FIRST DIVISION
answer for the obligation.
G.R. No. 171569 August 1, 2011
UNION BANK OF THE PHILIPPINES,
vs.
ALAIN* JUNIAT, WINWOOD APPAREL, INC., WINGYAN APPAREL, INC.,
NONWOVEN FABRIC PHILIPPINES,Respondents.
DECISION
DEL CASTILLO, J.:
To have a binding effect on third parties, a contract of pledge must appear in a public
instrument.
This Petition for Review on Certiorari under Rule 45 of the Rules of Court assails the
June 23, 2005 Decision and the February 9, 2006 Resolution of the Court of Appeals
(CA) in CA-G.R. CV No. 66392.
Factual Antecedents
Petitioner Union Bank of the Philippines (Union Bank) is a universal
banking corporation organized and existing under Philippine laws.
Respondents Winwood Apparel, Inc. (Winwood) and Wingyan Apparel, Inc. (Wingyan)
are domestic corporations engaged in the business of apparel manufacturing. Both
respondent corporations are owned and operated by respondent Alain Juniat (Juniat),
a French national based in Hongkong. Respondent Nonwoven Fabric Philippines, Inc.
(Nonwoven) is a Philippine corporation engaged in the manufacture and sale of various
types of nonwoven fabrics.
On September 3, 1992, petitioner filed with the Regional Trial Court (RTC) of Makati,
Branch 57, a Complaint with prayer for the issuance of ex-parte writs of preliminary
attachment and replevin against Juniat, Winwood, Wingyan, and the person in
possession of the mortgaged motorized sewing machines and equipment. Petitioner
alleged that Juniat, acting for and in behalf of Winwood and Wingyan, executed a
promissory note dated April 11, 1992 and a Chattel Mortgage dated March 27, 1992
over several motorized sewing machines and other allied equipment to secure their
obligation arising from export bills transactions to petitioner in the amount of
₱1,131,134.35; that as additional security for the obligation, Juniat executed a
Continuing Surety Agreement dated April 11, 1992 in favor of petitioner; that the loan
remains unpaid; and that the mortgaged motorized sewing machines are insufficient to
On September 10, 1992, the RTC issued writs of preliminary attachment and replevin
in favor of petitioner. The writs were served by the Sheriff upon Nonwoven as it was in
possession of the motorized sewing machines and equipment. Although Nonwoven
was not impleaded in the complaint filed by petitioner, the RTC likewise served
summons upon Nonwoven since it was in possession of the motorized sewing
machines and equipment.
On September 28, 1992, Nonwoven filed an Answer, contending that the unnotarized
Chattel Mortgage executed in favor of petitioner has no binding effect on Nonwoven
and that it has a better title over the motorized sewing machines and equipment
because these were assigned to it by Juniat pursuant to their Agreement dated May 9,
1992. Juniat, Winwood, and Wingyan, on the other hand, were declared in default for
failure to file an answer within the reglementary period.
On November 23, 1992, petitioner filed a Motion to Sell Chattels Seized by
Replevin, praying that the motorized sewing machines and equipment be sold to avoid
depreciation and deterioration. However, on May 18, 1993, before the RTC could act
on the motion, petitioner sold the attached properties for the amount of ₱1,350,000.00.
Nonwowen moved to cite the officers of petitioner in contempt for selling the attached
properties, but the RTC denied the same on the ground that Union Bank acted in good
faith.
Ruling of the Regional Trial Court
On May 20, 1999, the RTC of Makati, Branch 145, rendered a Decision in favor of
petitioner. The RTC ruled that both the Chattel Mortgage dated March 27, 1992 in favor
of petitioner and the Agreement dated May 9, 1992 in favor of Nonwoven have no
obligatory effect on third persons because these documents were not notarized.
However, since the Chattel Mortgage in favor of petitioner was executed earlier,
petitioner has a better right over the motorized sewing machines and equipment under
the doctrine of "first in time, stronger in right" (prius tempore, potior jure). Thus, the
RTC disposed of the case in this wise:
WHEREFORE, above premises considered, judgment is hereby rendered as follows:
1.] Declaring the [petitioner] UNION BANK OF THE PHILIPPINES, as having
the better right to the goods and/or machineries subject of the Writs of
Preliminary Attachment and Replevin issued by this Court on September 10,
1992.
 2.] Declaring the [petitioner] as entitled to the proceeds of the sale of the
subject machineries in the amount of ₱1,350,000.00;
3.] Declaring [respondents] Allain Juniat, Winwood Apparel, Inc. and Wingyan
Apparel, Inc. to be jointly and severally liable to the [petitioner], for the
deficiency between the proceeds of the sale of the machineries subject of this
suit [₱1,350,000.00] and original claim of the plaintiff [₱1,919,907.03], in the
amount of ₱569,907.03, with legal interest at the rate of 12% per annum from
date of this judgment until fully paid; and
4.] Declaring [respondents] Allain Juniat, Winwood Apparel, Inc. and Wingyan
Apparel, Inc. to be jointly and severally liable to the [petitioner] for the amount
of ₱50,000.00 as reasonable attorneys fees; and
5.] Cost of this suit against the [respondents].
SO ORDERED.
Nonwoven moved for reconsideration but the RTC denied the same in its
Order dated July 14, 1999.
Ruling of the Court of Appeals
On appeal, the CA reversed the ruling of the RTC. The CA ruled that the contract of
pledge entered into between Juniat and Nonwoven is valid and binding, and that the
motorized sewing machines and equipment were ceded to Nonwoven by Juniat by
virtue of a dacion en pago. Thus, the CA declared Nonwoven entitled to the proceeds
of the sale of the attached properties. The fallo reads:
WHEREFORE, premises considered, the assailed decision is hereby REVERSED and
SET ASIDE. [Petitioner] Union Bank of the Philippines is hereby DIRECTED to pay
Nonwoven Fabric Philippines, Inc. ₱1,350,000.00, the amount it holds in escrow,
realized from the May 18, 1993 sale of the machineries to avoid deterioration during
pendency of suit. No pronouncement as to costs.
SO ORDERED.
Petitioner sought reconsideration which was denied by the CA in a Resolution dated
February 9, 2006.
Issues
Hence, the present recourse where petitioner interposes the following issues:
1. Whether x x x the Court of Appeals committed serious reversible error in
setting aside the Decision of the trial court holding that Union Bank of the
Philippines had a better right over the machineries seized/levied upon in the
proceedings before the trial court and/or the proceeds of the sale thereof;
2. Whether x x x the Court of Appeals seriously erred in holding that
[Nonwoven] has a valid claim over the subject sewing machines.
Petitioner’s Arguments
Echoing the reasoning of the RTC, petitioner insists that it has a better title to the
proceeds of the sale. Although the Chattel Mortgage executed in its favor was not
notarized, petitioner insists that it is nevertheless valid, and thus, has preference over a
subsequent unnotarized agreement. Petitioner further claims that except for the said
agreement, no other evidence was presented by Nonwoven to show that the motorized
sewing machines and equipment were indeed transferred to them by
Juniat/Winwood/Wingyan.
Respondent Nonwoven’s Arguments
Nonwoven, on the other hand, claims ownership over the proceeds of the sale under
Article 1544 of the Civil Code on double sale, which it claims can be applied by
analogy in the instant case. Nonwoven contends that since its prior possession over
the motorized sewing machines and equipment was in good faith, it has a better title
over the proceeds of the sale. Nonwoven likewise maintains that petitioner has no right
over the proceeds of the sale because the Chattel Mortgage executed in its favor was
unnotarized, unregistered, and without an affidavit of good faith.
Our Ruling
The petition has merit.
Nonwoven lays claim to the attached motorized sewing machines and equipment
pursuant to the Agreement it entered into with Juniat, to wit:
Hong Kong, 9th May, 1992
With reference to talks held this morning at the Holiday Inn Golden Mile Coffee Shop,
among the following parties:
a. Redflower Garments Inc. – Mrs. Maglipon
b. Nonwoven Fabrics Phils. Inc. – Mr. J. Tan
 c. Winwood Apparel Inc./Wing Yan Apparel, Inc. – Mr. A. Juniat, Mrs. S. Juniat
IT WAS AGREED THAT:
a. Settlement of the accounts between Nonwoven Fabrics Phils. Inc. and Winwood
Apparel Inc./Wing Yan Apparel, Inc. should be effected as agreed through partial
payment by L/C with the balance to be settled at a later date for which Winwood
Apparel, Inc. agrees to consign 94 sewing machines, 3 snap machines and 2 boilers,
presently in the care of Redflower Garments Inc., to the care of Nonwoven Fabrics
Phils., Inc. as guarantee. Meanwhile, Nonwoven will resume delivery to Winwood/Win
Yang as usual.
nothing in the Agreement dated May 9, 1992 to indicate that the motorized sewing
machines, snap machines and boilers were ceded to Nonwoven as payment for the
Wingyan’s and Winwood’s obligation. It bears stressing that there can be no transfer of
ownership if the delivery of the property to the creditor is by way of security. In fact, in
case of doubt as to whether a transaction is one of pledge or dacion en pago, the
presumption is that it is a pledge as this involves a lesser transmission of rights and
interests.
In view of the foregoing, we are constrained to reverse the ruling of the CA. Nonwoven
is not entitled to the proceeds of the sale of the attached properties because it failed to
show that it has a better title over the same.

x x x x (Emphasis supplied.)
It insists that since the attached properties were assigned or ceded to it by Juniat, it
has a better right over the proceeds of the sale of the attached properties than
petitioner, whose claim is based on an unnotarized Chattel Mortgage.
We do not agree.
WHEREFORE, the petition is hereby GRANTED. The assailed June 23, 2005 Decision
and the February 9, 2006 Resolution of the Court of Appeals in CA-G.R. CV No. 66392
are hereby REVERSED and SET ASIDE. The May 20, 1999 Decision of the Regional
Trial Court of Makati, Branch 145, is hereby REINSTATED and AFFIRMED.
SO ORDERED.

Indeed, the unnotarized Chattel Mortgage executed by Juniat, for and in behalf of
Wingyan and Winwood, in favor of petitioner does not bind Nonwoven. However, it
must be pointed out that petitioner’s primary cause of action is for a sum of money with
prayer for the issuance of ex-parte writs of attachment and replevin against Juniat,
Winwood, Wingyan, and the person in possession of the motorized sewing machines
and equipment. Thus, the fact that the Chattel Mortgage executed in favor of petitioner
was not notarized does not affect petitioner’s cause of action. Petitioner only needed to
show that the loan of Juniat, Wingyan and Winwood remains unpaid and that it is
entitled to the issuance of the writs prayed for. Considering that writs of attachment and
replevin were issued by the RTC, Nonwoven had to prove that it has a better right of
possession or ownership over the attached properties.1avvphil This it failed to do.

A perusal of the Agreement dated May 9, 1992 clearly shows that the sewing
machines, snap machines and boilers were pledged to Nonwoven by Juniat to
guarantee his obligation. However, under Article 2096 of the Civil Code, "[a] pledge
shall not take effect against third persons if a description of the thing pledged and the
date of the pledge do not appear in a public instrument." Hence, just like the chattel
mortgage executed in favor of petitioner, the pledge executed by Juniat in favor of
Nonwoven cannot bind petitioner.

