70 , heavily relied upon by
said court is not applicable to the case at bar, the nature of the machinery and equipment
involved therein as real properties never having been disputed nor in issue, and they were
not the subject of a Chattel Mortgage. Undoubtedly, the Tumalad case bears more nearly
perfect parity with the instant case to be the more controlling jurisprudential authority.
WHEREFORE, the questioned decision and resolution of the Court of Appeals are hereby
reversed and set aside, and the Orders of the lower court are hereby reinstated, with costs
against the private respondent.
SO ORDERED.
Makasiar (Chairman), Aquino, Concepcion, Jr., Guerrero and Escolin, JJ., concur.
Abad Santos, J., concurs in the result.
Footnotes
1. p. 52, Rollo.
DECISION
TINGA , J : p
For resolution is a petition seeking to nullify the 30 January 2004 Decision 1 of the
Court of Appeals in CA-G.R. SP No. 77309 2 upholding the Securities and Exchange
Commission's (SEC) approval of the ASB Group's rehabilitation in SEC En Banc Case No.
EB-726. 3
The antecedent facts are as follows:
Bank of the Philippine Islands (BPI), through its predecessor-in-interest, Far East
Bank and Trust Company (FEBTC), extended credit accommodations to the ASB Group of
Companies (ASB Group) 4 with an outstanding aggregate principal amount of
P86,800,000.00, secured by a real estate mortgage over two (2) properties located in
Greenhills, San Juan. 5 On 2 May 2000, the ASB Group led a petition for rehabilitation and
suspension of payments before the SEC, docketed as SEC Case No. 05-00-6609. 6
Thereafter, on 18 August 2000, the interim receiver submitted its Proposed Rehabilitation
Plan (Rehabilitation Plan) 7 for the ASB Group. The Rehabilitation Plan provides, among
others, a dacion en pago by the ASB Group to BPI of one of the properties mortgaged to
the latter at the ASB Group as selling value of P84,000,000.00 against the total amount of
the ASB Group's exposure to the bank. In turn, ASB Group would require the release of the
other property mortgaged to BPI, to be thereafter placed in the asset pool. Speci cally, the
pertinent portion of the plan reads:
". . . ASB plans to invoke a dacion en pago for its #35 Eisenhower property
at ASB's selling value of P84 million against the total amount of the ASB's
exposure to the bank. In return, ASB requests the release of the #27 Annapolis
property which will be placed in the ASB creditors' asset pool." 8
T h e dacion would constitute full payment of the entire obligation due to BPI
because the balance was then to be considered waived, as per the Rehabilitation Plan. 9
BPI opposed the Rehabilitation Plan and moved for the dismissal of the ASB
Group's petition for rehabilitation. 1 0 However, on 26 April 2001, the SEC hearing panel
issued an order 1 1 approving ASB Group's proposed rehabilitation plan and appointed Mr.
Fortunato Cruz as rehabilitation receiver. IHaSED
Thus, if BPI does not nd the dacion en pago modality acceptable, the ASB Group
can propose to settle its debts at such amount as is equivalent to the selling price of the
mortgaged properties. If BPI still refuses this option, it can assert its rights in the
liquidation and distribution of the ASB Group's assets. It will not lose its status as a
secured creditor, retaining its preference over unsecured creditors when the assets of the
corporation are finally liquidated. 4 0
WHEREFORE, in view of the foregoing, the petition is DENIED and the Decision dated
30 January 2004 of the Court of Appeals in G.R. No. 16461 is AFFIRMED. Costs against
petitioner.
SO ORDERED.
Puno, C.J., Quisumbing, Ynares-Santiago, Sandoval-Gutierrez, Austria-Martinez,
Corona, Carpio-Morales, Azcuna, Velasco, Jr., Nachura, Reyes and Leonardo-de Castro, JJ.,
concur.
Carpio, J., is on leave.
Chico-Nazario, J., certify that J. Nazario concurred with the decision.
Footnotes
5. Id. at 6.
6. Id. at 5.
19. Id. at 8.
20. Id. at 11.
28. Rollo, p. 200, citing Lim v. Secretary of Agriculture , No. L-26990, 31 August 1970, 34 SCRA
751.
29. Id. at 207.
30. Id.
31. G.R. No. 166197, 27 February 2007.
32. The very same Rehabilitation Plan that is the subject of the instant petition. MBTC is also a
creditor of ASB Group. In the Rehabilitation Plan, ASB Group proposed payment by
dacion on some of the properties mortgaged to MBTC.
33. Westmoreland Human Opportunities, Inc., v. Walsh , 246 F. 3d 233, C.A.3 (Pa)., 2001. See
also In re: Epstein (39 B.R. 938, Bkrtcy. D.N.M. 1984).
SYNOPSIS
By virtue of a SEC Order, all actions for claims against Rubberworld Phil., Inc.,
pending before any court, tribunal, o ce, body or board were suspended.
Consequently, all pending incidents for preliminary injunctions, attachments,
foreclosures and the like were rendered moot and academic. Meanwhile, private
respondents who are employees of Rubberworld led against the latter their respective
complaints for illegal dismissal, unfair labor practice, damages and payment of
separation pay, retirement bene ts, 13th month pay and service incentive pay.
Rubberworld moved to suspend the proceedings in the labor cases on the strength of
the SEC Order, but the same was denied. Hence, this petition. cdasia
It must be noted that, upon petition of Rubberworld with the SEC, the latter
ordered the creation of a management committee and the suspension of all actions for
claims against Rubberworld. Thus, the applicable law here is P.D. 902-A, as amended.
No exception in favor of labor claims is mentioned in the law. Thus, allowing labor
cases to proceed clearly defeats the purpose of the automatic stay and severely
encumbers the management committee's time and resources, whose primary and
urgent duty is to work towards rehabilitating the corporation and making it viable again.
Besides, even if the NLRC awards the claims of private respondents, as it did, its ruling
could not be enforced as long as the petitioner is under the management committee.
True the NLRC has the power to hear and decide labor disputes but such authority is
deemed suspended when P.D. 902-A was put also effect by the SEC. Further, the
preferential right of workers and employees under Article 110 of the Labor Code may
be invoked only upon the institution of insolvency or judicial liquidation proceedings.
The present case involves the rehabilitation, not the liquidation of the corporation.
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Hence, the preference of credit granted the worker or employees under Article 110 of
the Labor Code is not applicable. THcEaS
SYLLABUS
2. ID.; ID.; ID.; DURATION THEREOF. — P.D. 902-A itself does not provide for
the duration of the automatic stay. Neither does the Order of the SEC. Hence, the
suspensive effect have no time limit and remains in force as long as reasonably
necessary to accomplish the purpose of the Order.
3. ID.; ID.; ID.; LABOR CLAIMS, INCLUDED. — Upon the creation of a
management committee or the appointment of a rehabilitation receiver, all claims for
actions "shall be suspended accordingly." No exception in favor of labor claims is
mentioned in the law. Since the law makes no distinction or exemptions, neither should
this Court. Ubi lex non distinguit nec nos distinguere debemos. Allowing labor cases to
proceed clearly defeats the purpose of the automatic stay and severely encumbers the
management committee's time and resources. The said committee would need to
defend against these suits, to the detriment of its primary and urgent duty to work
towards rehabilitating the corporation and making it viable again. To rule otherwise
would open the oodgates to other similarly situated claimants and forestall if not
defeat the rescue efforts. Besides, even if the NLRC awards the claims of private
respondents, as it did, its ruling could not be enforced as long as the petitioner is under
the management committee.
4. STATUTORY CONSTRUCTION; ARTICLE 217 OF THE LABOR CODE
SHOULD BE READ IN HARMONY WITH P.D. 902-A. — Article 217 of the Labor Code
should be construed not in isolation but in harmony with P.D. 902-A, according to the
basic rule in statutory construction that implied repeals are not favored. Indeed, it is
axiomatic that each and every statute must be construed in a way that would avoid
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con ict with existing laws. True, the NLRC has the power to hear and decide labor
disputes, but such authority is deemed suspended when P.D. 902-A is put into effect by
the Securities and Exchange Commission.
5. LABOR AND SOCIAL LEGISLATION; PREFERENTIAL RIGHT OF
EMPLOYEES CAN BE INVOKED ONLY IN INSOLVENCY PROCEEDINGS. — The
preferential right of workers and employees under Article 110 of the Labor Code may
be invoked only upon the institution of insolvency or judicial liquidation proceedings.
Indeed, it is well-settled that "a declaration of bankruptcy or a judicial liquidation must
be present before preferences over various money claims may be enforced." But
debtors resort to preference of credit — giving preferred creditors the right to have
their claims paid ahead of those of other claimants only when their assets are
insu cient to pay their debts fully. The purpose of rehabilitation proceedings is
precisely to enable the company to gain a new lease on life and thereby allow creditors
to be paid their claims from its earnings. In insolvency proceedings, on the other hand,
the company stops operating, and the claims of creditors are satis ed from the assets
of the insolvent corporation. The present case involves the rehabilitation, not the
liquidation, of petitioner-corporation. Hence, the preference of credit granted to
workers or employees under Article 110 of the Labor Code is not applicable. IDESTH
DECISION
PANGANIBAN , J : p
"In an order dated December 28, 1994, the SEC favorably ruled on the petition for
suspension of payments thusly:
'Accordingly, with the creation of the Management Committee, all actions
for claims against Rubberworld Philippines, Inc. pending before any court,
tribunal, o ce, board, body Commission of Sheriff are hereby deemed
SUSPENDED.
'Consequently, all pending incidents for preliminary injunctions, writ of
attachments (sic), foreclosures and the like are hereby rendered moot and
academic.'
"Private respondents, who claim to be employees of petitioner corporation, led
against petitioners [from] April to July 1995 their respective complaints for illegal
dismissal, unfair labor practice, damages and payment of separation pay,
retirement benefits, 13th month pay and service incentive pay.
"Petitioners moved to suspend the proceedings in the above labor cases on the
strength of the SEC Order dated December 28, 1994. Likewise, petitioners cited the
rulings of BF Homes vs. Court of Appeals (190 SCRA 262), Alemar's Sibal & Sons,
Inc. vs. Elbinias (186 SCRA 94) and Bank of the Philippine Islands vs. Court of
Appeals (229 SCRA 223) to support their motion to suspend the proceedings in
the labor cases. cdphil
"In an Order dated September 25, 1995, the Labor Arbiter denied the aforesaid
motion holding that the injunction contained in the SEC Order applied only to the
enforcement of established rights and did not include the suspension of
proceedings involving claims against petitioner which have yet to be ascertained.
The Labor Arbiter further held that the order of the SEC suspending all actions for
claims against petitioners does not cover the claims of private respondents in the
labor cases because said claims and the concomitant liability of petitioners still
had to be determined, thus carrying no dissipation of the assets of petitioners.
"Petitioners appealed the adverse order of the Labor Arbiter to public respondent
which, in a Resolution dated April 26, 1996, dismissed the appeal for lack of merit
and, instead, sustained the rulings of the Labor Arbiter.
"The motion for reconsideration of petitioners fared no better and was denied by
public respondent in a Resolution dated June 20, 1996." 5
In the case at bar, Petitioner Rubberworld led before the SEC a Petition for
Declaration of Suspension of Payments, as well as a proposed rehabilitation plan. On
December 28, 1994, the SEC ordered the creation of a management committee and the
suspension of all actions for claims against Rubberworld. Clearly, the applicable law is
PD 902-A, as amended, the relevant provisions of which read:
"SECTION 5. In addition to the regulatory adjudicative functions of the
Securities and Exchange Commission over corporations, partnerships and other
forms of associations registered with it as expressly granted under existing laws
and decrees, it shall have original and exclusive jurisdiction to hear and decide
cases involving:
It is plain from the foregoing provisions of law that "upon the appointment [by
the SEC] of a management committee or a rehabilitation receiver," all actions for claims
against the corporation pending before any court, tribunal or board shall ipso jure be
suspended. 9 The justi cation for the automatic stay of all pending actions for claims
"is to enable the management committee or the rehabilitation receiver to effectively
exercise its/his powers free from any judicial or extra-judicial interference that might
unduly hinder or prevent the 'rescue' of the debtor company. To allow such other
actions to continue would only add to the burden of the management committee or
rehabilitation receiver, whose time, effort and resources would be wasted in defending
claims against the corporation instead of being directed toward its restructuring and
rehabilitation." 1 0
Parenthetically, the rehabilitation of a nancially distressed corporation bene ts
its employees, creditors, stockholders and, in a larger sense, the general public. And in
considering whether to rehabilitate or not, the SEC gives preference to the interest of
creditors, including employees. The reason is that shareholders can recover their
investments only upon liquidation of the corporation, and only if there are assets
remaining after all corporate creditors are paid. 1 1
Labor Claims Included
in Suspension Order
The solicitor general, representing Public Respondent NLRC, argues that the
rationale for an automatic stay will not be frustrated even if the NLRC proceeds with the
disposition of these labor cases, because any favorable judgment obtained by the
private respondents would only establish their rights as creditors. The solicitor general
also contends that the assailed Resolutions of the NLRC will not result in an undue
preference for the assets of Rubberworld, as the private respondents will still present
their claims before the management committee. 1 2
We disagree. The law is clear: upon the creation of a management committee or
the appointment of a rehabilitation receiver, all claims for actions "shall be suspended
accordingly." No exception in favor of labor claims is mentioned in the law. Since the
law makes no distinction or exemptions, neither should this Court. Ubi lex non distinguit
nec nos distinguere debemos. 1 3 Allowing labor cases to proceed clearly defeats the
purpose of the automatic stay and severely encumbers the management committee's
time and resources. The said committee would need to defend against these suits, to
the detriment of its primary and urgent duty to work towards rehabilitating the
corporation and making it viable again. To rule otherwise would open the oodgates to
other similarly situated claimants and forestall if not defeat the rescue efforts. Besides,
even if the NLRC awards the claims of private respondents, as it did, its ruling could not
be enforced as long as the petitioner is under the management committee. 1 4
I n Chua v. National Labor Relations Commission, 1 5 we ruled that labor claims
cannot proceed independently of a bankruptcy liquidation proceeding, since these
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claims "would spawn needless controversy, delays, and confusion." 1 6 With more
reason, allowing labor claims to continue in spite of a SEC suspension order in a
rehabilitation case would merely lead to such results.
The solicitor general insists that since Article 217 of the Labor Code 1 7 vested
public respondent with jurisdiction to hear and decide these labor cases, the NLRC did
not exceed its jurisdiction when it refused to suspend the proceedings therein. 1 8 The
Court is not persuaded. LibLex
Article 217 of the Labor Code should be construed not in isolation but in
harmony with PD 902-A, according to the basic rule in statutory construction that
implied repeals are not favored. 1 9 Indeed, it is axiomatic that each and every statute
must be construed in a way that would avoid con ict with existing laws. 20 True, the
NLRC has the power to hear and decide labor disputes, but such authority is deemed
suspended when PD 902-A is put into effect by the Securities and Exchange
Commission.
Preference in Favor of Workers in
Case of Bankruptcy or Liquidation
The private respondents contend that automatic stay under PD 902-A is not
applicable to the instant case; otherwise, the preference granted to workers by Article
110 of the Labor Code would be rendered ineffective. 2 1 This contention is misleading.
The preferential right of workers and employees under Article 110 of the Labor
Code may be invoked only upon the institution of insolvency or judicial liquidation
proceedings. 2 2 Indeed, it is well-settled that "a declaration of bankruptcy or a judicial
liquidation must be present before preferences over various money claims may be
enforced." 2 3 But debtors resort to preference of credit — giving preferred creditors the
right to have their claims paid ahead of those of other claimants — only when their
assets are insu cient to pay their debts fully. 2 4 The purpose of rehabilitation
proceedings is precisely to enable the company to gain a new lease on life and thereby
allow creditors to be paid their claims from its earnings. In insolvency proceedings, on
the other hand, the company stops operating, and the claims of creditors are satis ed
from the assets of the insolvent corporation. The present case involves the
rehabilitation, not the liquidation, of petitioner-corporation. Hence, the preference of
credit granted to workers or employees under Article 110 of the Labor Code is not
applicable.
Duration of Automatic Stay Under PD 902-A
Finally, private respondents posit that under Section 6 of the Insolvency Law, the
December 28, 1994 Order of the SEC suspending all actions for claims against
Rubberworld should have expired after three months, in the absence of an agreement
between the company and the corporate creditors. 2 5 Private respondents also accuse
the SEC of abusing its power by "allowing said suspension order to remain pending for
many years without resolving and approving any rehabilitation plan." 2 6 They contend
that "[t]his is fatal to the instant petition for it had been a party to the abuse by the SEC
of its suspension order." 2 7
This Court notes that PD 902-A itself does not provide for the duration of the
automatic stay. Neither does the Order 2 8 of the SEC. Hence, the suspensive effect has
no time limit and remains in force as long as reasonably necessary to accomplish the
purpose of the Order. 2 9 On the other hand, the attack against the SEC's alleged "abuse
of power" is misplaced. Under review in this Petition for Certiorari are Resolutions of
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the NLRC, not of the SEC. The scope of this review is thus limited to whether the NLRC
gravely abused or exceeded its jurisdiction in refusing to heed the SEC Order of
Suspension and in issuing its challenged Resolutions. In any event, the bare allegation
of inaction is insu cient to condemn the Securities and Exchange Commission and the
management committee where, it should be noted, all affected parties, including the
labor union in the company, are represented.
WHEREFORE, the petition is hereby GRANTED. The assailed Resolutions of the
NLRC dated April 26, 1996, and June 20, 1996, are REVERSED and SET ASIDE. No
costs. prcd
SO ORDERED.
Romero, Vitug, Purisima and Gonzaga-Reyes, JJ., concur.
Footnotes
1. Section 6 (c).
2. Rollo, pp. 25-28.
3. Third Division, composed of Comm. Joaquin A. Tanodra, ponente; Pres. Comm. Lourdes
C. Javier and Comm. Ireneo B. Bernardo, both concurring.
4. Ibid., pp. 29-30.
5. Memorandum for Public Respondent, pp. 1-3; rollo, pp. 250-252.
6. The case was deemed submitted for resolution upon receipt by the Court of the
Memorandum for Private Respondents on April 20, 1998.
7. Memorandum for Petitioner, p. 14; rollo, p. 229.
8. Ching v. Land Bank of the Philippines, 201 SCRA 190, 199, September 2, 1991, per
Fernan, CJ .
9. See Barotac Sugar Mills, Inc. v. Court of Appeals, 275 SCRA 497, 503, July 15, 1997, per
Davide, Jr., CJ .
10. BF Homes, Incorporated v. Court of Appeals, 190 SCRA 262, 269, October 3, 1990, per
Cruz, J .
11. Jose C. Campos Jr. and Maria Clara Lopez-Campos, The Corporation Code Comments,
Notes and Selected Cases, p. 27 (1990).
12. Memorandum for Public Respondent, p. 7; rollo, p. 256.
13. Colgate Palmolive v. Gimenez, 1 SCRA 267, January 28, 1961.
14. See BF Homes, Incorporated v. Court of Appeals, supra, p. 268.
15. 190 SCRA 558, October 17, 1990, per Gutierrez, Jr., J .
19. See Ching v. Land Bank of the Philippines, supra, p. 202. See also Governor Pablo P.
Garcia et al. v. Hon. Jose P. Burgos et al., GR No. 124130, pp. 28-29, June 29, 1998;
citing Frivaldo v. Commission on Elections, 257 SCRA 727, 743-744, June 28, 1996.
20. Sajonas v. Court of Appeals, 258 SCRA 79, July 5, 1996.
21. Memorandum for Private Respondents, pp. 6-7; rollo, pp. 268-269.
SYLLABUS
DECISION
GUTIERREZ DAVID , J : p
On May 10, 1948, Rosario Cruzado, for herself and as administratrix of the intestate estate
of her deceased husband Pedro Cruzado in Special Proceedings No. 4959 of the Court of
First Instance of Manila, obtained from the defunct Rehabilitation Finance Corporation
(hereinafter referred to as the RFC) a loan in the amount of P11,000.00. To secure payment
thereof, she mortgaged the land then covered by Transfer Certi cate of Title No. 61358
issued in her name and that of her deceased husband. As she failed to pay certain
installments on the loan, the mortgage was foreclosed and the RFC acquired the property
for P11,000.00, subject to her rights as mortgagor to repurchase the same. On July 26,
1951, upon her application, the land was sold back to her conditionally for the amount of
P14,269.03, payable in seven years.