Neither can we sustain the finding of the CA that: "The machineries were ceded to
THIRD PARTY NONWOVEN by way of dacion en pago, a contract later entered into
by WINWOOD/WINGYAN and THIRD PARTY NONWOVEN." As aptly pointed out by
petitioner, no evidence was presented by Nonwoven to show that the attached
properties were subsequently sold to it by way of a dacion en pago. Also, there is
SECOND DIVISION
G.R. No. 183987 July 25, 2012
ASIA TRUST DEVELOPMENT BANK, Petitioner,
vs.
CARMELO H. TUBLE, Respondent.
DECISION
SERENO, J.:
Before this Court is a Petition for Review on Certiorari under Rule 45 of the Revised
Rules of Court, seeking to review the Court of Appeals (CA) 28 March 2008 Decision
and 30 July 2008 Resolution in CA-G.R. CV No. 87410. The CA affirmed the Regional
Trial Court (RTC) Decision of 15 May 2006 in Civil Case No. 67973, which granted to
respondent the refund of ₱845,805.49 representing the amount he had paid in excess
of the redemption price.
The antecedent facts are as follows:
Respondent Carmelo H. Tuble, who served as the vice-president of petitioner Asiatrust
Development Bank, availed himself of the car incentive plan and loan privileges offered
by the bank. He was also entitled to the bank’s Senior Managers Deferred Incentive
Plan (DIP).
Respondent acquired a Nissan Vanette through the company’s car incentive plan. The
arrangement was made to appear as a lease agreement requiring only the payment of
monthly rentals. Accordingly, the lease would be terminated in case of the employee’s
resignation or retirement prior to full payment of the price.
As regards the loan privileges, Tuble obtained three separate loans. The first, a real
estate loan evidenced by the 18 January 1993 Promissory Note No. 0142 with maturity
date of 1 January 1999, was secured by a mortgage over his property covered by
Transfer Certificate of Title No. T 145794. No interest on this loan was indicated.
The second was a consumption loan, evidenced by the 10 January 1994 Promissory
Note No. 0143 with the maturity date of 31 January 1995 and interest at 18% per
annum. Aside from the said indebtedness, Tuble allegedly obtained a salary loan,
his third loan.
On 30 March 1995, he resigned. Subsequently, he was given the option to either return
the vehicle without any further obligation or retain the unit and pay its remaining book
value.
Respondent had the following obligations to the bank after his retirement: (1) the
purchase or return of the Nissan Vanette; (2) ₱100,000 as consumption loan; (3)
₱421,800 as real estate loan; and (4) ₱16,250 as salary loan.
In turn, petitioner owed Tuble (1) his pro-rata share in the DIP, which was to be issued
after the bank had given the resigned employee’s clearance; and (2) ₱25,797.35
representing his final salary and corresponding 13th month pay.
Respondent claimed that since he and the bank were debtors and creditors of each
other, the offsetting of loans could legally take place. He then asked the bank to simply
compute his DIP and apply his receivables to his outstanding loans. However, instead
of heeding his request, the bank sent him a 1 June 1995 demand letter obliging him to
pay his debts. The bank also required him to return the Nissan Vanette. Despite this
demand, the vehicle was not surrendered.
On 14 August 1995, Tuble wrote the bank again to follow up his request to offset the
loans. This letter was not immediately acted upon. It was only on 13 October 1995 that
the bank finally allowed the offsetting of his various claims and liabilities. As a result,
his liabilities were reduced to ₱970,691.46 plus the unreturned value of the vehicle.
In order to recover the Nissan Vanette, the bank filed a Complaint for replevin against
Tuble. Petitioner obtained a favorable judgment. Then, to collect the liabilities of
respondent, it also filed a Petition for Extra-judicial Foreclosure of real estate mortgage
over his property. The Petition was based only on his real estate loan, which at that
time amounted to ₱421,800. His other liabilities to the bank were excluded. The
foreclosure proceedings terminated, with the bank emerging as the purchaser of the
secured property.
Thereafter, Tuble timely redeemed the property on 17 March 1997 for ₱1,318,401.91.
Notably, the redemption price increased to this figure, because the bank had
unilaterally imposed additional interest and other charges.
With the payment of ₱1,318,401.91, Tuble was deemed to have fully paid his
accountabilities. Thus, three years after his payment, the bank issued him a Clearance
necessary for the release of his DIP share. Subsequently, he received a Manager’s
Check in the amount of ₱166,049.73 representing his share in the DIP funds.
Despite his payment of the redemption price, Tuble questioned how the foreclosure
basis of ₱421,800 ballooned to ₱1,318,401.91 in a matter of one year. Belatedly, the
bank explained that this redemption price included the Nissan Vanette’s book value,
the salary loan, car insurance, 18% annual interest on the bank’s redemption price of
₱421,800, penalty and interest charges on Promissory Note No. 0142, and litigation
expenses. By way of note, from these items, the amounts that remained to be collected
as stated in the Petition before us, are (1) the 18% annual interest on the redemption
price and (2) the interest charge on Promissory Note No. 0142.
Because Tuble disputed the redemption price, he filed a Complaint for recovery of a
sum of money and damages before the RTC. He specifically sought to collect
₱896,602.02 representing the excess charges on the redemption price. Additionally, he
prayed for moral and exemplary damages.
The RTC ruled in favor of Tuble. The trial court characterized the redemption price as
excessive and arbitrary, because the correct redemption price should not have
included the above-mentioned charges. Moral and exemplary damages were also
awarded to him.
According to the trial court, the value of the car should not have been included,
considering that the bank had already recovered the Nissan Vanette. The obligations
arising from the salary loan and car insurance should have also been excluded, for
there was no proof that these debts existed. The interest and penalty charges should
have been deleted, too, because Promissory Note No. 0142 did not indicate any
interest or penalty charges. Neither should litigation expenses have been added, since
there was no proof that the bank incurred those expenses.
As for the 18% annual interest on the bid price of ₱421,800, the RTC agreed with
Tuble that this charge was unlawful. Act 3135 as amended, in relation to Section 28 of
Rule 39 of the Rules of Court, only allows the mortgagee to charge an interest of 1%
per month if the foreclosed property is redeemed. Ultimately, under the principle
of solutio indebiti, the trial court required the refund of these amounts charged in
excess of the correct redemption price.
On appeal, the CA affirmed the findings of the RTC. The appellate court only
expounded the rule that, at the time of redemption, the one who redeemed is liable to
pay only 1% monthly interest plus taxes. Thus, the CA also concluded that there was
practically no basis to impose the additional charges.
Before this Court, petitioner reiterates its claims regarding the inclusion in the
redemption price of the 18% annual interest on the bid price of ₱421,800 and the
interest charges on Promissory Note No. 0142. Petitioner emphasizes that an 18%
interest rate allegedly referred to in the mortgage deed is the proper basis of the
interest. Pointing to the Real Estate Mortgage Contract, the bank highlights the blanket
security clause or "dragnet clause" that purports to cover all obligations owed by Tuble:
All obligations of the Borrower and/or Mortgagor, its renewal, extension, amendment or
novation irrespective of whether such obligations as renewed, extended, amended or
novated are in the nature of new, separate or additional obligations;
All other obligations of the Borrower and/or Mortgagor in favor of the Mortgagee,
executed before or after the execution of this document whether presently owing or
hereinafter incurred and whether or not arising from or connection with the aforesaid
loan/Credit accommodation; x x x.
Tuble’s obligations are defined in Promissory Note Nos. 0142 and 0143. By way of
recap, Promissory Note No. 0142 refers to the real estate loan; it does not contain any
stipulation on interest. On the other hand, Promissory Note No. 0143 refers to the
consumption loan; it charges an 18% annual interest rate. Petitioner uses this latter
rate to impose an interest over the bid price of ₱421,800.
Further, the bank sees the inclusion in the redemption price of an addition 12% annual
interest on Tuble’s real estate loan.
On top of these claims, the bank raises a new item – the car’s rental fee – to be
included in the redemption price. In dealing with this argument raised for the first time
on certiorari, this Court dismisses the contention based on the well-entrenched
prohibition on raising new issues, especially factual ones, on appeal.
Thus, the pertinent issue in the instant appeal is whether or not the bank is entitled to
include these items in the redemption price: (1) the interest charges on Promissory
Note No. 0142; and (2) the 18% annual interest on the bid price of P421,800.
RULING OF THE COURT
The 18% Annual Interest on the Bid
Price of ₱421,800
The Applicable Law
The bank argues that instead of referring to the Rules of Court to compute the
redemption price, the courts a quoshould have applied the General Banking Law,
considering that petitioner is a banking institution.
The statute referred to requires that in the event of judicial or extrajudicial foreclosure
of any mortgage on real estate that is used as security for an obligation to any bank,
banking institution, or credit institution, the mortgagor can redeem the property by
paying the amount fixed by the court in the order of execution, with interest thereon at
the rate specified in the mortgage.
Petitioner is correct. We have already established in Union Bank of the Philippines v.
Court of Appeals, citing Ponce de Leon v. Rehabilitation Finance Corporation and Sy v.
Court of Appeals, that the General Banking Act – being a special and subsequent
legislation – has the effect of amending Section 6 of Act No. 3135, insofar as the
redemption price is concerned, when the mortgagee is a bank. Thus, the amount to be
paid in redeeming the property is determined by the General Banking Act, and not by
the Rules of Court in Relation to Act 3135.
The Remedy of Foreclosure
In reviewing the bank’s additional charges on the redemption price as a result of the
foreclosure, this Court will first clarify certain vital points of fact and law that both
parties and the courts a quo seem to have missed.
Firstly, at the time respondent resigned, which was chronologically before the
foreclosure proceedings, he had several liabilities to the bank. Secondly, when the
bank later on instituted the foreclosure proceedings, it foreclosed only the mortgage
secured by the real estate loan of ₱421,800. It did not seek to include, in the
foreclosure, the consumption loan under Promissory Note No. 0143 or the other
alleged obligations of respondent. Thirdly, on 28 February 1996, the bank availed itself
of the remedy of foreclosure and, in doing so, effectively gained the property.
As a result of these established facts, one evident conclusion surfaces: the Real Estate
Mortgage Contract on the secured property is already extinguished.
In foreclosures, the mortgaged property is subjected to the proceedings for the
satisfaction of the obligation. As a result, payment is effected by abnormal means
whereby the debtor is forced by a judicial proceeding to comply with the presentation or
to pay indemnity.
Once the proceeds from the sale of the property are applied to the payment of the
obligation, the obligation is already extinguished. Thus, in Spouses Romero v. Court of
Appeals, we held that the mortgage indebtedness was extinguished with the
foreclosure and sale of the mortgaged property, and that what remained was the right
of redemption granted by law.
Consequently, since the Real Estate Mortgage Contract is already extinguished,
petitioner can no longer rely on it or invoke its provisions, including the dragnet clause
stipulated therein. It follows that the bank cannot refer to the 18% annual interest
charged in Promissory Note No. 0143, an obligation allegedly covered by the terms of
the Contract.
Neither can the bank use the consummated contract to collect on the rest of the
obligations, which were not included when it earlier instituted the foreclosure
proceedings. It cannot be allowed to use the same security to collect on the other
loans. To do so would be akin to foreclosing an already foreclosed property.
Rather than relying on an expired contract, the bank should have collected on the
excluded loans by instituting the proper actions for recovery of sums of money. Simply
put, petitioner should have run after Tuble separately, instead of hostaging the same
property to cover all of his liabilities.
The Right of Redemption
Despite the extinguishment of the Real Estate Mortgage Contract, Tuble had the right
to redeem the security by paying the redemption price.
The right of redemption of foreclosed properties was a statutory privilege he enjoyed.
Redemption is by force of law, and the purchaser at public auction is bound to accept
it. Thus, it is the law that provides the terms of the right; the mortgagee cannot dictate
them. The terms of this right, based on Section 47 of the General Banking Law, are as
follows:
1. The redemptioner shall have the right within one year after the sale of the real
estate, to redeem the property.
2. The redemptioner shall pay the amount due under the mortgage deed, with interest
thereon at rate specified in the mortgage, and all the costs and expenses incurred by
the bank or institution from the sale and custody of said property less the income
derived therefrom.
3. In case of redemptioners who are considered by law as juridical persons, they shall
have the right to redeem not after the registration of the certificate of foreclosure sale
with the applicable Register of Deeds which in no case shall be more than three (3)
months after foreclosure, whichever is earlier.
Consequently, the bank cannot alter that right by imposing additional charges and
including other loans. Verily, the freedom to stipulate the terms and conditions of an
agreement is limited by law.
Thus, we held in Rural Bank of San Mateo, Inc. v. Intermediate Appellate Court that the
power to decide whether or not to foreclose is the prerogative of the mortgagee;
however, once it has made the decision by filing a petition with the sheriff, the acts of
the latter shall thereafter be governed by the provisions of the mortgage laws, and not
by the instructions of the mortgagee. In direct contravention of this ruling, though, the
bank included numerous charges and loans in the redemption price, which inexplicably
ballooned to ₱1,318,401.91. On this error alone, the claims of petitioner covering all
the additional charges should be denied. Thus, considering the undue inclusions of the
additional charges, the bank cannot impose the 18% annual interest on the redemption
price.
The Dragnet Clause
In any event, assuming that the Real Estate Mortgage Contract subsists, we rule that
the dragnet clause therein does not justify the imposition of an 18% annual interest on
the redemption price.
This Court has recognized that, through a dragnet clause, a real estate mortgage
contract may exceptionally secure future loans or advancements. But an obligation is
not secured by a mortgage, unless, that mortgage comes fairly within the terms of the
mortgage contract.
We have also emphasized that the mortgage agreement, being a contract of adhesion,
is to be carefully scrutinized and strictly construed against the bank, the party that
prepared the agreement.
Here, after reviewing the entire deed, this Court finds that there is no specific mention
of interest to be added in case of either default or redemption. The Real Estate
Mortgage Contract itself is silent on the computation of the redemption price. Although
it refers to the Promissory Notes as constitutive of Tuble’s secured obligations, the said
contract does not state that the interest to be charged in case of redemption should be
what is specified in the Promissory Notes.
In Philippine Banking Communications v. Court of Appeals, we have construed such
silence or omission of additional charges strictly against the bank. In that case, we
affirmed the findings of the courts a quo that penalties and charges are not due for
want of stipulation in the mortgage contract.
Worse, when petitioner invites us to look at the Promissory Notes in determining the
interest, these loan agreements offer different interest charges: Promissory Note No.
0142, which corresponds exactly to the real estate loan, contains no stipulation on
interest; while Promissory Note No. 0143, which in turn corresponds to the
consumption loan, provides a charge of 18% interest per annum.
Thus, an ambiguity results as to which interest shall be applied, for to apply an 18%
interest per annum based on Promissory Note No. 0143 will negate the existence of
the 0% interest charged by Promissory Note No. 0142. Notably, it is this latter
Promissory Note that refers to the principal agreement to which the security attaches.
In resolving this ambiguity, we refer to a basic principle in the law of contracts: "Any
ambiguity is to be taken contra proferentem, that is, construed against the party who
caused the ambiguity which could have avoided it by the exercise of a little more care."
Therefore, the ambiguity in the mortgage deed whose terms are susceptible of different
interpretations must be read against the bank that drafted it. Consequently, we cannot
impute grave error on the part of the courts a quo for not appreciating a charge of 18%
interest per annum.
Furthermore, this Court refuses to be blindsided by the dragnet clause in the Real
Estate Mortgage Contract to automatically include the consumption loan, and its
corresponding interest, in computing the redemption price.
As we have held in Prudential Bank v. Alviar, in the absence of clear and supportive
evidence of a contrary intention, a mortgage containing a dragnet clause will not be
extended to cover future advances, unless the document evidencing the subsequent
advance refers to the mortgage as providing security therefor.
In this regard, this Court adopted the "reliance on the security test" used in the above-
mentioned cases, Prudential Bank and Philippine Bank of Communications. In these
Decisions, we elucidated the test as follows:
x x x A mortgage with a "dragnet clause" is an "offer" by the mortgagor to the bank to
provide the security of the mortgage for advances of and when they were made. Thus,
it was concluded that the "offer" was not accepted by the bank when a subsequent
advance was made because (1) the second note was secured by a chattel mortgage
on certain vehicles, and the clause therein stated that the note was secured by such
chattel mortgage; (2) there was no reference in the second note or chattel mortgage
indicating a connection between the real estate mortgage and the advance; (3) the
mortgagor signed the real estate mortgage by her name alone, whereas the second
note and chattel mortgage were signed by the mortgagor doing business under an
assumed name; and (4) there was no allegation by the bank, and apparently no proof,
that it relied on the security of the real estate mortgage in making the advance.
(Emphasis supplied)
Here, the second loan agreement, or Promissory Note No. 0143, referring to the
consumption loan makes no reference to the earlier loan with a real estate mortgage.
Neither does the bank make any allegation that it relied on the security of the real
estate mortgage in issuing the consumption loan to Tuble.
It must be remembered that Tuble was petitioner’s previous vice-president. Hence, as
one of the senior officers, the consumption loan was given to him not as an ordinary
loan, but as a form of accommodation or privilege. The bank’s grant of the salary loan
to Tuble was apparently not motivated by the creation of a security in favor of the bank,
but by the fact the he was a top executive of petitioner.
Thus, the bank cannot claim that it relied on the previous security in granting the
consumption loan to Tuble. For this reason, the dragnet clause will not be extended to
cover the consumption loan. It follows, therefore, that its corresponding interest – 18%
per annum – is inapplicable. Consequently, the courts a quo did not gravely abuse their
discretion in refusing to apply an annual interest of 18% in computing the redemption
price. A finding of grave abuse of discretion necessitates that the judgment must have
been exercised arbitrarily and without basis in fact and in law.
The Interest Charges on Promissory
Note No. 0142
In addition to the 18% annual interest, the bank also claims a 12% interest per annum
on the consumption loan. Notwithstanding that Promissory Note No. 0142 contains no
stipulation on interest payments, the bank still claims that Tuble is liable to pay the
legal interest. This interest is currently at 12% per annum, pursuant to Central Bank
Circular No. 416 and Article 2209 of the Civil Code, which provides:
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. (Emphasis supplied)
While Article 2209 allows the recovery of interest sans stipulation, this charge is
provided not as a form of monetary interest, but as one of compensatory interest.
Monetary interest refers to the compensation set by the parties for the use or
forbearance of money. On the other hand, compensatory interest refers to the penalty
or indemnity for damages imposed by law or by the courts. Compensatory interest, as a
form of damages, is due only if the obligor is proven to have defaulted in paying the
loan.
Thus, a default must exist before the bank can collect the compensatory legal interest
of 12% per annum. In this regard, Tuble denies being in default since, by way of legal
compensation, he effectively paid his liabilities on time.
This argument is flawed. The bank correctly explains in its Petition that in order for
legal compensation to take effect, Article 1279 of the Civil Code requires that the debts
be liquidated and demandable. This provision reads:
(1) That each one of the obligors be bound principally, and that he be at the same time
a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are consumable,
they be of the same kind, and also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by
third persons and communicated in due time to the debtor. (Emphasis supplied)
Liquidated debts are those whose exact amount has already been determined. In this
case, the receivable of Tuble, including his DIP share, was not yet determined; it was
the petitioner’s policy to compute and issue the computation only after the retired
employee had been cleared by the bank. Thus, Tuble incorrectly invoked legal
compensation in addressing this issue of default.
Nevertheless, based on the findings of the RTC and the CA, the obligation of Tuble as
evidenced by Promissory Note No. 0142, was set to mature on 1 January 1999. But
then, he had already settled his liabilities on 17 March 1997 by paying ₱1,318,401.91
as redemption price. Then, in 1999, the bank issued his Clearance and share in the
DIP in view of the full settlement of his obligations. Thus, there being no substantial
delay on his part, the CA did not grievously err in not declaring him to be in default.
The Award of Moral and Exemplary
Damages
The courts a quo awarded Tuble ₱200,000 as moral damages and ₱50,000 as
exemplary damages.1âwphi1 As appreciated by the RTC, which had the opportunity to
examine the parties, the bank treated Tuble unfairly and unreasonably by refusing to
lend even a little charity and human consideration when it immediately foreclosed the
loans of its previous vice-president instead of heeding his request to make a
straightforward calculation of his receivables and offset them against his liabilities.
To the mind of the trial court, this was such a simple request within the control of the
bank to grant; and if petitioner had only acceded, the troubles of the lawsuit would have
been avoided.1âwphi1
Moreover, the RTC found that the bank caused Tuble severe humiliation when the
Nissan Vannette was seized from his new office at Kuok Properties Philippines. The
trial court also highlighted the fact that respondent as the previous vice-president of
petitioner was no ordinary employee – he was a man of good professional standing,
and one who actively participated in civic organizations. The RTC then concluded that
a man of his standing deserved fair treatment from his employer, especially since they
served common goals.
This Court affirms the dispositions of the RTC and the CA. They correctly ruled that the
award of moral damages also includes cases of besmirched reputation, moral shock,
social humiliation and similar injury. In this regard, the social and financial standings of
the parties are additional elements that should be taken into account in the
determination of the amount of moral damages. Based on their findings that Tuble
suffered undue embarrassment, given his social standing, the courts a quo had factual
Basis to justify the award of moral damages and, consequently, exemplary damages in
his favor.
From all the foregoing, we rule that the appellate court correctly deleted the 18%
annual interest charges, albeit for different reasons. First, the interest cannot be
imposed, because any reference to it under the Real Estate Mortgage Contract is
misplaced, as the contract is already extinguished. Second, the said interest cannot be
collected without any basis in terms of Tuble's redemption rights. Third, assuming that
the Real Estate Mortgage Contract subsists, the bank cannot collect the interest
because of the contract's ambiguity. Fourth, the dragnet clause referred to in the
contract cannot be presumed to include the 18% annual interest specified in the
consumption loan. Fifth, with respect to the compensatory interest claimed by the bank,
we hold that neither is the interest due, because Tuble cannot be deemed to be in
default of his obligations.

IN VIEW THEREOF, the assailed 28 March 2008 Decision and 30 July 2008
Resolution of the Court of Appeals in CA-G.R. CV No. 87410 are hereby AFFIRMED.

SO ORDERED.
SECOND DIVISION
G.R. No. 141311 May 26, 2005
BERNICE LEGASPI, petitioner,
vs.
SPOUSES RITA and FRANCISCO ONG, respondents.
DECISION
AUSTRIA-MARTINEZ, J.:
Before us is a petition for review on certiorari filed by petitioner Bernice Legaspi
seeking to annul and set aside the Decision dated July 30, 1998 of the Court of
Appeals (CA) reversing the decision of the trial court and ruling that the deed of sale
with right to repurchase executed by respondent spouses in favor of petitioner over the
subject property was an equitable mortgage; and its Resolution dated January 4,
2000 denying petitioner’s motion for reconsideration.
Respondent spouses Francisco and Rita Ong were owners of a parcel of land located
at 375 Matienza Street, San Miguel, Manila with an area of 1,010 square meters and a
two-storey house. They mortgaged the subject property with the Permanent Savings
and Loan Bank (PSLB) to secure their loan. For their failure to pay their loan, PSLB
foreclosed the mortgage on the subject property and thereafter sold it in a public
auction where the bank emerged as the highest bidder. Respondent spouses failed to
redeem the property within the redemption period, thus, the title was consolidated in
the name of PSLB under Transfer Certificate of Title (TCT) No. 182956 on November
10, 1988 but respondent spouses continued to occupy the premises. When PSLB was
subsequently ordered liquidated by the Monetary Board of the Central Bank, PSLB’s
acquired assets were required to be disposed of to pay its debts, thus respondent
spouses, being the original owners of the subject property, were given first priority by
the Central Bank Liquidator to buy back their property in the amount of P2,655,000.00
on or before June 13, 1989. Since respondent spouses had no money then, they
approached petitioner’s father, Stephen Hong, a classmate and friend of respondent
Francisco, and sought his help to pay and redeem the subject property. Petitioner and
her father were shown the title of the subject property in respondent Rita’s name. After
some deliberations thereon, the parties’ agreement was reduced into writing
denominated as a Deed of Sale with Right to Repurchase drafted by petitioner’s
counsel, Atty. Bienvenido Rillo, in the following terms and conditions:
...
The title to above-described property is presently held by the Central Bank of
the Philippines and the latter has given VENDOR the privilege of getting back
which respondent spouses and petitioner signed on June 13, 1989. Immediately after
the deed was signed, and since it was the last day to redeem the property, petitioner,
the title to the above-described property by paying them the amount of TWO
MILLION SIX HUNDRED FIFTY FIVE THOUSAND (P2,655,000.00) PESOS;
VENDOR has offered to sell this property to VENDEE on condition she be
allowed to repurchase this property subject to the terms and conditions
hereinafter recited:
1. VENDEE shall pay the Central Bank of the Philippines the amount of TWO
MILLION SIX HUNDRED FIFTY FIVE THOUSAND (P2,655,000.00) PESOS
for and in behalf of VENDOR;
2. VENDOR shall have the right to repurchase the above-described property
within a period of four (4) months, without interest, which shall be extended by
another month upon request of the VENDOR;
3. During the four (4) month period or its extension VENDOR shall have the
right to re-sell the said property to any party, other than the VENDEE, who
may desire to purchase the property;
4. In the event VENDOR should fail to repurchase the property within the four
(4) months agreed upon then VENDEE, notwithstanding the extended period,
shall pay interest at the rate of four (4%) percent per month reckoned from the
execution of this document;
5. In the event VENDOR shall repurchase the property at any time before the
expiration of four (4) months or its extended period the VENDOR shall pay
interest on the amount at the rate of four (4%) percent per month reckoned
from the signing of this Agreement;
6. Should VENDOR fail to comply with the foregoing terms and conditions then
the property shall by virtue thereof become the property of VENDEE;
7. All expenses to be incurred as a result of this transaction such as
documentary stamps, transfer fee, capital gains tax and documentation fees,
shall be for the account of VENDOR;
NOW, THEREFORE, for and in consideration of the foregoing, VENDOR
hereby sells, cedes, transfers and conveys unto the VENDEE the above-
described parcel of land together with all the improvement thereon fall (sic)
from any lien and encumbrances. VENDOR hereby warrants the property is
not devoted to the cultivation of palay or corn nor is it covered by the priority
development program of the government.
with her lawyer, Atty. Rillo, and respondent Francisco went to the Central Bank and
with petitioner’s check paid the amount of P2,655,000.00 to the bank for and in behalf
of respondents. A Deed of Absolute Sale was executed between PSLB’s Liquidator,
Renan V. Santos, and respondent spouses, as original owners, over the subject
property on June 13, 1989. Respondent Francisco then wrote the Deputy Liquidator of
PSLB, Central Bank, to release the Deed of Sale and the title to the subject property to
petitioner as his authorized representative. Petitioner received the documents on June
19, 1989.
In arriving at its decision, the trial court made the following disquisition:
On September 26, 1989, petitioner wrote respondents a letter reminding them that the
four-month period to repurchase the subject property will expire on October 12, 1989
and that failure to pay the amount of P2,655,000.00 on its due date will force her to
take the corresponding action to consolidate title on the property in her name. On
November 23, 1989, petitioner’s counsel wrote respondents a letter informing them
that petitioner, acting on their request for extension of a week’s time to repurchase the
subject property, consented to give them up to November 28, 1989. However,
respondent spouses failed to redeem the subject property from petitioner within the
period given them. Despite the expiration of the period to repurchase, petitioner still
granted respondent spouses opportunity to repurchase the subject property in a letter
dated April 14, 1990, where petitioner’s counsel demanded for the payment of the
amount of P2,655,000.00 plus all the interest due thereon within five days from receipt
otherwise, necessary legal action will be taken to transfer ownership in petitioner’s
name.
In October 1990, petitioner filed a petition for consolidation of ownership before the
Regional Trial Court (RTC) of Manila, which was raffled to Branch 39, docketed as
Civil Case No. 90-54623. Petitioner prayed for the cancellation of TCT No. 182956 and
for the issuance of a new title in her name, attorney’s fees and cost of suit.
In their answer with compulsory counterclaim, respondent spouses alleged that the
Deed of Sale with Right to Repurchase did not reflect the true intention of the parties
because the document was actually an equitable mortgage with illegal
provision, i.e., pactum commissorium; that petitioner has no cause of action against
respondents; that there was non-joinder of the real party-in-interest; that the Court has
no jurisdiction over the case; that relief sought will cause undue enrichment on
respondents as the subject property claimed was worth P15 million. They prayed for
the dismissal of the petition and asked for damages, attorney’s fees and costs of the
suit as counterclaim.
On July 6, 1993, the RTC rendered its decision in favor of petitioner, the dispositive
portion of which reads:
WHEREFORE, in view of the foregoing, judgment is hereby rendered ordering
the consolidation of title in the name of petitioner Bernice Legaspi and the
Register of Deeds of the City of Manila is hereby ordered to cancel Transfer
Certificate of Title No. 182956, issued in the name of Permanent Savings and
Loan Bank, and in lieu thereof, a new one be issued in the name of petitioner
BERNICE LEGASPI upon payment of the corresponding charges.
Respondents are hereby ordered to pay attorney’s fees in the sum
of P25,000.00.
Respondents’ counterclaim is hereby DISMISSED for lack of merit. With costs
against respondents.
The main controversy centers on the true nature of Exhibit "C", the Deed of
Absolute Sale with Right to Repurchase. The Court examines Exhibit "C", and
finds it clear, unambiguous and unequivocal. If the terms of the contract are
clear and leave no doubt upon the intention of the contracting parties, the
literal meaning of the stipulation shall control (Art. 1370 CC). The intention of
the parties is to be deduced from the language employed by them and the
terms of the contract found unambiguous, are conclusive in the absence of
averment and proof of mistake, the question being not what intention existed
in the minds of the parties but what intention is expressed by the language
used. When the words of a contract are plain and readily understandable,
there is no room for construction (Dihiasan, et al. vs. CA, G.R. 49839, Sept.
14, 1987).
According to Rita Ong who admitted having signed the document she trusted
Mr. Hong as her husband’s former classmate. There is a presumption in law
that a person takes ordinary care of his concern (Rule 131, Sec. 5(d), Revised
Rules of Evidence). It is to be presumed that Rita Ong a pharmacy and
medical technology graduate would not sign a document without being
satisfied of the contents thereof. She knew fully well what she was signing.
Rita Ong admitted on the stand that the matter was discussed in the residence
of the petitioner in the presence of her husband and Mr. Hong. She was
completely aware, therefore, that she was executing a document, a Deed of
Sale with Right to Repurchase. If she did not like its contents, she could easily
refrain from signing the document. After signing the document, she cannot
now be heard to complain that the parties to said exhibit intended the same to
be loan with mortgage contrary to what are clearly expressed therein. The
natural presumption is that one does not sign a document without first
informing himself of its contents. It is the duty of every contracting party to
learn and know the contents of a contract before he signs and delivers it. He
owes this duty to the other party to the contract because the latter may
probably pay his money and shape his action in reliance upon the agreement.
To permit a party when sued on a written contract to admit that he signed it but
to deny that it expresses the agreement he made or to allow him to admit that
he signed it but did not read it or know its stipulation could absolutely destroy
the value of all contracts. (Tan Tun Sia vs. Yu Bin Sentua, 56 Phil. 711).
 The Court rejects respondents’ Exhibits "11", "11-A" and "12" to show the
inadequacy of the price considering that evaluation of P4,500.00 per square
meter and the appraisal of P15M were not made on or before June 13, 1989,
the date the contract was executed by the parties. The evidence shows that
the lot in question is titled in the name of Permanent Savings and Loan Bank
for P2,655,000.00 and was paid by the petitioner in such amount. Said amount
is approximately 50% of their total assessed value of P1,016,580.00 (Exhibit
"D") as appearing in the tax declaration. A difference in value is not always a
decisive factor for determining whether or not the contract is one of sale with
right to repurchase or equitable mortgage.
After the sale on June 13, 1989, Spouses Ong did not pay the real estate
taxes on the land.
The records show that after the expiration of respondents’ right to repurchase
the lot, demands were made but were completely ignored, hence, the filing of
this case and the unlawful detainer with the Metropolitan Trial Court (Exhibit
"E").
Assessing the evidence on record, the Court declares that the contract
entered into by the petitioner and respondents Spouses Ong is one of a sale
with right to repurchase, as supported by the evidence on record.
Respondents Ongs had already parted with their property when the mortgage
was foreclosed by Permanent Savings and Loan Bank for P2,655,000.00
which was the price of the lot and, therefore, having discussed the transaction
with the petitioner prior to the preparation of the contract, respondents cannot
now repudiate what they have done. Since petitioner was forced to litigate to
enforce her right under the contract, respondent spouses Ong should pay
reasonable attorney’s fees.
Respondent spouses’ motion for reconsideration was denied in an Order dated
November 25, 1993.
At the time that the proceedings for the petition for consolidation of ownership were on-
going, petitioner, on February 14, 1991, claiming her right to possess the subject
property on the basis of respondents’ failure to repurchase the subject property had
filed an unlawful detainer case against respondents before the Metropolitan Trial Court
(MeTC), Branch 19, Manila, docketed as Civil Case No. 134770-CV. The MeTC
decided against respondent spouses on September 1, 1993 whereby respondent
spouses were ordered to vacate the subject property and surrender possession thereof
to petitioner; to pay P25,000.00 a month from February 13, 1991 as reasonable
compensation for the use and occupancy of the subject property until possession is
surrendered to petitioner; and attorney’s fees plus cost of the suit. The MeTC granted
the motion for execution filed by petitioner and issued a writ of execution on October 8,
1993. Possession of the subject property was delivered by the sheriff to petitioner’s
father on October 11, 1993. Respondent spouses’ appeal with the RTC was dismissed
in an Order dated March 9, 1994 for being moot and academic as the respondents had
already abandoned the property and possession thereof was turned over to petitioner
and ordered that the records be remanded to the court a quo for execution of its own
judgment.
As respondents were aggrieved by the decision of the RTC granting the consolidation
of title in petitioner’s name, respondent spouses appealed to the CA. During the
pendency of respondents’ appeal, petitioner filed a motion for execution pending
appeal of the RTC’s decision dated July 6, 1993. The appellate court granted the
motion for execution pending appeal in a Resolution dated December 1, 1994, subject
to the posting of a bond in the amount of P50,000.00. It anchored its judgment on the
following findings: (1) the property had been adjudged by the trial court to be owned by
petitioner who paid the purchase price to the bank; (2) the ejectment case filed by
petitioner against respondents was decided by the MeTC in favor of the former by
ordering respondents to vacate the property, to pay P25,000.00 a month from February
13, 1991, as compensation for the use of the property and to surrender possession, in
addition to attorney’s fees; (3) possession of the property was already delivered to
petitioner and that respondents had already abandoned the premises "much earlier";
(4) upon inspection made by the sheriff, it was found that the house was destroyed,
cannibalized and stripped of vital fixtures and furnitures; (5) major repairs had to be
undertaken at "quite staggering cost"; (6) realty taxes were not paid by respondents
from 1989 up to the present nor did they pay the capital gains tax, transfer fee,
documentary stamps and documentation fees even though there was an agreement for
such payment; (7) taxes due on the property, and surcharges on overdue payment
continue to accumulate which endangered the property and the possibility of its being
lost through auction sale; and (8) the grant of execution pending appeal would then
bind the petitioner to preserve the property and to return it to respondents should the
appeal be in their favor.
Respondent spouses filed their motion for reconsideration which was denied by the CA
in a Resolution dated June 30, 1995. As a consequence, the Register of Deeds of
Manila cancelled TCT No. 182956 in the name of PSLB and issued TCT No. 219397 in
petitioner’s name.
On July 30, 1998, the CA rendered herein assailed decision reversing the RTC
decision dated July 6, 1993, the dispositive portion of which reads:
Wherefore, judgment is hereby rendered setting aside the decision of the court
a quo dated July 6, 1993 in Civil Case No. 90-54623 and dismissing the
complaint of plaintiff-appellee.
The appellants are hereby ordered to redeem the property from appellee in the
amount of P2,655,000.00 with legal interest computed from the time the sale
of redemption fell due up to the time the obligation is fully paid.
 Appellee is hereby ordered to pay appellants the monthly rent of the subject
premises from October 1993 up to the time possession thereof is turned over
to appellant, which is hereby fixed in the amount of P25,000.00 a month;
attorney’s fees in the amount of P100,000.00; and the cost of suit.
The appellate court’s reversal was based on the following findings:
Art. 1602. The contract shall be presumed to be an equitable mortgage, in any
of the following cases:
(1) When the price of a sale with right to repurchase is unusually
inadequate;
(2) When the vendor remains in possession as lessee or otherwise;
(3) When upon or after the expiration of the right to repurchase
another instrument extending the period of redemption or granting a
new period is executed;
(4) When the purchaser retains for himself a part of the purchase
price;
(5) When the vendor binds himself to pay the taxes on the thing sold;
(6) In any other case where it may be fairly inferred that the real
intention of the parties is that the transaction shall secure the payment