About two years thereafter, or on February 13, 1953, Rosario Cruzado, as guardian of her
minor children in Special Proceedings No. 14198 of the Court of First Instance of Manila,
was authorized by the court to sell with the previous consent of the RFC the land in
question together with the improvements thereon for a sum not less than P19,000.
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Pursuant to such authority and with the consent of the RFC, she sold to Pura L. Villanueva
for P19,000.00 "all their rights, interest, title and dominion on and over the herein described
parcel of land together with the existing improvements thereon, including one house and
an annex thereon; free from all charges and encumbrances, with the exception of the sum
of P11,009.52, plus stipulated interest thereon which the vendor is still presently obligated
to the RFC and which the vendee herein now assumes to pay to the RFC under the same
terms and conditions speci ed in that deed of sale dated July 26, 1951." Having paid in
advance the sum of P1,500.00, Pura L. Villanueva, the vendee, in consideration of the
aforesaid sale, executed in favor of the vendor Rosario Cruzado a promissory note dated
March 9, 1953, undertaking to pay the balance of P17,500.00 in monthly installments. On
April 22, 1953, she made an additional payment of P5,500.00 on the promissory note. She
was, subsequently, able to secure in her name Transfer Certi cate of Title No. 32526
covering the house and lot above referred to, and on July 10, 1953, she mortgaged the said
property to Magdalena C. Barretto as security for a loan in the amount of P30,000.00.
As said Pura L. Villanueva had failed to pay the remaining installments on the unpaid
balance of P12,000.00 on her promissory note for the sale of the property in question, a
complaint for the recovery of the same from her and her husband was led on September
21, 1953 by Rosario Cruzado in her own right and in her capacity as judicial guardian of her
minor children. Pending trial of the case, a lien was constituted upon the property in the
nature of a levy in attachment in favor of the Cruzados, said lien being annotated at the
back of Transfer Certi cate of Title No. 32526. After trial, decision was rendered ordering
Pura Villanueva and her husband, jointly and severally, to pay Rosario Cruzado the sum of
P12,000.00, with legal interest thereon from the date of the ling of the complaint until
fully paid plus the sum of P1,500.00 as attorney's fees.
Pura Villanueva having, likewise, failed to pay her indebtedness of P30,000.00 to
Magdalena C. Barretto, the latter, jointly with her husband, instituted against the Villanueva
spouses an action for foreclosure of mortgage, impleading Rosario Cruzado and her
children as parties defendants. On November 11, 1956, decision was rendered in the case
absolving the Cruzados from the complaint and sentencing the Villanuevas to pay the
Barrettos, jointly and severally, the sum of P30,000.00, with interest thereon at the rate of
12% per annum from January 11, 1954, plus the sum of P4,000.00 as attorney's fees. Upon
the nality of this decision, the Barrettos led a motion for the issuance of a writ of
execution which was granted by the lower court on July 31, 1958. On August 14, 1953, the
Cruzados led their "Vendor's Lien" in the amount of P12,000.00, plus legal interest, over
the real property subject of the foreclosure suit, the said amount representing the unpaid
balance of the purchase price of the said property. Giving due course to the lien, the court
on August 18, 1958 ordered the same annotated in Transfer Certi cate of Title No. 32526
of the Registry of Deeds of Manila, decreeing that should the realty in question be sold at
public auction in the foreclosure proceedings, the Cruzados shall be credited with their
pro-rata share in the proceeds thereof "pursuant to the provisions of Articles 2248 and
2249 of the new Civil Code in relation to Article 2242, paragraph 2 of the same Code." The
Barrettos led a motion for reconsideration on September 12, 1958, but on that same
date, the sheriff of the City of Manila, acting in pursuance of the order of the court granting
the writ of execution, sold at public auction the property in question. As highest bidder, the
Barrettos themselves acquired the properties for the sum of P49,000.00.
On October 4, 1958, the Court of First Instance issued an order con rming the aforesaid
sale and directing the Register of Deeds of the City of Manila to issue to the Barrettos the
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corresponding certi cate of title, subject, however, to the order of August 18, 1958
concerning the vendor's lien. On the same date, the motion of the Barrettos seeking
reconsideration of the order of the court giving due course to the said vendor's lien was
denied. From this last order, the Barrettos spouses interposed the present appeal.
The appeal is devoid of merit.
In claiming that the decision of the Court of First Instance of Manila in Civil Case No.
20075 — awarding the, amount of P12,000.00 in favor of Rosario Cruzado and her minor
children — cannot constitute a basis for the vendor's lien led by the appellee Rosario
Cruzado, appellants allege that the action in said civil case was merely to recover the
balance of a promissory note. But while, apparently, the action was to recover the
remaining obligation of promisor Pura Villanueva on the note, the fact remains that Rosario
P. Cruzado as guardian of her minor children was an unpaid vendor of the realty in
question, and the promissory note was, precisely, for the unpaid balance of the purchase
price of the property bought by said Pura Villanueva.
Article 2242 of the New Civil Code enumerates the claims, mortgages and liens that
constitute an encumbrance on specific immovable property, and among them are:
"(2) For the unpaid price of real property sold, upon the immovable sold"; and
Article 2249 of the same Code provides that "if there are two or more credits with
respect to the same speci c real property or real rights, they shall be satis ed pro-rata,
after the payment of the taxes and assessments upon the immovable property of real
rights.
Application of the above-quoted provisions to the case at bar would mean that the herein
appellee Rosario Cruzado as an unpaid vendor of the property in question has the right to
share pro-rata with the appellants the proceeds of the foreclosure sale.
The appellants, however, argue that inasmuch as the unpaid vendor's lien in this case was
not registered, it should not prejudice the said appellants' registered rights over the
property. There is nothing to this argument. Note must be taken of the fact that article
2242 of the new Civil Code enumerating the preferred claims, mortgages and liens on
immovables, speci cally requires that — unlike the unpaid price of real property sold —
mortgage credits, in order to be given preference, should be recorded in the Registry of
Property. If the legislative intent was to impose the same requirement in the case of the
vendors lien, or the unpaid price of real property sold, the lawmakers could have easily
inserted the same quali cation which now modi es the mortgage credits. The law,
however, does not make any distinction between registered and unregistered vendor's lien,
which only goes to show that any lien of that kind enjoys the preferred credit status.
Appellants also argue that to give the unrecorded vendor's lien the same standing as the
registered mortgage credit would be to nullify the principle in land registration system that
prior unrecorded interests cannot prejudice persons who subsequently acquire interests
over the same property. The Land Registration Act itself, however, respects without
reserve or quali cation the paramount rights of alien holders on real property. Thus,
section 70 of that Act provides that:
"Registered land, and ownership therein shall in all respects be subject to the
same burdens and incidents attached by law to unregistered land. Nothing
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contained in this Act shall in any way be construed to relieve registered land or the
owners thereof from any rights incident to the relation of husband and wife, or
from liability to attachment on mesne process or levy on execution, or from
liability to any lien of any description established by law on land and the
buildings thereon, or the interest of the owners of such land or buildings, or to
change the laws of descent, or the rights of partition between co-owners, joint
tenants and other co-tenants, or the right to take the same by eminent domain, or
to relieve such land from liability to be appropriated in any lawful manner for the
payment of debts, or to change or affect in any other way any other rights or
liabilities created by law and applicable to unregistered land, except as otherwise
expressly provided in this Act or in the amendments thereof." (Emphasis supplied)
As to the point made that the articles of the Civil Code on concurrence and preference of
credits are applicable only to the insolvent debtor, suf ce it to say that nothing in the law
shows any such limitation. If we are to interpret this portion of the Code as intended only
for insolvency cases, then other creditor-debtor relationships where there are concurrence
of credits would be left without any rules to govern them, and it would render purposeless
the special laws on insolvency.
Premises considered, the order appealed from is hereby af rmed. Costs against the
appellants.
Bengzon, Padilla, Bautista Angelo, Labrador, Paredes, and Dizon J .J ., concur.
Concepcion, Reyes, J.B.L., and Barrera, JJ ., concur in the result.
Appellants, spouses Barretto, have led a motion vigorously urging, for reason to be
discussed in the course of this resolution, that our decision of 28 January 1961 be
reconsidered and set aside, and a new one entered declaring that their right as
mortgagees remain superior to the unrecorded claim of herein appellee for the balance of
the purchase price of her rights, title, and interest in the mortgaged property.
It will be recalled that, with Court authority Rosario Cruzado sold all her right, title, and
interest and that of her children in the house and lot herein involved to Pura L. Villanueva
for P19,000.00. The purchaser paid P1,500 in advance, and executed promissory note for
the balance of P17,500.00. However, the buyer could only pay P5,500 on account of the
note, for which reason the vendor obtained judgment for the unpaid balance. In the
meantime, the buyer Villanueva was able to secure a clean certi cate of title (No. 32526),
and mortgaged the property to appellant Magdalena C. Barretto, married to Jose G.
Barretto, to secure a loan of P30,000.00, said mortgage having been duly recorded.
Pura Villanueva defaulted on the mortgage loan in favor of Barretto. The latter foreclosed
the mortgage in her favor, obtained judgment, and upon its becoming nal asked for
execution on 31 July 1958. In 14 August 1958, Cruzado led a motion for recognition of
her "vendor's lien" in the amount of P12,000.00, plus legal interest, involving Articles 2242,
2243 and 2249 of the new Civil Code. After hearing, the court below ordered the "lien''
annotated on the back of Certi cate of Title No. 32526, with the proviso that in case of
sale under the foreclosure decree the vendor's lien and the mortgage credit of appellant
Barretto should be paid pro rata from the proceeds. Our original decision af rmed this
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order of the Court of First Instance of Manila.
Appellants insist that:
(1) The vendor's lien under Articles 2242 and 2243 of the New Civil Code of
the Philippines, can only become effective in the event of insolvency
of the vendee, which has not been proved to exist in the instant case;
and
(2) That the appellee Cruzado is not a true vendor of the foreclosed
property.
We have given protracted and mature consideration to the facts and law of this case, and
have reached the conclusion that our original decision must be reconsidered and set aside,
for the following reasons:
A. The previous decision failed to take fully into account the radical changes introduced by
the Civil Code of the Philippines into the system of priorities among creditors ordained by
the Civil Code of 1889.
Pursuant to the former Code, con icts among creditors entitled to preference as to
speci c real property under Article 1923 were to be resolved according to an order of
priorities established by Article 1927, whereby one class of creditors could exclude the
creditors of lower order until the claims of the former were fully satis ed out of the
proceeds of the sale of the real property subject of the preference, and could even exhaust
such proceeds if necessary.
Under the system of the Civil Code of the Philippines, however, only taxes enjoy a similar
absolute preference. All the remaining thirteen classes of preferred creditors under Article
2242 enjoy no priority among themselves, but must be paid pro rata, i.e., in proportion to
the amount of the respective credits. Thus, Article 2249 provides:
"If there are two or more credits with respect to speci c real property or real rights,
they shall be satis ed pro rata, after the payment of the taxes and assessments
upon the immovable property or real rights."
But in order to make this prorating fully effective, the preferred creditors enumerated in
Nos. 2 to 14 of Article 2242 (or such of them as have credits outstanding) must
necessarily be convened, and the import of their claims ascertained. It is thus apparent
that the full application of Articles 2249 and 2242 demands that there must be rst some
proceeding where the claims of all the preferred creditors may be bindingly adjudicated,
such as insolvency, the settlement of a decedent's estate under Rule 87 of the Rules of
Court, or other liquidation proceedings of similar import.
This explains the rule of Article 2243 of the New Civil Code that —
"The claims or credits enumerated in the two preceding articles 1 shall be
considered as mortgages or pledges of real or personal property, or liens within
the purview of legal provisions governing insolvency . . . (Emphasis supplied).
And the rule is further clarified in the Report of the Code Commission, as follows:
"The question as to whether the Civil Code and the Insolvency Law can be
harmonized is settled by this Article (2243). The preferences named in Articles
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2261 and 2262 (now 2241 and 2242) are to be enforced in accordance with the
insolvency law." (Emphasis supplied)
Thus, it becomes evident that one preferred creditor's third-party claim to the proceeds
of a foreclosure sale (as in the case now before us) is not the proceeding contemplated
by law for the enforcement of preferences under Article 2242, unless the claimant were
enforcing a credit for taxes that enjoy absolute priority. If none of the claims is for
taxes, a dispute between two creditors will not enable the Court to ascertain the pro
rata dividend corresponding to each, because the rights of the other creditors likewise
enjoying preference under Article 2242 can not be ascertained. Wherefore, the order of
the Court of First Instance of Manila now appealed from, decreeing that the proceeds
of the foreclosure sale be apportioned only between appellant and appellee is incorrect,
and must be reversed.
In the absence of insolvency proceedings (or other equivalent general liquidation of the
debtor's estate ), the con ict 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 (as the appellant concededly is) takes registered property free
from liens and encumbrances other than statutory liens and those recorded in the
certi cate of title. There being no insolvency or liquidation, the claim of the appellee, as
unpaid vendor, did not acquire the character and rank of a statutory lien co-equal to the
mortgagee's recorded encumbrance, and must remain subordinate to the latter.
We are understandably loathed (absent a clear precept of law so commanding) to adopt a
rule that would undermine the faith and credit to be accorded to registered Torrens titles
and nullify the bene cient 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 it in every instance subject to all the fourteen preferred claims enumerated in
Article 2242 of the New Civil Code, even if the existence and import thereof can not be
ascertained from the records, all con dence in Torrens titles would be destroyed, and
credit transactions on the faith of such titles would be hampered, if not prevented, with
incalculable results. Loans on real estate security would become aleatory and risky
transactions, for no prospective lender could accurately estimate the hidden liens on the
property offered as security, unless he indulged in complicated, tedious investigations. The
logical result might well be a contraction of credit to unforeseeable proportions that could
lead to economic disaster.
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 liquidation
proceedings.
B. The close study of the facts disclosed by the records casts strong doubt on the
proposition that appellees Cruzados should be regarded as unpaid vendors of the
property (land, buildings and improvements) involved in the case at bar, so as to be
entitled to preference under Article 2242. The record on appeal, specially the nal decision
of the Court of First Instance of Manila in the suit of the Cruzados against Villanueva,
clearly establishes that after her husband's death, and with due court authority, Rosario
Cruzado, for herself and as administratrix of her husband's estate, mortgaged the property
to the Rehabilitation Finance Corporation (RFC) to secure repayment of a loan of P11,000,
in installments, but that the debtor failed to pay some of the installments; wherefore the
RFC, on 24 August 1949, foreclosed the mortgage, and acquired the property, subject to
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the debtor's right to redeem or repurchase the said property; and that on 25 September
1950, the RFC consolidated its ownership, and the certi cate of title of the Cruzados was
cancelled and a new certificate issued in the name of the RFC.
While on 26 July 1951 the RFC did execute a deed selling back the property to the
erstwhile mortgagors and former owners Cruzados in installments, subject to the
condition (among others) that the title to the property and its improvements "shall remain
in the name of the Corporation (RFC) until after said purchase price, advances and interest
shall have been fully paid" as of 27 September 1952, Cruzado had only paid a total of
P1,360, and had defaulted on six monthly amortizations; for which reason the RFC
rescinded the sale, and forfeited the payments made, in accordance with the terms of the
contract of 26 July 1951.
It was only on 10 March 1953 that the Cruzados sold to Pura L. Villanueva all "their rights,
title, interest and dominion on and over" the property, lot, house, and improvements for
P19,000.00, the buyer undertaking to assume payment of the obligation to the RFC, and by
resolution of 30 April 1953, the RFC approved "the transfer of the rights and interests of
Rosario P. Cruzado and her children in their property herein above-described in favor of
Pura L. Villanueva"; and on 7 May 1953 the RFC executed a deed of absolute sale of the
property to said party, who had fully paid the price of P14,269.03. Thereupon, the spouses
Villanueva obtained a new Transfer Certificate of Title No. 32526 in their name.
On 10 July 1953, the Villanuevas mortgaged the property to the spouses Barretto,
appellants herein.
It is clear from the facts above-stated that ownership of the property had passed to the
Rehabilitation Finance Corporation since 1950, when it consolidated its purchase at the
foreclosure sale, and obtained a certi cate of title in its corporate name. The subsequent
contract of resale in favor of the Cruzados did not revest ownership in them, since they
failed to comply with its terms and conditions, and the contract itself provided that the
title should remain in the name of the RFC until the price was fully paid.
Therefore, when after defaulting in their payments due under the resale contract with the
RFC the appellants Cruzados sold to Villanueva "their rights, title, interest and dominion" to
the property, they merely assigned whatever rights or claims they might still have thereto;
the ownership of the property rested with the RFC. The sale from Cruzado to Villanueva,
therefore, was not so much a sale of the land and its improvements as it was a quitclaim
deed in favor of Villanueva. In law, the operative sale was that from the RFC to the latter,
and it was the RFC that should be regarded as the true vendor of the property. At the most,
the Cruzados transferred to Villanueva an option to acquire the property, but not the
property itself, and their credit, therefore, can not legally constitute a vendor's lien on the
corpus of that property that should stand on an equal footing with the mortgaged credit
held by appellants Barretto.
In view of the foregoing, the previous decision of this Court, promulgated on 28 January
1961, is hereby reconsidered and set aside, and a new one entered reversing the judgment
appealed from and declaring the appellants Barretto entitled to full satisfaction of their
mortgaged credit out of the proceeds of the foreclosure sale in the hands of the Sheriff of
the City of Manila. No costs.
Padilla, Bautista Angelo, Concepcion, Barrera, Paredes, Regala and Makalintal, JJ ., concur.
Bengzon, Labrador and Dizon, JJ ., did not take part.
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Footnotes
REYES, J.B.L. , J : p
Appellants, spouses Barretto, have led a motion vigorously urging, for reason to be
discussed in the course of this resolution, that our decision of 28 January 1961 be
reconsidered and set aside, and a new one entered declaring that their right as
mortgagees remain superior to be unrecorded claim of herein appellee for the balance of
the purchase price of her rights, title, and interest in the mortgaged property.
It will be recalled that, with Court authority, Rosario Cruzado sold all her right, title, and
interest and that of her children in the house and lot herein involved to Pura L. Villanueva
for P19,000.00. The purchaser paid P1,500 in advance, and executed a promissory note
for the balance of P17,500.00. However, the buyer could only pay P5,500 on account of the
note, for which reason the vendor obtained judgment for the unpaid balance. In the
meantime, the buyer Villanueva was able to secure a clean certi cate of title (No. 32526),
and mortgaged the property to appellant Magdalena C. Baretto, married to Jose G.
Barretto, to secure a loan of P30,000.03, said mortgage having been duly recorded.
Pura Villanueva defaulted on the mortgage loan in favor of Barreto. The latter foreclosed
the mortgage in her favor, obtained judgment, and upon its becoming nal asked for
execution on 31 July 1958. On 14 August 1958, Cruzado led a motion for recognition for
her "vendor's lien" in the amount of P12,000.00 plus legal interest, invoking Articles 2242,
2243, and 2249 of the new Civil Code. After hearing, the court below ordered the "line"
annotated on the back of Certi cate of Title No. 32526, with the proviso that in case of
sale under the foreclosure decree the vendor's lien and the mortgage credit of appellant
Barreto should be paid pro rata from the proceeds. Our original decision af rmed this
order of the Court of First Instance of Manila.