of a debt or the performance of any other obligation.
In any of the foregoing cases, any money, fruits, or other benefit to be
received by the vendee as rent or otherwise shall be considered as interest
which shall be subject to the usury laws.
From the aforecited provisions, it is clear that the contract executed between
the parties is one of equitable mortgage. The law requires anyone, and not the
concurrence of all the circumstances mentioned therein to conclude that the
transaction is one of equitable mortgage. It is clear from the records of the
case, that appellants remained in possession of the property even after the
execution of the contract, aside from the fact that the amount in the document
purportedly the consideration of the sale was only P2.6 Million, while the
property commands the price of P16 Million (Exhs. 12-12-U; TSN, August 12,
1992, pp. 16-17, 19), hence, there was gross inadequacy of the price.
Likewise, the deed stipulates the payment of interest (TSN, April 27, 1992, p.
40; TSN, May 28, 1992, p. 31), and there were a number of extensions of time
given by the appellee for the payment by appellants of the sum of P2.6 Million
(TSN, Sept. 30, 1991, pp. 5-6, 54-56).
These circumstances proven by the appellants to show that the agreement
was not sale with right to repurchase but one of equitable mortgage are
conclusive. On the other hand, appellee failed to rebut these pieces of
evidence.
...
The extensions of the original period of redemption as contained in pars. 2, 3
and 5 of the Deed of Sale with Right to Repurchase are indicative that the
instrument was one of equitable mortgage. As ruled by the Supreme Court in
Reyes vs. De Leon, 20 SCRA 639 and Burdalian vs. CA, 129 SCRA 645, it
said that –
It is well-settled that extension of the period of redemption is indicative
of equitable mortgage.
After a careful evaluation of the above-stated circumstances, this Court finds
the present case to exhibit several of the familiar badges of a concealed
mortgage enumerated by Art. 1602 of the Civil Code. According to the said
provisions of the Civil Code, presence of any of the circumstances
enumerated would be sufficient enough to declare the transaction of absolute
sale as one impressed with an equitable mortgage. In the instant case there is
even more than one circumstance indicating an equitable mortgage . . .
It has also been convincingly shown that appellants were badly in need of
money at the time of the transaction because they wanted to redeem the
property and the deadline within which to do that had almost been up. This
circumstance is likewise conclusive of the fact that "a pacto de retro sale may
be deemed an equitable mortgage when executed due to urgent necessity for
money of the apparent vendor."
The CA denied petitioner’s motion for reconsideration in a Resolution dated January 4,
2000.
Petitioner filed the instant petition for review on certiorari on the question of whether a
Deed of Sale with Right To Repurchase may be interpreted as one of equitable
mortgage as found by the CA.
As a rule, only questions of law may be raised in a petition for review under Rule 45 of
the Rules of Court, nonetheless factual issues may be entertained by this Court in
exceptional cases. These include instances where the findings of fact are conflicting or
when the findings of the CA are contrary to those of the trial court, as in the present
case. We are constrained to go over the records of the case and examine the
arguments of the parties in their pleadings.
We have consistently decreed that the nomenclature used by the contracting parties to
describe a contract does not determine its nature. Decisive for the proper
determination of the true nature of the transaction between the parties is the intent of
the parties, as shown not necessarily by the terminology used in the contract but by all
the surrounding circumstances, such as the relative situations of the parties at that
time; the attitudes, acts, conduct, and declarations of the parties; the negotiations
between them leading to the deed; and generally, all pertinent facts having a tendency
to fix and determine the real nature of their design and understanding.
Even if a contract is denominated as a pacto de retro, the owner of the property may
still disprove it by means of parol evidence, provided that the nature of the agreement
is placed in issue by the pleadings filed with the trial court. It must be stressed,
however, that there is no conclusive test to determine whether a deed absolute on its
face is really a simple loan accommodation secured by a mortgage. In fact, it is often a
question difficult to resolve and is frequently made to depend on the surrounding
circumstances of each case. When in doubt, courts are generally inclined to construe a
transaction purporting to be a sale as an equitable mortgage, which involves a lesser
transmission of rights and interests over the property in controversy.
Art. 1602 of the Civil Code enumerates the instances when a contract, regardless of its
nomenclature, may be presumed to be an equitable mortgage. They are as follows: (a)
when the price of a sale with right to repurchase is unusually inadequate; (b) when the
vendor remains in possession as lessee or otherwise; (c) when upon or after the
expiration of the right to repurchase another instrument extending the period of
redemption or granting a new period is executed; (d) when the purchaser retains for
himself a part of the purchase price; (e) when the vendor binds himself to pay the taxes
on the thing sold; and, (f) in any other case where it may be fairly inferred that the real
intention of the parties is that the transaction shall secure the payment of a debt or the
performance of any other obligation. Art. 1603 provides that in case of doubt, a
contract purporting to be a sale with right to repurchase shall be construed as an
equitable mortgage.
The presence of even one of the above-mentioned circumstances as enumerated in
Article 1602 is sufficient basis to declare a contract of sale with right to repurchase as
one of equitable mortgage. As stated by the Code Commission which drafted the new
Civil Code, in practically all of the so-called contracts of sale with right of repurchase,
the real intention of the parties is that the pretended purchase price is money loaned
and in order to secure the payment of the loan, a contract purporting to be a sale
with pacto de retro is drawn up.
The CA found the presence of four circumstances in the transaction on which bases it
ruled that the transaction was an equitable mortgage, to wit: (a) respondents remained
in possession of the subject property even after the execution of the contract; (b) there
was gross inadequacy of price of P2,655,000.00 as contract price since the property
commands the price of P16 million; (c) extensions of the original period of redemption;
and (d) stipulation of interest.
We agree with the finding of the CA that the transaction between respondents and
petitioner was not a sale with right to repurchase but an equitable mortgage.
Petitioner argues that Article 1602 does not apply in the instant case; that petitioner
was the one who purchased the subject property from PSLB, the registered owner, for
and in behalf of respondents; that since the ownership had been consolidated in PSLB
and the title was in PSLB’s name as early as November 10, 1988, respondents were
no longer the owners of the subject property at the time the Deed of Sale with Right To
Repurchase was executed by respondents in favor of petitioner on June 13, 1989; that
respondents can no longer constitute a mortgage on the subject property; that
respondents had the personality to sell the property only because they were the
original owners who were favored by the Bank with the first option but it was
petitioner’s money that was used in buying back the subject property. Petitioner also
claims that there was never any loan between the parties as money was not given by
one to the other since petitioner paid her money directly to the bank, thus debt which is
a condition sine qua non of an equitable mortgage was absent.
We are not persuaded.
While it is true that the title to the subject property was consolidated in PSLB’s name as
early as 1988, the property was bought back by respondent spouses, the original
owners, who were given the first option to buy it during PSLB’s liquidation.
Respondents were given up to June 13, 1989 to buy back the property and since they
had no money, they had to approach petitioner’s father to help them in their
predicament. As respondents were able to redeem the subject property with the use of
petitioner’s money, a deed of sale was executed by the Liquidator in favor of
respondent spouses on June 13, 1989, the last day given to respondents to buy back
the property. Since the money came from petitioner, respondent spouses, as owners,
had executed a document, which was denominated as a Deed of Sale with Right to
Repurchase, which was prepared by petitioner’s counsel and signed by the parties also
on June 13, 1989. It can be seen that the transactions are intimately related and they
were even embodied in the deed of sale with right to repurchase, to wit:
The title to above-described property is presently held by the Central Bank of
the Philippines and the latter has given VENDOR the privilege of getting back
the title to the above-described property by paying them the amount of TWO
MILLION SIX HUNDRED FIFTY FIVE THOUSAND (P2,655,000.00) PESOS;
VENDOR has offered to sell this property to VENDEE on condition she be
allowed to repurchase this property subject to the terms and conditions
hereinafter recited:
1. VENDEE shall pay the Central Bank of the Philippines the amount
of TWO MILLION SIX HUNDRED FIFTY FIVE THOUSAND
(P2,655,000.00) PESOS for and in behalf of VENDOR;
Clearly, the deed of sale with right to repurchase was precisely executed by
respondents to secure the money paid by petitioner for and in behalf of respondents to
PSLB Liquidator to buy back the subject property, i.e., as equitable mortgage. Notably,
respondent spouses bought back the subject property in the amount of P2,655,000.00
and sold the same to petitioner at exactly the same amount they paid to PSLB
Liquidator. If the intention of the respondent spouses were to sell, they could have at
least earned some profit or interest on such sale, otherwise, they could have just
allowed PSLB Liquidator to sell it to anybody in a public bidding. Respondents wanted
to hold on to their property and not to part with it by selling the same.
Petitioner claims that respondents expressly recognized their intention to sell the
subject property to her when they executed a letter requesting the bank Liquidator to
release the Deed of Sale executed between the bank and respondents as well as the
duplicate copy of the title to petitioner.
We are not impressed.
Respondent Francisco wrote Deputy Liquidator Leopoldo Ramos and requested him to
release the deed of sale and title to the subject property to petitioner as his authorized
representative. There was nothing in the letter that would show that respondents
acknowledged petitioner as the new owner of the property.
Although, we do not agree with the CA that the price of the sale with right to
repurchase is grossly inadequate since the appraisal of the property in the amount of
more than P16 million was not made on or before June 13, 1989, the date the contract
was executed by the parties, but only on July 24, 1992, we find in the transaction the
presence of some other circumstances enumerated in Art. 1602 of the Civil Code
which would establish that the transaction was an equitable mortgage rather than sale.
Respondent spouses, as vendors, remained in the possession of the subject property
even after the execution of the deed of sale with right to repurchase. Well settled to the
point of being elementary is the doctrine that where the vendor remains in physical
possession of the land as lessee or otherwise, the contract should be treated as an
equitable mortgage. If the deed executed was really what it purports to be, a sale with
right to repurchase, petitioner should have asserted her right for the immediate delivery
of the subject property to her so that she would have the enjoyment and possession of
the same, since petitioner, during those times, was renting a place in New Manila,
Quezon City, and not allowed respondents to freely stay in the premises.
Notably, in all the letters of petitioner and her lawyer, i.e., reminding respondents that
the period to repurchase was about to lapse and later the extension of period to
repurchase and demands for respondents to repurchase the property in the amount
of P2,655,000.00 plus interest within a certain period, were sent to respondents’
address which is the subject property, without registering any objection on
respondents’ continuous possession of the same. In effect, petitioner acknowledged
respondents’ right to retain possession of the subject property even after the execution
of the "pacto de retro sale." It was only on January 14, 1991 that petitioner made a
demand for respondents to vacate the subject property after respondents failed to
"repurchase" the property.
Another circumstance is the fact that the period to repurchase the subject property was
extended by petitioner. In the letter dated November 23, 1989 to respondents by
petitioner’s counsel, Atty. Rillo, he stated that petitioner had consented to respondents’
request for an extension of time to repurchase the subject property by giving them up
to November 28, 1989. In fact, even in the petition for consolidation itself, petitioner
stated that despite the expiration of the right to repurchase on November 28, 1989,
petitioner still granted respondent spouses opportunity to repurchase the subject
property in a letter dated April 14, 1990 by paying the amount due thereon. Moreover,
petitioner, on cross-examination, even admitted that more than one extension was
given for the respondents to repurchase. It is well settled that extension of the period
of redemption is indicative of equitable mortgage.
Petitioner claims that there was no separate instrument extending the period of
redemption granting a new period executed between the parties. Petitioner through her
counsel wrote Exhibit "I" extending the period of redemption. In Claravall vs. Court of
Appeals, we held that a note executed extending a period of redemption is indicative of
equitable mortgage.
Also, we find that there was no transmission of ownership to the vendee. As stated in
the deed, to wit:
8. Should VENDOR fail to comply with the foregoing terms and conditions then
the property shall by virtue thereof become the property of VENDEE;
This stipulation is contrary to the nature of a true pacto de retro sale since ownership of
the property sold is immediately transferred to the vendee a retro upon execution of the
sale, subject only to the repurchase of a vendor a retro within the stipulated period.
Such stipulation is considered a pactum commissorium enabling the mortgagee to
acquire ownership of the mortgaged properties without need of foreclosure
proceedings which is a nullity being contrary to the provisions of Article 2088 of the
Civil Code. The inclusion of such stipulation in the deed shows the intention to
mortgage rather than to sell.
Moreover, the following provision, to wit:
3. During the four (4) month period or its extension VENDOR shall have the
right to re-sell the said property to any party, other than the VENDEE, who
may desire to purchase the property;
of the subject deed is a concrete revelation of the real intention of the parties, as
contemplated in paragraph (6) of Article 1602 of the Civil Code, that the transaction
was merely to secure the payment of a debt. A purchaser like the petitioner would not
allow the respondent spouses, as the purported vendors, to re-sell the property to any
party who may desire to purchase the property. This clearly indicates that petitioner
recognized the right of respondent spouses to exercise their ownership of the property.
Petitioner contends that the assailed decision of the CA runs counter with the findings
of the same appellate court in the Resolution dated December 1, 1994 granting
petitioner’s motion for execution pending appeal.
While the appellate court had earlier issued a Resolution granting the motion for
execution pending appeal which upheld the trial court’s findings that the transaction
between the parties was one of sale, such finding did not preclude the same appellate
court from making its final judgment on the appealed case after a review of the
evidence. The nature of the transaction is the very issue raised in the appeal filed by
the respondents. Execution pending appeal does not bar the continuance of the appeal
on the merits, for the Rules of Court precisely provides for restitution according to
equity in case the executed judgment is reversed on appeal.
Appellate Court, 188 SCRA 170 [1990]). The reason for the award must be
stated in the text of the court’s decision. If it is stated only in the dispositive
portion of the decision, the same shall be disallowed. As to the award of
attorney’s fees being an exception rather than the rule, it is necessary for the
court to make findings of fact and law that would bring the case within the
exception and justify the grant of the award. Refractories Corporation of the
Philippines v. Intermediate Appellate Court, 176 SCRA 539 [1989].
WHEREFORE, the petition is PARTIALLY GRANTED. The decision of the Court of
Appeals is AFFIRMED with MODIFICATION to the effect that the award of monthly
rentals on the subject property and attorney’s fees in favor of respondents is
DELETED.
SO ORDERED.