Appellants insists that:
(1) The vendor's lien, under Articles 2242 and 2243 of the new Civil Code of
the Philippines, can only become effective in the event of insolvency
of the vendee, which has not been proved to exist in the instant case;
and
But in order to make the prorating fully effective, the preferred creditors enumerated in
Nos. 2 to 14 of Article 2242 (or such of them as have credits outstanding) must
necessarily be convened, and the import of their claims ascertained. It is thus apparent
that the full application of Articles 2249 and 2242 demands that there must be rst some
proceeding where the claims of all the preferred creditors may be bindingly adjudicated,
such as insolvency, the settlement of a decedent's estate under Rule 87 of the Rules of
Court, or other liquidation proceedings of similar import.
This explains the rule of Article 2243 of the new Civil Code that —
"The claims or credits enumerated in the two preceding articles 1 shall be
considered as mortgages or pledges of real or personal property or liens within
the purview of legal provisions governing insolvency . . ." (Emphasis supplied).
and the rule is further clarified in the Report of the Code Commission, as follows:
"The question as to whether the Civil Code and the Insolvency Law can be
harmonized is settled by this Article (2243). The preferences named in Articles
2261 and 2262 (now 2241 and 2242) are to be enforced in accordance with the
Insolvency Law." (Emphasis supplied.)
Thus, it becomes evident that one preferred creditor's third-party claim to the proceeds
of a foreclosure sale (as in the case now before us) is not the proceeding contemplated
by law for the enforcement of preferences under Article 2242, unless he claimant were
enforcing a credit for taxes that enjoy absolute priority. If none of the claims is for
taxes, a dispute between two creditors will not enable the court to ascertain the pro
rata dividend corresponding to each, because the rights of the other creditors likewise
enjoying preference under Article 2242 can not be ascertained. Wherefore, the order of
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the Court of First Instance of Manila now appealed from, decreeing that the proceeds
of the foreclosure sale be apportioned only between appellant and appellee, is incorrect
and must be reversed.
In the absence of insolvency proceedings (or other equivalent general liquidation of the
debtor's estate), the con ict 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 (as the appellant concededly is) takes registered property free from liens and
encumbrances other than statutory liens and those recorded in the certi cate of title.
There being no insolvency or liquidation, the claim of the appellee, as unpaid vendor, did
not acquire the character and rank of a statutory lien co-equal to the mortgagee's recorded
encumbrance, and must remain subordinate to the latter.
We are understandably loath (absent a clear precept of law so commanding) to adopt a
rule that would undermine the faith and credit to be accorded to registered Torrens titles
and nullify the bene cent 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 it in every instance subject to all the fourteen preferred claims enumerated in
Article 2242 of the new Civil Code, even if the existence and import thereof can not be
ascertained from the records, all con dence in Torrens titles would be destroyed, and
credit transactions on the faith of such titles would be hampered, if not prevented, with
incalculable results. Loans on real estate security would become aleatory and risky
transactions, for no prospective lender could accurately estimate the hidden liens on the
property offered as security, unless he indulged in complicated, tedious investigations. The
logical result might well be a contraction of credit to unforeseeable proportions that could
lead to economic disaster.
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.
B. The close study of the facts disclosed by the records casts strong doubt on the
proposition that appellees Cruzados should be regarded as unpaid vendors of the
property (land, buildings and improvements) involved in the case at bar so as to be entitled
to preference under Article 2242. The record on appeal, specially the nal decision of the
Court of First Instance of Manila in the suit of the Cruzados against Villanueva, clearly
establishes that after her husband's death, and with due court authority, Rosario Cruzado,
for herself and as administratrix of her husband's estate, mortgaged the property to the
Rehabilitation Finance Corporation (RFC) to secure repayment of a loan of P11,000, in
installments but that the debtor failed to pay some of the installments; wherefore the RFC,
on 24 August 1949, foreclosed the mortgage, and acquired the property, subject to the
debtor's right to redeem or repurchase the said property; and that on 25 September 1950,
the RFC consolidated its ownership, and the certi cate of title of the Cruzados was
cancelled and a new certificate issued in the name of the RFC.
While on 26 July 1951 the RFC did execute a deed selling back the property to the
erstwhile mortgagors and former owners Cruzados in installments, subject to the
condition (among others) that the title to the property and its improvements "shall remain
in the name of the Corporation (RFC) until after said purchase price, advances and interest
shall have been fully paid", as of 27 September 1952, Cruzado had only paid a total of
P1,360, and had defaulted on six monthly amortizations; for which reason the RFC
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rescinded the sale, and forfeited the payments made, in accordance with the terms of the
contract of 26 July 1951.
It was only on 10 March 1953 that the Cruzados sold to Pura L. Villanueva all "their rights,
title, interest and dominion on and over" the property, lot, house, and improvements for
P19,000.00, the buyer undertaking to assume payment of the obligation to the RFC, and by
resolution of 30 April 1953, the RFC approved "the transfer of the rights and interests of
Rosario P. Cruzado and her children in their property herein above-described in favor of
Pura L. Villanueva"; and on 7 may 1953 the RFC executed a deed of absolute sale of the
property to said party, who had fully paid the price of P14,269.03. Thereupon, the spouses
Villanueva obtained a new Transfer Certificate of Title No. 32526 in their name.
On 10 July 1953, the Villanuevas mortgaged the property to the spouses Barreto,
appellants herein.
It is clear from the facts above-stated that ownership of the property had passed to the
Rehabilitation Finance Corporation since 1950, when it consolidated its purchase at the
foreclosure sale and obtained a certi cate of title in its corporate name. The subsequent
contract of resale in favor of the Cruzados did not revest ownership in them, since they
failed to comply with its terms and conditions, and the contract itself provided that the
title should remain in the name of the RFC until the price was fully paid.
Therefore, when after defaulting in their payments due under the resale contract with the
RFC the appellants Cruzados sold to Villanueva "their rights, title, interest and dominion" to
the property, they merely assigned whatever rights or claims they might still have thereto;
the ownership of the property rested with the RFC. The sale from Cruzado to Villanueva,
therefore, was not so much a sale of the land and its improvements as it was a quitclaim
deed in favor of Villanueva. In law, the operative sale was that from the RFC to the latter,
and it was the RFC that should be regarded as the true vendor of the property. At the most,
the Cruzados transferred to Villanueva an option to acquire the property, but not the
property itself, and their credit, therefore, can not legally constitute a vendor's lien on the
corpus of that property that should stand on an equal footing with the mortgaged credit
held by appellants Barretto.
IN VIEW OF THE FOREGOING, the previous decision of this Court, promulgated on 28
January 1961, is hereby reconsidered and set aside, and a new one entered reversing the
judgment appealed from and declaring the appellants Barrettos entitled to full satisfaction
of their mortgaged credit out of the proceeds of the foreclosure sale in the hands of the
Sheriff of the City of Manila. No costs.
Padilla, Bautista Angelo, Concepcion, Barrera, Paredes, Regala and Makalintal, JJ ., concur.
Bengzon, C . J ., Labrador and Dizon, JJ ., did not take part.
Footnotes
1. Arts. 2241 (credits affecting specific personality) and 2242 (credits on realty).
DECISION
NACHURA , J : p
Before the Court are the consolidated petitions for review on certiorari under
Rule 45 of the Rules of Court: (1) G.R. No. 180893, assailing the Decision 1 dated May
17, 2007 and the Resolution 2 dated October 30, 2007 of the Court of Appeals (CA) in
CA-G.R. SP No. 92695, entitled "Export and Industry Bank v. Puerto Azul Land, Inc."; and
(2) G.R. No. 178768, assailing the Decision 3 dated March 16, 2007 and the Resolution 4
dated June 29, 2007 of the CA in CA-G.R. SP No. 91996, entitled "Puerto Azul Land, Inc.
v. The Regional Trial Court of Manila, Br. 24; Sheriff IV of Pasay City Virgilio F. Villar; and
Paci c Wide Realty & Development Corporation (as substitute for Export and Industry
Bank, Inc.)".
The Facts
In G.R. No. 180893
Puerto Azul Land, Inc. (PALI) is the owner and developer of the Puerto Azul
Complex situated in Ternate, Cavite. Its business involves the development of Puerto
Azul into a satellite city with residential areas, resort, tourism and retail commercial
centers with recreational areas. 5 In order to nance its operations, it obtained loans
from various banks, the principal amount of which amounted to Six Hundred Forty
Million Two Hundred Twenty-Five Thousand Three Hundred Twenty-Four Pesos
(P640,225,324.00). PALI and its accommodation mortgagors, i . e . , Ternate
Development Corporation (TDC), Ternate Utilities, Inc. (TUI), and Mrs. Trinidad Diaz-
Enriquez, secured the loans. 6 CTSHDI
In the beginning, PALI's business did very well. However, it started encountering
problems when the Philippine Stock Exchange rejected the listing of its shares in its
initial public offering which sent a bad signal to the real estate market. This resulted in
potential investors and real estate buyers shying away from the business venture. The
situation was aggravated by the 1997 Asian nancial crisis and the decline of the real
estate market. Consequently, PALI was unable to keep up with the payment of its
obligations, both current and those that were about to fall due. One of its creditors, the
Export and Industry Bank 7 (EIB), later substituted by Paci c Wide Realty and
Development Corporation (PWRDC), led foreclosure proceedings on PALI's
mortgaged properties. Thrust to a corner, PALI led a petition for suspension of
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payments and rehabilitation, 8 accompanied by a proposed rehabilitation plan and three
(3) nominees for the appointment of a rehabilitation receiver. 9
On September 17, 2004, after nding that the petition was su cient in form and
substance, the Regional Trial Court (RTC) issued a Stay Order 10 and appointed Patrick
V. Caoile as rehabilitation receiver. 11 Dissatis ed, EIB led a motion to replace the
appointed rehabilitation receiver. On January 25, 2005, the RTC denied the motion. 12
On April, 20, 2005, the rehabilitation receiver led his rehabilitation report and
recommendation, wherein he proposed that PALI should be rehabilitated rather than be
dissolved and liquidated. On June 9, 2005, PALI filed a revised rehabilitation plan. 13
EIB and the other creditors of PALI led their respective comments/opposition
to the report/recommendations of the rehabilitation receiver. On November 2, 2005,
EIB, together with another creditor of PALI, Tranche I (SPV-MC), Inc., led an urgent
motion to disqualify the appointed rehabilitation receiver. The RTC denied the motion in
an Order 14 dated December 9, 2005. 15
On December 13, 2005, the RTC rendered a Decision 16 approving PALI's petition
for suspension of payments and rehabilitation. The pertinent portions of the decision
read:
The rehabilitation of the petitioner, therefore, shall proceed as follows:
1. The creditors shall have, as rst option, the right to be paid with real estate
properties being offered by the petitioner in dacion en pago, which shall be
implemented under the following terms and conditions:
a. The properties offered by the petitioner shall be appraised by three
appraisers, one to be chosen by the petitioner, a second to be chosen by the bank
creditors and the third to be chosen by the Receiver. The average of the appraisals
of the three (3) chosen appraisers shall be the value to be applied in arriving at
the dacion value of the properties. In case the dacion amount is less than the total
of the secured creditor's principal obligation, the balance shall be restructured in
accordance with the schedule of payments under option 2, paragraph (a). In case
of excess, the same shall [be] applied in full or partial payment of the accrued
interest on the obligations. The balance of the accrued interest, if any, together
with the penalties shall [be] condoned. HcSaAD
2. Creditors who will not opt for dacion shall be paid in accordance with the
restructuring of the obligations as recommended by the Receiver as follows:
2. The Rehabilitation Receiver, creditors, and the petitioner shall submit to the
Court at the end of the rst year of the petitioner's rehabilitation, and annually
thereafter until the termination of the rehabilitation, their respective reports on the
progress of the petitioner's rehabilitation, specially the petitioner's compliance
with the provisions of the plan as modified by the Rehabilitation Receiver;
3. The Rehabilitation Receiver shall report to the Court any change in the
assumptions used in the Rehabilitation Plan, its projections, and forecasts, that
may be brought about by the settlement through dacion en pago of any of the
obligations and to recommend corresponding changes, if any, in such
assumptions, projections, and forecasts;
4. The rehabilitation of the petitioner is binding upon the creditors and all
persons who may be affected by it, including the creditors, whether or not they
have participated in the proceedings or opposed the plan or whether or not their
claims have been scheduled.
The petitioner is hereby strictly enjoined to abide by the terms and conditions set
forth in this Order and the provisions of the Interim Rules on Corporate
Rehabilitation.
"w) To bring to the attention of the court any material change affecting
the debtor's ability to meet the obligations under the rehabilitation plan";CHaDIT
Finding the terms of the rehabilitation plan and the quali cations of the
appointed rehabilitation receiver unacceptable, EIB led with the CA a petition for
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review under Rule 42 of the Rules of Court. The case was entitled, "Export and Industry
Bank v. Puerto Azul Land, Inc."
On May 17, 2007, the CA rendered a Decision, 18 the fallo of which reads:
W HE R E F O R E , in view of the forgoing, the petition for review is hereby
D IS MIS S ED. The assailed December 13, 2005 decision of the court a quo is
hereby AFFIRMED in toto. 19
EIB led a motion for reconsideration. However, the same was denied in a
Resolution 20 dated October 30, 2007.
In G.R. No. 178768
On September 21, 2004, EIB entered its appearance before the rehabilitation
court and moved for the clari cation of the stay order dated September 17, 2004
and/or leave to continue the extrajudicial foreclosure of the real estates owned by
PALI's accommodation mortgagors. In opposition, PALI argued that the foreclosure
sought would preempt the rehabilitation proceedings and would give EIB undue
preference over PALI's other creditors. On November 10, 2004, the RTC issued an
Order, 21 denying EIB's motion. 22
On March 3, 2005, EIB led an urgent motion to order PALI and/or the mortgagor
TUI/rehabilitation receiver to pay all the taxes due on Transfer Certi cate of Title (TCT)
No. 133164. EIB claimed that the property covered by TCT No. 133164, registered in
the name of TUI, was one of the properties used to secure PALI's loan from EIB. The
said property was subject to a public auction by the Treasurer's O ce of Pasay City for
non-payment of realty taxes. Hence, EIB prayed that PALI or TUI be ordered to pay the
realty taxes due on TCT No. 133164. 23
PALI opposed the motion, arguing that the rehabilitation court's stay order
stopped the enforcement of all claims, whether for money or otherwise, against a
debtor, its guarantors, and its sureties not solidarily liable to the debtor; thus, TCT No.
133164 was covered by the stay order. 24
On March 31, 2005, the RTC issued an Order, 25 the dispositive portion of which
reads:
Accordingly, and as being invoked by the creditor movant, this Court hereby
modi es the Stay Order of September 17, 2004, in such a manner that TCT No.
133614 which is mortgaged with creditor movant Export and Industry Bank, Inc. is
now excluded from the Stay Order. As such, Export and Industry Bank, Inc. may
settle the above-stated realty taxes of third party mortgagor with the local
government of Pasay City. In return, and to adequately protect the creditor movant
Export and Industry Bank, Inc., the latter may foreclose on TCT No. 133614.
SO ORDERED. 26 TSacAE
On April 12, 2005, PALI led an urgent motion for a status quo order, praying that
the stay order be maintained and that the enforcement of the claim of Pasay City be
held in abeyance pending the hearing of its motion. 27 On April 13, 2005, the RTC, so as
not to render moot PALI's motion, issued an Order, 28 directing EIB to refrain from
taking any steps to implement the March 31, 2005 Order. The City Treasurer of Pasay
City was, likewise, directed to respect the stay order dated September 17, 2004 insofar
as TCT No. 133164 was concerned, until further orders from the court. 29
On August 16, 2005, the RTC issued an Order 30 addressing the April 12, 2005
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urgent motion of PALI. In the said order, the rehabilitation court maintained its March
31, 2005 Order. The court reiterated that TCT No. 133164, under the name of TUI, was
excluded from the stay order. In order to protect the interest of EIB as creditor of PALI,
it may foreclose TCT No. 133164 and settle the delinquency taxes of third-party
mortgagor TUI with the local government of Pasay City.
PALI led an urgent motion to modify the Order dated August 16, 2005. The
same was denied by the RTC in an Order 3 1 dated October 19, 2005. Aggrieved, PALI
led with the CA a petition for certiorari under Rule 65 of the Rules of Court, ascribing
grave abuse of discretion on the part of the rehabilitation court in allowing the
foreclosure of a mortgage constituted over the property of an accommodation
mortgagor, to secure the loan obligations of a corporation seeking relief in a
rehabilitation proceeding. The case was entitled, "Puerto Azul Land, Inc. v. The Regional
Trial Court of Manila, Br. 24; Sheriff IV of Pasay City Virgilio F. Villar; and Export and
Industry Bank, Inc."
On March 16, 2007, the CA rendered a Decision, 32 the fallo of which reads:
WHEREFORE , above premises considered, the instant Petition is GRANTED . The
October 19, 2005 Order of the Regional Trial Court of Manila, Br. 24, in Civil Case
No. 04-110914 is hereby declared NULL and VOID and the properties covered by
TCT No. 133164 are hereby DECLARED subject to and covered by the September
17, 2004 stay order. Accordingly, Public Respondent Sheriff Virgilio F. Villar, or his
substitute or equivalent, is O R D E R E D to immediately cease and desist from
enforcing the Amended Notice of Sheriff's Sale, dated February 8, 2007, and from
conducting the sale at public auction of the parcels of land covered by TCT No.
133164 on March 20, 2007 or at anytime thereafter. No costs.
SO ORDERED . 33
EIB led a motion for reconsideration. The CA denied the same in a Resolution 34
dated June 29, 2007.
Hence, this petition for review on certiorari under Rule 45 of the Rules of Court.
On July 27, 2009, the Court ordered the consolidation of the two petitions.
The Issues
The issues for resolution are the following: (1) whether the terms of the
rehabilitation plan are unreasonable and in violation of the non-impairment clause; and
(2) whether the rehabilitation court erred when it allowed the foreclosure of the
accommodation mortgagee's property and excluded the same from the coverage of
the stay order. AEHTIC
In G.R. No. 180893, the rehabilitation plan is contested on the ground that the
same is unreasonable and results in the impairment of the obligations of contract.
PWRDC contests the following stipulations in PALI's rehabilitation plan: fty percent
(50%) reduction of the principal obligation; condonation of the accrued and substantial
interests and penalty charges; repayment over a period of ten years, with minimal
interest of two percent (2%) for the first five years and five percent (5%) for the next five
years until fully paid, and only upon availability of cash flow for debt service.
We nd nothing onerous in the terms of PALI's rehabilitation plan. The Interim
Rules on Corporate Rehabilitation provides for means of execution of the rehabilitation
plan, which may include, among others, the conversion of the debts or any portion
thereof to equity, restructuring of the debts, dacion en pago, or sale of assets or of the
controlling interest.
The restructuring of the debts of PALI is part and parcel of its rehabilitation.
Moreover, per ndings of fact of the RTC and as a rmed by the CA, the restructuring of
the debts of PALI would not be prejudicial to the interest of PWRDC as a secured
creditor. Enlightening is the observation of the CA in this regard, viz.:
There is nothing unreasonable or onerous about the 50% reduction of the
principal amount when, as found by the court a quo, a Special Purpose Vehicle
(SPV) acquired the credits of PALI from its creditors at deep discounts of as much
as 85%. Meaning, PALI's creditors accepted only 15% of their credit's value.
Stated otherwise, if PALI's creditors are in a position to accept 15% of their credit's
value, with more reason that they should be able to accept 50% thereof as full
settlement by their debtor. . . . . 38
For purposes of this section, the creditor shall lack adequate protection if it can be
shown that:
Upon showing of a lack of adequate protection, the court shall order the
rehabilitation receiver to (a) make arrangements to provide for the insurance or
maintenance of the property, or (b) to make payments or otherwise provide
additional or replacement security such that the obligation is fully secured. If such
arrangements are not feasible, the court shall modify the stay order to allow the
secured creditor lacking adequate protection to enforce its claim against the
debtor; Provided, however, that the court may deny the creditor the remedies in
this paragraph if such remedies would prevent the continuation of the debtor as a
going concern or otherwise prevent the approval and implementation of a
rehabilitation plan.