We find no basis for the CA to order petitioner to pay respondents the monthly rent
of P25,000.00 for the former’s possession of the subject property from October 1993
up to the time the property is surrendered to respondents. The origin of this petition for
review is the petition for consolidation of ownership filed by petitioner which was
granted by the trial court since it found that the transaction between respondents and
petitioner is a sale. Respondents then filed their appeal with the CA. An examination of
the appellants’ (respondents’) brief filed before the appellate court merely claimed that
they are the ones entitled to the damages and attorney’s fees without mention of any
back rentals. In fact, in the prayer in their brief, respondents merely asked that another
judgment be rendered dismissing the plaintiff’s (petitioner’s) complaint. Moreover, the
appellate court did not make any discussion on the basis of how it arrived in the
amount of P25,000.00 as monthly rental since the same was only mentioned in the
dispositive portion of the decision. Courts in making an award must point out specific
facts which can serve as basis for measuring whatever compensatory or actual
damages are borne.

We also disallow the award of attorney’s fees as the appellate court merely stated such
award in the dispositive portion without explicitly stating in the text of the decision the
legal reason for such award. In Consolidated Bank & Trust Corporation (Solidbank) vs.
Court of Appeals, we held:

The award of attorney’s fees lies within the discretion of the court and depends
upon the circumstances of each case. However, the discretion of the court to
award attorney’s fees under Article 2208 of the Civil Code of the Philippines
demands factual, legal and equitable justification, without which the award is a
conclusion without a premise and improperly left to speculation and
conjecture. It becomes a violation of the proscription against the imposition of
a penalty on the right to litigate (Universal Shipping Lines Inc. v. Intermediate
THIRD DIVISION It appears that on August 22, 2000, Premiere Bank sent a letter to Central Surety
demanding payment of the ₱6,000,000.00 loan, to wit:
G.R. No. 176246 February 13, 2009
August 22, 2000
PREMIERE DEVELOPMENT BANK, Petitioner,
vs. CENTRAL SURETY AND INSURANCE CO.
CENTRAL SURETY & INSURANCE COMPANY, INC., Respondent. 2nd Floor Universalre Bldg.
No. 106 Paseo de Roxas, Legaspi Village
DECISION Makati City

NACHURA, J.: Attention: Mr. Constancio T. Castaneda, Jr.

President
Before us is a petition for review on certiorari assailing the Court of Appeals (CA)
Decision in CA-G.R. CV No. 85930, which reversed and set aside the decision of the Mr. Engracio T. Castaneda
Regional Trial Court (RTC), Branch 132, Makati City in Civil Case No. 0051306. Vice President

On August 20, 1999, respondent Central Surety & Insurance Company (Central -------------------------------------------------
Surety) obtained an industrial loan of ₱6,000,000.00 from petitioner Premiere
Development Bank (Premiere Bank) with a maturity date of August 14, 2000. This Gentlemen:
₱6,000,000.00 loan, evidenced by Promissory Note (PN) No. 714-Y, stipulates
payment of 17% interest per annum payable monthly in arrears and the principal This has reference to your overdue loan of ₱6.0 Million.
payable on due date. In addition, PN No. 714-Y provides for a penalty charge of 24%
interest per annum based on the unpaid amortization/installment or the entire unpaid
We regret to inform you that despite efforts to restructure the same, you have failed up
balance of the loan. In all, should Central Surety fail to pay, it would be liable to
to this time, to submit the required documents and come up with equity necessary to
Premiere Bank for: (1) unpaid interest up to maturity date; (2) unpaid penalties up to
implement the restructuring scheme.
maturity date; and (3) unpaid balance of the principal.

To secure payment of the ₱6,000,000.00 loan, Central Surety executed in favor of In view thereof, we regret that unless the above loan is settled on or before five (5)
Premiere Bank a Deed of Assignment with Pledge covering Central Surety’s days from the date hereof, we shall exercise our option to have the Stock Certificate
Membership Fee Certificate No. 217 representing its proprietary share in Wack Wack No. 217 with Serial No. 1793 duly issued by Wack Wack Golf and Country Club, Inc.
Golf and Country Club Incorporated (Wack Wack Membership). In both PN No. 714-Y transferred in the name of Premiere Development Bank in accordance with the terms
and Deed of Assignment, Constancio T. Castañeda, Jr. and Engracio T. Castañeda, and conditions of the Deed of Assignment with Pledge executed in favor of Premiere
Development Bank.
president and vice-president of Central Surety, respectively, represented Central
Surety and solidarily bound themselves to the payment of the obligation.
We shall appreciate your prompt compliance.
Parenthetically, Central Surety had another commercial loan with Premiere Bank in the
amount of ₱40,898,000.00 maturing on October 10, 2001. This loan was, likewise, Very truly yours,
evidenced by a PN numbered 376-X and secured by a real estate mortgage over
Condominium Certificate of Title No. 8804, Makati City. PN No. 376-X was availed of (sgd.)
through a renewal of Central Surety’s prior loan, then covered by PN No. 367-Z. As IGNACIO R. NEBRIDA, JR.
with the ₱6,000,000.00 loan and the constituted pledge over the Wack Wack Senior Asst. Vice President/
Membership, the ₱40,898,000.00 loan with real estate mortgage was transacted by Business Development Group - Head
Constancio and Engracio Castañeda on behalf of Central Surety.
Posthaste, Central Surety responded and sent the following letter dated August 24,
2000:
24 August 2000 2nd Floor Universalre Bldg. No. 106
Paseo de Roxas, Legaspi Village, Makati City
Mr. Ignacio R. Nebrida, Jr.
Senior Asst. Vice President/ RE: YOUR COMMERCIAL LOAN OF ₱40,898,000.00 &
Business Development Group – Head ₱6,000,000.00 WITH PREMIERE DEVELOPMENT BANK
Premiere Bank UNDER ACCOUNT NOS. COM-367-Z AND COM 714-Y
EDSA cor. Magallanes Avenue
Makati City **************************************************

Sir: Dear Sirs:

With reference to this 6.0 Million loan account, we have informed Ms. Evangeline We write on behalf of our client, Premiere Development Bank, in connection with your
Veloira that we are intending to settle the account by the end of September. As of 14 above-captioned loan account.
August 2000 we made payment to your bank as per receipt attached.
While our client has given you all the concessions, facilities and opportunities to
As you may know, present conditions have been difficult for the insurance industry service your loans, we regret to inform you that you have failed to settle the same
whose performance is so closely linked to the nation’s economic prosperity; and we are despite their past due status.
now asking for some consideration and leeway on your very stiff and immediate
demands.
In view of the foregoing and to protect the interest of our client, please be advised that
unless the outstanding balances of your loan accounts as of date plus interest,
Kindly extend to us your favorable approval. penalties and other fees and charges are paid in full or necessary arrangements
acceptable to our client is made by you within ten (10) days from date hereof, we shall
Very truly yours, be constrained much to our regret, to file foreclosure proceedings against the collateral
of the loan mortgaged to the Bank or pursue such action necessary in the premises.
(sgd.)
ENGRACIO T. CASTANEDA We trust, therefore, that you will give this matter your preferential attention.
Vice-President
Very truly yours,
Accordingly, by September 20, 2000, Central Surety issued Bank of Commerce (BC)
Check No. 08114 dated September 22, 2000 in the amount of ₱6,000,000.00 and (sgd.)
payable to Premiere Bank. The check was received by Premiere Bank’s Senior PACITA M. ARAOS
Account Manager, Evangeline Veloira, with the notation "full payment of loan-Wack (italics supplied)
Wack," as reflected in Central Surety’s Disbursement Voucher. However, for
undisclosed reasons, Premiere Bank returned BC Check No. 08114 to Central Surety,
The very next day, on September 29, 2000, Central Surety, through its counsel, wrote
and in its letter dated September 28, 2000, demanded from the latter, not just payment
Premiere Bank and re-tendered payment of the check:
of the ₱6,000,000.00 loan, but also the ₱40,898,000.00 loan which was originally
covered by PN No. 367-Z. In the same letter, Premiere Bank threatened foreclosure of
the loans’ respective securities, the pledge and real estate mortgage, should Central 29 September 2000
Surety fail to pay these within ten days from date, thus:
PREMIERE BANK
28 September 2000 EDSA cor. Magallanes Avenue
Makati City
CENTRAL SURETY & INSURANCE CO.
By: Constancio T. Castañeda Jr. – President
Engracio T. Castañeda – Vice President
Attention: Mr. Ignacio R. Nebrida, Jr. Dear Atty. Cua:
Senior Asst. Vice President/
Business Development Group – Head Thank you for your two (2) letters both dated 29 September 2000 on behalf of your
clients with the enclosed check nos. 0008114 and 0008115 for the total of
Re : Promissory Note No. 714-Y ₱8,600,000.00.