In its March 31, 2005 Order, the rehabilitation court ratiocinated that PALI
violated the terms of the MTI by failing to take reasonable steps to protect the security
given to PWRDC, viz.:
It is crystal clear that Ternate Utilities, Inc. being the owner of TCT No. 133614 is
the one liable to pay the realty taxes to the local government of Pasay City. The
petitioner [PALI], not being the owner of the subject land does not owe the local
government of Pasay City in the same way [as] the local government of Pasay
City is not a creditor of petitioner [PALI]. The local government of Pasay City is
pursuing directly the tax obligation of Ternate Utilities, Inc. which company is not
the petitioner [PALI] in this case. Hence, for all intents and purposes, the Stay
Order does not cover the tax obligations of Ternate Utilities, Inc. to the local
government of Pasay City.
In [petitioner PALI's] Comment, it can be gleaned that neither Ternate Utilities, Inc.
nor the petitioner [PALI] has the intention of paying the real property taxes on TCT
No. 133614, which inaction will naturally result in the auctioning of [the] subject
land to the prejudice and damage of creditor movant being the mortgagee
thereof. Likewise, it is uncontested that the failure of the petitioner or Ternate
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Utilities, Inc. to pay the realty property taxes violate[d] the pre-existing agreement
of the petitioner [PALI] and Ternate Utilities, Inc. to the creditor movant. 4 5
In the August 16, 2005 Order, the rehabilitation court rea rmed its decision to
remove TCT No. 133164 from the coverage of the stay order in order to protect the
secured claim of PWRDC, viz.: AEDCHc
Considering that the auction sale of TCT No. 133614 by the local government of
Pasay City without the Ternate Utilities, Inc., or the petitioner [PALI] redeeming or
paying the corresponding due taxes and penalties totaling to P7,523,257.50 as
indicated in the aforesaid Certi cate of Sale of Delinquent Real Property, the
interest of creditor EIB is greatly prejudiced.
Lastly, even assuming that the value of the PALI property covered by the MTI
[Mortgage Trust Indenture] is indeed P1.877 Billion, however, the total claim of EIB
against the petitioner [PALI] is more than P1.4 Billion Pesos (By statement of
Asset attached by EIB in its Comment/Opposition to the petition for rehabilitation
dated November 10, 2004) as of October 31, 2004 which total obligation is still
counting as to date. Hence, not redeeming the auctioned TCT No. 133614 from
the Pasay City Government de nitely renders creditor EIB not possessing
adequate protection over [the] property securing its claim against petitioner [PALI].
46
Thus, there is no question that the action of the rehabilitation court in G.R. No.
178768 was justified.
WHEREFORE , in view of the foregoing, (1) the Decision dated May 17, 2007 and
the Resolution dated October 30, 2007 of the Court of Appeals in CA-G.R. SP No. 92695
are hereby AFFIRMED ; and (2) the Decision dated March 16, 2007 and the Resolution
dated June 29, 2007 of the Court of Appeals in CA-G.R. SP No. 91996 are hereby SET
ASIDE. The October 19, 2005 Order of the Regional Trial Court of Manila in Civil Case
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No. 04-110914 is hereby AFFI RME D. The property covered by TCT No. 133164 is
hereby declared excluded from the coverage of the September 17, 2004 Stay Order.
No costs.
SO ORDERED.
Corona, Chico-Nazario, Leonardo-de Castro * and Peralta, JJ., concur.
Footnotes
* Additional member in lieu of Associate Justice Presbitero J. Velasco, Jr. per Raffle dated
July 22, 2009.
1. Penned by Associate Justice Lucenito N. Tagle, with Associate Justices Amelita G.
Tolentino and Mariflor Punzalan-Castillo, concurring; rollo (G.R. No. 180893), pp. 53-65.
2. Id. at 67-72.
3. Penned by Associate Justice Normandie B. Pizarro, with Associate Justices Edgardo P.
Cruz and Fernanda Lampas Peralta, concurring; rollo (G.R. No. 178768), pp. 51-64.
4. Id. at 66-68.
5. Rollo (G.R. No. 180893), p. 54.
6. Rollo (G.R. No. 178768), p. 52.
7. Formerly known as Urban Bank.
8. The case filed by PALI was entitled "In the Matter of the Corporate
Rehabilitation/Suspension of Payments of Puerto Azul Land, Inc.; pursuant to the
Interim Rules of Procedure on Corporate Rehabilitation (A.M. No. 009-10-SC)", and
docketed as Civil Case No. 04-110914.
9. Rollo (G.R. No. 180893), p. 54.
10. CA rollo (CA-G.R. SP No. 92695), pp. 110-113.
11. Rollo (G.R. No. 180893), pp. 53-55.
12. CA rollo (CA-G.R. SP No. 92695), pp. 140-141.
13. Rollo (G.R. No. 180893), p. 55.
14. CA rollo (CA-G.R. SP No. 92695), pp. 352-354.
42. Philippine Airlines, Incorporated v. Zamora, G.R. No. 166996, February 6, 2007, 514
SCRA 585.
43. Negros Navigation Co., Inc. v. Court of Appeals, Special Twelfth Division, supra note 36,
at 451-452.
44. CA rollo (CA-G.R. SP No. 91996), p. 76.
SYNOPSIS
In 1984, when Marinduque Mining and Industrial Corporation (MMIC) failed to settle
its loan obligations, PNB and DBP foreclosed and eventually acquired MMIC's mortgaged
properties. PNB and DBP then assigned their rights to the properties to Nonoc Mining,
Maricalum Mining and Island Cement. Meantime, however, between 1982 to 1983, MMIC
purchased construction materials from Remington Corp. which remained unpaid as of
1984. Remington Corp. thus led "a collection case against MMIC and later included
therein PNB and DBP, then Nonoc Mining, Maricalum Mining, and Island Cement.
Remington Corp. asserted that the transfer of MMIC properties to the three newly created
entities practically owned wholly by PNB and DBP, were made in fraud of creditors. The
defendant corporations must be treated as one and the same entity by disregarding the
veil of corporate fiction.
The Court found no fraud on the part of MMIC and its transferees to warrant the
piercing of the corporate veil. PNB and DBP foreclosed the mortgaged properties by
mandate of PD 385, when the past due account of MMIC incurred arrearages of more than
20% of the total outstanding obligation. The establishment of the three new corporations
were by necessity since DBP is not authorized to engage in mining business. The hiring of
MMIC's personnel and the maintaining of business at MMIC's premises are both
incidental. Lastly, DBP cannot be held liable for the obligation of MMIC in the absence of
liquidation proceedings.
SYLLABUS
DECISION
KAPUNAN , J : p
Before the Court is a petition for review on certiorari under Rule 45 of the Rules of
Court, seeking a review of the Decision of the Court of Appeals dated October 6, 1995 and
the Resolution of the same court dated August 29, 1996.
The facts are as follows:
Marinduque Mining Industrial Corporation (Marinduque Mining), a corporation
engaged in the manufacture of pure and re ned nickel, nickel and cobalt in mixed sul des,
copper ore/concentrates, cement and pyrite conc., obtained from the Philippine National
Bank (PNB) various loan accommodations. To secure the loans, Marinduque Mining
executed on October 9, 1978 a Deed of Real Estate Mortgage and Chattel Mortgage in
favor of PNB. The mortgage covered all of Marinduque Mining's real properties, located at
Surigao del Norte, Sipalay, Negros Occidental, and at Antipolo, Rizal, including the
improvements thereon. As of November 20, 1980, the loans extended by PNB amounted
to P4 Billion, exclusive of interest and charges. 1
On July 13, 1981, Marinduque Mining executed in favor of PNB and the Development
Bank of the Philippines (DBP) a second Mortgage Trust Agreement. In said agreement,
Marinduque Mining mortgaged to PNB and DBP all its real properties located at Surigao
del Norte, Sipalay, Negros Occidental, and Antipolo, Rizal, including the improvements
thereon. The mortgage also covered all of Marinduque Mining's chattels, as well as assets
of whatever kind, nature and description which Marinduque Mining may subsequently
acquire in substitution or replenishment or in addition to the properties covered by the
previous Deed of Real and Chattel Mortgage dated October 7, 1978. Apparently,
Marinduque Mining had also obtained loans totaling P2 Billion from DBP, exclusive of
interest and charges. 2
On April 27, 1984, Marinduque Mining executed in favor of PNB and DBP an
Amendment to Mortgage Trust Agreement by virtue of which Marinduque Mining
mortgaged in favor of PNB and DBP all other real and personal properties and other real
rights subsequently acquired by Marinduque Mining. 3
For failure of Marinduque Mining to settle its loan obligations, PNB and DBP
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instituted sometime on July and August 1984 extrajudicial foreclosure proceedings over
the mortgaged properties.
The events following the foreclosure are narrated by DBP in its petition, as follows:
In the ensuing public auction sale conducted on August 31, 1984, PNB and
DBP emerged and were declared the highest bidders over the foreclosed real
properties, buildings, mining claims, leasehold rights together with the
improvements thereon as well as machineries [sic] and equipments [sic] of MMIC
located at Nonoc Nickel Re nery Plant at Surigao del Norte for a bid price of
P14,238,048,150.00 [and] [o]ver the foreclosed chattels of MMIC located at Nonoc
Re nery Plant at Surigao del Norte, PNB and DBP as highest bidders, bidded for
P170,577,610.00 (Exhs. "5" to "5-A", "6", "7" to "7-AA-" PNB/DBP). For the
foreclosed real properties together with all the buildings, major machineries &
equipment and other improvements of MMIC located at Antipolo, Rizal, likewise
held on August 31, 1984, were sold to PNB and DBP as highest bidders in the sum
of P1,107,167,950.00 (Exhs. "10" to "10-X"- PNB/DBP).
Finally, at the public auction sale conducted on September 18, 1984 on the
foreclosed personal properties of MMIC, the same were sold to PNB and DBP as
the highest bidder in the sum of P678,772,000.00 (Exhs. "11" and "12-QQQQQ"—
PNB). TaCDcE
PNB and DBP thereafter thru a Deed of Transfer dated August 31, 1984,
purposely, in order to ensure the continued operation of the Nickel re nery plant
and to prevent the deterioration of the assets foreclosed, assigned and transferred
to Nonoc Mining and Industrial Corporation all their rights, interest and
participation over the foreclosed properties of MMIC located at Nonoc Island,
Surigao del Norte for an initial consideration of P14,361,000,000.00 (Exh. "13"-
PNB).
Likewise, thru [sic] a Deed of Transfer dated June 6, 1984, PNB and DBP
assigned and transferred in favor of Maricalum Mining Corp. all its rights, interest
and participation over the foreclosed properties of MMIC at Sipalay, Negros
Occidental for an initial consideration of P325,800,000.00 (Exh. "14"—PNB/DBP).
On February 27, 1987, PNB and DBP, pursuant to Proclamation No. 50 as
amended, again assigned, transferred and conveyed to the National Government
thru [sic] the Asset Privatization Trust (APT) all its existing rights and interest over
the assets of MMIC, earlier assigned to Nonoc Mining and Industrial Corporation,
Maricalum Mining Corporation and Island Cement Corporation (Exh. "15" & "15-A"
PNB/DBP). 4
In the meantime, between July 16, 1982 to October 4, 1983, Marinduque Mining
purchased and caused to be delivered construction materials and other merchandise from
Remington Industrial Sales Corporation (Remington) worth P921,755.95. The purchases
remained unpaid as of August 1, 1984 when Remington led a complaint for a sum of
money and damages against Marinduque Mining for the value of the unpaid construction
materials and other merchandise purchased by Marinduque Mining, as well as interest,
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attorney's fees and the costs of suit.
On September 7, 1984, Remington's original complaint was amended to include
PNB and DBP as co-defendants in view of the foreclosure by the latter of the real and
chattel mortgages on the real and personal properties, chattels, mining claims, machinery,
equipment and other assets of Marinduque Mining. 5
On September 13, 1984, Remington led a second amended complaint to include as
additional defendant, the Nonoc Mining and Industrial Corporation (Nonoc Mining). Nonoc
Mining is the assignee of all real and personal properties, chattels, machinery, equipment
and all other assets of Marinduque Mining at its Nonoc Nickel Factory in Surigao del Norte.
6
On March 26, 1986, Remington led a third amended complaint including the
Maricalum Mining Corporation (Maricalum Mining) and Island Cement Corporation (Island
Cement) as co-defendants. Remington asserted that Marinduque Mining, PNB, DBP, Nonoc
Mining, Maricalum Mining and Island Cement must be treated in law as one and the same
entity by disregarding the veil of corporate fiction since:
1. Co-defendants NMIC, Maricalum and Island Cement which are
newly created entities are practically owned wholly by defendants PNB and DBP,
and managed by their o cers, aside from the fact that the aforesaid co-
defendants NMIC, Maricalum and Island Cement were organized in such a hurry
and in such suspicious circumstances by co-defendants PNB and DBP after the
supposed extrajudicial foreclosure of MMIC's assets as to make their supposed
projects assets, machineries and equipment which were originally owned by co-
defendant MMIC beyond the reach of creditors of the latter.
On April 10, 1990, the Regional Trial Court (RTC) rendered a decision in favor of
Remington, the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff, ordering
the defendants Marinduque Mining & Industrial Corporation, Philippine National
Bank, Development Bank of the Philippines, Nonoc Mining and Industrial
Corporation, Maricalum Mining Corporation, Island Cement Corporation and Asset
Privatization Trust to pay, jointly and severally, the sum of P920,755.95,
representing the principal obligation, including the stipulated interest as of June
22, 1984, plus ten percent (10%) surcharge per annum by way of penalty, until the
amount is fully paid; the sum equivalent to 10% of the amount due as and for
attorney's fees; and to pay the costs. 8
Upon appeal by PNB, DBP, Nonoc Mining, Maricalum Mining, Island Cement and APT,
the Court of Appeals, in its Decision dated October 6, 1995, a rmed the decision of the
RTC. Petitioner led a Motion for Reconsideration, which was denied in the Resolution
dated August 29, 1996.
Hence, this petition, DBP maintaining that Remington has no cause of action against
it or PNB, nor against their transferees, Nonoc Mining, Island Cement, Maricalum Mining,
and the APT.
On the other hand, private respondent Remington submits that the transfer of the
properties was made in fraud of creditors. The presence of fraud, according to Remington,
warrants the piercing of the corporate veil such that Marinduque Mining and its
transferees could be considered as one and the same corporation. The transferees,
therefore, are also liable for the value of Marinduque Mining's purchases.
In Yutivo Sons Hardware vs. Court of Tax Appeals , 9 cited by the Court of Appeals in
its decision, 1 0 this Court declared:
It is an elementary and fundamental principle of corporation law that a
corporation is an entity separate and distinct from its stockholders and from other
corporations to which it may be connected. However, when the notion of legal
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entity is used to defeat public convenience, justify wrong, protect fraud, or defend
crime, the law will regard the corporation as an association of persons or in case
of two corporations, merge them into one". (Koppel [Phils.], Inc., vs. Yatco , 71 Phil.
496, citing 1 Fletcher Encyclopedia of Corporation, Permanent Ed., pp. 135-136;
U.S. vs. Milwaukee Refrigeration Transit Co ., 142 Fed., 247, 255 per Sanborn, J.). .
..
In accordance with the foregoing rule, this Court has disregarded the separate
personality of the corporation where the corporate entity was used to escape liability to
third parties. 1 1 In this case, however, we do not nd any fraud on the part of Marinduque
Mining and its transferees to warrant the piercing of the corporate veil.
It bears stressing that PNB and DBP are mandated to foreclose on the mortgage
when the past due account had incurred arrearages of more than 20% of the total
outstanding obligation. Section 1 of Presidential Decree No. 385 (The Law on Mandatory
Foreclosure) provides:
It shall be mandatory for government nancial institutions, after the lapse
of sixty (60) days from the issuance of this decree, to foreclose the collateral
and/or securities for any loan, credit accommodation, and/or guarantees granted
by them whenever the arrearages on such account, including accrued interest and
other charges, amount to at least twenty percent (20%) of the total outstanding
obligations, including interest and other charges, as appearing in the books of
account and/or related records of the nancial institution concerned. This shall
be without prejudice to the exercise by the government nancial institution of
such rights and/or remedies available to them under their respective contracts
with their debtors, including the right to foreclose on loans, credits,
accommodations and/or guarantees on which the arrearages are less than
twenty (20%) percent.
Thus, PNB and DBP did not only have a right, but the duty under said law, to
foreclose upon the subject properties. The banks had no choice but to obey the statutory
command. acAIES
The import of this mandate was lost on the Court of Appeals, which reasoned that
under Article 19 of the Civil Code, "Every person must, in the exercise of his rights and in
the performance of his duties, act with justice, give everyone his due, and observe honesty
and good faith." The appellate court, however, did not point to any fact evidencing bad faith
on the part of the Marinduque Mining and its transferees. Indeed, it skirted the issue
entirely by holding that the question of actual fraudulent intent on the part of the
interlocking directors of DBP and Marinduque Mining was irrelevant because:
As aptly stated by the appellee in its brief, ". . . where the corporations have
directors and o cers in common, there may be circumstances under which their
interest as o cers in one company may disqualify them in equity from
representing both corporations in transactions between the two. Thus, where one
corporation was 'insolvent and indebted to another, it has been held that the
directors of the creditor corporation were disquali ed, by reason of self-interest,
from acting as directors of the debtor corporation in the authorization of a
mortgage or deed of trust to the former to secure such indebtedness . . ." (page
105 of the Appellee's Brief). In the same manner that ". . . when the corporation is
insolvent, its directors who are its creditors can not secure to themselves any
advantage or preference over other creditors. They can not thus take advantage
of their duciary relation and deal directly with themselves, to the injury of others
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in equal right. If they do, equity will set aside the transaction at the suit of
creditors of the corporation or their representatives, without reference to the
question of any actual fraudulent intent on the part of the directors, for the right
of the creditors does not depend upon fraud in fact, but upon the violation of the
fiduciary relation to the directors." . . . . (page 106 of the Appellee's Brief)
We also concede that ". . . directors of insolvent corporation, who are
creditors of the company, can not secure to themselves any preference or
advantage over other creditors in the payment of their claims. It is not good
morals or good law. The governing body of o cers thereof are charged with the
duty of conducting its affairs strictly in the interest of its existing creditors, and it
would be a breach of such trust for them to undertake to give any one of its
members any advantage over any other creditors in securing the payment of his
debts in preference to all others. When validity of these mortgages, to secure
debts upon which the directors were indorsers, was questioned by other creditors
of the corporation, they should have been classed as instruments rendered void
by the legal principle which prevents directors of an insolvent corporation from
giving themselves a preference over outside creditors. . . . " (page 106-107 of the
Appellee's Brief.) 1 2
The Court of Appeals made reference to two principles in corporation law. The rst
pertains to transactions between corporations with interlocking directors resulting in the
prejudice to one of the corporations. This rule does not apply in this case, however, since
the corporation allegedly prejudiced (Remington) is a third party, not one of the
corporations with interlocking directors (Marinduque Mining and DBP).
The second principle invoked by respondent court involves "directors . . . who are
creditors" which is also inapplicable herein. Here, the creditor of Marinduque Mining is
DBP, not the directors of Marinduque Mining.
Neither do we discern any bad faith on the part of DBP by its creation of Nonoc
Mining, Maricalum and Island Cement. As Remington itself concedes, DBP is not
authorized by its charter to engage in the mining business. 1 3 The creation of the three
corporations was necessary to manage and operate the assets acquired in the foreclosure
sale lest they deteriorate from non-use and lose their value. In the absence of any entity
willing to purchase these assets from the bank, what else would it do with these
properties in the meantime? Sound business practice required that they be utilized for the
purposes for which they were intended.
Remington also asserted in its third amended complaint that the use of Nonoc
Mining, Maricalum and Island Cement of the premises of Marinduque Mining and the hiring
of the latter's officers and personnel also constitute badges of bad faith.
Assuming that the premises of Marinduque Mining were not among those acquired
by DBP in the foreclosure sale, convenience and practicality dictated that the corporations
so created occupy the premises where these assets were found instead of relocating
them. No doubt, many of these assets are heavy equipment and it may have been
impossible to move them. The same reasons of convenience and practicality, not to
mention e ciency, justi ed the hiring by Nonoc Mining, Maricalum and Island Cement of
Marinduque Mining's personnel to manage and operate the properties and to maintain the
continuity of the mining operations. EACTSH
To reiterate, the doctrine of piercing the veil of corporate ction applies only when
such corporate ction is used to defeat public convenience, justify wrong, protect fraud or
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defend crime. 1 4 To disregard the separate juridical personality of a corporation, the
wrongdoing must be clearly and convincingly established. It cannot be presumed. 1 5 In this
case, the Court nds that Remington failed to discharge its burden of proving bad faith on
the part of Marinduque Mining and its transferees in the mortgage and foreclosure of the
subject properties to justify the piercing of the corporate veil.
The Court of Appeals also held that there exists in Remington's favor a "lien" on the
unpaid purchases of Marinduque Mining, and as transferee of these purchases, DBP
should be held liable for the value thereof.
In the absence of liquidation proceedings, however, the claim of Remington cannot
be enforced against DBP. Article 2241 of the Civil Code provides:
ARTICLE 2241. With reference to speci c movable property of the
debtor, the following claims or liens shall be preferred:
xxx xxx xxx
(3) Claims for the unpaid price of movables sold, on said movables, so
long as they are in the possession of the debtor, up to the value of the same; and
if the movable has been resold by the debtor and the price is still unpaid, the lien
may be enforced on the price; this right is not lost by the immobilization of the
thing by destination, provided it has not lost its form, substance and identity,
neither is the right lost by the sale of the thing together with other property for a
lump sum, when the price thereof can be determined proportionally;
(4) Credits guaranteed with a pledge so long as the things pledged are
in the hands of the creditor, or those guaranteed by a chattel mortgage, upon the
things pledged or mortgaged, up to the value thereof;
I n Barretto vs. Villanueva, 1 6 the Court had occasion to construe Article 2242,
governing claims or liens over speci c immovable property. The facts that gave rise to the
case were summarized by this Court in its resolution as follows:
. . . Rosario Cruzado sold all her right, title, and interest and that of her
children in the house and lot herein involved to Pura L. Villanueva for P19,000.00.
The purchaser paid P1,500 in advance, and executed a promissory note for the
balance of P17,500.00. However, the buyer could only pay P5,500 on account of
the note, for which reason the vendor obtained judgment for the unpaid balance.
In the meantime, the buyer Villanueva was able to secure a clean certi cate of
title (No. 32626), and mortgaged the property to appellant Magdalena C. Barretto,
married to Jose C. Baretto, to secure a loan of P30,000.03, said mortgage having
been duly recorded.
Upon motion by appellants, however, the Court reconsidered its decision. Justice
J.B.L. Reyes, speaking for the Court, explained the reasons for the reversal:
A. The previous decision failed to take fully into account the radical
changes introduced by the Civil Code of the Philippines into the system of
priorities among creditors ordained by the Civil Code of 1889.
Pursuant to the former Code, con icts among creditors entitled to
preference as to speci c real property under Article 1923 were to be resolved
according to an order of priorities established by Article 1927, whereby one class
of creditors could exclude the creditors of lower order until the claims of the
former were fully satis ed out of the proceeds of the sale of the real property
subject of the preference, and could even exhaust proceeds if necessary.
Under the system of the Civil Code of the Philippines, however, only taxes
enjoy a similar absolute preference. All the remaining thirteen classes of preferred
creditors under Article 2242 enjoy no priority among themselves, but must be paid
pro rata, i.e., in proportion to the amount of the respective credits. Thus, Article
2249 provides:
"If there are two or more credits with respect to the same speci c real
property or real rights, they shall be satis ed pro rata, after the payment of the
taxes and assessments upon the immovable property or real rights."
But in order to make this prorating fully effective, the preferred creditors
enumerated in Nos. 2 to 14 of Article 2242 (or such of them as have credits
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outstanding) must necessarily be convened, and the import of their claims
ascertained. It is thus apparent that the full application of Articles 2249 and 2242
demands that there must be rst some proceeding where the claims of all the
preferred creditors may be bindingly adjudicated, such as insolvency, the
settlement of decedent's estate under Rule 87 of the Rules of Court, or other
liquidation proceedings of similar import.
This explains the rule of Article 2243 of the new Civil Code that —
"The claims or credits enumerated in the two preceding articles shall be
considered as mortgages or pledges of real or personal property, or liens within
the purview of legal provisions governing insolvency . . . (Italics supplied).
And the rule is further clari ed in the Report of the Code Commission, as
follows:
"The question as to whether the Civil Code and the Insolvency Law can be
harmonized is settled by this Article (2243). The preferences named in Articles
2261 and 2262 (now 2241 and 2242) are to be enforced in accordance with the
Insolvency Law." (Italics supplied)
Thus, it becomes evident that one preferred creditor's third-party claim to the proceeds of a
foreclosure sale (as in the case now before us) is not the proceeding contemplated by law for the
enforcement of preferences under Article 2242, unless the claimant were enforcing a credit for
taxes that enjoy absolute priority. If none of the claims is for taxes, a dispute between two
creditors will not enable the Court to ascertain the pro rata dividend corresponding to each,
because the rights of the other creditors likewise enjoying preference under Article 2242 can not
be ascertained. Wherefore, the order of the Court of First Instance of Manila now appealed from,
decreeing that the proceeds of the foreclosure sale be apportioned only between appellant and
appellee, is incorrect, and must be reversed. [Italics supplied] cTACIa
The ruling in Barretto was reiterated in Phil. Savings Bank vs. Hon. Lantin, Jr., etc., et
al., 1 8 and in two cases both entitled Development Bank of the Philippines vs. NLRC. 1 9
Although Barretto involved speci c immovable property, the ruling therein should
apply equally in this case where speci c movable property is involved. As the extrajudicial
foreclosure instituted by PNB and DBP is not the liquidation proceeding contemplated by
the Civil Code, Remington cannot claim its pro rata share from DBP.
WHEREFORE, the petition is GRANTED. The decision of the Court of Appeals dated
October 6, 1995 and its Resolution promulgated on August 29, 1996 is REVERSED and
SET ASIDE. The original complaint led in the Regional Trial Court in CV Case No. 84-
25858 is hereby DISMISSED.
SO ORDERED.
Davide, Jr., C.J., Puno, Pardo and Ynares-Santiago, JJ., concur.
Footnotes
SYLLABUS
DECISION
REGALADO , J : p
The core issue in this case is whether or not a mortgagor, whose property has been
extrajudicially foreclosed and sold at the corresponding foreclosure sale, may validly
execute a mortgage contract over the same property in favor of a third party during the
period of redemption.
The present appeal by certiorari assails the decision 1 of respondent Court of Appeals in
CA-G.R. CV No. 12678 where it answered the question posed by the foregoing issue in the
negative and modified the decision 2 of the then Court of First Instance of Cebu in Civil
Case No. R-18616 wherein the validity of said subsequent mortgage was assumed and the
case was otherwise disposed of on other grounds.
The facts which gave rise to the institution of the aforesaid civil case in the trial court, as
found by respondent Court of Appeals, are as follows:
"On October 10, 1974 plaintiff spouses, alarmed of losing their right of
redemption over lot 4731 of the Cebu City Cadastre and embraced under TCT No.
14272 from Mr. Juan Gandioncho, purchaser of the aforesaid lot at the
foreclosure sale of the previous mortgage in favor of Cebu City Development
Bank, went to Teotimo Abellana, president of defendant Association, to obtain a
loan of P30,000.00. Prior thereto or on October 3, 1974, their son Teofredo Dolino
filed a similar loan application for Twenty-Five Thousand (P25,000.00) Pesos
with lot No. 4731 offered as security for the Thirty Thousand (P30,000.00) Pesos
loan from defendant association. Subsequently, they executed a promissory note
in favor of defendant association. Both documents indicated that the principal
obligation is for Thirty Thousand (P30,000.00) Pesos payable in one year with
interest at twelve (12%) percent per annum.
"When the loan became due and demandable without plaintiff paying the same,
defendant association caused the extrajudicial foreclosure of the mortgage on
March 16, 1976. After the posting and publication requirements were complied
with, the land was sold at public auction on April 19, 1976 to defendant
association being the highest bidder. The certificate of sale was issued on April
20, 1976 and registered on May 10, 1976 with the Register of Deeds of Cebu.
"On May 24, 1971 (sic, 1977), no redemption having been effected by plaintiff,
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TCT No. 14272 was cancelled and in lieu thereof TCT No. 68041 was issued in
the name of defendant association." 3
xxx xxx xxx
On October 18, 1979, private respondents filed the aforestated Civil Case No. R-18616 in
the court a quo for the annulment of the sale at public auction conducted on April 19, 1976,
as well as the corresponding certificate of sale issued pursuant thereto.
In their complaint, private respondents, as plaintiffs therein, assailed the validity of the
extrajudicial foreclosure sale of their property, claiming that the same was held in violation
of Act No. 3135, as amended, and prayed, inter alia, for the cancellation of Transfer
Certificate of Title No. 68041 issued in favor of therein defendant City Savings and Loan
Association, Inc., now known as City Savings Bank and one of the petitioners herein.
In its answer, the defendant association therein denied the material allegations of the
complaint and averred, among others, that the present private respondent spouses may
still avail of their right of redemption over the land in question.
On January 12, 1983, after trial on the merits, the court below 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, as amended, under the following dispositive part:
"WHEREFORE, the foregoing premises considered and upon the view taken by the
Court of this case, judgment is hereby rendered, as follows:
1. Declaring ineffective the extrajudicial foreclosure of the mortgage over Lot
No. 4731 of the Cadastral Survey of Cebu;
For this purpose, defendant Association is given 15 days from receipt hereof
within which to submit its statement of the amount due it from the plaintiffs
Dolino, with notice to them. The payment to be made by the plaintiffs shall be
within ninety (90) days from their receipt of the order approving the amount due
the defendant Cebu City Savings and Loan Association, Inc.
Herein petitioners then filed a motion for reconsideration which was denied by respondent
court in its resolution dated March 5, 1991, hence the present petition which, in synthesis,
postulates that respondent court erred in declaring the real estate mortgage void, and also
impugns the judgment of the trial court declaring ineffective the extrajudicial foreclosure
of said mortgage and ordering the cancellation of Transfer Certificate of Title No. 68041
issued in favor of the predecessor of petitioner bank. 7
The first submission assailing the judgment of respondent Court of Appeals is
meritorious. llcd
Said respondent court 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. 8
Nonetheless, since respondent Court took cognizance thereof and, in fact, anchored its
modificatory judgment on its ratiocination of that issue, we are inclined to liberalize the
rule so that we can in turn pass upon the correctness of its conclusion. We may consider
such procedure as analogous to the rule that an unassigned error closely related to an
error properly assigned, or upon which the determination of the question properly
assigned is dependent, may be considered by an appellate court. 9 We adopt this
approach since, after all, both lower courts agreed upon the invalidity of the extrajudicial
foreclosure but differed only on the matter of the validity of the real estate mortgage upon
which the extrajudicial foreclosure was based.
In arriving at its conclusion, respondent court placed full reliance on what obviously is an
obiter dictum laid down in the course of the disquisition in Dizon vs. Gaborro, et al. which
we shall analyze. 1 0 For, as explicitly stated therein by the Court, "(t)he basic issue to be
resolved in this case is whether the 'Deed of Sale with Assumption of Mortgage' and the
`Option to purchase Real Estate,' two instruments executed by and between petitioner
Jose P. Dizon and Alfredo G. Gaborro (defendant below) on the same day, October 6,
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1959, constitute in truth and in fact an absolute sale of the three parcels of land therein
described or merely an equitable mortgage or conveyance thereof by way of security for
reimbursement or repayment by petitioner Jose P. Dizon of any and all sums which may
have been paid to the Development Bank of the Philippines and the Philippine National
Bank by Alfredo G. Gaborro . . ." Said documents were executed by the parties and the
payments were made by Gaborro for the debt of Dizon to said banks after the
Development Bank of the Philippines had foreclosed the mortgage executed by Dizon and
during the period of redemption after the foreclosure sale of the mortgaged property to
said creditor bank. llcd
The trial court held that the true agreement between the parties therein was that Gaborro
would assume and pay the indebtedness of Dizon to the banks and, in consideration
thereof, Gaborro was given the possession and enjoyment of the properties in question
until Dizon shall have reimbursed him for the amount paid to the creditor banks.
Accordingly, the trial court ordered the reformation of the documents to the extent
indicated and such particular relief was affirmed by the Court of Appeals. This Court held
that the agreement between the parties is one of those innominate contracts under Article
1307 of the Civil Code whereby the parties agreed "to give and to do" certain rights and
obligations, but partaking of the nature of antichresis.
Hence, on appeal to this Court, the judgment of the Court of Appeals in that case was
affirmed but with the following pronouncements:
"The two instruments sought to be reformed in this case appear to stipulate rights
and obligations between the parties thereto pertaining to and involving parcels of
land that had already been foreclosed and sold extrajudicially, and purchased by
the mortgage creditor, a third party. It becomes, therefore, necessary, to determine
the legality of said rights and obligations arising from the foreclosure and sale
proceedings not only between the two contracting parties to the instruments
executed between them but also in so far as the agreement affects the rights of
the third party, the purchaser Bank.
xxx xxx xxx
"Under the Revised Rules of Court, Rule 39, Section 33, the judgment debtor
remains in possession of the property foreclosed and sold, during the period of
redemption. If the judgment debtor is in possession of the property sold, he is
entitled to retain it, and receive the fruits, the purchaser not being entitled to such
possession. (Riosa vs. Verzosa, 26 Phil. 86; Velasco vs. Rosenberg's, Inc., 32 Phil.
72; Pabico vs. Pauco, 43 Phil. 572; Power vs. PNB, 54 Phil. 54; Gorospe vs.
Gochangco, L-12735, Oct. 30, 1959).
"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 (Exh.
A-Stipulation), 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." (Emphasis ours.)
It was apparently the second reason stated by the Court in said case which was relied
upon by respondent court in the present case on which to premise its conclusion. Yet, as
demonstrated by the relevant excerpts above quoted, not only was that obiter therein
unnecessary since evidently no sale was concluded, but even inaccurate, if not
inconsistent, when considered in the context of the discussion in its entirety. 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 the redemption period
without his credit having been discharged, it is illogical to hold that during that same
period of twelve months the mortgagor was "divested" of his ownership, since the absurd
result would be that the land will consequently be without an owner although it remains
registered in the name of the mortgagor.
That is why the discussion in said case carefully and felicitously states that what is
divested from the mortgagor is only his "full right as owner thereof to dispose (of) and sell
the lands," in effect, merely clarifying that the mortgagor does not have the unconditional
power to absolutely sell the land since the same is encumbered by a lien of a third person
which, if unsatisfied, could result in a consolidation of ownership in the lienholder but only
after the lapse of the period of redemption. Even on that score, it may plausibly be argued
that what is delimited is not the mortgagor's jus disponendi, as an attribute of ownership,
but merely the rights conferred by such act of disposal which may correspondingly be
restricted.
At any rate, even the foregoing considerations and arguments would have no application in
the case at bar and need not here be resolved since what is presently 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.
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. 1 2 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. 1 3 To repeat, the rule has always been that it
is only upon the expiration of the redemption period, without the judgment debtor having
made use of his right of redemption, that the ownership of the land sold becomes
consolidated in the purchaser. 1 4
Parenthetically, therefore, what actually is effected where redemption is seasonably
exercised by the judgment or mortgage debtor is not the recovery of ownership of his land,
which ownership he never lost, but the elimination from his title thereto of the lien created
by the levy on attachment or judgment or the registration of a mortgage thereon. The
American rule is similarly to the effect that the redemption of property sold under a
foreclosure sale defeats the inchoate right of the purchaser and restores the property to
the same condition as if no sale had been attempted. Further, it does not give to the
mortgagor a new title, but merely restores to him the title freed of the encumbrance of the
lien foreclosed. 1 5
We cannot rule on the plaint of petitioners that the trial court erred in declaring ineffective
the extrajudicial foreclosure and the sale of the property to petitioner bank. The court
below spelled out at length in its decision the facts which it considered as violative of the
provisions of Act No. 3135, as amended, by reason of which it nullified the extrajudicial
foreclosure proceeding and its effects. Such findings and ruling of the trial court are
already final and binding on petitioners and can no longer be modified, petitioners having
failed to appeal therefrom. prLL
An appellee who has not himself appealed cannot obtain from the appellate court any
affirmative relief other than the ones granted in the decision of the court below. 1 6 He
cannot impugn the correctness of a judgment not appealed from by him. He cannot assign
such errors as are designed to have the judgment modified. All that said appellee can do is
to make a counter-assignment of errors or to argue on issues raised at the trial only for the
purpose of sustaining the judgment in his favor, even on grounds not included in the
decision of the court a quo nor raised in the appellant's assignment of errors or
arguments. 1 7
WHEREFORE, the decision of respondent Court of Appeals, insofar as it modifies the
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judgment of the trial court, is REVERSED and SET ASIDE. The judgment of said trial court in
Civil Case No. R-18616, dated January 12, 1983, is hereby REINSTATED.
SO ORDERED.
Melencio-Herrera, Paras, Padilla and Nocon, JJ ., concur.
Footnotes
1. Justice Manuel C. Herrera, ponente; Justices Eduardo R. Bengson and Jainal D. Rasul,
concurring.
DECISION
CARPIO , J : p
The Case
This is a petition for review 1 of the 13 March 2006 Decision 2 and 19 December
2006 Resolution 3 of the Court of Appeals in CA-G.R. SP No. 78626. In its 13 March
2006 Decision, the Court of Appeals denied petitioner BPI Family Savings Bank, Inc.'s
(BPI Family) petition for mandamus and certiorari. In its 19 December 2006 Resolution,
the Court of Appeals denied BPI Family's motion for reconsideration.
The Facts
On 26 October 1994, CEDEC Transport, Inc. (CEDEC) mortgaged two parcels of
land covered by Transfer Certi cate of Title (TCT) Nos. 134327 and 134328 situated in
Malibay, Pasay City, including all the improvements thereon (properties), in favor of BPI
Family to secure a loan of P6,570,000. On the same day, the mortgage was duly
annotated on the titles under Entry No. 94-2878. On 5 April and 27 November 1995,
CEDEC obtained from BPI Family additional loans of P2,160,000 and P1,140,000,
respectively, and again mortgaged the same properties. These latter mortgages were
duly annotated on the titles under Entry Nos. 95-6861 and 95-11041, respectively, on
the same day the loans were obtained.
Despite demand, CEDEC defaulted in its mortgage obligations. On 12 October
1998, BPI Family filed with the ex-officio sheriff of the Regional Trial Court of Pasay City
(RTC) a veri ed petition for extrajudicial foreclosure of real estate mortgage over the
properties under Act No. 3135, as amended. 4
On 10 December 1998, after due notice and publication, the sheriff sold the
properties at public auction. BPI Family, as the highest bidder, acquired the properties
for P13,793,705.31. On 14 May 1999, the Certi cate of Sheriff's Sale, dated 24
February 1999, was duly annotated on the titles covering the properties.
On 15 May 1999, the one-year redemption period expired without CEDEC
redeeming the properties. Thus, the titles to the properties were consolidated in the
name of BPI Family. On 13 September 2000, the Registry of Deeds of Pasay City issued
new titles, TCT Nos. 142935 and 142936, in the name of BPI Family.
However, despite several demand letters, CEDEC refused to vacate the
properties and to surrender possession to BPI Family. On 31 January 2002, BPI Family
filed an Ex-Parte Petition for Writ of Possession over the properties with Branch 114 of
the Regional Trial Court of Pasay City (trial court). In its 27 June 2002 Decision, the trial
court granted BPI Family's petition. 5 On 12 July 2002, the trial court issued the Writ of
Possession. TcEAIH
The Honorable Court of Appeals seriously erred in upholding the nding of the
Honorable Regional Trial Court that despite the fact that private respondents
merely stepped into the shoes of mortgagor CEDEC, being the vendee of the
properties in question, they are categorized as third persons in possession thereof
who are claiming a right adverse to that of the debtor/mortgagor CEDEC.