Sir:
This is further to our client’s letter to you dated 24 August 2000, informing you that it
would settle its account by the end of September 2000.
Please be advised that on 20 September 2000 our client delivered to your bank BC
cheque no. 08114 payable to Premiere Bank in the amount of SIX MILLION PESOS
(₱6,000,000.00), which was received by your Senior Account Manager, Ms.
Evangeline Veloira. However, for unexplained reasons the cheque was returned to us.
As previously relayed to your client, Premiere Bank cannot accept the two (2) checks
as full settlement of the obligation under Account Nos. PN #714-Y and PN # 717-X, as
the amount is insufficient.
In accordance with the terms and conditions of the Promissory Notes executed by your
clients in favor of Premiere Development Bank, we have applied the two (2) checks to
the due obligations of your clients as follows:
1) Account No.: COM 235-Z ₱1,044,939.45

We are again tendering to you the said cheque of SIX MILLION PESOS 2) Account No.: IND 717-X ₱1,459,693.15
(₱6,000,000.00), in payment of PN#714-Y. Please accept the cheque and issue the
corresponding receipt thereof. Should you again refuse to accept this cheque, then I 3) Account No.: COM 367-Z ₱4,476,200.18
shall advise my client to deposit it in court for proper disposition.
4) Account No.: COM 714-Y ₱1,619,187.22
Thank you.
TOTAL ₱8,600,000.00
Very truly yours,
We are enclosing Xerox copy each of four (4) official receipts covering the above
(sgd.) payments. The originals are with us which your clients or their duly authorized
EPIFANIO E. CUA representative may pick-up anytime during office hours.
Counsel for Central Surety & Insurance Company
(italics supplied)
We shall appreciate the settlement in full of the accounts of your client or necessary
arrangements for settlement thereof be made as soon as possible to put the accounts
On even date, a separate letter with another BC Check No. 08115 in the amount of on up to-date status.
₱2,600,000.00 was also tendered to Premiere Bank as payment for the Spouses
Engracio and Lourdes Castañeda’s (Spouses Castañeda’s) personal loan covered by
Thank you.
PN No. 717-X and secured by Manila Polo Club, Inc. membership shares.

Very truly yours,

On October 13, 2000, Premiere Bank responded and signified acceptance of Central
Surety’s checks under the following application of payments:
(sgd.)
13 October 2000 MS. ELSA M. SAPAPO
Manager
Loans Accounting and
ATTY. EPIFANIO E. CUA Control Department
2/F Universalre Condominium
106 Paseo de Roxas
Legaspi Village, Makati City
Significantly, the ₱8,600,000.00 check payments were not applied in full to Central
Surety’s ₱6,000,000.00 loan under PN No. 714-Y and the Spouses Castañeda’s
personal loan of ₱2,600,000.00 under PN No. 717-X. Premiere Bank also applied
proceeds thereof to a commercial loan under PN No. 235-Z taken out by Casent Realty
and Development Corporation (Casent Realty), and to Central Surety’s loan originally
covered by PN No. 367-Z, renewed under PN No. 376-X, maturing on October 20,
2001.
Strongly objecting to Premiere Bank’s application of payments, Central Surety’s
counsel wrote Premiere Bank and reiterated Central Surety’s demand for the
application of the check payments to the loans covered by PN Nos. 714-X and 714-Y.
Additionally, Central Surety asked that the Wack Wack Membership pledge, the
security for the ₱6,000,000.00 loan, should be released.
In the final exchange of correspondence, Premiere Bank, through its SAVP/Acting
Head-LGC, Atty. Pacita Araos, responded and refused to accede to Central Surety’s
demand. Premiere Bank insisted that the PN covering the ₱6,000,000.00 loan granted
Premiere Bank sole discretion respecting: (1) debts to which payments should be
applied in cases of several obligations by an obligor and/or debtor; and (2) the initial
application of payments to other costs, advances, expenses, and past due interest
stipulated thereunder.
As a result, Central Surety filed a complaint for damages and release of security
collateral, specifically praying that the court render judgment: (1) declaring Central
Surety’s ₱6,000,000.00 loan covered by PN No. 714-Y as fully paid; (2) ordering
Premiere Bank to release to Central Surety its membership certificate of shares in
Wack Wack; (3) ordering Premiere Bank to pay Central Surety compensatory and
actual damages, exemplary damages, attorney’s fees, and expenses of litigation; and
(4) directing Premiere Bank to pay the cost of suit.
On July 12, 2005, the RTC rendered a decision dismissing Central Surety’s complaint
and ordering it to pay Premiere Bank ₱100,000.00 as attorney’s fees. The RTC ruled
that the stipulation in the PN granting Premiere Bank sole discretion in the application
of payments, although it partook of a contract of adhesion, was valid. It disposed of the
case, to wit:
Now that the issue as to the validity of the stipulation is settled, [Premiere Bank] was
right in contending that it had the right to apply [Central Surety’s] payment to the most
onerous obligation or to the one it sees fit to be paid first from among the several
obligations. The application of the payment to the other two loans of Central Surety
namely, account nos. COM 367-Z and IND 714-Y was within [Premiere Bank’s] valid
exercise of its right according the stipulation.lawphil.net However, [Premiere Bank]
erred in applying the payment to the loan of Casent Realty and to the personal
obligation of Mr. Engracio Castañeda despite their connection with one another.
Therefore, [Premiere Bank] cannot apply the payment tendered by Central Surety to
the other two entities capriciously and expressly violating the law and pertinent Central
Bank rules and regulations. Hence, the application of the payment to the loan of
Casent Realty (Account No. COM 236-Z) and to the loan of Mr. Engracio Castañeda
(Account No. IND 717-X) is void and must be annulled.
As to the issue of whether or not [Central Surety] is entitled to the release of
Membership Fee Certificate in the Wack Wack Golf and Country Club, considering now
that [Central Surety] cannot compel [Premiere Bank] to release the subject collateral.
With regard to the issue of damages and attorney’s fees, the court finds no basis to
grant [Premiere Bank’s] prayer for moral and exemplary damages but deems it just and
equitable to award in its favor attorney’s fees in the sum of Php 100,000.00.
WHEREFORE, judgment is hereby rendered dismissing the complaint and ordering
[Central Surety] to pay [Premiere Bank] Php 100,000.00 as attorney’s fees. (emphasis
supplied)
On appeal by Central Surety, the CA reversed and set aside the trial court’s ruling. The
appellate court held that with Premiere Bank’s letter dated August 22, 2000 specifically
demanding payment of Central Surety’s ₱6,000,000.00 loan, it was deemed to have
waived the stipulation in PN No. 714-Y granting it the right to solely determine
application of payments, and was, consequently, estopped from enforcing the same. In
this regard, with the holding of full settlement of Central Surety’s ₱6,000,000.00 loan
under PN No. 714-Y, the CA ordered the release of the Wack Wack Membership
pledged to Premiere Bank.
Hence, this recourse by Premiere Bank positing the following issues:
WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED
REVERSIBLE AND PALPABLE ERROR WHEN IT APPLIED THE PRINCIPLE OF
WAIVER AND ESTOPPEL IN THE PRESENT CASE INSOFAR AS THE DEMAND
LETTER SENT TO [CENTRAL SURETY] IS CONCERNED NULLIFYING THE
APPLICATION OF PAYMENTS EXERCISED BY [PREMIERE BANK]
WHETHER OR NOT THE FINDING OF WAIVER AND ESTOPPEL BY THE
HONORABLE COURT OF APPEALS COULD PREVAIL OVER THE CLEAR AND
UNMISTAKABLE STATUTORY AND CONTRACTUAL RIGHT OF [PREMIERE BANK]
TO EXERCISE APPLICATION OF PAYMENT AS WARRANTED BY THE
PROMISSORY NOTE
EVEN ASSUMING EX GRATIA THAT THE 6 MILLION SHOULD BE APPLIED TO
THE SUBJECT LOAN OF RESPONDENT, WHETHER OR NOT THE SUBJECT
WACK-WACK SHARES COULD BE RELEASE[D] DESPITE THE CROSS DEFAULT
AND CROSS GUARANTEE PROVISIONS OF THE DEED OF ASSIGNMENT WITH
PLEDGE AND RELEVANT REAL ESTATE MORTGAGE CONTRACTS EXECUTED
BY [CENTRAL SURETY], CASENT REALTY AND SPS. CASTAÑEDA.
WHETHER OR NOT THERE IS A VALID TENDER OF PAYMENT AND
CONSIGNATION OF THE SUBJECT TWO CHECK PAYMENTS BY [CENTRAL
SURETY].
WHETHER OR NOT, AS CORRECTLY FOUND BY THE COURT A QUO [CENTRAL
SURETY] IS ESTOPPED FROM CONTESTING THE STIPULATIONS OR
PROVISIONS OF THE PROMISSORY NOTES AUTHORIZING [PREMIERE BANK]
TO MAKE SUCH APPLICATION OF PAYMENTS
WHETHER OR NOT AS CORRECTLY FOUND BY THE LOWER COURT [PREMIERE
BANK] IS ENTITLED TO AN AWARD OF DAMAGES AS OCCASIONED BY THE
MALICIOUS FILING OF THIS SUIT.
At the outset, we qualify that this case deals only with the extinguishment of Central
Surety’s ₱6,000,000.00 loan secured by the Wack Wack Membership pledge. We do
not dispose herein the matter of the ₱2,600,000.00 loan covered by PN No. 717-X
subject of BC Check No. 08115.
We note that both lower courts were one in annulling Premiere Bank’s application of
payments to the loans of Casent Realty and the Spouses Castañeda under PN Nos.
235-Z and 717-X, respectively, thus:
It bears stressing that the parties to PN No. 714-Y secured by Wack Wack membership
certificate are only Central Surety, as debtor and [Premiere Bank], as creditor. Thus,
when the questioned stipulation speaks of "several obligations", it only refers to the
obligations of [Central Surety] and nobody else.
[I]t is plain that [Central Surety] has only two loan obligations, namely: 1.) Account No.
714-Y – secured by Wack Wack membership certificate; and 2.) Account No. 367-Z –
secured by Condominium Certificate of Title. The two loans are secured by separate
and different collaterals. The collateral for Account No. 714-Y, which is the Wack Wack
membership certificate answers only for that account and nothing else. The collateral
for Account No. 367-Z, which is the Condominium Certificate of Title, is answerable
only for the said account.
The fact that the loan obligations of [Central Surety] are secured by separate and
distinct collateral simply shows that each collateral secures only a particular loan
obligation and does not cover loans including future loans or advancements.
As regards the loan covered by Account No. 235-Z, this was obtained by Casent
Realty, not by [Central Surety]. Although Mr. Engracio Castañeda is the vice-president
of [Central Surety], and president of Casent Realty, it does not follow that the two
corporations are one and the same. Both are invested by law with a personality
separate and distinct from each other.
Thus, [Central Surety] cannot be held liable for the obligation of Casent Realty, absent
evidence showing that the latter is being used to defeat public convenience, justify
wrong, protect fraud or defend crime; or used as a shield to confuse the legitimate
issues, or when it is merely an adjunct, a business conduit or an alter ego of [Central
Surety] or of another corporation; or used as a cloak to cover for fraud or illegality, or to
work injustice, or where necessary to achieve equity or for the protection of
creditors.1avvphi1
Likewise, [Central Surety] cannot be held accountable for the loan obligation of
spouses Castañeda under Account No. IND 717-X. Settled is the rule that a
corporation is invested by law with a personality separate and distinct from those of the
persons composing it. The corporate debt or credit is not the debt or credit of the
stockholder nor is the stockholder’s debt or credit that of the corporation.
The mere fact that a person is a president of the corporation does not render the
property he owns or possesses the property of the corporation, since that president, as
an individual, and the corporation are separate entities.
In fact, Premiere Bank did not appeal or question the RTC’s ruling specifically annulling
the application of the ₱6,000,000.00 check payment to the respective loans of Casent
Realty and the Spouses Castañeda. Undoubtedly, Premiere Bank cannot be allowed,
through this petition, to surreptitiously include the validity of its application of payments
concerning the loans to Casent Realty and the Spouses Castañeda.
Thus, we sift through the issues posited by Premiere Bank and restate the same, to
wit:
1. Whether Premiere Bank waived its right of application of payments on the
loans of Central Surety.
2. In the alternative, whether the ₱6,000,000.00 loan of Central Surety was
extinguished by the encashment of BC Check No. 08114.
3. Corollarily, whether the release of the Wack Wack Membership pledge is in
order.
The Petition is meritorious.
We shall take the first and the second issues in tandem.
Creditor given right to apply payments
At the hub of the controversy is the statutory provision on application of payments,
specifically Article 1252 of the Civil Code, viz.:
Article 1252. He who has various debts of the same kind in favor of one and the same
creditor, may declare at the time of making the payment, to which of them the same
must be applied. Unless the parties so stipulate, or when the application of payment is
made by the party for whose benefit the term has been constituted, application shall
not be made as to debts which are not yet due.
If the debtor accepts from the creditor a receipt in which an application of the payment
is made, the former cannot complain of the same, unless there is a cause for
invalidating the contract.
The debtor’s right to apply payment is not mandatory. This is clear from the use of the
word "may" rather than the word "shall" in the provision which reads: "He who has
various debts of the same kind in favor of one and the same creditor, may declare at
the time of making the payment, to which of the same must be applied."
Indeed, the debtor’s right to apply payment has been considered merely directory, and
not mandatory, following this Court’s earlier pronouncement that "the ordinary
acceptation of the terms ‘may’ and ‘shall’ may be resorted to as guides in ascertaining
the mandatory or directory character of statutory provisions."
Article 1252 gives the right to the debtor to choose to which of several obligations to
apply a particular payment that he tenders to the creditor. But likewise granted in the
same provision is the right of the creditor to apply such payment in case the debtor fails
to direct its application. This is obvious in Art. 1252, par. 2, viz.: "If the debtor accepts
from the creditor a receipt in which an application of payment is made, the former
cannot complain of the same." It is the directory nature of this right and the subsidiary
right of the creditor to apply payments when the debtor does not elect to do so that
make this right, like any other right, waivable.
Rights may be waived, unless the waiver is contrary to law, public order, public policy,
morals or good customs, or prejudicial to a third person with a right recognized by law.
A debtor, in making a voluntary payment, may at the time of payment direct an
application of it to whatever account he chooses, unless he has assigned or waived
that right. If the debtor does not do so, the right passes to the creditor, who may make
such application as he chooses. But if neither party has exercised its option, the court
will apply the payment according to the justice and equity of the case, taking into
consideration all its circumstances.
Verily, the debtor’s right to apply payment can be waived and even granted to the
creditor if the debtor so agrees. This was explained by former Senator Arturo M.
Tolentino, an acknowledged expert on the Civil Code, thus:
The following are some limitations on the right of the debtor to apply his payment:
xxxx
5) when there is an agreement as to the debts which are to be paid first, the debtor
cannot vary this agreement.
Relevantly, in a Decision of the Supreme Court of Kansas in a case with parallel facts,
it was held that:
The debtor requested Planters apply the payments to the 1981 loan rather than to the
1978 loan. Planters refused. Planters notes it was expressly provided in the security
agreement on the 1981 loan that Planters had a legal right to direct application of
payments in its sole discretion. Appellees do not refute this. Hence, the debtors had no
right by agreement to direct the payments. This also precludes the application of the
U.S. Rule, which applies only in absence of a statute or specific agreement. Thus the
trial court erred. Planters was entitled to apply the Hi-Plains payments as it saw fit.
In the case at bench, the records show that Premiere Bank and Central Surety entered
into several contracts of loan, securities by way of pledges, and suretyship
agreements. In at least two (2) promissory notes between the parties, Promissory Note
No. 714-Y and Promissory Note No. 376-X, Central Surety expressly agreed to grant
Premiere Bank the authority to apply any and all of Central Surety’s payments, thus:
In case I/We have several obligations with [Premiere Bank], I/We hereby empower
[Premiere Bank] to apply without notice and in any manner it sees fit, any or all of
my/our deposits and payments to any of my/our obligations whether due or not. Any
such application of deposits or payments shall be conclusive and binding upon us.
This proviso is representative of all the other Promissory Notes involved in this case. It
is in the exercise of this express authority under the Promissory Notes, and following
Bangko Sentral ng Pilipinas Regulations, that Premiere Bank applied payments made
by Central Surety, as it deemed fit, to the several debts of the latter.
All debts were due; There was no
waiver on the part of petitioner
Undoubtedly, at the time of conflict between the parties material to this case,
Promissory Note No. 714-Y dated August 20, 1999, in the amount of ₱6,000,000.00
and secured by the pledge of the Wack Wack Membership, was past the due and
demand stage. By its terms, Premiere Bank was entitled to declare said Note and all
sums payable thereunder immediately due and payable, without need of "presentment,
demand, protest or notice of any kind." The subsequent demand made by Premiere
Bank was, therefore, merely a superfluity, which cannot be equated with a waiver of
the right to demand payment of all the matured obligations of Central Surety to
Premiere Bank.
Moreover, this Court may take judicial notice that the standard practice in commercial
transactions to send demand letters has become part and parcel of every collection
effort, especially in light of the legal requirement that demand is a prerequisite before
default may set in, subject to certain well-known exceptions, including the situation
where the law or the obligations expressly declare it unnecessary.
Neither can it be said that Premiere Bank waived its right to apply payments when it
specifically demanded payment of the ₱6,000,000.00 loan under Promissory Note No.
714-Y. It is an elementary rule that the existence of a waiver must be positively
demonstrated since a waiver by implication is not normally countenanced. The norm is
that a waiver must not only be voluntary, but must have been made knowingly,
intelligently, and with sufficient awareness of the relevant circumstances and likely
consequences. There must be persuasive evidence to show an actual intention to
relinquish the right. Mere silence on the part of the holder of the right should not be
construed as a surrender thereof; the courts must indulge every reasonable
presumption against the existence and validity of such waiver.
Besides, in this case, any inference of a waiver of Premiere Bank’s, as creditor, right to
apply payments is eschewed by the express provision of the Promissory Note that: "no
failure on the part of [Premiere Bank] to exercise, and no delay in exercising any right
hereunder, shall operate as a waiver thereof."
Thus, we find it unnecessary to rule on the applicability of the equitable principle of
waiver that the Court of Appeals ascribed to the demand made by Premiere Bank upon
Central Surety to pay the amount of ₱6,000,000.00, in the face of both the express
provisions of the law and the agreements entered into by the parties. After all, a diligent
creditor should not needlessly be interfered with in the prosecution of his legal
remedies.
When Central Surety directed the application of its payment to a specific debt, it knew it
had another debt with Premiere Bank, that covered by Promissory Note 367-Z, which
had been renewed under Promissory Note 376-X, in the amount of ₱40.898 Million.
Central Surety is aware that Promissory Note 367-Z (or 376-X) contains the same
provision as in Promissory Note No 714-Y which grants the Premiere Bank authority to
apply payments made by Central Surety, viz.:
In case I/We have several obligations with [Premiere Bank], I/We hereby empower
[Premiere Bank] to apply without notice and in any manner it sees fit, any or all of
my/our deposits and payments to any of my/our obligations whether due or not. Any
such application of deposits or payments shall be conclusive and binding upon us.
Obviously, Central Surety is also cognizant that Promissory Note 367-Z contains the
proviso that:
the bank shall be entitled to declare this Note and all sums payable hereunder to be
immediately due and payable, without need of presentment, demand, protest or notice
of nay kind, all of which I/We hereby expressly waive, upon occurrence of any of the
following events: x x x (ii) My/Our failure to pay any amortization or installment due
hereunder; (iii) My/Our failure to pay money due under any other document or
agreement evidencing obligations for borrowed money x x x.
by virtue of which, it follows that the obligation under Promissory Note 367-Z had
become past due and demandable, with further notice expressly waived, when Central
Surety defaulted on its obligations under Promissory Note No. 714-Y.
Mendoza v. Court of Appeals forecloses any doubt that an acceleration clause is valid
and produces legal effects. In fact, in Selegna Management and Development
Corporation v. United Coconut Planters Bank, we held that:
Considering that the contract is the law between the parties, respondent is justified in
invoking the acceleration clause declaring the entire obligation immediately due and
payable. That clause obliged petitioners to pay the entire loan on January 29, 1999, the
date fixed by respondent.
It is worth noting that after the delayed payment of ₱6,000,000.00 was tendered by
Central Surety, Premiere Bank returned the amount as insufficient, ostensibly because
there was, at least, another account that was likewise due. Obviously, in its demand of
28 September 2000, petitioner sought payment, not just of the ₱6,000,000.00, but of all
these past due accounts. There is extant testimony to support this claim, as the
transcript of stenographic notes on the testimony of Atty. Araos reveals:
Atty. Opinion: Q. But you accepted this payment of Six Million (₱6,000,000.00) later on
when together with this was paid another check for 1.8 Million?
Witness: A. We accepted.
Atty. Opinion: Q. And you applied this to four (4) other accounts three (3) other
accounts or to four (4) accounts mentioned in Exhibit "J." Is that correct?
Atty. Tagalog: We can stipulate on that. Your Honor.
Court: This was stipulated?
Atty. Tagalog: Yes, Your Honor. In fact, there is already stipulation that we confirm that
those are the applications of payments made by the defendant Bank on those loan
accounts.
Atty. Opinion: Q. Were these accounts due already when you made this application, But in this case, Central Surety does not appear so weak as to be placed at a distinct
distribution of payments? disadvantage vis-à-vis the bank. As found by the lower court:

Witness: A. Yes sir.
Conversely, in its evidence-in-chief, Central Surety did not present any witness to
testify on the payment of its obligations. In fact, the record shows that after marking its
evidence, Central Surety proceeded to offer its evidence immediately. Only on the
rebuttal stage did Central Surety present a witness; but even then, no evidence was
adduced of payment of any other obligation. In this light, the Court is constrained to
rule that all obligations of Central Surety to Premiere Bank were due; and thus, the
application of payments was warranted.
Considering that [Central Surety] is a known business entity, the [Premiere Bank] was
right in assuming that the [Central Surety] could not have been cheated or misled in
agreeing thereto, it could have negotiated with the bank on a more favorable term
considering that it has already established a certain reputation with the [Premiere
Bank] as evidenced by its numerous transactions. It is therefore absurd that an
established company such as the [Central Surety] has no knowledge of the law
regarding bank practice in loan transactions.
The Dragnet Clause.

Being in receipt of amounts tendered by Central Surety, which were insufficient to The factual circumstances of this case showing the chain of transactions and long-
cover its more onerous obligations, Premiere Bank cannot be faulted for exercising the standing relationship between Premiere Bank and Central Surety militate against the
authority granted to it under the Promissory Notes, and applying payment to the latter’s prayer in its complaint for the release of the Wack Wack Membership, the
obligations as it deemed fit. Subject to the caveat that our ruling herein shall be limited security attached to Promissory Note 714-Y.
only to the transactions entered into by the parties to this case, the Court will not
disturb the finding of the lower court that Premiere Bank rightly applied the payments A tally of the facts shows the following transactions between Premiere Bank and
that Central Surety had tendered. Corollary thereto, and upon the second issue, the Central Surety:
tender of the amount of ₱6,000,000.00 by Central Surety, and the encashment of BC
Check No. 08114 did not totally extinguish the debt covered by PN No. 714-Y.
Date Instrument Amount Stipulation
Release of the pledged covered

Wack Wack Membership

August 20, 1999 PN 714-Y P6M
Contract of Adhesion

August 29, 1999 Deed of ₱ 15 M As security for PN 714-Y and/or

To the extent that the subject promissory notes were prepared by the Premiere Bank
Assignment such Promissory Note/s which
and presented to Central Surety for signature, these agreements were, indeed,
with Pledge the ASSIGNOR / PLEDGOR
contracts of adhesion. But contracts of adhesion are not invalid per se. Contracts of
shall hereafter execute in favor
adhesion, where one party imposes a ready-made form of contract on the other, are
of the ASSIGNEE/PLEDGEE
not entirely prohibited. The one who adheres to the contract is, in reality, free to reject it
entirely; if he adheres, he gives his consent.
From these transactions and the proviso in the Deed of Assignment with Pledge, it is
In interpreting such contracts, however, courts are expected to observe greater clear that the security, which peculiarly specified an amount at ₱15,000,000.00
vigilance in order to shield the unwary or weaker party from deceptive schemes (notably greater than the amount of the promissory note it secured), was intended to
contained in ready-made covenants. Thus, Article 24 of the Civil Code pertinently guarantee not just the obligation under PN 714-Y, but also future advances. Thus, the
states: said deed is explicit:

In all contractual, property or other relations, when one of the parties is at a As security for the payment of loan obtained by the ASSIGNOR/PLEDGOR from the
disadvantage on account of his moral dependence, ignorance, indigence, mental ASSIGNEE/PLEDGEE in the amount of FIFTEEN MILLION PESOS (15,000,000.00)
weakness, tender age or other handicap, the courts must be vigilant for his protection. Philippine Currency in accordance with the Promissory Note attached hereto and made
an integral part hereof as Annex "A" and/or such Promissory Note/s which the
ASSIGNOR/PLEDGOR shall hereafter execute in favor of the ASSIGNEE/PLEDGEE,
the ASSIGNOR/PLEDGOR hereby transfers, assigns, conveys, endorses, encumbers
and delivers by way of first pledge unto the ASSIGNEE/PLEDGEE, its successors and
assigns, that certain Membership fee Certificate Share in Wack Wack Golf and Country
Club Incorporate covered by Stock Certificate No. 217 with Serial No. 1793 duly issue
by Wack Wack Golf and Country Club Incorporated on August 27, 1996 in the name of
the ASSIGNOR." (Emphasis made in the Petition.)
Then, a Continuing Guaranty/Comprehensive Surety Agreement was later executed by
Central Surety as follows:
From the foregoing, it is more than apparent that when, on August 29, 1999, the parties
executed the Deed of Assignment with Pledge (of the Wack Wack Membership), to
serve as security for an obligation in the amount of ₱15,000,000.00 (when the actual
loan covered by PN No. 714-Y was only ₱6,000,000.00), the intent of the parties was
for the Wack Wack Membership to serve as security also for future advancements. The
subsequent loan was nothing more than a fulfillment of the intention of the parties. Of
course, because the subsequent loan was for a much greater amount
(₱40,898,000.00), it became necessary to put up another security, in addition to the
Wack Wack Membership. Thus, the subsequent surety agreement and the specific
security for PN No. 367-X were, like the Wack Wack Membership, meant to secure the
ballooning debt of the Central Surety.