B.
Thus, the general rule is that a purchaser in a public auction sale of a foreclosed
property is entitled to a writ of possession and, upon an ex parte petition of the
purchaser, it is ministerial upon the trial court to issue the writ of possession in favor of
the purchaser.
There is, however, an exception. Section 33, Rule 39 of the Rules of Court
provides:
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Section 33. Deed and possession to be given at expiration of redemption
period; by whom executed or given. — . . .
Upon the expiration of the right of redemption, the purchaser or redemptioner
shall be substituted to and acquire all the rights, title, interest and claim of the
judgment obligor to the property as of the time of the levy. The possession of the
property shall be given to the purchaser or last redemptioner by the same of cer
unless a third party is actually holding the property adversely to the
judgment obligor . (Emphasis supplied)
In this case, respondents' possession of the properties was premised on the sale
to them by CEDEC for the amount of P15,000,000. Therefore, respondents hold title to
and possess the properties as CEDEC's transferees and any right they have over the
properties is derived from CEDEC. As transferees of CEDEC, respondents merely
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stepped into CEDEC's shoes and are necessarily bound to acknowledge and respect
the mortgage CEDEC had earlier executed in favor of BPI Family. 2 5 Respondents are
the successors-in-interest of CEDEC and thus, respondents' occupancy over the
properties cannot be considered adverse to CEDEC.
Moreover, in China Bank v. Lozada, 2 6 we discussed the meaning of "a third party
who is actually holding the property adversely to the judgment obligor." We stated:
The exception provided under Section 33 of Rule 39 of the Revised Rules of Court
contemplates a situation in which a third party holds the property by adverse title
or right, such as that of a co-owner, tenant or usufructuary. The co-owner,
agricultural tenant, and usufructuary possess the property in their own right, and
they are not merely the successor or transferee of the right of possession of
another co-owner or the owner of the property. 2 7
In this case, respondents cannot claim that their right to possession over the
properties is analogous to any of these. Respondents cannot assert that their right of
possession is adverse to that of CEDEC when they have no independent right of
possession other than what they acquired from CEDEC. Since respondents are not
holding the properties adversely to CEDEC, being the latter's successors-in-interest,
there was no reason for the trial court to order the suspension of the implementation of
the writ of possession.
Furthermore, it is settled that a pending action for annulment of mortgage or
foreclosure sale does not stay the issuance of the writ of possession. 2 8 The trial court,
where the application for a writ of possession is led, does not need to look into the
validity of the mortgage or the manner of its foreclosure. 2 9 The purchaser is entitled to
a writ of possession without prejudice to the outcome of the pending annulment case.
30
In this case, the trial court erred in issuing its 7 March 2003 Order suspending
the implementation of the alias writ of possession. Despite the pendency of Civil Case
No. 99-0360, the trial court should not have ordered the sheriff to suspend the
implementation of the writ of possession. BPI Family, as purchaser in the foreclosure
sale, is entitled to a writ of possession without prejudice to the outcome of Civil Case
No. 99-0360.
WHEREFORE , we GRANT the petition. We SET ASIDE the 13 March 2006
Decision and the 19 December 2006 Resolution of the Court of Appeals in CA-G.R. SP
No. 78626. We SET ASIDE the 7 March and 20 June 2003 Resolutions of the Regional
Trial Court, Branch 114, Pasay City. We ORDER the sheriff to proceed with the
implementation of the writ of possession without prejudice to the outcome of Civil
Case No. 99-0360.
SO ORDERED . HcTDSA
Footnotes
SYLLABUS
DECISION
REYES, J. B. L. , J : p
Appeal by defendant Segundo Fernando from the judgment of the Court of First
Instance of Nueva Ecija in its Civil Case No. 1694 for foreclosure of mortgage. The
appeal was originally brought to the Court of Appeals, but was certi ed to us by that
tribunal because it raises only questions of law.
The facts are not disputed. On May 26, 1950, the defendant Segundo Fernando executed a
deed of mortgage in favor of plaintiff Cecilio Diego over two parcels of land registered in
his name, to secure a loan of P2,000, without interest, payable within four years from the
date of the mortgage (Exhibit "A"). After the execution of the deed, possession of the
mortgaged properties were turned over to the mortgagee.
The debtor having failed to pay the loan after four years, the mortgagee Diego made
several demands upon him for payment; and as the demands were unheeded, Diego filed
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this action for foreclosure of mortgage.
Defendant Fernando's defense was that the true transaction between him and plaintiff was
one of antichresis and not of mortgage; and that as plaintiff had allegedly received a total
of 120 cavans of palay from the properties given as security, which, at the rate of P10 a
cavan, represented a value of P5,200, his debt had already been paid, with plaintiff still
owing him a refund of some P2,720.00.
The Court below, however, found that there was nothing in the deed of mortgage Exhibit
"A" to show that it was not a true contract of mortgage, and that the fact that possession
of the mortgaged properties were turned over to the mortgagee did not alter the
transaction; that the parties must have intended that the mortgagee would collect the
fruits of the mortgaged properties as interest on his loan, which agreement is not
uncommon; and that the evidence showed that plaintiff had already received 55 cavans of
palay from the properties during the period of his possession. Whereupon, judgment was
rendered for plaintiff in the amount of P2,000, the loan he gave the defendant, with legal
interest from the filing of the action until full payment, plus P500 as attorney's fees and the
costs; and in case of default in payment, for the foreclosure of the mortgage. From this
judgment, defendant took the present appeal.
The main issue raised is whether the contract between the parties is one of mortgage or of
antichresis. Appellant, while admitting that the contract Exhibit "A" shows a deed of
mortgage, contends that the admitted fact that the loan was without interest, coupled with
the transfer of the possession of the properties mortgaged to the mortgagee, reveals that
the true transaction between him and appellee was one of antichresis. As correctly pointed
out by appellee and the lower court, however, it is not an essential requisite of a mortgage
that possession of the mortgaged premises be retained by the mortgagor (Legaspi and
Salcedo vs. Celestial, 66 Phil., 372). To be antichresis, it must be expressly agreed between
creditor and debtor that the former, having been given possession of the properties given
as security, is to apply their fruits to the payment of the interest, if owing, and thereafter to
the principal of his credit (Art. 2132, Civil Code, Barretto vs. Barretto, 37 Phil., 234; Diaz vs.
De Mendezona, 48 Phil., 666); so that if a contract of loan with security does not stipulate
the payment of interest but provides for the delivery to the creditor by the debtor of the
property given as security, in order that the latter may gather its fruits, without stating that
said fruits are to be applied to the payment of interest, if any, and afterwards that of the
principal, the contract is a mortgage and not antichresis (Legaspi vs. Celestial, supra). The
court below, therefore, did not err in holding that the contract Exhibit "A" is a true mortgage
and not an antichresis.
The above conclusion does not mean, however, that appellee, having received the fruits of
the properties mortgaged, will be allowed to appropriate them for himself and not be
required to account for them to the appellant. For the contract of mortgage Exhibit "A"
clearly provides that the loan of P2,000 was "without interest within four (4) years from
date of this instrument"; and there being no evidence to show that the parties had intended
to supersede such stipulation when the possession of the mortgaged properties were
turned over to the appellee by another allowing the latter to collect, the fruits thereof as
interest on the loan, the trial court is not authorized to infer from this transfer of
possession alone that the parties had verbally modified their written agreement that the
loan was to be without interest for four years, and substituted another giving appellee the
right to receive the fruits of the mortgaged properties as interests.
The true position of appellee herein under his contract with appellant is a "mortgage in
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possession" as that term is understood in American equity jurisprudence; that is, "one who
has lawfully acquired actual or constructive possession of the premises mortgaged to
him, standing upon his rights as mortgagee and not claiming under another title, for the
purpose of enforcing his security upon such property or making its income help to pay his
debt" (Diaz vs. De Mendezona, citing 27 Cyc. 1237, 48 Phil., 666). As such mortgagee in
possession, his rights and obligations are, as pointed out by this Court in Macapinlac vs.
Gutierrez Repide (43 Phil., 770), similar to those of an antichretic creditor:
"The respective rights and obligations of the parties to a contract of
antichresis, under the Civil Code, appear to be similar and in many respects
identical with those recognized in the equity jurisprudence of England and
America as incident to the position of a mortgagee in possession, in reference to
which the following propositions may be taken to be established, namely, that if
the mortgagee acquires possession in any lawful manner, he is entitled to retain
such possession until the indebtedness is satisfied and the property redeemed;
that the non-payment of the debt within the term agreed does not vest the
ownership of the property in the creditor; that the general duty of the mortgagee in
possession towards the premises is that of the ordinary prudent owner; that the
mortgagee must account for the rents and profits of the land, or its value for
purposes of use and occupation, any amount thus realized going towards the
discharge on the mortgage debt; that if the mortgagee remains in possession
after the mortgage debt has been satisfied, he becomes a trustee for the
mortgagor as to the excess of the rents and profits over such debt; and lastly, that
the mortgagor can only enforce his rights to the land by an equitable action for an
account and to redeem. (3 Pom. Eq. Jur. secs. 1215-1218)"
Similarly, in Enriquez vs. National Bank, 55 Phil., 414, we ruled that a creditor with a lien on
real property who took possession thereof with the consent of the debtor, held it as an
"antichretic creditor with the right to collect the credit with interest from the fruits,
returning to the antichretic debtor the balance, if any, after deducting the expenses",
because the fact that the debtor consented and asked the creditor to take charge of
managing his property "does not entitle the latter to appropriate to itself the fruits thereof
unless the former has expressly waived his right thereto".
In the present case, the parties having agreed that the loan was to be without interest, and
the appellant not having expressly waived his right to the fruits of the properties
mortgaged during the time they were in appellee's possession, the latter, like an antichretic
creditor, must account for the value of the fruits received by him, and deduct it from the
loan obtained by appellant. According to the findings of the trial court, appellee had
received a net share of 55 cavans of palay out of the mortgaged properties up to the time
he filed the present action; at the rate of P9.00 per cavan (a rate admitted by the parties),
the total value of the fruits received by appellee is P495.00. Deducting this amount from
the loan of P2,000 received by appellant from appellee, the former has only P1,505.00 left
to pay the latter.
Appellant also claims that the lower court erred in ordering him to pay legal interest on his
indebtedness to plaintiff from the filing of the action, since the latter is, up to the present,
still in the possession of the properties mortgaged and still enjoying its fruits. The court
did not err in so holding, since at the time the action was filed and up to the present,
appellant has not discharged his indebtedness to appellee, and the law allows the latter, in
the absence of stipulation as to payment of interest, legal interest from the time of the
debtor's default (Art. 2209, New Civil Code, Art. 1108, old). However, appellee should be
made to account for the fruits he received from the properties mortgaged from the time of
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the filing of this action until full payment by appellant, which fruits should be deducted
from the total amount due him from appellant under this judgment.
Wherefore, the judgment of the court below is modified in the sense that the amount of
appellee's principal recovery is reduced to P1,505, with an obligation on the part of
appellee to render an accounting of all the fruits received by him from the properties in
question from the time of the filing of this action until full payment, or in case of appellant's
failure to pay, until foreclosure of the mortgage thereon, the value of which fruits shall be
deducted from the total amount of his recovery. No costs in this instance.
Parás, C.J., Bengzon, Padilla, Bautista Angelo, Labrador, Concepción, Barrera, and Gutierrez
David, JJ., concur.
DECISION
PERLAS-BERNABE , J : p
This is a direct recourse to the Court from the Regional Trial Court (RTC) of
Calamba City, Province of Laguna, Branch 35 (RTC Br. 35), through a petition for review
on certiorari, 1 raising a pure question of law. In particular, petitioners Bureau of Internal
Revenue (BIR), Assistant Commissioner Alfredo V. Misajon (Misajon), Group Supervisor
Rolando M. Balbido (Balbido), and Examiner Reynante DP. Martirez (Martirez;
collectively, petitioners) assail the Decision 2 dated June 1, 2015 and the Order 3 dated
October 26, 2015 of the RTC Br. 35 in Civil Case No. 4813-2014-C, which found Misajon,
Balbido, and Martirez (Misajon, et al.) guilty of indirect contempt and, accordingly,
ordered them to pay a fine of P5,000.00 each. TIADCc
The Facts
On December 23, 2011, respondent Lepanto Ceramics, Inc. (LCI) — a corporation
duly organized and existing under Philippine Laws with principal o ce address in
Calamba City, Laguna — led a petition 4 for corporate rehabilitation pursuant to
Republic Act No. (RA) 10142, 5 otherwise known as the "Financial Rehabilitation and
Insolvency Act (FRIA) of 2010," docketed before the RTC of Calamba City, Branch 34,
the designated Special Commercial Court in Laguna (Rehabilitation Court). Essentially,
LCI alleged that due to the nancial di culties it has been experiencing dating back to
the Asian nancial crisis, it had entered into a state of insolvency considering its
inability to pay its obligations as they become due and that its total liabilities
amounting to P4,213,682,715.00 far exceed its total assets worth P1,112,723,941.00.
Notably, LCI admitted in the annexes attached to the aforesaid Petition its tax liabilities
to the national government in the amount of at least P6,355,368.00. 6
On January 13, 2012, the Rehabilitation Court issued a Commencement Order, 7
which, inter alia: (a) declared LCI to be under corporate rehabilitation; (b) suspended all
actions or proceedings, in court or otherwise, for the enforcement of claims against
LCI; (c) prohibited LCI from making any payment of its liabilities outstanding as of even
date, except as may be provided under RA 10142; and (d) directed the BIR to le and
serve on LCI its comment or opposition to the petition, or its claims against LCI. 8
Accordingly, the Commencement Order was published in a newspaper of general
circulation and the same, together with the petition for corporate rehabilitation, were
personally served upon LCI's creditors, including the BIR. 9
Despite the foregoing, Misajon, et al., acting as Assistant Commissioner, Group
Supervisor, and Examiner, respectively, of the BIR's Large Taxpayers Service, sent LCI a
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notice of informal conference 1 0 dated May 27, 2013, informing the latter of its
de ciency internal tax liabilities for the Fiscal Year ending June 30, 2010. In response,
LCI's court-appointed receiver, Roberto L. Mendoza, sent BIR a letter-reply, reminding
the latter of the pendency of LCI's corporate rehabilitation proceedings, as well as the
issuance of a Commencement Order in connection therewith. Undaunted, the BIR sent
LCI a Formal Letter of Demand 1 1 dated May 9, 2014, requiring LCI to pay de ciency
taxes in the amount of P567,519,348.39. 1 2 This prompted LCI to le a petition 1 3 for
indirect contempt dated August 13, 2014 against petitioners before RTC Br. 35. In said
petition, LCI asserted that petitioners' act of pursuing the BIR's claims for de ciency
taxes against LCI outside of the pending rehabilitation proceedings in spite of the
Commencement Order issued by the Rehabilitation Court is a clear de ance of the
aforesaid Order. As such, petitioners must be cited for indirect contempt in accordance
with Rule 71 of the Rules of Court in relation to Section 16 of RA 10142. 1 4
For their part, petitioners maintained that: (a) RTC Br. 35 had no jurisdiction to
cite them in contempt as it is only the Rehabilitation Court, being the one that issued the
Commencement Order, which has the authority to determine whether or not such Order
was de ed; (b) the instant petition had already been mooted by the Rehabilitation
Court's Order 1 5 dated August 28, 2014 which declared LCI to have been successfully
rehabilitated resulting in the termination of the corporate rehabilitation proceedings; (c)
their acts do not amount to a de ance of the Commencement Order as it was done
merely to toll the prescriptive period in collecting de ciency taxes, and thus, sanctioned
by the Rules of Procedure of the FRIA; (d) their acts of sending a Notice of Informal
Conference and Formal Letter of Demand do not amount to a "legal action or other
recourse" against LCI outside of the rehabilitation proceedings; and (e) the indirect
contempt proceedings interferes with the exercise of their functions to collect taxes
due to the government. 1 6
The RTC Br. 35 Ruling
In a Decision 1 7 dated June 1, 2015, the RTC Br. 35 found Misajon, et al. guilty of
indirect contempt and, accordingly, ordered them to pay a ne of P5,000.00 each. 1 8
Preliminarily, the RTC Br. 35 ruled that it has jurisdiction over LCI's petition for indirect
contempt as it is docketed, heard, and decided separately from the principal action. 1 9
Going to petitioners' other contentions, the RTC found that: (a) the supervening
termination of the rehabilitation proceedings and the consequent lifting of the
Commencement Order did not render moot the petition for indirect contempt as the
acts complained of were already consummated; (b) petitioners' acts of sending LCI a
notice of informal conference and Formal Letter of Demand are covered by the
Commencement Order as they were for the purpose of pursuing and enforcing a claim
for de ciency taxes, and thus, are in clear de ance of the Commencement Order; and
(c) petitioners could have tolled the prescriptive period to collect de ciency taxes
without violating the Commencement Order by simply ventilating their claim before the
rehabilitation proceedings, which they were adequately noti ed of. In this relation, the
RTC Br. 35 held that while the BIR is a juridical entity which can only act through its
authorized intermediaries, it cannot be concluded that it authorized the latter to commit
the contumacious acts complained of, i.e., de ance of the Commencement Order. Thus,
absent any contrary evidence, only those individuals who performed such acts, namely,
Misajon, et al., should be cited for indirect contempt of court. 2 0
Aggrieved, Misajon, et al. moved for reconsideration, 2 1 which was, however,
denied in an Order 2 2 dated October 26, 2015; hence, this petition.
The Issue Before the Court
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The issue for the Court's resolution is whether or not the RTC Br. 35 correctly
found Misajon, et al. to have de ed the Commencement Order and, accordingly, cited
them for indirect contempt.
The Court's Ruling
The petition is without merit.
Section 4 (gg) of RA 10142 states: AIDSTE
WHEREFORE , the petition is DENIED . The Decision dated June 1, 2015 and the
Order dated October 26, 2015 of the Regional Trial Court of Calamba City, Province of
Laguna, Branch 35 in Civil Case No. 4813-2014-C are hereby AFFIRMED .
SO ORDERED.
Sereno, C.J., Leonardo-de Castro, Del Castillo and Caguioa, JJ., concur.
Footnotes
4. Id. at 55-65.
5. Entitled "AN ACT PROVIDING FOR THE REHABILITATION OR LIQUIDATION OF FINANCIALLY
DISTRESSED ENTERPRISES AND INDIVIDUALS."
6. See rollo, pp. 47 and 55-58.
23. Bank of the Philippine Islands v. Sarabia Manor Hotel Corp., 715 Phil. 420, 435-436 (2013).
24. See id. at 437-439.
25. Bank of the Philippine Islands v. Sarabia Manor Hotel Corp., supra note 23, at 436.
26. See Section 16 (q) (1) of RA 10142.
30. Rollo, pp. 66-68. Penned by Presiding Judge Maria Florencia B. Formes-Baculo.
31. Id. at 69.
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32. Id. at 70-72.
Puruganan Chato Tan & Geronimo for petitioner in G.R. No. 112991.
Potenciano A. Flores for petitioners in G.R. No. 109373.
Marbibi Law Office for private respondent.
The Solicitor General for public respondent.
SYLLABUS
DECISION
MENDOZA , J : p
These cases have been consolidated because the principal question involved is
the same: whether a petition for liquidation under 29 of Rep. Act No. 265, otherwise
known as the Central Bank Act, is a special proceeding or an ordinary civil action. The
Fifth and the Fourteenth Divisions of the Court of Appeals reached opposite results on
this question and consequently applied different periods for appealing. cdphil
In his order of February 10, 1992, respondent judge disallowed the Liquidator's
Notice of Appeal on the ground that it was late, i.e., more than 15 days after receipt of
the decision. The judge declared his September 13, 1991 order and subsequent orders
to be final and executory and denied reconsideration. On March 27, 1992 he granted the
Union's Motion for Issuance of a Writ of Execution.
Ang Keong Lan and E.J. Ang Int'l., private respondents in G.R. No. 112991 ,
likewise led claims for the payment of investment in the PaBC allegedly in the form of
shares of stocks amounting to US$2,531,632.18. The shares of stocks, consisting of
154,462 common shares, constituted 11% of the total subscribed capital stock of the
PaBC. They alleged that their claim constituted foreign exchange capital investment
entitled to preference in payment under the Foreign Investments Law. cdll
In his order dated September 11, 1992, respondent judge of the RTC directed the
Liquidator to pay private respondents the total amount of their claim as preferred
creditors. 7
The Liquidator received the order on September 16 , 1992 . On September 30 ,
1992 he moved for reconsideration, but his motion was denied by the court on October
2, 1992. He received the order denying his Motion for Reconsideration on October 5 ,
1992. On October 14,1992 he led a Notice of Appeal from the orders of September
16, 1992 and October 2, 1992. As in the case of the Union, however, the judge ordered
the Notice of Appeal stricken off the record on the ground that it had been led without
authority of the Central Bank and beyond 15 days. In his order of October 28, 1992, the
judge directed the execution of his September 11, 1992 order granting the
Stockholders/Investors' claim.
II.
Proceedings in the Court of Appeals
The Liquidator led separate Petitions for Certiorari, Prohibition and Mandamus
in the Court of Appeals to set aside the orders of the trial court denying his appeal from
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the orders granting the claims of Union and of the Stockholders/Investors. The two
Divisions of the Court of Appeals, to which the cases were separately raf ed, rendered
conflicting rulings.
In its decision of November 17, 1992 in CA-G.R. SP No. 27751 (now G.R. No.
109373) the Fifth Division 8 held in the case of the Union that the proceeding before the
trial court was a special proceeding and, therefore, the period for appealing from any
decision or nal order rendered therein is 30 days. Since the notice of appeal of the
Liquidator was led on the 30th day of his receipt of the decision granting the Union's
claims, the appeal was brought on time. The Fifth Division, therefore, set aside the
orders of the lower court and directed the latter to give due course to the appeal of the
Liquidator and set the Record on Appeal he had filed for hearing. llcd
On the other hand, on December 16, 1993, the Fourteenth Division 9 ruled in CA-
G.R. SP No. 29351 (now G.R. No. 112991 ) in the case of the Stockholders/Investors
that a liquidation proceeding is an ordinary action. Therefore, the period for appealing
from any decision or nal order rendered therein is 15 days and that since the
Liquidator's appeal notice was led on the 23rd day of his receipt of the order appealed
from, deducting the period during which his motion for reconsideration was pending,
the notice of appeal was led late. Accordingly, the Fourteenth Division dismissed the
Liquidator's petition.
III.
Present Proceedings
The Union and the Liquidator then separately filed petitions before this Court.
In G.R. No. 109373 the Union contends that:
1. The Court of Appeals acted without jurisdiction over the subject matter or
nature of the suit.
2. The Court of Appeals gravely erred in taking cognizance of the petition for
certiorari filed by Nañagas who was without any legal authority to file it.
5. The Court of Appeals erred seriously in declaring that the second notice of
appeal filed on December 23, 1991 by the Solicitor General is a superfluity.
On the other hand, in G.R. No. 112991 the Liquidator contends that:
1. The Petition for Assistance in the Liquidation of the Paci c Banking
Corporation is a Special Proceeding case and/or one which allows multiple
appeals, in which case the period of appeal is 30 days and not 15 days
from receipt of the order/judgment appealed from.
2. Private respondents are not creditors of PaBC but are plain stockholders
whose right to receive payment as such would accrue only after all the
creditors of the insolvent bank have been paid.
3. The claim of private respondents in the amount of US$22,531,632.18 is not
in the nature of foreign investment as it is understood in law.
The Fourteenth Division of the Court of Appeals held that the proceeding is an
ordinary action similar to an action for interpleader under Rule 63. 10 The Fourteenth
Division stated:
The petition led is akin to an interpleader under Rule 63 of the Rules of Court
where there are con icting claimants or several claims upon the same subject
matter, a person who claims no interest thereon may file an action for interpleader
to compel the claimants to "interplead" and litigate their several claims among
themselves. (Section 1, Rule 63).
An interpleader is in the category of a special civil action under Rule 62 which, like
an ordinary action, may be appealed only within fteen (15) days from notice of
the judgment or order appealed from. Under Rule 62, the preceding rules covering
ordinary civil actions which are not inconsistent with or may serve to supplement
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the provisions of the rule relating to such civil actions are applicable to special
civil actions. This embraces Rule 41 covering appeals from the regional trial court
to the Court of Appeals.
...
Thus, under Section 1, Rule 2 of the Rules of Court, an action is de ned as "an
ordinary suit in a court of justice by which one party prosecutes another for the
enforcement or protection of a right or the prevention or redress of a wrong." On
the other hand, Section 2 of the same Rule states that "every other remedy
including one to establish the status or right of a party or a particular fact shall be
by special proceeding."
To our mind, from the aforequoted de nitions of an action and a special
proceeding, the petition for assistance of the court in the liquidation of an asset
of a bank is not "one to establish the status or right of a party or a particular fact."
Contrary to the submission of the petitioner, the petition is not intended to
establish the fact of insolvency of the bank. The insolvency of the bank had
already been previously determined by the Central Bank in accordance with
Section 9 of the CB Act before the petition was led. All that needs to be done is
to liquidate the assets of the bank and thus the assistance of the respondent
court is sought for that purpose. LLphil
It should be pointed out that this petition led is not among the cases categorized
as a special proceeding under Section 1, Rule 72 of the Rules of Court, nor among
the special proceedings that may be appealed under Section 1, Rule 109 of the
Rules.
We disagree with the foregoing view of the Fourteenth Division. Rule 2 of the
Rules of Court provide:
§1. Action de ned . — Action means an ordinary suit in a court of justice, by
which one party prosecutes another for the enforcement or protection of a right, or
the prevention or redress of a wrong.
§2. Special proceeding distinguished. — Every other remedy, including one to
establish the status or right of a party or a particular fact, shall be by special
proceeding.
Action is the act by which one sues another in a court of justice for the
enforcement or protection of a right, or the prevention or redress of a wrong while
special proceeding is the act by which one seeks to establish the status or right of
a party, or a particular fact. Hence, action is distinguished from special
proceeding in that the former is a formal demand of a right by one against
another, while the latter is but a petition for a declaration of a status, right or fact.
Where a party-litigant seeks to recover property from another, his remedy is to le
an action. Where his purpose is to seek the appointment of a guardian for an
insane, his remedy is a special proceeding to establish the fact or status of
insanity calling for an appointment of guardianship.
The Fifth Division of the Court of Appeals correctly granted the Liquidator's
Petition for Certiorari, Prohibition and Mandamus and its decision should, therefore, be
affirmed.
Second. In G.R. No. 109373, The Union claims that under §29 of Rep. Act No. 265,
the court merely assists in adjudicating the claims of creditors, preserves the assets of
the institution, and implements the liquidation plan approved by the Monetary Board
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and that, therefore, as representative of the Monetary Board, the Liquidator cannot
question the order of the court or appeal from it. It contends that since the Monetary
Board had previously admitted PaBC's liability to the laborers by in fact setting aside
the amount of P112,234,292.44 for the payment of their claims, there was nothing else
for the Liquidator to do except to comply with the order of the court.
The Union's contention is untenable. In liquidation proceedings, the function of
the trial court is not limited to assisting in the implementation of the orders of the
Monetary Board. Under the same section (§29) of the law invoked by the Union, the
court has authority to set aside the decision of the Monetary Board "if there is a
convincing proof that the action is plainly arbitrary and made in bad faith." 14 As this
Court held in Rural Bank of Buhi, Inc. v. Court of Appeals: 15
There is no question that the action of the Monetary Board in this regard may be
subject to judicial review. Thus, it has been held that the Court's may interfere
with the Central Bank's exercise of discretion in determining whether or not a
distressed bank shall be supported or liquidated. Discretion has its limits and has
never been held to include arbitrariness, discrimination or bad faith (Ramos v.
Central Bank of the Philippines, 41 SCRA 567 [1971]).
In truth, the Liquidator is the representative not only of the Central Bank but also
of the insolvent bank. Under §28A-§29 of Rep. Act No. 265 he acts in behalf of the bank
"personally or through counsel as he may retain, in all actions or proceedings or against
the corporation" and he has authority "to do whatever may be necessary for these
purposes." This authority includes the power to appeal from the decisions or nal
orders of the court which he believes to be contrary to the interest of the bank.
Finally the Union contends that the notice of appeal and motion for extension of
time to le the record on appeal led in behalf of the Central Bank was not led by the
Of ce of the Solicitor General as counsel for the Central Bank. This contention has no
merit. On October 22, 1992, as Assistant Solicitor General Cecilio O. Estoesta informed
the trial court on March 27, 1992, the OSG had previously authorized lawyers of the
PDIC to prepare and sign pleadings in the case. 16 Conformably thereto the Notice of
Appeal and the Motion for Additional Time to Submit Record on Appeal led were
jointly signed by Solicitor Reynaldo I. Saludares in behalf of the OSG and by lawyers of
the PDIC. 17
WHEREFORE, in G.R. No. 109373 and G.R. No. 112991, the decisions appealed
from are AFFIRMED.
SO ORDERED.
Narvasa, C.J., Bidin, Regalado and Puno, JJ., concur.
Footnotes
a) The claim for holiday pay covering the period from November 1, 1974 to
October 31, 1985;
b) The claim for 28% salary differential pursuant to the CBA increase;
c) The claim for Christmas Bonus which should be pro rated based on the
employees length of service rendered up to 1985 when the Paci c Banking Corporation
was placed under liquidation; and
d) The claim for unused sick leave bene ts which should be computed and
paid accordingly.
Furthermore, this Court orders:
a) The prorata payment of 13th month pay in accordance with the position
taken by the Liquidator provided in the Implementing Rules of the Department of Labor;
and
b) Consistent with the previous orders of this Court payment of 10%
attorney's fees should be deducted from the total claims afforded to the
plaintiffs/intervenors and other employees of the bank (PaBC).
7. The dispositive portion of the trial court's order, dated September 11, 1992 reads:
WHEREFORE, premises considered, the Liquidator of PaBC is ordered to pay
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claimants, through their Attorney-In-Fact Gonzalo C. Sy, their total investment of
US$2,531,632.18 as preferred creditors. Dividends and/or interest that accrued in favor
of claimants is hereby deferred pending study by the Liquidator who is hereby ordered
to submit his report and recommendation within thirty (30) days from receipt of this
Order.
8. Justice Sera n E. Camilon, Chairman and ponente; Justices Sera n V.C. Guingona and
Cancio C. Garcia, Members, concurring.
9. Justice Antonio M. Martinez, Chairman and ponente; Justices Artemon D. Luna and
Ma. Alicia Austria-Martinez, Members, concurring.
10. §1. Interpleader when proper. — Whenever con icting claims upon the same subject
matter are or may be made against a person, who claims no interest whatever in the
subject matter, or an interest which in whole or in part is not disputed by the claimants,
he may bring an action against the con icting claimants to compel them to interplead
and litigate their several claims among themselves.
11. 1 MORAN, COMMENTS ON THE RULE OF COURT 119-120 (1979), citing Hagans v.
Wislizenus, 42 Phil. 880, 882, (1922).
12. Alvarez v. Commonwealth, 65 Phil. 302 (1938).
13. Rep. Act No. 265, 29, as amended.
14. Salud v. Central Bank of the Philippines, 143 SCRA 590 (1986).
15. 162 SCRA 288 (1988).
16. Rollo, p. 41, G.R. No. 112991.
17. Annexes "H" and "I", Rollo, CA-G.R. S.P. No. 27751.
Puruganan, Chato, Tan & Geronimo for petitioner in G.R. No. 112991.
Potenciano A. Flores, Jr. for petitioners in G.R. No. 109373.
Marbibi Law Office for private respondents in G.R. No. 112991.
The Solicitor General for respondents. cdasia
SYLLABUS
RESOLUTION
MENDOZA, J : p
This relates to the Motion to Cite in Contempt, filed by petitioner in G.R. No.
112991, against Judge Regino T. Veridiano II, Deputy Sheriff Carmelo V. Cachero
and Atty. Marino E. Eslao in connection with their attempt to execute the Court's
decision in this case before its finality.cdasia
It appears that just four days after the promulgation of the decision on March 24,
1995, Atty. Marino E. Eslao, counsel for private respondents in G.R. No. 112991,
already sent a written request 1 to Deputy Sheriff Carmelo V. Cachero of the
Regional Trial Court of Manila, Branch 31, "for the immediate enforcement of the
Writ of Execution" issued on October 28, 1992 by respondent Judge Regino T.
Veridiano II in Sp. Proc. No. 86-35313 and "to further demand from the
depository banks the immediate release of the garnished funds (of the Pacific
Banking Corporation or PaBC) sufficient to satisfy the claims" of Atty. Eslao's
clients.
Acting on the request, the sheriff sent notices to the Land Bank of the Philippines
(LBP) and the Philippine National Bank (PNB), depositories of the garnished
funds of the PaBC, demanding the immediate release and delivery of the
amounts in question.
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In compliance with the demand, the LBP released on March 29, 1995 the
amount of P1,393,178.05, covered by Cashier's Check No. 075937, 2 which
was received by respondent sheriff on the same day. 3 But as the PNB refused
to comply with his demand, the respondent reported the matter to the judge
and prayed for the issuance of an order to the PNB to release the amount. cdtai
On the same day, respondent judge issued an order with the following
dispositive portion: 6
WHEREFORE, President of PNB, its Agents, Representatives and/or
Assigns are hereby directed to appear before this Court immediately
upon receipt of this Order to personally explain the delay of the release of
the garnished amounts mentioned in its order dated April 3, 1995 in the
satisfaction of the Decision in Sp. Proc. No. 86-35313 and to show cause
why they should not be cited for contempt of court.
SO ORDERED.
On April 5, 1995, the Bank Liquidator filed with this Court an Urgent
Motion for Status Quo Order to respondents not to continue enforcing the writ
until such time that the motions for reconsideration were resolved.
On April 7, 1995, this Court ordered respondents to cease and desist,
effective immediately and continuing until further orders, from further
implementing and enforcing the lower court's writ of execution.
Meanwhile, the Bank Liquidator, petitioner in G.R. No. 112991, filed a
motion for reconsideration on April 11, 1995 of the decision in this case. To
this motion private respondents (Stockholders/Investors) filed an Opposition. cdta
3. There was no malice or bad faith by the Presiding Judge in issuing the
implementing Orders as it was done in good faith in the honest
belief that it was in the regular performance of his official duty in
view of the Honorable Supreme Court's decision that "because of
the Liquidator's failure to perfect his appeal, the Order granting the
claims of the Stockholders/Investors became final." Hence, the
undersigned had presumed that there was no further legal obstacle
to the writ of execution which was issued three (3) years ago; and
cdt
Second. Indeed, all the respondents in this motion for contempt cannot
pretend ignorance of the fact that the decision of this Court was not yet final.
Promulgated on March 20, 1995, it could not have been final on March 24,
1995, just four days later, when respondent Atty. Eslao asked respondent
Deputy Sheriff Carmelo V. Cachero to demand from the LBP and the PNB the
release of the garnished funds, or on April 3, 1995 when the deputy sheriff in
turn asked respondent Judge Regino T. Veridiano II for an order to the two
banks to release the funds.
As a matter of fact, the decision in this case was served on the Bank
Liquidator only on March 29, 1995 and, therefore, he had until April 13, 1995,
within which to file a motion for reconsideration, which he in fact filed on April
11, 1995.
It is therefore plainly erroneous for respondent judge to suppose that,
because the decision of this Court stated that the effect of the Bank
Liquidator's failure to perfect his appeal was to render the lower court's
decision final, he could order the immediate execution of his decision. This
Court's decision declaring the lower court's decision to have become final was
not yet final. cdasia
(At 376-377)
(At 379-380)
There is need to reaffirm the ruling in that case because its teaching
seems to have been lost on respondent judge in this case.
With respect to respondent Deputy Sheriff Cachero, the following
statement from Pacis v. Averia, 124 Phil. 1541, 1556 (1966) is particularly
apropos:
The Court cannot tolerate evasion of its commands by any omission,
negligence, artifice or contrivance of any kind, nor would it countenance
any disregard of its authority. For it is essential to the effective
administration of justice that the processes of the courts be obeyed. And
upon no one else does this obligation of obedience rest with more binding
force than a judicial officer such as respondent sheriff. cdtai
WHEREFORE, in accordance with Rule 71, § 3 (b) (d) and § 6 of the Rules
of Court, the Court finds Judge Regino T. Veridiano II, Deputy Sheriff Carmelo
V. Cachero and Atty. Marino E. Eslao GUILTY of indirect contempt and
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sentences each one to pay a FINE of One Thousand Pesos (P1,000.00) within
ten (10) days from notice, or, in default thereof, to suffer IMPRISONMENT of
one (1) month, and warns them that a repetition of the act herein dealt with
will be punished more severely.
SO ORDERED. prLL
Footnotes
3. Id., p. 305.
4. Id., p. 308.
5. Id., pp. 310-311.
6. Id., p. 312.
7. Id., p. 313.
DECISION
PERLAS-BERNABE, J : p
Before the Court is a petition for review on certiorari 1 assailing the Decision 2
dated April 24, 2006 and Resolution 3 dated December 6, 2006 of the Court of
Appeals, Cebu City (CA) in CA-G.R. CV. No. 81596 which affirmed with
modification the rehabilitation plan of respondent Sarabia Manor Hotel
Corporation (Sarabia) as approved by the Regional Trial Court of Iloilo City,
Branch 39 (RTC) through its Order 4 dated August 7, 2003.
The Facts
Sarabia is a corporation duly organized and existing under Philippine laws, with
principal place of business at 101 General Luna Street, Iloilo City. 5 It was
incorporated on February 22, 1982, with an authorized capital stock of
P10,000,000.00, fully subscribed and paid-up, for the primary purpose of owning,
leasing, managing and/or operating hotels, restaurants, barber shops, beauty
parlors, sauna and steam baths, massage parlors and such other businesses
incident to or necessary in the management or operation of hotels. 6
In 1997, Sarabia obtained a P150,000,000.00 special loan package from Far East
Bank and Trust Company (FEBTC) in order to finance the construction of a five-
storey hotel building (New Building) for the purpose of expanding its hotel
business. An additional P20,000,000.00 stand-by credit line was approved by
FEBTC in the same year. 7
The foregoing debts were secured by real estate mortgages over several parcels
of land 8 owned by Sarabia and a comprehensive surety agreement dated
September 1, 1997 signed by its stockholders. 9 By virtue of a merger, Bank of
the Philippine Islands (BPI) assumed all of FEBTC's rights against Sarabia. 10 HAcaCS
Sarabia started to pay interests on its loans as soon as the funds were released
in October 1997. However, largely because of the delayed completion of the New
Building, Sarabia incurred various cash flow problems. Thus, despite the fact that
it had more assets than liabilities at that time, 11 it, nevertheless, filed, on July
26, 2002, a Petition 12 for corporate rehabilitation (rehabilitation petition) with
prayer for the issuance of a stay order before the RTC as it foresaw the
impossibility to meet its maturing obligations to its creditors when they fall due.