Date Instrument Amount Stipulation The above-quoted provision in the Deed of Assignment, also known as the "dragnet
Notarized, Sept. Continuing ₱40,898,000.00 In consideration of clause"
the loanin American jurisprudence, would subsume all debts of respondent of past and
22, 1999 Guaranty/Comprehensive and/or any future origins. It is a valid and legal undertaking, and the amounts specified as
credit
Surety Agreement accommodation which consideration
you in the contracts do not limit the amount for which the pledge or mortgage
stands
(petitioner) have extended as security, if from the four corners of the instrument, the intent to secure future
and other
and/or will extend to Central indebtedness can be gathered. A pledge or mortgage given to secure future
advancements
Surety and Insurance Co. is a continuing security and is not discharged by the repayment of the
amount named in the mortgage until the full amount of all advancements shall have
been paid.
And on October 10, 2000, Promissory Note 376-X was entered into, a renewal of the
prior Promissory Note 367-Z, in the amount of ₱40,898,000.00. In all, the transactions Our ruling in Prudential Bank v. Alviar is instructive:
that transpired between Premiere Bank and Central Surety manifest themselves,
thusly:
A "blanket mortgage clause," also known as a "dragnet clause" in American
jurisprudence, is one which is specifically phrased to subsume all debts of past or
Date Amount future origins. Such clauses are "carefully scrutinized and strictly construed."
Instrument Stipulation
covered Mortgages of this character enable the parties to provide continuous dealings, the
nature or extent of which may not be known or anticipated at the time, and they avoid
August 20, 1999 PN 714-Y ₱6M the expense and inconvenience of executing a new security on each new transaction.
A "dragnet clause" operates as a convenience and accommodation to the borrowers as
it makes available additional funds without their having to execute additional security
August 29, 1999 Deed of Assignment with ₱ 15 M As security for documents,
PN 714-Y and/orthereby saving time, travel, loan closing costs, costs of extra legal
Pledge such Promissory Note/srecording
services, which fees, et cetera. Indeed, it has been settled in a long line of
the ASSIGNOR / PLEDGOR
decisions that mortgages given to secure future advancements are valid and legal
shall hereafter execute
contracts,in favor of amounts named as consideration in said contracts do not limit the
and the
the ASSIGNEE/PLEDGEE
amount for which the mortgage may stand as security if from the four corners of the
instrument the intent to secure future and other indebtedness can be gathered.
Notarized, Continuing ₱40,898,000.00 In consideration of the loan
Sept. 22, 1999 Guaranty/Comprehensive and/or any creditTheaccommodation
"blanket mortgage clause" in the instant case states:
Surety Agreement which you (petitioner) have
extended and/or will extend to
That for and in consideration of certain loans, overdraft and other credit
Central Surety and Insurance Co.
accommodations obtained from the Mortgagee by the Mortgagor and/or
________________ hereinafter referred to, irrespective of number, as DEBTOR, and
October 10, 2000 Promissory Note 376-X (PN ₱40,898,000.00 to secure the payment of the same and those that may hereafter be obtained, the
367-Z) principal or all of which is hereby fixed at Two Hundred Fifty Thousand (₱250,000.00)
Pesos, Philippine Currency, as well as those that the Mortgagee may extend to the
Mortgagor and/or DEBTOR, including interest and expenses or any other obligation
owing to the Mortgagee, whether direct or indirect, principal or secondary as appears in
the accounts, books and records of the Mortgagee, the Mortgagor does hereby transfer
and convey by way of mortgage unto the Mortgagee, its successors or assigns, the
parcels of land which are described in the list inserted on the back of this document,
and/or appended hereto, together with all the buildings and improvements now existing
or which may hereafter be erected or constructed thereon, of which the Mortgagor
declares that he/it is the absolute owner free from all liens and incumbrances. . . .
xxxx
In the case at bar, the subsequent loans obtained by respondents were secured by
other securities, thus: PN BD#76/C-345, executed by Don Alviar was secured by a
"hold-out" on his foreign currency savings account, while PN BD#76/C-430, executed
by respondents for Donalco Trading, Inc., was secured by "Clean-Phase out TOD CA
3923" and eventually by a deed of assignment on two promissory notes executed by
Bancom Realty Corporation with Deed of Guarantee in favor of A.U. Valencia and Co.,
and by a chattel mortgage on various heavy and transportation equipment. The matter
of PN BD#76/C-430 has already been discussed. Thus, the critical issue is whether the
"blanket mortgage" clause applies even to subsequent advancements for which other
securities were intended, or particularly, to PN BD#76/C-345.
Under American jurisprudence, two schools of thought have emerged on this question.
One school advocates that a "dragnet clause" so worded as to be broad enough to
cover all other debts in addition to the one specifically secured will be construed to
cover a different debt, although such other debt is secured by another mortgage. The
contrary thinking maintains that a mortgage with such a clause will not secure a note
that expresses on its face that it is otherwise secured as to its entirety, at least to
anything other than a deficiency after exhausting the security specified therein, such
deficiency being an indebtedness within the meaning of the mortgage, in the absence
of a special contract excluding it from the arrangement.
The latter school represents the better position. The parties having conformed to the
"blanket mortgage clause" or "dragnet clause," it is reasonable to conclude that they
also agreed to an implied understanding that subsequent loans need not be secured by
other securities, as the subsequent loans will be secured by the first mortgage. In other
words, the sufficiency of the first security is a corollary component of the "dragnet
clause." But of course, there is no prohibition, as in the mortgage contract in issue,
against contractually requiring other securities for the subsequent loans. Thus, when
the mortgagor takes another loan for which another security was given it could not be
inferred that such loan was made in reliance solely on the original security with the
"dragnet clause," but rather, on the new security given. This is the "reliance on the
security test."
Hence, based on the "reliance on the security test," the California court in the cited
case made an inquiry whether the second loan was made in reliance on the original
security containing a "dragnet clause." Accordingly, finding a different security was
taken for the second loan no intent that the parties relied on the security of the first loan
could be inferred, so it was held. The rationale involved, the court said, was that the
"dragnet clause" in the first security instrument constituted a continuing offer by the
borrower to secure further loans under the security of the first security instrument, and
that when the lender accepted a different security he did not accept the offer.
In another case, it was held that a mortgage with a "dragnet clause" is an "offer" by the
mortgagor to the bank to provide the security of the mortgage for advances of and
when they were made. Thus, it was concluded that the "offer" was not accepted by the
bank when a subsequent advance was made because (1) the second note was
secured by a chattel mortgage on certain vehicles, and the clause therein stated that
the note was secured by such chattel mortgage; (2) there was no reference in the
second note or chattel mortgage indicating a connection between the real estate
mortgage and the advance; (3) the mortgagor signed the real estate mortgage by her
name alone, whereas the second note and chattel mortgage were signed by the
mortgagor doing business under an assumed name; and (4) there was no allegation by
the bank, and apparently no proof, that it relied on the security of the real estate
mortgage in making the advance.
Indeed, in some instances, it has been held that in the absence of clear, supportive
evidence of a contrary intention, a mortgage containing a "dragnet clause" will not be
extended to cover future advances unless the document evidencing the subsequent
advance refers to the mortgage as providing security therefor.
It was therefore improper for petitioner in this case to seek foreclosure of the
mortgaged property because of non-payment of all the three promissory notes. While
the existence and validity of the "dragnet clause" cannot be denied, there is a need to
respect the existence of the other security given for PN BD#76/C-345. The foreclosure
of the mortgaged property should only be for the ₱250,000.00 loan covered by PN
BD#75/C-252, and for any amount not covered by the security for the second
promissory note. As held in one case, where deeds absolute in form were executed to
secure any and all kinds of indebtedness that might subsequently become due, a
balance due on a note, after exhausting the special security given for the payment of
such note, was in the absence of a special agreement to the contrary, within the
protection of the mortgage, notwithstanding the giving of the special security. This is
recognition that while the "dragnet clause" subsists, the security specifically executed
for subsequent loans must first be exhausted before the mortgaged property can be
resorted to.
The security clause involved in the case at bar shows that, by its terms:
As security for the payment of loan obtained by the ASSIGNOR/PLEDGOR from the
ASSIGNEE/PLEDGEE in the amount of FIFTEEN MILLION PESOS (15,000,000.00)
Philippine Currency in accordance with the Promissory Note attached hereto and made
an integral part hereof as Annex "A" and/or such Promissory Note/s which the
ASSIGNOR/PLEDGOR shall hereafter execute in favor of the ASSIGNEE/PLEDGEE,
the ASSIGNOR/ PLEDGOR hereby transfers, assigns, conveys, endorses, encumbers
and delivers by way of first pledge unto the ASSIGNEE/PLEDGEE, its successors and
assigns, that certain Membership fee Certificate Share in Wack Wack Golf and Country
Club Incorporated covered by Stock Certificate No. 217 with Serial No. 1793 duly issue
by Wack Wack Golf and Country Club Incorporated on August 27, 1996 in the name of
the ASSIGNOR."
it is comparable with the security clause in the case of Prudential, viz.:
That for and in consideration of certain loans, overdraft and other credit
accommodations obtained from the Mortgagee by the Mortgagor and/or
________________ hereinafter referred to, irrespective of number, as DEBTOR, and
to secure the payment of the same and those that may hereafter be obtained, the
principal or all of which is hereby fixed at Two Hundred Fifty Thousand (₱250,000.00)
Pesos, Philippine Currency, as well as those that the Mortgagee may extend to the
Mortgagor and/or DEBTOR, including interest and expenses or any other obligation
owing to the Mortgagee, whether direct or indirect, principal or secondary as appears in
the accounts, books and records of the Mortgagee, the Mortgagor does hereby transfer
and convey by way of mortgage unto the Mortgagee, its successors or assigns, the
parcels of land which are described in the list inserted on the back of this document,
and/or appended hereto, together with all the buildings and improvements now existing
or which may hereafter be erected or constructed thereon, of which the Mortgagor
declares that he/it is the absolute owner free from all liens and incumbrances. . . .
and there is no substantive difference between the terms utilized in both clauses
securing future advances.
To recall, the critical issue resolved in Prudential was whether the "blanket mortgage"
clause applies even to subsequent advancements for which other securities were
intended. We then declared that the special security for subsequent loans must first be
exhausted in a situation where the creditor desires to foreclose on the "subsequent"
loans that are due. However, the "dragnet clause" allows the creditor to hold on to the
first security in case of deficiency after foreclosure on the special security for the
subsequent loans.
In Prudential, we disallowed the petitioner’s attempt at multiple foreclosures, as it
foreclosed on all of the mortgaged properties serving as individual securities for each
of the three loans. This Court then laid down the rule, thus:
where deeds absolute in form were executed to secure any and all kinds of
indebtedness that might subsequently become due, a balance due on a note, after
exhausting the special security given for the payment of such note, was, in the
absence of a special agreement to the contrary, within the protection of the mortgage,
notwithstanding the giving of the special security. This is recognition that while the
"dragnet clause" subsists, the security specifically executed for subsequent loans must
first be exhausted before the mortgaged property can be resorted to.
However, this does not prevent the creditor from foreclosing on the security for the first
loan if that loan is past due, because there is nothing in law that prohibits the exercise
of that right. Hence, in the case at bench, Premiere Bank has the right to foreclose on
the Wack Wack Membership, the security corresponding to the first promissory note,
with the deed of assignment that originated the "dragnet clause." This conforms to the
doctrine in Prudential, as, in fact, acknowledged in the decision’s penultimate
paragraph, viz.:
Petitioner, however, is not without recourse. Both the Court of Appeals and the trial
court found that respondents have not yet paid the ₱250,000.00 and gave no credence
to their claim that they paid the said amount when they paid petitioner ₱2,000,000.00.
Thus, the mortgaged property could still be properly subjected to foreclosure
proceedings for the unpaid ₱250,000.00 loan, and as mentioned earlier, for any
deficiency after D/A SFDX#129, security for PN BD#76/c-345, has been exhausted,
subject of course to defenses which are available to respondents.
In any event, even without this Court’s prescription in Prudential, the release of the
Wack Wack Membership as the pledged security for Promissory Note 714-Y cannot yet
be done as sought by Central Surety. The chain of contracts concluded between
Premiere Bank and Central Surety reveals that the Wack Wack Membership, which
stood as security for Promissory Note 714-Y, and which also stands as security for
subsequent debts of Central Surety, is a security in the form of a pledge. Its return to
Central Surety upon the pretext that Central Surety is entitled to pay only the obligation
in Promissory Note No. 714-Y, will result in the extinguishment of the pledge, even with
respect to the subsequent obligations, because Article 2110 of the Civil Code provides:
(I)f the thing pledged is returned by the pledgor or owner, the pledge is extinguished.
Any stipulation to the contrary is void.
This is contrary to the express agreement of the parties, something which Central
Surety wants this Court to undo. We reiterate that, as a rule, courts cannot intervene to
save parties from disadvantageous provisions of their contracts if they consented to the
same freely and voluntarily.
Attorney’s Fees
The final issue is the propriety of attorney’s fees. The trial court based its award on the
supposed malice of Central Surety in instituting this case against Premiere Bank. We
find no malice on the part of Central Surety; indeed, we are convinced that Central
Surety filed the case in the lower court in good faith, upon the honest belief that it had
the prerogative to choose to which loan its payments should be applied.
Malicious prosecution, both in criminal and civil cases, requires the presence of two
elements, to wit: (a) malice and (b) absence of probable cause. Moreover, there must
be proof that the prosecution was prompted by a sinister design to vex and humiliate a
person; and that it was initiated deliberately, knowing that the charge was false and
baseless. Hence, the mere filing of what turns out to be an unsuccessful suit does not
render a person liable for malicious prosecution, for the law could not have meant to
impose a penalty on the right to litigate. Malice must be proved with clear and
convincing evidence, which we find wanting in this case.

WHEREFORE, the instant petition is PARTIALLY GRANTED. The assailed Decision of

the Court of Appeals in CA-G.R. CV No. 85930 dated July 31, 2006, as well as its
Resolution dated January 4, 2007, are REVERSED and SET ASIDE. The Decision of
the Regional Trial Court of Makati City, Branch 132, in Civil Case No. 00-1536, dated
July 12, 2005, is REINSTATED with the MODIFICATION that the award of attorney’s
fees to petitioner is DELETED. No pronouncement as to costs.SO ORDERED.