In the said petition, Sarabia claimed that its cash position suffered when it was
forced to take-over the construction of the New Building due to the recurring
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default of its contractor, Santa Ana — AJ Construction Corporation (contractor), 13
and its subsequent abandonment of the said project. 14 Accordingly, the New
Building was completed only in the latter part of 2000, or two years past the
original target date of August 1998, thereby skewing Sarabia's projected
revenues. In addition, it was compelled to divert some of its funds in order to
cover cost overruns. The situation became even more difficult when the grace
period for the payment of the principal loan amounts ended in 2000 which
resulted in higher amortizations. Moreover, external events adversely affecting
the hotel industry, i.e., the September 11, 2001 terrorist attacks and the Abu
Sayyaf issue, also contributed to Sarabia's financial difficulties. 15 Owing to these
circumstances, Sarabia failed to generate enough cash flow to service its
maturing obligations to its creditors, namely: ( a ) BPI (in the amount of
P191,476,421.42); (b) Rural Bank of Pavia (in the amount of P2,500,000.00); (c)
Vic Imperial Appliance Corp. (Imperial Appliance) (in the amount of
P5,000,000.00); (d) its various suppliers (in the amount of P7,690,668.04); (e)
the government (for minimum corporate income tax in the amount of
P547,161.18); and (f) its stockholders (in the amount of P18,748,306.35). 16
In its proposed rehabilitation plan, 17 Sarabia sought for the restructuring of all
its outstanding loans, submitting that the interest payments on the same be
pegged at a uniform escalating rate of: ( a) 7% per annum (p.a.) for the years
2002 to 2005; (b) 8% p.a. for the years 2006 to 2010; (c) 10% p.a. for the years
2011 to 2013; (d) 12% p.a. for the years 2014 to 2015; and (e) 14% p.a. for the
year 2018. Likewise, Sarabia sought to make annual payments on the principal
loans starting in 2004, also in escalating amounts depending on cash flow.
Further, it proposed that it should pay off its outstanding obligations to the
government and its suppliers on their respective due dates, for the sake of its day
to day operations.
Finding Sarabia's rehabilitation petition sufficient in form and substance, the RTC
issued a Stay Order 18 on August 2, 2002. It also appointed Liberty B. Valderrama
as Sarabia's rehabilitation receiver (Receiver). Thereafter, BPI filed its Opposition.
19
After several hearings, the RTC gave due course to the rehabilitation petition and
referred Sarabia's proposed rehabilitation plan to the Receiver for evaluation. 20
In a Recommendation 21 dated July 10, 2003 (Receiver's Report), the Receiver
found that Sarabia may be rehabilitated and thus, made the following
recommendations:
(1)Restructure the loans with Sarabia's creditors, namely, BPI, Imperial
Appliance, Rural Bank of Pavia, and Barcelo Gestion Hotelera, S.L. (Barcelo),
under the following terms and conditions: (a) the total outstanding balance as of
December 31, 2002 shall be recomputed, with the interest for the years 2001
and 2002 capitalized and treated as part of the principal; (b) waive all penalties;
(c) extend the payment period to seventeen (17) years, i.e., from 2003 to 2019,
with a two-year grace period in principal payment; ( d) fix the interest rate at
6.75% p.a. plus 10% value added tax on interest for the entire term of the
restructured loans; 22 ( e) the interest and principal based on the amortization
schedule shall be payable annually at the last banking day of each year; and (f)
any deficiency shall be paid personally by Sarabia's stockholders in the event it
fails to generate enough cash flow; on the other hand, any excess funds
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generated at the end of the year shall be paid to the creditors to accelerate the
debt servicing; 23 ACTIcS
(2)Pay Sarabia's outstanding payables with its suppliers and the government so
as not to disrupt hotel operations; 24
(3)Convert the Advances from stockholders amounting to P18,748,306.00 to
stockholder's equity and other advances amounting to P42,688,734.00 as of the
December 31, 2002 tentative financial statements to Deferred Credits; the said
conversion should increase stockholders' equity to P268,545,731.00 and bring
the debt to equity ratio to 0.85:1; 25
(4)Require Sarabia's stockholders to pay its payables to the hotel recorded as
Accounts Receivable — Trade, amounting to P285,612.17 as of December 31,
2001, and its remaining receivables after such date; 26
(5)No compensation or cash dividends shall be paid to the stockholders during
the rehabilitation period, except those who are directly employed by the hotel as
a full time officer, employee or consultant covered by a valid contract and for a
reasonable fee; 27
(6)All capital expenditures which are over and above what is provided in the case
flow of the rehabilitation plan which will materially affect Sarabia's cash position
but which are deemed necessary in order to maintain the hotel's
competitiveness in the industry shall be subject to the RTC's approval prior to its
implementation; 28
(7)Terminate the management contract with Barcelo, thereby saving an
estimated P25,830,997.00 in management fees, over and above the salaries and
benefits of certain managerial employees; 29
(8)Appoint a new management team which would be required to submit a
comprehensive business plan to support the generation of the target revenue as
reported in the rehabilitation plan; 30
(9)Open a debt servicing account and transfer all excess funds thereto, which in
no case should be less than P500,000.00 at the end of the month; the funds will
be drawn payable to the creditors only based on the amortization schedule; 31
and
(10)Release the surety obligations of Sarabia's stockholders, considering the
adequate collaterals and securities covered by the rehabilitation plan and the
continuing mortgages over Sarabia's properties. 32
The RTC Ruling
In an Order 33 dated August 7, 2003, the RTC approved Sarabia's rehabilitation
plan as recommended by the Receiver, finding the same to be feasible. In this
accord, it observed that the rehabilitation plan was realistic since, based on
Sarabia's financial history, it was shown that it has the inherent capacity to
generate funds to pay its loan obligations given the proper perspective. 34 The
recommended rehabilitation plan was also practical in terms of the interest rate
pegged at 6.75% p.a. since it is based on Sarabia's ability to pay and the
creditors' perceived cost of money. 35 It was likewise found to be viable since,
based on the extrapolations made by the Receiver, Sarabia's revenue projections,
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albeit projected to slow down, remained to have a positive business/profit outlook
altogether. 36
The RTC further noted that while it may be true that Sarabia has been unable to
comply with its existing terms with BPI, it has nonetheless complied with its
obligations to its employees and suppliers and pay its taxes to both local and
national government without disrupting the day-to-day operations of its business
as an on-going concern. 37 CASIEa
More significantly, the RTC did not give credence to BPI's opposition to the
Receiver's recommended rehabilitation plan as neither BPI nor the Receiver was
able to substantiate the claim that BPI's cost of funds was at the 10% p.a.
threshold. In this regard, the RTC gave more credence to the Receiver's
determination of fixing the interest rate at 6.75% p.a., taking into consideration
not only Sarabia's ability to pay based on its proposed interest rates, i.e., 7% to
14% p.a., but also BPI's perceived cost of money based on its own published
interest rates for deposits, i.e., 1% to 4.75% p.a., as well as the rates for treasury
bills, i.e., 5.498% p.a. and CB overnight borrowings, i.e., 7.094%. p.a. 38
The CA Ruling
In a Decision 39 dated April 24, 2006, the CA affirmed the RTC's ruling with the
modification of reinstating the surety obligations of Sarabia's stockholders to BPI
as an additional safeguard for the effective implementation of the approved
rehabilitation plan. 40 It held that the RTC's conclusions as to the feasibility of
Sarabia's rehabilitation was well-supported by the company's financial
statements, both internal and independent, which were properly analyzed and
examined by the Receiver. 41 It also upheld the 6.75%. p.a. interest rate on
Sarabia's loans, finding the said rate to be reasonable given that BPI's interests
as a creditor were properly accounted for. As published, BPI's time deposit rate for
an amount of P5,000,000.00 (with a term of 360-364 days) is at 5.5% p.a.; while
the benchmark ninety one-day commercial paper, which banks used to price
their loan averages to 6.4% p.a. in 2005, has a three-year average rate of 6.57%
p.a. 42 As such, the 6.75% p.a. interest rate would be higher than the current
market interest rates for time deposits and benchmark commercial papers.
Moreover, the CA pointed out that should the prevailing market interest rates
change as feared by BPI, the latter may still move for the modification of the
approved rehabilitation plan. 43
Aggrieved, BPI moved for reconsideration which was, however, denied in a
Resolution 44 dated December 6, 2006.
Hence, this petition.
The Issue Before the Court
The primordial issue raised for the Court's resolution is whether or not the CA
correctly affirmed Sarabia's rehabilitation plan as approved by the RTC, with the
modification on the reinstatement of the surety obligations of Sarabia's
stockholders.
BPI mainly argues that the approved rehabilitation plan did not give due regard
to its interests as a secured creditor in view of the imposition of a fixed interest
rate of 6.75% p.a. and the extended loan repayment period. 45 It likewise avers
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that Sarabia's misrepresentations in its rehabilitation petition remain
unresolved. 46
On the contrary, Sarabia essentially maintains that: ( a ) the present petition
improperly raises questions of fact; 47 (b) the approved rehabilitation plan takes
into consideration all the interests of the parties and the terms and conditions
stated therein are more reasonable than what BPI proposes; 48 and ( c ) BPI's
allegations of misrepresentation are mere desperation moves to convince the
Court to overturn the rulings of the courts a quo. 49
The Court's Ruling
The petition has no merit.
A.Propriety of BPI's petition;
procedural considerations.
It is fundamental that a petition for review on certiorari filed under Rule 45 of
the Rules of Court covers only questions of law. In this relation, questions of fact
are not reviewable and cannot be passed upon by the Court unless, the following
exceptions are found to exist: (a) when the findings are grounded entirely on
speculations, surmises, or conjectures; (b) when the inference made is manifestly
mistaken, absurd, or impossible; (c) when there is a grave abuse of discretion; (d)
when the judgment is based on misappreciation of facts; (e) when the findings of
fact are conflicting; (f) when in making its findings, the same are contrary to the
admissions of both parties; ( g) when the findings are contrary to those of the
trial court; ( h ) when the findings are conclusions without citation of specific
evidence on which they are based; (i) when the facts set forth in the petition as
well as in the petitioner's main and reply briefs are not disputed by the
respondent; and ( j ) when the findings of fact are premised on the supposed
absence of evidence and contradicted by the evidence on record. 50 STHAID
Among other rules that foster the foregoing policies, Section 23, Rule 4 of the
Interim Rules of Procedure on Corporate Rehabilitation 56 (Interim Rules) states
that a rehabilitation plan may be approved even over the opposition of
the creditors holding a majority of the corporation's total liabilities if
there is a showing that rehabilitation is feasible and the opposition of
the creditors is manifestly unreasonable. Also known as the "cram-down"
clause, this provision, which is currently incorporated in the FRIA, 57 is necessary
to curb the majority creditors' natural tendency to dictate their own terms and
conditions to the rehabilitation, absent due regard to the greater long-term
benefit of all stakeholders. Otherwise stated, it forces the creditors to accept the
terms and conditions of the rehabilitation plan, preferring long-term viability
over immediate but incomplete recovery.
It is within the parameters of the aforesaid provision that the Court examines
the approval of Sarabia's rehabilitation.
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i.Feasibility of Sarabia's rehabilitation.
In order to determine the feasibility of a proposed rehabilitation plan, it is
imperative that a thorough examination and analysis of the distressed
corporation's financial data must be conducted. If the results of such examination
and analysis show that there is a real opportunity to rehabilitate the corporation
in view of the assumptions made and financial goals stated in the proposed
rehabilitation plan, then it may be said that a rehabilitation is feasible. In this
accord, the rehabilitation court should not hesitate to allow the corporation to
operate as an on-going concern, albeit under the terms and conditions stated in
the approved rehabilitation plan. On the other hand, if the results of the financial
examination and analysis clearly indicate that there lies no reasonable
probability that the distressed corporation could be revived and that liquidation
would, in fact, better subserve the interests of its stakeholders, then it may be
said that a rehabilitation would not be feasible. In such case, the rehabilitation
court may convert the proceedings into one for liquidation. 58 As further guidance
on the matter, the Court's pronouncement in Wonder Book Corporation v.
Philippine Bank of Communications 59 proves instructive:
Rehabilitation is . . . available to a corporation [which], while illiquid, has
assets that can generate more cash if used in its daily operations than
s o ld . Its liquidity issues can be addressed by a practicable
business plan that will generate enough cash to sustain daily
operations, has a definite source of financing for its proper and
full implementation, and anchored on realistic assumptions and
goals. This remedy should be denied to corporations whose
insolvency appears to be irreversible and whose sole purpose is
to delay the enforcement of any of the rights of the creditors,
which is rendered obvious by the following: (a) the absence of a
sound and workable business plan; (b) baseless and unexplained
assumptions, targets and goals; (c) speculative capital infusion
or complete lack thereof for the execution of the business plan;
(d) cash flow cannot sustain daily operations; and (e ) negative
net worth and the assets are near full depreciation or fully
depreciated. 60 (Emphasis and underscoring supplied)
Keeping with these principles, the Court thus observes that: STADIH
While Section 23, Rule 4 of the Interim Rules states that the rehabilitation court
shall consider certain incidents in determining whether the opposition is
manifestly unreasonable, 70 BPI neither proposes Sarabia's liquidation over its
rehabilitation nor questions the controlling interest of Sarabia's shareholders or
owners. It only takes exception to: (a) the imposition of the fixed interest rate of
6.75% p.a. as recommended by the Receiver and as approved by the courts a
quo, proposing that the original escalating interest rates of 7%, 8%, 10%, 12%,
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and 14%, over seventeen years be applied instead; 71 and ( b ) the fact that
Sarabia's misrepresentations in the rehabilitation petition, i.e., that it physically
acquired additional property whereas in fact the increase was mainly due to the
recognition of Revaluation Increment and because of capital expenditures, were
not taken into consideration by the courts a quo. 72
Anent the first matter, it must be pointed out that oppositions which push for
high interests rates are generally frowned upon in rehabilitation proceedings
given that the inherent purpose of a rehabilitation is to find ways and means to
minimize the expenses of the distressed corporation during the rehabilitation
period. It is the objective of a rehabilitation proceeding to provide the best
possible framework for the corporation to gradually regain or achieve a
sustainable operating form. Hence, if a creditor, whose interests remain well-
preserved under the existing rehabilitation plan, still declines to accept interests
pegged at reasonable rates during the period of rehabilitation, and, in turn,
proposes rates which are largely counter-productive to the rehabilitation, then it
may be said that the creditor's opposition is manifestly unreasonable.
In this case, the Court finds BPI's opposition on the approved interest rate to be
manifestly unreasonable considering that: ( a ) the 6.75% p.a. interest rate
already constitutes a reasonable rate of interest which is concordant with
Sarabia's projected rehabilitation; and ( b ) on the contrary, BPI's proposed
escalating interest rates remain hinged on the theoretical assumption of future
fluctuations in the market, this notwithstanding the fact that its interests as a
secured creditor remain well-preserved.
The following observations impel the foregoing conclusion: first, the 6.75% p.a.
interest rate is actually higher than BPI's perceived cost of money as evidenced
by its published time deposit rate (for an amount of P5,000,000.00, with a term
of 360-364 days) which is only set at 5.5% p.a.; second, the 6.75% p.a. is also
higher than the benchmark ninety one-day commercial paper, which is used by
banks to price their loan averages to 6.4% p.a. in 2005, and has a three-year
average rate of 6.57% p.a.; and third, BPI's interests as a secured creditor are
adequately protected by the maintenance of all Sarabia's existing real estate
mortgages over its hotel properties as collateral as well as by the reinstatement
of the comprehensive surety agreement of Sarabia's stockholders, among other
terms in the approved rehabilitation plan.
As to the matter of Sarabia's alleged misrepresentations, records disclose that
Sarabia already clarified its initial statements in its rehabilitation petition by
submitting, on its own accord, a supplemental affidavit dated October 24, 2002
73 that explains that the increase in its properties and assets was indeed by
recognition of revaluation increment. 74 Proceeding from this fact, the CA
observed that BPI actually failed to establish its claimed defects in light of
Sarabia's assertive and forceful explanation that the alleged inaccuracies do not
warrant the dismissal of its petition. 75 Thus, absent any compelling reason to
disturb the CA's finding on this score, the Court deems it proper to dismiss BPI's
allegations of misrepresentation against Sarabia.
As a final point, BPI claims that Sarabia's projections were "too optimistic," its
management was "extremely incompetent" 76 and that it was even forced to pay
a pre-termination penalty due to its previous loan with the Landbank of the
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Philippines. 77 Suffice it to state that bare allegations of fact should not be
entertained as they are bereft of any probative value. 78 In any event, even if it
is assumed that the said allegations are substantiated by clear and convincing
evidence, the Court, absent any cogent basis to proceed otherwise, remains
steadfast in its preclusion to thresh out matters of fact on a Rule 45 petition, as
in this case. aIcDCT
All told, Sarabia's rehabilitation plan, as approved and modified by the CA, is
hereby sustained. In view of the foregoing pronouncements, the Court finds it
unnecessary to delve on the other ancillary issues as herein raised.
WHEREFORE, the petition is DENIED. Accordingly, the Decision dated April 24,
2006 and Resolution dated December 6, 2006 of the Court of Appeals, Cebu City
in CA-G.R. CV. No. 81596 are hereby AFFIRMED.
SO ORDERED.
Brion, Bersamin, *Del Castillo and Perez, JJ., concur.
Footnotes
5.Id. at 192.
6.Id.
7.Id. at 10.
8.Id. at 70. Including parcels of land covered by Transfer Certificates of Title Nos. T-
116065 to T-116088.
9.I d . Referring to Sps. Salvador Sr. and Amparo Sarabia, Salvador Sarabia, Jr.,
Suzanne Javelosa, Sandra S. Gomez, Gina S. Espinosa, Rosalie S. Treñas, Melvin
D. Sarabia, and John Paul Sarabia.
10.Id. at 10.
11.Id. at 69. Sarabia had total assets in the amount of P481,586,031.21 with total
liabilities amounting to P225,962,556.99.
12.Id. at 68-95. Docketed as Civil Case No. 02-27252.
13.Id. at 70.
14.Id. at 72-73.
15.Id. at 71-72.
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16.Id. at 80.
17.Records pp. 269-285.
18.Rollo, pp. 98-100.
19.Id. at 101-122.
20.Id. at 191.
21.Id. at 162-175.
22.Id. at 171.
23.Id. at 172.
24.Id. at 173.
25.Id.
26.Id.
27.Id.
28.Id.
29.Id. at 173-174.
30.Id. at 174.
31.Id. at 175.
32.Id.
33.Id. at 189-213.
34.Id. at 204.
35.Id.
36.Id. at 205.
37.Id. at 204.
38.Id. at 207-208.
39.Id. at 49-64.
40.Id. at 62-63.
41.Id. at 59.
42.Id. at 60.
43.Id.
44.Id. at 66-67.
45.Id. at 37-42.
46.Id. at 42-44.
47.Id. at 473-479.
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48.Id. at 480-489.
49.Id. at 491-500.
51.Id.
52.Section 5(g), Rule 56 of the Rules of Court states:
SEC. 5. Grounds for dismissal of appeal. — The appeal may be dismissed motu
proprio or on motion of the respondent on the following grounds:
xxx xxx xxx
(g) The fact that the case is not appealable to the Supreme Court.
53.Rollo, p. 169.
54.See Express Investments III Private Ltd. v. Bayan Telecommunications, Inc., G.R.
Nos. 174457-59, December 5, 2012, 687 SCRA 50, 86-87.
55.Id. at 87.
56.A.M. No. 00-8-10-SC dated November 21, 2000. The Court deems it proper to
assess Sarabia's rehabilitation within the parameters of the Interim Rules since
these were the rules applicable at the time the rehabilitation plan was approved.
Republic Act No. 10142, otherwise known as the "Financial Rehabilitation and
Insolvency Act of 2010" (FRIA), which is the current law on the matter, took
effect only on August 31, 2010. Its rules of procedure have yet to be
promulgated as of date.
(c) convert the proceedings into one for the liquidation of the debtor upon a finding
that:
(1) the debtor is insolvent; and
60.Id. at 501.
61.Rollo, p. 204.
62.Id. at 205.
63.Id. at 8.
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64.Id. at 9.
65.Id.
66.Id.
67.Id. at 10.
68.Id. at 20.
69.Id. at 18-19, 21.
a. That the plan would likely provide the objecting class of creditors with compensation
greater than that which they would have received if the assets of the debtor
were sold by a liquidator within a three-month period;
b. That the shareholders or owners of the debtor lose at least their controlling interest
as a result of the plan; and
71.Rollo, p. 37.
72.Id. at 43-44.
73.Id. at 123-141.
76.Id. at 43.
77.Id. at 40.